Appendix — Employers Insurance of Wausau v. Avondale Shipyards, Inc.

| FIER DR

JUN 16 388

No. JOSEPH F. SPANIOL, JR.

CLERK

In The

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM 1988

EMPLOYERS INSURANCE OF WAUSAU,

AS REPRESENTATIVE OF THOSE CERTAIN

UNDERWRITERS SUBSCRIBING TO

CERTIFICATE NO. 14880

Petitioner

Vv.

AVONDALE SHIPYARDS, INC.,

OGDEN CORPORATION,

SEABULK TRANSMARINE II, INC.,

HVIDE MARINE INTERNATIONAL, INC.,

AND HVIDE SHIPPING INCORPORATED,

Respondents

ON WRIT OF CERTIORARI FROM THE

UNITED STATES COURT OF

APPEALS FOR THE FIFTH CIRCUIT

APPENDICES TO PETITION FOR CERTIORARI

CHARLES E. LUGENBUHL*

NATHAN P. HORNER

Lugenbuhl, Burke, Wheaton,

Peck & Rankin

2775 Pan-Am rican Life Center

New Orleans, LA 70130

Telephone: (504) 568-1990

Attorneys for Employers Insurance

of Wausau and Those Certain

merican Underwriters Sub-

scribing to Certificate No. 14880

*Counsel of Record

TABLE OF CONTE

APPENDICES:

A. Opinion and Judgment of Court

Wr is iare cares cacnndcavasisoncbarecacbaesisens

B. Memorandum of Opinion of

PIE RA iicccbtaiiersaistearrertinnsemnancuniens

C. Court of Appeal’s Order Remanding

Case for Reconsideration.....................

D. District Court’s Opinion on Remand...

E. Judgment of the Court of Appeals.......

F. Denial of Petition for Rehearing..........

PAGE

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87a

139a

140a

144a

147a

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APPENDIX A

EMPLOYERS INSURANCE OF WAUSAU as

Representative of Those Certain

Underwriters Subscribing to

Certificate No. 14880 and

Certificate No. 14482,

Plaintiff-Appellee,

Vv.

SUWANNEE RIVER SPA LINES, INC.,

Suwannee River Chartering, Inc., Permian

Trading Corporation, Occidental Export, Inc.,

Occidental Chemical Agricultural Products,

Inc., and Occidental Petroleum Corp.,

Plaintiffs-Appellants,

v.

AVONDALE SHIPYARDS, INC., et al., Defendants,

J.J. Henry Co., Inc., and

Victoria Machine Works, Inc.,

Defendants-Appellees.

OCCIDENTAL PETROLEUM CORP., et al.,

Plaintiffs-Appellants,

Vv.

AVONDALE SHIPYARDS, INC., et al., Defendants,

Victoria Machine Works, Inc.,

Defendant-Appellee.

OCCIDENTAL PETROLEUM CORP., et al.,

Plaintiffs-Appellants,

v

AVONDALE SHIPYARDS, INC., et al., Defendants,

Victoria Machine Works, Inc.,

Defendant-Appellee.

2a

EMPLOYERS INSURANCE OF WAUSAU as

Representative of those Certain Underwriters

Subscribing to Certificate No. 14880 and

Certificate No. 14482,

Plaintiff-Appellee,

Suwanne River Spa Lines, Inc., et al.,

Plaintiffs-Appellees,

v

AVONDALE SHIPYARDS, INC., et al.,

Defendants-Appellants.

EMPLOYERS INSURANCE OF WAUSAU as

Representative of those Certain Underwriters

Subscribing to Certificate No. 14880 and

Certificate No. 14482, et al.,

Plaintiffs-Appellees,

Vv

AVONDALE SHIPYARDS, INC. and

Ogden Corporation, Defendants-Appellants.

Nos. 86-3218, 86-3473 and 87-3549.

United States Court of Appeals,

Fifth Circuit.

Feb. 13, 1989.

Vessel owner brought action against builder and

supervisor of construction of vessel to recover for losses

sustained when vessel sunk. The United States

District Court for the Eastern District of Louisiana,

Morey L. Sear, J., entered judgment for owner, and

appeal was taken. The Court of Appeals, King, Circuit

3a

Judge, held that: (1) rule that no products liability

claim lies in admiralty when only injury claimed is

economic loss applies to contracts: for professional

services, rendered in connection with manufacture or

construction of product, by party other than builder or

manufacturer, and (2) finding that vessel was

improperly mated and unseaworthy on delivery, and

that this was sole cause of loss, was sufficiently

supported by evidence.

Affirmed in part, reversed in part, and remanded.

1. Admiralty 11, 18

Contracts relating to construction of vessels are

not considered maritime contracts, and thus claims for

breach of such contracts are not within admiralty

jurisdiction; however, tort claims for negligent

construction or design of vessel will lie in admiralty if

negligence constitutes maritime tort.

2. Admiralty 18

Alleged negligence in construction or design of

vessel was maritime tort where harm allegedly caused

by tort occurred on high seas and in course of maritime

commerce, for purpose of determining whether claims

came within admiralty jurisdiction.

4a

3. Admiralty 18

Federal court had admiralty jurisdiction over

maritime tort claim, even if plaintiff could not recover

for claims under substantive maritime law, in that

claims were not patently without merit.

4. Products Liability 17

Rule that no products liability claim lies in

admiralty when only injury claimed is economic loss

applies to contracts for professional services, rendered

in connection with manufacture or construction of

product, by party other than builder or manufacturer,

in that professional services are integral part of

manufacture or construction.

5. Action 27(1)

Party that provides professional services as part of

manufacture or construction of product has no duty in

maritime tort, independent of its contractual

obligations, to prevent a product from injuring itself.

6. Shipping 80

Owner of catamaran integrated tug barge could not

recover from supervisor of design and construction for

purely economic losses on theory of negligent

performance of contract for professional services.

5a

7. Shipping 75

Finding that manufacturer of catamaran

integrated tug barge, and party supervising design and

construction, breached their contracts by failing to

deliver properly mated and seaworthy vessel, and that

such failure was sole cause of vessel’s sinking in storm,

was sufficiently supported by expert testimony and

physical evidence.

8. Shipping 75

Supervisor’s acceptance of catamaran integrated

tug barge from manufacturer did not insulate

manufacturer from liability to owner for construction

defects, though supervisor had been engaged by owner

to supervise construction of vessel, in_ that

manufacturer undertook independent contractual

obligation to construct vessel according to plans and

specifications; supervisor was independent contractor,

without authority to unilaterally modify requirements

of plans and specifications.

9. Shipping 75

Specifications in construction contract for

construction of catamaran integrated tug barge

contained express warranty that vessel would be

seaworthy on delivery, where language of specifications

indicated that object of contract was building of

seaworthy vessel.

6a

10. Shipping 75

Warranty of seaworthiness contained in vessel

construction contract was subsumed in contract’s

guarantee deficiency clause, which restricted available

remedies, in that clause covered "any deficiency" in

construction.

11. Shipping 75

Clause in vessel construction contract, limiting

owner's recovery to cost of repairing or replacing

guarantee deficiencies, was effective, though vessel had

sunk as result of deficiency, making repairs impossible,

in that risk of damage was recognized by parties and

contractually allocated to owner.

Geoffrey J. Ginos, Herbert M. Lord, Burlingham,

Underwood & Lord, New York City, John J. Weigel,

Stewart E. Niles, Jr., New Orleans, La., for Ogden and

Avondale.

Norman C. Sullivan, Jr., Gelpi, Sullivan, Carroll &

Laborde, New Orleans, La., Terence Gargan, New York

City, for Hvide, et al.

James B. Kemp, Jr., George R. Wentz, Jr., George

B. Hall, Jr., New Orleans, La., for appellees.

7a

John J. Weigel, Stewart E. Niles, Jr., Madeleine

Fischer, Edward H. Bergin, George R. Alvey, Jones,

Walker, Waechter, Poitevent, Carrere & Denegre, New

Orleans, La., for Avondale.

Charles E. Lugenbuhl, Nathan P. Horner,

Lugenbuhl, Wheaton, Peck & Rankin, New Orleans,

La., for Employers Ins. and Am. Underwriters.

Phillip A. Wittmann, Denise M. Pilie, Stone,

Pigman, Walther, Wittmann & Hutchinson, New

Orleans, La., Jesse Climenko, John B. Grant, Jr., New

York City, for J.J. Henry Co., Inc.

James B. Kemp, Jr., Margot Mazeau, New

Orleans, La., for Certain Underwriters at Lloyds.

Paul A. Nalty, Joel L. Borrello, Michael D. Carbo,

New Orleans, La., for Victoria Machine Works.

Appeals from the United States District Court for

the Eastern District of Louisiana.

Before KING and JOHNSON, Circuit Judges, and

BOYLE, District Judge.*

a

District Judge of the Eastern District of Louisiana, sitting by

designation.

8a

KING, Circuit Judge:

This lawsuit arises from the ill-fated voyage of the

Oxy Producer, a catamaran integrated tug barge.

While en route to the Soviet Union with a cargo of

chemicals, the linkage system that held the tug and

barge together as a single unit failed. Efforts to repair

the vessel while at sea proved fruitless and the tug

sank in heavy weather off the Azores. This lawsuit

ensued, replete with claims and cross-claims against

and between the owner and insurers of the vessel and

various parties who played a role in its construction.

On appeal, we affirm the district court’s holding

that the vessel was improperly mated and unseaworthy

on delivery and that this was the sole cause of the

damage to the vessel and the loss of the tug. We hold,

however, that the economic loss rule adopted in the

East River case precludes recovery in maritime tort for

purely economic loss stemming from the negligent

performance of a contract for professional services

where those services are rendered as part of the

construction of a vessel. The plaintiffs are therefore

limited to their contractual remedies against the

contract supervisor. While the maritime tort claims

must consequently be dismissed, we retain pendent

jurisdiction over the remaining claims.

9a

We hold further that the contract supervisor’s

acceptance of the vessel in its improperly mated

condition was not binding on the purchaser, and that

the shipbuilder is therefore fully liable to the owner for

breach of contract. We find, however, that the

Construction Contract’ effectively limits the

shipbuilder’s liability to the cost of repairing or

replacing deficiencies in the contract work.

Finally, we hold that the district court improperly

dismissed two parties from the suit following its

conclusion that they were not liable for damage to the

Oxy Producer. While we affirm that finding, we hold

that dismissal was premature and remand for specific

findings regarding the liability of all defendants for the

damage to the Oxy Producer’s two sister ships.

A. The Cast

1. Plaintiffs

Plaintiffs below were Suwannee River Lines, Inc.,

Suwannee River SPA Lines, Inc., and Suwannee River

Phosphate Lines, Inc. (collectively, the "lines"), the

bareboat charterers of, respectively, the Oxy Trader,

the Oxy Producer, and the Oxy Grower (collectively, the

"ships"); Suwannee River Chartering, Inc.

("Chartering"), the time-charterer of the ships;

Occidental Export, Inc. ("Export"), the seller

10a

of certain chemicals transported by the ships; and

Occidental Petroleum Corp. ("Occidental"), the parent

corporation of all of the preceding plaintiffs.

Additionally, the American underwriters and certain

underwriters at Lioyds assert subrogated claims.

Lines, Chartering, Export, Chemical, and

Occidental are referred to collectively as "Occidental" or

as the "Oxy plaintiffs." Because this lawsuit focuses

primarily on the sinking of the Oxy Producer, it will be

referred to most often, and the Oxy Grower and Oxy

Trader will be referred to as the "sister ships.”

2. Defendants

The defendants are J.J. Henry Co., a naval

architectural firm; Avondale Shipyards, Inc.

("Avondale"); Ogden Corp. ("Ogden"), guarantor and

former parent of Avondale; Victoria Machine Works,

Inc. ("Victoria"), the manufacturer and supplier of

certain component parts for the ships; and Seabulk

Transmarine I, Inc., Seabulk Transmarine II, Inc.,

Hvide Marine International, Inc., and Hvide Shipping,

Inc. (collectively, "Hvide"), supervisors of the design

and construction of the vessel. Hvide also provided the

crew of the Oxy Producer and thus appears in this law

suit in two roles.

B. The Claims

In the early 1970's, Occidental entered an

agreement to manufacture, sell, and _ transport

lla

superphosphoric acid ("SPA") to the Soviet Union.

Shortly thereafter, Occidental arranged for the

construction of three catamaran integrated tugbarges

("catug ITBs") to transport the SPA to the Soviet

Union.! The unique feature of a catug ITB is the

interconnection system between the tug and barge

units consisting of bumper pads, link arms, and

greenheart-bearing surfaces which are designed to hold

the tug and barge together as a single rigidly connected

unit.

Defendant Hvide holds a patent on the catug

design and was retained, because of its expertise with

this type of vessel, to supervise the design and

construction of the vessels for Occidental ("Supervision

Agreement”). Hvide contracted in turn with J.J. Henry

to prepare the plans and specifications for the vessels

("Henry Agreement”). Hvide assigned the Henry

Agreement to Occidental. Occidental then engaged

Avondale to construct the vessel ("Construction

Contract”). Avondale entered into a_ subcontract

("Purchase Order") with Victoria to manufacture the

bumper pads for the catug’s interconnection system.

1 Occidental formed a subsidiary, Suwannee River SPA

Finance, Inc. ("Finance"), for the purpose of constructing the

Oxy Producer. To avoid further confusion, given the number

of subsidiaries involved, we do not refer to Finance separately

in the text although it was the original party to the contracts

discussed above. Finance ultimately assigned its rights under

the Supervision Agreement, the Henry Agreement, and the

Construction Contract to the Oxy plaintiffs.

12a

The vessels were completed and delivered between

March and September of 1981. The Oxy Producer was

delivered on June 9, 1981 and made one uneventful

round-trip voyage between the United States and the

Soviet Union. Its second voyage, however, was

disastrous. The Oxy Producer embarked from

Jacksonville, Florida on September 5, 1981. On the

evening of September 11, the Oxy Producer encountered

weather conditions more severe than any it had

previously encountered. During the early morning

hours of September 12, a crewmember on watch first

noticed relative movement between the tug and the

barge. The movement increased and the crew

discovered, on examination, that parts of the linkage

system were damaged. The crew attempted to make

temporary repairs but the movement worsened and the

linkage system deteriorated further. The captain of the

Oxy Producer, Captain Kanellos, decided to divert the

vessel to the Azores in order to make repairs. The

vessel arrived at the Port of Ponta Delgada in the

Azores on September 14 but was denied entry into the

harbor. While the crew awaited the result of further

efforts to obtain permission to enter the harbor, they

effected further repairs to the ship which remained at

anchor a half mile off the breakwater at Ponta

Delgada. The weather forecast on September 18 was

for heavy weather on September 20 due to tropical

storm Harvey, passing to the southwest of the Azores.

On the night of the 19th, Captain Kanellos evaluated

13a

possible responses to the predicted change in weather.

Afraid of dragging anchor and spilling his hazardous

cargo if the ship remained anchored near the

breakwater, the captain decided early on the morning

of the 20th to weigh anchor and maneuver the vessel

away from the breakwater. Before the vessel could

proceed, however, a second storm, coming from the

north, passed over the area, creating confused seas and

causing even greater movement between the tug and

the barge. The movement of the barge tongue against

the hulls of the tug ultimately opened large holes in the

hulls, causing the tug to sink.

Following the sinking of the Oxy Producer, the

Coast Guard revoked the inspection certificates on the

Oxy Producer’s two sister ships--the Oxy Trader and

the Oxy Grower. The linkage systems on each of the

sister ships were subsequently repaired and upgraded.

Occidental then brought this lawsuit to recover

damages stemming from the loss of the Oxy Producer

and from the recision of the certificates of inspection for

the two sister ships.2 The Oxy plaintiffs asserted that

the sinking of the Oxy Producer’s tug was due to

defendants’ breaches of their contractual duties and to

negligence in the performance of their contracts and

that defendants are similarly responsible for the

repairs to the sister ships. The claims against the

various defendants were as follows:

Originally, three separate complaints were filed. The

complaints were consolidated for trial.

l4a

Henry: The Oxy plaintiffs asserted below that

Henry breached its warranty that the plans and

specifications were seaworthy. The plaintiffs also

alleged that Henry was negligent in performing its

contract, particularly in failing to consult the patent, to

conduct model tests, or to follow up on defects noted in

its plan review.

Avondale: Plaintiffs asserted that Avondale

breached its contract and its warranty and specifically

that, when delivered, the Oxy Producer was not

properly mated in accordance with the plans and

specifications, that the link arms and bumper pads

were defective, and that the vessel consequently was

not seaworthy. The plaintiffs also alleged that

Avondale was negligent in performing its contract and

in delivering the vessel in an unseaworthy condition.

Avondale responded that it could not be held liable

for any deficiency in the mating of the vessel because

Hvide was Occidental’s agent and authorized the

mating procedure and accepted delivery of the vessel

with full knowledge of the measurements of the fit

which Occidental now claims were not in accordance

with the plans and specifications. Avondale further

asserted that the loss of the tug was due to the crew’s

negligence in failing to tighten the linkage system after

the first voyage, and not to an initially improper

mating. Avondale also claimed that once the problem

15a

was discovered, the tug would not have been lost if the

captain had been sufficiently diligent in his efforts to

secure entry into the harbor.

Victoria: Plaintiffs claimed that they were third

party beneficiaries of the Victoria Purchase Order and

that Victoria breached its contract and its warranty in

two respects: first, the bumper pads were not sufficient

to restrict relative movement between the tug and the

barge, and second, the bumper pads were not

vulcanized as required by the Purchase Order.

Huide: Plaintiffs asserted that Hvide breached

its contract and its warranty that the catug design was

seaworthy and had been fully integrated into the plans

and specifications. Plaintiffs also claimed that Hvide

was grossly negligent in performing its contractual

duties.

C. The District Court Opinion

At the conclusion of a three and one half month

bench trial, the district court concluded that the sole

cause of the sinking of the Oxy Producer was that the

vessel had not been properly mated and was therefore

unseaworthy on delivery. The court found that

Avondale had breached its contract and its express

warranty of seaworthiness and had been negligent in

the performance of its contract, but found that the

Construction Contract effectively disclaimed tort

liability. The court also found that Hvide had breached

its Supervision Agreement and its warranty that the

plans were seaworthy and that Hvide had furthermore

16a

been negligent in supervising the mating of the vessel.

The court found that the Supervision Agreement did

not limit Hvide’s liability in tort, so that Hvide could be

liable for damages beyond the $5 million limitation

provided in the contract.

The district court found that the bumper pads and

link arms did not cause or contribute to causing any of

the damage to the Oxy Producer but were instead

casualties themselves of the improper fitting. Because

Victoria and Henry were not responsible in any way for

the poorly mated condition in which the vessel was

delivered, they were dismissed from the case.

The proceedings below were bifurcated and the

district court has not yet addressed the issue of

damages.

D. The Appeal

1. Claims on Appeal

The Oxy plaintiffs appeal from the dismissal of

Victoria and Henry. Hvide asserts on appeal that in

light of the Supreme Court’s decision in East River, the

negligence claims against Hvide are not cognizable in

maritime tort. Hvide also claims that the district

court’s finding that the improper mating of the vessel

was the sole cause of its sinking is not supported by a

preponderance of the evidence. Hvide argues further

that even if the negligence claims are cognizable in

maritime tort, the district court erred in holding that

the limitation of liability contained in the Supervision

17a

Agreement did not anply to negligence claims as well as

to contract claims. Hvide also asserts that the district

court erred in imposing joint and several liability.

Going one step further than Hvide, Avondale urges

that East River so clearly bars plaintiffs’ negligence

claims that the federal courts lack admiralty

jurisdiction over this case. Avondale also challenges

the dismissal of Henry, arguing that the evidence

supports a finding that Henry’s design of the linkage

system was defective. Avondale further asserts that

even if the vessel was improperly mated, the district

court erred in finding that Hvide’s acceptance of the

vessel was not binding on Occidental. Avondale also

contests the district court’s finding that Avondale failed

to prove that negligence of the vessel’s captain or crew

was an intervening or contributory cause in the damage

to the vessel or in the loss of the tug. Finally, Avondale

contends that even if it is liable for the improper

mating of the vessel, the district court erred in

concluding that Avondale’s liability for breach of the

warranty of seaworthiness was not limited by the

guarantee deficiency clause of the Construcvion

Contract. Avondale too contests the imposition of joint

and several liability.

These claims comprise seven broad issues which

we will address in turn: (1) the effect of the East River

decision on this case, (2) whether the district court

erred in finding that Avondale and Hvide breached

18a

their contracts by failing to deliver a properly mated

and seaworthy vessel, (3) whether Hvide’s acceptance of

the fitting was binding on Occidental, (4) whether the

district court erred in concluding that the Construction

Contract created an express warranty of seaworthiness

independent of the contract’s limitations of remedies

and liability, (5) whether the district court erred in

holding that the Supervision Contract did not limit

Hvide’s liability in negligence, (6) whether the district

court erred in holding Hvide and Avondale jointly and

severally liable, and (7) whether the district court erred

in dismissing Henry and Victoria from the suit.

2. Standard of Review

The district court’s findings of fact may not be set

aside on appeal unless they are clearly erroneous.

Fed.R.Civ.Proc. 52(a). A finding of fact is clearly

erroneous only if "the reviewing court on the entire

evidence is left with the definite and firm conviction

that a mistake has been committed." Anderson v.

Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511,

84 L.Ed.2d 518 (1985). The district court’s conclusions

of law, however, are freely reviewable on appeal.

Inwood Labs v. Ives Labs, 456 U.S. 844, 855 n. 15, 102

S.Ct. 2182, 2189 n. 15, 72 L.Ed.2d 606 (1982).

19a

II.

A. The Effect of the East River Decision

1. Admiralty Jurisdiction

Defendants argue that in light of the Supreme

Court’s decision in East River S.S. Corp. v.

Transamerica Delaval, Inc., 476 U.S. 858, 106 S.Ct.

2295, 90 L.Ed.2d 865 (1986), the federal courts have no

admiralty jurisdiction over this case. In East River, the

Supreme Court adopted the established rule of the

Courts of Appeal that concepts of products liability,

grounded in both negligence and strict liability, are a

part of general maritime law. Jd. 476 U.S. at 865, i106

S.Ct. at 2299. The Court held, however, "that a

manufacturer in a commercial relationship has no duty

under either a negligence or strict products-liability

theory to prevent a product from injuring itself." Jd. at

871, 106 S.Ct. at 2302. "Thus, whether stated in

negligence or strict liability, no products-liability claim

lies in admiralty when the only injury claimed is

economic loss." Jd. at 876, 106 S.Ct. at 2304.

[1,2] The defendants contend that because the

plaintiffs’ negligence claims, like those of the East River

plaintiffs, allege only economic loss, those claims

20a

do not sound in maritime tort and therefore do not

provide a basis for admiralty jurisdiction.?

The plaintiffs, however, note correctly that East

River’s holding has limited implications for the

existence of admiralty jurisdiction. Whether a tort is

maritime in nature, and therefore within the admiralty

jurisdiction of the federal courts, turns on the

application of the "situs" and "nexus" tests set forth in

Executive Jet Aviation, Inc. v. City of Cleveland, 409

3 Contracts relating to the construction of vessels are not

considered maritime contracts. Kossick v. United Fruit Co.,

365 U.S. 731, 735, 81 S.Ct. 886, 889, 6 L.Ed.2d 56 (1961);

Walter v. Marine Office of America, 537 F.2d 89 (5th

Cir.1976). Consequently, claims for breach of such contracts

are not within the admiralty jurisdiction. However, tort

claims for negligent construction or design of a vessel will lie

in admiralty if the negligence constitutes a maritime tort. Jig

the Third Corp. v. Puritan Marine Ins. Underwriters Corp.,

519 F.2d 171, 174 (5th Cir. 1975).

The district court correctly found that plaintiffs’

negligence cluims constituted maritime torts because (1) the

harm allegedly caused by the tort occurred on the high

seas--meeting the locality requirement for admiralty

jurisdiction and (2) they occurred in the course of maritime

commerce--satisfying the requirement that the tort bear a

substantial relationship to traditional maritime activities.

The district court alro agreed to exercise pendent jurisdiction

over the contract claims.

Because admiralty jurisdiction was premised in this

case on plaintiffs’ tort claims, defendants contend that if East

River bars those claims, the grounds for admiralty jurisdiction

are eliminated.

Zla

U.S. 249, 93 S.Ct. 493, 34 L.Ed.2d 454 (1972). If those

requirements are met, the court has jurisdiction.

Whether the plaintiff may recover for those torts is not

a question of admiralty jurisdiction but of substantive

maritime law. In East River itself, the Supreme Court

found that under the "locality" test the plaintiffs tort

claims were within the admiralty jurisdiction.*

Applying substantive maritime law, the Court then

affirmed the granting of summary judgment in favor of

defendants based on its conclusion that the negligence

claims were not cognizable in maritime tort.

Although defendants argue here that plaintiffs

have failed to state a claim on which relief can be

granted, the Supreme Court made clear in Bell v. Hood,

327 U.S. 678, 66 S.Ct. 773, 90 L.Ed. 939 (1946), that

whether the court lacks subject matter jurisdiction and

whether the plaintiff fails to state a claim on which

relief can be granted are distinct questions:

4 The Supreme Court declined to decide whether the

additional requirement of a "maritime nexus,” necessary to

establish admiralty jurisdiction over torts occurring on

navigable waters within the United States, was also necessary

to establish jurisdiction over torts occurring on the high seas.

476 U.S. at 864, 106 S.Ct. at 2298. Because the ships were

engaged in maritime commerce, “a primary concern of

admiralty law,” the Court found that if there were a “maritime

nexus" requirement it would have been met. Jd. Similarly,

there is a sufficient maritime nexus in this case to meet the

second prong of the Executive Jet test.

22a

Jurisdiction ... is not defeated ... by the possibility

that the averments might fail to state a cause of

action on which [the plaintiff] could actually

recover. For it is well settled that the failure to

state a proper cause of action calls for a judgment

on the merits and not for a dismissal for want of

jurisdiction. Whether the complaint states a cause

of action on which relief could be granted is a

question of law and just as issues of fact it must be

decided after and not before the court has assumed

jurisdiction over the controversy. If the court does

later exercise its jurisdiction to determine that the

allegations in the complaint do not state a ground

for relief, then dismissal of the case would be on

the merits, not for want of jurisdiction.

Id. 327 U.S. at 682, 66 S.Ct. at 776. Bell recognized

two exceptions to this rule. A suit may be dismissed for

want of jurisdiction when (1) the allegations are clearly

concocted for the sole purpose of obtaining federal

jurisdiction, or (2) the claims are "wholly insubstantial

and frivolous." Id.

[3] Thus, the federal courts would lack subject

matter jurisdiction over this suit only if the plaintiffs’

tort claims are so clearly barred by the East River

holding that they fall within one of the Bell exceptions.

We do not think that the plaintiffs’ negligence claims

are "so patently without merit" as to deprive the

23a

federal courts of subject matter jurisdiction.° Id. 327

U.S. at 683, 66 S.Ct. at 776.

5 Defendants urge that Boson Marine 6 Ltd. v. Crown

Point Indus., 854 F.2d 46 (5th Cir.1988), is “extremely

pertinent” to the jurisdiction issue. In that case, we found

that following East River, the plaintiffs efforts to recover on a

theory of strict product liability for damages to the product

itself did not state a claim cognizable in maritime tort law.

While the court did affirm the district court’s dismissal of the

case for lack of subject matter jurisdiction, the basis for this

affirmance is ambiguous.

After holding that the plaintiffs product liability claim

was not cognizable in maritime tort, the Boson court also

rejected the plaintiffs argument that there was an additional

basis for admiralty jurisdiction. The court held that the

defendant's promise to “take care of" any problems caused by

the equipment did not amount to a contract to repair the

vessel--which would be maritime in nature--but constituted at

most a warranty of the equipment. The court then concluded

that “[blecause a claim for breach of warranty is not within

the admiralty jurisdiction," the case was properly dismissed

for lack of subject matter jurisdiction. Id.

It is therefore unclear whether the court in Boson was

concluding that the product liability claims were "so patently

without merit” in light of East River as to deprive the court of

subject matter jurisdiction, or whether the tort claims were

dismissed on their merits, and the dismissal for lack of subject

matter jurisdiction upheld because there was no admiralty

jurisdiction over the remaining warranty claim. (The fact that

the court did not discuss the possibility of pendent jurisdiction

over the warranty claim could indicate that the first holding

was jurisdictional, but is hardly conclusive.)

24a

In East River, the Court expressly declined to

decide “whether a tort cause of action can ever be

stated in admiralty when the only damages sought are

economic.” 476 U.S. at 871 n. 6, 106 S.Ct. at 2302 n. 6.

The East River decision thus stopped short of holding

that a tort claim for purely economic loss would never

be cognizable in maritime tort. Therefore, a maritime

tort claim alleging purely economic loss should not be

dismissed for want of subject matter jurisdiction where

the requirements for admiralty jurisdiction are

otherwise met if the facts of the case support a theory of

recovery not clearly barred by East River or by other

controlling authority.

In admiralty, as in other areas of subject matter

jurisdiction, we have held that if the issues necessary to

decide the question of subject matter jurisdiction are

intertwined with the merits, the court should assume

jurisdiction and proceed to the merits of the claim

unless the maritime basis for the claim is "immaterial

6 In any event, Boson may be distinguished from the

instant case because the Boson plaintiffs tort claims--against

the manufacturer of an allegedly defective product that caused

injury only to itself--fell clearly within the parameters of the

East River holding.

25a

or is wholly insubstantial." See Parker v. Gulf

Fisheries, Inc., 803 F.2d 828, 829 (5th Cir. 1986); 14

Wright, Miller & Cooper Federal Practice & Procedure

§ 3676 (Supp. 1988)(citing Parker).

In the instant case, we find that the plaintiffs’

claim that Hvide was negligent in performing its

obligations under the Supervision Agreement are not so

clearly precluded by East River as to deprive the federal

courts of admiralty jurisdiction.’ The district court

held on remand that the claim against Hvide was

distinguishable from the claims in East River because

the Oxy plaintiffs alleged negligence in the performance

6 This approach does not place a burden on judicial

resources because the court may render a decision on the

merits early in the proceedings--on a Rule 12(b)(6) motion for

failure to state a claim, or on a motion for summary

judgment. If the federal claims are dismissed, and there is no

other ground for federal jurisdiction, the district court may

also dismiss any pendent state law claims.

Our discussion focuses on the negligence claims

against Hvide because the negligence claims against Avondale

are not an issue on appeal. While the district court found that

Avondale was negligent in its performance of the Construction

Contract, it also found that the contract disclaimed liability in

tort. That holding is not contested here.

The negligence claims against Avondale would,

moreover, be precluded by our decision in Shipco 2296 Inc. uv.

Avondale Shipyards Inc., 825 F.2d 925 (5th Cir.1987)

(applying East River economic loss rule to tort claims against

shipbuilder), cert. denied, --- U.S. ----, 108 S.Ct. 1472, 99

L.Ed.2d 701 (1988).

26a

of a contract for professional services. Defendants have

countered that one of the claims in East River was

similarly for negligent supervision--of the installation

of a component part of the vessel. We note, however,

that the economic loss rule adopted in East River

applies specifically to claims against manufacturers

and that the supervisor and the manufacturer in East

River were one and the same.® The East River decision

does not address whether the economic loss rule in

maritime tort applies to contracts for professional

services? where the provider of the services is a party

other than the manufacturer itself. !°

8 The East River plaintiffs alleged that the defendant,

"as part of the manufacturing process,” negligently supervised

the installation of a component part. 476 U.S. at 871, 106

S.Ct. at 2302.

9 Indeed, in declining to foreclose altogether the

possibility that "a tort cause of action could be stated in

admiralty when the only damages sought are economic,” the

Court cites Ultramares v. Touche, 255 N.Y. 170, 174 N.E. 441

(1931), a case allowing third parties to recover damages for

negligence in the performance of a contract for professional

services. 476 U.S. at 871 n. 6, 106 S.Ct. at 2302 n. 6.

10 Defendants also argue that our decision in Shipco,

“makes clear that even a designer of equipment, who was in

no way involved--not even as a _ supervisor--in the

manufacturing process, is still within the rule of East River."

Defendants, however, are not entirely accurate in their

characterization of this portion of our decision in Shipco.

Shipco did not foreclose the possibility that a provider of

services could be treated differently than a manufacturer or

builder. In asserting the liability of the designer of the

component part, the plaintiffs in Shipco did not rely on the

27a

We therefore will not dismiss Occidental’s

negligence claims against Hvide for lack of subject

matter jurisdiction. Rather, we hold that this case falls

within the admiralty jurisdiction and will decide, on the

merits, whether the plaintiffs’ negligence claims are

cognizable in maritime tort following the East River

decision.

2. Are Plaintiffs’ Negligence Claims

Cognizable in Maritime Tort?

While we agree with the district court’s

characterization of the Supervision Contract as one for

the provision of professional services, we do not agree

that this answers the question whether plaintiffs’

negligence claims are cognizable in maritime

the distinction between a manufacturer and a provider of

services. Rather, they argued that under East River’s “other

property” exception, the designer of a component part could be

held liable for damages to a vessel. We held that “[t]he

critical fact [was] that Shipco bargained for a finished

vessel.” 825 F.2d at 929. The vessel therefore could not be

treated as “other property” in relation to the allegedly

defective component part.

While we agree with defendants that East River

militates against drawing a distinction between a provider of

services and a manufacturer, Shipco did not expressly decide

whether the East River rule applies to a provider of services

who is distinct from the manufacturer or builder.

28a

tort.11 Rather, this case raises an issue of first

impression: Does the East River economic loss rule

apply to contracts for professional services, rendered in

connection with the manufacture or construction of a

product, by a party other than the builder or

manufacturer?!“ In order to determine whether

11 Plaintiffs’ assertion that defendants have waived their

argument that the negligence claims against Hvide are not

cognizable in maritime tort is without merit. We must apply

the law in effect at the time of our decision, not the law that

was in effect when the case was argued or decided by the

district court. Bradiey v. Richmond School Bd., 416 U.S. 696,

94 S.Ct. 2006, 40 L.Ed.2d 476 (1974); Nations v. Sun Oil Co.,

695 F.2d 933 (5th Cir.), cert. denied, 464 U.S. 893, 104 S.Ct.

239, 78 L.Ed.2d 229 (1983). East River effectively overruled

the law of this circuit regarding the ability of plaintiffs to

recover in maritime tort for purely economic losses. Shipco,

825 F.2d at 927. While the East River economic loss rule does

not specifically include service contracts, neither has the

Supreme Court or any circuit recognized an exception to the

rule. Therefore, to determine whether plaintiffs’ negligence

claims are cognizable in maritime tort following East River,

we must first determine the scope of the rule.

12 To the extent that a contract for the construction of a

vessel is considered to be a service contract, compare Jn re

American Export Lines, 620 F.Supp. 490, 515 (S.D.N.Y.1985)

(contract for construction of vessel is predominantly for

services, and therefore is not governed by U.C.C.) with Silver

v. Sloop Silver Cloud, 259 F.Supp. 187 (S.D.N.Y.1966)

(applying U.C.C. to contract for construction of vessel), our

holding in Shipco provides further support for our holding

today. In Shipco, we applied the East River rule to tort claims

against a shipbuilder without addressing explicitly the

goods/services dichotomy.

29a

East River’s rationale should be extended to this

context, we must review carefully the Court’s reasoning

and the possible arguments against limiting plaintiffs

to their contractual remedies.

In deciding to limit the scope of products liability

in the maritime tort context, the Supreme Court

comprehensively reviewed the origins and purposes of

the doctrine and its relationship to contract law. The

Court noted that "[p]roducts liability grew out of a

public policy judgment that people need more protection

from dangerous products than is afforded by the law of

warranty.” 476 U.S. at 866, 106 S.Ct. at 2299.

Expressing concern, however, "that if this development

were allowed to progress too far, contract law would

drown in a sea of tort," the Court answered in the

negative the question that it posed at the outset of the

case: “whether a commercial product injuring itself is

the kind of harm against which public policy requires

manufacturers to protect, independent of any

contractual obligation." Id.

The Court reasoned that "[wJhen a product injures

only itself the reasons for imposing a tort duty are weak

and those for leaving the party to its contractual

remedies are strong."!3 Jd. at 871, 106 S.Ct. at 2302.

13 The Court also rejected as “too indeterminate" the

intermediate land-based positions that allow recovery for

damage to the product alone when the defect poses a risk of

personal injury or damage to other property. 476 U.S. at 870,

106 S.Ct. at 2301.

30a

A manufacturer is liable without negligence under

strict products liability because "public policy demands

that responsibility be fixed wherever it will most

effectively reduce the hazards to life and health

inherent in defective products that reach the market."

Id. at 866, 106 S.Ct. at 2299. (quoting Escola v. Coca

Cola Bottling Co., 24 Cal.2d 453, 462, 150 P.2d 436

(1944) (concurring opinion)). The manufacturer’s duty

of care was, for similar reasons, expanded to include

protection against property damage. Id. 476 U.S. at

867, 106 S.Ct. at 2300. While conceding that "damage

to a product itself has certain attributes of a

products-liability claim,” the Court concluded that "the

injury suffered--the failure of the product to function

properly--is the essence of a warranty action, through

which a contracting party can seek to recoup the

benefit of its bargain." Jd. at 867-68, 106 S.Ct. at

2300-01.

The Court reasoned that contract law provides

adequate remedies in a commercial setting where the

parties are generally of equal bargaining power. In this

context, the parties are able to allocate between

themselves the risks of defects. Jd. at 872-73, 106 S.Ct.

at 2302-03. Moreover, to the extent that the purchaser

is unable to recover from the manufacturer the full

measure of expectation damages that are available in a

warranty or breach of contract action, it may insure

against such losses. Id. at 873, 106 S.Ct. at 2303.

"Society need not presume that [such] a customer

3la

needs [the] special protection" of an extracontractual

remedy. "The increased cost to the public that would

result from holding a manufacturer liable in tort for

injury to the product itself is not justified." Jd. at 872,

106 S.Ct. at 2302.

Plaintiffs argue that because Hvide contracted

only to provide professional services and did not

manufacture any part of the Oxy Producer, East River’s

rationale for confining the parties to their contractual

remedies does not apply. It is true that some

jurisdictions recognize an exception to the economic loss

rule when the underlying contract is for the provision of

professional services.14 See Consol. Edison Co. v.

Westinghouse Elec. Corp., 567 F.Supp. 358, 365

(S.D.N.Y.1983) (New York cause of action for negligent

performance of contractual duties should not be applied

outside context of negligence in the performance of

services); Morse / Diesel, Inc. v. Trinity Indus., Inc., 664

F.Supp. 91 (S.D.N.Y.1987), rev’d on other grounds, 859

F.2d 242 (2d Cir.1988);!5 cf Republic Steel Corp. v.

Penn. Engineering Corp., 785 F.2d 174, 182 n. 13 (7th

14 Plaintiffs argue erroneously that New York law is

controlling on this point. While it is undisputed that New

York law governs the interpretation of the Supervision and

Construction Contracts, the question before us is whether

plaintiffs’ negligence claims are cognizable in maritime tort,

not whether they are cognizable under New York law.

15 These cases are remarkably silent on the reasons for

excepting contracts for professional services from the economic

loss rule.

32a

Cir.1986) (not reaching question whether Illinois law

recognized such an exception because contract found to

be predominantly for sale of goods); Adams Labs v.

Jacobs Engineering Co., 761 F.2d 1218, 1223 (7th

Cir.1985) (whether Illinois would recognize exception to

economic loss rule for design professionals unclear).

But see Flinkote Co. v. Dravo Corp., 678 F.2d 942,

949-50 (11th Cir.1982) (Georgia courts would not

recognize exception to economic loss rule for

professional services--particularly where services were

rendered in process of manufacturing or constructing a

product).

[4] The question before us is whether such an

exception should be recognized in maritime tort. We

conclude that East River’s broad concern for preserving

the integrity of contract law in commercial settings

applies equally to a case such as this where the

professional services are an integral part of the

manufacture or construction of a product and where the

only injury alleged is to the product itself.

As in East River, the damage alleged here is purely

economic. Thus, the public policy concerns which

underpin the imposition of a duty in tort--the need to

provide consumers with greater protection from

personal injury and property damage than is afforded

33a

by warranty or contract--are not implicated.!® 476 U.S.

at 866, 106 S.Ct. at 2299; see also Prosser & Keeton on

Torts 693 (5th ed. 1984).

The only remaining reasons for concluding that

contract law does not provide an adequate remedy for a

buyer of professional services who incures purely

economic loss are (1) it may be more difficult to define

in a contract what constitutes satisfactory performance

of services and (2) contracts for services are not subject

to the implied warranties of the Uniform

16 We reject plaintiffs’ contention that the claims against

Hvide fall within East River’s “other property" exception. We

held in Shipco, that the designer of a component part could

not be treated separately from the manufacturer for purposes

of the “other property" exception. 825 F.2d at 928 (noting that -

East River involved an identical claim). Because the

completed vessel was the object of the contract, the vessel

itself could not be considered “other property” in relation to its

component parts. Jd. Hvide’s services were similarly an

integral part of the construction of the Oxy Producer.

Therefore, the vessel itself cannot be regarded as “other

property” in relation to Hvide’s services.

Plaintiffs’ argument that loss of the Oxy Producer's

cargo constitutes damage to “other property” is also without

merit. Louis Dreyfus Corp. v. 27,946 Long Tons of Corn, 830

F.2d 1321, 1328 n. 5 (5th Cir.1987) (loss of cargo is not

damage to “other property” within meaning of East River).

en ee ae ee ce

vrewnen

34a

Commercial Code.!”? We find that neither of these

considerations provides an adequate reason for

imposing an extracontractual duty on one who

contracts to provide professional services in a

commercial context.

We recognize that in some cases it may be more

difficult to define what constitutes the satisfactory

performance of services than it is to define what

constitutes a satisfactory product.!® See PPG Indus.,

17 Admiralty law, of course, recognizes an implied

warranty of workmanlike service which arises from

contractual relationships. Ryan v. Pan-Atlantic Steamship

Corp., 350 U.S. 124, 133-34, 76 S.Ct. 232, 237-38, 100 L.Ed.

133 (1956). Other jurisdictions find that a similar standard of

performance, analogous to a duty of care in tort, is implied in

service contracts. See Milau Assoc. v. North Ave. Development

Corp., 42 N.Y.2d 482, 398 N.Y.S.2d 882, 368 N.E.2d 1247,

1251 (Ct.App.1977) (citing Bloomsburg Mills, Inc. v. Sordoni

Constr. Co., 401 Pa. 358, 164 A.2d 201 (1960); Union Mar. &

Gen. Ins. Co. v. American Export Lines, 274 F.Supp. 123

(S.D.N.Y.1966); Pepsi Cola Bottling Co. v. Superior Burner

Serv. Co., 427 P.2d 833 (Alaska 1967); Wolfe v. Virusky, 306

F.Supp. 519 (S.D.Ga.1969)). Unlike the implied warranties of

the U.C.C., however, these warranties necessarily parallel a

negligence standard rather than imposing strict liability.

18 We note, however, that the standards which define

satisfactory goods under the implied warranty provisions of

the U.C.C.-- merchantability or fitness for a particular

purpose--are not terribly determinate. U.C.C. §§ 2-314, 2-315,

1 U.L.A. 371-72, 482 (1976 & Supp.1988).

35a

Inc. v. Sundstrand Corp., 681 F.Supp. 287, 290

(W.D.Pa.1988). This problem is minimized, however,

when the parties possess equal bargaining power. In

such cases, the parties are capable of bargaining for a

definition of adequate performance that focuses on

either “outcome” or "effort." See Comment, Guidelines

for Extending Implied Warranties to Service Markets,

125 U.Pa.L.Rev. 365, 382-86 (1976) (discussing

differing effects of "“effort-oriented" and

“outcome-oriented" standards). The contract could

incorporate a guarantee that the contract will be

performed in a “workmanlike” manner. !9

Alternatively, when the services are directly related to

the manufacture of a product, the parties may impose a

higher standard, defined with reference to the product

itself. 2°

19 We note that the Supervision Contract contains an

express warranty of workmanlike performance. Thus, it is

clearly not unrealistic to expect that parties can bargain for

such guarantees.

2c While the quality of the services may be defined in

terms of the quality of the finished product, this does not alter

the fact that the Supervision Contract is one for the provision

of services rather than for the sale of goods. The fact that the

services were rendered as part of the construction of the Oxy

Producer does, however, militate against excepting such

service contracts from the economic loss rule. See infra note

28.

36a

A more significant reason for imposing an

extracontractual duty of care on sellers of services, but

not on sellers of goods, may be that contracts for

services are not governed by the U.C.C.21

There are particularly strong reasons for leaving to

the U.C.C. commercial disputes over economic losses

stemming from defective products because ‘(tlhe

maintenance of product value is precisely the

21 The distinction between goods and services has been

widely criticized, and has been particularly difficult to define

in the context of “hybrid contracts"--such as construction

contracts, contracts for repaire that involve the provision or

replacement of a part, or sales contracts that include

installation. See, e.g., J. White & R. Summers, Uniform

Commercial Code 346-49 (2d ed. 1980); Article Two

Warranties in Commercial Transactions: An Update, 72

Cornell L.Rev. 1159, 1199-1201 (1987) (suggesting that courts

analogize services to goods where the buyer’s reliance on the

service provider resembles a buyer's reliance on a merchant

when purchasing a good); Note, Disengaging Sales Law from

the Sale Construct: A Proposal to Extend the Scope of Article II

of the U.C.C., 96 Harv.L.Rev. 470 (1982); Comment,

Extending Implied Warranties, supra. See also Prosser &

Keeton on Torts, supra, at 720 (discussing difficulty of

distinguishing sales and service contracts for purposes of

determining whether action may lie in strict products

liability).

The difficulty of drawing this distinction further

militates against excepting contracts for services from the

economic loss rule. See infra note 28.

37a

purpose of express and implied warranties."22 Id.; see

also Prosser & Keeton on Torts, supra at 708-09 (risk of

harm to the product itself is type of risk that parties to

purchase and sale contracts should be allowed to

allocate pursuant to the terms of _ the

contract--especially in the commercial context); Note,

Privity Revisited: Tort Recovery by a Commercial Buyer

for a Defective Product’s Self-Inflicted Damage, 84

Mich.L.Rev. 517 (1985) (arguing that imposition of tort

liability in cases where the parties are in privity and

the product injures only itself does not achieve optimal

allocation of risks). On the rationale of East River, the

implied warranties provided by Article II of the U.C.C.

are an adequate replacement for the imposition of a

duty in tort when the defective product has injured only

itself.

Arguably, because contracts for services are not

subject to the implied warranties provided by the

U.C.C., it is necessary to impose a duty of proper

performance in tort in order to provide the buyer of

services with analogous protection from economic

22 Allowing extracontractual remedies in tort may also

defeat the U.C.C.’s goal of achieving uniformity and

predictability in commercial transactions. See White &

Summers, supra, note 21, at 20-21 (discussing goals of

U.C.C.); Note, Disengaging Sales Law, supra, note 21, at 470

(same).

38a

loss.22 See Note, Extending Implied Warranties, supra,

at 393 (because no implied warranties apply to

contracts for services, an aggrieved buyer must rely on

a tort remedy). This rationale is persuasive in a

noncommercial context where the purchaser of services

is not in a position to bargain for a specific guarantee of

the quality of the service. See generally, id. (arguing

for extension of implied warranties to certain service

markets in order to protect consumers).

In a commercial context, however, parties are

generally capable of allocating the risk of defective

performance of a contract for services in the same way

that they can allocate the risk of a defect in the product

itself.24 While the commercial purchaser of

23 While implied warranties impose strict liability, their

protective value is diminished by the fact that they may be

disclaimed entirely, leaving the buyer with only an argument

that the disclaimer at issue is unconscionable. This is

mitigated in the consumer context by the provisions of the

Magnuson-Moss Warranty Act which restrict substantially the

parties’ freedom to disclaim the implied warranty of

merchantability.

24 In limiting the buyers of defective commercial goods to

their contractual remedies, New York courts have followed

essentially the same rationale as the Supreme Court in East

River: “Economic loss results from the failure of the product to

perform to the level expected by the buyer and the seller...

The original purchaser, particularly a large company ... can

protect itself against the risk of unsatisfactory performance by

bargaining for a warranty.” Consolidated Edison, 567 F.Supp.

at 365 (quoting Schiavone Construction Co. v. Elgood Mayo

Corp., 81 A.D.2d 221, 439 N.Y.S.2d 933, 939 (1982)).

39a

services will not have the benefit of implied warranties

imposed by the U.C.C., it may bargain--as mentioned

above--for an express warranty of workmanlike

performance or for an express warranty defined in

terms of the quality of the finished product.2> The

contract price would then turn in part on whether the

provider of services is willing to guarantee that its

performance of the contract will be satisfactory.

At least one district court has agreed with this

analysis, finding East River to be persuasive authority

for applying the economic loss rule to a commercial

party’s claim of negligent performance of a contract for

professional services. In PPG _ Industries, a

non-maritime case involving a dispute over an

engineering agreement, the court noted that "the

special non-contractual duties of professionals such as

doctors, lawyers and architects enforced by tort law

were created in part to make up for the lack of

Presumably, the New York courts have concluded that

even a sophisticated party who contracts for the provision of

services is less able to bargain for similar guarantees of a

satisfactory performance.

25 A service contract containing such express warranties

would be treated differently from a contract for the sale of

goods only in that the U.C.C. will not govern a court’s

interpretation of disclaimers of express warranties. However,

in construing a contract for services, courts are free to reason

by analogy to U.C.C. § 2-316(1). Moreover, it is unlikely that

a substantially different outcome would result from the

application of traditional common law contract principles.

40a

sophistication and bargaining power of those seeking

these professional services." 681 F.Supp. at 290; see

also Flinkote, 678 F.2d at 949-50 (finding no reason to

except contractors or other professionals from Georgia

economic loss rule).

The Supreme Court emphasized in East River that

in a commercial context there are rarely disparities in

the bargaining power of the parties that would justify

the imposition of such extracontractual duties. 476

U.S. at 872-73, 106 S.Ct. at 2302-03. Like the court in

PPG Industries, we find this to be equally true where

the parties to a contract for services are sophisticated

commercial entities, “adept at negotiating complex

agreements and allocating risks between them.” 681

F.2d at 290; see also Note, Privity Revisited, supra, at

532-39 (argumg that where parties are of equal

bargaining power, as in most commercial cases, the

parties themselves are best able to allocate the risk of

defects).

Hvide and Occidental are both sophisticated

commercial actors, capable of anticipating and

allocating the risk of the type of economic loss that

occurred in this case, and of insuring against the

possibility that such losses may not be recovered in a

breach of warranty or contract action. There is no

reason for society to presume that a commercial entity

such as Occidental “needs special protection." East

River, 476 U.S. at 870, 106 S.Ct. at 2301; see also Note,

Privity Revisited, supra at 532-39. Whether the

4la

negligence alleged is in the performance of a contract

for services, or in a contract for the sale of goods, the

resulting economic loss "is essentially the failure of the

purchaser to receive the benefit of its bargain--

traditionally the core concern of contract law." East

River, 476 U.S. at 870, 106 S.Ct. at 2301.

[5] We do not hold that a tort cause of action

may never be stated in admiralty when the only

damages sought are economic.2© Jd. at 871 n. 6, 106

S.Ct. at 2302 n. 6. We hold only that a plaintiff may

not recover purely economic losses on a theory of

negligent performance of a contract for professional

services when the services were rendered as a part of

the manufacture or construction of a product. That is,

a party that provides professional services as part of

the manufacture or construction of a _ product

26 The Supreme Court left open the possibility that a

party not in privity with the defendant could recover purely

economic damages on a theory of negligent performance of a

contract for professional services. 476 U.S. at 871 n. 6, 106

S.Ct. at 2302 n. 6 (citing Ultramares v. Touche, 255 N.Y. 170,

174 N.E. 441 (1931) (allowing third party to recover economic

loss resulting from negligent accounting)). That possibility,

however, may be largely foreclosed by Robins Dry Dock &

Repair Co. v. Flint, 275 U.S. 303, 309, 48 S.Ct. 134, 135, 72

L.Ed. 290 (1927) ("as a general rule, at least, a tort to the

person or property of one man does not make the tort feasor

liable to another merely because the injured person was under

a contract with that other, unknown to the doer of the

wrong”). See id.

42a

has no duty in maritime tort, independent of its

contractual obligations, to prevent the product from

injuring itself.27 See id. at 876, 106 S.Ct. at 2304.

To hold otherwise would allow a plaintiff who

contracts separately for "services" related to the

manufacturing process--such as the design of the

product or the supervision of the contract work--to

recover in tort for purely economic losses from the

provider of those services while East River would bar

any similar recovery in cases in which those same

services are performed by the manufacturer itself.2®

27 This rule applies only to parties who are in privity. We

do not decide whether a party not in privity with the

defendant may recover in negligence, see supra note 26.

28 Under New York law, the economic loss rule applies

only to the sales components of a contract and the courts

appear willing to parse a single contract to determine the

extent to which the party may recover economic loss in tort.

Consolidated Edison, 567 F.Supp. at 366 n. 12 (whether

contract is essentially one for goods or services for purposes of

determining applicable statute of limitations not dispositive of

extent to which claims for economic loss are cognizable in tort:

economic loss may be recovered on negligence theory only to

extent that claims relate to service component of contract).

East River, however, appears to foreclose this

approach. With respect to the plaintiffs allegation that the

defendant, "as part of the manufacturing process,” negligently

supervised the installation of a component part, 476 U.S. at

861, 106 S.Ct. at 2297, the Court simply concluded that the

defendant “owed no duty under a products-liability theory

based on negligence to prevent the product from

43a

Creating an exception to the economic loss rule for

professional services when those services’ are

injuring itself." Jd. at 876, 106 S.Ct. at 2304. The Court cites

as support two cases that declined to except services rendered

as part of a manufacturing or construction contract from the

economic loss rule: S.M. Wilson & Co. v. Smith Int'l Inc., 587

F.2d 1363, 1372 (9th Cir.1978) (applying California law), and

Flinkote, 678 F.2d at 950 (applying Georgia law). The Court

therefore implicitly rejected the notion that the service

component of a manufacturing contract could be segregated for

purposes of the economic loss rule.

In Republic Steel Corp., the Seventh Circuit, applying

Illinois law, took a different approach. The court refused to

segregate the service component of a contract for the

engineering, design, sale, and installation of two furnaces as

well as for purchase agency services. 785 F.2d at 182.

Finding the contract to be primarily for the sale of goods, the

court found it unnecessary, to decide whether the Illinois

economic loss rule applied to service contracts. Jd. at 182 n.

13. Consequently, if there were an exception to the economic

loss rule, it would apply only to contracts that were

predominantly for services. Flinkote, which is cited in East

River, held that construction contracts, which are generally

held to be predominantly for services, were not excepted from

the economic loss rule. 678 F.2d at 949-50.

We do not think that the Supreme Court would treat

hybrid sales-service contracts in which services predominate

any differently than the hybrid contract at issue in East

River. Indeed, we effectively refused to do so in Shipco in

which we applied the economic loss rule to tort claims against

a shipbuilder--even though contracts for the construction of a

vessel are hybrid sales-service contracts in which services

arguably predominate. See also Gulf Boat Marine Services,

Inc. v. George Engine Co., 659 F.Supp. 6 (E.D.La.1986)

44a

are exercised “only in the process of manufacturing or

constructing a product" would "effectively eviscerate

the economic loss rule" adopted in East River. See

Flinkote, 678 F.2d at 950.

[6] We conclude then, that following East River,

Occidental’s negligence claims against Hvide are not

cognizable in maritime tort. This holding does not,

however, eliminate our jurisdiction over the claims

remaining in this case. We may, within our discretion,

retain jurisdiction over the pendent contract claims

that would not otherwise be within the admiralty

jurisdiction if “considerations of judicial economy,

convenience and fairness to litigants" would be served

by doing so.29 United Mine Workers v. Gibbs, 383 U.S.

715, 726, 86 S.Ct. 1130, 1139, 16 L.Ed.2d 218 (1966);

Ingram Corp. v. J. Ray McDermott & Co., 698 F.2d

1295, 1320 (5th Cir.1983).

(applying East River rule to a case including a claim that

seller was negligent in repairing defective engine). For the

reasons set forth above, we conciude that the intent of East

River can be given effect only by recognizing a bright-line rule

that extends the economic loss rule to all service

contracts--whether “purely” for services or predominantly for

services-where the services are rendered as part of the

manufacture or construction of a product and the only injury

alleged is to the product itself.

29 It is not disputed that the negligence ciaims and the

contract claims arise from "a common nucleus of operative

fact." Gibbs, 383 U.S. at 725, 86 S.Ct. at 1138.

45a

Prior to East River, plaintiffs’ negligence claims

were, under the law of this circuit, clearly cognizable in

maritime tort. Jig the Third Corp. v. Puritan Marine

Insurance Underwriters Corp., 519 F.2d 171, 175-76

(5th Cir.1975). East River, which effectively overruled

the Fifth Circuit rule, Shipco, 825 F.2d at 927, was

decided two weeks after the district court had rendered

its decision in this case, at the conclusion of a three and

one half month bench trial. "Considerations of judicial

economy, convenience and fairness to the litigants"

thus weigh heavily against dismissing the pendent

claims at this late date.2° Accordingly, we will retain

jurisdiction over the remaining claims.

30 The Supreme Court emphasized in Carnegie-Mellon

Univ. v. Cohill, --- U.S. ----, ---- 108 S.Ct. 614, 618, 98 L.Ed.2d

720 (1988), that "a federal court’s determination of state-law

claims could conflict with the principle of comity to the

States.” Thus,

[wJhen the balance of these factors indicates that a

case properly belongs in state court, as when the

federal-law claims have dropped out of the lawsuit in

its earlier stages and only state-law claims remain, the

federal court should decline the exercise of jurisdiction

by dismissing the case without prejudice.

Id. 108 S.Ct. at 619. Given the advanced stage of these

proceedings and the amount of judicial resources that are

necessarily consumed in trying a case as cumbersome as this,

we think that the balance of factors weighs clearly in favor of

retaining jurisdiction over the pendent claims in this case.

46a

We turn now to the district court’s resolution of

those claims.

B. Did the district court err in finding that Avondale

and Hvide breached their contracts by failing to

deliver a properly mated and seaworthy vessel and

that this was the sele cause of the sinking of the

Oxy Producer?

[7] After a lengthy bench trial, the district court

concluded that the Oxy Producer had not been mated in

accordance with the plans and specifications and that

this failure had rendered the vessel unseaworthy on

delivery. The district court found that Avondale

breached its Construction Contract by failing to comply

with the plans and_ specifications?! and _ that

31 Article II(a) of the Construction Contract provides that:

The Contractor, at its own risk and expense, shall

furnish all plant, facilities, working plans, labor,

materials, supplies and equipment, and shall perform

all work required under this Construction Contract and

the Vessel Plans and Specifications to construct,

launch, outfit, test and deliver the Vessel in accordance

with the Vessel Plans and Specifications as defined in

Article I hereof; and shall further, at its own risk and

expense, do everything required of the Contractor by

this Construction Contract and the Vessel Plans and

Specifications. (emphasis added).

47a

Hvide had breached its Supervision Agreement by

failing to insure that the plans and specifications were

followed.22. The district court also held that the

32

Article XVI(a) provides that:

a dock trial and a sea trial shall be held in order to

determine whether the Vessel and its machinery and

equipment are in proper working order and in

accordance with the requirements of this Construction

Contract, the Vessel Plans and Specifications and

requirements of the Regulatory Agencies. (emphasis

added).

The district court also held that the Construction

Contract contained an express warranty of seaworthiness

which Avondale also breached. That issue is addressed below

in Section D, and the relevant language from the

specifications is set out infra at note 46.

Section 4(c) of the Supervision Agreement provides that:

4. Design

(c) The Supervisor and HMI further jointly and

severally warrant that the Vessel, if constructed by the

Contractor in accordance with the Construction

Contract and the Plans and Specifications, (i) will be

complete and seaworthy, (ii) will be suitable for the

carriage of superphosphoric acid from ports of the

United States to the Soviet Union and for the carriage

in worldwide service of petroleum products or any other

lawful cargo in bulk for which the Vessel and its tanks

are suitable and (iii) will perform in strict accordance

with the Construction Contract and the Plans and

Specifications. (emphasis added). ,

Section 9 provides that:

9. Plan Approval. The Supervisor with HSI under

the Subcontract shall review and shall cause Henry to

review and approve all Contractor working lans and

48a

improper mating of the vessel was the sole cause of the

sinking of the Oxy Producer.

The district court’s holding that the vessel was not

properly mated is a finding of fact and will not be

disturbed on appeal unless it is clearly erroneous.

Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct.

1504, 1511, 84 L.Ed.2d 518 (1985); McAllister v. United

States, 348 U.S. 19, 75 S.Ct. 6, 99 L.Ed. 20 (1954)

(clearly erroneous rule applies to review of judgment of

trial court sitting in admiralty). Issues concerning

breach of contract and warranty are also treated as fact

and are therefore subject to the clearly erroneous

standard of review. Automated Med. Laboratories v.

Armour Pharm. Co., 629 F.2d 1118 (5th Cir.1980)

(contract); Noel v. Kline, 325 F.2d 496 (5th Cir.1963)

drawings and vendor plans and drawings according to

the Construction Contract and the Plans and

Specifications. The Supervisor shall also review any

other plans and drawings submitted to it by the Owner

or the Contractor for its review.

Section 10 provides that:

10. On Site Inspection. The Supervisor with HSI

under the Subcontract shall provide qualified on-site

supervisory staff which will perform construction

inspection in respect of the construction of the Vessel.

Inspection will be made to assure that the Vessel is

constructed in accordance with the Construction

Contract and the Plans and Specifications and in a

sound and workmanlike manner. (emphasis added).

49a

(contract); Martin v. Xarin Real Estate, 703 F.2d 883,

889 (5th Cir.1983) (warranty). Questions of negligence

and causation are similarly treated as fact. Kratzer v.

Capital Marine Supply, Inc., 645 F.2d 477 (5th

Cir.1981) (negligence); Consolidated Grain & Barge Co.

v. Marcona Conveyor Corp., 716 F.2d 1077 (5th

Cir.1983) (causation).

"[A] finding is ’clearly erroneous’ when, although

there is evidence to support it, the reviewing court on

the entire evidence is left with the definite and firm

conviction that a mistake has been committed."

Anderson, 470 U.S. at 573, 105 S.Ct. at 1511. "If the

district court’s account of the evidence is plausible in

light of the record viewed in its entirety, [we] may not

reverse even though convinced that had [we] been

sitting as the trier of fact, [we] would have weighed the

evidence differently. Where there are two permissible

views of the evidence, the factfinder’s choice between

them cannot be clearly erroneous.... This is so even

when the district court’s findings do not rest on

credibility determinations, but are based instead on

physical documentary evidence or inferences from other

facts." Id. at 573-74, 105 S.Ct. at 1511.

For the reasons set forth below, we find no clear

error in the district court’s findings of fact.

50a

1. The Mating of the Vessel

The district court noted that the Barge

Specifications contained detailed instructions regarding

the amount of contact required between the tug and the

barge along the _ greenheart surfaces.?% The

33 The interconnection system of the Oxy Producer is

designed to hold the tug and barge together as an integrated

vessel. A tongue-shaped projection from the aft end of the

barge is fitted into a wedge-shaped recess formed by the

catamaran hulls of the barge, the crossover deck connecting

the two hulls on the top and the ledges protruding from the

lower portion of each of the two tug hulls. Greenheart (a very

hard wood) bearing surfaces are placed on the top of the barge

tongue and along the upper surface of each tug ledge to

achieve a tight, customized fit between the tug and the barge.

Two link arms (described as "suitcase latches") are used to

engage and disengage the tug and barge and te maintain the

longitudinal engagement of the tug on the barge tongue.

With each of the link arms latched down and in

tension, the main link pin at the head of the arm pulls against

and compresses a steel/neoprene sandwich ("bumper pad").

The compression of the bumper pad causes the nevuprene to

"flow" upward creating a bulge between the steel plates,

indicating that the barge and tug are properly fitted to

prevent movement.

Over time, the fit-up is intended to become tighter as

the wedging action causes the steel structures to wear down

the high spots on the greenheart. Ultimately, the contact

along the greenheart will become uniform.

5la

specifications also provided that the contractor should

measure the contact to ensure that the fit was proper.

It was undisputed, however, that the measurements

taken by a Hvide employee, Robert Bibbo, revealed that

the specified amount of contact had not been achieved

at the final mating. The district court concluded that

"the Oxy Producer was delivered with virtually no

greenheart contact and large gaps between the tug and

the barge along its greenheart surfaces. The vessel

therefore was not constructed in accordance with the

plans and specifications."

The court further found that the damage sustained

by the vessel on September 12, 1981 "was caused solely

by the poorly mated condition in which Avondale

delivered the vessel. Had the vessel been delivered

with the percentage of contact between the tug and the

barge along the greenheart surfaces required by the

plans and specifications, no significant movement

would have developed and no damage would have been

sustained.” The court held that these same factors

were responsible for the sinking of the tug on

September 20.

Avondale and Hvide dispute the district court’s

holding on several grounds. Avondale argues first, that

Bibbo’s measurements may not have been taken under

the conditions required by the Barge Specifications.

Second, Avondale notes that the specifications prescribe

the percentage of contact to be achieved before sea

trials and not at the final mating. Third,

52a

Avondale argues that because Hvide had extensive

experience in the mating of ITBs, the district court

should have deferred to Hvide’s "interpretation" of the

specifications. According to Avondale, the Oxy

Producer’s strong performance at sea trials was a

better indication of the adequacy of the fit than were

the measurements.

There is evidence in the record, however, to

support each of the district court’s findings. First,

despite Avondale’s post-hoc explanations for Bibbo’s

measurements, no evidence was presented that directly

contradicted the measurements. The district court

noted, moreover, that Carlton Ledet, the Avondale

engineer responsible for mating the vessel, admitted

that he did not take any steps to insure that there was

sufficient contact before the vessel was delivered,*4

even though the adequacy of contact could readily be

measured. Ledet went so far as to testify that had he

known of Bibbo’s measurements, he would have found

the fit-up inadequate. Certainly the district court could

find that these factors undermined the credibility of

Avondale’s post-hoc explanations for the unfavorable

measurements.

34 The tug and barge had been separated following the

sea trials and were re-mated for delivery.

53a

Second, although the specifications did not refer

explicitly to the final mating, the court relied on the

testimony of Roderick Hulla, a naval architect

employed by J.J. Henry, who expressed the view that

contact in the range of 85-90%, as provided in the

specifications, was necessary to avoid rapid greenheart

wear and sudden decompression of the linkage system.

It was Hulla’s opinion that failure to achieve the

specified percentage of contact could cause _ the

greenheart to wear down more rapidly, leading to a

sudden loss of friction and relative movement between

the tug and the barge. This theory supports the view

that it was necessary to comply with the specifications

at the final mating and not simply before the sea trials.

Hvide argues that Hulla’s opinion regarding the

consequences of a failure to comply with the

specifications was pure speculation and did not provide

an adequate basis for the court’s finding that the

improper mating of the vessel initiated the chain of

events leading to the loss of the Oxy Producer.*°

36 Hulla’s testimony relates to two separate points: first,

that the specifications prescribed the percentage of contact .

necessary for the vessel to be safely mated on delivery and not

simply the percentage of contact to be achieved before the sea

trial, and second, that the improper mating caused the

damage to the vessel and the sinking of the tug. We address

the causation issue below.

54a

The fact that the trial judge relied heavily on

Hulla’s testimony does not, however, render his

decision clearly erroneous. The trial judge stated in his

memorandum opinion that "[eJach party’s experts

presented a different theory of the casualty. These

theories varied widely and were often marred by the

experts’ obvious bias. Their tendency to be advocates

and to protect the parties which called them often made

their explanations obscure and illogical." The ability to

assess the credibility of witnesses is at the heart of the

trial court’s function and is not a matter for the

appellate court to second guess.

The fact that Avondale and Hvide are able to

produce examples of testimony that appear to

contradict the district court’s findings does not,

therefore, persuade us that the findings are clearly

erroneous. In sifting through a vast array of competing

evidence, the trial judge must evaluate the credibility of

the witnesses and determine whose account of the

events is most persuasive: "[W]hen a trial judge’s

finding is based on his decision to credit the testimony

of one of two or more witnesses, each of whom has told

a coherent and facially plausible story that is not

contradicted by extrinsic evidence, that finding, if not

internally inconsistent, can virtually never be clear

error.” Anderson, 470 U.S. at 575, 105 S.Ct. at 1512.

The district court found Mr. Hulla to be the most

“candid and responsive" of the expert witnesses. Hulla

presented a "coherent and facially plausible” theory

55a

that was supported by the evidence. We therefore find

no clear error in the district court’s reliance on Hulla’s

testimony as a basis for its findings that the vessel was

not properly mated on delivery. We agree that

Avondale and Hvide breached their contracts with

Occidental in failing to insure that the vessel was

properly mated.

2. Alternative Theories of Causation

We will next address the district court’s finding

that the improper mating of the vessel was the sole

cause of both the damage to the Oxy Producer on

September 12 and the sinking of the tug on September

20.

a. Failure to Adjust the Fit

Defendants argued at trial that the relative

movement between the tug and the barge which began

on September 12 was due to Occidental’s failure to

tighten the fit following the first voyage. Again, the

district court relied on Hulla’s testimony in rejecting

this argument. Hulla explained that if the vessel had

been properly mated at the outset, the greenheart

would wear down and, with periodic tightening, would

achieve nearly 100% contact. If, however, the vessel

were not properly mated, the greenheart would wear

down too rapidly, causing a relatively sudden loss of

friction. Referring to the testimony of the crew, and to

Bibbo’s measurements, the district court found that the

56a

events leading up to the sinking of the Oxy Producer

were most consistent with the second theory. Bibbo’s

measurements disclosed that there was contact at only

a few "high spots" in the greenheart, the situation that

Hulla testified was likely to result in a sudden loss of

friction. The theory was supported further by the

crew’s observations, prior to the 12th, that there had

been significant bulges in the neoprene pads indicating

that the pads were under compression and that the fit

was satisfactory. Furthermore, the relative movement

between the tug and the barge did not increase

gradually, but increased suddenly when the vessel

encountered heavy weather on September 12. The

district court found that the sea conditions either

knocked the vessel off of its high spots, or caused it

finally to wear off of its high spots.

The defendant’s objections to the district court’s

findings establish at most that there are several

plausible explanations of the events. The district

court’s choice of one of several permissible views of the

evidence cannot constitute clear error. Anderson, 470

U.S. at 574, 105 S.Ct. at 1511.

b. Negligence of the Captain

Avondale also argued at trial that even if the

relative movement was caused initially by improper

mating of the vessel, the negligence of the crew was an

intervening or contributing cause in the damage

sustained by the vessel on September 12 and in the

57a

sinking of the tug on September 20. The district court

held that Avondale failed to carry its burden of proving

this affirmative defense with respect to the events of

both September 12 and September 20.2 The court’s

finding that the Captain acted reasonably in setting

sail for the Azores in order to effect repairs is supported

by the expert testimony and is not clearly erroneous.

The court also found that the Captain had been

diligent in his attempts to obtain entry into the harbor

at Ponta Delgada and had not acted unreasonably in

setting out to sea on September 20.

While the harbor officials testified later that they

would have permitted the Oxy Producer to enter the

harbor if they had known that the vessel was in peril,

the district court discounted this testimony as

speculative. Given that the ultimate decision was not

in the Captain’s hands, and considering the range of

factors that could affect the Harbor Master’s decision

whether to grant permission to enter, the district

court’s assessment of this evidence is certainly

36 Although we held above that plaintiffs’ negligence

claims are not cognizable in maritime tort, the district court’s

findings on the issues of causation will be relevant to its

determination of the foreseeability of damages stemming from

Avondale’s and Hvide’s breaches of contract. Because the

district court has not yet addressed this issue, we express no

opinion as to the foreseeability of the events discussed in this

section.

58a

permissible.2’ The district court properly concluded

that the mere possibility that the Captain might have

obtained permission to enter the harbor if he had been

more insistent did not establish that he was negligent.

Avondale next argues that the district court judge

failed to apply the proper legal standard to judge the

Captain’s conduct on September 20. The district court

invoked the doctrine of in extremis which holds that

“where, without prior negligence, a vessel is put in the

very center of destructive natural forces and a hard

choice between competing courses must immediately be

made, the law requires that there be something more

than mere mistake of judgment by the master in that

decision in extremis." Boudoin v. J. Ray McDermott &

Co., 281 F.2d 81, 84 (5th Cir.1960).

Avondale argues that the circumstances

confronting the Captain on September 20 were not

sufficiently severe to warrant application of the in 2

extremis doctrine and that the Captain’s conduct should

have been judged according to the ordinary "prudent

seaman” standard.

37 ’ The officials initially denied entry because the Oxy

Producer's draft was too deep for the harbor, creating a risk

that the vessel would run aground and spill its hazardous

cargo in the harbor. The only berth deep enough for the Oxy

Producer was at the NATO quay, and permission to berth

there was denied because NATO vessels were expected to

arrive at the port before the repairs on the Oxy Producer could

have been completed.

a

59a

Avondale contends that a predicted storm does not

constitute sudden peril because "it is the nature of the

calling of the shipmaster to know the tempestuous

forces of wind and tide and seas." Boudoin, 281 F.2d at

84 (application of in extremis doctrine inappropriate

where storm tides from hurricane were predicted

several days in advance).

The heavy weather predicted for September 20 was

not, however, the only difficulty facing Captain

Kanellos. His disabled vessel, which carried a

hazardous cargo, had been denied entry into the

harbor. Moreover, another storm moved into the area

early on the 20th, exacerbating the heavy seas created

by tropical storm Harvey.2® While these factors may

38 Avondale asserts that the district court erred in stating

that the “norther" which exacerbated the poor weather

conditions on the 20th was unforecast and also in stating that

the storm reached the anchorage "just as the vessel weighed

anchor.” While there is testimony to the effect that the storm

was forecast, the record is ambiguous as to when, precisely,

these forecasts were made. It appears that the forecasts may

not have been available until early in the morning of the

20th. Similarly, the record indicates that if the district court

judge erred in his assessment of when the storm struck, he

misstated the time by less than an hour. Thus, even if

Avondale’s assertions are correct, it appears that the Captain

was confronted with rapidly changing weather conditions

which would make the application of the in extremis doctrine

all the more appropriate. We cannot conclude, then, that the

district court erred, either in the legal standard that it applied

60a

not have placed the vessel in "sudden peril,” we think

that the district court was justified in finding that the

combination of these factors presented "a situation of

sufficient peril and immediacy to require application of

a standard of law different from the standard of

ordinary maritime negligence.” M.P. Howlett Inc. v.

Tug Michael Moran, 425 F.2d 619, 623 (2d Cir.), cert.

denied, 400 U.S. 833, 91 S.Ct. 67, 27 L.Ed.2d 65 (1970).

The district court properly evaluated the Captain’s

conduct in light of the principle that:

The master of a vessel caught in an emergency

where he is forced to choose between risky

alternatives, is entitled to a wide range of

discretion in deciding what to do, provided it is a

reasonable exercise of current standards of

nautical knowledge and skill under’ the

circumstances. It does not become negligence

because the decision he makes may later, in the

light of subsequent events revealed through

hindsight, be shown to have been wrong.

Esso Standard Oil S.A. v. S.S. Gasbras Sul, 387 F.2d

573, 580 (2d Cir.1967), cert. denied, 391 U.S. 914, 88

S.Ct. 1808, 20 L.Ed.2d 653 (1968).

to the Captain’s conduct, or in its ultimate conclusion that

Avondale failed to carry its burden of proving that the

negligence of the Captain was an intervening cause in the

sinking of the Oxy Producer.

6la

In arguing that Captain Kanellos was imprudent,

Avondale relies on our decision in Boudoin in which we

held that a shipmaster’s decision to remain docked in

the face of an oncoming hurricane, rather than sailing

upriver to a more protected harbor, was imprudent. A

central factor in our holding in Boudoin, however, was

that there was no showing that the tug master

evaluated his options critically and made a conscious

decision that it would be safer to remain at the dock

rather than moving his vessel to another port. 281 F.2d

at 86. The experts who testified in Boudoin all agreed

that a prudent seaman would not have remained

docked in light of the weather forecasts. Furthermore,

there was no evidence that taking the vessel upriver

would have been dangerous before the onset of the

hurricane was imminent. /d. at 87.

The instant case is readily distinguishable from

Boudoin. First, there is ample evidence that Captain

Kanellos carefully considered his options (none of which

could be guaranteed to succeed) and made a conscious

decision that the risk of dragging anchor, running

aground, and spilling the vessel’s hazardous cargo

outweighed the risk of attempting to maneuver the

vessel away from the breakwater. Second, the experts

who testified at trial did not agree on _ one

62a

prudent course of action.°? Finally, at least one expert

agreed with Captain Kanellos that remaining at anchor

could have been dangerous.*°

The district court found that the expert testimony

established, at most, that another course of action

might have been successful and that this was not

enough to establish that the Captain’s actions had been

unreasonable under the circumstances. We agree.

"The standard of judging the exercise of prudent

seamanship here was tempered by the requirement for

decision under very difficult, abnormal circumstances

and the error, if there was error, was not negligence."

Tug Michael Moran, 425 F.2d at 623 (citations

omitted). The district court did not err in holding that

Avondale failed to establish that the imprudence of the

Captain was an intervening or contributory cause in

the loss of the Oxy Producer. The district court must,

however, decide whether the events discussed in this

section were foreseeable for purposes of determining

The experts suggested a number of alternatives,

including declaring an emergency and requesting standby

tugs, dropping two anchors instead of one, and going to sea

but staying close to the shoreline. The experts disagreed

among themselves, however, as to the relative merits of each

of these options.

40 The district court felt that the other experts discounted

too readily the Captain’s concern that the vessel could run

aground and spill its hazardous cargo if it remained at anchor.

incest

63a

damages for breach of ccntract. See supra note 36;

Skibs A/S Gylfe v. Nat'l. Cargo Bureau Inc., 438 F.2d

803, 805 n.1, 807-08 (6th Cir.1971) (distinguishing

“superceding” and "intervening cause" as used in tort

from "foreseeability" in determining damages for breach

of contract).

c. Negligence or Breach of Contract by

Henry and Victoria

The district court also rejected the contention that

the cause of the damage sustained by the Oxy Producer

on September 12 was the defective design and

manufacture of the interconnection system as a whole

and the bumper pads and link arms in particular. The

district court found that this theory was inconsistent

with the physical evidence, with the testimony of every

other expert in naval architecture and marine

engineering, with the crewmembers’ _ testimony

regarding the fore and aft direction of the movement

between the tug and barge, and with the fact that no

lateral movement appeared before September 12.

Again, we find no clear error in the district court’s

assessment of the evidence.

Having concluded that the sole cause of the

damage to the Oxy Producer was the improper mating

of the vessel, the district court held that Henry and

Victoria were not liable to the plaintiffs for any damage

to the Oxy Producer. Because we find no clear error in

the district court’s findings of causation, we agree with

this conclusion. However, we address below in section

G the propriety of dismissing Henry and Victoria from

the lawsuit in light of the additional claims regarding

the Oxy Producer’s sister ships--the Oxy Grower and

the Oxy Trader.

We affirm the district court’s finding that both

Avondale and Hvide breached their contracts with

Occidental by failing to deliver a properly mated and

seaworthy vesse:. We furthermore affirm the district

court’s holding that the improper mating of the vessel

was the sole cause both of the damage sustained by the

Oxy Producer on September 12, and of the sinking of

the tug on September 20.

C. Was Hvide’s acceptance of the vessel binding on

Occidental?

[8] Avondale contends that even if the loss of the

Oxy Producer was caused by the improper mating of the

vessel, Hvide’s acceptance of the fit-up was binding on

Occidental because the Supervision Contract vested

Hvide with the power to accept or reject work or

materials provided by Avondale. Avondale essentially

argues that Hvide’s acceptance of the vessel insulated

Avondale from liability for any deficiencies in its own

work. This argument is implausible. While Hvide was

engaged to supervise the construction of the vessel,

Avondale undertook an independent’ contractual

obligation to construct the vessel according to the plans

and specifications. See supra note 31.

65a

The district court correctly found that Hvide had

no actual authority to unilaterally modify the

requirements of the plans and specifications*! in a

fashion that would be binding on Occidental because

the Supervision Agreement expressly provided that

Hvide was an independent contractor.*”

Avondale notes, however, that this holding did not

necessarily dispose of the question whether Hvide had

apparent authority to bind Occidental. The two

inquiries are distinct:

While actual authority is the result of the

principal’s consent manifested to the agent,

apparent authority is the result of consent

manifested to the third party. The apparent

authority for which a principal can be held

41 We note that Avondale does not argue that Hvide

actually directed Avondale to deviate from the plans and

specifications. Rather, Avondale’s contention is that by

accepting the vessel when it was not mated in accordance with

the plans and specifications, Hvide implicitly modified the

plans and specifications.

42 Section 2 of the Supervision Agreement provides:

2. Independent Contractor. The Supervisor shall

perform all of the work specified in this Agreement as

an independent contractor, and, except as expressly

contained in this Agreement, nothing shall be deemed

to constitute the Supervisor and/or its employees or

consultants as the agents of the Owner for any purpose

whatsoever. Except as expressly provided herein, the

Supervisor shall have no authority to incur any

obligations, contractual or otherwise, in the name of

the Owner or for the account of the Owner.

66a

liable must be traceable to him; it cannot be

established by the unauthorized acts,

representations, or conduct of the agent.

Strip Clean Floor Refinishing v. N.Y. District Council

Brotherhood of Painters, 333 F.Supp. 385, 396

(E.D.N.Y.1971). Thus, Hvide’s acceptance of the

mating of the vessel would be binding on Occidental

only if Occidental represented to Avondale that

modifications of the plans and specifications by Hvide

would be binding on Occidental and would relieve

Avondale of its independent obligation to follow the

plans and specifications.

A third party in Avondale’s position may not

assume the existence of such authority. Rather, a party

who does business with an agent does so at his or her

own peril: "[T]Jhe principal will not be bound by the act

of his agent in excess of his actual authority where the

party doing business with the agent knows the extent of

the latter's authority, or where the facts and

circumstances are such as to put him on inquiry as to

the power and good faith of the agent." Id. (emphasis in

original); Legal Aid Soc’y of N.E.N.Y. v. Economic

Opportunity Comm’n of Nassau, 132 A.D.2d 113, 521

N.Y.S.2d 833 (1987) (party dealing with an agent must

make necessary effort to discover actual scope of agent’s

authority). The circumstances of this case indicate that

Avondale should have taken steps to confirm the scope

of Hvide’s authority. It was clear from the terms of

67a

the Construction Contract that any deviation from the

plans and specifications would expose Avondale to

liability. The contract provides that Avondale should

confer with the "Purchaser’--Occidental-- in the event

that it encountered any "discrepancy, error, omission or

lack of clarity in the Vessel Plans and Specifications”

and that any work performed by Avondale based on a

“discrepancy, error, omission or lack of clarity" about

which Avondale knew or should have known would be

at Avondale’s own risk unless Avondale had first

received clarification from Occidental. In light of these

factors, any reliance by Avondale on Hvide’s “apparent’

authority to bind Occidental by accepting work not in

conformity with the plans and specifications, with no

attempt to confirm that such deviations were

acceptable to Occidental, was manifestly unreasonable

and unjustified.*?

We conclude that the district court properly found

that Hvide’s acceptance of the vessel was not binding

on Occidental and therefore did not relieve Avondale of

liability for its own breach of contract.

43 Avondale’s argument is particularly weak in light of

the district court’s holding which indicates that the improper

mating of the vessel did not stem from any conscious

modification of the plans and specifications, but from

Avondale’s and Hvide’s negligence in failing to insure that the

plans and specifications were followed.

68a

D. Avondale’s Liability under the Construction

Contract

The district court found that the specifications for

the tug and the barge contained an express warranty

that the vessel would be seaworthy on delivery which

was incorporated into the Construction Contract*4 and

that this warranty was not disclaimed or subject to the

provisions limiting Occidental’s remedies or Avondale’s

liability. The district court then found that Avondale

breached both its express warranty that the vessel

would be constructed in accordance with the plans and

specifications and its warranty that the vessel would be

seaworthy upon delivery.

Avondale maintains first that the language in the

plans and specifications referring to seaworthiness does

not create an express warranty, and second, that if

there is a warranty of seaworthiness, it is subsumed in

the guarantee deficiency clause of the contract and is

therefore subject to the exclusive remedy of repair and

replacement.

44 Article III of the Construction Contract provides that

the plans and specifications "are hereby made a part of this

construction contract with the same force and effect as though

herein set out in full.”

69a

The parties agree that the Construction Contract

is governed by New York law. It is unclear whether,

under New York law, contracts for the construction of a

vessel are subject to the U.C.C. Compare In re

American Export Lines, 620 F.Supp. at 515 (contract for

the construction of a vessel is predominantly for

services and is therefore not governed by the U.C.C.)

with Silver v. Sloop Silver Cloud, 259 F.Supp. at 191

(applying U.C.C. to contract for construction of a

vessel). Because our conclusions would be the same

under either the New York U.C.C. or New York

common law, we do not decide this issue.

1. Warranty of Seaworthiness

[9] Under New York law, "a warranty is an

assurance by one party to a contract of the existence of

a fact upon which the other party may rely."4°

Pittsburgh Coke & Chemical Co. v. Bollo, 421 F.Supp.

908, 928 (E.D.N.Y.1976), affd, 560 F.2d 1089 (2d

Cir.1977). We agree with the district court that the

language in the specifications constituted an express

45 Section 2-313(1Xa) of the U.C.C. provides that "[aJny

affirmation of fact or promise made by the seller to the buyer

which relates to the goods and becomes part of the basis of the

bargain creates an express warranty that the goods shall

conform to the affirmation or promise." 1 U.L.A. 311 (1976 &

Supp.1988). We hold that the warranty of seaworthiness is an

express warranty under either New York common law or the

New York Uniform Commercial Code.

70a

warranty that the vessel would be seaworthy on

delivery*® and that the warranty is incorporated into

the Construction Contract by Article III(a) of the

contract. The language of the specifications indicates

that the object of the contract work is the building of a

seaworthy vessel.

2. The Guarantee Deficiency Clause

[10] We find, however, that the warranty of

seaworthiness is subsumed in the guarantee deficiency

46 The Tug Specifications provide that "[tJhe builder shall

be responsible for the construction, using good shipbuilding

practices, of a complete and fully documented seaworthy vessel

suitable and ready for the service intended in accordance with

the requirements of these specifications.”

Similarly, the Barge Specifications provide that "[t]he

intent and spirit of these specifications is that the contractor

shall deliver the vessel in a seaworthy and safe condition and

ready for service.”

In addition, both the Barge and Tug Specifications

state that:

Should there be any errors or omissions in these

specifications or in the Contract Guidance Plans (listed

herein) that would affect the construction of a complete

and seaworthy vessel in accordance with good

shipbuilding practice, the Contractor shall correct such

errors as part of the Contract Work with no increase in

the Contract Price.

Tla

clause.4” "Guarantee Deficiency" is broadly defined as:

[A]ny weakness, deficiency, failure, breaking down

or deterioration in workmanship or material

produced or furnished by the Contractor in

performing the Contract Work or any failure of any

equipment, machinery or material produced or

furnished by the Contractor or a vendor or

subcontractor of the Contractor to function as

prescribed by the Vessel Plans and Specifications.

Seaworthiness is a qualitative statement which

may mean something more than the failure of the

contractor to comply with the plans and specifications:

not every such failure would render the _ vessel

unseaworthy.4® Thus, a deficiency that causes the

vessel to be unseaworthy may be more serious than one

that does not.49 Nevertheless, the plain language of

48

49

Unless the district court’s interpretation of a contract

is based upon consideration of extrinsic evidence regarding,

for example, the intent of the parties, the construction of a

contract is a question of law and is not subject to the clearly

erroneous rule. Strachan Shipping Co. v. Dresser Indus., inc.,

701 F.2d 483, 486 (5th Cir. 1983).

A vessel may be “unseaworthy” when, among other

things, it is not constructed so that it is fit for its voyage. In

re Gulf & Midlands Barge Line, Inc. v. The Tug Ramrod, 509

F.2d 713, 721 (5th Cir.1975) (meaning of term in marine

insurance contract).

Of course, a vessel may be considered unseaworthy due

to any number of defects that are not sufficiently serious to

cause the vessel to sink.

72a

the guarantee deficiency clause sweeps broadly to

include deficiencies of varying degrees of severity.°°

Looking to the plain language of the contract, we

cannot conclude that “any ... deficiency" does not

include those deficiencies which render the vessel

unseaworthy.°!

50 The district court’s interpret-tion of the guarantee

deficiency clause as a one year warranty of workmanship and

materials, independent of the warranty that the vessel would

be seaworthy upon delivery, is not supported by the language

of the contract. While the guarantee period begins upon

delivery, the guarantee deficiency clause includes deficiencies

that “appear or [are] discovered" during the guarantee period.

This necessarily encompasses deficiencies which occurred

before delivery but were not discovered until after

delivery--including deficiencies that would have made the

vessel unseaworthy on delivery.

51 The guarantee deficiency clause is therefore similar to

a warranty that the goods will be of the quality and kind

described in the contract-- that is, the vessel will be seaworthy

upon delivery. A defect that is discovered after delivery would

indicate that the product, when delivered, was not of the

quality and kind described in the contract. Despite this

temporal consideration, however, the buyers remedies may

still be limited by a one-year warranty to repair or replace

defective parts or workmanship.

73a

The district court’s finding that the vessel had not

been mated in accordance with the specifications falls

precisely within the definition of guarantee deficiency:

Avondale’s failure to mate the vessel properly was a

"deficiency ... in workmanship ... in performing the

Contract Work."

The fact that the contract narrowly restricts the

remedies that are available for guarantee deficiencies

to “repair or replacement" does not render this clause

unconscionable, nor should it prompt a court to engage

in tortured interpretation of the contract:°2

Within the framework of this commercial

transaction the Court perceives no valid legal

reason why [the plaintiff] should not be held to the

clear and express terms of the written agreement

between the parties. Warranty and limitation of

liability clauses such as found in the present

contract, which restrict [the plaintiff's] remedies to

the repair and replacement of non-conforming

parts and limit [the defendant’s] liability,

regardless of its negligence in causing such

nonconformities, are valid and enforceable and

have been consistently upheld by the courts.

62 The district court based its conclusion that the

warranty of seaworthiness could not be subsumed in the

guarantee deficiency clause in part on the concern that such

an interpretation would compel the result that if a defective

$1 bolt rendered the vessel unseaworthy and caused the vessel

to sink, Avondale would have been obligated only to replace

the $1 part.

74a

American Elec. Power Co. v. Westinghouse Elec. Corp.,

418 F.Supp. 435, 453 (S.D.N.Y.1976) (quoting Potomac

Elec. Power Co. v. Westinghouse Elec. Corp., 385

F.Supp. 572, 575 (D.D.C.1974), rev’d and remanded on

other grounds, 527 F.2d 853 (D.C.Cir.1975)). The

warranty of seaworthiness is no different from other

express warranties of the quality or performance of

goods which have, in other cases, been subject to a

similar limitation of remedies.

a. Failure of the Exclusive Remedy

[11] Plaintiffs maintain, however, that even if the

warranty of seaworthiness is subsumed in _ the

guarantee deficiency clause, the exclusive remedy

provision is inoperative because circumstances have

caused the remedy to fail of its essential purpose within

the meaning of section 2-719(2) of the U.C.C. Section

2-719(2) provides that "[wJhere circumstances cause an

exclusive or limited remedy to fail of its essential

purpose, remedy may be had as provided in this Act."

1A U.L.A. 493 (1976 & Supp.1988) The official

comment provides further that “where an apparently

fair and reasonable clause because of circumstances

fails in its purpose or operates to deprive either party of

the substantial value of the bargain, it must give way

to the general remedy provisions of this Article."

U.C.C. § 2-719 comment 1, LA U.L.A. 494.

75a

Occidental argues that the purpose of the remedy

was to bring the vessel into conformity with the plans

and specifications. Because Avondale’s initial failure to

mate the vessel in accordance with the plans and

specifications caused the tug to sink, the repair and

replacement remedy was ineffective--the flaws in the

mating of the vessel could not be corrected.

As noted above, it is not clear whether the

Construction Contract is governed by the New York

Uniform Commercial Code. It is therefore unclear

whether section 2-719(2) of the U.C.C. is directly

applicable.©? However, even if we were to reason by

analogy to the U.C.C., we conclude that the express

terms of the contract, limiting Occidental’s recovery to

the cost of repairing or replacing guarantee deficiencies,

are effective.

53 This ambiguity is problematic because the official

comment to this section states that "[i]f the parties intend to

conclude a contract for sale within this Article they must

accept the legal consequence that there be at least a fair

quantum of remedy for breach of the obligations or duties

outlined in the contract." U.C.C. § 2-719 comment 1, 1A

U.L.A. 494. Thus, if the contract is not governed by the

U.C.C., it is not clear that the parties should be made, simply

by force of analogy, to “accept the legal consequences" of

making a contract subject to these particular code provisions.

On the other hand, the contract provisions at issue

here are identical to those addressed in section 2-719.

76a

Where a seller “has been guilty of willful and

dilatory behavior in not honoring" its promise to repair

or replace, there is no doubt that the remedy has failed

of its essential purpose. See, eg., Computerized

Radiological Services, Inc. v. Syntex Corp., 595 F.Supp.

1495 (E.D.N.Y.1984), affd in part, rev'd in part, 786

F.2d 72 (2d Cir.1986); American Electric, 418 F.Supp.

at 435-54. In such cases, the seller has not only failed

to deliver goods conforming to its warranties, it has

also breached its promise to repair, or attempt to

repair, the defects.

Courts are divided on the question whether the

seller’s inability to repair causes the remedy to fail of

its essential purpose. On one hand, several courts have

concluded that a seller’s inability to repair or replace

defective parts or workmanship constitutes a failure of

the remedy. Consolidated Data Terminals, Inc. v.

Applied Digital Data Systems, 708 F.2d 385, 392 (9th

Cir.1983); S.M. Wilson & Co. v. Smith Int'l, Inc., 587

F.2d 1363, 1375 (9th Cir.1978). On this view, the buyer

has bargained to receive a product of a particular

quality. If repairs cannot bring the product into

compliance with the warranty, the remedy has failed of

its essential purpose, the buyer has been deprived of

the substantial benefit of its bargain, and the buyer

must have recourse to alternative remedies.

77a

Other courts have found, however, that the seller’s

inability to repair or replace does not cause the remedy

to fail. Rather, a contract may anticipate the

possibility that repairs would not be sufficient to

correct all defects. Potomac Electric, 385 F.Supp. at

578-79; U.S. Fibres, Inc. v. Proctor & Schwartz, Inc.,

358 F.Supp. 449, 457, 465 (E.D.Mich.1972), affd, 509

F.2d 1043 (6th Cir.1975). On this view, the buyer has

bargained for the seller’s efforts to bring the product

into conformity with the warranties. The risk that such

efforts would not succeed has been allocated to the

buyer.

The instant case differs from both lines of cases in

that there was no opportunity to effect repairs because

the sinking of the tug made both actual or attempted

repairs by Avondale--or anyone else--impossible.

Assuming that these circumstances caused the remedy

to fail of its essential purpose to actually repair

guarantee deficiencies, our inquiry is not complete. The

Construction Contract further provides that "[t]he

Contractor shall not be liable to the Purchaser for any

damage to the Vessel or its equipment or cargo or other

property of such purchaser or for consequential

damages of the Purchaser arising out of any such

Guarantee Deficiency." Avondale argues that this

clause operates as an independent limitation of its

liability--effectively allowing Occidental to recover only

the cost of repairing guarantee deficiencies.

78a

b. Limitation of Liability

It is well established that under New York law the

failure of a remedy to achieve its essential purpose does

not render ineffective all other limitations of liability:

"A better reading is that the exclusive remedy clause

should be ignored; other clauses limiting remedies in

less drastic manners and on different theories would be

left to stand or fall independently of the stricken

clause." Computerized Radiological Services, 595

F.Supp. at 1510; American Electric, 418 F.Supp. at 457.

Whether a separate limitation of damages will

survive the failure of the exclusive remedy will

frequently depend on whether the damages excluded by

the challenged clause have resulted from the seller’s

willful or dilatory conduct in failing to comply with the

remedy provision. Indeed, most New York cases have

upheld a separate limitation of consequential damages

when those damages stem from the seller’s inability to

repair rather than from a refusal to repair. This case,

however, presents a third situation because "the [direct

and] consequential damages suffered precede[d] the

failure of the limited remedy and bear no relation to

it." Eddy, On the ” "Essential" Purpose of Limited

Remedies: The Metaphysics of UCC Section 2-719(2), 65

Calif.L.Rev. 28, 88-89 (1977). That is, the direct and

consequential damages suffered by Occidental are not

due to Avondale’s failure to repair the guarantee

deficiency. Rather, it is the extent of damage--the

sinking of the tug--that caused the remedy to fail.

79a

The facts of this case resemble those of Henningsen

v. Bloomfield Motors, 32 N.J. 358, 161 A.2d 69 (1960), a

pre-code case discussed in Eddy’s aarticle. In

Henningsen, a defective part caused the plaintiffs

automobile to swerve from the road injuring the

plaintiff and damaging the car. The contract limited

remedies to the repair or replacement of defective parts

and excluded consequential damages. Eddy concludes

that when the consequential damages do not flow from

the failure to repair, but precede any opportunity to

repair, the limitation of consequential damages should

not be invalidated as having failed of its essential

purpose--although the limitation might properly be

considered unconscionable. Jd. This case differs from

Henningsen, however, in two_ respects: First,

Henningsen wes a classic consumer case. Second, the

Construction Contract would allow recovery of the cost

of repair.

It is by no means clear that limiting Occidental to

recovery of the cost of repairs would be unconscionable

or deprive it of an adequate remedy. Whether

application of the clause would deprive Occidental of

the substantial value of its bargain depends manifestly

on what Occidental bargained for.

The cases discussed above, involving a seller's

inability to repair, are instructive on this point. From

these two lines of cases, it is clear that whether

“circumstances” have caused a remedy to fail depends

on whether the contract anticipated and allocated the

risk that the exclusive remedy would not cure all

80a

defects.°4 Under the first line of cases, the court has

concluded that the parties did not anticipate and

allocate the risk that repairs would-be

unsuccessful--thus, the remedy fails of its essential

purpose. Under the second line of cases, the court has

concluded that the parties did anticipate, and allocate

to the buyer, the risk that the repairs might not be

effective-- thus, the remedy does not fail of its essential

purpose.

The question presented here is not simply whether

the contract anticipates that efforts to repair may be

ineffective, but whether it anticipates that repairs may

be impossible.°°

54 This view is consistent with the purposes of section

2-719(2): "the subsection is not concerned with arrangements

which were oppressive at their inception, but rather with the

application of an arrangement to novel circumstances not

contemplated by the parties.” Eddy, supra, at 71 (quoting /

State of New York Law Review Commission, Study of the

Uniform Commercial Code 584 (1955)).

The question whether circumstances caused the

remedy to fail has been construed to mean whether

circumstances changed so as to cause the remedy to fail.

Computerized Radiological Services, 595 F.Supp. at 1510

(citing Wilson Trading Corp. v. David Ferguson Ltd., 23

N.Y.2d 398, 297 N.Y.S.2d 108, 244 N.E.2d 685 (1968)). Thus,

if no conduct by the seller is alleged to have caused the

circumstances to change, we must consider whether the

55

circumstances contemplated by the contract have in fact

changed so as to make the remedy ineffective, or whether the

circumstances alleged to have caused the remedy to fail were

anticipated by the contract.

8la

Although the circumstances which caused the

repair remedy to fail had catastrophic results, those

circumstances were not beyond the contemplation of the

parties. The guarantee deficiency clause clearly

recognizes the possibility that a deficiency could result

in damage to the vessel and its cargo. The risk of such

loss is allocated by the express terms of the contract to

Occidental. If the damage to the Oxy Producer had

been severe, but had not caused the tug to sink, the

remedy would not have failed of its essential purpose

and Avondale would be responsible, by the terms of the

contract, only for the cost of repairing the underlying

deficiency, not for any other damage caused by the

deficiency--no matter how severe.

The fact that damage to the vessel caused it to

sink, rendering the remedy of actual repair ineffective,

does not require that the allocation of the risk of

damage to the vessel be shifted to Avondale. The risk

that the vessel would sink is only the most serious of

the risks that the Construction Contract allocates by its

plain terms to Occidental. While this allocation of risks

may appear severe, it is not illogical.

One commentator has noted that "[a]ls one moves

into the realm of industry or commerce ... the goods sold

become more complex and more frequently custom

designed.... Where goods are not standardized or, in

the extreme alternative, where they are experimental ...

the reasonable expectations of the buyer become

attenuated [and] the degree of risk imposed by an

absolute construction of the repair duty becomes

extensive.” Eddy, supra, at 77, 80.

82a

When the goods which are the subject of the

contract are complex or innovative the contract may

allocate the risk of defects differently than when the

contract involves "standard" goods--such as

automobiles. Id. at 80. Thus, in American Electric, the

court emphasized that "the contract here in issue is not

of the type entered into by the average consumer, but a

commercial agreement painstakingly negotiated

between industrial giants.... The rule that the agreed

upon risk should not be disturbed is particularly

appropriate where, as here, the warranted item is a

highly complex, and in some ways experimental piece of

equipment.” 418 F.Supp. at 459.°6

56 Finding that there was a genuine issue of material fact

regarding the sellers efforts to comply with the exclusive

remedy, the court: did not decide whether the remedy had

failed of its essential purpose. The court relied on the factors

outlined above in holding that in the event that the remedy

did fail of its essential purpose, the clause limiting the seller's

liability to "the price of the equipment [or] part on which such

liability is based” was still effective. 418 F.Supp. at 459.

The court went on, however, to construe this provision

as allowing full recovery of the purchase price in the event

that the generator as a unit could not or had not been repaired

to comply with the contract specifications. This, they found,

would constitute an adequate remedy in the event that the

remedy of repair and replacement was found to have failed of

its essential purpose.

83a

In the instant case, Avondale argues that because

the design for the Oxy Producer was relatively novel, it

was willing to assume only the most limited liability for

possible defects. The contract reflects this allocation of

risks. Occidental agreed that in the event of a

guarantee deficiency, Avondale would be liable only for

the cost of repairing or replacing deficiencies. It agreed

that Avondale would not be liable for any damage to

the vessel, its cargo, or its equipment, arising from such

a deficiency. We will not disturb the agreed upon

allocation of risks simply because the worst of those

risks has materialized.

While this result may seem harsh, it is clear that

two sophisticated commercial actors such as Avondale

and Occidental could have allocated the risk of damage

stemming from a guarantee deficiency differently. We

note that the construction contract involved in Shipco

provided that Avondale would be liable for damage to

the vessel immediately caused by any guarantee

deficiency. 631 F.Supp. 1123, 1126 n. 3 (E.D.La.1986)

(quoting contract language) affd, 825 F.2d 925 (5th

Cir.1987), cert denied, --- U.S. ----, 108 S.Ct. 1472, 99

L.Ed.2d 701 (1988). Under the terms of that contract,

Avondale might have been liable for the loss of the

vessel. Occidental, however, did not secure a similar

promise with respect to the Oxy Producer.

84a

Occidental and Avondale are "commercial giants"

of equal bargaining power. Their lengthy negotiations

produced a detailed contract of nearly 100 pages in

length. We will not rewrite this contract to

substantially alter the allocation of risks to which the

parties have consented. See American Electric, 418

F.Supp. at 440 n. 2.

The district court should therefore determine the

extent of the damages that Occidental may recover

consistent with this holding.

E. Hvide’s Liability under the Supervision Contract

We held above that under the economic loss rule

adopted in East River the plaintiffs’ negligence claim

against Hvide is not cognizable in maritime tort. We

therefore do not need to reach the issue whether the

Supervision Contract limits Hvide’s liability in

negligence. The parties do not dispute that the

Supervision Contract limits Hvide’s liability for breach

of contract to $5 million.

F. Joint and Several Liability

Because the district court has not yet determined

the proportionate responsibility of Hvide and Avondale

for the losses suffered by Occidental, and because our

decision on appeal will affect the total amount of

damages that can be recovered against each defendant,

we decline to decide whether the imposition of joint and

several liability is appropriate here. That question may

85a

be addressed after the district court has conducted

proceedings to determine the extent and allocation of

the damages.

G. The Dismissal of Henry and Victoria

We affirmed above the district court’s finding that

the improper mating of the vessel was the sole cause of

the sinking of the Oxy Producer and that there were no

defects in the design or manufacture of the linkage

system as a whole, or in the link arms or bumper pads.

This holding, however, does not eliminate plaintiffs’

claims regarding the sister ships. Following the

sinking of the Oxy Producer, the Coast Guard revoked

the certificates of inspection for the Oxy Producer’s

sister ships--the Oxy Trader and the Oxy Grower. After

an inspection revealed damage in the linkage systems

of the sister ships, parts of the linkage system were

redesigned and replaced. Occidental sought to recover

the losses it sustained in repairing the sister ships.

Although the district court’s opinion states only

that "Henry and Victoria are not liable... for any

damage suffered by the Oxy Producer," and does not

address the sister ships explicitly, the court dismissed

Henry and Victoria from the entire lawsuit.

Occidental contends that the district court’s

dismissal of Henry and Victoria was improper--at least

with respect to the claims regarding the sister ships.

While we affirm the district court’s holding that Henry

and Victoria are not liable for any damage to the Oxy

86a

Producer, we do not think that the dismissal of Henry

and Victoria was proper without specific findings

regarding the sister ships. We therefore reverse the

dismissal and remand to the district court for

resolution of these claims consistent with our holdings

in this case.

ITI.

The decision of the district court is AFFIRMED in

part, REVERSED in part, and REMANDED for

determination of damages consistent with this decision,

and for resolution of the claims regarding the sister

ships.

87a

APPENDIX B

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF LOUISIANA

EMPLOYERS INSURANCE * CIVIL ACTION

OF WAUSAU, ET AL. °

* NO. 82-4034 and

consolidated cases

*

VERSUS

AVONDALE SHIPYARD, * SECTION "G"

INC., ET AL. .

MEMORANDUM OF OPINION

This is the story of the ill-fated OXY

PRODUCER which sank in the North Atlantic Ocean

on September 20, 1981 during a storm off the coast of

the Island of San Miguel in the Azores Archipelago.

I. THE PARTIES

The bareboat charterer!, time charterer, and

1 The vessel was constructed for Suwanee River SPA

Finance, Inc. ("Finance"), a subsidiary of Occidental

Petroleum Corporation. Upon delivery of the vessel,

Finance assigned its rights under the Construction

Contract to Hartford National Bank & Trust Company

("Hartford Bank") as title holder and trustee for General

Electric Corporation of Georgia, the financing interest and

beneficial owner. Hartford Bank, in turn, bareboat

chartered the vessel to Suwanee River SPA Lines, Inc.

("Lines"), which sub-bareboat chartered it to Seabulk

Transmarine II, Inc., which then time chartered the vessel

to Suwanee River Chartering, Inc. ("Chartering”).

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insurers” of the OXY PRODUCER? (collectively, “the

OXY plaintiffs")* brought these consolidated actions

against the naval architect which designed the vessel,

J.J. Henry Co., Inc. ("Henry"); the shipyard which

constructed the vessel, Avondale Shipyard, Inc., and its

guarantor, Ogden Corporation (collectively,

"Avondale"); the manufacturer of certain component

parts of the vessel, Victoria Machine Works, Inc.

2 The insurers are Employers Insurance of Wausau

representing certain American underwriters subscribing to

Certificates Numbered 14880 and 14882 and certain

underwriters at Lloyd’s subscribing to Certificates

Numbered 14880, 14882 and 14888. The insurers are

subrogated to the claims of Lines and Chartering in the

amount they paid in claims against the certificates

providing coverage on the OXY PRODUCER.

3 The OXY PRODUCER was an integrated tug-barge

composed of the tugboat OXY PRODUCER and the barge

OXY 4102.

4 Occidental Chemical Agricultural Products, Inc.

("Chemical"), the manufacturer and distributor of certain

products that the vessel was designed to transport, is also

named as a plaintiff in these consolidated actions. At the

April 9, 1986 pretrial conference for the trial on damages,

plaintiffs’ counsel abandoned any claim that Chemical had

for loss sustained from the disruption of its business caused

by the sinking of the vessel.

Suwanee River Lines, Inc. and Suwanee River Phosphate

Lines, Inc., the bareboat charterers of the OXY

PRODUCER’s sister ships, the OXY TRADER and the OXY

GROWER, are also named as plaintiffs in these

consolidated actions. Their claims are discussed in

connection with the damages phase of the trial.

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("Victoria"); and the supervisors of the design and

construction of the vessel, Seabulk Transmarine II,

Inc., Hvide Marine International, Inc. and Hvide

Shipping, Inc. (collectively, “"Hvide").

Hvide, in its capacity as the operator of the

vessel, also sued Henry, Avondale and Victoria

(collectively the OXY plaintiffs and Hvide are hereafter

"plaintiffs").

The OXY plaintiffs bring two claims against

each defendant. First, they claim each breached

certain contractual obligations that it undertook in

connection with the construction of the vessel. Second,

they claim that each negligently performed the

contractual obligation it undertook in connection with

the construction of the vessel. See Jig The Third Corp.

v. Puritan Mar. Ins. Under. Corp., 519 F.2d 171 (5th

Cir. 1975), cert. denied, 96 S. Ct. 1429 (1976). The OXY

plaintiffs argue that as a result of the defendants’

breaches and negligence the vessel was unseaworthy

when it was delivered and that its unseaworthiness

was the sole cause of its sinking.®

Hvide, in its standing as a plaintiff, joins the

OXY plaintiffs in certain of their tort claims against

Henry, Avondale and Victoria.

5 The OXY plaintiffs initially alleged numerous other causes

of action. Before and during trial, all except the breach of

contract and negligence claims were dismissed or

abandoned and no other evidence was offered at trial on

these cther claims.

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The defendants deny any liability. They

argue that operational and navigational negligence of

the vessel’s captain and crew caused the sinking of the

vessel. The defendants have each brought cross-claims

against each other.

Il. JURISDICTION

The Court has admiralty jurisdiction over the

plaintiffs’ tort claims because of their maritime

character. 28 U.S.C. § 1333.6 While contracts for the

construction of a vessel are not maritime contracts and

therefore claims for their breach are not cognizable in

admiralty, actions based on negligent construction and

design of a vessel will lie in admiralty if the negligence

constitutes a maritime tort. Walter v. Marine Office of

America, 537 F.2d (5th Cir. 1976); Smith v. Pan Am

Corp., 684 F.2d 1102 (5th Cir. 1982); Moser v. Texas

Trailer Corp., 623 F.2d 1006 (5th Cir. 1980).

The criteria for maritime tort jurisdiction has

its modern roots in the so-called "locality plus" test

enunciated by the United States Supreme Court in

Executive Jet Aviation, Inc. v. City of Cleveland, 93

S. Ct. 493 (1972). That is, the tort must occur on

navigable waters and must bear a_ substantial

relationship to traditional maritime activities. A

maritime tort "occurs", for purposes of the locality

requirement, where the alleged negligence has

6 28 U.S.C. § 1333 provides in part:

The district court shall have original jurisdiction,

exclusive of the courts of the States, of: (1) Any civil case

of admiralty or maritime jurisdiction . . .

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its effect rather than where the negligent acts or

omissions take place. Woessner v. Johns-Manville Sales

Corp., 757 F.2d 634 (5th Cir. 1985). Thus, the

negligent conduct complained of in this case satisfies

the locality requirement of maritime tort jurisdiction

since the negligence had its effect when the vessel

sustained its casualty in navigable waters in the North

Atlantic.

In order to determine whether the alleged

wrong bears a substantial relationship to traditional

maritime activities, it is necessary to consider: (1) the

functions and roles of the parties; (2) the types of

vehicles and _ instrumentalities involved; (3) the

causation and the type of injury; and (4) traditional

concepts of the role of admiralty law. Kelly v. Smith,

485 F.2d 520 (5th Cir. 1973), cert. denied sub nom.

Chicot Land Co. v. Kelly, 94 S. Ct. 1991 (1974). Here,

the injured plaintiffs were performing traditional

maritime activities -- commerce and trade -- at the time

of the sinking. The vehicle involved was a unique

ocean-going vessel "whose function was transportation

across navigable waters, a traditional role of

watercraft." Jd., at 526. The _ instrumentalities

involved were integral parts of the vessel’s design. The

cause of the injury was a condition created solely to

facilitate that design. The type of injury -- the sinking

of the OXY PRODUCER-- is perforce maritime in

nature. Finally, the traditional concepts of the role of

admiralty law are not offended, and in fact are

enhanced, by the exercise of jurisdiction in this case.

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Pendent jurisdiction is exercised, upon the

request of the parties, over the remaining claims in

these actions, including the plaintiffs’ contract claims.

Ill. THE VESSEL

The OXY PRODUCER and its barge the OXY

4102 (together referred to as "the OXY PRODUCER’ or

"the vessel") was a catamaran integrated tug-barge

("catug ITB"). A catug ITB is a tug and barge which

are integrated into a single vessel. The tug boat has

two catamaran hulls connected by a crossover deck

("tug crossover"). A ledge protrudes from the lower

portion of each of the hulls. The after end of the barge

("barge tongue") is tapered to fit into a wedge formed by

the hulls of the tug on each side, the tug crossover on

the top, and the ledges on the bottom ("the wedge’).

When properly constructed the tug and barge behave as

a single unit. A catug ITB is designed to make

transoceanic voyages in virtually any weather.

The essence of the catug ITB design is the fit

of the barge tongue along its top and bottom surfaces

into the wedge. To achieve the necessary fit, the top of

the barge tongue is designed with a strip of greenheart

wood ("greenheart")’ running along its length on each

side. Each ledge is also designed with a strip

7 Greenheart is "a hard and strong wood originating from

Guiana, highly resistent to the attacks of marine borers. It

is useful in shipbuilding for all purposes where great

strength and durability are required, as in rudder stocks."

de Kerchove, International Maritime Dictionary, (2d ed.

1961).

93a

of greenheart running along its upper surface. When

the tug and the barge are properly mated, the

greenheart on the top of the barge tongue fits along the

steel underside of the tug crossover and the greenheart

on the ledges fits along the steel underside of the barge

tongue. The friction along the areas of greenheart to

steel contact is designed to restrict relative movement

of the tug and the barge to less than one-tenth of one

inch.

The design of the OXY PRODUCER included

additional features auxillary to the wedge fit

integration of the tug and the barge.® First, there were

four bumper pads located between the inside surface of

the tug hulls and the sides of the barge tongue. These

pads were constructed of rubber strips, or billets,

sandwiched between a steel base plate welded to either

the tug or barge hull and a steel face plate. Two of

these pads were welded onto the after end of the barge

tongue, one on each side. The other two pads were

welded to the forward end of the tug hulls, one on each

of the hulls’ inside surfaces. The bumper pads were

designed to restrict relative lateral movement of the

tug and the barge. The pads were pre-loaded at 800

long tons of compression. The preload on the pads

enabled them to work together at sea to absorb any

excessive transverse load on the vessel from sea waves

by alternately compressing and decompressing.

8 These features are not general features of all catugs since,

as catug technology has advanced, the features auxillary to

the wedge fit have been improved.

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Second, there were two "suitcase" type

latching mechanisms ("link arms") connecting the deck

of the tug crossover to the deck of the barge, one on

each side of the center line. Each link arm consisted of

a long metal member with a pin fitted through its end.

The link arm was attached to support blocks ("pillow

blocks") which were welded onto the deck of the

cross-over. The pin lay in a cradle which was welded to

the deck of the barge. The link arms locked down by

means of hydraulic cylinders. When engaged, the link

arms were designed to exert 847,000 pounds of tension

pulling the barge and the tug together. The link arms

served three functions. They drew the tug and barge

together during mating, supplemented the wedge fit by

restricting aft movement of the tug relative to the barge

and assisted in disengaging the tug and the barge.

Third, there were two sets of metal plates

("thrust shims") welded on to the hull of the barge

forward of the barge tongue and facing the tug

crossover. The thrust shims were designed to fill the

gap between the barge and the tug crossover.

The catug ITB design was patented by John

Stevens in 1972. It was thereafter acquired by Hvide

and its owners. The first two catug ITBs, the

SEABULK MAGNACHEM and the SEABULK

CHALLENGER were built in the mid 1970s.?

9 These vessels had different auxillary features than the

OXY PRODUCER. For example, the Seabulk vessels had

hydraulic movable side wedges instead of the bumper pads

that were installed on the OXY PRODUCER.

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The OXY PRODUCER and its sister ships were only

the second generation of catugs constructed. The catug

design has continued to evolve and it is still very much

in use. 10

IV. CONSTRUCTION OF THE OXY PRODUCER

During the early 1970s, Occidental

Petroleum Corporation ("Occidental")!! embarked on a

business venture to manufacture superphosphoric acid

("SPA") for export to the Soviet Union. As part of the

venture, Occidental required special vessels to

transport the dense and corrosive SPA across the

Atlantic Ocean. Among various options, Occidental

chose to construct three identical catug ITBs. The OXY

PRODUCER was the second of these vessels.

Occidental formed a subsidiary, Suwanee

River SPA Finance, Inc. ("Finance"), for the sole

purpose of constructing the OXY PRODUCER. Finance

entered into, had assigned to it or was a third party

beneficiary of four major contracts in connection with

the construction of the vessel. Finance contracted with

Hvide to supervise the design and construction of the

vessel ("Supervision Agreement”). Hvide, in

10 The defendants offered exper. testimony from the captain

of the MOKU PAHU, a catug recently built with link arms

equipped with gauges to measure their tension and with

cradle assemblies which can be hydraulically adjusted at

sea from the bridge.

li Occidental Petroleum Corporation is the corporate parent of

all the corporations with Suwanee names, e.g., Suwanee

River SPA Lines, Inc.

96a

turn, contracted with Henry to prepare the contract

plans and specifications for the vessel ("Henry

Agreement"). Hvide assigned the Henry Agreement to

Finance. Finance then contracted with Avondale to

construct the vessel ("Construction Contract’).

Avondale entered into a subcontract ("Purchase Order")

with Victoria to design and manufacture the bumper

pads ("Purchase Order"). Finance was a third party

beneficiary of the Purchase Order because Finance was

named in it as the purchaser of the vessel for which the

pads were being ordered. New Orleans Public Service,

Inc. v. United Gas Pipe Line Co., 732 F.2d 452 (5th Cir.

1984), cert. denied sub nom. Morial v. United Gas Pipe

Line Co., 105 S. Ct. 434. Finance ultimately assigned

its rights under the Supervision Agreement, the Henry

Agreement and the Construction Contract to the OXY

plaintiffs. The parties agree that each of these three

contracts is governed by New York law and that the

Purchase Order is governed by Louisiana law.!”

1. HENRY AGREEMENT

Henry contracted to prepare the plans and

specifications for construction of the vessel.4* Henry

also contracted to "review and approve all Contractor

working plans and drawings and vendor plans and

12 Supervision Agreement, section 24. Henry Agreement,

general conditions 914. Construction Contract, article

XXXII. Purchase Order, page 1.

13 Henry Agreement, { 2(a).

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drawings submitted in accordance with the approved

plan schedule for conformance with the Contract Plans

and Specifications. !4

Henry warranted that the "Catug Design"

had been fully incorporated into the plans and

specifications.15 Henry further warranted that each

vessel, if constructed in accordance with the plans and

specifications and the approved working plans, would

be seaworthy.46 Henry also warranted that it would

perform its services in conformance with the highest

professional standards and approved practices of the

professions of naval architecture and marine

engineering. !”

The OXY plaintiffs’ primary claim against

Henry is that Henry breached its warranty that the

plans and specifications and the approved working

plans called out a seaworthy vessel. In particular, they

claim that the bumper pads and link arms, as designed

in the plans and specifications and working plans, were

insufficient to restrict relative movement between the

tug and the barge. The plaintiffs also claim

14 Henry Agreement, { 3.

16 Henry Agreement, 4 2(a).

16 Henry Agreement, { 2(b), provides "Henry warrants that

each vessel, if constructed by the Contractor in accordance

with the approved working plans, to the extent approved by

Henry... will perform in accordance with the Contract

Plans and Specifications and that the tug will properly

interfit and interlock with the barge.”

17 Henry Agreement, { 1.

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that Henry was negligent in its performance of its

contract. In particular, the plaintiffs claim that Henry

failed to consult the Catug Patent, that Henry failed to

conduct model tests and that Henry failed to follow up

on the defects it noted during its plan review to insure

that those defects were corrected.

2. AVONDALE CONSTRUCTION CONTRACT

Avondale contracted to construct the vessel

in accordance with the plans and specifications

prepared by Henry, including the furnishing of all

plant, facilities, working plans, labor, materials,

supplies and equipment necessary to complete the

work.18 Avondale also contracted to conduct trials and

tests "sufficient to assure that the Vessel complies with

the requirements of this Construction Contract and the

Vessel Plans and Specifications."19 In addition,

Avondale contracted to repair or replace, at its own

expense, any deficiency of its workmanship, material,

equipment or machinery which arose within one year of

the date of the vessel’s delivery.2°

Avondale warranted that the vessel would be

constructed in accordance with the plans and

specifications and that the vessel would be seaworthy

upon delivery. The Tug Specifications, paragraph Gl,

provide that "the Builder shall be responsible for the

18 Construction Contract, article II(a).

19 Construction Contract, article XVI(a).

20 Construction Contract, article XVIII(a).

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construction, using good shipbuilding practices, of a

complete and fully documented seaworthy vessel

suitable and ready for the service intended, in

accordance with the requirements of these

specifications." The Barge Specifications section1(A)

likewise provide "the intent and spirit of these

specifications is that the Contractor shall deliver the

vessel in a seaworthy and safe condition and ready for

service. The Tug Specifications and the Barge

Specifications are incorporated into the Construction

Contract and are its essence.*!

21 Construction Contract, article III(a).

Avondale argues that this warranty in the plans and

specifications is not incorporated into the Construction

Contract because it conflicts with article XVIII(g) and

article XXXVI of the Construction Contract and because

article [II(b) provides that the provisions of the

Construction Contract prevail over conflicting provisions of

the plans and specifications.

I reject Avondale’s argument. Article XVIII(g) provides:

“The warranties and guarantees set forth in article VIII,

relating to speed, fuel consumption, SPA carrying

capacity and deadweight tonnage, in this article XVIII,

relating to any auarantee deficiency and in article

XXXVIII, relating to design responsibility for the barge,

are exclusive and are in lieu of all implied warranties

(including but not limited to any implied warranties of

merchantability, fitness for a particular purpose and

workmanlike services).”

100a

The OXY plaintiffs claim that Avondale

breached its contract and its warranty. In particular,

they claim that upon delivery the OXY PRODUCER’s

tug and barge were not properly mated in accordance

with the plans and specifications (i.e, there was

insufficient contact between the tug and the barge

along the greenheart surfaces),22 that the bumper pads

and link arms were defective and that consequently the

vessel was unseaworthy. The plaintiffs also claim

22

At most this provision disclaims all implied warranties. It,

however, does not disclaim express warranties like the

warranty that the vessel be seaworthy upon delivery. To

read article XVIII(g) broadly to disclaim all warranties and

remedies other than those stated would be particularly

inappropriate given that article XVIII limits itself to

providing for Avondale’s one year guarantee and does not

mention Avondale’s express warranty to deliver a

seaworthy vessel.

Article XXXVI provides,

"notwithstanding any other provision of this

Construction Contract, the rights and remedies as

expressed herein shall be exclusive and in lieu of any

other remedies available to Purchaser and to Contractor,

whether in contract, tort or otherwise.”

This provision simply limits the parties’ rights to those in

the contract. The warranty that the vessel will be

seaworthy upon delivery is part of the contract. Article

XXXVI, therefore, does not conflict with the warranty.

This claim was initially presented by Henry and adopted by

the OXY plaintiffs at trial.

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that Avondale negligently performed its contract in

constructing and delivering the vessel in the above

condition.

3. VICTORIA PURCHASE ORDER

Victoria contracted with Avondale to design

and manufacture the bumper pads for the vessel in

accordance with the terms of the Purchase Order.

Victoria warranted that the pads would be suitable for

the service intended.?° .

The OXY plaintiffs claim they were third

party beneficiaries of the Purchase Order. They claim

that Victoria breached its contract and its warranty in

that the pads were, in several respects, insufficient to

restrict relative movement between the tug and the

barge. In particular, the OXY plaintiffs claim that the

billets in the pads were not vulcanized as required by

the Purchase Order. The plaintiffs also claim that

Victoria was negligent in designing and manufacturing

the pads.

4. HVIDE SUPERVISION AGREEMENT

Hvide contracted to supervise both the

design and construction of the vessel. Hvide contracted

to "review and... cause Henry to review and approve

all Contractor working plans and drawings and vendor

plans and drawings according to the Construction

23 Purchase Order, Appendix I, paragraph (I), provides that

“the Vendor shall be _ responsible for equipment

compatability and performance for the service intended or

implied. The equipment shall be complete and ready for

operation.”

102a

Contract and the Plans and Specifications."*4 Hvide

also contracted to "provide qualified on site supervisory

staff which [would] perform construction inspection .. .

to assure that the Vessel [was] constructed in

accordance with the Construction Contract and the

Plans and Specifications... at the Shipyard and at the

facilities of such subcontractor."25

Hvide warranted that the Catug Design was

seaworthy and had been fully incorporated into the

plans and specifications prepared by Henry. Hvide also

warranted that the plans and specifications called out a

seaworthy vessel and that the vessel would be

constructed in accordance with the plans and

specifications.”°

The OXY plaintiffs claim that Hvide

breached its contract and warranty and was grossly

negligent in doing so. The OXY plaintiffs claim that

Hvide completely failed to supervise Henry, Avondale

and Victoria and allowed those parties to negligently

breach their contracts.

V. THE MATING OF THE VESSEL

Once the tug and the barge had been

completed, it was necessary to "mate" them in the

shipyard. During April, 1981, the tug and the barge

were mated together two or three times in order to

achieve a sufficient fit. Between April 28th and

re Supervision Agreement, section 9.

25 Supervision Agreement, section 10.

26 Supervision Agreement, section 4(c) and section 10.

103a

May 4th, the vessel was tested during sea trials.

Following the sea trials, the vessel was disengaged as

part of a Coast Guard inspection. On May 27th, the

vessel was remated for the final time. The OXY

PRODUCER was delivered on June 9, 1981.

The Barge Specifications, section VIII,

subsection 6, require:

The Barge Contractor will adjust the fit

of the tug and the barge by first mating

the two units and taking measurements

from inside the tug crossover structure

between the tug and barge greenheart

surfaces with the tug in negative

buoyancy through 1/2 inch pipe plug

holes. Measurements are to be recorded,

tug and barge are then to be

disconnected and the top greenheart

planed to obtain a 85-90% contact.

When specified contact is obtained on

the top greenheart, the bottom contact is

to be measured through drilled holes in

the aft rake ballast tank on the wedge

box. Readings are to be recorded, tug

and barge are then to be disconnected,

and barge to be partially deballasted so

that any shims, as required, can be

welded to the bottom of the barge

mating surface with the tug to obtain a

80-85% contact.

104a

The proper mating of the vessel required the specified

percentage of contact between the tug and the barge

along the greenheart surfaces as measured through

special holes ("measuring holes"). This method was

developed by Hvide during its experience with the

Seabulk vessels, the previous generation of catug ITBs.

Henry incorporated the method and the greenheart

contact requirement into the plans and specifications of

the OXY PRODUCER.

It is uncontroverted that the measurements

of the contact between the tug and the barge along the

greenheart surfaces after the final mating taken by

Robert Bibbo, an employee of Avondale, recorded

contact at only two out of ten measuring holes along the

barge greenheart and no contact at any of the eight

measuring holes along the tug greenheart.27

Furthermore, at the holes where there was no contact,

Bibbo measured varying gaps between the tug and the

barge of up to one inch.

Avondale and Hvide, nevertheless, argue

that the vessel was properly mated upon delivery.

They offered the testimony of Professor Rene Teesta, an

expert in structural design and in the determination of

forces causing failures in structures; Jan Van Rynbach,

an expert in naval architecture and marine

engineering; Brian Sowery, Vice-President of

Engineering for Hvide; and Ed Bellyk, the Hvide

27 Bibbo’s measurements indicate only slightly more than ten

percent greenheart contact at the measuring holes.

105a

supervisor who was responsible for supervising the

mating of the vessel. These witnesses testified that the

measuring holes did not accurately reflect the

percentage of greenheart contact because the holes

were located between the frames of the vessel.

Although there was no physical evidence to support

such a claim, they argued that contact existed at the

frames because that was where the weight of the vessel

was supported. They testified that in their opinion the

vessel’s strong performance during sea trials was a

more reliable indication that there was sufficient

greenheart contact.

I find Avondale and Hvide’s argument

unpersuasive for several reasons. First, Carlton Ledet,

a professional engineer and the Avondale employee

responsible for mating the vessel, testified that he was

not even trying to obtain a high percentage of

greenheart contact. He was aware that the percentage

of greenheart contact at any point, including the

frames, was easily determinable by using "bluing” or

some similar substance. He admitted that he failed to

do so because greenheart contact was not important to

him. He explained that he was simply trying to obtain

two matching parallel greenheart and steel surfaces

that would "wear in" well together at sea. Yet even

Ledet admitted that had he known about Bibbo’s

measurements, he would have found the final mating

unacceptable.

106a

Second, the frames were about two feet apart

so that even if there had been contact at every frame

there still would have been much less than 80%

greenheart contact. Furthermore, the steel surface

between the frames was one inch thick so that it is

unlikely that the surface buckled enough to register a

one inch gap in between frames and yet was in contact

at a frame only one foot away.

Third, Avondale and Hvide’s witnesses dil

not appear to realize that the vessel was disengagec

and remated after the sea trials and that Bibbo’s

measurements were taken of the final mating before

delivery. The vessel’s performance during sea trials

therefore did not reflect the fit of the final mating but

rather reflected the fit of a previous mating.

Furthermore, Roderick Hulla, an expert in naval

architecture, and Robert Giblon, an expert in naval

architecture and marine engineering, testified that the

catug ITB can remain rigidly mated with only a few

points of contact at "high spots” of the greenheart until

it either "wears down" or gets knocked off those high

spots. A good performance at sea trials therefore is not

necessarily inconsistent with a poor fit. ~

Accordingly, I find that the OXY

PRODUCER was. delivered with virtually no

greenheart contact and large gaps between the tug and

the barge along its greenheart surfaces. The vessel was

therefore not constructed in accordance with the plans

and specifications.

107a

Avondale argues that the OXY plaintiffs are

barred from recovery for any deficiency in the mating of

the vessel because Hvide was its agent and Hvide

authorized the mating procedure and accepted delivery

with full knowledge of Bibbo’s measurements. I reject

Avondale’s argument because the Supervision

Agreement, section 2, clearly provides that Hvide was

an independent contractor with no authority to

unilaterally modify the requirements of the plans and

specifications.2®

Accordingly, I find that Avondale breached

the Construction Contract by failing to construct the

vessel in accordance with the plans and specifications.

I also find that Hvide breached the Supervision

Agreement by not properly supervising Avondale and

by failing to assure that the vessel was constructed in

accordance with the plans and specifications.

28 Supervision Agreement, section 2 provides:

2. Independent Contractor. The Supervisor shall

perform all of the work specified in this Agreement as an

independent contractor, and, except as expressly

contained in this Agreement, nothing shall be deemed to

constitute the Supervisor and/or its employees or

consultants as the agents of the Owner for any purpose

whatsoever. Except as expressly provided herein, the

Supervisor shall have no authority to incur any

obligations, contractual or otherwise, in the name of the

Owner or for the account of the Owner.

108a

Furthermore, I find that Avondale was

negligent in mating the vessel with so little contact.

Ledet testified had he known about’ Bibbo’s

measurements he would have found the final mating

unacceptable. Avondale, however, failed to provide any

explanation for why Ledet, its engineer in charge of the

mating, did not know about Bibbo’s measurements

which were taken pursuant to an explicit requirement

of the Construction Contract. The OXY plaintiffs’ tort

claims, however, are barred by Article XXXVIII of the

Construction Contract which provides:

Notwithstanding any other provision of

this Construction Contract, the rights

and remedies as expressed herein shall

be exclusive and in lieu of any other

remedies available to Purchaser and to

Contractor, whether in contract, tort or

otherwise.

Accordingly, I find that Avondale is not liable to the

OXY plaintiffs for its negligence in connection with its

performance of the Construction Contract.

Finally, I find that Hvide was negligent in

supervising the mating of the vessel. Bellyk, the Hvide

supervisor responsible for the mating, testified that he

was not even at the final mating of the vessel. In fact,

Bellyk admitted that he could not remember being at

any of the matings of the vessel. Bellyk explained that

while he had worked very closely with Ledet in mating

the first of the OXY vessels, the OXY TRADER, he

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relied almost entirely on Ledet to properly mate the

second vessel, the OXY PRODUCER. Ledet, however,

testified that he had no prior experience with catug

ITBs before his work on the OXY TRADER. The OXY

plaintiffs contracted with Hvide to supervise Avondale

precisely because Avondale had no expertise in catug

ITBs while Hvide had "unique expertise" .”9

VI. INITIAL CASUALTY ON SEPTEMBER 12, 1981

1. THE CASUALTY

The OXY PRODUCER embarked on its

maiden voyage on June 23, 1981. It was operated and

managed by Hvide pursuant to a contract by which

Hvide was responsible for hiring and training the

captain and crew and for maintaining the vessel in good

repair.°° That voyage was uneventful. The weather

was moderate and the vessel encountered no difficulty.

Richard Graham was the captain for the first leg of the

voyage to the Soviet Union. He was relieved by

Captain Peter Kanellos who made the return voyage.

The vessel returned to the United States in

August of 1981. At Jacksonville, Florida the vessel

changed crews except for the Captain and then

proceeded to Taft, Louisiana to load cargo. It returned

to Florida and embarked from Jacksonville on its

second and last voyage on September 5, 1981. At that

time there were two storm systems in the North

Atlantic.

29 Supervision Agreement, page 3.

30 Seabulk Transmarine II, Inc., the sub-bareboat charterer, a

Hvide party, entered into a Management Agreement with

Hvide Shipping, Inc. See also footnote 1.

110a

The OXY PRODUCER encountered its first

difficulties on the night of Septemberllth. The

weather conditions that night and into the next

morning were more severe than the vessel had

previously experienced. The seas were confused due to

the confluence of the effects of Hurricane Emily and the

tropical storm that had been Hurricane Floyd. The

significant wave height reached approximately 14 feet

and the wind topped force 9 on the Beaufort s

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