Opinion analysis: Court finds particular maritime safe berth clause constitutes charterer’s warranty of safety

In a 7-2 decision announced today, the Supreme Court held that a safe berth clause in a particular maritime charter party agreement constituted a warranty of safety, making the charterer, who designated the unloading berth, liable for costs to clean up an oil spill. In concluding that the charter party agreement allocated such a risk to the charterer (collectively referred to as CARCO), the court umpired a dispute involving more than $130 million dollars between the parties, resolved a circuit split between the U.S. Courts of Appeals for the 2nd and 3rd Circuits on one side and the 5th Circuit on the other, and announced a default rule regarding the form contract at issue in the case.

Frescati Shipping Company chartered the M/T Athos I to Star Tankers, which in turn entered into a subcharter agreement with CARCO using a standard maritime form contract. The form included a provision known as a “safe berth clause,” which provided that “[t]he vessel shall load and discharge at any safe place or wharf, … which shall be designated and procured by the Charterer, provided the Vessel can proceed thereto, lie at, and depart therefrom always safely afloat, any lighterage being at the expense, risk and peril of the Charterer.” Additionally, the agreement said CARCO would direct the vessel to a “safe” port on the East Coast of the United States. CARCO designated its asphalt refinery in Paulsboro, New Jersey, along the Delaware River as the port. When the vessel was about 900 feet from completing its 1,900-mile voyage from Venezuela, it allided with a submerged nine-ton anchor that an unknown party had abandoned, causing a spill of 264,000 gallons of heavy crude oil.

Under the Oil Pollution Act of 1990, Frescati, as a “responsible party” for cleanup under the statute, covered the cost of the cleanup operations, for which it was partly reimbursed by the federal government to the extent its expenditures exceeded the applicable statutory limits. Frescati and the government sought to recover cleanup costs from CARCO under the safe berth clause. Over the course of two appeals, the 3rd Circuit concluded that Frescati was an implied third-party beneficiary of the Star Tankers/CARCO charter, and that the safe berth clause constituted an express warranty of the safety of the chosen berth. In reaching that conclusion, the appeals court followed the lead of the 2nd Circuit, rather than that of the 5th Circuit, which has required a charterer to exercise only due diligence.

In an opinion by Justice Sonia Sotomayor, the court held that the analysis of the maritime contract “starts and ends with the language of the safe-berth clause … As even CARCO acknowledges, the clause plainly imposes on the charterer at least some ‘duty to select a “safe” berth.’ … Given the unqualified language of the safe-berth clause, it is similarly plain that this acknowledged duty is absolute.” Acknowledging that “the safe-berth clause does not expressly invoke the term ‘warranty,’” the court nonetheless deemed the clause to constitute a warranty because it “contains a statement of material fact regarding the condition of the berth selected by the charterer.”

The majority rejected CARCO’s argument that the safe berth clause imposes simply a duty to exercise due diligence. Such a due diligence standard resonates more in tort, rather than contract, law, the majority reasoned. The parties could have adopted a due diligence standard explicitly in the safe berth clause, as they did elsewhere in the contract. The absence of similar language in the safe berth clause provides further evidence that the parties did not seek to imply such a limitation on the duty of the charterer.

Sotomayor devoted most of the rest of her opinion to a series of single-paragraph rejections of CARCO’s other arguments. The general exception excusing the charterer from liability for “perils of the seas” does not help CARCO here because the general-exceptions clause does not apply when liability is otherwise expressly addressed, as it is by the safe-berth clause. The requirement that Star Tankers carry oil-spill insurance does not reflect an intention to relieve CARCO, because that requirement addresses risks other than those relating to selection of a safe berth. Even if the vessel could refuse to enter a port its master deemed unsafe, such a right does not “overwrite the safe-berth clause’s express prescription of a warranty of safety,” Sotomayor wrote. The court rejected CARCO’s reliance on judicial precedents as unpersuasive in view of the “unambiguous language” in the agreement.

CARCO also relied on a discussion in the maritime treatise “The Law of Admiralty”  by law professors Grant Gilmore and Charles Black Jr. Sotomayor interpreted Gilmore and Black as believing that vessel owners are better able than charterers to bear the liability from an unsafe berth, but she concluded that the authors’ prescriptive view “does not alter the plain meaning of the safe-berth clause here.”

Justice Clarence Thomas, joined by Justice Samuel Alito, dissented, maintaining that the background rule the majority established is not based on the text of the safe berth clause. Rather than imposing a warranty of safety on the charterer, the clause gives the charterer the good-faith right to designate a discharge port but gives the vessel the right to refuse an unsafe venue. Thomas pointed to Gilmore and Black (“the leading admiralty treatise”) to support this interpretation, reading their treatment as an analysis of the textual language as well as a policy-driven prescription. Thomas found telling the absence of any reference to “warranty” in the safe-berth clause, especially because “Owner warrants” or “Charterer warrants” appear elsewhere in the charter on multiple occasions. The clause itself does not state that the charterer assumes liability for all damages due to an unsafe berth, and the amicus brief by the association that generated the form “acknowledged” that the clause did not specify whether the charterer made an absolute warranty regarding the berth’s safety. Thomas further complained that the majority improperly conflates obligations with warranties, which would lead to construing the safe berth clause as involving conflicting warranties by the charterer and the vessel master.

Thomas also contested the majority’s conclusion that the safe berth clause imposes a clear warranty of safety on the charterer. He maintained that Sotomayor’s argument that the omission of the word “warranty” from the safe berth clause is not dispositive because the clause contains “a statement of material fact regarding the condition of the berth selected by the charterer” was not preserved below. Moreover, he continued, the argument is unpersuasive, because the majority inferred, but the safe berth clause did not assert, that CARCO thought the designated berth was safe; materiality involves a question of fact, not law; and it is not clear that the safe berth clause helped induce the making of the contract, which would be part of the materiality analysis. Thomas would have remanded the case for fact-finding regarding whether maritime custom and usage regards the safe berth clause as a warranty of safety and whether the parties negotiated with knowledge of any such custom.

Notwithstanding the clear analytical differences between the majority and the dissent, the opinions share some common ground. The dissent expressed its appreciation of “the majority’s desire to interpret the safe-berth clause in a manner that provides clarity to the maritime industry” even while contesting the rule chosen. And both sides essentially recognized that the majority’s interpretation applies to the form at issue but does not preclude maritime parties from agreeing to different allocations of risk.

[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.]