Charterers Beware: Supreme Court Affirms Strict Liability Standard
On March 30, 2020, the Supreme Court upheld a decision by the Third Circuit imposing strict liability on shippers who enter into charter party agreements (a form of maritime contract involving the marine transport of goods) with “safe berth” clauses.
The Supreme Court‘s decision in CITGO v. Frescati Shipping Co. is a cautionary tale for shippers entering into charter agreements that include “safe berth” provisions. The decision found that unless language is included that limits a shipper’s obligation, a shipper may be held strictly liable for damages resulting from the designation of a berth, even if the damages are unforeseeable.
The issue before the Supreme Court arose on November 26, 2004, when Frescati, the vessel owner, allided with a hidden anchor that had been abandoned by an unknown party in the Delaware River. The allision occurred in a federal anchorage (where vessels essentially park while waiting to enter a wharf) approximately 300 yards from the vessel’s intended berth. The allision resulted in an oil spill costing in excess of $100 million dollars to clean up.
Frescati, as the vessel owner, was originally designated as the party responsible for the cleanup. However, Frescati and the United States, which administers an industry-funded reserve designated for clean-up of damages resulting from oil spills, pursued recovery against CARCO, the vessel charterer and owner of the wharf where the vessel was destined.
The primary issue brought before the Supreme Court was the Third Circuit’s interpretation of the safe berth clause in the charter party agreement. The clause, which is commonly used in charter agreements, provided that CARCO was to designate a “safe place or wharf” where the Vessel could “proceed thereto, lie at, and depart therefrom always safely afloat.”
The Third Circuit reasoned that the clause embodied an express warranty of safety made without regard to the charterer’s diligence in selecting the berth. The Third Circuit found that the contractual warranty was breached because the entrance to the berth was obstructed by an (unknown and unknowable) anchor. Thus, the Third Circuit, consistent with prior decisions in the Second Circuit but contrary to Fifth Circuit precedent, interpreted the “safe berth” language in the charter agreement to hold the shipper of the cargo strictly liable for the resulting oil spill.
In affirming the Third Circuit’s decision, the Supreme Court looked to the four corners of the contract stating that “the clause imposes on the charterer a duty to select a safe berth.” And given the unqualified language of the clause, the charterer’s duty is absolute: The charterer must designate a berth that is “safe: and that allows the vessel to come and go ‘always’ safely afloat. That absolute duty amounts to a warranty of safety.”
The Supreme Court further noted, however, that charterers are free to contract around unqualified language that would otherwise establish a warranty of safety, by expressly limiting the extent of their obligations or liability. Accordingly, the Supreme Court held that because CARCO failed to include language that limited the extent of its obligation, the plain language of the safe-berth clause established a warranty of safety without limitation.
In light of the Supreme Court’s holding, the onus is on shippers entering into charter agreements to include language that limits their liability when designating a “safe berth.” If a charterer fails to do so, they may find themselves assuming strict liability obligations for damages that may run into the hundreds of millions of dollars. This could be, for example, an oil spill resulting from a vessel encountering unknown and unknowable hazards in an otherwise safe berth.
The Supreme Court’s decision highlights the importance of clear drafting in charter agreements to avoid the imposition of unlimited damages on charterers.
GKG Law Principal Brendan Collins concentrates his practice in the areas of transportation law, commercial litigation, bankruptcy, communications law, and association law. He has extensive complex litigation experience in federal and state courts and before numerous regulatory bodies, including the Federal Maritime Commission and the Surface Transportation Board.
GKG Law Associate Kristine O. Little handles a range of transportation matters, including litigation, contract drafting and regulatory issues. She has represented shippers and transportation intermediaries on both regulatory and commercial issues pertaining to international trade and transportation.