On March 30, 2020, the United States Supreme Court issued a decision that can impact the way Charter Party Agreements are negotiated. Particularly, given the present COVID-19 orders that purport to limit whether vessels can enter certain ports, orders that appear to change on a daily basis, this decision should serve notice to those negotiating Charter Party Agreements.
CITGO Asphalt Refining Company, et al. v. Frescati Shipping Company, Ltd., et al. No. 18-565 (March 30, 2020) resolves the interpretation of a “safe berth” clause in a shipping contract. In a 7-2 ruling, the Court held that a “safe berth” clause establishes a warranty of safety, thereby imposing liability for an unsafe berth regardless of a party’s diligence in selecting the berth. See Id at 1.
The facts of the case date back to 2004 when CITGO and related companies contracted with Frescati Shipping Co. for the shipment of crude oil from Venezuela to New Jersey. Frescati, the operator and owner of the oil tanker M/T Athos I, had chartered the tanker to Star Tankers. The oil tanker was then sub-chartered by Star Tankers to CITGO Asphalt Refining Company and others (collectively CARCO). Shortly before reaching her destination, M/T Athos I allided with an anchor in the Delaware River from an abandoned ship, puncturing the hull of the oil tanker and causing 264,000 gallons of crude oil to spill into the river. As the owner of the oil tanker, Frescati was required pursuant to the Oil Pollution Act (“OPA 90”) to clean up the spill and pay all associated costs. The total cost of the cleanup was $133 million. Under OPA 90, Frescati’s liability was limited to $45 million. As such, the Oil Spill Liability Trust Fund reimbursed Frescati for the additional $88 million. Frescati and the Federal Government sued CARCO alleging that CARCO had breached the “safe berth” clause in the subcharter agreement between CARCO and Star Tankers. The “safe berth” clause in the subcharter agreement provided as follows:
“SAFE BERTHING – SHIFTING. The vessel shall load and discharge at any safe place or wharf, or alongside vessels or lighters reachable on her arrival, 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.” Id at 18.
Frescati as an intended third-party beneficiary of the subcharter agreement, and the United States alleged that the clause obligated CARCO to choose a berth that was safe and that would allow the oil tanker “to come and go ‘always safely afloat.’” Id. at 1. The Third Circuit agreed with Frescati and the United States and held that the “safe berth” clause embodied an express warranty of safety “made without regard to the amount of diligence taken by the charterer.” Id at 4. With that said, the Third Circuit found that CARCO was liable for breaching the warranty. Id at 5.
The Supreme Court granted certiorari to resolve the issue of whether the “safe berth” clause merely imposes a duty of diligence or is a warranty of safety.[1] Id. “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.” Id. CARCO argued that the Court should adopt the Fifth Circuit’s interpretation that “safe berth” clauses impose a duty of due diligence on the charterer rather than strict liability.
As Justice Sotomayor writing for the majority pointed out, the “analysis starts and ends with the language of the safe-berth clause.” Id at 6. To the majority, the fact that the clause did not expressly use the term “warranty” is not persuasive as “[i]t is well settled as a matter of maritime contracts that ‘[s]tatements of fact contained in a charter party agreement relating to some material matter are called warranties,’ regardless of the label ascribed in the charter party.” Id at 7 citing to Davison v. Von Lingen, 113 U. S. 40, 49–50 (1885) (a stipulation going to “substantive” and “material” parts of a charter party forms “a warranty”). Accordingly, what is important is whether the “safe berth” clause contains a statement of material fact as to the condition of the selected berth. Id. In response to CARCO’s argument that the “safe berth” clause contains limitations on liability, the Court held that there was no basis for this argument given the language of the charter party. Id at 10. CARCO attempted to allege that the “safe berth” clause does not embody a warranty of safety relying on Atkins v. Disintegrating Co., 18 Wall. 272 (1874) and Orduna S. A., 913 F. 2d 1149. Although the Court agreed that the Fifth Circuit in Orduna held a similarly unqualified “safe berth” clause to impose a duty of due diligence, the Fifth Circuit considered only tort law and policy considerations rather than purporting to interpret the language of the clause at issue in the instant case. Id at 14. Instead, the Court was more persuaded by the long line of decisions of the Second Circuit interpreting the language of “safe berth” clauses to establish a warranty of safety. Id at 12.
After careful review of the line of cases presented by CARCO, Frescati and the United States, the Court concluded that although charterers are free to contract around the language establishing a warranty of safety, the plain meaning of the “safe berth” clause in the instant case “unambiguously establishes a warranty of safety.” Id at 15.
In their dissenting opinion, Justice Thomas and Justice Alito held that the plain language of the “safe berth” clause does not include a warranty of safety. Furthermore, they pointed out that “the majority’s opinion applies only to this specific contract. . .” Id at 27. The dissent suggests a narrow reading of the majority’s holding and does not contemplate that the agreement between Star Tankers and CARCO was based on an industry standard form contract, the Asbatankvoy Charter Party Agreement. The standard form contract is a widely used charter form that was produced by the Association of Ship Brokers and Agents. As such, the Asbatankvoy “safe berth” clause is standard in most charter party agreements. Thus, the majority’s interpretation that the “safe berth” clause creates a warranty of safety will undoubtedly have far-reaching implications in the maritime industry and to an extent, will allow for consistency. As Justice Sotomayor emphasized, the majority’s decision “does no more than provide a legal backdrop against which future [charter parties] will be negotiated.” Id at 15 citing Kirby, 543 U.S., at 31-32. “Charterers remain free to contract around unqualified language that would otherwise establish a warranty of safety, by expressly limiting the extent of their obligations or liability.” Id at 16.
“Safe berth” provisions take a variety of forms and are commonly used between owners and charterers in the maritime shipping industry. BIMCO as the world’s largest shipping association with more than 1,900 members from over 120 countries has created standard charter parties, bills of lading and other standard agreements that parties can use as is or edit to reflect the parties’ specific business needs. Certain contract clauses are widely used because they provide certainty and consistency of obligations and responsibilities, thereby reducing the possibility of disputes. The Supreme Court’s recognition that “safe berth” clauses appear in different contracts throughout the shipping supply chain only reinforces the importance of its ruling to the shipping industry. The Court’s decision provides clarity to owners and charterers regarding the interpretation of the “safe berth” clause, as a warranty imposing liability on charterers for breach even in the absence of fault. Moreover, the ruling provides “stability and consistency required to conduct business.” See Brief of Amici Curae BIMCO, The International Association of Independent Tanker Owners and the International Association of Dry Cargo Shipowners at 13.
Additionally, this ruling has several potential implications for shipowners and charterers operating in the midst of the COVID-19 pandemic. Given the current COVID-19 pandemic, charterers need to be aware as to whether a port affected by the virus is a safe port to ensure compliance with the Charter Party Agreement. After all, it is the obligation of the charterer in these types of agreements to select ports which are safe. At present, it is difficult to say whether a port is safe or what the appropriate measure is to delineate a port as safe. Most commercial ports around the world are still operating and open despite the spread of COVID-19. With the need for continued transportation and discharge of containers, bulk, oil, chemicals, and gas to meet global demand, it is unclear how “safe berth” clauses will affect charterers in the current climate. The definition of safety is clearly an evolving concept as so many factors must be taken into consideration. In addition to political or civil unrest, lack of navigational aids, negligence of pilots, high congestion at a port and certain physical characteristics of a port, the maritime industry now also needs to consider the spread of a global pandemic during the course of its operations.
[1] The Fifth Circuit has held that the “safe berth” clause only imposes a duty of diligence, contradicting the Second Circuit, which has held that the “safe berth” clause establishes a warranty of safety.