Respondent’s Unsound Damages Theory Fails to Compel a Vigilant Court
In the Matter of the Complaint of ENSCO Offshore Company, as Owner of the Modu ENSCO 74 for Exoneration From or Limitation of Liability
Civil Action No. H-09-2838
United States District Court, S.D. Texas, Houston Division: Opinion Delivered January 7, 2014
Ensco was the owner of “Ensco 74,” a self-elevating drilling unit and vessel measured at approximately 74 meters long, 63 meters wide, and 8 meters deep. In September 2008, Hurricane Ike swept Ensco 74 from its location off the Coast of Louisiana leaving only its “legs” on the site and moving the rig’s barge approximately 100 miles where it sank 65 miles south of Galveston, Texas. Ensco claimed it followed hurricane procedures and secured the rig. Until an oil tanker was damaged by the remains of Ensco 74 on March 6, 2009, Ensco 74 had been lost at sea for six months despite efforts to locate it by Ensco, C&C Technologies, NOAA, the U.S. Coast Guard, and third parties. Ensco filed an action in the District Court, Southern District of Texas seeking exoneration from or limitation of liability under the civil and maritime laws. Among other claimants, High Island Offshore System, LLC (“HIOS”) appeared and filed claims against Ensco.
HIOS asserted that Ensco 74 struck and damaged its pipeline that runs across the seabed of the Gulf of Mexico and is used to transport natural gas from offshore production facilities to shore. It alleged that, as a result of the damage to its pipeline caused by Ensco 74, the pipeline was shut down for 104 days for repairs, and that Ensco was negligent in failing to design, maintain, and properly prepare Ensco 74 for hurricane conditions. HIOS further claimed that Ensco was not entitled to exoneration from or limitation of liability and sought damages from Ensco in excess of $26.5 million plus interest.
Though denying any liability to HIOS, Ensco moved for partial summary judgment seeking an order by the court that the proper measure of HIOS’s claim for economic loss is the difference between the present value of HIOS’s revenue stream with no incident and the present value of HIOS’s revenue stream with the incident. Ensco theorized that HIOS – a transporter of gas owned by others – did not lose any revenue because the gas in the pipeline was not lost and it remained in the ground while the pipeline was shut down for repairs, and the destined production facility simply shut down operations until the pipeline was repaired and operating again. Accordingly, Ensco argued that HIOS did not lose any earnings, but rather its earnings were merely deferred for 104 days.
HIOS countered that Ensco’s “deferred production” damages model was inapplicable because it is “a unique methodology developed for cases involving oil and gas producers, i.e., the owners of oil and gas being brought to market.” Since HIOS was not a producer and it was not asserting a deferred production claim, but rather it was a transporter of gas owned by others, it argued that the “deferred production” model did not apply. As for damages, HIOS pointed to its repair costs of over $19.6 million and over $5.6 million in fees it was unable to collect due to the shutdown.
HIOS further argued that the assumption applied by Ensco’s expert, that the “deferred production” model applied, is fundamentally flawed and thus his report should be disregarded. HIOS also challenged Ensco’s expert’s report by contending that, even if the “deferred production” model was applicable, to properly render an opinion on HIOS’s economic losses, the expert would have to know the life expectancy of the pipeline and the oil fields that produced into the pipeline, information Ensco’s expert conceded he did not have.
Noting that the Fifth Circuit’s decisions in maritime collision cases reflect “no single measure of damages definitive when a production facility or a vessel is shut in for repairs because of damage caused by a negligent third party,” the court concluded that, under the particular circumstances of the case, the appropriate measure of damages are HIOS’s repair costs plus the fees it would have obtained during the 104-day shutdown, provided it can prove those damages to a reasonable certainty. Citing to the Fifth Circuit’s decision in Continental Oil Co. v. The SS Electra, 431 F.2d 391 (1970), the court noted that “in traditional collision cases various alternative theories of damages may apply depending on the circumstances, [such as]: the value of hire of other vessels, the value of hire of the disabled vessel, the return on investment, or no damage at all.”
In denying Ensco’s motion, the court held that “district courts have discretion to adopt any reasonable measure of damages that compensates the injured party in an effort ‘to place the injured person as nearly as possible in the condition he would have occupied if the wrong had not occurred.’” (Citing Freeport Sulphur Co. v. S/S Hermosa, 526 F.2d 300, 304 (5th Cir. 1976).) The court’s vigilance appears to account for the possibility of HIOS’s lost revenues, assuming available supply and demand for the gas during the 104 day damages period – a factor similar to one cited by the Honorable Katherine B. Forrest, in the U.S. District Court for the Southern District of New York, in her opinion for a matter in which we assisted with determining lost profits involving an allision between a dredge and a tanker.
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