Rule B: Expanded Scope of Maritime Contract Jurisdiction – Vessel Sales Contracts
 
October 8, 2008
 
Michael J. "Mike" Frevola- New York
James "Jim" Hohenstein- New York
Francesca Morris- New York

Overview: Rule B Jurisdiction

A fundamental requirement in asserting a Rule B maritime attachment action is that the underlying claim is within the federal court’s maritime jurisdiction.¹ This principle makes perfect sense as the very purpose of maritime attachments are rooted in the unique and mobile nature of maritime commerce.²

Vessel Sales Contracts

For decades, it has been a basic principle of U.S. admiralty law that contracts for the sale of a vessel are not within the maritime jurisdiction.³ While the principle has been criticized,⁴ nonetheless it is still considered black letter law.

Kalafrana Shipping Ltd.

In a decision issued last week, a judge of the U.S. District Court for the Southern District of New York, the Honorable Shira A. Scheindlin, has held that a contract for the sale of a vessel is within the maritime jurisdiction and thus supports the maintenance of a Rule B attachment action.⁵

In Kalafrana, an aspect of the sales agreement concerned repairs to the vessel. A dispute over the repairs led to a London arbitration and award. The New York Rule B action was based on the award. While Judge Scheindlin certainly recognized and acknowledged the traditional precedent, the Court held that more recent U.S. Supreme Court and New York appellate decisions supported the “demise” of the traditional rule.⁶

Commentary

This decision is extraordinary in that it weakens a bedrock principle in New York admiralty jurisdiction (always a leading light in U.S. maritime jurisprudence). The ruling is likely to have an immediate and wide-reaching impact on New York Rule B actions.

Whether or not Kalafrana itself is appealed, the issue will undoubtedly come up in other cases which will be subject to appellate review.

Kalafrana also placed emphasis on the fact that the dispute involved a “launched ship that has been plying the seas for some time” – particularly repairs to the vessel being made under the sales contract.⁷ While the decision is broad enough at least to enable other parties to argue, in good faith, that a straightforward ship sales contract is within the maritime jurisdiction, the fact that the vessel was already in operation is a key point to consider. Because newbuilding vessels are sometimes sold before even leaving the shipyard, the traditional rule is still significant.

As the other judges of New York federal courts are not bound by Kalafrana⁸ this issue portends further extensive litigation.

Finally, whatever one’s opinion concerning the rationale of the traditional view, it is worth noting that Kalafrana is consistent with general principles of international maritime law.⁹

For more information, contact:

James H. Hohenstein
212.513.3213
jim.hohenstein@hklaw.com

Michael J. Frevola
212.513.3516
michael.frevola@hklaw.com

Francesca Morris
212.513.3431
francesca.morris@hklaw.com

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1 See Winter Storm Shipping, Ltd. v. TPI, 310 F.3d 263, 268 (2d Cir. 2002) (to warrant the issuance of a maritime attachment, “the plaintiff’s claim must be one which will support a finding of admiralty jurisdiction under 28 U.S.C. §1333”) (citations omitted).

2 “Maritime attachments arose because it is frequently, but not always, more difficult to find property of parties to a maritime dispute than of parties to a traditional civil action. Maritime parties are peripatetic and their assets are often transitory.” Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd., 460 F.3d 434, 443 (2d Cir. 2006) (citation omitted).

3 See, e.g., The Ada, 250 F. 194 (2d Cir. 1918); International Shipping Co., S.A. v. Hydra Offshore, Inc., 675 F.Supp. 146, 150 (S.D.N.Y. 1987), aff’d, 875 F.2d 388 (2d Cir. 1989); Economu v. Bates, 222 F.Supp. 988, 991 (S.D.N.Y. 1963).

4 “[T]he petrified rule that ship-sale contracts are not within the admiralty jurisdiction … ‘arose as an analogy to a case which is inconsistent with the basic principles governing the admiralty jurisdiction of United States courts.’” Jack Neilson, Inc. v. Tug Peggy, 428 F.2d 54, 58 (5th Cir. 1970) (quoting Note, Admiralty and Ship-Sale Contracts, 6 Stan. L. Rev. 540, 540 (1954)).

5 Kalafrana Shipping Ltd. v. Sea Gull Shipping Co. Ltd., a/k/a Sea Gull Shipping Co. SARL, 08 Civ. 5299 (SAS) (S.D.N.Y. Oct. 2, 2008) (“Opinion”).

6 Id. at 11 (citing Norfolk Southern Railway Co. v. James N. Kirby, Pty Ltd., 543 U.S. 14 (2004) and Folksamerica Reinsurance Co. v. Clean Water of New York, Inc., 413 F.3d 307 (2d Cir. 2005)). Neither Kirby (the scope of maritime contract jurisdiction regarding bills of lading) nor Folksamerica (the scope of maritime insurance contracts) dealt with contracts for the sale of a vessel. However, in Kalafrana Judge Scheindlin concluded that “Given their broad language, Kirby and Folksamerica support the demise of the holding in The Ada.” Opinion at 11.

7 Opinion at 11. Certainly, claims relating to ship repairs are part of the traditional maritime jurisdiction. See Flota Maritime Browning de Cuba, Sociadad v. Snobl, 363 F.2d 733, 736 (4th Cir. 1966).

8 For example, on August 25, 2008, another judge of the Southern District, the Honorable Jed S. Rakoff, issued a memorandum order vacating a maritime attachment and dismissing the complaint on the basis that the action was founded on a vessel sale contract. Vrita Marine Co. Ltd. v. Seagulf Trading, LLC, 08 Civ. 5614 (JSR) (S.D.NY. Aug. 25, 2008).

9 See International Convention on Arrest of Ships, 1999, Article 1(1)(v) (any dispute arising out of a contract for the sale of a ship is a “maritime claim”). While the 1999 convention is not yet in force, its definitions arguably reflect the evolving state of international maritime law. As of July 26, 2008, seven nations have consented to the 1999 Convention. Ten signatories are required for it to enter into force. http://treaties.un.org/Pages/ViewDetails.aspx?src=IND&id=335&chapter=12&lang=en.
Moreover, the contents of this Maritime Alert are not intended to be, and should not be construed as, legal advice. The assistance of attorneys should be sought with regard to any specific circumstances for which legal advice is required.



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