The Accident on the Deepwater Horizon Oil Rig: a Trial Analysis*

Introduction

On 20 April 2010, the Deepwater Horizon oil platform exploded in the Gulf of Mexico in the Macondo Prospect, 80 kilometres off the coast of Louisiana. Despite efforts to extinguish the fire, the burning platform sank to a depth of around 1,500 metres on 22 April, killing 11 workers. Over several months, about 5 million barrels of oil were estimated to have spilled through damaged well pipes. The event caused a major environmental disaster involving oil contamination of the sea. The event resulted in a complex and complex lawsuit that lasted several years.

In analysing the multistage legal dispute arising from the disaster, the author of this paper will seek to address the shortcomings in the existing regulation of oil spill-related legal relations, which are fully evident in this case. Before addressing the issue, it is important to familiarise ourselves with the current international regulation of this issue.

International regulation

In the mid-20th century, oil transportation by tanker began to develop rapidly. It became clear that there were many risks involved in this activity. Unfortunately, more often than not, a serious tragedy is the reason for the rapid adoption of a convention in maritime law. For example, after the sinking of the Titanic, a convention to protect people at sea was drawn up. Thus SOLAS (safe our life at sea), the international convention for the protection of human life at sea, was born. The trigger for the development of a mechanism to regulate oil pollution at sea was the famous accident of the major oil tanker Torrey Canyon. In 1967 it ran onto rocks off the Isles of Scilly off the coast of the UK, near France, and suffered a huge blowout, got stuck and spilled over 100,000 tonnes of oil. At the time, there were no effective methods for dealing with spilled oil and no proper legal regulation of such incidents.

Two years after the incident, the 1969 International Convention on Civil Liability for Oil Pollution Damage (CLC) was adopted¹. It is now in force with the 1992 Protocol and the abbreviation CLC 69-92 is generally accepted. The CLC is a universal Convention with 130 Contracting Parties as of 2012 including the Russian Federation which implemented the Convention in its Commercial Navigation Code. The CLS includes several significant principles:

1. Directed liability. The essence of this principle is as follows: the injured party has a direct claim against the ship owner, and the latter may bring a recourse against the actual tortfeasor.

2. Strict liability. Blame is irrelevant and cases of exemption from liability are limited to minor exceptions: acts of war; phenomena of an unavoidable nature; acts or omissions of third parties; situation where damage was caused by the negligence of the government or other authority responsible for keeping lights and other navigational aids in order;

3. The owner of a ship shall be entitled to limit his liability to a certain amount, depending on the capacity of the ship. This limitation may only be invoked by establishing a fund for a total amount equal to the limit of his liability before the court or other competent authority of the state where the action is or may be brought;

4. Limit the liability of the ship owner only when there is no intent, gross negligence or recklessness.

As already noted, the CLC Convention provides a mechanism for compensation for damage caused by pollution through the establishment of a fund. According to the said provisions, the fund is established by depositing an amount or by providing a bank guarantee or other security, in particular an insurer’s guarantee. If it is established, no property of the defendant can be recovered. In this way, the claims of the injured party and the damages are accumulated in one place. The contents of the fund are distributed among the claimants in proportion to the amounts of their justified claims. This design is somewhat similar to the idea of insolvency proceedings: a fund, a mass of property, is set up in the court in which the trial is taking place; there are claims from those affected by oil pollution; they prove the validity of their claims and a register is formed through which the mass is distributed to the injured claimants.

The existing compensation mechanism did not guarantee full compensation for damages and at the same time did not alleviate the serious financial burden on the tortfeasor. A more rational compensation mechanism needs to be developed. Thus, the International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage was signed in Brussels in 1971. The 1971 Convention was amended by the 1976 and 1984 Protocols, and in 1992 it was completely redrafted by a new protocol.

The 1992 International Convention on the Establishment of an International Fund for Oil Pollution Compensation is now in force, replacing the 1971 Convention in its entirety. The Convention entered into force in 1978 and the Fund is headquartered in London. The operation of the Fund is based on a complex scheme of contributions. Each state party to the Convention collects a contribution from oil importers (most often in cash) and passes it on to the Fund.

The compensation arrangements can be presented as several levels of compensation. The first level of compensation is the CLC Convention compensation: either the full liability of the shipowner, or the liability is limited by the establishment of a fund. The amount of possible compensation, as defined by the Convention, is insignificant in the event of a major environmental catastrophe. Therefore, when the fund is exhausted and there are outstanding claims, the second tier of compensation, the International Fund, is involved.

In May 2003, the Protocol on the establishment of the Supplementary Oil Pollution Compensation Fund was adopted. Under this Protocol, a third tier of compensation was established. Participation in the Supplementary Fund is optional and open to all Contracting States to the 1992 Fund Convention. Those states that have chosen not to join the Supplementary Fund will continue to benefit from their current coverage under the current CLC regime and the International Fund². According to the latest current report of the International Fund for 2021, there are 120 member states participating. While there are only 32 states participating in the Supplementary Fund³.

In this legal relationship, there is the following powerful circumstance. The fact is that the available compensation mechanisms may not be suitable for oil spill claimants. The International Convention Establishing the International Fund also, like the CLC Convention, declares the limits of possible compensation. Of course, it must be said that the limits of liability existing in the two conventions have been significantly increased. In particular, thanks to amendments adopted at a conference held in 1992 and again during the 82nd session of the Legal Committee held 16–20 October 2000⁴.

It cannot be said that the established oil spill compensation arrangements are irrelevant to convention parties. On the contrary, in total, since its inception in 1978, the funds have dealt with 156 incidents and paid out some £752 million as of 31 December 2022 (£331 million of which was in respect of the 1971 Fund)⁵. However, the available compensation mechanism ignores claims by claimants outside the two (or three) named levels of compensation.

For example, in the 1978 Amoco Cadiz case (the oil spill occurred in the English Channel area), the plaintiffs, represented by France, which was a member of the CLC, as well as the French municipalities and victims, understood that by applying the CLC Convention, they would receive less monetary relief. Therefore, the plaintiffs applied to the jurisdiction of the United States, a state that was neither a party to the CLC Convention nor to the International Fund. The lawsuits were filed in the Amoco group’s place of business, Illinois and New York. The Illinois and New York cases were consolidated in the Northern District of Illinois by the Judicial Panel on Multidistrict Litigation, not least because US law applied in the litigation⁶.

At the time of the Deepwater Horizon accident, the United States was also not a party to the CLC Convention⁷, so this case was similarly governed by US domestic law, applying different rules from the CLC mechanism and the International Fund for Shipowner’s Limited Liability.

Litigation

Before examining the litigation, it is necessary to identify a few significant actors, without whom the content of the dispute cannot be understood. The accident is most often associated solely with BP (until May 2001, British Petroleum), a multinational oil and gas company headquartered in London. It is impossible not to mention several other companies that, like BP, were involved in the accident.

The first is Transocean Ltd. – a Swiss drilling rig company. It is the largest offshore drilling contractor. The Deepwater Horizon platform was owned by Transocean. Transocean’s team drilled the Macondo well for BP Exploration and Production (BPEP), the US subsidiary of BP, which was leased the area from the US government. The next company is Cameron International, the manufacturer of the failed safety valve, a device to block the well in the event of an emergency. The last company is Halliburton, an American multinational oilfield services company, which has designed a cement well seal to protect the part of the drilling rig that is underwater from natural gases.

The Deepwater Horizon drilling platform was built in 2001 by Hyundai Heavy Industries CO., LT on behalf of R&B Falcon, which became part of Transocean Ltd in 2001. The same year the platform was leased to BP and arrived in the Gulf of Mexico. The rig was then ordered repeatedly by BP under multi-year leases. In February 2010, the Deepwater Horizon platform began drilling the well.

On 20 April 2010, at 22:00 local time, there was an explosion on the platform. The fire quickly spread to the platform, and two days later it sank. An oil spill began immediately after the explosion, which was not stopped until several months later. The reasons for the explosion on the platform are worthy of a separate article and the author will not dwell on them.

The first claims against BP, Transocean Ltd. and Cameron International came from local fishermen who had been fishing for seafood in the Gulf of Mexico. Further claims came from coastal homeowners, real estate agents and restaurants. While 31 claims had been filed by May 2010, by early 2012 there were more than 500 claims. Most of the claims from unemployed fishermen, restaurants and tourist resorts were unsuccessful.

Interestingly that BP and Transocean wanted the cases to be heard in Houston, which is considered friendly to the oil business, but the plaintiffs asked that the case be heard in Louisiana, Mississippi or Florida. Also complicating matters was the fact that five New Orleans judges had declined to hear oil spill cases because of shareholdings in the companies involved or other conflicts of interest. By August, a trial was scheduled, presided over by US District Judge Carl Barbier. The judge tried the case without a jury, as is customary under the Maritime Dispute Rules.

In August 2010, numerous individual lawsuits stemming from the events described were consolidated into a so-called multi-district lawsuit – MDL No. 2179⁸ . The relevant circumstances in this case were so numerous that a special website was even created where the evidence was stored⁹.

For ease of explanation of the logic of the litigation, the author has divided it into two main parts. The first part, deals with the US claim against the named companies (the defendant firms); the second part deals with the multiple defendants’ claims against BP.

“United States v. BP and Contractors”¹⁰

On December 15, 2010, the US Department of Justice filed a civil lawsuit against BP and other defendants for violations of the Clean Water Act and the Oil Pollution Act of 1990 in force in the US. The Acts provided for fines ranging from $1,100 to $4,300 for each barrel of oil spilled. The US government demanded the maximum amount of the fine and the recognition of unlimited financial liability of the defendant firms for the damage caused and the cost of the clean-up. The case follows the consolidation of several proceedings into a single proceeding because by this time the defendant firms had been sued by the Gulf of Mexico states (Louisiana, Alabama in particular) and some other private parties.

Based on an examination of the experts’ position as set out, inter alia, in court transcripts¹¹, the US Department of Justice demanded that the defendants be fined as severely as possible because the evidence suggested that management was ultimately responsible for this gross departure from the principles of good faith in the oilfields. The plaintiffs’ arguments were as follows:

1. A negative pressure test that could have detected the severe gas blowout that led to the disaster was not properly conducted.

2. Transocean did not specifically train any member of the drilling crew, including the offshore rig manager, driller, assistant driller or toolmaker, on how to interpret the negative pressure test. Even the Deepwater Horizon captain was woefully undertrained in safety management.

3. Since the drilling platform went into service in 2001, the evidence suggests that it has never entered port for maintenance, repairs, refits. Not once in nine years.

4. Halliburton should have provided timely evidence of the cement slurry that was used to seal the well, but it did not. Moreover, the prepared mortar also failed to meet the proper quality.

5. It is clear from the case reports that BP did not use the guidelines, did not test the equipment, and generally repeatedly chose speed over safety.

In a suit brought by the Ministry of Justice against Transocean, Transocean pleaded guilty and paid a fine of almost $1.5 billion. BP decided to shift the blame onto Transocean because in BP’s opinion, Transocean should be held liable for the disaster. BP subsequently filed claims in federal court in New Orleans not only against the rig owner, but also against Halliburton and fuse manufacturer Cameron International.

On 26 January 2012, a US federal court ruled that BP’s contractors (Transocean Ltd, Cameron International and Halliburton) should not share in the costs and penalties of the damages. According to a BP spokesperson, the ruling does not absolve Transocean from liability for damages, fines and penalties imposed on the company as a result of its own actions¹².

“Injured v. BP”

Prior to the disaster, the United States government established the Oil Spill Liability Trust Fund, funded by oil producers from tax revenues, fines for illegal oil discharge and other sources, in anticipation of the possible negative consequences. The Clean Water Act establishes the following rule: the responsible party in a dispute must pay damages for claims that it may subsequently recover from the responsible third party or from the Oil Spill Liability Trust Fund. However, the fund cannot pay out more than $1 billion per accident, while the limit for natural resource damages is $500 million¹³. Naturally, the environmental disaster caused by the Deepwater Horizon explosion exceeded the limits, demonstrating the inability of the current mechanism for dealing with such situations to adapt flexibly to disasters of this scale.

The fact that BP is a company capable of paying a huge amount of compensation cannot be overlooked. The situation could have turned out very differently. On the one hand, there is international regulation of such incidents, national rules on the establishment of a dedicated fund, specialist CLC provisions, either fully or partially implemented in national legislation. However, on the other hand, if we take a closer look at the proposed mechanisms, we are faced with the fact that national legislation (using the US example), as well as international acts, is burdened with significant limitations in terms of shipowner liability and the possibility of compensation.

Nevertheless, negotiations between BP and the United States government resulted in a workable solution. A $20 billion trust fund, the Gulf Coast Claims Facility (GCCF), was set up. The management of the fund was entrusted not to BP but to US lawyer Kenneth Feinиberg who at one time managed a compensation fund for victims of the September 11, 2001 tragedy. BP put up $3bn as an initial contribution to the trust, with the remaining

$17bn contributed by the company over several years. The agreement included an option to return the remaining monies once the dispute is settled. At the same time, it was noted that BP would continue to meet its compensation obligations even if the payments exceeded $20 billion.

In March 2012 it became known that a settlement agreement had been reached between BP and the plaintiffs. As a result of the negotiations, the amount of compensation was $7.8 billion. The settlement agreement consisted of two parts: the first related to damages and lost profits; the second related to compensation for life and health. After the settlement agreement was signed, it was sent to the federal court in New Orleans, where on December 21, 2012, Judge Carl Barbier said in a 125-page ruling that the settlement agreement is “fair, reasonable and adequate”. However, as BP representatives pointed out, the fact that the settlement had been signed did not yet confirm that the company was at fault for what had happened.

The strategy chosen by BP in resolving the dispute is, according to some experts, controversial. In particular, Roger Williams University Law School Dean David A. Logan notes the following aspects of the decision. The well-funded fund established allowed BP to compensate quickly for losses and avoid unnecessary litigation. The decision was ineffective in the sense that BP continued to deny fault in the main proceedings and tried to avoid paying damages in other lawsuits. Also, by excluding the categories of damages disputes from the court order, BP allowed plaintiffs to avoid proving a causal link between the explosion and the harm¹⁴.

Over time, it became clear that the above-mentioned doubts about the compensation strategy chosen in the settlement agreement were confirmed. The shortcomings of the pre-trial settlement led to further litigation as the amount of the settlement claims kept increasing. By the end of April 2012, the company had increased its damages estimate to $10.3 billion. By December 2013, BP had paid out $13 billion. In 2014, BP appealed to the Court of Appeal for the District to limit the amount of the claimants’ payment, but the court rejected the application.

Although a Fifth Circuit Court of Appeals panel determined in May 2015 that BP had the right to appeal decisions on “sham” claims, the very right of businesses and individuals to receive compensation has not been questioned, and thus the amount payable is not limited.

As far as is known today, the United States Supreme Court also did not support BP’s arguments. The company wanted the court to consider whether persons and businesses that had suffered no damages related to the oil spill could be included in the settlement. The Supreme Court ruled that under the settlement agreement to which BP had agreed, the businesses did not need to prove that they had been directly affected by the spill in order to recover money. What is required is evidence that their income in the three to eight months following the spill has declined, compared to a comparable period before the spill¹⁵. In recent years, courts have refused plaintiffs seeking to recover compensation based on the events of 2010. In particular, the website of the law firm Kirkland & Ellis LLP, which represented BP, reports that the firm has had a Florida federal judge dismiss a group of claims related to the oil spill¹⁶. Despite this, the final amount paid by BP is still unknown.

It should be emphasised that the amount of compensation was also influenced by the possibility of punitive damages in the event of further litigation. BP was able to reach out-of-court settlements in some of the claims so that punitive damages were not awarded. As of February 2013, it is known that the total amount paid was more than $42.2 billion¹⁷.

Continuation of “US v. BP and contractors” part

In February 2013, the civil trial against BP, Transocean and Halliburton resumed in a New Orleans court. The purpose of the trial was: 1. Definition of BP’s and contractors’ responsibilities under the The Clean Water Act. 2. Assessment of damage to natural resources under The Oil Pollution Act. 3. Determining the final amount of fines.

The plaintiffs sought to argue that “gross negligence” was the cause of the environmental disaster that occurred. The U.S. Oil Pollution Act of 1990 limited liability to $75 million beyond the cost of cleanup, unless the accident was caused by “gross negligence, or willful misconduct” (as in the CLC), or failure to comply with federal safety, construction or operating standards by the responsible party, the responsible party’s agent (representative) or employee or person acting under contract to the responsible party¹⁸. If gross negligence is admitted, the fine for each barrel of oil spilled has quadrupled (from $1.1. to $4.3 thousand).

On 4 September 2014, Judge Сarl Barbier ruled that BP was grossly negligent and guilty of wilful misconduct (“Guilty of gross negligence and wilful misconduct”). The actions of Transocean and Halliburton were also found to be negligent. Thus, liability for the oil spill was shared between the three companies: 67% responsibility lay with BP; 30% with Transocean; 3% with Halliburton. Fines were apportioned according to the degree of responsibility of the parties. The judge acknowledged that many of the decisions made by BP were “primarily driven by a desire to save time and money rather than to ensure the safety of the well”¹⁹.

The court’s order for the second phase, announced in January 2015, set the volume of oil for which the parties involved would be liable at 3.19 million barrels.

In the third phase, the court imposed a maximum fine of $4,300 for each barrel of oil spilled. In July 2015, after the Supreme Court rejected an appeal on the maximum fines for the disaster, a tentative agreement was reached between BP, the federal government and the five states affected by the spill. BP estimates it cost the company $18.7 billion. Transocean paid $1.4 billion in civil and criminal penalties. Halliburton settled all disputes to the tune of $1.1 billion without claim.

In October 2015, a final settlement of $20.8 billion was announced for BP, bringing the third phase to a close. Not counting the fact that BP had already paid the $28 billion they had spent on the disaster response by that point (not counting the settlement agreement amount). This was the largest financial penalty ever imposed on a single company by the US government. Some observers noted that much of the compensation could be written off on the company’s taxes as a business expense and therefore questioned the severity of the penalty. The settlement was finally formally approved in April 2016²⁰.

Of particular note is the fact that no manager or engineer has been imprisoned for the improper performance of duties that caused the oil spill. An agreement was reached between BP and the Department of Justice to pay $4.5 billion to the US government in exchange for dropping criminal charges for criminal negligence. BP has pleaded guilty to 14 counts relating to the causes of the oil spill as well as the deaths of workers as a result of the accident. Of the amount BP paid, $1.26 billion went to a discretionary fund controlled by the Justice Department, about $2.4 billion to the National Fish and Wildlife Foundation (NFWF) and $350 million to the National Academy of Sciences (NAS). BP also agreed to pay more than half a billion dollars to the Securities and Exchange Commission for misleading its shareholders about the extent of the oil spill. The agreement was approved in January 2013. Similar agreements for smaller amounts were reached jointly with Transocean and Halliburton.

Conclusion

The author makes no claim to absoluteness or comprehensiveness of the conclusions presented, as such cases provide an opportunity to explore many aspects of the issue raised. Nevertheless, as time has passed since a disaster of this magnitude and the lengthy judicial process that followed, several conclusions can be drawn.

The public and legal changes that followed the tragedy deserve special attention. In particular, the US created the Bureau of Ocean Energy Management, Regulation and Enforcement (referring to the extraction of mineral resources from offshore platforms) – The Bureau of Ocean Energy management, regulation and enforcement²¹. The response to oil spills and its regulators need to improve, so the author’s key focus is otherwise.

One may get the impression that the CLC Convention and the activities of the International Fund are not as significant in resolving oil spill disputes.

This position is erroneous. Although the CLC was not directly applicable in this dispute, its impact on national law cannot be denied. The CLC in part has a slightly different economic purpose. It is for the most part designed for cases where an oil spill involves the transport of oil by tanker. Therefore, the limited liability and amount of compensation depends directly on the tonnage of the vessel.

A platform set up for oil production, although defined in the judicial acts through the concept of ‘vessel’, is a slightly different category. The oil-bearing capacity of a well far exceeds the volume of barrels of oil that can fit into a tanker. However, in the Amoco Cadiz case, France, as a member of the CLC and in a position to apply the Convention directly, turned to US jurisdiction, which appeared in those circumstances to be better able to satisfy the interests of the aggrieved party.

This does not mean that the CLC and International Funds should be abandoned. Their models for regulating oil spill relations are not perfect. It should not be forgotten that most of these smaller cases have been successfully resolved by the CLC and parties have been compensated by the fund.

It cannot be said that the CLC Convention is not used and the activities of the International Funds are imitated. On the contrary, the procedures in place for possible compensation are practical, as can be seen from the number of incidents dealt with under the Convention. Prior to the Torrey Canyon oil spill there had also been oil spills, but it was this event that influenced the creation of CLC. The Deepwater Horizon oil platform accident demonstrates that the existing limited liability mechanisms, the ability to compensate some of the damage established by the known instruments, needs to be refined, in terms of increasing the amount of compensation. As there are currently no projects that propose to increase the amount of compensation payable by the Funds.

In terms of damages, the US Clean Water Act and the Oil Pollution Act, while flawed, have been relatively effective. As noted, BP and the US government have been able to take advantage of the flexibility of the Acts to establish a trust fund capable of compensating damages quickly.

The negative experience of the Deepwater Horizon accident provides an opportunity to review not only the technical aspects that caused the accident, but also the legalities of the industry’s settlement. It is up to us to learn from others’ mistakes. ■

* The author is grateful to A.G. Arkhipova for her valuable comments during the preparation of this paper.

Notes