Argument analysis: Justices consider maritime circuit split regarding voyage charter safe-berth clause

The Supreme Court heard oral argument yesterday in CITGO Asphalt Refining Co. v. Frescati Shipping Co., which concerns whether federal maritime law treats a standard safe-berth clause in a voyage charter as guaranteeing the ship’s safety or as satisfied by the charterer’s due diligence.

The U.S. Court of Appeals for the 3rd Circuit decision under review construed the clause as the charterer’s warranty of a safe port – which was breached when the vessel struck an unknown anchor in the Delaware River, producing an oil spill and other damage exceeding $140 million – to the vessel owner, who initially paid for the spill cleanup, and to the United States, which reimbursed the owner in part and became partly subrogated to the owner’s rights.

The case presents a circuit split between the U.S. Courts of Appeals for the 2nd and 3rd Circuits, which have treated such safe-berth clauses as warranties, and the U.S. Court of Appeals for the 5th Circuit, which has applied a due-diligence requirement.

Carter Phillips, representing the charterer, began by arguing that the 3rd Circuit improperly imposed strict liability on the charterer, thereby subjecting it to damages for an “unknown and unknowable” accident, a result he characterized as “an extraordinary interpretation under the circumstances.” Although Phillips acknowledged that parties could “write around” the ultimate interpretation of the safe-berth or safe-port clause, the Supreme Court had the “fundamental obligation to determine” the default rule. Phillips recognized that the 2nd Circuit had adopted a “broader” interpretation of the clause, but he asserted that both the 5th Circuit and a maritime treatise by Grant Gilmore and Charles Black adopted a different, due-diligence interpretation of the clause. Phillips argued that the clause, in the context of the charter, suggested that the parties did not intend to make the charterer strictly liable for this sort of accident. Phillips acknowledged that other forms were available, including those that imposed a due-diligence duty, but maintained that they were irrelevant absent evidence tying those forms to the decision of the contracting parties here.

Justice Elena Kagan observed that the contract is “pretty well oriented” to the 2nd Circuit because it identifies New York or London as arbitration sites and the U.S. District Court for the Southern District of New York as a venue for certain cargo disputes. Phillips responded that the case was litigated in the 3rd Circuit, not New York, that those provisions did not indicate an acceptance of the 2nd Circuit’s approach to safe-berth clauses and that New York arbitration decisions do not go as far as the 3rd Circuit did here. Moreover, the contract provides that United States law governs, and that law depends on the Supreme Court’s decision.

In response to questions from several justices, Phillips suggested that the term “safe” need not guarantee against any mishap but could simply refer to the ordinary usage based on what was known regarding the characteristics of the port. Phillips argued that the chosen port was safe based on numerous other ships’ navigating through it for years without incident.

The respondents, consisting of the vessel owner and manager and the United States, split their time equally. Assistant to the Solicitor General Erica Ross, representing the United States, followed Phillips. She argued that the commercial entities to the transaction chose a safe-berth clause that had long been interpreted as imposing a warranty instead of language imposing a more limited obligation. That choice required that the charterer’s chosen port be safe, not that due diligence was exercised in making the choice.

Justice Neil Gorsuch asked both Phillips and Ross what the difference is between the due-diligence standard, favored by Phillips, and the warranty approach with an exception for losses due to abnormal circumstances, which Gorsuch attributed to Ross. Gorsuch suggested they are “awfully close at the end of the day” and asked whether the charterer had made the abnormal-circumstances argument below. He also asked Ross why the due-diligence rule would not be more easily administered. Phillips said that an abnormal-occurrence argument was made, but Ross denied that it had been preserved. Ross also pushed back against the idea that the approaches end up in the same place, arguing that an abnormal-occurrence doctrine is limited to instances in which something from outside the port causes the damage. In such cases, the cause of the injury is not the failure to designate a safe port. Ross said the warranty approach is administrable based on its longevity.

Like Ross, Thomas Goldstein, representing the owner-manager, began by emphasizing that the parties chose a form that said the charterer would provide a safe berth rather than one imposing a due-diligence obligation. He suggested that the industry understanding of the safe-berth clause could be inferred from the fact that the safe-port forms provided for arbitration in New York or London, not Houston, and that those jurisdictions “uniformly” treat the provision as a warranty.

Returning to questions that Gorsuch and Justice Brett Kavanaugh had posed, Goldstein argued that the critical question is “whether the injury is caused by the port or by some other thing” and said he was unaware of any authority “that something that is on the floor of the port is not a characteristic of the port.” Goldstein emphasized that, when the loss results from a condition of the port, the charterer is responsible because it chose the port.

Goldstein rejected the idea that strict liability is problematic. When loss occurs due to an unknown and unknowable risk, one party will inevitably be liable without fault. The issue is whether it should be the vessel owner or the charterer. Whereas the due-diligence form would have placed the risk on the owner, the form in this case allocated it to the charterer, he argued.

In rebuttal, Phillips argued that there is no evidence that the due-diligence forms were considered by the parties, so their existence is irrelevant to determining the parties’ intent. The anchor that caused the damages was not a characteristic of the port, as Goldstein argued, but a peril of the seas, Phillips contended, and accordingly was not a risk allocated to the charterer. The charterer was least able to prevent the injuries in circumstances like those present in this case. Phillips denied that his position would impose the loss on the vessel owner, because the owner could seek exoneration from oil-spill liability from the federal government, attributing the loss to the fault of the unknown third party who left the anchor in the waterway. That outcome, Phillips suggested, would be more equitable than imposing the loss on the charterer.

[Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, is among the counsel to the respondents in this case. The author of this post is not affiliated with the firm.]

Editor’s Note: Analysis based on transcript of oral argument.