Face Challenges Confidently

466 Transocean Offshore Deepwater Drilling, Inc. v. ENI U.S. Operating Co., Inc.

Tuesday, September 1st, 2015

Richard F. Brown

The following is not a legal opinion.  You should consult your attorney if the case may be of significance to you.
Transocean Offshore Deepwater Drilling, Inc. v. ENI U.S. Operating Co., Inc., 957 F.Supp.2d 836 (S.D. Tex. 2013) applied admiralty law to interpret the risk of loss provisions in an offshore drilling contract after all drilling operations in the Gulf of Mexico were halted due to the unrelated blowout of BP’s Macondo Well.  The parties entered into a multi-year agreement (“Drilling Contract”) by which Transocean (as “Contractor”) leased its vessel, Transocean Amirante, to Eni (as “Operator”) for drilling operations in the Gulf of Mexico.  The Operator owed the Contractor an Operating Rate of $350,000 per day unless and until some other rate specified in the Drilling Contract became effective.  In April 2010, the Amirante was drilling the Allegheny Well #3 for the Operator in the Gulf of Mexico.  On April 20, the Deepwater Horizon experienced the blow-out at BP’s Macondo Well.  On May 28, the Operator applied to the U.S. Department of the Interior Minerals Management Service (“MMS”) for a completion permit.  On May 30, MMS closed the Gulf for a six-month moratorium on drilling deepwater wells and ordered abandonment of all wells then being drilled.  On June 2, MMS returned the Operator’s completion application “for future resubmittal due to deepwater moratorium.”  On June 8, the MMS issued a second order, which was a new requirement for drilling vessels such as the Amirante, that the drilling vessel “must have an independent third party conduct a detailed physical inspection and design review of the BOP [(Blowout Preventer)].”  On June 9, the Amirante completed the temporary abandonment of the Alleghany Well #3 by plugging it and headed for the shipyard.  On June 11, the vessel arrived at the shipyard and began routine maintenance.  On July 10, the third party inspectors arrived, found multiple problems with the BOP, and the repairs took months to complete.  On October 12, the moratorium was lifted.  On January 21, 2011, the third party inspectors issued a certificate of compliance.  On January 24, the Operator obtained the permit to use the Amirante.  On February 11, after the Contractor completed some additional, unrelated repairs, the Amirante finally left the shipyard and resumed operations.
The Operator paid at a rate that was undisputed for all of the time, except for the approximately seven months from July 10, 2010 to February 11, 2011.  This was the time interval from the date the inspectors arrived until the vessel left port.  Under the terms of the Drilling Contract, the Contractor claimed the applicable rate for the contested interval was the “Standby Rate,” and the Operator claimed the applicable rate was the “Repair Rate.”  The difference was approximately $78 million.
The court followed the basic principle of contract interpretation in admiralty law: to “interpret, to the extent possible, all the terms in a contract without rendering any of them meaningless or superfluous.”  The Drilling Contract included three applicable rates: (1) the basic Operating Rate of $350,000 that would remain in effect “unless it is replaced by another rate” specified in the contract, (2) the Repair Rate, which was “for any period during which operations are suspended to permit necessary replacement, regulatory inspection, repair or maintenance of the [Amirante]” (which started at 98% of the Operating Rate for a maximum of 48 hours per month or 288 hours cumulatively, then a Zero Rate kicked in), and (3) the Standby Rate which was for “any period of delay as a direct result of an act, instruction, or omission of Operator including, but without limitation, the failure of any of Operator’s Items, or the failure of Operator to issue instructions, provide Operator Items or furnish services” (which was 98% of the Operating Rate and never went to the Zero Rate).
Contractor argued that the Repair Rate is “triggered only if the suspension of operations results from a Repair Rate event.”  Contractor contended that the suspension of operations was not to make repairs beginning July 10, because the suspension had already occurred under the moratorium.  Moreover, Contractor also advanced arguments that Operator failed to provide all of the Operator’s Items under the contract, failed to issue instructions to Contractor at the time, did not have other work available, etc.
The court disagreed with Contractor’s strict reading of the language in the Drilling Contract and held that the language did not “require that a Repair Rate event be the sole and exclusive cause of the suspension.”  If the parties had intended that the Repair Rate would not apply when operations were also suspended for some other reason, then the word “only” would have been inserted after “suspended.”  The court also compared the language in the Repair Rate clause with that of the Standby Rate clause, which imposed a stricter causation requirement.  Finally, the court considered the Drilling Contract as a whole and held that “[t]he various contractual rates reflect the parties’ careful division of responsibilities and allocation of the risks of downtime.”  Contractor assumed the risk for the condition and regulatory compliance of the BOP.
The significant holding of the case was that, under the language used in this Drilling Contract, an event triggering the Repair Rate clause made any event triggering the Standby Rate clause irrelevant.