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Maritime Update: Supreme Court Holds That “Safe-Berth” Clause is Warranty of Safety

Bill Schwartz - 

Holding: “Safe-Berth” Clause is Warranty of Safety

On March 30, 2020, the U.S. Supreme Court in the case of CITGO ASPHALT REFINING COMPANY, ET AL., PETITIONERS v. FRESCATI SHIPPING COMPANY, LTD held a safe-berth clause in a voyage charter is a guarantee of a ship’s safety and affirms liability in a contractual safe-berth clause. The Court rejected the argument by the terminal that the traditional safe-berth warranty in charter parties is not absolute, but is instead simply one of due diligence. In doing so, the Court accepted the Second and Third Circuits’ view of the warranty, which comports with the traditional analysis, and rejected that espoused by the Fifth Circuit Court of Appeals in the Zen-Noh case in 1990.

Facts:

In 2004, the M/T Athos I, a 748-foot oil tanker, allided with a nine-ton anchor abandoned on the bed of the Delaware River. The anchor punctured the tanker’s hull, causing 264,000 gallons of heavy crude oil to spill into the river. As required by federal statute, respondents Frescati Shipping Company—the Athos I’s owner—and the United States covered the costs of cleanup. They then sought to reclaim those costs from petitioners CITGO Asphalt Refining Company and others (collectively CARCO), which had chartered the Athos I for the voyage that occasioned the oil spill. According to Frescati and the United States, CARCO had breached a contractual “safe-berth clause” obligating CARCO to select a “safe-berth” that would allow the Athos I to come and go “always safely afloat.”

The Oil Pollution Act of 1990, 33 U.S.C. §2702(a), required Frescati, the vessel’s owner, to cover the cleanup costs in the first instance. Pursuant to the statute, Frescati’s liability was limited to $45 million, and the Oil Spill Liability Trust Fund, operated by the Federal Government (also a respondent here), reimbursed Frescati for an additional $88 million in cleanup costs. Frescati and the United States then sued CARCO to recover their respective portions of the cleanup costs. Both alleged that CARCO was ultimately at fault for the oil spill because CARCO had breached a contractual “safe-berth clause” in the subcharter agreement (“charter party”) between CARCO and Star Tankers. According to Frescati and the United States, that clause obligated CARCO to select a “safe-berth” that would allow the vessel to come and go “always safely afloat,” and that obligation amounted to a warranty regarding the safety of the selected berth. After concluding that Frescati was an implied third-party beneficiary of the safe-berth clause, the Third Circuit held that the clause embodied an express warranty of safety made without regard to the charterer’s diligence in selecting the berth.

Law:

The question before the Supreme Court was whether the safe-berth clause is a warranty of safety, imposing liability for an unsafe berth regardless of CARCO’s diligence in selecting the berth. They held it was a warranty and strict liability would attach regardless of whether they proved they exercised due diligence in selecting the berth.

At the core of the parties’ dispute is a clause in the charter party requiring the charterer, CARCO, to designate a safe berth at which the vessel may load and discharge cargo. This provision, a standard feature of many charter parties, is customarily known as a safe-berth clause.

After the Exxon-Valdez oil spill in 1989, Congress passed the Oil Pollution Act of 1990 (OPA) to promote the prompt cleanup of oil spills. To that end, OPA deems certain entities responsible for the costs of oil spill cleanups, regardless of fault. It then limits the liability of such “responsible part[ies]” if they (among other things) timely assist with cleanup efforts. Responsible parties that comply with the statutory conditions receive a reimbursement from the Oil Spill Liability Trust Fund (Fund), operated by the Federal Government, for any cleanup costs exceeding a statutory limit. Although a statutorily responsible party must pay cleanup costs without regard to fault, it may pursue legal claims against any entity allegedly at fault for an oil spill. So may the Fund. By reimbursing a responsible party, the Fund becomes subrogated to the responsible party’s rights (up to the amount reimbursed to the responsible party) against any third party allegedly at fault for the incident. As owner of the Athos I, Frescati was deemed a “responsible party” for the oil spill under OPA. Frescati worked with the U.S. Coast Guard in cleanup efforts and covered the costs of the cleanup. As a result, Frescati’s liability was statutorily limited to $45 million, and the Fund reimbursed Frescati for an additional $88 million that Frescati paid in cleanup costs.

Following the cleanup, Frescati and the United States each sought recovery against CARCO. Frescati sought to recover the cleanup costs not reimbursed by the Fund, while the United States sought to recover the amount disbursed by the Fund. As relevant here, both Frescati and the United States claimed that CARCO had breached the safe-berth clause by failing to designate a safe berth, and thus was at fault for the spill. After a complicated series of proceedings—including a 41-day trial, a subsequent 31-day evidentiary hearing, and two appeals—the Court of Appeals for the Third Circuit found for Frescati and the United States.

The court first concluded that Frescati was an implied third-party beneficiary of the safe-berth clause in the charter party between CARCO and Star Tankers, thereby allowing the breach-of-contract claims by Frescati and the United States to proceed against CARCO.

The court then held that the safe-berth clause embodied an express warranty of safety “made with-out regard to the amount of diligence taken by the charterer,” and that CARCO was liable to Frescati and the United States for breaching that warranty.

The U.S. Supreme Court heard the appeal to resolve whether the safe-berth clause at issue here merely imposes a duty of diligence, as the Fifth Circuit had held in a similar case, or established a warranty of safety, as the Second Circuit had held in other analogous cases. The former interpretation allows a charterer to avoid liability by exercising due diligence in selecting a berth; the latter imposes liability for an unsafe berth without regard to the care taken by the charterer. Because the Supreme Court found the plain language of the safe-berth clause included the warranty of safety of the berth it designated, they affirmed the judgment of the Third Circuit.

Click here to read the decision in its entirety.

If you have any questions regarding this maritime matter, please contact Bill Schwartz at (504) 569-2900 or wschwartz@bhbmlaw.com.


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