Client Alert: U.S. Supreme Court Holds Duty of Safe-Berth is a Warranty, Regardless of Diligence or Fault

Citgo Asphalt Refining Co., et al. v. Frescati Shipping Co., Ltd., et al., 589 U.S. ___ (2020) (majority opinion by Justice Sotomayor; dissent by Justices Thomas and Alito)

In November 2004, the 748-foot, oil tanker ATHOS I embarked on a 1,900 mile voyage from Puerto Miranda, Venezuela to Paulsboro, New Jersey laden with heavy crude oil.  In the final 900 feet of that voyage, as she made her approach to the berth in Paulsboro on the Delaware River, the flukes of an abandoned ship anchor punctured the single-hull of ATHOS I.  Approximately 264,000 gallons of cargo spilled into the river. 

ATHOS I was owned by Frescati, chartered to and operated by Star Tankers, and subchartered to CARCO (a group including CITGO Asphalt Refining Company and others).  The charter party (i.e., the contract of charter) between Star Tankers and CARCO included an unqualified safe-berth clause obligating, inter alia, CARCO as follows:
[t]he vessel shall load and discharge at any safe place or wharf, . . . 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.

Under the statutory scheme established by the Oil Pollution Act of 1990 (OPA), 33 U.S.C. § 2701, et seq. (enacted after the 1989 Exxon-Valdez oil spill), certain entities deemed responsible parties must bear the cost of oil-spill cleanup, regardless of fault.  § 2702(a).  OPA limits the liability of responsible parties that comply with OPA’s requirements and, among other things, timely assist with cleanup efforts.  § 2704.  If a responsible party complies with OPA, it is reimbursed by the Federal Government out of the Oil Spill Liability Trust Fund (Fund) for cleanup costs in excess of a statutory limit.  § 2708.

Responsible parties are permitted, however, to pursue claims against any other entity allegedly at fault for the oil spill.  §§ 2710, 2751(e).  The Federal Government may also pursue claims against an at fault entity to the extent of the amount the Fund reimbursed a responsible party.  §§ 2712(f), 2715(a).

Under OPA, Frescati was deemed a responsible party and it paid the statutory limit of $45 million to clean up the spill.  Frescati was reimbursed by the Fund for an additional $88 million of cleanup costs.

Circuit Split

After a lengthy procedural history, including a 41-day trial and a subsequent 31-day evidentiary hearing, the Court of Appeals for the Third Circuit concluded that Frescati was an implied third-party beneficiary of the subcharter between Star Tankers and CARCO and concluded that the safe-berth clause was an express warranty of safety, made without regard to fault or the level of due diligence taken by the charterer.  Notably, there was no evidence that CARCO knew or should have known of the existence of the anchor near this busy oil terminal.

In contrast to the Third Circuit’s holding (which is in accord with prior holdings from the Second Circuit), the Fifth Circuit previously held that such safe-berth clauses merely impose a duty of diligence.  The Supreme Court granted certiorari to resolve this split between the circuits.  587 U.S. ___ (2019); compare Orduna S.A. v. Zen-Noh Grain Corp., 913 F. 2d 1149 (5th Cir. 1990), with, e.g., Paragon Oil Co. v. Republic Tankers, S.A., 310 F. 2d 169 (2d Cir. 1962). 

The Court’s Analysis

The Court’s opinion hinges on the premise that maritime contracts must be construed like any other contract: by their terms and consistent with the intent of the parties.  Norfolk Southern R. Co. v. James N. Kirby, Pty Ltd., 543 U.S. 14, 31 (2004).  Where the words of a contract are clear and unambiguous, its meaning is to be determined in accordance with its plainly expressed intent.  In such a case, the parties’ intent can be determined from the face of the agreement and the language they used to memorialize that agreement.  Resort to extrinsic evidence is only warranted where the words of the contract are ambiguous.

In analyzing the safe-berth provision, the Court held that the clause imposed on CARCO a duty to select a safe berth.  The Court found the language “unqualified” and that the duty was absolute:

The clause requires the charterer to designate a ‘safe’ berth: That means a berth ‘free from harm or risk.’ Webster’s Collegiate Dictionary 1030 (10th ed. 1994); see also New Oxford American Dictionary 1500 (E. Jewell & F. Abate eds. 2001) (‘safe’ means ‘protected from or not exposed to danger or risk’).  And the berth must allow the vessel to come and go ‘always’ safely afloat: That means afloat ‘at all times’ and ‘in any event.’ Webster’s Collegiate Dictionary, at 35; see also New Oxford American Dictionary, at 47 (‘always’ means ‘at all times; on all occasions’).

CARCO argued that such an interpretation was unreasonable because it rendered the charterer strictly liable without regard to fault.  The Court agreed that contract law typically imposes strict liability, noting that an obligor under a contract is liable in damages for breach without regard to fault.  The Court rejected CARCO’s efforts to read into this contract tort-law concepts of fault.  The Court similarly rejected CARCO’s argument that the lack of the word “warranty” in the safe-berth clause (where the word “warranty” was used elsewhere in the charter party) limited the strict liability nature of the safe-berth clause or precluded it from being a warranty.

The Court pointed out that contracting parties are free to include tort-law concepts in contracts to limit the otherwise strict application of a contract’s terms.  The Court found in this case that no such tort concepts were found in the safe-berth clause and that CARCO failed to identify any such limiting language. The Court noted that other provisions of the contract expressly included such limitations. 

In addition, the Court compared the safe-berth clause language in the charter party at issue, (a ASBATANKVOY form charter party), with another available standard industry form (a INTERTANKVOY form charter party), which provides “[c]harterers shall exercise due diligence to ascertain that any places to which they order the vessel are safe for the vessel and that she will lie there always afloat.”

At its heart, the Supreme Court’s decision upholds the distinction between contract law and tort law.  It reaffirms that a breach of a material contractual term subjects the breaching party to strict liability in contrast to liability in tort, which is typically premised on failure to act reasonably under the circumstances.  The decision also reinforces longstanding principles of freedom of contract, including that parties are free to reduce or eliminate the strict liability nature of contractual breaches by including appropriate contractual limitations.

For contracting parties, this decision reinforces the need for careful and thoughtful consideration and review of the terms of a contract before it is signed.  Given the financial implications in the shipping world, a thorough assessment of existing and future contracts should take these principles into account.