U.S. Fifth Circuit Considers Meaning of Any Contractual Relationship in the Context of Third Party Defense to Liability Under OPA

Written by Philip Brickman

The U.S. Fifth Circuit Court of Appeals recently provided some clarity on whether the third party defense to liability under OPA applies where the third party alleged to be at fault committed an act or omission in connection with an indirect contractual relationship with the responsible party. In Buffalo Marine Services, Inc. v. U.S. , the Court held that both direct and indirect contractual relationships serve to prevent a party from availing itself from the application of the OPA third party defense to liability . Application of the third party defense is precluded even where the contractual relationship between the responsible party and alleged third party is indirect and not just where there is direct privity of contract.

This case involved an oil spill on the Neches River in Texas. In August 2004, a tug and barge owned by Buffalo Marine attempted to dock along the tanker M/T TORM MARY to deliver fuel. While positing the tug and barge for refueling operations, the Buffalo Marine barge collided with the TORM MARY, rupturing the vessel’s hull and fuel oil tank. As a result, several thousand gallons of heavy fuel oil spilled into the Neches River. Buffalo Marine, the Torm vessel interests (“Torm”) and their insurers coordinated the clean-up effort at a cost of $10.1 million.

Under the Oil Pollution Act of 1990, a responsible party for a vessel from which oil is discharged is liable for the removal costs and damages that result from the incident . A responsible party for a vessel is defined by statute as “any person owning, operating, or demise chartering the vessel.”  The liability of the responsible party is statutorily capped at a dollar limit, which is based on the gross tonnage of the responsible party’s vessel . If cleanup costs exceed the statutory limit, the responsible party can seek to have those excess costs reimbursed by the Oil Spill Liability Trust Fund (OSLTF) . Here, Torm was designated as the responsible party under OPA.

There is a provision under OPA that may afford a responsible party a complete defense to liability. The responsible party must establish by a preponderance of the evidence that the spill was caused solely by an act or omission of a third party, other than a third party whose act or omission occurs in connection with any contractual relationship with the responsible party . The provision also requires a showing by the responsible party that it exercised due care with respect to the spilled oil and that it took precautions against the foreseeable acts or omissions of the third party to whom it is attempting to shift liability .

Buffalo Marine, Torm and their insurers jointly submitted a request for reimbursement of cleanup costs to the U.S. Coast Guard’s National Pollution Funds Center (“NPFC”), the agency responsible for administering the OSLTF. In the request, the parties sought to declare Buffalo Marine the sole third party cause of the spill, exonerate Torm from liability and also substitute Buffalo Marine as the responsible party pursuant to 33 USC §2703(a)(3).

The NFPC denied the claim, citing a contractual relationship between Torm and Buffalo Marine. Torm was the end buyer of the fuel. Bominflot was the seller of the fuel; LQM Production Services was the broker that acted as an intermediary between Torm and Bominflot. Buffalo Marine was to deliver the fuel to the TORM MARY. Torm and Buffalo Marine then sought review of the NPFC’s decision in federal district court. While the Fifth Circuit opinion addressed issues of review of an agency decision under the Administrative Procedures Act, the key issue was the Court’s analysis and interpretation of the statutory limitation of liability under OPA. The Court reviewed whether the NPFC’s interpretation of the phrase “act or omission occur[ring] in connection with any contractual relationship” included acts or omissions occurring in connection with an indirect contractual relationship with the responsible party.

In denying the reimbursement request, the NPFC ultimately concluded that acts occurring with a commercial fuel delivery, even where a chain of agents or contracts stands between the party delivering the fuel and the party receiving the fuel, can be construed as a contractual relationship. Further, direct privity of contract between Torm and Buffalo Marine for the purchase of fuel was not necessary to determine that there was a contractual relationship sufficient to prevent the parties from availing themselves of the OPA limitation provision.

In this case, the Fifth Circuit was asked to determine if the NPFC’s interpretation of the “contractual relationship” phrase was based on a permissible construction of the OPA statute. The Fifth Circuit agreed with the NPFC’s interpretation for several reasons. First, the lack of a contract the parties does not preclude them from having a contractual relationship. Second, the statute specifies that the third party defense does not apply where the third party’s act or omission occurred in connection with any contractual relationship with the responsible party. The term “any” must encompass all varieties of contractual relationship, including those that indirectly involve two parties. Further, the Court took note of CERCLA’s third party defense provision, which is nearly identical to the OPA defense. CERCLA’s provisions apply to both direct and indirect contractual relationships .

Third, the Court found nothing in the legislative history of OPA to indicate that the restriction on the limitation would only apply to situations where there is a direct contractual relationship. Finally, the Court explained that allowing responsible parties to escape liability even when the third party’s act was in connection with an indirect contractual relationship would allow them in cases such as this to avoid liability by the simply inserting an extra link or two in the chain of distribution.

NPFC took the position that Torm and Buffalo Marine had an indirect contractual relationship and that the acts that led to the spill were connected to that relationship. In other words, the collision occurred during the process of delivering the fuel to the TORM MARY. As such, Torm, Buffalo Marine and their insurers could not assert the third party defense under OPA. The Fifth Circuit agreed and affirmed the NPFC’s decision.

The Fifth Circuit’s opinion is significant because it clarifies the conditions under which a responsible party may attempt to limit its liability under OPA by alleging fault of a third party. There cannot be any contractual relationship, either direct or indirect, between responsible party and the third party alleged to be solely at fault for the spill, thus narrowing the circumstances under which the limitation of liability defense is available to the responsible party.

Please contact Phil Brickman at (504) 523-2600 or [email protected] for further information on these issues.