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Two divergent branches grow from a common law root – Judicial interpretation of unsafe port/berth clauses in US and English law

 

George Bernard Shaw observed that England and America are two nations divided by a common language.  Following the Third Circuit’s opinion in the ATHOS I litigation,1 it could equally be said that they are two common law regimes divided by interpretation of contract law.

 

The federal courts interpret the charterparties following the ATHOS I oil spill
In November 2004, the tanker ATHOS I struck an abandoned anchor while coming into berth at Paulsboro, New Jersey.  The anchor holed the hull resulting in a spill of about 200,000 barrels of heavy crude into the Delaware River.  How the anchor came to rest 900 feet from the berth was never determined. 

 

Under the US pollution regime (OPA 90) vessel interests were strictly liable in the first instance for clean-up and compensation to the applicable OPA 90 limitation of liability.  Thereafter the costs were assumed by the Oil Pollution Liability Trust Fund (the Fund), a government-administered fund that pays claims that exceed the limitation.   Simply put, the pollution regime worked according to design.  It is the litigation after the clean-up between the vessel, the charterers, the government and the terminal that gives rise to this comparison of US law versus English law.  

 

In this article, Gard News reviews the concept of third-party beneficiary to a safe port/safe berth charter clause in light of the recent Third Circuit Court of Appeal decision involving the recovery action by owner of the vessel and the US government.

 

Charterparty chain
The owner and manager of the ATHOS I (collectively referred to hereafter as “Frescati”) time chartered the vessel to pool operator Star Tankers, which voyage chartered the vessel to CARCO (CITGO Asphalt Refining Company, CITGO Petroleum Corporation and CITGO East Coast Oil Corporation)2 on ASBATANKVOY and additional terms.  The head time charter was subject to English law and arbitration while the sub-voyage charter was subject to US law.  The ASBATANKVOY terms of the latter provided that the vessel would proceed to the discharge port “or so near thereunto as she may safely get (always afloat)” and that the vessel would discharge “at any safe place or wharf” designated by the charterer “provided that the Vessel can proceed thereto, lie at, and depart therefrom always safely afloat”.  The cargo aboard the vessel was bound for the CITGO refinery and the facility where she was to berth was owned and operated by CITGO.

 

The trial court decides Frescati can not recover from CARCO
Apparently, Frescati, as responsible party under OPA 90, paid out USD 180 million but recouped nearly USD 88 million from the Fund. 

 

Frescati sued CARCO for damage to the vessel and clean-up and compensation.  The US government sued CARCO for the costs the Fund paid above the vessel limitation.

 

The case was tried in the US District Court for the Eastern District of Pennsylvania.  The litigation was complex but, essentially, Frescati and the government claimed that CARCO, as the operator of the terminal, was negligent in failing to discover the anchor located on the approach to the berth.  Further, they argued that CARCO breached the safe berth warranty in the voyage charter and that although this charter was with Star Tankers, Frescati and the US government, effectively  as subrogated interests, were entitled to recover as  third-party beneficiaries of that contract. 

 

Following a 41-day non-jury trial, the District Court rejected both the tort and contract claims.  With respect to the unsafe berth claim the District Court found:

“Frescati, which is not a party to the Charter Party, seeks to invoke the safe port and safe berth clauses of that contract as an intended third-party beneficiary.  In this case, there was no testimony from representatives of either CARCO or Star Tankers that Frescati was an intended third-party beneficiary of the contract.  Star Tankers, not Frescati, assumed the role of owner of the ATHOS I for the purposes of the voyage.  There was also testimony to the effect that Frescati and Star Tankers are engaged in an arbitration in London over Frescati’s claims for damage to the ATHOS I, persuasive evidence that Frescati has its own contractual remedy, rather than status as a third-party beneficiary.”  

 

Such an outcome would not have caused much surprise in other jurisdictions.

 

Third Circuit Court of Appeal reverses the District Court
The Third Circuit reversed the District Court holding that “although Frescati is not a named beneficiary to the safe berth warranty within the charterparty between Star Tankers and CARCO, the ATHOS I benefits from this warranty, and Frescati, as the vessel’s owner  is thus a third-party beneficiary”.

 

As a practical matter then, Frescati was free to initiate London arbitration against Star Tankers under the terms of the time charter and also sue CARCO as a third-party beneficiary of the voyage charter which was subject to US law. Indeed, Frescati’s chances of recovery were enhanced by staying the arbitration and proceeding against CARCO because the time charter safe berth clause obligated Star Tankers to exercise only due diligence in naming a berth while the voyage charter contained an outright warranty.  The Third Circuit appreciated that the clauses were not aligned but paradoxically found that it “would be an odd windfall if Star Tankers were allowed to collect on CARCO’s safe berth warranty but not be required to pass on these remedial dollars to the ship’s ultimate  owner”.  Of course any loss Star Tankers may have experienced and claimed against CARCO would pale in light of the USD 188 million claim by Frescati and the government so it is not at all clear what “windfall” the appeal court envisioned.   If Star Tankers had no liability to Frescati, then they had no loss, far less an entitlement to recoup USD 188 million.

 

Privity of contract turned on its head – Would an English court have reached the same result?
The requirement of privity is one of the historical pillars of the common law of contracts, the root of both English and US contract law.  It means that a contract cannot confer rights or impose obligations arising under it on anyone except the parties to it.  It also means that only the parties to the contract have title to sue for breach.  While US courts have chipped away at the requirement of privity in individual cases, the doctrine is so fundamental to English law that legislation was required to abrogate from it.  The Contracts (Rights of Third Parties) Act of 1999 set the requirements for a non-party to enforce contractual terms.  There are two bases for claiming rights as a third party – when the contract expressly provides for it or where the term purports to confer a benefit on the third party unless it appears on a true construction of the contract that the contracting parties did not intend him to have the right to enforce it.

 

Would an English court have come to the same conclusion as the Third Circuit that the vessel and therefore the owners qualified as an implied beneficiary of the voyage charterparty? The English legislation may seem broad enough to run the argument but it would probably not succeed.  The practice in litigation under charterparty “chains”, where the head owner has suffered a loss allegedly due to an unsafe port or berth is that the owner initiates litigation against its charterer who in turn initiates litigation against its own contractual counter-party and so on down the line.  Only the parties to the specific charterparty have title to sue so this cascade of litigation is the norm.  Where the charter terms specify English law and arbitration and the terms are back-to-back the parties may agree to “streamline” an arbitration by all appointing the same arbitrators and combining the proceedings, but this is done merely for convenience and cost-saving.  In the enforcement of a safe port/berth warranty there is no recognised right in English law to proceed directly from the top of the chain to the bottom as was done in the US litigation, even when the terms are identical. 

 

Charterparties are freely negotiable and parties to them are held to their bargain.  The Third Circuit was concerned with a “windfall” due to a due diligence standard in the time charter versus a warranty in the voyage charter.   Rather than look behind the contracts for fairness, an English court probably would have found the misalignment to be a sign that owners were not intended  to benefit from the warranty in the Star Tankers voyage charter when they agreed to the due diligence standard in their own contract.  That owners had a poorer chance against Star Tankers would simply be the result of their own bargain.

 

Conclusion
The ATHOS I litigation is not concluded because the Appellate Court sent the case back to the District Court to determine whether the berth was indeed unsafe.  This will require the trial court to assess the facts in light of the standards set in the English  High Court case The EASTERN CITY,3 which is the case law cited on both sides of the Atlantic.  Thus, following the District Court decision we may have yet another opportunity to compare the US court and English precedent applying the same case law.

 

Footnotes
1In re: Frescati Shipping Co., Ltd., 2013 U.S. App. LEXIS 9827 (3d Cir. May 16, 2013).
2 The related companies were addressed as one by the US courts despite the different corporate identities and relationships.  For convenience the CITGO entity is referred hereafter as terminal, the cargo owner and the charterer are referred to hereafter as CARCO.
3 [1958] 2 Lloyd’s Rep 127.

 

Any comments on this article can be e-mailed to the Gard News Editorial Team.