On March 10, 2016, I reported on the Fifth Circuit’s opinion in Petrobras America, Inc., et al. v. Vicinay Cadenas S.A., No. 14-20589 (03/07/16), where the Fifth Circuit addressed the waivability of OCSLA’s choice of law provision and determined that it could never be waived. The appellee, Vicinay Cadenas, S.A., has now petitioned for a rehearing en banc and asserts the decision conflicts with the Court’s prior holding of In Re HECI Expl. Co., 862 F.2d 513 (5th Cir. 1988) holding that choice of law – even if mandated by a statutory provision that cannot be overridden by the parties’ agreement – is non-jurisdictional and thus subject to waiver. The appellee also urges that the decision threatens to impair the efficient administration of justice by placing a statutorily-prescribed choice of law provision on par with subject matter jurisdiction, thereby requiring continual reconsideration of the issue regardless of whether it was ever timely raised. A majority of the Court’s judges must now vote that the matter deserves an en banc rehearing for the appeal to move forward.
This week The United States Fifth Circuit Court of Appeals in Petrobras America, Inc., et al. v. Vicinay Cadenas, S.A., No. 14-20589 (03/07/16) addressed in further detail whether the choice of law provision under the Outer Continental Shelf Lands Act (OCSLA) can be waived in any context. Prior to this decision, the Fifth Circuit had established that OCSLA’s choice of law scheme was prescribed by Congress and parties could not voluntarily contract around Congress’s mandate. Texaco Exploration & Production, Inc. v. AmClyde Engineered Prods. Co., Inc., 448 F.3d 760, 772 n. 8 (5th Cir., 2006); see also Union Tex. Petroleum Corp. v. PLT Eng’g, Inc., 895 F.2d 1043, 1050 (5th Cir. 1990) (“We find it beyond any doubt that OCSLA is itself a Congressionally-mandated choice of law provision requiring that the substantive law of the adjacent state is to apply even in the presence of a choice of law provision in the contract to the contrary.”)
In this instance neither party had asserted that the issues before the district court were to be determined according to the law of the adjacent state, Louisiana, asserting, to the contrary, that maritime law was controlling. It was only after a motion for partial summary judgment was granted against the plaintiff based on applying admiralty law that the plaintiff asserted OCSLA required the application of the law of Louisiana.
In the case at hand, Petrobras America sued Vicinay Cadenas, S.A., the manufacturer of an underwater tether chain that broke just after being installed. The chain secured a pipeline system for oil production from the Outer-Continental Shelf of the Gulf of Mexico. Petrobras had contracted with Technip U.S.A., Inc. to construct five “free-standing hybrid riser” systems to move crude oil from wellheads on the sea bed to floating production storage and off-loading facilities on the surface of the sea. Technip had subcontracted with Vicinay to supply the chains that were specified to be without weld-over cracks and defects to be used to tether the riser systems. Shortly after the chains were installed, one broke causing loss of one of the free-standing hybrid riser systems, a loss of use of the oil storage facility and loss oil and gas production.
Petrobras and its underwriters sued Vicinay in federal court asserting negligence, product liability and failure to warn claims. They alleged subject matter jurisdiction based on admiralty law or, alternatively, under OCSLA. They did not assert that Louisiana law applied. Vicinay moved for partial summary judgment, arguing that it was entitled to prevail under the maritime law’s economic loss doctrine announced in East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 106 S. Ct. 2295 (1986).
While opposing Vicinay’s motion for partial summary judgment, Petrobras and its underwriters did not contest the application of maritime law. The district court, assuming that maritime law applied, granted summary judgment to Vicinay to which an interlocutory appeal was filed. Approximately two months later, Petrobras’ underwriters filed a motion for leave to amend their complaint asserting for the first time that Louisiana law, not maritime law, applied to this dispute under OCSLA. This was denied by the district court and the appeal of this ruling was consolidated with the previous interlocutory appeals.
Vicinay argued before the Fifth Circuit that Petrobras’ underwriters waived their choice of law argument by not raising it in the district court until the eleventh hour motion to amend their complaint which was filed after the summary judgment was granted. They asserted that the underwriters confused OCSLA’s subject matter jurisdiction conferred on federal courts in 43 U.S.C. § 1349(b)(1)(A) and which cannot be waived, with OCSLA’s choice of law 43 U.S.C. § 1333(a) which allegedly could be waived, and therefore could not be raised for the first time on appeal.
Noting that the court’s precedents firmly established that OCSLA’s choice of law could not be waived by contract, as it was prescribed by Congress and parties may not voluntarily contract around Congress’ mandate, the court determined that, even more so, the choice of law provision could not be waived by failure to raise the issue below. This was found to be distinguishable from the Court’s earlier holding in Fruge v. Amerisure Mutual Insurance Co., 663 F.3d 743, 777 (5th Cir. 2011). It was explained that the failure to raise an issue as to the choice of law analysis in Fruge stemmed from a contractual provision, and since it was not timely raised before the district court, it was waived. In the instant case, the choice of law provision was one that stemmed from a statutorily mandate and could not be waived under any circumstances.
I attended an excellent conference on March 3, 2016, put on by WorkBoat® exploring the “OSV Capital Outlook for 2016 and Beyond”. The conference featured a diverse and highly experienced panel of speakers including investment and marketing analysts and consultants, vessel operators, shipyard executives and WorkBoat® editors. You may want to read WorkBoat’s® own blog post about the conference; my takeaways from attending are as follows:
- Praveen Narra, a Raymond James analyst, indicated that while oil prices appear to have bottomed and are beginning to climb toward an expected range of $65 to $70 per barrel in 2017 and 2018, a sustainable turnaround in OSV day rates and utilization should not be expected until at least 2018.
- Mr. Narra stated that actual rig tendering activity will likely continue to decline in 2016 with no substantial uptick in day rates until 2017.
- Richard Sanchez, a marine analyst with IHS Energy-Petrodata MarineBase, cautioned that when drilling activity does resume, it is likely to first rebound onshore rather than offshore, as onshore projects can be brought to production much faster, more efficiently and at less cost than offshore projects.
- Sanchez is seeing that the downturn in OSV utilization is affecting shallow water platform supply vessels more than large PSVs and anchor handling tugs, with day rates for shallow water PSVs at below break-even levels.
- Matthew Rigdon, a senior executive with Jackson Offshore Operators, cited as one of the lingering effects of this downturn the loss of trained, certified and licensed labor to operate vessels when the rebound finally does occur. Many mariners will move to jobs in other industries. Additionally, U.S. Coast Guard certification requirements necessitate expensive periodic training and recertification, the cost of which is traditionally shared between OSV operators and the mariners. Many out-of-work mariners may not have the means or inclination to maintain these certifications, which will shrink the pool of qualified labor available when their services are needed.
- Allen Brooks, managing director at PPHB, LP, cited as the “elephant” in the rig market the degree of debt-load of drilling companies. This also is a significant concern for OSV operators. High debt service obligation coupled with diminished cash flows due to low utilization and low day rates will lead to substantial destressed asset activity. However, the amount of this activity is unknown. It is also unknown when investors will begin to seize the opportunity to acquire these assets.
Armed with knowledge of the bleak outlook, OSV operators should be pro-active in making decisions regarding stacking of vessels, redeployment or laying off personnel, cost cutting and restructuring debt-loads. Bankers are traditionally hesitant to repossess OSVs. There is significant costs in storing and maintaining them pending resale and these costs could mount if, as is the case now, prospects for an advantageous resale are dim. It should be emphasized that the current downturn in the OSV market does not only affect the Gulf, but is a global phenomenon. Thus, there will be no buyers for these vessels until the market begins to rebound. This gives OSV operators leverage in restructuring negotiations. [On that note, see my post of November 23, 2015.]
Many of the indemnity provisions Master Service Agreements use in the energy and construction industries contain the term “invitee” in the definition of “Owner Group” and “Contractor Group”. However, the term “invitee” is rarely defined itself. Drafters should strongly consider jettisoning the term “invitee” from the definition of “group”. For most contracts applicable to worksite operations, the terms “contractor” and “subcontractor” are substantially easier to understand and to apply.
In the absence of a contractual definition, the courts will have to resort to judicial definitions of “invitee” in order to give meaning to the indemnity provision. In Grogan v. W&T Offshore, Inc., No. 15 – 30369 (5th Cir. Jan. 27, 2016), the U.S. Fifth Circuit Court of Appeals had to interpret indemnity provisions in which both “groups” included the undefined term “invitee”. W&T agreed to defend and indemnify Triton from the claims of W&T’s invitees, and Triton agreed to defend and indemnify Triton from the claims of Triton’s invitees.
Tiger was hired by W&T to provide hydrogen sulfide (H2S) monitoring services and personnel, training and equipment during the operation of Triton’s vessel. Mr. Grogan, an employee of Tiger, was injured when he fell to the deck of the Triton vessel on which he had worked while attempting to board a personnel basket.
The Fifth Circuit adopted the parties’ reliance on the Louisiana judicial definition of invitee in Blanks v. Murco Drilling Corp., 766 F.2d 891 (5th Cir. 1985) to supply the applicable definition of invitee in a maritime contract. (It remains to be seen whether this Louisiana land–based definition is applied by other coastal courts in interpreting “invitee” in their maritime contracts.) Under Blanks, an invitee is “a person who goes onto premises with the expressed or implied invitation of the occupant, on business of the occupant or for their mutual advantage.” Id. at 894.
The district court denied cross–motions for summary judgment, finding disputed material facts as to whose invitee Mr. Grogan qualified; the issues were ultimately resolved through trial on submitted memoranda and evidence including deposition transcripts.
On appeal, the Fifth Circuit first concluded that even though Triton owned the premises, W&T exercised sufficient control (presence of a company man, establishment of the order of work, etc.), that W&T qualified as an occupant for purposes of Mr. Grogan’s status as W&T’s invitee. Thereafter, the court of appeals concluded that even though Triton impliedly consented to Mr. Grogan’s working from the Triton vessel, and that Triton indirectly benefitted from his presence, it was W&T that ultimately benefitted from Mr. Grogan’s presence and services. As a result, the district court did not err in concluding Mr. Grogan was the invitee of W&T, not Triton.
 King, Krebs & Jurgens, the author, and his partner, Jack Jurgens, represented W&T Offshore in the district court and on appeal.
Louisiana Governor John Bel Edwards’ proposal for short term fixes for the State’s fiscal problems includes a shot at already-hurting offshore supply vessel owners/operators. OSV operators/owners currently receive a refundable credit of 100% of the ad valorem taxes paid on vessels operating on the Outer Continental Shelf. The Governor’s plan would suspend these credits for 2016 and reduce them to 80% beginning in 2017.
Governor Edwards made his pitch to the industry at a recent meeting of the Offshore Marine Service Association in New Orleans. He cited the need for all sectors of the Louisiana economy to share in addressing the State’s budget shortfall. However, the proposed suspension and reduction of the credit could not come at a worse time for OSV operators already finding it difficult to weather current stormy market conditions.
The Greek shipping industry will have to sustain additional taxes according to a proposed bailout agreement. Greek shipowners already agreed to voluntarily pay an additional tonnage tax from 2014-2017 to help the embattled economic crisis. However, the Greek government says that isn’t enough and plans to further increase the tonnage tax (a flat annual rate based on a ship’s capacity), and will also cut other tax advantages that have been accorded to shipowners for years.
Greek shipowners are therefore having to weigh their options, and many state that if these measures are enacted they will have to consider relocating to other shipping-friendly places such as Cyprus, London, Singapore and Dubai. In fact, Hong Kong, Singapore, London and Cyprus have sent delegations to lobby disgruntled shipowners. Cyprus has had the most success by recently luring 42 Greek shipping companies to their country. The Central Bank of Cyprus stated that revenues from shipping have increased 9.3% (approximately $491 million) in the past year.
Greece’s unemployment rate is now above 25%, and the Greek shipping industry currently employs about 200,000 people, representing about 3.5% of the country’s workforce. The shipping industry makes up about 7.5% of the already dwindling Greek economy. It is anticipated that the continued exodus of Greek shipowners would cause a blow to the industry and to the economy as a number of people would lose their jobs.
Guest blogger Joanne Mantis is a multilingual attorney in the New Orleans office of King, Krebs & Jurgens. She is admitted to both the Louisiana and Greek Bar, and represents a variety of clients both domestically and internationally. She has previously blogged for Offshore Winds regarding the Greek Tonnage Tax.
Vessel sales are a constant in the marine industry, even during downturns in the market. In fact, some see adverse market conditions as an opportunity to find bargains on vessels and other marine equipment. Once the buyer has “kicked the tires” on a vessel and the parties have agreed on a price, there usually is great pressure from all sides to quickly sign a purchase and sale agreement and close the deal. However, signing an agreement that fails to or inadequately addresses a key issue can cause problems down the road.
Based on years of negotiating, drafting and reviewing vessel purchase and sale agreements for vessels large and small, here is a checklist of the key business and legal points that should normally be addressed in a vessel purchase agreement:
- Deposit – If there is to be a deposit, the parties should specify how much it will be and the condition under which it will be deemed forfeited.
- Inspection – These clauses vary widely depending on the circumstances. If the buyer has already inspected and is satisfied with the condition of the vessel, the contract may simply provide that the sale is outright and definite upon execution with no right of inspection. Usually, and especially with larger and/or classed vessels with specialized equipment, the buyer will want the right to inspect the vessel and its class records and have the ability to get out of the contract and receive back the deposit, or receive an adjustment in price, if dissatisfied with the condition of the vessel. If there is to be an inspection, the contract normally specifies the scope of the inspection and provides a strict timeline to accomplish it, and may also spell out the consequences for delaying or impeding inspection, insurance and indemnity for claims of inspectors, and allocation of inspection costs.
- Time and Place of Delivery – These clauses may include consequences, such as a right of cancellation and/or liability for damages, for failure to timely deliver the vessel.
- Total Loss Before Sale – These provisions normally give the buyer the right to cancel if the vessel becomes a total loss before delivery.
- Drydocking or Underwater Survey – Similar to inspection provisions, these clauses should address the circumstances under which the buyer may require drydocking or divers’ inspection and who pays for these inspections, which may depend on what is found during the inspection, and insurance and indemnity for claims arising during drydocking. These provisions may also address the buyer’s right to have the tail shaft or other vessel components surveyed during drydocking.
- Bunkers, Spares – These clauses typically address how and when bunkers are quantified and priced and paid for, delivery of spares and other items of vessel equipment and whether these are included in the price or paid for separately.
- Closing Documentation – The key issue on this point is that the buyer will want to ensure that the seller’s deliverables include all certificates and other documents necessary to meet the requirements of the registry the buyer plans to use. The contract should provide for these to be delivered as a condition of payment of the purchase price, so the buyer does not have to chase the seller after closing for a piece of paper needed to complete registration of the vessel in the buyer’s name.
Vessel purchase and sale agreements usually also have other customary provisions, such as those addressing:
- Seller’s obligation to deliver the vessel free from all charters, encumbrances, mortgages and liens.
- Seller’s indemnification for claims incurred prior to delivery that are asserted after delivery.
- Allocation of responsibility for taxes, fees and expenses.
- The required condition of the vessel and equipment upon delivery.
- Default by the buyer or seller and the consequences of default.
- Dispute resolution.
Numerous forms of vessel purchase and sale agreements are available publicly to use as templates in drafting agreements and specific clauses. However, when presented with any contract, whether based on an established template (e.g. BIMCO, Saleform) or drafted for the particular deal, you should never hesitate to negotiate what is important to you and revise the agreement accordingly.
A Texas court of appeals recently held that a drill ship undergoing a renovation for nearly two years in dry dock might still be a “vessel in navigation.” Gold v. Helix Energy Solutions Group, Inc., No. 14-15-00123-CV, (Tex. App. Dec. 15, 2015). The plaintiff, who had been hired to work as a seaman aboard the Helix, was working on the ship in dry dock when he began to experience neck pain and was diagnosed with a bulging disk. He sued the ship owner under the Jones Act for his injuries. The owner successfully moved for summary judgment on the basis that the worker was not a Jones Act seaman because the Helix, which was under conversion in the Jurong Shipyard in Singapore for a total of 20 months, was not a vessel in navigation. The Texas court of appeals reversed the grant of summary judgment, holding that fact issues existed as to vessel status despite the lengthy withdrawal from navigation.
The Supreme Court has held that a vessel does not cease to be a vessel simply because she is berthed for minor repairs. See, e.g., Chandris, Inc. v. Latsis, 515 U.S. 347, 374, 115 S. Ct. 2172, 2192, 132 L. Ed. 2d 314 (1995). However, there is a point the repairs become so significant, or the time out of the water so vast, that the vessel can no longer be considered “in navigation” for Jones Act purposes. For example, the Ninth Circuit held that a ship undergoing reconstruction over 17 months (three months less than the Helix) was not a vessel in navigation. McKinley v. All Alaskan Seafoods, Inc., 980 F.2d 567, 568 (9th Cir. 1992). The Fifth Circuit held that an extensive overhaul lasting only 77 days was enough to render a ship no longer in navigation. Hodges v. S. S. Tillie Lykes, 512 F.2d 1279, 1280 (5th Cir. 1975). And yet the Helix, laid up for repairs far longer than the ships in either of those cases and with no means of self propulsion, might nevertheless be “in navigation.”
Although there is no settled expiration date for “in navigation” status for vessels under repairs, the weight of authority in the Fifth Circuit and admiralty courts elsewhere suggests that a ship undergoing a major conversion over the course of nearly two years is definitely not a vessel in navigation for Jones Act purposes. Thus, the Texas court of appeals’ decision in the Helix case is a bit of an outlier. Still, the decision is worth noting as a demonstration of how far some courts are willing to go to find Jones Act seaman status.
- evaluate debt service obligations and ability to pay;
- assess potential for financial covenant default;
- reach out to lenders to obtain waivers/amendments to credit facilities; and
- identify assets that can be sold.
The U.S. Fifth Circuit recently reversed and rendered a District Court’s finding of future lost wages so that it was based on statistical work life expectancy rather than Social Security retirement age. In the recent unpublished Fifth Circuit opinion, Mark Barto vs. Shore Construction, LLC; McDermott Inc., No. 14-31326, the Court affirmed a finding of Jones Act negligence against a derrick barge owner, an award for future general damages, and the award for cure against the plaintiff’s nominal employer. However, with regard to the plaintiff’s future lost wages, the decision focused on the District Court’s adoption of the plaintiff’s economist’s supposition that the plaintiff would work until his Social Security retirement age of 67 was reached rather than to an age supported by statistical work life expectancy. The Fifth Circuit reversed the District Court’s finding of future lost wages and reduced the amount as would be appropriate in determining that the plaintiff would have only worked until the age of 55.8 rather than 67.