Charterers Are Not the Life of the Party: Charterers Are Liable to Vessel Owners for Unsafe Berths
On March 30, 2020, the Supreme Court of the United States issued its decision in CITGO Asphalt Ref. Co. v. Frescati Shipping Co., 140 S. Ct. 1081 (2020), holding that, under federal maritime law, a safe berth clause is a warranty of safety that imposes liability on a charterer for an unsafe berth, irrespective of a charterer’s diligence in selecting the berth. The Court likely granted certiorari based on the Circuit court’s split on safe berth clauses. The Fifth Circuit held in Orduna S.A. v. Zen-Noh Grain Corp., 913 F.2d 1149 (5th Cir. 1990), that a safe berth clause simply imposes a duty of due diligence. The Second Circuit opined in Paragon Oil Co. v. Republic Tankers S.A., 310 F.2d 169 (2nd Cir, 1962), that the language of unqualified safe berth clauses as embodying an express warranty of safety. The procedural posture of Citgo Asphalt Refining Co. included the Third Circuit following the Second Circuit precedent, that the safe berth clause was an express warranty of safety without consideration of a charterer’s diligence in selecting the berth. The Supreme Court understands the importance of promoting uniformity when deciding maritime cases. See Dutra Group v. Batterton, 139 S. Ct 627 (2019).
Frescati Shipping Company owned the oil tanker Athos I and entered into a charter party with Star Tankers, operator of tanker vessels, to charter the Athos I. Star Tankers entered into a charter party for Citgo Asphalt Refining Co. (CARCO) to charter the oil tanker. A charter party is a contract to lease a vessel. The subject charter party used the standard industry form contract. CARCO was required to designate a safe berth at which the vessel may load and discharge cargo. A berth is a vessel’s allotted place at a wharf or dock. CARCO designated Paulsboro, New Jersey as its berth of discharge. The vessel almost completed its journey when a sunken, abandoned ship punctured the tank’s hull in the Delaware River. This caused two holes in the hull of tanker to spill out 264,000 gallons of crude oil. As the vessel owner, Frescati was required to cover the cleanup costs but was able to limit its liability to $45 million under the Oil Pollution Act. The federal government reimbursed Frescati for an additional $88 million through the Oil Spill Liability Trust Fund.
Frescati and the United States government sued CARCO to recover their respective costs for the cleanup, arguing that CARCO breached the safe berth clause in the charter party between CARCO and Star Tankers by failing to designate a safe berth. The safe berth clause required CARCO to select a safe berth that would allow the vessel to arrive and depart safely. Frescati argued that it was an implied third-party beneficiary of the charter party, which contained the safe berth clause. The safe berth clause provided under the charter party as follows:
SAFE BERTHING — SHIFTING. The vessel shall load and discharge at any safe place or wharf, . . . which shall be designated and procured by the Charterer [CITGO], 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
Based on the plain language of the safe berth clause, the Court determined that the provision containing “shall designate” a “safe place” that is “always safely afloat” provided an absolute duty for safety of the berth on the charter. Based on federal maritime law, statements of material facts in charter parties are warranties irrespective of the name of the clause. Davison v. Von Lingene, 113 U.S. 40 (1885). The safe berth was construed to be a material fact constituting an express warranty not subject to any conditions. The Court determined that CARCO had an absolute duty and warranted the safety of the berth it designated.
CARCO argued the safe berth provision did not impose strict liability on the charterer but, rather, required due diligence standard in selecting a safe berth. The Court looked to the express language of the safe berth paragraph that provided liability resulting from the designation of an unsafe berth. The contractual provision did not state any due diligence requirement. The Court found that CARCO’s interpretation of the safe berth clause invited tort concepts as opposed to the contractual analysis. Under contractual provisions, a breaching party is liable regardless of due diligence or fault.
Based on the Court’s ruling, a general safe berth provision will protect a vessel owner for an unsafe berth during a charter. A charterer will not be afforded with an opportunity to defend a breach of charter party based on its diligent efforts. The Supreme Court followed basic contract principles by looking to the express terms of the contract. However, a charterer can still protect itself by negotiating the safe berth clause and avoiding the standard industry form. A charterer entering into a charter party can negotiate a more favorable safe berth clause by limiting its liability and obligations and imposing a due diligence requirement. The Court’s rulings provide uniformity with its decision by holding that safe berth clauses utilized on the standard industry forms will trigger a warranty of safety for an unsafe berth.
*Dean is an associate working in our New York City office. He can be reached at 212.376.6449 or firstname.lastname@example.org.
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