U.S. Fifth Circuit Enforces Indemnity Provision in Offshore Goods and Services Contract

On January 11, 2024, in the case Earnest v. Palfinger Marine USA, Inc., the U.S. Fifth Circuit Court of Appeals reversed a district court ruling that applied Louisiana law to a contract to inspect and repair lifeboats on the Outer Continental Shelf. This ruling is significant because the application of maritime law affects whether indemnity is owed by one corporate defendant to another.

A.  Background

In 2018, Shell Offshore, Inc. and/or its affiliates (collectively "Shell") owned an oil platform in the Gulf of Mexico on the Outer Continental Shelf off the Louisiana coast. The platform had ten lifeboats Shell had to maintain for immediate use. Shell contracted with Palfinger USA ("Palfinger") to inspect, maintain, and repair the lifeboats. In June 2019, Palfinger inspected the lifeboats and recommended replacement of a corroded cable. Nevertheless, Palfinger concluded everything was in working order. A few weeks later, Shell conducted a quarterly drill during which they deployed lifeboats from the platform. During the recovery of one of the vessels a corroded cable failed causing the lifeboat to fall eighty feet into the water. Two rig workers died, and one was injured.

The injured worker and families of the deceased employees filed suit against Shell and Palfinger. The individual claims were settled and Palfinger asserted a third-party indemnity claim against Shell under the contract. Shell and Palfinger filed cross motions for summary judgment to address indemnity provisions in the contract. The district court found that although the Shell/Palfinger contract involved services to facilitate drilling and production of gas on navigable waters a vessel would not play a substantial role in the completion of the contract. It then held that Louisiana law applied and the indemnity provisions in favor of Palfinger were unenforceable. The district court granted Shell's motion for partial summary judgment and dismissed Palfinger's indemnity claim. Palfinger appealed.

B.  Discussion

The sole issue on appeal was whether the Shell/Palfinger contract was a maritime contract, which in this case dictated whether federal or state law applied under the Outer Continental Shelf Land Act's choice of law provisions. On appeal, Palfinger argued that the Shell/Palfinger contract was a maritime contract and federal maritime law should apply of its own force. The Fifth Circuit accepted Palfinger's argument, reversed the district court, and concluded that the Shell/Palfinger contract was a classically maritime contract. The Court determined that the Shell/Palfinger contract provided services to facilitate the drilling and production of oil and gas on navigable waters, which is commercial maritime activity. The contract also required the inspection and repair of lifeboats required by United States Coast Guard regulations to support Shell's commercial maritime activity.

C.  Why Is This Important

• Winning the battle over whether a contract is maritime contract or not is often determinative of whether contractual indemnity provisions are enforceable in an offshore dispute.
• The Outer Continental Shelf Lands Act ("OCSLA") extends federal law to "all artificial islands" and "installations and other devices . . . attached to the seabed," like oil platforms.
• The OCSLA incorporates adjacent state law as federal law on these fictional enclaves, but only to the extent they are not inconsistent with other Federal laws like admiralty law.

W. Brett Mason is a Member at Stone Pigman Walther Wittmann L.L.C. and advises companies doing business in Louisiana in their desire to evaluate and manage maritime risk by counseling them on changes in law and protecting their interests should a dispute arise.