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Legal Watch: Volume 3

Prepared by William H. Bode
Bode & Grenier, LLP
1150 Connecticut Ave., NW
Washington, D.C. 20036
Telephone: 202-862-4300 | Email: wbode@bode.com

OIL RIG OWNER DENIED INDEMNIFICATION FROM CHARTERER AS A RESULT OF OWNER'S BREACH OF SEAWORTHINESS WARRANTY

Case Summary: Plaintiff sued the owner and charterer of the M/V MIKE MARTIN ELEVATOR, a jack-up rig operating in the South Pass 27 in the Gulf of Mexico, after Plaintiff was injured while servicing the rig. As a result of built-up pressure, the rig erupted in flames, and Plaintiff was injured. Plaintiff's injuries were exacerbated as a result of the lack of working fire extinguishers on the MIKE MARTIN ELEVATOR. The MIKE MARTIN ELEVATOR was owned by Elevating Boats, LLC ("Elevating Boats"), and chartered by Energy Partners Ltd. ("Energy Partners"). Plaintiff sued both Elevating Boats and Energy Partners, and alleged that Defendants violated their duties to provide him with a safe workplace. Plaintiff settled his claims against both Defendants. Elevating Boats subsequently sought indemnification from Energy Partners for its portion of the settlement pursuant to the knock-for-knock indemnity provision contained in their charter agreement. Elevating Boats brought the indemnification action against Energy Partners, Plaintiff's statutory employer, in the Federal District Court in Eastern Louisiana. The Court ruled that, despite the clear knock-for-knock indemnity clause contained in the charter agreement, Elevating Boats was not entitled to indemnification for injuries that occurred as a result of the lack of operative fire extinguishers onboard the MIKE MARTIN ELEVATOR. The Court stated that the lack of operative fire extinguishers onboard the MIKE MARTIN ELEVATOR violated Elevating Boats' warranty of seaworthiness. Further, the Court held that the knock-for-knock indemnity clause was superseded by a charter agreement clause which excludes warranty breaches from indemnification.

LESSON: Knock-for-knock indemnity provisions may not provide full protection against liability. Knock-for-knock indemnity provisions provide some protection against potential suits brought by the employees of a charterer or operator. However, the agreement containing the indemnity provision must be carefully reviewed to ensure that property owners are not surprised by liability stemming from exceptions to the knock-for-knock indemnity clause. (Comeaux, et al., v. Coil Tubing Services, et al.)

VESSEL OWNER DENIED DEMURRAGE RECOVERY AS A RESULT OF DELAY IN INITIATING LITIGATION AGAINST CHARTERER

Case Summary: Arcadia Petroleum Ltd. ("Arcadia"), an oil trader and the owner of the M/V Magdelaine, entered into two Tanker Voyage Charter Party agreements (the "Agreements") with Sun International Ltd. ("Sun"). The Agreements related to the transport of oil from Escravos, Nigeria to Philadelphia, Pennsylvania. The Agreements required Sun to pay demurrage to Arcadia if excessive laytime occurred. Cargo was discharged in Philadelphia pursuant to the Agreements on February 5, 2000 and March 29, 2000. Arcadia notified Sun on February 10, 2000 and April 5, 2000 that demurrage had been incurred. On August 30, 2000, Sun provided Arcadia with Sun's calculation of the net total of demurrage, which Arcadia accepted. Between August 2000 and 2004, Arcadia and Sun continued to engage in other mutually beneficial business transactions, but Sun failed to pay the owed demurrage. In February 2004, the demurrage remained unpaid, and Arcadia sued Sun in the Federal District Court in Eastern Pennsylvania, alleging breach of contract. The Court stated that Arcadia forfeited the demurrage as a result of its delay in bringing suit. The Court held that the Agreements imposed a one-year limitations period within which Arcadia could sue Sun as a result of unpaid demurrage. The limitations period began to run on the date of cargo discharge, and Arcadia sued Sun four years later.

LESSON: Agreements may impose severe time limitations upon parties who suffer harm as a result of contract violations. It is vital that petroleum transporters and terminal operators be vigilant in asserting their contractual rights, lest these rights evaporate as a result of the passage of time. The aggrieved party must initiate litigation within the contractual time limit, even if the aggrieved party continues to maintain other business relationships with the breaching party. (Arcadia Petroleum Ltd. v. Sun International Ltd.)

EMPLOYEE LIMITED TO WORKER'S COMPENSATION INSURANCE BENEFITS AS A RESULT OF WORK-RELATED BLOOD DISORDER

Case Summary: Plaintiff, an employee of Chevron Research and Technology Company ("CRTC"), was diagnosed with myelodysplasia (a serious blood disorder) as a result of his exposure to benzene during his employment. CRTC is a division of Chevron U.S.A., Inc. ("Chevron"). Plaintiff was exposed to benzene was a result of his work as a technician in CRTC's Lube Lab. His doctors linked his benzene exposure to his health problems, and Plaintiff sued Chevron, alleging that Chevron breached its duties as the owner of the CRTC property where Plaintiff worked. The Court of Appeal of California stated that an employee who becomes ill as a result of injuries suffered while working is generally limited to worker's compensation benefits as their exclusive recovery. However, if the injured employee's workplace is not owned by his employer, the employee may bring suit against the property owner for injuries arising out of property defects. Nevertheless, the Court of Appeal of California held that Chevron was not liable for Plaintiff's injuries, because: 1) it was unclear that Plaintiff's injuries were caused by a defect in the property; and 2) Chevron did not monitor safety conditions on the property, or assume responsibility to monitor safety conditions on the property.

LESSON: Worker's compensation insurance generally provides an exclusive remedy for workers injured while on the job. However, each state maintains individual rules regarding worker's compensation exclusivity, and it is important that employers remain aware of the nuances that apply to their operations and corporate structure. Given the danger of benzene exposure, it is particularly important that terminal operators remain aware of their liability position regarding worker's compensation insurance. In addition, property owners must remain vigilant regarding their duties if they assume responsibility to monitor safety conditions on the property. (Laico, et al., v. Chevron U.S.A., Inc.)

Please address any comments or questions to Mr. Bode at 202-862-4300 or wbode@bode.com.

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