SCOTUS Determines that Plain Language of a Safe Berth Clause Imposes Liability on Charterer to Warrant the Ship’s Safety
In CITGO Asphalt Refining Co. v. Frescati Shipping Co., the United States Supreme Court issued a 7-2 decision affirming the United States Court of Appeals for the Third Circuit, holding that a safe berth clause in a voyage charter party guarantees a ship’s safety rather than merely imposing a duty of due diligence. Looking to the language of the charter party, the Supreme Court found that the charter party imposed liability on the voyage charterer for selecting an unsafe berth regardless of the care exercised by the charterer. The Supreme Court noted that a charterer may limit its liability and the parties are free to contract for a due diligence standard instead of a warranty of safety. Charterers and terminal operators should take care to carefully contract for the appropriate standard when drafting charter parties and terminal agreements.
As we have previously reported, the Third Circuit’s rule with respect to safe berth clauses is that they warrant the safety of the berth, which is aligned with Second Circuit jurisprudence. In re Frescati Shipping Co., 886 F.3d 291 (3d Cir. 2018); Paragon Oil Co. v. Republic Tankers, S.A., 310 F.2d 169 (2d Cir. 1962). This interpretation conflicts with Fifth Circuit precedent holding that a “safe berth clause imposes upon the charterer a duty of due diligence to select a safe berth.” Orduna S.A. v. Zen-Noh Grain Corp., 913 F.2d 1149, 1157 (5th Cir. 1990).
The underlying facts provide some context. The M/T ATHOS I, a single hulled oil tanker, was owned by Frescati Shipping Company, Ltd., and managed by Tsakos Shipping & Trading, S.A. The sub-charterer, CITGO, chartered the vessel from the tanker pool to deliver crude oil to its berth in Paulsboro, New Jersey. On November 26, 2004, when the vessel was approximately 900 feet from its intended berth, the ATHOS I struck an abandoned anchor on the bottom of the Delaware River, causing a spill of approximately 264,000 gallons of crude oil. The cleanup cost was $143 million. Frescati paid to clean up the spill and was reimbursed $88 million by the United States pursuant to the Oil Pollution Act. Frescati and the United States filed suit to recover these costs from CITGO, relying on the safe berth clause in the voyage charter party. The Third Circuit ruled in favor of the ship owner, Frescati, and held that “the safe berth warranty is an express assurance made without regard to the amount of diligence taken by the charterer.”
On appeal, the Supreme Court analyzed the language of the safe berth provision in the charter party, which required the charterer to select a safe berth for the vessel. The applicable provision provided that “[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, any lighterage being at the expense, risk and peril of the Charterer.”
The charter party also required CITGO to direct the vessel to a “safe por[t]” along the Atlantic coast of the United States. The “safe-port clause” in the charter party provided that “[t]he vessel . . . shall, with all convenient dispatch, proceed as ordered to Loading Port(s) named . . . , or so near thereunto as she may safely get (always afloat), . . . and being so loaded shall forthwith proceed, . . . direct to the Discharging Port[s], or so near thereunto as she may safely get (always afloat), and deliver said cargo.”
The Supreme Court determined that the requirement to designate a “safe” berth, meaning a berth “free from harm or risk,” and that berth must allow the vessel to remain “always” safely afloat, meaning afloat “at all times” and “in any event.” Failure to select a safe berth constitutes a breach of contract, and therefore, “binds the charterer to a warranty of safety.” The Supreme Court reasoned that the charter party need not specifically use the term “warranty” or express warranty language because the contract terms contain statements of fact that relate to a material matter, namely the condition of the berth to be selected by the charterer.
The Supreme Court distinguished and rejected the Fifth Circuit standard of due diligence. The concept of due diligence, the Supreme Court reasoned, is a fault-based concept that arises under a theory of tort liability, which has “no place” in a contract analysis. The charterer is liable for damages for his breach of contract, regardless of fault. There is no language in the charter party, the Supreme Court held, that indicates that the charterer’s liability is one of due diligence. There are other industry form charter parties that expressly limit the charterer’s liability. The INTERTANKVOY form states that “[c]harterers shall exercise due diligence to ascertain that any places to which they order the vessel are safe for the vessel and that she will lie there always afloat.” The charter party in this case did not have that language.
The Supreme Court discussed the Fifth Circuit jurisprudence arising from Orduna S.A. v. Zen-Noh Grain Corp., 913 F.2d 1149, 1157 (5th Cir. 1990), and explained that CITGO’s reliance on that case was misplaced. The Fifth Circuit, the Supreme Court noted, relied principally on tort law and policy considerations rather than examining the language of the contractual provisions, which similarly contained an unqualified safe berth clause. The clause’s unambiguous meaning must trump any tort or policy considerations, the Supreme Court held. The Supreme Court affirmed the decision of the Third Circuit in favor of the vessel owner and held that the language of the safe berth clause at issue in this case “unambiguously establishe[d] a warranty of safety.” The Supreme Court noted, however, that “[c]harterers remain free to contract around unqualified language that would otherwise establish a warranty of safety, by expressly limiting the extent of their obligations or liability.”
Dissenting, Justice Thomas, would have held that the plain language of the safe berth provision in the charter party contains no warranty of safety by the charterer. Instead, the minority reasoned, the language in the safe berth clause puts an obligation on the vessel’s master to discharge and gives him a right of refusal, whereas the charterer has a right of selection of a location for discharge and a duty to pay for lighterage if the vessel cannot safety reach that point. The minority continues that there is no express warranty language imposing the warranty of safety on the charterer contained in the charter party. The minority argues that the majority’s opinion “indifferently conflates a duty to take a certain action — ‘designat[e]’ a wharf understood to be safe — with a warranty guaranteeing a certain result — the ultimate safety of the berth.” This amounts to, Justice Thomas found, “conflating an action with an outcome” that “converts every obligation tangentially related to safety into a warranty of safety.” Justice Thomas, therefore, would have reversed the judgment and remanded for further proceedings.