Maritime or non-maritime? The status of oilfield contracts in Louisiana



On 8 January 2018 the Fifth Circuit  en banc (In re Larry Doiron, Inc., (5th Cir. Jan. 8, 2018 No. 16-30217)) reworked the test for determining whether oilfield contracts are maritime or non-maritime in nature. Under maritime law knock for knock indemnity clauses in oil field service contracts are valid, but under anti-indemnity statutes in some states, such as Louisiana and Texas, they are invalid.


The case involved flowback operations performed in state waters on a fixed platform. The master service contract for the flowback work did not call for any vessel involvement. However, during the job the flowback contractor, STS, found a crane was needed to manipulate some of the flowback equipment. A tug and barge were needed to get the crane to the platform and the platform owner had to charter in vessels to allow the flowback contractor to do its work. required the platform owner (Apache) to subcontract with Larry Doiron Inc to charter in the necessary vessels to allow STS to do its work under the MSC.   During the ensuing operations, an STS technician was injured, and LDI sought indemnity from STS under the terms of the Apache-STS MSC (which provided for indemnity from STS to Apache and any of Apache’s subcontractors).


The Fifth Circuit set out a new two part test to determine whether or not the contract is maritime in nature. First, is the contract one to provide services to facilitate the drilling or production of oil and gas on navigable waters? Second, if the answer to the above question is “yes,” does the contract provide or do the parties expect that a vessel will play a substantial role in the completion of the contract? If so, the contract is maritime in nature.


Applying this new test to this case, the oral work order called for STS to perform downhole work on a gas well that had access only from a platform. After the STS crew began work down hole, the crew encountered an unexpected problem that required a vessel and a crane to lift equipment needed to resolve this problem. The use of the vessel to lift the equipment was an insubstantial part of the job and not work the parties expected to be performed. Therefore, the contract was non maritime and controlled by Louisiana law which barred the indemnity under Louisiana Oilfield Indemnity Act.

International insolvency outside the EU: contract under English law and we’ll see you right.

Before the twenty-first century there was a clear and undoubted rule in international insolvency known as the Gibbs rule (Antony Gibbs & Sons v La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399). Whatever recognition or other co-operation we might be prepared to grant foreign insolvency proceedings, if an obligation was governed by English law and otherwise valid, its validity could not be affected by any act of foreign courts or authorities proceeding under their own insolvency law.

There is no doubt that this is no longer the case for EU insolvencies: the EU Insolvency Regulations of 2000 and more recently 2015 have clearly put paid to any such exceptionalism. But what of non-EU insolvencies? Since 2006 there has been some question whether the simple Gibbs rule might have been affected by the UNCITRAL-based CBIR (Cross-Border Insolvency Rules), which now give the English courts considerable scope to replicate in England the effects of a foreign insolvency proceeding in a debtor’s own COMI (centre of main interests, essentially where its business was run from). Progressive and academic opinion (the latter as usual generally aping the former) consistently suggested that the answer ought to be Yes, on the basis that modified universalism in insolvency needed to become more global and less narrowly jurisdictional.

Today, however, Hildyard J, in a careful judgment in Bakhshiyeva v Sberbank of Russia & Ors [2018] EWHC 59 (Ch), a case on the dry subject of paper issued by a Baku bank, gave the answer No. The bank, OJSC, with connections to the Azeri state, was highly insolvent. It went into Chapter 11-style reconstruction in Azerbaijan, successfully applying to have the proceeding recognised in the UK under the CBIR. A vote of an overwhelming number of creditors, valid under Azeri law, agreed a complex debt-for-government-bonds-and-new-lower-debt arrangement under which OJSC would then continue trading. Two financial institutions, one English (Templeton) and one Russian (Sberbank), holding English-law-governed debt issued by OJSC, held out. They took no part in the vote, though as a matter of Azeri law they were bound by it.

The question was, could the English court prevent these two minority creditors bloody-mindedly enforcing their rights in full against the bank once the moratorium created by the Azeri proceedings was over? As stated above, the answer was No. Whatever one might think of the Gibbs rule, it was too solidly anchored to have been removed by the side-wind of the CBIR. Nor should it be bypassed by, for example, admitting that the debt still existed but then reducing it to something like the grin on the Cheshire cat by preventing its enforcement against the assets of the debtor.

There is much to be said for Hildyard J’s solution, both on grounds of legal certainty and also because Parliament has occasionally stepped in in other areas, but not this one, to prevent abuse of international creditors’ rights (notably, in enforcing statutory debt relief for poor countries against vulture funds and the like).

It may, moreover, be important not only for bondholders — who will obviously be opening discreet magnums of champagne this evening — but for other creditors, including maritime ones. Charter claimants and bunker suppliers whose rights are governed by English law will now, it seems, be able to watch smugly from the sidelines while shipping companies go into reconstruction, waiting for the proceedings to end before pouncing, catlike, on the very same companies, seizing their London accounts and arresting their vessels for the full amount of their claim as soon as they venture far from home. Commerce red in tooth and claw, you might say: but then that’s how it’s always been in shipping.


Barratry and the Hague-Visby Rules

Glencore Energy UK Ltd v Freeport Holdings Ltd [2017] EWHC 3348 (Comm) raised the question of  whether barratry affected owners’ entitlement to rely on two of the exceptions in art. IV (2) of the Hague-Visby Rules. A fire started inside the engine control room of the “Lady M” while the vessel was on a laden voyage from Russia to the USA.  The fire resulted in owners engaging salvors to tow the vessel to Las Palmas where owners declared general average. Cargo interests denied liability to contribute on the basis that there had been the fire had constituted a breach of the contract of carriage, which was subject to the Hague-Visby Rules. I

t was agreed that the fire was started deliberately by a member of the crew with the intent to cause damage and for the purposes of the preliminary issues the assumed facts were that:  the perpetrator was the Chief Engineer; he acted alone; at the time of starting the fire deliberately and with intent to cause damage he was: “a. under extreme emotional stress and/or anxiety due to the illness of his mother; b. alternatively, suffering from an unknown and undiagnosed personality disorder and/or mental illness;c. alternatively, neither a nor b above.”

Three preliminary issues came before Popplewell J.

(1)        Did the conduct of the chief engineer constitute barratry?

(2)        Is Article IV Rule 2(b) capable of exempting the Owners from liability if the fire was deliberately or barratrously caused?

(3)        Are the Owners exempt from liability under the “any other cause” exception in Article IV Rule 2(q)?


Popplewell J defined barratry as (i) a deliberate act or omission by the master, crew or other servant of the owners (ii) which is a wrongful act or omission (iii) to the prejudice of the interests of the owner of the ship or goods (whether or not such prejudice is intended) (iv) without the privity of the owner. A “wrongful act or omission” would be: one that is generally recognised as a crime, including the mental element necessary to make the conduct criminal; or (b) a serious breach of duty owed by the person in question to the shipowner, committed by him knowing it to be a breach of duty or reckless whether that be so. It would be necessary for the crew member to have had the necessary knowledge or intent that what he is doing is either a crime or a serious breach of duty owed towards his owners, or at least recklessness in that regard. On the assumed facts the chief engineer may or may not have constituted barratry, depending upon further facts as to his state of mind. However, the issue of barratry was not determinative of the second and third preliminary issues.

Popplewell J went on to find that the owners were able to rely on the fire exception in art. IV (2)(b) applied, whether or not the fire was caused by  barratry. However, they would not be able to rely on the “any other cause” exception in art. IV (2)(q) as the chief engineer was acting within the course of his employment on the agreed facts. His access to the control room arose directly from the field of activities entrusted to him by the owners and his setting fire to the control room, with intent to cause damage, was a misuse of his position in the field of activities for which he was employed.


Unseaworthiness and general average.  The Cape Bonny.


The Cape Bonny [2017] EWHC 3036 (Comm) gives us another general average judgment, following hot on the heels of the Supreme Court’s decision in The Longchamp. This time it was the effect of an actionable fault of the shipowner that was in issue.

An oil tanker suffered an engine breakdown on a voyage to China at a time when the vessel was endeavouring to avoid a tropical storm. The vessel required towage assistance and engaged a tow. She was not permitted to enter a port of refuge in Japan or to discharge at the Chinese discharge port and was taken to South Korea to transfer her cargo to another vessel by STS. At the time the vessel set sail, she had been unseaworthy in two respects. First, some of her filters were not seaworthy. Secondly, there was abnormal wear on one of the bearings. Cargo interests refused to pay their general average contribution on the basis that there had been actionable fault on the part of the shipowners, namely their failure  to exercise due diligence to make the vessel seaworthy as required by art III(1) of the Hague-Visby Rules which were incorporated into the contract of carriage.

Teare J found that owners had failed to exercise due diligence in respect of both of the instances of unseaworthiness, but that the first instance had not been causative of the breakdown.  A proper inspection of the filter candles prior to sailing would not necessarily have revealed that some had damaged mesh, as not all the candles were damaged. However, the deflection readings prior to sailing would have alerted a prudent engineer or superintendent to taking bearing clearance measurements. This failure to take due diligence was causative in that such measurements would have indicated abnormal wear requiring a repair before the voyage could safely be undertaken.

Accordingly, the general average expenditure incurred by the owners was due to their actionable fault and cargo interests were not liable to make a general average contribution. Teare J then went on to consider, obiter, whether the tow expenses would have been recoverable as being “reasonably made” as required by Rule A.  Although the vessel was immobilised at sea and not in danger of drifting aground, there was a tropical storm in the area and it was reasonable to engage a tug which could get to the vessel as soon as possible. Teare J approved the statement in Lowndes and Rudolf at para. A-42 to the effect that immobilisation caused by a main engine breakdown is a sufficient peril or danger in the law of general average “even if the accident occurs in fine weather. The cost of towage and/or salvage into a port of refuge will then unquestionably be treated as general average.” The actions of the owners in discharging the cargo by STS operations were also reasonable given that owners had failed in their attempts to get the vessel into a Japanese port of refuge and to get the receivers to accept delivery in the Chinese port of discharge.


Varying the order of priorities between in rem claimants in Singapore.

In The Posidon [2017] SGHC 138 Singapore High Court has recently held that the order of priorities set out in the High Court (Admiralty Jurisdiction) Act (Cap 123, 2001 Rev Ed) (“HCAJA”) could be varied in exceptional circumstances where: (i) there was knowledge that the mortgagor was insolvent; (ii), the mortgagee had been been fully aware, in advance, of the nature and extent of the expenditure incurred by the competing claimant; (iii) any such expenditure had brought about some benefit to the mortgagee.

The dispute arose as to the order of priorities against proceeds paid into court following the judicial sale of two vessels. The bank claimed as second mortgagee and the bunker supplies claimed as necessariesmen. The bunker suppliers argued that the court should depart from the usual order of priorities in Singapore and give them priority over the bank. Belinda Ang Saw Ean J held that the facts of the case did not justify varying the order of priorities set out in the HCAJA, stating [87] “Injustice warranting an alteration to the order of priorities is only present when the mortgagee stands by and allows such bunker arrangements to take place despite knowing that the mortgagors were insolvent and that the mortgagee would somehow be benefitting from the supplies at the expense of the bunker supplier.”

The borrowers here had been operating at a loss and accumulating trade debts for some time prior to the bank’s decision to terminate the loan facility agreement and enforce the mortgages. That did not mean that the borrower was insolvent and at the time of the termination of the loan facility arrangement the bank had not considered the borrower to be at risk of becoming insolvent. There was also no evidence that the bank was fully aware in advance of the owners’ bunkering arrangements. Nor did the supply of bunkers to the vessels bring about any benefit to the bank. The bank’s security interest was not protected because the bunkers gave the vessels motive power.

Singapore arrest is for Singapore litigation.


In The Eurohope  [2017] SGHC 218 the Singapore High Court has held that it is an abuse of process to arrest a vessel in Singapore for the purpose of obtaining security for legal proceedings in another jurisdiction, in this case the High Court in England. This reflects the position in English law prior to s.26 of the Civil Jurisdiction and Judgments Act 1982 which empowered the court to order that property arrested be retained for the satisfaction of a judgment given in foreign court proceedings. Singapore has not enacted any equivalent legislation, and only provides for the arrest of ships to be used as security for pending international arbitrations (s. 7(1) the International Arbitration Act 1995).

Accordingly, the court ordered the in rem writ to be struck out, the warrant of arrest to be set aside, and the letter of undertaking issued by the owners’ P&I Club to be returned to the owners or their solicitors for immediate cancellation. The Court declined to award damages for wrongful arrest or wrongful continuance of arrest of the vessel. Taken as a whole the plaintiff’s behaviour was reasonable and did not amount to bad faith or malice.

Operating expenses incurred during ransom negotiations. Now allowable under Rule F of YAR 1974.

In The Longchamp reported in our blog of 9 August 2016, the Court of Appeal held that four items of vessel operating expenses incurred during ransom negotiations with pirates were not allowable in general average as substituted expenses under Rule F of the York Antwerp Rules 1974.

Rule F provides:

“Any extra expense incurred in place of another expense which would have been allowable as general average shall be deemed to be general average and so allowed without regard to the saving, if any, to other interests, but only up to the amount of the general average expense avoided.

The items claimed in respect of this period were: crew wages; the high risk bonus due to the crew for being at sea in a high risk area; crew maintenance; bunkers consumed. The expenses were incurred over a 51 day period of negotiation with the pirates which resulted in the release of the vessel on payment of a ransom of US1.85m, as opposed to the US$ 6m initially demanded. The Court of Appeal held that Rule F presupposes some real choice being made. Acceptance of the initial ransom demand is not a true alternative; nor is acceptance of any other ransom sum less than that initially demanded but greater than that eventually agreed.

The Supreme Court has now overturned the decision of the Court of Appeal and held, Lord Mance dissenting on the facts, that the four operating expenses were allowable under Rule F. The Supreme Court disagreed with the Court of Appeal’s decision that the operating expenses did not fall within Rule F because payment of a reduced ransom was not an ‘alternative course of action’ to paying the ransom initially demanded, but was merely a variant. This reasoning required a different means to be adopted to complete the adventure from that which might normally be expected. This was the prevailing view of the texts on General Average and among practitioners, but was not supported by the language of Rule F. In any event, incurring the operating expenses did represent an ‘alternative course of action’ to paying the ransom intially demanded.

Both lower courts had found that the reference in Rule F to “another expense which would have been allowable as general average” is to an expense whose quantum is such that it would have qualified as a claim under Rule A. Both lower courts had accepted that on the facts payment of the ransom in full would have been reasonable. The Supreme Court disagreed with this construction of Rule F. The reference in Rule F to ‘allowable in General Average’ did not mean that the expense (in this case payment of the full ransom demanded) had to be reasonably incurred. It had to be of a type that would constitute a General Average expense. If so, the substituted expense (in this case the payment of the lower ransom together with the operating costs during the period of negotiation) would be allowable, but only to the extent that it did not exceed the sum avoided and that it was established that it was reasonable to pay the ransom that was paid together with incurring the operating expenses and the negotiation expenses during the 51 days.

The Supreme Court also rejected cargo interest’s argument that the exclusion of indirect loss including demurrage from General Average under Rule C served to exclude the operating expenses from Rule F. Rule C did not apply to expenses recoverable under Rule F which by definition were expenses not themselves allowable in General Average but were alternatives to sums that were allowable.


Salvage Convention time limit and recovery of items from wreck


The time limit for salvage claims under article 23(1) of the 1989 Salvage Convention article 23(1) is two years commencing on the day on which the salvage operations are terminated. Where items are salved from a historic wreck, when does the two year limit start to run? This was the issue before Teare J. in  The Queen (on the application of David Knight) v Secretary of State for Transport [2017] EWHC 1722 (Admin).

Mr Knight undertook dives from various wrecks and claimed salvage from the Receiver of Wreck. The claim was denied on the ground that the two year limit had expired by the time salvage was claimed in respect of the items raised from the wrecks. Mr Knight argued that salvage operations of a wreck on the sea-bed cannot, as a matter of law, be considered to be finished or complete until everything is raised from the sea-bed or the salvor abandons his operations.

Teare J rejected this contention. The day on which salvage operations are terminated is the day on which the activities to assist a vessel or any other property in danger and which have given rise to a claim under the Convention have been terminated. This was a question of fact to be determined in every case. Here, the salvage operations in question had terminated after the salved items left the site. Although further diving operations on the wrecks continued in subsequent years this was not enough to show that they were part of the same operations as resulted in the recovery of the items for which salvage was claimed. Further preservation work on the items once ashore did not continue the salvage operations which ended once the items were rescued from danger on navigable or other waters.

The claim had also been rejected on the ground of fraud or dishonest conduct on the part of Mr Knight who had been convicted of offences in relation to the salved items under s. 237 of  the Merchant Shipping Act 1995. Teare J was of the view that the discretion under art. 18 to refuse a salvage award in whole or in part due to fraud or dishonest conduct was not limited to conduct committed by the salvor in the actual salvage operations.