Where a charter agreement contains a “safe berth” clause, which provides that the charterer will designate a safe port as the vessel’s destination, is the safe berth clause a warranty for the ship’s safety or a promise that the charterer will exercise due diligence in selecting a safe port?
This case arises out of an incident in 2004 when the Athos I, a ship that CITGO Asphalt Refining Co. (“CARCO”) had chartered, collided with an abandoned anchor near CARCO’s designated port. This case asks the Supreme Court to decide how to interpret the charter agreement’s “safe berth” clause, under which CARCO was obligated to designate a safe destination port for the Athos I. CARCO argues that, under the safe berth clause, it was obligated only to exercise due diligence in selecting a safe port. Frescati Shipping Co. (“Frescati”), the Athos I’s owner, counters that the clause is better interpreted as a warranty of safety that gives rise to strict liability. The outcome of this case will determine the contours of a charterer’s obligations under safe berth clauses and the degree to which industry actors can efficiently bargain to allocate risks before accidents occur.
Questions as Framed for the Court by the Parties
Whether under federal maritime law a safe berth clause in a voyage charter contract is a guarantee of a ship’s safety, as the U.S. Courts of Appeals for the 2nd and 3rd Circuits have held, or a duty of due diligence, as the U.S. Court of Appeals for the 5th Circuit has held.
CITGO Asphalt Refining Company (“CARCO”) chartered a single-hulled oil tanker, the M/T Athos I, from an intermediary of Frescati Shipping Co., Ltd. and Tsakos Shipping & Trading, S.A. (“Frescati”) to deliver crude oil from Venezuela to CARCO’s berth in New Jersey. The contract between CARCO and Frescati contained a “safe berth” clause stipulating that, as the “charterer,” CARCO would designate a berth—in this case, CARCO’s own port in New Jersey—where the Athos I could “safely get (always afloat).” CARCO warranted that the Athos I would be able to reach the designated berth safely as long as the ship was “drawing,” or sailing with its keel at a depth of thirty-seven feet or less upon arrival.
To reach CARCO’s berth, the ship needed to pass through Federal Anchorage Number 9, a federally designated zone where ships may anchor temporarily. While there, the Athos I struck an abandoned anchor while the ship was drawing less than thirty-seven feet. The accident caused an oil spill that cost $143 million to clean up. Acting under the incentive structure of the Oil Pollution Act of 1990 (OPA), Frescati paid for the full cost of the initial cleanup, and the United States (the “Government”) later reimbursed Frescati approximately $88 million out of the OPA Trust Fund, a trust fund established by the OPA and funded by taxes on the petroleum industry.
Litigation began when Frescati filed a “Petition for Exoneration or Limitation of Liability,” leading CARCO and Frescati to claim damages against each other. Because the Government partially reimbursed Frescati under the OPA, the Government asserted its subrogation right and also claimed damages from CARCO. At trial, the United States District Court for the Eastern District of Pennsylvania (the “District Court”) held that CARCO was free from any liability. On appeal, the Third Circuit determined that CARCO owed “an unspecified duty of care to Frescati in tort” and remanded the case for a determination of the scope of such duty and whether CARCO had breached it. The Third Circuit also requested that the District Court determine the contours of the safe berth clause.
On remand, the District Court held CARCO liable in both contract and tort. Specifically, the District Court found that CARCO had breached the contract’s safe berth provision because the accident occurred despite Frescati’s compliance with the provision’s conditions. In other words, the District Court construed the safe berth provision as a warranty giving rise to strict liability in the event that it was breached. The District Court also held that CARCO had a duty in tort “to search for obstructions in the approach to its berth” by using side-scan sonar, and that this duty obligated CARCO either to remove any obstructions discovered or to warn ships of their presence. The District Court concluded that CARCO had breached this duty because it had not conducted any search for obstructions.
On appeal again, the Third Circuit affirmed CARCO’s breach of the safe berth clause but vacated the tort judgment. In so ruling, the Third Circuit reasoned that imposing a duty of care on wharf owners such as CARCO to search for obstructions—at least in the specific manner of using side-scan sonar, as mandated by the District Court—was overly burdensome. Nevertheless, the Third Circuit reiterated its earlier holding that CARCO had some unspecified “duty of reasonable diligence” to provide a “safe approach to its berth.”
The United States Supreme Court granted CARCO’s petition for a writ of certiorari on April 22, 2019.
PLAIN MEANING OF THE “SAFE BERTH” CLAUSE
Petitioner CARCO argues that the plain text of the safe berth clause does not read as a warranty that imposes strict liability on the charterer. For one, asserts CARCO, there is nothing in the clause’s text that allocates total liability to the charterer regardless of fault. In addition, continues CARCO, the clause’s “always afloat” language is too vague to constitute a warranty. CARCO instead interprets that language to convey the more narrow “ordinary meaning” that the charterer will designate a port where the water is deep enough for the ship not to strike the ground. While acknowledging that the charterer has some obligation to designate a safe berth, CARCO continues, this does not mean that the safe berth clause warrants against all “unknown and unknowable risks.” CARCO furthermore points out that, under the clause’s proviso, the ship’s captain retains the right to refuse to enter the designated port if it appears unsafe. In such event, explains CARCO, the charterer is liable for any “lighterage,” or cargo-transferring expenses, incurred in the ensuing delay. CARCO asserts that it is expenses such as these, and not damages from unforeseeable accidents, that the safe berth clause contemplates. Therefore, contends CARCO, a ship owner’s only available remedy against a charterer in such cases is in negligence under tort law, not under a strict liability theory of breach of contract.
Respondent Frescati disagrees, arguing that, under its the plain text, the safe berth clause is a warranty. According to Frescati, the clause uses unambiguous and unqualified language to promise that the designated port will be safe. Because this promise is so “plain and unconditional,” continues Frescati, the clause amounts to an express warranty despite not being explicitly labeled as such. Frescati claims that this clear contractual warranty is independent of and cannot be limited by any supposed standard of care that inheres in tort. Respondent the United States agrees, adding that CARCO misconstrues the “always afloat” language of the clause. In interpreting “always safely afloat” to mean merely that the port’s water is deep enough to keep the vessel from striking ground or physical barriers, the United States asserts that CARCO fails to read the phrase within the context of the rest of the clause guaranteeing the port’s safety. Nevertheless, the United States argues, even CARCO’s narrow reading of “always afloat” would impose full liability on CARCO here, since it was precisely in striking an anchor near CARCO’s port that the Athos I was damaged.
CARCO argues that, when read in its entirety, the contract demonstrates that the parties did not intend the safe berth clause to be a warranty that shifted total liability to the charterer for “all possible hazards.” CARCO contends that the contract’s inclusion of more than a dozen express warranties for a variety of purposes, including the ship owner’s warranties that the ship complied with Coast Guard safety regulations, and that it had not recently been to Cuba, show that the parties would have also included an express warranty that the designated berth would be safe if that had been their intention. CARGO moreover points out that, under one such express warranty, Star Tankers––Frescati’s sub-charterer––promised to maintain insurance specifically to cover oil spills. CARCO therefore contends that the parties’ clear allocation of the risk for the specific type of accident that occurred here shows that they did not intend for CARCO to be strictly liable for oil spills under the safe berth clause. CARCO further argues that the contract’s “General Exceptions Clause” shields the charterer from liability arising from “perils of the sea.” According to CARCO, “perils of the sea” includes unforeseeable collisions with underwater objects. This, concludes CARCO, is further evidence that the parties did not intend for the safe berth clause to apply to the type of unforeseeable accident that occurred here.
Frescati counters that the parties did not need to include an express warranty for the ship’s safety because CARCO’s promise of a safe berth did not require the redundant language of “warranty.” The United States agrees, arguing that if the parties had intended to apply a due diligence standard to the safe berth clause, then they would have included an express provision for that instead, as the parties did elsewhere in the contract. By way of example, the United States compares the safe berth clause with the contract’s seaworthiness clause, which does expressly provide for a due diligence standard. Frescati explains that it is industry practice to structure safe berth clauses in one of two ways. On the one hand, a charter party contract could adopt a due diligence standard and/or disclaim warranty. On the other hand, the contract could use an unqualified safe berth warranty. By not adopting a due diligence standard or expressly disclaiming a warranty here, Frescati contends that the safe berth clause must operate as a warranty. Frescati also points out that CARCO itself, in other contracts of its own, has adopted the due diligence standard in its safe berth clauses, and in at least one other contract, has used a safe berth clause that “expressly disclaim[ed] a warranty.” Frescati thus implies that CARCO knows how to contract for a due diligence standard, and therefore intentionally did not do so here.
CARCO claims that Supreme Court rulings dating back over a century establish longstanding support for their position that safe berth clauses are not warranties that give rise to strict liability. CARCO points to Atkins v. Fibre Distributing Co. (1874), which held that the charterer there was not liable when the ship struck a reef. In interpreting the safe berth clause in that case, continues CARCO, the Court determined that the clause imposed liability on the charterer only where the chosen port exposed the ship to “more than the ordinary perils of the seas.” CARCO contends that “unknown submerged object[s],” such as the anchor that damaged the Athos I here, are typical perils of the sea. As such, CARCO concludes that safe berth clauses cannot give rise to strict liability. CARCO argues that safe berth clauses are more properly invoked when the charterer orders the vessel to a port that has a known hazard. CARCO claims that cases such as The Gazelle & Cargo (1888) and Mencke v. Cargo of Java Sugar (1902) illustrate this point. In those cases, explains CARCO, the ships justifiably refused to enter ports that were clearly unsafe. CARCO accordingly distinguishes The Gazelle and Mencke from the present case, in which the charterer did not know of the danger.
In response, the United States contends that CARCO’s reliance on Atkins is misplaced because in that case, the Court actually found that the designated port was unsafe. It was only because the ship’s captain had inspected the port and waived the safe berth protection, the United States explains, that the charterer was not held responsible for the ship striking the submerged reef. The United States likewise contends that The Gazelle and Mencke are also not instructive, because the safe berth clause here did not distinguish between known and unknown risks. The United States therefore concludes that the safe berth clause is an unqualified warranty assuring the Athos I’s safety. Frescati agrees, claiming that every published New York arbitration award interpreting unqualified safe-berth clauses has construed such clauses as warranties. According to Frescati, the Society for Maritime Arbitration has published at least 67 such decisions since 1965, and each decision “interpreted the clause as a strict promise of safety, i.e., a warranty.” Frescati notes that CARCO has not identified any arbitration awards that have construed unqualified safe-berth clauses as requiring only due diligence. Foreign jurisdictions, Frescati continues, also view unqualified safe-berth clauses as warranties. Frescati contends that since at least 1861, and as recently as 2017, English courts and arbitrators have consistently construed such clauses as warranties.
SHOULD STRICT LIABILITY APPLY?
CARCO argues that holding charterers strictly liable would create a mismatch between charterers’ duties and those of wharfingers, the berths’ owners. Arguing in support of CARCO, The American Fuels and Petrochemical Manufacturers Association and the International Liquid Terminals Association (“AFPMA” and “ILTA”) explain that, like charterers, wharfingers also assure ship owners of their berths’ safety. Because wharfingers control their own berths, AFPMA and ILTA continue, the duty that wharfingers’ owe to vessels should be at least as demanding as any duties that charterers owe. Because wharfingers owe duties of only due diligence, AFPMA and ILTA maintain, it would be incongruous to impose a more exacting strict liability standard on charterers, who often act from a distance.
CARCO also argues that imposing strict liability here would unfairly allocate total liability to CARCO for an accident that was not its fault. According to CARCO, this is exactly what Congress sought to avoid in passing the Oil Pollution Act (“OPA”), which implements a cost-spreading scheme. Under the OPA, explains CARCO, a “responsible party” may seek indemnification from the industry-funded OPA Trust Fund for losses caused by an unknown third party. The AFPMA and ILTA contend that imposing strict liability on charterers would give the United States a perverse incentive to sue charterers for guaranteed payouts rather than provide reimbursement under the OPA. Imposing strict liability, the AFPMA and ILTA continue, would also disincentive the Government from maintaining its waterways.
The United States counters that contractual liability supersedes any supposed tort law duties. Frescati agrees, asserting that parties to contracts should not be able to dodge contractual liability simply because they later regret the contract’s terms. Even if tort law principles are applicable in a contract case like this one, Frescati continues, there is no policy justification to hold wharfingers and charterers to identical standards of care. That is especially true here, argues Frescati, because CARCO served as both charterer and wharfinger. Because CARCO designated its own berth as safe, asserts Frescati, CARCO was best positioned to mitigate hazards. Frescati thus implies that that CARCO’s status here as a charterer is not as “innocent” as CARCO portrays.
The United States further contends that, although the OPA indemnifies “responsible parties” for their cleanup costs, this does not absolve parties from their contractual obligations. The United States explains that the OPA’s aim is to incentivize certain responsible parties to mitigate oil spills expediently. Thus, the United States argues, reimbursement from the OPA Trust Fund does not eliminate a party’s liability. Reimbursement is merely a stopgap that incentivizes a timely cleanup until liability can be determined. To that end, the United States points out that the Government retains subrogation rights under the OPA. These subrogation rights, continues the United States, allows the Government to replenish the OPA Trust Fund.
IMPACT ON THE SHIPPING INDUSTRY
CARCO contends that interpreting safe berth clauses as warranties would hinder marine commerce by imposing excessive burdens on charterers. The North American Export Grain Association (“NAEGA”), arguing in support of CARCO, explains that because shipping is a complex industry with long supply chains and interwoven contracts, a due diligence scheme is most efficient because it incentivizes all of the various contractual parties to take care. NAEGA contends that if some of these interwoven contracts contain warranties giving rise to strict liability, then parties will be tempted to over-litigate any colorable claim in the hope of a payout. Also arguing in support of CARCO, the AFPMA and ILTA claim that holding charterers strictly liable will leave charterers the burdensome task of actually ensuring that a berth’s waters are hazard-free. For example, the AFPMA and ILTA explain, a charterer would have to “locate every conceivable obstruction” within its berth.
The United States responds that contract law aims to promote certainty. A safe berth clause properly understood and enforced as a warranty, continues the United States, allows parties to allocate risk in advance. The United States concludes that this certainty best promotes commerce, because it allows parties to operate according to their “reasonable expectations.” BIMCO (formerly the Baltic and International Maritime Council), supporting the United States and Frescati, agrees, pointing out that when risks are unknowable, warranties enable parties to preempt costly litigation by allocating risk beforehand. Reinterpreting safe berth clauses, Frescati therefore asserts, will impede commerce by introducing uncertainty into parties’ bargaining. BIMCO also adds that, due to the highly international character of the shipping industry, it is desirable for there to be uniformity between the two major maritime jurisdictions, the United States and England. To that end, continues BIMCO, American law should follow English law in treating safe berth clauses as warranties.
- Jeanne Amy: SCOTUS Grants Cert to Resolve Circuit Split on Safe Berth Warranty: Guarantee of a Ship’s Safety or Due Diligence?, The National Law Review (May 29, 2019).
- David Loh: Supreme Court Considers Safe Berth Warranty, JD Supra (June 26, 2019).