Case No. 18-565 | 3d Cir.
Preview by Sean Lowry, Online Editor*
In 2004, Frescati operated an oil tanker that was chartered by the petitioners, which are multiple related companies under the CITGO corporate umbrella (collectively referred to as “CARCO”), to transport oil from Venezuela to a refinery in New Jersey. As the ship’s captain approached the dock in New Jersey, the oil tanker struck an anchor hidden on the bottom of the Delaware River, eventually spilling over 260,000 gallons of crude oil. The cleanup over the following months required thousands of workers and cost $143 million, which was partially financed by Frescati and the United States (who contributed approximately $88 million in payments out of the federal Oil Spill Liability Trust Fund).
Litigation between the parties soon erupted in 2005, with each party aiming to shield itself from liability to the other while also attempting to recover damages. The central legal issue in the case is the interpretation of a “safe berth” clause in the private parties’ contract. This clause, common in many shipping contracts, required that CARCO direct any vessels chartered under the contract to a safe place or wharf to deliver the cargo.
After a long procedural history, the district court awarded Frescati $55.5 million in damages, in part reflecting unreimbursed oil spill cleanup expenses. (The district court also awarded the United States $44 million for a partial recovery of its payments.) As it affirmed the district court’s awards, the Third Circuit adopted the Second Circuit’s interpretation of safe berth clauses as express warranties of safety, for which CARCO could be strictly liable for any damages once the ship approached the designated port within a contractually specified “draft” (distance between the surface of the water and the lowest point of the vessel).
In its petition for certiorari, petitioners urge the Court to adopt the Fifth Circuit’s interpretation that “safe berth” clauses impose a duty of due diligence on a charterer, rather than a warranty of strict liability. Petitioners argue that the Third Circuit’s decision reads a warranty into the text of the contract for which the parties did not bargain. In other words, CARCO did not agree to the risk of millions of dollars in damages even if it took reasonable measures to prevent an oil spill. Additionally, petitioners argue that the strict liability interpretation of safe berth clauses is undesirable from a policy perspective, as it imposes liability on charterers rather than the ship managers who are better positioned to judge the safety of their vessel in the waters they are navigating.
In contrast, respondents urge the Court to adopt the Third Circuit’s warranty interpretation. From a policy perspective, the respondents argue that parties should be able to bargain over inclusion of the safe berth “warranty” based on whether the charterer or ship manager, in a particular context, is better positioned to inspect and assure the safety of the port. As further support, respondents also point to English courts and examples of industry custom that support the proposition that a safe berth clause prescribes a warranty of strict liability and not merely a duty of due diligence.
The Court’s decision in this case could clarify how the common law of admiralty interprets contractual language that is standard in many shipping agreements, and affect how parties to future agreements allocate risk.
*Sean Lowry is a 3LE (Class of 2021) and Analyst in Public Finance at the Congressional Research Service (CRS). The views expressed are those of the author and are not necessarily those of the Library of Congress or CRS.