OCSLA Choice of Law is Not Waivable, and Maritime Law Not Applicable to Oil and Gas Exploration/Production Activities on the Outer Continental Shelf
August 31, 2016
Melanie A. Leney
Types : Alerts
In Petrobras America, Inc. v. Vicinay Cadenas, the United States Court of Appeals for the Fifth Circuit handed down two significant rulings for those who do business on the Outer Continental Shelf: 1) that the choice of law provision under the Outer Continental Shelf Lands Act (OCSLA) cannot be waived, and 2) that general maritime law did not apply to a claim that arose in the context of oil and gas exploration and/or production.
This matter arose from the failure of an allegedly defective underwater tether chain, which was used to secure a piping system for oil production in the Gulf of Mexico. The chain ruptured shortly after installation and severed the pipeline connection between the wellheads on the seabed and a Floating Production Storage and Offloading (FPSO) facility on the surface. The damage to the system included loss of the associated free-standing hybrid riser system, loss of use of the FPSO facility, and lost oil and gas production.
Petrobras America and its Underwriters sued Vicinay Cadenas, S.A., the manufacturer of the alleged defective underwater tether chain in federal district court asserting various tort claims. They alleged subject matter jurisdiction based on maritime law or, alternatively, under OCSLA. Vicinay moved for summary judgment, arguing that it was entitled to prevail under maritime law’s economic loss doctrine, which disallows tort recovery when the only physical damage resulting from the incident is to the product itself.
The district court assumed maritime law applied and granted summary judgment to Vicinay. Two months later, Underwriters filed a motion for leave to amend and asserted for the first time that state law, specifically Louisiana, applied and not maritime law. The motion was denied as untimely.
Both issues were appealed. As to choice of law, Vicinay maintained that Underwriters had waived their choice of law argument. The Fifth Circuit rejected this argument reasoning that the choice of law prescribed by OCSLA is statutorily mandated by Congress and not waivable by the parties, whether voluntarily or inadvertently.
Under OCSLA, either maritime law or adjacent state law could apply. Rejecting the district court’s ruling on this issue, the Fifth Circuit found that state law applied. For maritime law to apply, the incident has to meet the twin tests of location and connection with maritime activity. The Court did not address the location test because it found the connection test was not satisfied. The connection test requires that the activity giving rise to the plaintiff’s injury has to be substantially related to traditional maritime activity. The Court determined that here a component failed on an underwater structure in an offshore production installation and caused the structure to fall to the sea floor. This disrupted oil and gas production and development rather than navigation or traditional maritime commerce. Even the involvement of the FPSO, although legally a vessel, was unrelated because the FPSO’s only purpose was to store and process oil in a fixed location for later transport. Finally, the fact that a buoyancy can eventually floated to the surface and had to be recovered had, under the circumstances, only a de minimus potential to disrupt maritime commerce or navigation. Therefore, state law applied.
The Fifth Circuit’s decision reinforces previous case law finding that maritime law will not apply to oil and gas exploration and production activities that do not involve traditional maritime activity. While every case is fact-sensitive, stakeholders should be aware of the interplay between maritime law and state law in this context.