Cookies on this site

This site uses cookies to store information on your computer. By using our site you accept the terms of our Privacy Policy

Accept and close
Emergency Number +44 7932 113573

News

Article: Safe berth warranties - lessons from the Athos I saga in the US

11 January 2019

Introduction 
On 26 November 2004, while the Athos I, a single-hulled tanker owned by Frescati Shipping Company and certain related interests (collectively, ‘Frescati’), was attempting to dock at the Citgo Asphalt & Refining Company’s (CITGO) Paulsboro, New Jersey refinery on the Delaware River, her hull was punctured by a nine-ton anchor abandoned on the river bed just 900 feet off CITGO’s dock. The anchor punched a hole in a cargo tank allowing over 264,000 gallons of heavy crude oil to spill into the river, closing the port while emergency responders scrambled to contain the spill under difficult tidal and weather conditions.

What followed was a $143m clean up operation and a further 14 years of litigation and ‘the devoted commitment of an army of lawyers and experts from the government and the private sector’ [1] to resolve the issues. This article illustrates the importance of careful drafting of safe berth warranties in charterparties.

 

The shipowner’s liabilities
The oil spill clean-up costs were in excess of $143m. The vessel also suffered millions of dollars in damages and was out of commission for many months.

As the shipowner, Frescati submitted a claim to the National Pollution Fund Center for reimbursement of its response costs in excess of its $45m limitation cap under the US Oil Pollution Act of 1990. In 2006, the Fund determined that the owner was entitled to limit its liability and reimbursed it in the amount of $88m [2]. In order to recover the balance of $55m and other costs which it had expended on the oil spill cleanup, the shipowner commenced proceedings against CITGO who was the sub-charterer and wharfingers of the delivery terminal.


Claims against CITGO
The shipowner sued CITGO for breach of a maritime ‘safe berth’ warranty under the ASBATANKVOY sub-charter, and for negligence as a wharfinger in failing to ensure that the approach to its terminal’s berth was clear of obstructions to navigation.

The shipowner claimed damages of $55m, in relation to the following claims:

  • its unreimbursed oil spill response costs
  • cost of hull repairs
  • detention and related expenses.

 

First instance legal proceedings
The first trial was held in 2010 in the US District Court in Philadelphia. The court held that:

  • the shipowner was not a third-party beneficiary of the safe berth warranty in the CITGO sub-charter
  • in any event, the safe berth warranty was not an absolute warranty but rather a due diligence undertaking
  • CITGO was not liable for wharfinger’s negligence because it did not control the federal anchorage through which ships approached its terminal.

The court therefore dismissed all claims against CITGO. The court did not make a finding of fact regarding the vessel’s arrival draft or whether there was causative negligent navigation or unseaworthiness, given that this it was not required to make a determination on these issues due to its findings described above.


Appeal
The shipowner appealed this decision. In 2014, the Third Circuit Court of Appeals reversed these holdings by the trial court, holding that:

  • the shipowner, although not a party to the CITGO sub-charter, was nonetheless a third-party beneficiary of an ‘absolute’ safe berth warranty in CITGO’s subcharter
  • the owner was entitled to rely on the absolute warranty that the berth was safe for the Athos I provided her draft was no more than 37 feet and there was no negligent navigation or unseaworthiness that was a contributing cause of the casualty
  • CITGO had a duty to ensure the approach to its dock was safe even though the approach ran through a federal anchorage because CITGO was not prohibited from surveying the federal anchorage for obstructions.

The case was remanded to the trial court for determination of the issues concerning:

  • the vessel’s arrival draft
  • negligent navigation or unseaworthiness
  • the quantum of damages.

 

Second Trial
The second trial was held in 2015 before a different trial judge. This time, the court found in favor of the shipowner on all counts.

The court found that the vessel’s arrival draft was less than 37 feet, which meant that CITGO was in breach of the safe berth warranty as it applied to the Athos I.

The court also found in the shipowner’s favor in respect of the claim of wharfinger’s negligence, holding that the appropriate standard of care for CITGO was to periodically sonar side scan the approach to determine any obstructions to navigation.

In addition, the court concluded that there was no negligent navigation by the ship or unseaworthiness that contributed to the cause of the casualty. As to damages, the court awarded the shipowner the full amount of its claim of $55m plus interest. [3] 


The CITGO appeal
CITGO appealed the trial court’s decision. On 29 March 2018, the Third Circuit Court of Appeals affirmed the trial court’s finding that CITGO was in breach of the safe berth warranty. While the appeal court’s decision mentioned that it was not strictly necessary to consider the wharfinger’s negligence claim in light of its breach of safe berth warranty holding, the court addressed it nonetheless.

The court held that CITGO, as a wharfinger, had a duty to use reasonable diligence to ascertain if the approach to its berth was safe for the Athos I, but declined to hold that CITGO’s duty of reasonable care required it to utilise sonar side scan. [4]

CITGO petitioned the Third Circuit Court of Appeals for a re-hearing by a full court but the petition was denied on 30 May 2018. On 31 October 2018, CITGO petitioned the US Supreme Court to hear this case.

A decision by the Supreme Court as to whether to take the case should come down in the first quarter of 2019. If the Supreme Court takes the case, formal briefs, oral argument and a final decision is estimated at the end of 2019 or even early 2020.

 

Takeaways
The long history of this case illustrates the uncertainties inherent in litigation when courts who are often unfamiliar with maritime terms and practices are asked to interpret standard charterparty terms. It is uncertain how a future court or arbitration panel in the US would interpret the safe berth warranty such as is included in the ASBATANKVOY form charter party, and indeed there have been substantial variations in the approaches to ’safe port’ warranties by different courts in the United States. For instance, the Fifth Circuit Court of Appeals (which covers New Orleans and Houston) holds that the warranty is simply an undertaking by the charterer to exercise due diligence. The Second Circuit (covering New York) and now the Third Circuit (covering New Jersey and Pennsylvania) hold that the warranty is absolute.

Under US law, the shipowner may be a third party beneficiary of the voyage party, even though not a party to the charter. If the parties, in fact intend to limit the applicability of the clause to the parties/signatories to the charter they should expressly provide for this in the charterparty.

Likewise, if the parties wish to limit the scope of the ‘safe ports’ warranty with a due diligence qualifier, they can draft the warranty accordingly. For example, the SHELLTIME 4 time charter provides in relevant part of its “Period Trading Limits’ clause (4) as follows:

‘…Charterers shall use due diligence to ensure that the vessel is only employed between and at safe places…where she can safely lie always afloat…. Charterers do not warrant the safety of any place to which they order the vessel and shall be under no liability in respect thereof except for loss or damage caused by their failure to exercise due diligence as aforesaid…. (emphasis added)...’

A safe berth warranty worded in this fashion eliminates the notion that the warranty is absolute. Instead, the charterer will be held to a reasonable standard of care to provide a safe berth, including the approach to the berth. This standard of care will vary with the factual circumstances of a given berth.

In conclusion, we recommend that members of the club pay attention to how ’safe port’ and ‘safe berth’ warranties are drafted especially in their US law contracts and to seek timely and appropriate legal advice to avoid the uncertainties and protracted and expensive litigation such as ensued in the Athos I.

 

-

[1] Per US Federal District Court Judge Joel Slomsky
[2] The US government therefore joined in the action against CITGO to recover the $88 million it had paid to Frescati.    
[3] However, the trial court reduced the US government’s claim by 50%, ie down to $44m on the theory of 'equitable recoupment'.  
[4] Moreover, the Court of Appeals reversed the Second trial court and reinstated the US government’s claim to its full amount of $88m that it had reimbursed Frescati.  

 

Author:

Eugene J. O'Connor, Partner
Montgomery McCracken Walker & Rhoads LLP
Tel: +1 212 551 7734
eoconnor@mmwr.com 
www.mmwr.com