Petition for Writ of Certiorari — SGS Control Services, Inc. v. International Ore & Fertilizer Corp.

No.2 4168 6 APR 1 4 1995

QEFICE OF THE CLERK

IN THE

Supreme Court of the Anited States

OCTOBER TERM, 1994

SGS CO?.TROL SERVICES, INC.,

Petitioner,

—V.—

INTERNATIONAL ORE & FERTILIZER CORP.,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF AFPEALS FOR THE SECOND CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

CHARLES B. UPDIKE

Attorney of Record for Petitioner

SCHOEMAN, MARSH & UPDIKE

60 East 42nd Street

New York, New York 10165

(212) 661-5030

i

QUESTIONS PRESENTED FOR REVIEW

1. Whether the court of appeals abuses its discretion when,

after rejecting the claim upon which the trial court’s money

judgment for plaintiff was based, it nevertheless affirms the

judgment by substituting a different claim that had been dis-

missed by the trial judge and that plaintiff had waived on the

appeal.

2. Whether maritime law incorporates the non-maritime

law principle that where parties contract informally, an

extreme disproportion between contract price and claimed

damages indicates that the damages were not within the con-

templation of the contracting parties.

ii

LISTING OF PARTIES, PARENT

COMPANIES AND SUBSIDIARIES

All parties to the proceeding in the court whose judgment

is sought to be reviewed are named in the caption.

The parent corporation of SGS Control Services Inc. is SGS

North America Inc., whose parent corporation is SGS-Soci-

ete Generale de Surveillance Holding, S.A., whose shares are

publicly traded on the Swiss Bourse. SGS Control Services

Inc. has two subsidiaries, Independent Cargo Services Inc.

and Qualitest, S.A., neither of which is publicly traded.

ee er eae Ree

ill

TABLE OF CONTENTS

PAGE

QUESTIONS PRESENTED FOR REVIEW ........... i

LISTING OF PARTIES, PARENT COMPANIES AND

Ee oriaet ii

pe Be ae es iii

TABLE OF AUTHORITIES ........................... iv

PRELIMINARY STATEMENT ........................ l

The Facts of the Dispute .......................... 2

Proceedings in the District Court................. 3

Proceedings in the Court of Appeals ............. 5

REASONS WHY CERTIORARI SHOULD BE

ESET 9

Question 1: Abuse of Discretion of the Court of

Appeals By Deciding Claims That

Mave Been Waived ....................... 9

Question 2: Disproportionality of Price to Damages

Under Maritime Law..................... 13

as iod ub innva cscs ssdccececuscccs. 15

iV

TABLE OF AUTHORITIES

Cases

Air et Chaleur, S.A. v. Janeway, 757 F.2d 489

CRO GIG. RG khnhe vanki nkcnscgqankadawedabaritks

Anderson v. Branen, 27 F.3d 29 (2d Cir. 1994)........

Arcadia, Ohio v. Ohio Power Co., 111 S. Ct. 415

PE 0snn4cdseddedavaaeeieateduansruneceeesicacs

Boddie v. Connecticut, 401 U.S. 371 (1971)...........

Evra Corp. v. Swiss Bank Corp., 673 F.2d 951 (7th Cir.),

cert. denied, 459 U.S. 1017 (1982) ...............

Glatt v. Bank of Kirkwood Plaza, 383 N.W.2d 473

PR es SE 6 ddc anid bas bdeedsdeenisnbess cheea

Goodstein Construction Corp. v. City of New York,

SOS TE. Fare SEP CFs Be ROMO) ocd e sk v esas desceces

Jackson v. Culinary School of Washington, 27 F.3d

DES Celis Sets TOE bh edsn bases denissecemaniens

Lebron v. National Railroad Passenger Corp., 115 S. Ct.

POE CEOS? scsdiveccadenbsdcvncandendeesstesssyiiis

Mellon Bank v. United Bank Corporation of New York,

SE PSG TES CRG G, BRO) sive sen icccsccisvcciacves

Perini Corp. v. Greate Bay Hotel & Casino, Inc.,

GE D.De De eas ME oa wank cnc de tcsneevesaieees

Rollins Environmental Services v. U.S. EPA, 937 F.2d

CO EE, Se Bee dk ona hobs Rhes nabs tevecnnets

Sovereign Chemical & Petroleum Products, Inc. v.

Ameropan Oil Corp., 148 F.R.D. 208 (N.D. Ill.

SOIREE 3 6s cdecahaehekanpandaensndt)\kielereneendeis

PAGE

11

10

1]

10

13

13

11

11

13

10

13

PAGE

Sundance Cruises Corp. v. American Bureau of

Shipping, 7 F.3d 1077 (2d Cir. 1993), cert.

denied, 1148S. Ct. 1399 (1994) .......00.0........ 7

Sweet Home Chapter v. Babbitt, 30 F.3d 190

Set Ay En i boise cde ude Geb cb b2 hdd ede Vhadhcdns 9

United States National Bank of Oregon v. Independent

Insurance Agents of America, 113 S. Ct. 2173

Be RRR NCE nero: . Seen nae HON aE ean 9

United States v. Bell, 936 F.2d 337 (7th Cir. 1991).... 10

United States v. Olano, 113 S. Ct. 1770 (1993) ....... 10

United States v. Quiroz, 22 F.3d 489 (2d Cir. 1994)... 10

United States v. Restrepo, 986 F.2d 1462 (2d Cir.

i OTE, ONES LEP LET SE RTE TN DIE SACS 10

United States v. Williams, 112 S. Ct. 1735 (1992)..... 11

Vito! Trading, S.A. v. SGS Control Services, 874

We FP Ge GD bars Se ancouk oid eassnsescas 7

Williams-Guice v. Board of Education of Chicago,

MP Trae WE CO Ge, BGG ooo ven vcinncensccccacc 9

Winston v. Children & Youth Services of Delaware

Cty., 948 F.2d 1380 (3d Cir. 1991)................ 10

Statutes and Rules

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NE io nds cca wctws deg ads aihavhdedcecca, |

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PAGE

SE MR din'n-o haadnderwebuless seed onandnekacssens 1]

BD Mi vont. &0dnecekdeddoutaawedenéssaaieieen 11

SD CD ani nthisdsavcecadacennk &ieksdkdauonaunas 10

Other

M.N. Kniffen, “A Newly Identified Contract

Unconscionability: Unconscionability of Remedy,”

63 Notre Dame L. Rev. 247 (1988) ............. ' 13

Notes of Advisory Committee on Appellate Rules,

BOD eb CRED cadds ch davechtsicsausenesesaewenenesi 11

Restatement of Contracts (Second), § 351(3),

I oc bh eb seebiek eaobhbctaedwabenwe 13

PRELIMINARY STATEMENT

The opinion of the United States Court of Appeals for the

Second Circuit, together with the dissenting opinion, is

reported at 38 F.3d 1279 and is reproduced at App. A-1. The

opinions of the United States District Court for the Southern

District of New York are reported at 743 F. Supp. 250 and 828

F. Supp. 1098 and are reproduced at App. A-50 and A-99,

respectively. The unreported opinion of the district court

denying a motion for a new trial is reproduced at App. A-132.

The judgment of the court of appeals sought to be reviewed

was entered on October 24, 1994. The order of the court of

appeals denying the petition for rehearing was entered on Jan-

uary 20, 1995, and is reproduced at App. A-18. The transcript

of oral argument in the Court of Appeals on April 24, 1994 is

reproduced at App. A-185.

Jurisdiction to review the judgment of the court of appeals

by writ of certiorari is conferred on this Court by 28 U.S.C.

§ 1254.

This case involves a question of federal appellate procedure

and a question of maritime law, but does not involve a con-

Stitutional provision, treaty, statute, ordinance or regulation.

STATEMENT OF THE CASE

This case is within the admiralty and maritime jurisdiction

of the district court pursuant to 28 U.S.C. § 1333. This case

arose out of a contract between defendant SGS Control Ser-

vices Inc. (“SGS”) and plaintiff International Ore & Fertilizer

Corp. (“Interore”) for the inspection by SGS of the holds of

a vessel in navigable waters in the Port of Tampa, Florida.

The inspection was performed by SGS for a contractual fee

of $150. Claiming that the inspection was improperly per-

formed, plaintiff Interore sought to recover damages of

$2,400,000. Without deciding whether the contract had been

breached, the district court dismissed Interore’s contract claim

because the claimed damages were not contemplated by the

parties. However, the district court held that SGS had negli-

gently reported the results of the inspection and held it liable

in tort for $479,687.12.

On the appeal, Interore waived the contract claim and the

parties contested only the tort claim. In its decision, the court

of appeals rejected the tort claim. However, the court of

appeals did not reverse. Instead, with one judge dissenting, it

reinstated the waived contract claim, found that the contract

had been breached (despite the trial court’s failure to rule on

the issue of breach), and affirmed the judgment.

The Facts of the Dispute

Interore, a subsidiary of Occidental Petroleum Corp., sells

phosphate fertilizer products in the international market. SGS

is a surveyor of marine cargoes and vessels.

In June 1991, Interore hired SGS to sample and test a bulk

cargo of phosphate and, in conjunction therewith, to inspect

and report on the condition of three holds of the M/V

ADELINA, prior to loading.

SGS had previously performed this type of service many

times for Interore and therefore the hiring was very informal.

The contract was merely a one-page telex from Interore to

SGS. The telex requested that SGS inspect holds 2, 3, and 5

prior to loading, and stated in relevant part:

Pls act our behalf performing inspection, sampling and

analysis. Pls issue flwg docs: 1) Cert of hold inspection,

confirming vsls holds were clean, dry and suitable.

Although not set forth in the telex, the price of the hold

inspection and report, in accordance with past practice, was

$50 per hold or $150 for all three.

To perform the hold inspection, SGS hired a subcontractor,

Captain Luard, who had previously performed numerous hold

inspections in Tampa. Captain Luard boarded the ship on July

2, 1985 and inspected holds 2, 3 and 5, and hatch covers.

Luard then completed a Certificate of Readiness, which

stated, in relevant part: “Said cargo compartments and

HATCH COVERS have been surveyed and found suitable to

load a cargo of PHOSPHATE this time and date.”

After Luard completed the Certificate of Readiness, the

vessel loaded the cargo and left Tampa, bound for New

Zealand.

Seven months prior to the Tampa inspection, the ADELINA

had carried a cargo of barley. However, since that time, the

holds had been freshly painted, and Luard had not seen grains

of barley that apparently were still lodged in overhead support

beams. During the voyage to New Zealand, some of the grains

were shaken loose and fell on top of the cargo.

When the holds were opened, a New Zealand government

inspector noted what he considered to be barley contamina-

tion. Interore’s New Zealand buyer, East Coast Fertilizer Co..,

Ltd., then refused to unload the cargo and refused to pay

Interore the $2,691,803.96 purchase price. To effect salvage,

Interore transported the cargo to Antwerp, where it was sold.

Proceedings in the District Court

Interore sued SGS to recover its alleged loss of $2,400,000,

by filing a four-claim complaint in the United States District

Court for the Southern District of New York on September 2,

1987. Interore’s first three claims alleged breach of warranty

under the inspection contract, negligent performance of the

contract, and breach of contract. Interore’s fourth claim was

for tortious misrepresentation as to the condition of the holds

and hatches.

After a non-jury trial on liability issues, District Judge

Charles H. Tenney rendered an opinion dated August 28, 1990

and reported at 743 F. Supp. 250. Judge Tenney held that

Interore could not recover compensatory damages on the con-

tract. Although he found that the parties contemplated that

SGS would use workmanlike efforts, Judge Tenney declined

to reach the issues of what such efforts would entail or

whether there was a breach. 743 F. Supp. at 257. Instead he

found that the disproportion between the $2,400,000 of dam-

ages sought and the $150 contract price, coupled with the

informal dealings between the parties, indicated that the par-

ties had not attempted to allocate all of the risks. Jd. at 257-

258. Therefore, he ruled, the Court was justified in allocating

the risks fairly. Jd. He concluded that “[a]ccordingly,”

Interore should not recover compensatory damages on the

contract. Jd. at 258.

Judge Tenney also ruled that Interore’s negligence claim

could not be asserted because the alleged negligence was not

an independent tort separate from the contract. /d.

However, Judge Tenney found SGS liable on the fourth

claim, for negligent misrepresentation. He ruled that the Cer-

tificate of Readiness contained a negligent misrepresentation

in that the inspector negligently failed to report to the vessel’s

representative that there were areas in the holds that he had

been unable to inspect. Jd. at 259.

Judge Tenney also found that Interore had failed to alert

SGS to the extremely strict standards in New Zealand regard-

ing importation of vegetable matter. Jd. at 260. Ruling that

Interore and SGS were equally responsible for the loss, Judge

Tenney held SGS liable for 50% of the damages resulting

from contamination of the Tampa cargo. Id.

The issues relating to damages were then tried without a

jury before Chief Magistrate Judge Nina Gershon. Her report,

rendered on March 31, 1993, and reproduced at 828 F.Supp.

1098, 1105, found the total damages suffered from contami-

a ate EE ee

5

nation of the Tampa cargo to be $959,375.44, consisting pri-

marily of the transshipment cost from New Zealand to

Antwerp and other salvage expenses. She recommended that

Interore receive a damage award of $479,687.72, plus pre-

judgment interest.

Judge Tenney then adopted and accepted the Chief Magis-

trate Judge’s report and recommendations, in an opinion dated

August 10, 1993, reported at 828 F. Supp. 1098.

An amended judgment in favor of Interore and against SGS,

in the amount of $713,666.27, inclusive of prejudgment inter-

est, was entered on September 15, 1993.

SGS filed a notice of appeal from the amended judgment

and Interore filed a notice of cross-appeal from the amended

judgment.

Proceedings in the Court of Appeals

In the court of appeals, the issues and arguments presented

related only to Interore’s tort claim. Interore intentionally did

not assert the dismissed contract claims, and thereby waived

them.

SGS’s appellant’s brief to the court of appeals argued that

liability could not be founded in tort because the dispute was

governed by contract.' In its answering brief as appellee,

Interore argued that SGS’s negligent misrepresentation

breached a duty independent of the contract.

The Points in Interore’s Brief as to SGS’s appeal were the

following:

“POINT I: THE DISTRICT COURT PROPERLY

RULED SGS LIABLE FOR NEGLIGENT

l

SGS’s brief also argued that the elements of negligent misrep-

resentation were not established, that damages had been improperly cal-

culated and that the trial court had committed procedural error on the

issue of proximate cause.

PERFORMANCE OF PROFESSIONAL

SERVICES

POINT II: JUDGE TENNEY’S FINDINGS OF FACT

WITH REGARD TO SGS’S NEGLIGENCE

WERE NOT CLEARLY ERRONEOUS

POINT III: THE DISTRICT COURT PROPERLY

REFUSED TO OFFSET THE SETTLE-

MENT BETWEEN INTERORE AND EAST

COAST”

[Subheadings omitted. ]

These Points correspond closely to the Statement of Issues

Presented for Review set forth in Interore’s brief for the

cross-appeal.

On its cross-appeal, Interore argued only that Judge Tenney

should not have limited SGS’s liability for negligent mis-

representation to 50% of the damages.

The single Point in Interore’s brief as to Interore’s cross-

appeal was the following:

“POINT I: INTERORE WAS NOT CONTRIBUTO-

RILY NEGLIGENT”

[Subheadings omitted. ]

This Point corresponds closely to the single issue as to the

cross-appeal stated in the Statement of Issues Presented for

Review set forth in Interore’s Brief.

Interore’s brief did not state any issue, argument, reasons or

citations in support of the contract claims. SGS’s reply brief

addressed only the issues raised by Interore and did not argue

the contract claims.

At the oral argument of the appeal, Interore again declined

to argue the contract claims or to argue that the contract was

breached. The transcript of the argument (App. 6) confirms

that Interore’s counsel confined their contentions to the neg-

ligent misrepresentation claim. Midway through Interore’s

oral presertation, the Court asked why Interore’s counsel had

not cross-appealed from the dismissal of its contract claims.

App. A-225. Interore’s counsel answered to the effect that

they thought the Second Circuit opinions in Sundance? and

Vitol’, as well as Judge Tenney’s opinion below, were con-

trolling. App. A-226 (Sundance and Vitol are contract cases

that had disallowed consequential damages that were dis-

proportionately large in relation to the contract prices.)

Interore’s counsel never disputed or distinguished these

precedents, although they were presented by the panel with a

clear opportunity to do so.

The court of appeals affirmed the amended judgment on

October 24, 1994. The panel rejected the tort claim on which

the judgment had been based. However, with one judge dis-

senting, the panel adopted the breach of contract claim, which

Interore had already waived on the appeal, and found that the

contract had in fact been breached.

Although the panel found for Interore on its waived con-

tract claim, the panel limited Interore’s recovery to the

amount of the amended judgment. The panel said that “there

has been no cross-appeal from the district court’s dismissal of

the contract claim, and we therefore leave the smaller judg-

ment in place.” 38 F.3d at 1279. Since Interore had in fact

cross-appealed from the amended judgment, the finding that

it failed to cross-appeal from dismissal of the contract claim

could only refer to Interore’s failure io argue the contract

claim in its brief or at oral argument.

Interore’s failure was not, however, simply a failure to

cross-appeai. Interore’s failure to argue or otherwise present

the breach of contract claim in its brief or at oral argument

. Sundance Cruises Corp v. American Bureau of Shipping, 7 F.3d

1077 (2d Cir. 1993), cert. denied, 114 S.Ct. 1399 (1994).

’ Vitol Trading S.A. v. SGS Control Services, 874 F.2d 76 (2d Cir.

1989).

was also a waiver. Interore had intentionally not sought to

sustain the judgment on contract grounds. With an eye to the

opinions in Sundance and Vitol, it deliberately sought to sus-

tain the judgment only on tort grounds. It thereby waived the

breach of contract claim.

On the merits of the contract claim, the panel rejected

Judge Tenney’s view that the consequential damages were not

recoverable due to the extreme disproportion between the fee

charged and the damages claimed. 38 F.3d at 1284-1285. The

panel found that the purpose of the certificate was to guar-

antee the condition of the hold so as to insure the preservation

of the cargo. /d. at 1285.

Judge Tenney had also expressly not decided what specif-

ically the contract required and had not decided whether SGS

had in fact performed in a workmanlike manner. Nevertheless,

and despite Interore’s failure to argue these issues in the court

of appeals, the court of appeals held that SGS had breached

the contract. /d. at 1286.

The dissenting member of the panel agreed with the major-

ity that liability could not be founded in tort. Jd. at 1287. He

too addressed the breach of contract claim, notwithstanding

Interore’s waiver of that claim on the appeal. Jd. However, the

dissenting judge agreed with Judge Tenney that the dispro-

portion between the $2,400,000 of damages sought and the

$150 contract price, coupled with the informality of the par-

ties’ dealings, and prior Second Circuit precedents, required

dismissal of the contract claims. /d. at 1287-1289.

On October 7, 1994, SGS petitioned for rehearing and sug-

gested rehearing en banc. SGS argued, inter alia, that it was

improper for the court of appeals to decide the breach of con-

tract claim after Interore had waived it and to find a breach

when the trial judge had not reached that issue. On January

20, 1995, the court of appeals denied rehearing, without

opinion.

PRI TI ew.

REASONS WHY CERTIORARI

SHOULD BE GRANTED

Question 1: Abuse of Discretion of the Court of Appeals

By Deciding Claims That Have Been Waived

Certiorari should be granted to clarify the standard under

which in civil cases a court of appeals may decide a claim

that the proponent of the claim has waived. The absence of a

clear standard undermines the integrity of the federal appel-

late process.

The Court has recognized that a court may consider an

issue antecedent to and ultimately dispositive of the dispute

before it, even an issue the parties fail to identify and brief in

that court. United States National Bank of Oregon v. Inde-

pendent Insurance Agents of America, 113 S. Ct. 2173, 2178

(1993).

However, the Court has not yet clearly articulated the stan-

dard for determining when the exercise of that discretion is

appropriate. In the absence of a clearly expressed standard,

some court of appeals’ judges, relying on Independent Insur-

ance Agents, assume, as the court of appeals apparently did in

the present case, that they have virtually unlimited authority

to decide dispositive issues, whether or not presented by the

parties. See Williams-Guice v. Board of Education of Chicago,

45 F.3d 161 (7th Cir. 1995); Jackson v. Culinary School of

Washington, 27 F.3d 573, 583-584 (D.C. Cir. 1994); Sweet

Home Chapter v. Babbitt, 30 F.3d 190, 193-194 (D.C. Cir.

1994) (Silberman, J., dissenting from denial of rehearing en

banc).

The court of appeals in the present case affirmed the judg-

ment based on a claim that had not been presented and clearly

had been waived. None of the judges of the panel that decided

the appeal furnished any reason why deciding this waived

contract claim would be a proper exercise of the court’s

power.

10

To conform to other established principles of appellate

practice and to prevent a major disruption of the appellate

process, the Court should set clear standards as to how the

court of appeals must exercise its discretion.

The need for a standard is suggested by the requirement of

due process, because limitless discretion can deprive

adversely affected litigants of a meaningful opportunity to be

heard. Cf. Boddie v. Connecticut, 401 U.S. 371, 377-378

(1971) (due process requires meaningful opportunity to be

heard absent countervailing state interest of overriding sig-

nificance). In this case, SGS properly relied on Interore’s

waiver and, in accordance with F. R. App. P. 28(c), its reply

brief addressed only the arguments in Interore’s answering

brief. Because it followed the rules, SGS did not have a

meaningful opportunity to be heard in the court of appeals on

what proved to be the determinative issues in the case.

The need for a standard is also suggested by United States

v. Olano, 113 S. Ct. 1770 (1993), where the Court carefully

circumscribed the power of the court of appeals to consider

issues not timely raised in the District Court in criminal cases.

It would make little sense to narrowly restrict the court of

appeals’ power to correct plain errors at trial if at the same

time the court of appeals has limitless discretion to consider

unpresented issues.

The need for a standard is also suggested by the well-set-

tled rule that failure to identify or argue an issue in a party’s

initial brief is a waiver of that issue and a court of appeals

will ordinarily not consider that issue on the appeal, absent

manifest injustice. See, e.g., Anderson v. Branen, 27 F.3d 29,

30 (2d Cir. 1994); United States v. Quiroz, 22 F.3d 489, 490

(2d Cir. 1994); United States v. Restrepo, 986 F.2d 1462, 1463

(2d Cir. 1993); Winston v. Children & Youth Services of

Delaware Cty., 948 F.2d 1380, 1385 (3d Cir. 1991); United

States v. Bell, 936 F.2d 337, 343 (7th Cir. 1991); Rollins Envi-

ronmental Services v. U.S. EPA, 937 F.2d 649, 653 (D.C. Cir.

1]

1991). It is not manifest injustice to enforce a waiver result-

ing from the intentional tactical decision of experienced coun-

sel. See Mellon Bank v. United Bank Corporation of New

York, 31 F.3d 113 (2d Cir. 1994); Air et Chaleur, S.A. v.

Janeway, 757 F.2d 489, 492 (2d Cir. 1985).

The need for a standard is also suggested by the Federal

Rules of Appellate Procedure. F. R. App. P. Rules 28(a) and

(b) require parties to specify and brief the issues. F. R. App.

P. Rule 2, the sole rule that permits suspension of the appel-

late rules, authorizes the courts to relieve litigants of the con-

sequences of default only where manifest injustice would

otherwise result. See Notes of Advisory Committee on Appel-

late Rules, Note 2 (1967).

The Court’s recent cases are unclear as to what the standard

is for the exercise of discretion to decide unargued issues.

Compare Independent Insurance Agents and Arcadia, Ohio

v. Ohio Power Co., 111 S. Ct. 415 (1990) with Lebron v.

National Railroad Passenger Corp., 115 S. Ct. 961 (1995) or

United States v. Williams, 112 S. Ct. 1735 (1992).

For example, judges and litigants do not now know whether

the factors present in Independent Insurance Agents are nec-

essary, or sufficient, for the exercise of the appellate court’s

discretion. In Independent Insurance Agents, (a) the unpre-

sented issue (whether 12 U.S.C. § 92 had been repealed) was

implicit in the respondent’s argument from the start; (b) the

unpresented issue involved the existence or non-existence of

an Act of Congress; and (c) the court of appeals had given the

parties “ample opportunity” to address the issue. See 113 S.

Ct. at 2178-2179. In Arcadia the unpresented issue was

implicit, and the issue involved the scope of a federal statute

in relation to orders of federal agencies. In Lebron and

Williams, however, while the Court recognized its power to

“review an issue not pressed, but passed upon by the lower

court,” it failed to indicate any standard for when the review-

ing court’s discretion may be properly exercised.

12

In the present case, none of the /ndependent Insurance

Agent factors appeared. The issue presented did not involve

the existence (or scope) of an Act of Congress. The waived

contract claim was not implicit in or antecedent to the tort

claim, but rather was a separate alternative to it. SGS was not

given the opportunity to address or brief the issue in the court

of appeals. And, unlike Lebron and Williams, in Interore the

court of appeals decided the dispositive issue (that the con-

tract had been breached), even though that issue had not been

passed upon by the district court.

A limitless standard for the courts of appeals sua sponte to

review waived claims creates an immense practical problem

for the appellate bar, and ultimately for the appellate courts

themselves.

Absent a clear standard for when, and how, the court of

appeals may consider waived issues, prudent appellants will

be compelled in their initial briefs to raise and argue a wide

range of potentially dispositive issues and claims as to which

they may already have prevailed in the lower court, whether

or not their adversaries wish to appeal those matters.* This

will transform the nature—and ultimately the size—of appel-

lants’ briefs. It will also do great violence to the orderly

scheme of F. R. App. P. Rule 28 which requires the appellee

to raise whatever alternate issues have not been raised by the

appellant and then affords the appellant the opportunity of a

reply to respond to those matters.

. For example, a plaintiff might prevail in the district court on the

defendant’s motions to dismiss based on lack of personal jurisdiction,

improper venue, statute of frauds, failure to comply with a discovery

order and so forth, but might lose at trial on a decisive evidentiary issue.

Under /nterore, the plaintiff-appellant’s brief apparently should raise and

argue not merely the evidentiary issue, but also all these pre-trial issues,

whether or not defendant-appellee wishes to raise them. Otherwise, as in

Interore, the Court of Appeals might affirm on an alternative unargued

ground without the appellant’s having addressed it in that court.

13

If the courts of appeals are to have the discretion to con-

sider waived issues, it is vitally important to the appellate

process that the Court clarify the standard under which that

discretion is to be exercised.

Question 2: Disproportionality of Price To Damages

Under Maritime Law

Certiorari should be granted to decide whether maritime

law incorporates the principle of non-maritime contract law

that where parties contract informally, an extreme dispro-

portion between the contract price and the amount of damages

claimed for breach indicates that the damages were beyond

the parties’ contemplation and therefore are not recoverable

(the “Disproportionality Principle”). Second Circuit cases

conflict on this issue and continued uncertainty significantly

affects the maritime service industry.

The Disproportionality Principle is well-established in non-

maritime law. See, e.g., Restatement of Contracts (Second),

§351(3), comment f; Vitol Trading, S.A. v. SGS Control Ser-

vices, 874 F.2d 76, 81 (2d Cir. 1989); Evra Corp. v. Swiss

Bank Corp., 673 F.2d 951, 956 (7th Cir.), cert. denied, 459

U.S. 1017 (1982); Goodstein Construction Corp. v. City of

New York, 590 N.Y.S.2d 425, 490 (N.Y. 1992); Perini Corp.

v. Greate Bay Hotel & Casino, Inc., 610 A.2d 364 (N.J. 1992)

(approving the principle but finding it inapplicable to the

facts); Glatt v. Bank of Kirkwood Plaza, 383 N.W.2d 473, 484

(N.D. 1986); M. N. Kniffen, “A Newly Identified Contract

Unconscionability: Unconscionability of Remedy,” 63 Notre

Dame L. Rev. 247 (1988); but see Sovereign Chemical &

Petroleum Products, Inc. v. Ameropan Oil Corp., 148 F.R.D.

208, 213 (N.D. Ill. 1992) (declining to adopt the principle

under Illinois law). The Disproportionality Principle protects

contracting parties from the unduly harsh consequences of a

breach where the parties have not clearly agreed to assume

liability. The Disproportionality Principle recognizes the com-

mercial reality that a very low price is a strong indication that

14

the contracting party did not assume a potentially crushing

contingent liability for damages where the contract is infor-

mal and is silent as to such liability.

As a result of the Disproportionality Principle, commercial

parties in a non-maritime context may conduct their affairs

informally and inexpensively, without undue risk.

In maritime cases, however, there is a conflict within the

Second Circuit as to the availability of the Disproportional-

ity Principle. Compare Sundance Cruises Corp. v. American

Bureau of Shipping, 7 F.3d 1077 (2d. Cir 1993) (applying the

principle), cert. denied, 114 S. Ct. 1399 (1994), with the court

of appeals decision in the present case.

In Sundance, the court of appeals applied the Dispropor-

tionality Principle, in a dispute between sophisticated com-

mercial maritime parties, to disallow damages that were

approximately 3,200 times the contract price. 7 F.3d at 1084.

However in Interore, the court of appeals refused to apply the

Disproportionality Principle even though the claimed damages

were 16,000 times the contract price. See Interore, 38 F.3d at

1288 (dissenting opinion). Moreover, the /nterore court sug-

gested that it would never apply the principle in this case no

matter how disproportionate (“whatever the amount”) the

damages claimed might be. 38 F.3d at 1285.

If the Disproportionality Principle applies under maritime

law, the benefits that flow from its use in a land-based case

would flow from its use in a sea-based case. If, however,

under /nterore, maritime service companies, contracting on an

informal basis, are to face potentially limitless claims for lia-

bility, the effect on the maritime service industry will be dra-

matic. Either the cost of maritime service contracts is likely

to increase markedly, or maritime service companies are

likely to suffer severe financial strains. In either case, both

the providers of maritime services and the consumers of those

services need to know whether the Disproportionality Prin-

ciple applies in maritime cases.

15

CONCLUSION

For the foregoing reasons, petitioner respectfully prays for

issuance of a writ of certiorari to the United States of Appeals

for the Second Circuit.

Dated: New York, New York

April 13, 1995

CHARLES B. UPDIKE

Attorney of Record for

Petitioner

SCHOEMAN, MARSH & UPDIKE

60 East 42nd Street

New York, New York 10165

(212) 661-5030