Court of Appeals Orders "Do-Over" in ATHOS I Case

In April 2011, District Judge Fullam in the Eastern District of Pennsylvania found that the Owner and Manager (hereinafter collectively “Frescati”) of the oil tanker M/T ATHOS I were unable to sustain their contractual and tort claims against the voyage charterers of the Vessel (hereinafter “CARCO”) for damages arising out of a 2004 oil spill in the Delaware River.  In a fifty-eight (58) page decision issued Thursday morning, May 16, 2013, the Third Circuit Court of Appeals vacated the majority of Judge Fullam’s decision, remanding the case (in part) for additional factfinding on Frescati’s contractual (and possibly negligence) claims.

Frescati’s claims against CARCO arose from the M/T ATHOS I’s allision with an abandoned ship anchor, hidden on the bottom of the Delaware River merely nine hundred (900) feet from the Vessel’s berth.  The abandoned anchor punctured the ship’s hull and caused approximately 263,000 gallons of crude oil to spill into the River.  As a result, Frescati incurred approximately USD 180 million in cleanup costs and ship damages.  Although Frescati was reimbursed nearly USD 88 million of these costs by the United States’ National Pollution Funds Center (“NPFC”), it subsequently brought claims in contract and tort against CARCO, the voyage charterer that requested the oil shipped on the ATHOS I and the owner of the marine terminal where the Vessel was to dock to unload its oil.  Specifically, Frescati alleged that CARCO had breached safe port/safe berth warranties contained in CARCO’s voyage charter party with non-party Star Tankers, Inc.  Frescati also alleged both negligence and negligent misrepresentation claims against CARCO, as the owner of the marine terminal where the Vessel was nearing when the allision occurred.  The United States, as subrogee to Frescati for the USD 88 million that the NPFC reimbursed to Frescati, similarly sought reimbursement from CARCO based on Frescati’s contractual theory of liability.

Following a forty-one (41) day bench trial, the District Court dismissed Frescati’s claims in their entirety, finding that sole fault for the incident belonged to the unknown and unidentifiable (former) owner of the abandoned anchor.  Specifically, District Judge Fullam concluded that Frescati was not a party to CARCO’s charter party with Star Tankers, nor was it an intended beneficiary of this agreement or the safe port/safe berth warranties contained therein.  Additionally, the District Court found that even if Frescati was an intended beneficiary of the warranties, the warranties were not unconditional guarantees; they were simply promises that CARCO would exercise due diligence, which the District Court found had been exercised.  The District Court further determined that, to the extent the warranties applied to Frescati, the warranties were excused under the “named port exception” because CARCO had specified the port ahead of the ATHOS I’s arrival, which placed the burden on the Master of the Vessel to accept the port as safe or reject it.   The District Court similarly rejected Frescati’s claims that CARCO was liable to Frescati in tort for negligence and/or negligent misrepresentation.  Frescati and the United States appealed the decision to the Third Circuit.

On appeal, the Third Circuit first noted that the District Court’s failure to comply with Federal Rule of Civil Procedure 52(a)(1), which requires a trial court to make separate findings of fact and conclusions of law following a bench trial, required a remand of the matter.  Notwithstanding this finding, the Court nonetheless addressed the legal issues appealed by Frescati and the United States.

Considering the contractual claims first, the Third Circuit first held that the ATHOS I – and, by extension, its owner Frescati – was an implied beneficiary of the safe berth warranty contained in the CARCO/Star Tankers voyage charter.  In reaching this finding, the Court relied on decisions from the Second Circuit Court of Appeals which held that a safe berth warranty explicitly benefits the vessel, and found that it would be “nonsensical to deprive the vessel’s owner the benefits of this promise.”  Having found that Frescati could rely on CARCO’s safe port/safe berth warranties as a third-party beneficiary, the Court next addressed the scope of these warranties.  The Third Circuit rejected the District Court’s findings that these warranties required only due diligence, again relying on longstanding holdings from the Second Circuit that a safe berth warranty is an “express assurance” that the berth will be as represented.  As such, the Court concluded that the safe port/safe berth warranties are “express assurance[s] made without regard to the amount of diligence taken by the charterer.”  Because CARCO conceded at oral argument that the safe berth warranty – if applicable – would include the Anchorage where the allision occurred, the Court did not need to determine the geographic scope of the safe berth warranty.  Rather, the Court considered whether the warranty had been breached by the anchor’s presence.  The Third Circuit found that additional factual findings would need to be made on remand as to (1) the safe berth warranty itself (which appeared from the Third Circuit’s review of the record to cover the ATHOS I up to a draft of thirty-seven (37) feet); and (2) if a safe berth had been assured for a ship drafting thirty-seven (37) feet or less, whether thirty-seven (37) feet of clearance existed at the time of the incident.  Finally, the Third Circuit rejected the District Court’s findings that the “named port exception” to the safe port/safe berth warranties existed in this matter, holding that there was no suggestion that anyone (including the Master of the ATHOS I or CARCO itself, as the owner of the terminal) was aware of the anchor’s presence in the River.  Because this hazard was unknown to the parties and not reasonably foreseeable, the Third Circuit concluded that the naming of CARCO’s port in advance of the ATHOS I’s arrival did not provide the Vessel or her Master with an opportunity to accept this unknown hazard, and that this exception was inapplicable.

The Third Circuit next found that if Frescati were to succeed in its contractual claims on remand, there would be no need for the District Court to reach its tort claims.  Notwithstanding, the Court briefly evaluated Frescati’s claims of negligence and negligent representation, affirming the District Court’s dismissal of Frescati’s negligent misrepresentation claims, but vacating the District Court’s conclusion that Frescati’s negligence claim was precluded.  Evaluating the negligence claim first, the Court considered each of the elements of a negligence claim in admiralty law, i.e.: (1) the existence of a duty required by law; (2) a breach of that duty; (3) a resulting loss or injury to the plaintiff; and (4) a causal connection between the defendant’s conduct and the resulting injury.  The Third Circuit concluded that CARCO had a duty to maintain a safe approach to its terminal, and that, applying the “plain meaning” of the word “approach”, the geographic scope of this duty extended to “when a ship transitions from its general voyage to a final, direct path to its destination.”  Based on the facts of the matter, the Court found that the ATHOS I was within its approach to CARCO’s terminal when it struck the anchor and, as such, CARCO had a duty to exercise reasonable diligence in providing the ATHOS I with a safe approach.  Turning next to whether (or not) this duty was breached, the Court found that there were insufficient facts in the record to “delineate the exact standard of care required by CARCO” and, as such, remand was necessary to determine whether there was a breach of CARCO’s duty to maintain a safe approach.  The Third Circuit similarly found that, on remand, the District Court would need to determine whether any breach of this duty proximately caused the allision.  Because there were insufficient factual findings necessary to resolve Frescati’s negligence claim, the Third Circuit remanded for further proceedings (if necessary) on this claim.

While departing from most of the District Court’s findings, the Third Circuit concluded that the District Court had properly rejected Frescati’s negligent misrepresentation claim.  Frescati argued that CARCO failed to inform the ATHOS I of a reduction in the maximum draft at its facility’s ship dock prior to the Vessel’s arrival and that this failure constituted a negligent misrepresentation.  The District Court rejected this argument on the basis that “the areas of concern was not the area where the casualty occurred and the draft at the berth was factually irrelevant to the casualty.”  The Third Circuit agreed, holding that “an misrepresentation about the ship dock is factually irrelevant to the accident because it did not occur at the dock, but rather 900 feet out in the Anchorage.  There was no injury sustained that resulted from the failure to note the draft reduction at or immediately adjacent to CARCO’s dock.”

Finally, the Court considered a limited settlement agreement that CARCO had reached with the United States, whereby CARCO agreed not to raise any equitable defense premised on the government’s regulation of the Anchorage and failure to detect, mark and/or remove underwater obstructions to navigation (such as the abandoned anchor) in the Delaware River.  The government argued that CARCO should be precluded on remand from raising these issues.  Notwithstanding this limited settlement agreement and the promises made by each party thereto, the Third Circuit accepted CARCO’s arguments that by failing to address these issues at trial, the government waived the issue.   Accordingly, the Third Circuit declined to preclude CARCO from raising an equitable defense to the government’s subrogation claims on remand.

In short, the Third Circuit’s Opinion essentially orders a “do-over” of the case before the District Court, for further factual findings as to whether CARCO breached the contractual safe port/safe berth warranties owed to the ATHOS I and to Frescati.  To the extent that analysis of Frescati’s negligence claim is necessary (i.e. – if, on remand, the District Court finds no breach of CARCO’s contractual warranties), the District Court will need to determine the appropriate standard of care, whether it was breached, and, if so, did that breach proximately cause the oil spill.  On remand, the matter will be considered by District Judge Joel H. Slomsky, who was assigned to the case following Judge Fullam’s retirement.

To read a copy of the Third Circuit’s decision, click here. 

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