The U.S. Supreme Court Monday imposed a stiffer level of liability for energy companies involved in tanker ship oil spills and other marine accidents near ports.
By a 7-2 vote in the case CITGO Asphalt Refining Co. (CARCO) V. Frescati Shipping Co., the high court ruled that boilerplate language in contract agreements between charterers – oil and petrochemical companies – and ship owners establishes a “warranty of safety” that makes charterers liable for the damage caused by certain oil spills.
The standard agreements at issue include a “safe berth” clause requiring charterers – in this instance CARCO – to send the leased ship only to ports it can reach safely. CARCO claimed that the language only required a less rigid “due diligence” in picking a safe berth.
But Justice Sonia Sotomayor, writing for the majority, said “CARCO does not identify—nor can we discern—any language in the clause hinting at ‘due diligence’ or related concepts of ‘fault.’” The duty imposed by the clause, she added, is “absolute.”
The decision brings to an end a 16-year-old dispute triggered by an oil spill near a CITGO refinery in New Jersey. The chartered tanker bringing crude oil from Venezuela ran into an abandoned nine-ton anchor in the Delaware River, ripping the hull and spilling 264,000 gallons into the river.
Frescati Shipping, the owner of the tanker, and the U.S. government paid $143 million to decontaminate the river and settle other third-party claims. They sued CITGO entities, claiming that the “safe berth” clause was breached, making CITGO liable.
The U.S. Court of Appeals for the Third Circuit agreed that the clause imposes a warranty on charterers, setting the stage for CITGO to appeal before the Supreme Court. CITGO urged the justices to adhere instead to the “reasoned position” of the U.S. Court of Appeals for the Fifth Circuit. The Fifth Circuit in 1990 ruled in Orduna S.A. v. Zen-Noh Grain Corp. that the clause imposed only a duty of due diligence to select a safe berth. The Supreme Court upheld the Third Circuit’s interpretation, in effect shifting all liability to CARCO. Justice Clarence Thomas, joined by Justice Samuel Alito Jr., dissented.
“What is the basis for this conclusion? The majority’s experience negotiating maritime contracts?” Thomas asked sarcastically in his dissent.
“Today’s decision is a disappointing result to a very long story, one that has been working its way through the judicial system since 2004,” CITGO President and CEO Carlos Jordá said in a statement Monday. “While we obviously have different views regarding the merits of our case, we respect the Court’s interpretation and can finally close this chapter.”
At the oral argument law November, CITGO’s lawyer Carter Phillips, partner at Sidley Austin, warned that adopting the “warranty” standard could have broad ramifications. “Any time you begin to impose virtually limitless liability on a party who has no ability to make a choice, and you do so in a way that … will dash the expectations of a very large part of the economy that operates in the Gulf of Mexico, this court ought to think long and hard about whether that’s the more sensible rule.”
Amicus briefs filed in the case also sounded the alarm. George Diaz-Arrastia of Schirrmeister Diaz-Arrastia Brem said in a brief on behalf of Houston-based Tricon Energy that his client could be severely affected if the high court adopted the Third Circuit’s interpretation.
“Tricon has limited knowledge of the navigational conditions at the ports throughout the world where it makes deliveries using chartered vessels, or of the approaches to them,” Diaz-Arrastia wrote. “In most cases, the delivery port is chosen by the buyer, not Tricon. Tricon’s manner of doing business is not unique or unusual. Tricon’s potential liability will be greatly increased, and it will be difficult for Tricon to adequately insure against this potential liability, or contract around it.”
Sarah Harrington, partner at Goldstein & Russell and counsel of record for Frescati, the ship owner, was pleased with the outcome of the case. The ruling, she said in a statement, “reaffirms the tanker industry’s longstanding view that the unqualified safe-berth clause is a warranty of safety. Going forward, parties remain free to contract for whatever type of promise they prefer – a warranty or due diligence. But now they can feel confident that when they choose a safe-berth clause, they are bargaining for a warranty.”