Spotlight - Court Decisions

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Maritime economic loss doctrine

The US Court of Appeals for the Fifth Circuit ruled that a maritime plaintiff is restricted to warranty remedies when a defective product damages only the product itself. In the instant case, plaintiff’s helicopter made an emergency landing in the Gulf of Mexico due to engine trouble. The pilot and passenger escaped safety, but the helicopter inverted and was a total loss. Evidence indicated that the problem was the result of a manufacturing defect on the part of the engine manufacturer. The helicopter owner brought suit against the engine manufacturer and the helicopter manufacturer, alleging post-sale failure to warn of a pre-sale product defect. The court held that, under US maritime jurisprudence, such economic loss, when not accompanied by damage to other property, is recoverable, if at all, only for breach of warranty.

Turbomeca, S.A. v. Era Helicopters LLC, No. 07-30885 (5th Cir., July 16, 2008).

Open and obvious danger exonerates shipowner

The US Court of Appeals for the Fifth Circuit ruled that a shipowner is not liable for injuries incurred by a longshore worker injured while unloading cargo when the dangerous condition of the cargo was open and obvious. The longshore worker was injured when struck by a falling steel coil that was about to be unloaded. The worker sued the ship owner and others for failing to exercise reasonable care to turn the ship over to the stevedore in such condition that a reasonably competent stevedore could safely unload it. That steel coil and others had shifted during the voyage due to heavy weather. The court found that the dangerous condition of the cargo was open and obvious, and that the stevedore should have taken appropriate precautions.

Kirksey v. Tonghai Maritime, No. 07-40616 (5th Cir., July 15, 2008).

Insurance company not liable for insufficient coverage

The US Court of Appeals for the First Circuit ruled that, absent special circumstances, an insurance company is not liable to an insured for not recommending a higher amount of coverage. In the instant case, plaintiff fishing vessel owner insured the vessel for $1 million protection & indemnity (P&I) coverage. This level of coverage was never changed during the 16 years that plaintiffs owned the vessel. An injured crewmember brought suit for damages and the judgment well exceeded the insurance coverage limits, resulting in seizure and sale of the vessel. Plaintiffs sued their insurance company for negligence, asserting that the insurance company had an obligation to recommend higher coverage. The court ruled that there is no general duty of an insurance agent to ensure that the insurance policies procured provide coverage that is adequate for the needs of the insured. A plaintiff in such a case must be able to show a specific assertion of coverage recommendation and a subsequent reliance on that assertion to establish special circumstances in order to allow for liability to obtain.

AGA Fishing Group Limited v. Brown & Brown, Inc., No. 07-2408 (1st Cir., July 10, 2008).

Puerto Rico Ports Authority entitled to sovereign immunity

The US Court of Appeals for the District of Columbia ruled that the Puerto Rico Ports Authority (PRPA) is an arm of the Government of the Commonwealth of Puerto Rico and entitled to sovereign immunity. This decision reverses an earlier ruling by the Federal Maritime Commission (FMC) and effectively ends complaints filed by various maritime interests against the PRPA before the FMC.

Puerto Rico Ports Authority v. Federal Maritime Commission, No. 06-1407 (D.C. Cir., July 8, 2008).

Apportionment of liability when both vessels violate COLREGS

The US Court of Appeals for the Ninth Circuit upheld the determination of the federal district court regarding allocation of liability in a collision case where both ships had violated the International Regulations for Preventing Collisions at Sea (COLREGS). In the instant case, defendant’s tanker was entering Puget Sound. In accordance with federal law, it hired two of plaintiff’s vessels to provide escort service. In accordance with the pre-arranged transit plan, one of the escort vessels was to be tethered to the stern of the tanker and the other escort vessel was to position itself on the tanker’s port shoulder. Plans called for the two escort vessels to rendezvous with the tanker by proceeding on a course of 058 degrees true at 12.5 knots while the tanker, which was approaching from the Pacific Ocean, would proceed on the same course, but at 15 knots, until the appropriate positions were attained. The escort vessel that was to be on the tanker’s port shoulder failed to correct its course as steered to account for wind and currents. The ensuing collision nearly capsized the escort vessel. The court found the colliding vessels each violated two COLREGS. It also found that the vessels were operating in concert and pursuant to agreed maneuvers (although this did not necessarily excuse violations of the COLREGS). It then found that the actions of the escort vessel were more serious as regards causation. The court also found that the master of the escort vessel had serious medical and alcohol problems that may have impacted his situational awareness and that the owner had a duty to conduct further inquiry before allowing this individual to serve as master of the escort vessel. The federal district court allocated 70% of the liability against the owner of the escort vessel and 30% of the liability against the owner of the tanker. In affirming this allocation, the appellate court stated: "it is precisely this type of fact-intensive decision that is committed by our precedent to the district court for its determination."

Crowley Marine Services v. Maritrans Inc., No. 07-35237 (9th Cir., July 3, 2008).

Proper “maintenance” of an ORB includes duty to avoid knowing material errors

The US Court of Appeals for the Fifth Circuit ruled that the federal government may prosecute a ship owner and chief engineer, under the Act to Prevent Pollution from Ships (APPS), for failure to properly maintain an oil record book (ORB) when the ship entered a US port with an ORB onboard that the chief engineer knew to contain false material entries. In the instant case, defendant chief engineer on a ship owned by defendant shipowner, allegedly directed the discharge of oily waste water from the ship on the high seas without making entries in the ORB required by MARPOL. The ship entered ports of the United States on eight separate occasions before the US Coast Guard discovered the fraudulent entries. The chief engineer and the shipowner were then charged with conspiracy, making a false statement to the Coast Guard, and eight counts of knowing failure to maintain an ORB in violation of APPS. Only the eight counts under APPS were in dispute here. The defendants contended that the failure to maintain the ORB occurred when the ORB entries were made and that happened on the high seas, outside the jurisdiction of the US. The government contended that "maintenance" of an ORB is a continuing duty to keep it accurately. Otherwise, the ability of the port state to fulfill its obligation under international law to enforce MARPOL against ships calling at its ports would be frustrated. The appellate court reversed the ruling of the federal district court and adopted the government’s argument that there is a continuing duty to maintain the ORB such that it does not contain known false material entries. Note: This decision has potentially broad implications for the marine industry. Previously, a shipowner and chief engineer were only likely to be prosecuted for actually "presenting" a falsified ORB to the Coast Guard during a port state control boarding. Now, they are subject to prosecution for each US port call from the time an ORB is falsified until either the ORB is corrected or the ORB is officially retired (three years after the last entry in that particular ORB). With chief engineers changing every six months or so and ships changing owners/operators on a regular basis, it is unclear at this time how this new doctrine of expanded obligation will develop. If nothing else, it enhances the importance of due diligence and having a formal compliance program.

United States v. Jho, No. 06-41749 (5th Cir., June 30, 2008).

Gradual payment of asbestosis claims permissible

The US Court of Appeals for the Second Circuit ruled that a bankrupt shipping line may, consistent with the pay-to-be-paid principle in its protection and indemnity insurance policy, make payments on its numerous outstanding asbestosis claims in seriatim. Under the trustee’s proposed payment structure, cash from the trust account would be paid to claimants. The trustee would then seek reimbursement from the P&I Club. The trustee would then use the insurance funds to make a further payment to the claimants, starting the process anew. Assertions by the insurer that this was a sham were rejected. The insurer, though, was granted a pro-rata in seriatim right of recovery of various insurance premiums that were unpaid by the shipping line.

In re Prudential Lines, Inc., No. 05-5925-bk (2nd Cir., June 19, 2008).

Allocation of liability for allision

The US Court of Appeals for the Fourth Circuit upheld the decision of the federal district court in allocating 90% of the liability in an allision to the moving ship and 10% of the liability to the dredge. In the instant case, a container ship was entering Charleston. The pilot on the ship called the dredge to learn, among other things, the location of its submerged dredge spoil pipeline. The dredge responded with confusing and misleading information. The ship allided with the dredge spoil pipeline and litigation ensued. The appellate court ruled that the decision of the district court was supported by the evidence.

Evergreen International v. Norfolk Dredging, No. 07-1879 (4th Cir., June 25, 2008).

Florida Wrecking Statute declared unconstitutional

The US District Court for the Southern District of Florida ruled that the Florida Wrecking Statute (now found at 46 U.S.C. § 80102) is unconstitutional because it vests in an Article III court duties inconsistent with the grant of judicial power. The statute, which dates from 1828, provides that wreckers (or salvors) could only engage in their profession in Florida if they had a license issued by the federal district court. The statute had been ignored until recently. This decision has hopefully consigned the statute to a well-deserved grave.

Towboat One, Inc. v. M/V Waterdog, No. 08-80162-CIV-ZLOCH (S.D. Fla., June 24, 2008).

Punitive damages may not exceed compensatory damages

The US Supreme Court reduced the punitive damages that had been assessed against Exxon Shipping Company as a result of the 1989 EXXON VALDEZ oil spill from $2.5 billion to about $500 million. The opinion is lengthy (61 pages) and complex, with one concurring opinion and three opinions concurring in part and dissenting in part. One Justice (Alito) did not participate because he holds Exxon stock. The Court was equally divided on whether maritime law provides for corporate liability for punitive damages based on the acts of managerial agents (in this case, Captain Hazelwood, the master). Thus, the opinion of the Ninth Circuit allowing for such liability is undisturbed. The Court determined that federal law, including the Federal Water Pollution Control Act (FWPCA), as it existed in 1989 did not preempt punitive damage awards in marine pollution cases. This portion of the opinion may well have been decided differently if the Oil Pollution Act of 1990 (OPA 90) had been applicable to EXXON VALDEZ spill. Finally, the Court examined in detail the issue of whether the punitive damage award against Exxon (originally $5 billion) was excessive as a matter of maritime common law. Because there have been so few examples of such awards under maritime law, the Court also looked to land-based law for guidance. While it recognized that punitive damages are aimed at retribution and deterring harmful conduct, it found that the unpredictability of high punitive damage awards is in tension with their function because of the implication of unfairness that an eccentrically high punitive verdict carries. The Court ruled that a penalty should be reasonably predictable in its severity and should threaten defendants with a fair probability of suffering in like degree for like damage. The Court then examined various methodologies for determining an appropriate level of punitive damages. After discarding several methods as unworkable, the Court ruled that a 1:1 ratio between compensatory damages and the upper limit of punitive damages was appropriate. Since the lower courts had set the compensatory damages in this case at $507.5 million, the Supreme Court ruled that the same amount should be maximum punitive damages award in this case. The case was remanded to the Ninth Circuit for appropriate action consistent with the opinion. Note: In the

amicus curiae brief filed by Chet Hooper of this firm on behalf of the International Chamber of Shipping, the Baltic and International Maritime Council, the Chamber of Shipping of America, Teekay Corporation, and the Bahamas Shipowners Association, he contended that general maritime law does not support the award of punitive damages for vicarious liability (an issue on which this Court was unable to reach consensus) and stated that the Court should (as they have done here) establish clear standards for the award of punitive damages in areas of general maritime law not governed by treaties or statutes.Exxon Shipping Co. v. Baker, No. 07-219 (June 25, 2008).

Justice Scalia, joined by Justice Thomas, concurred, but noted that, in his opinion, the Due Process Clause provides no substantive protection against "excessive" or "unreasonable" awards of punitive damages. Justice Stevens concurred with the initial parts of the Court’s opinion, but felt that any limits on punitive damage awards should be left for Congress to decide. Justice Ginsberg filed a separate opinion, concurring with Justice Stevens. Justice Breyer filed a separate opinion largely concurring with the ruling of the Court, but taking the position that an exception to the 1:1 ratio should be allowed in exception circumstances. He did state, though, that the 1:1 ratio was warranted in the Exxon case. The Court has put off until another day any ruling on whether maritime law allows for vicarious liability. Unfortunately, this leaves the federal court courts divided on this important issue. Overall, though, the broad uncertainty that previously existed with regard to punitive damage awards has been clarified.