On April 22, 2019, the U.S. Supreme Court granted certiorari to resolve a split between circuit courts over the meaning of a safe berth charter party clause. On March 29, 2018, in United States v. CITGO Asphalt Ref. Co. (In re Frescati Shipping Co.), 886 F.3d 291 (3rd Cir. 2018), the Third Circuit issued a decision that found Citgo, as the charterer, responsible for approximately $140 million in pollution clean-up costs by concluding Citgo’s safe berth clause imposed a strict liability duty, even as it related to unknowable or unforeseeable risks.
To understand the significance of this case being considered by the U.S. Supreme Court, a brief review of this dispute is in order. In 2001, a shipowner, Frescati Shipping Company, Ltd. (Frescati), chartered a vessel known as Athos I to Star Tankers Inc. (Star) pursuant to a time charter. This charter allowed Star to sub-charter the vessel for certain voyages. In 2004, Star sub-chartered the vessel to Citgo for a single voyage from Venezuela to Citgo’s asphalt refinery in Paulsboro, N.J. This voyage charter contained the following safe berth clause:
[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.
On November 26, 2004, while transiting the Delaware River to deliver a bulk shipment of crude oil to the Citgo terminal in New Jersey, the vessel passed through an area known as “Federal Anchorage No. 9.” This anchorage is one of a number of anchorages exclusively maintained, controlled, and monitored by the United States government. The U.S. Army Corps of Engineers regularly conducted soundings in this anchorage area. Unfortunately, while transiting through this anchorage, the vessel struck a previously unknown and abandoned anchor that was located roughly 900 feet from the Citgo terminal, in an area not maintained by Citgo. Approximately 263,000 gallons of crude oil spilled into the Delaware River as a result of this casualty.
The spill clean-up was conducted pursuant to the Oil Pollution Act of 1990 (OPA), 33 U.S.C. Sec. 2701, et seq. OPA statutorily identifies “responsible parties” who are required to pay for a clean-up in the first instance. As the shipowner, Frescati was designated as a responsible party. OPA permits responsible parties to limit their liability. In this case, Frescati filed an administrative claim with the National Pollution Fund Center (NPFC) to limit its liability and recover certain uncompensated costs and damages. The NPFC limited Frescati’s liability to roughly $45.5 million and reimbursed Frescati another $88 million in excess of the limitation amount.
Frescati claimed against Citgo for roughly $56 million in clean-up costs and additional damages. Having reimbursed Frescati through the NPFC, the United States pursued its own claim against Citgo to recover its reimbursement of approximately $88 million.
After a 41 day trial in 2010, the district court found neither Citgo nor any other party to the litigation knew or had reason to know about the anchor’s location. The court concluded that the fault for the casualty rested with the anchor’s former owner who abandoned it without notifying anyone. The court ultimately rejected any obligation on the part of Citgo to have scanned for hazards within the Federal Anchorage area, irrespective of the wording of the voyage charter party’s safe berth clause.
In interpreting the duties arising from the voyage charter’s safe berth clause, the Third Circuit held that the district court erred in relying upon the Fifth Circuit standard in Orduna S.A. v. Zen-Noh Grain Corp., 913 F.2d 1149 (5th Cir. 1990), which only requires a charterer to exercise due diligence in selecting a safe berth. Instead, the Third Circuit adopted the Second Circuit’s formulation in Cities Serv. Transp. Co. v. Gulf Ref. Co., 79 F.2d 521 (2nd Cir. 1935) (per curiam) that finds that a safe berth provision guarantees the safety of the berth “without regard to the amount of diligence taken by the charterer.” In other words, the safe berth warranty should be applied strictly without regard to whether the hazards were known or reasonably foreseeable to the charterer.
The Second Circuit, and now the Third Circuit, interpret this safe berth clause broadly because — in their view — such clauses are designed to guarantee the safety of the berth. Indeed, if we closely examine the language in the voyage charter, Citgo — as charterer — voluntarily agreed to provide for a “safe place or berth” so “the [v]essel can proceed thereto, lie at, and depart therefrom always safely afloat …” This provision contains no limitation concerning the nature of berth or the approach by which the vessel can traverse to and from the berth. As such, this language was found by the Third Circuit to be consistent with the holding of Cities Serv. that argued “the charter itself [is] an express assurance, on which the master [is] entitled to rely, that at the berth ‘indicated’ the ship would be able to lie ‘always afloat.’ ” Id., 79 F.2d at 521.
This interpretation was earlier rejected by the Fifth Circuit in Orduna, 913 F.2d 1149, 1157, that held:
[N]o legitimate legal or social policy is furthered by making the charterer warrant the safety of the berth it selects. Such a warranty could discourage the master on the scene from using his best judgment in determining the safety of the berth. Moreover, avoiding strict liability does not increase risks because the safe berth clause itself gives the master the freedom not to take his vessel into an unsafe berth.
In the Fifth Circuit’s view, a more reasonable interpretation of a general safe berth clause is that it merely “imposes upon the charterer a duty of due diligence to select a safe berth” unless there is an explicit agreement for the assumption of a broader duty. Id.
Taking this interpretation a step further, the Fifth Circuit also believed that holding the charterer responsible without regard to any fault, i.e. on a strict liability basis, was simply not reasonable — especially since the master would normally be in the best position to judge a berth’s safety under the circumstances. This reasoning has particular resonance in the case of Athos I because the abandoned anchor was not known to anyone in the local area. Beyond conducting its own side scan sonar over all possible approaches to and from its berth, including an area not controlled by Citgo, it is hard to conceive of any circumstance by which Citgo could have discovered the existence of this abandoned anchor and avoided this casualty. Unfortunately for Citgo, the Third Circuit adopted the Second Circuit’s interpretation because, in their view, the charterer has a non-delegable duty to provide a safe berth for the vessel without regard to how much due diligence is exercised by the charterer to accurately verify the port’s conditions.
Admittedly, Citgo could have avoided this predicament by insisting on a safe berth clause with language that imposed a lesser duty on the charterer. It is not known what steps, if any, Citgo took to negotiate the specific wording of the safe berth clause, but it is not uncommon for a safe berth clause to require a charterer to exercise only due diligence in selecting a port for loading or discharging cargo.
It bears mentioning that the Third Circuit largely vacated the district court’s opinion by finding Frescati was an “implied” third-party beneficiary of the voyage charter party. The Third Circuit reasoned a safe berth clause “necessarily benefits the vessel, and thus benefits its owner as a corollary beneficiary” as a matter of law. This determination is controversial. In order to be considered a third-party beneficiary, there usually has to be evidence of such intent either through contractual language or the conduct of the parties. In this case, the Third Circuit concluded Frescati was an implied third-party beneficiary based on the language of the charter alone. This conclusion was interesting because the charter contained no provision referring to third-party beneficiaries. Indeed, the charter made no reference to Frescati in any way, and identified only Star as having an ownership interest in the vessel. It will be interesting to see how the U.S. Supreme Court will address whether having a direct benefit from a contract is sufficient to confer third-party beneficiary status.
Oral argument has not yet been scheduled by the U.S. Supreme Court, but we anticipate at least another 12 months before a final decision is issued.