On September 4, 2014 the federal district judge overseeing the multidistrict litigation resulting from the Deepwater Horizon oil spill issued long-awaited rulings as to liability. The court concluded that BP is subject to enhanced civil penalties under the Clean Water Act ("CWA") because the discharge of oil was the result of the company's "gross negligence" and "willful misconduct."
Action Items: In light of this ruling, offshore leaseholders, operators, and contractors will likely be held to an increased standard of care because the severity of the potential harm from a well blowout, explosion, and oil spill is great. Accordingly, leaseholders, operators, and contractors in the offshore industries should review their safety and environmental compliance policies and procedures to ensure they meet or exceed the high standard of care that may be applied to complex, high-risk drilling operations.
Following the Deepwater Horizon oil spill on April 20, 2010, multidistrict litigation was consolidated in the district court in New Orleans, Louisiana. The current trial, which involves two key cases filed against BP and the other entities involved in the drilling of the Macondo well, is being heard by the court without a jury pursuant to the court's admiralty jurisdiction.
The consolidated trial's first phase in early 2013 was to determine the liability of BP, Transocean, Halliburton, and other companies, and to assess, for the purposes of penalty calculation, whether the companies acted with gross negligence and willful misconduct with respect to the loss of well control and the resulting explosion, fire, and sinking of the rig.
The trial's second phase, which occurred during the fall of 2013, addressed the post-incident efforts to control the spill and the quantity of oil that spilled into the Gulf of Mexico. The judge has not yet issued a ruling with respect to the issues presented in the second phase. The third phase, which is scheduled to begin in January 2015, will focus on all other liability issues arising from the oil spill cleanup, including containment issues and the use of dispersants.
The court held that the complexities of drilling the Macondo well in deepwater and the potential magnitude of the harms from a blowout, explosion, and oil spill were so great that BP's direction of the drilling operation was subject to an increased standard of care. The court further found that BP's operational and engineering personnel were well aware the Macondo well had been particularly troublesome to drill and those difficulties continued throughout the efforts to isolate the well from the reservoir. Thus, the court held that the record of well control problems during the drilling of the Macondo well required an even higher standard of care during the preparations for the temporary abandonment of the well.
The Court found that BP's team leader on the rig and its senior drilling engineer ashore in Houston had knowledge of these difficulties and their associated risks, and failed to exercise the "heightened" vigilance required by the circumstances when interpreting the results of the negative pressure test, the principal test used to determine if the well was properly isolated from the reservoir before proceeding to displace the well. Based on the results of the negative pressure test conducted on the Macondo well, the court determined a reasonable drilling engineer in that situation would have concluded that the test was a failure and should have required the test to be repeated. The court noted that conducting a second negative pressure test would have imposed an extremely light burden when compared to the severe and foreseeable consequences that could, and did, result from continuing the displacement procedures after a failed test. Consequently, the court held that BP's engineers' failure to order a new test before proceeding with the well displacement procedures constituted an extreme departure from the care required under the circumstances.
The court also found that BP's engineers knew of facts that would have led a reasonable drilling engineer in the industry to realize that that the failure to stop the well displacement would probably result in physical injuries, death, and severe property damage. However, even though the BP engineers had to briefly pause the displacement procedure just minutes before the blowout occurred to conduct a required sheen test, instead of directing that another negative pressure test be performed, they affirmatively ordered that the displacement procedure be resumed. The court held that this conduct amounted to recklessness.
The court further found that BP committed a separate series of negligent acts and omissions that resulted in the discharge of oil. Taken together, these additional acts of negligence amounted to gross negligence and willful misconduct under the CWA. Moreover, the court found that some of these acts and omissions resulted from profit-driven decisions. The court held that these instances of negligence, taken together, provide an independent basis for enhanced penalties under the CWA because they constituted an extreme deviation from the standard of care and a conscious disregard of known risks.
Based on these findings and conclusions, the court determined that BP was vicariously liable under the CWA's enhanced penalty provision for the gross negligence and/or willful misconduct of its employees. Accordingly, the court's ruling subjects BP to an enhanced civil penalty of $4,300 per barrel under the CWA, which is nearly four times higher than the standard penalty for oil spills involving simple negligence under that statute. As a result of this decision, BP could be found liable for as much as $18 billion in CWA penalties when phase three is completed with regard to making a determination on the amount of oil that was discharged.
Although the court indicated that BP's conduct warrants the imposition of punitive damages under general maritime law, under precedent in the U.S. Court of Appeals for the Fifth Circuit, operational recklessness or willful disregard of a known risk by an employee is generally insufficient to visit punitive damages upon the employer. Accordingly, the court held that in the matter before it, BP could not be held liable for punitive damages in states within the Fifth Circuit (e.g., for claims involving Texas and Louisiana). The court also ruled, however, that BP could be held liable for punitive damages for claims that are subject to standards set by other Circuit Courts. This decision is particularly important, for example, with regard to claims in Florida and Alabama, which are within the Eleventh Circuit. There already are reports that the state of Alabama is preparing its case against BP for compensatory and punitive damages.
General Maritime Law Liability
The court also concluded that BP and its drilling partners, Transocean, the owner of the Deepwater Horizon, and Halliburton, the cement contractor for the Macondo well, were each liable under general maritime law for the blowout, explosion and oil spill. However, while BP's conduct was reckless, the court held that Transocean's and Halliburton's conduct was simply negligent. For purposes of determining comparative fault, BP was apportioned 67 percent of the fault, while Transocean was apportioned 30 percent and Halliburton was apportioned 3 percent. The court concluded that Transocean's share of liability was considerably less than BP's because, while BP's failures created the catastrophic situation, Transocean's failures, by contrast, concerned its inability to stop the catastrophe BP set in motion. Similarly, while the court found that Halliburton failed to properly monitor the well, its failure was relatively small when compared to others' failures, and it was a failure shared by Transocean's drill crew.
Related Liability Rulings
Significantly, the court held that Transocean's and Halliburton's indemnity and release clauses in their respective contracts with BP were valid and enforceable against BP, including for any liability that Transocean may have to government entities for removal costs as an operator of the rig under the Oil Pollution Act of 1990.
The court also ruled that Transocean was not entitled to limit its liability under the Limitation of Liability Act because certain negligent failures of the Deepwater Horizon's crew, which were within Transocean's privity and knowledge, created unseaworthy conditions that caused or contributed to the explosion, fire, and oil spill.
It should be noted that this decision will not affect those claims of businesses and individuals affected by the spill that were involved in the March 2, 2012 class action settlement with BP. It will, however, likely affect the resolution of the claims that are still pending in the federal multidistrict litigation, as well as other claims that have been filed in various state courts.
In a future opinion to be issued concerning the second phase of the trial, the judge is expected to review BP's efforts to control the spill and render his determination of the total amount of oil that spilled into the Gulf of Mexico. Based on the present rulings, BP could face liability for as much as $18 billion in Clean Water Acts penalties, depending on the court's findings and conclusions from the second phase of the trial.
In the third and final phase of the trial, the judge will determine damages resulting from the oil spill cleanup.
Following the conclusion of the trial, all of the district court's rulings for each phase of the trial may be appealed to the Fifth Circuit.
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