Energy Legal Roundup

03 October 2018

UK Court decides subcontractor not covered by construction project insurance

In a recent case the UK Courts were ask to consider whether project insurers were entitled to bring a subrogated claim against sub-contractors on the insured project or, to put it another way, whether the sub-contractors were entitled to the benefit of the project insurance.

A Trust (the claimants) had contracted with a construction firm to perform major construction works to a school. In turn, the construction firm contracted with a number of sub-contractors, for the roofing works. The main contractor, as it was required to do by its agreement with the claimants, obtained project insurance. Separately a sub-contractor had agreed to take out its own liability cover, which it did for a limit of £5mm.

While the subcontractor was carrying out ‘hot works’, a fire occurred and caused severe damage to the buildings. The Claimants sued the main contractor for £8.75mm who claimed under their insurance, which was settled. The insurers then looked to subrogate against the sub-contractor.

The subrogation claim against the sub-contractor was limited to the extent of the sub-contractor’s liability insurance, i.e. £5mm. The sub-contractor argued that it was a co-insured under the Project Insurance and that as a result, the Project Insurers had waived their right of subrogation against them. Although the sub-contractor was not named as a co-insured, it was common ground that it fell within the class of subcontractors who would ordinarily be a co-insured, but the Project Insurers argued that there was an exception where the sub-contractor was required to maintain its own liability insurance.

The case was argued and analysed in a number of ways, but ultimately the Court held that the effect of the express term in the sub-contract which required the sub-contractor to take out its own liability insurance was that the sub-contractor did not have the benefit of the Project Insurance. The Judge’s preferred analysis was that of “standing offer”. 

The standing offer made by the Project Insurers was to insure all subcontractors joining a defined grouping upon execution of the relevant sub-contract, and the acceptance of the offer would be to imply a term into the contract between the main contractor and the sub-contractor. However, the sub-contract contained a term that the sub-contractor would obtain its own insurance so a conflicting term that it was part of the defined grouping of insureds under the Project Insurance could never be implied. The sub-contractor was not, therefore, a co-insured under the Project Insurance.

While this case is not energy related it potentially has ramifications for onshore and offshore CAR policies under English Law and jurisdiction.

US APPEALS COURT APPLIES NEW TEST FOR MARITIME CONTRACT DETERMINATION

Earlier this year (see our April newsletter), the United States Court of Appeals for the Fifth Circuit established a new test for defining maritime contracts when it issued its unanimous en banc decision, abandoning the previous multi-factor tort-based test in favour of a two-pronged contract-based test that turns on the answers to the following:

1. Is the contract one to provide services to facilitate the drilling or production of oil and gas on navigable waters?

2. Does the contract provide or do the parties expect that a vessel will play a substantial role in the completion of the contract?

In July this year the Fifth Circuit considered, for the first time post this change whether an agreement executed between an operator and contractor for plugging and abandonment work (“P&A”) was a maritime contract. The agreement consisted of two documents: (i) a master service contract that provided general terms governing the parties’ working relationship and (ii) a bid letter that outlined the specifics of the P&A work to be performed. Notably, the master service contract contained several indemnity provisions that required the contractor to defend and indemnify the operator against “any claims for bodily injury, death, or damage to property.” The bid letter also contained a specific section that listed the equipment required to perform the P&A work, including three vessels.

On appeal, the Court was required to address whether the financial obligations for personal injuries outlined in the agreement’s indemnity provisions were enforceable or if those provisions were invalidated by application of the Louisiana Oilfield Indemnity Act. Ultimately, the Fifth Circuit determined that the agreement was a maritime contract and that federal maritime law applied.

In reaching its decision, the Fifth Circuit employed a fact specific approach in light of the new two-prong test First, the Court considered whether the contract at issue was one to facilitate the drilling or production of oil and gas on navigable waters. Initially, the Court determined that the plugging and abandonment of well heads is considered part of the “drilling and production of oil and gas” because the decommissioning of a well is part of its lifecycle. The Court further determined that, regardless of whether the personal injury action for which a party seeks indemnification occurs on a vessel, the first prong of the test is satisfied if the contract itself calls for oil and gas production on navigable waters. Here, the Fifth Circuit determined that the contract contemplated work to be performed upon navigable waters despite the fact that the underlying tort claim arose out of an incident that occurred on a fixed platform.

Next, the Fifth Circuit turned to the second prong of the test which asks whether the agreement provides or the parties expect that a vessel will play a substantial role in the completion of the contract. The Fifth Circuit first acknowledged, that it determined work is likely “substantial” if it comprises over thirty percent of the performance under the agreement. Ultimately, the Court found that because over half of the P&A operations were comprised of wireline work, and because the wireline equipment was located on one of the three vessels indicated in the original bid offer, the parties must have contemplated that the vessel was to play a substantial role in the completion of the contract.

Having decided that the two prongs of the test were met, the Fifth Circuit concluded that the agreement between the parties was a maritime contract. Accordingly, federal maritime law applied, and the indemnity provisions in the contract were enforced.

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If you require any further information, please contact John Cooper, Managing Director on +44 (0)20 7466 6510 or email john_cooper@jltgroup.com.

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