Appendix — SGS Control Services, Inc. v. International Ore & Fertilizer Corp.

Rg FILED

/ NoQ@ 4168 6 APR 1 4 1995

ee

OFFICE OF THE CLERK

IN THE

Supreme Court of the United States

OCTOBER TERM, 1994

>

SGS CONTROL SERVICES, INC.,

Petitioner,

—_—vV.—

INTERNATIONAL ORE & FERTILIZER CORP.,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

APPENDIX TO

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

at

TABLE OF CONTENTS

Opinion of the Court of Appeals,

dated October 24, 1994,

reported at 38 F.3d 1279 ... A-l

Opinion of the District Court,

dated August 23, 1990,

reported at 743 F. Supp.

BGs «+ mew sveevueseeenecea « SSC

Opinion of the District Court

dated August 10, 1993,

reported at 828 F. Supp.

oo ee ir ee i a ee ee ee a eo.

Opinion of the District Court,

dated October 23, 1993

(unreported). . ..«-+««.« « « e A-132

Appendix A. Report and

Recommendation of the Chief

Magistrate Judge, dated

Marcn 31,.1993 . « « « « « Awi4i

Order of the Court of Appeals

Denying Rehearing, dated

January 20, 1995

(unreported). . «+ « « « «© « « « AW182

Transcript of Oral Argument in

The Court of Appeals on

eeeai BA, 3994. «+ « « «© 2» 2 « « APU

Me ae ea

1. OPINION OF THE COURT OF APPEALS,

DATED OCTOBER 24, 1994, REPORTED

AT 38 F.3D 1279

INTERNATIONAL ORE & FERTILIZER CORP.,

Plaintiff-Appellee-Cross-Appellant,

Ve

SGS CONTROL SERVICES, INC.,

Defendant-Appellant-Cross-Appellee,

and

CHARLES B. UPDIKE, ESQ. and SCOTT

M. RIEMER, ESQ., Appellants-

Cross-Appellees.

Nos. 1480, 1481 and 1709, Dockets

93-9046, 93-9332, 94-7084

UNITED STATES COURT OF APPEALS,

SECOND CIRCUIT.

Argued April 25, 1994

Decided October 24, 1994

MICHAEL E. SCHOEMAN and CHARLES B.

UPDIKE, New York City (Scott M. Riemer,

Schoeman, Marsh & Updike, of counsel), for

defendant-appellant-cross-appellee SGS

Control Services, Inc. and appellants-

cross-appellees Charles B. Updike and

Scott M. Riemer.

RICHARD H. SOMMER, New York City (J.

Scot Provan, Robert A. Milana, Kirlin,

Campbell, Meadows & Keating, cof counsel),

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for plaintiff-appellee-cross-appellant.

Before: VAN GRAAFEILAND and WINTER,

Circuit Judges, and MISHLER‘’, District

Judge.

WINTER, Circuit Judge:

SGS Control Services, Inc. ("SGS") appeals

from Judge Tenney’s order awarding

$713,666.27 to International Ore &

Fertilizer Corp. ("Interore") on the

grounds that SGS negligently

misrepresented the cleanliness of three

ship’s cargo holds resulting in contami-

nation and other damage to the cargo.

Interore cross-appeals from the district

court’s finding of contributory negligence

and the consequent halving of damages.

SGS’s counsel also appeal from the

. The Honorable Jacob Mishler,

District Judge, United States District

Court for the Eastern District of New

York, sitting by designation.

A~3

district court’s award of Fed. R. Civ. P.

11 sanctions for the making of repetitive

motions.

We affirm but on rather different

grounds. We believe that any duty that

SGS owed to Interore arose from a contract

between the parties to inspect the cargo

holds and that SGS is not liable in tort.

However, we also conclude that SGS

breached its contract with Interore and

that Interore would ordinarily be entitled

to full damages. However, there has been

no cross-appeal from the district court’s

dismissal of the contract claim, and we

therefore leave the smaller judgment in

place. We affirm the imposition of Rule

11 sanctions.

BACKGROUND

Interore, a Delaware corporation with

its principal place of business in New

York City is, as its name suggests, an

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international corporation specializing in

the trading of fertilizer products.

Interore contracted to sell 22,202 metric

tons of compound phosphate fertilizers to

East Coast Fertilizer Company, Ltd. ("East

Coast"), a New Zealand corporation, ona

cost and freight basis for $4,118,287.

Interore chartered the M/V ADELINA to

transport the fertilizer from Sweden to

Tampa, Florida, and from Tampa to Napier,

New Zealand. The agreement with East

Coast required Interore to have an

independent hold inspector certify the

condition of the holds prior to loading

the fertilizer. Interore contracted with

SGS, as it had several hundred times

previously, to inspect the ADELINA’s holds

and provide such a certificate. Interore

confirmed the oral contract by telex,

which read in relevant part: "PLS ACT OUR

BEHALF PERFORMING INSPECTION, SAMPLING AND

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Pe ee

ANALYSIS. PLS ISSUE FLWG DOCS: 1) CERT OF

HOLD INSPECTION, CONFIRMING VSLS HOLDS

WERE CLEAN, DRY AND SUITABLE. .. ."

Interore paid SGS $150 for the inspection

of the ADELINA’s three holds loaded at

Tampa.

The ADELINA has five cargo holds, each

approximately eighty-one by eighty-seven

feet square and forty-seven feet high,

separated fore and aft by vertical

bulkheads. The most forward hold, hold

one, is slightly narrower. On the port

and starboard sides of each hold are

vertical ribs protruding two feet from the

side of the hull and extending from the

top of the hold to where an angled section

of the hold begins approximately eight

feet from the floor. Horizontal bars,

called stringers, are attached at regular

intervals to the front of the vertical

ribs, and vertical pipes are nested

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between some of the ribs, each protected

by horizontal bars fastened to the front

of the ribs. Each hold has a large,

Square hatch opening at the top, measuring

approximately forty-one by twenty-eight

feet on hold one and fifty-five by

thirty-nine feet on the other holds.

The ADELINA’s previous cargo was coal,

but the penultimate cargo had been barley.

Although the crew cleaned and painted the

holds following the discharge of the coal,

they failed to remove a substantial amount

of barley grains trapped in the pockets

behind the stringers. The inspection of

holds one and four in Sweden, performed by

SGS’s Swedish affiliate, lasted

approximately forty-five minutes, during

which the inspector descended into the

holds and inspected the stringers and the

hatch covers from below. The inspector

also inquired of the crew as to the

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vessel’s prior cargoes. The inspector

certified holds one and four as clean,

ary, and suitable for loading.

SGS’s subcontractor, Captain Peter

Luard, who had four years of experience in

hold inspections, performed the Tampa

inspection of holds two, three, and five

in the early morning hours of July 2,

1985. Between 1:45 a.m. and 2:15 a.m.,

Luard inspected the three holds, spending

approximately ten minutes in each hold.

He climbed down the aft ladders and walked

the floors, inspecting the stringers and

overhead deck beams. Luard did not

attempt to look behind the stringers.

Following his visual inspection, he was

informed of the previous cargoes by the

crew but did not return to the holds. At

2:15 a.m., Luard completed a document on

SGS letterhead titled "Certificate of

Readiness" which read:

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Wa oom Regan ede

ere en ere eee Sat

Certificate of Readiness

THIS IS TO CERTIFY that the undersigned

Marine Surveyor did, at the request of

ad "on behalf of " "

did attend on board the M.V. Adelina of

16356.78 Gross Tons, Port of Registry

PIRAEUS, whereof CAPT. MATSELOS P. is

Master and now lying at GARDINER TERMINAL

for the purpose of surveying the following

cargo holds Nos 2, 3 and 5. Said cargo

compartments AND HATCH COVERS have been

surveyed and found suitable to load a

cargo of PHOSPHATE this time and date.

DATE JULY 2nd 1985

TIME PASSED 0215

Peter F. Luard

for SURVEYOR

SGS CONTROL SERVICES INC.

VALID ONLY AT PORT OF ISSUANCE

Member of the SGS Group

ALL INSPECTIONS ARE CARRIED OUT TO THE

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BEST OF OUR KNOWLEDGE AND ABILITY AND OUR

RESPONSIBILITY IS LIMITED TO THE EXERCISE

OF REASONABLE CARE [italics designate

handwriting]

Following Luard’s issuance of this

certificate, the ADELINA loaded holds two,

three and five with fertilizer and sailed

for New Zealand.

Upon arrival in New Zealand on August

1, 1985, officials of the New Zealand

Ministry of Agriculture and Fisheries

("MAF") discovered that the fertilizer was

contaminated with barley and barred its

discharge unless East Coast notified all

buyers of the contamination and took steps

to prevent it from being used in barley--

growing areas. East Coast refused to do

so or to accept the shipment, and the

fertilizer remained aboard the ADELINA.

Interore hired New Zealand surveyors who

found the barley lodged in the stringers

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and hatch covers. Following futile

attempts to find other buyers in Australia

or Southeast Asia, Interore shipped

the fertilizer to Antwerp, Belgium, where

it was sold off in small lots. During

this process Interore incurred damages in

costs and lost value of $ 959,375.44.

Interore brought the present action

against SGS alleging breach of contract,

breach of warranty, negligence, and

negligent misrepresentation. In a pre-

trial order, the district court bifurcated

the trial into, first, a bench trial

generally concerning liability issues,

and, second, a hearing before Chief

Magistrate Judge Gershon concerning "[a]ll

issues associated with damages." The

order lists the issues to be tried in the

first phase as:

whether the inspection of holds 2, 3,

and 5 by SGS/Peter Luard which

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resulted in the issuance by SGS

Control Services of a Certificate that

those holds were clean, dry and fit

for the intended cargo was conducted

in a proper and workmanlike manner

using reasonable care and professional

skill; whether SGS Control Services

breached its contract with Interore to

conduct a proper and workmanlike hold

survey: whether SGS breached any

warranties owed to Interore and

whether SGS misrepresented the

condition of holds 2, 3, and 5 as

clean, dry and fit for the intended

cargo.

Following the bench trial, the

district court held that under New York

law Interore could not recover on its

contract claim because, "the low contract

price and informal dealings between the

parties indicates that they did not

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ee

ee el

ms EIT Mat a

attempt to allocate all the risks.

Therefore, the court is justified in

allocating them fairly." International

Ore & Fertilizer Corp. v. SGS Control

Servs., 743 F. Supp. 250, 257-58 (S.D.N.Y

1990) ("Interore I"). In so holding, the

district court relied upon the opinion in

Vitol Trading S.A. v. SGS Control

Services, 874 F.2d 76, 81 (2d Cir. 1989).

The district court rejected Interore’s

negligence claim because SGS "did not

have a duty to perform any particular

kind of inspection, except as required

under the contract," and, therefore,

"there can be no independent tort

liability for failing to take certain

steps as part of that inspection."

Interore I, 743 F. Supp. at 258.

However, the district court held that

SGS was liable for negligent misrepre-

sentation for issuing the inaccurate

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certification of the cleanliness and

suitability of the holds, but

apportioned half of the liability to

Interore for its failure to inform SGS

that "the slightest amount of foreign

matter could contaminate the cargo” in

the eyes of the vigilant New Zealand

MAF. Id. at 259-60.

Following this ruling, Chief

Magistrate Judge Gershon held a

conference at which the parties dis-

puted whether the district court had

resolved the issue of proximate cause.

Chief Magistrate Judge Gershon then

referred the case back to the district

court. The district court stated that

Chief Magistrate Judge Gershon could

"take into consideration whether the

plaintiff took reasonable steps to

diminish any damages," and could

consider, "{i]f the plaintiff’s

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partial fauit contributed to the

damages, namely, the failure to

provide a [Lloyd’s Certificate of

Cleanliness] document... ."

However, the district court also

cautioned SGS that any attempt to push

further than these "limited" issues,

"smells too much of trying to open up

a trial because you forgot to do

something at the time of the trial."

In her report and recommendation to

the district court, Chief Magistrate

Judge Gershon observed that the

resolution of liability had necessarily

also determined proximate cause, citing

Greyhound Exhibitgroup, Inc. v. E.L.U.L.

Realty Corp., 973 F.2d 155, 159 (2d Cir.

1992), cert. denied, U.S. __, 113

S. Ct. 1049, 122 L. Ed. 2d 357 (1993).

International Ore & Fertilizer Corp.

v. SGS Control Servs., 828 F. Supp.

A-15

1098, 1106 (S.D.N.Y 1993) ("Interore

II"). SGS filed objections to this

ruling, arguing that Interore I

"clearly required the second phase of

the trial to determine the damages

‘resulting from’ the contamination of

the fertilizer." (SGS’s emphasis).

In Interore II, 828 F Supp. at 1100,

the district court adopted Chief

Magistrate Judge Gershon’s report and

recommendation in full, ruling that,

"the liability phase of the trial did

in fact address the causation issues."

Following this ruling, SGS moved for a

new trial pursuant to Fed. R. Civ. P.

59 and for amended or supplemental

findings of fact pursuant to Fed. R.

Civ. P. 52. SGS again argued that it

had not been allowed to offer all its

evidence regarding proximate causation.

Interore opposed both motions and

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requested sanctions pursuant to

Fed. R. Civ. P. 11. The district

court granted Interore’s motion based

on "the groundless and repetitive

nature of defense counsel’s motion."

International Ore & Fertilizer Corp.

v. SGS Control Servs., No. 87 Civ.

6391 (CHT), 1993 WL 438902 at 2 S.D.N.Y.

Oct. 28, 1993) ("Interore III"). SGS and

its counsel then brought the present

appeal.

DISCUSSION

We briefly summarize our holding. SGS

attacks the judgment on the ground that

the tort of negligent misrepresentation

cannot be the basis of liability where its

sole legal duties to Interore arose

entirely out of a contract. This is so,

SGS argues, whether resort is had to

federal maritime law, see Fast River S.S.

Corp. v. Transamerica Delaval Inc., 476

A-17

U.S. 858, 90 L. Ed. 2d 865, 106 S. Ct.

2295 (1986), or to New York law, see

Clark-Fitzpatrick, Inc. v. Long Island

R.R. Co., 70 N.Y. 2€ 382, 516 N.E. 20a 190,

521 N.Y.S. 2d 653 (N.Y.1987).* We agree.

However, we believe that Interore was

entitled to recover full damages on its

contract claim, which was dismissed by the

district court. Interore has limited its

cross-appeal to the finding that it was

contributorily negligent and has thus not

challenged the dismissal of its contract

claim. Nevertheless, we may uphold the

* On appeal, the parties dispute the

proper source of law to govern our

resolution of this matter. SGS argues for

the application of general federal

maritime law. Interore argues for the

application of New York law and points out

that the district court noted that both

parties had assumed New York law

controlled. Interore I, 743 F. Supp. at

255 n.4. Because we believe that the

disposition of this case would be the same

under either federal maritime or New York

law, we do not address the question.

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validity of a judgment on any ground,

whether or not a cross-appeal has been

filed. We may not, however, enlarge a

money judgment absent such a cross-appeal.

We therefore affirm.

Ae Breach of Contract and Negligent

Misrepresentation

[1,2] We agree with SGS that East

River, 476 U.S. 858, 106 S. Ct. 2295, and

Clark-Fitzpatrick, 70 N.Y. 2d 382, 516

N.E. 20 190, 521 N.Y.S. 2d 653, compel the

holding that any duty owed by SGS to

Interore must be derived from the contract

and that the negligent misrepresentation

Claim, which sounds in tort and entails a

duty independent of the contract, should

have been dismissed. However, we disagree

with the district court that SGS was not

liable for full damages for breach of

contract. Under the contract, SGS was to

inspect the ADELINA’s holds and, if

appropriate, certify that they were

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"clean, dry and suitable" for the loading

of phosphate. SGS was obliged by the

Certificate, and by an implied duty to

perform the contract in a workmanlike

fashion, see Mayer Boat Works v. Bright

Marine Basin, 265 F. Supp. 352, 355

(E.D.N.Y. 1966); Lunn v. Silfies, 106

Misc. 2d 41, 431 N.Y.S. 2d 282, 284 (Sup.

Ct. 1980), to carry out this inspection

with "reasonable care," a duty that the

district court’s opinion makes clear was

not performed. Indeed, it is not con-

sistent to find negligent

misrepresentation on the ground that Luard

"knew, or should have known, that his

limited inspection did not provide a valid

basis upon which to state that the hold

was, in fact, free of all possible

contaminants," Interore I, 743 F. Supp. at

259, while also holding that SGS was not

liable for breach of contract for

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ar

ar Whee,

DT SE

certifying after the very same inspection

that the holds were "clean, dry and

suitable" for the loading of phosphate.

In dismissing the contract claim, the

district court relied upon Vitol Trading

S.A. v. SGS Control Services, 874 F.2d 76

(2d Cir. 1989). However, the portion of

Vitol relied upon represented the views of

only one judge. That portion stated that

SGS, the same defendant as in this case,

was not liable for the full measure of

damages on a contract. The portion relied

upon reasoned that when a chemical tester

"ha[s] no notice of potential special

damages" stemming from the failure to

conduct an accurate test and "as a

rational economic actor ... it would

have charged substantially more for its

testing services," if it knew, Id. at 81,

SGS could not be liable for $ 500,000 in

damages on a contract for which it

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received only a $ 220 fee. As the other

members of the Vitol panel noted in their

separate opinions, these statements were

dicta in which they did not join. Id. at

82. Moreover, that portion of the Vitol

opinion cannot be reconciled with the

controlling New York case Glanzer v.

Shepard, 233 N.Y. 236, 135 N.E. 275 (N.Y.

1922), which we believe also reflects

federal maritime law. In Glanzer, the New

York Court of Appeals held independent

weighers liable for special damages above

the contract fee for negligent

mismeasurement of commodities. The court

stated that the buyers’ justifiable

reliance on the certificates of proper

weight "was not an indirect or collateral

consequence of the action of the weighers.

It was a consequence which, to the

weighers’ knowledge, was the end and aim

of the transaction." Id. 135 N.E. at 275.

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Similarly, SGS’s performance of an

accurate inspection rather than a cursory

one was "the end and aim of the

transaction."

The fact that SGS charged a seemingly

low fee relative to potential liability

hardly suggests that the parties failed to

contemplate SGS’s bearing the risk of a

negligent inspection. Indeed, the

Certificate expressly "limited" SGS’s

"responsibility .. . to the exercise of

reasonable care." SGS performs similar

professional services on a frequently

recurring basis and can insure against

liability for inaccurate inspections which

result in major damage to cargo. Then,

SGS can set its prices accordingly. SGS

and Interore are sophisticated repeat

players in a competitive market for

inspection services. We do not agree with

our dissenting colleague that the parties

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here had an informal arrangement that

obscured from SGS the consequences of a

negligent performance of its contract.

SGS is a professional organization that

continuously performs specialized

inspections and issues formal written

"Certificate[s] of Readiness" necessary to

contracts of sale involving goods to be

transported by sea. Interore was required

by its contract with East Coast to obtain

such a written certificate, and there is

no significance to the fact that its

request to SGS for the certificate was by

phone and telex. The parties had a

business relationship that involved

hundreds of such transactions. There is

thus no reason to treat the inspection at

issue as the equivalent to a one-time-

hiring of a stranger to mow one’s lawn for

$ 5 with resultant property damage in the

thousands of dollars. sSGS isa

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professional organization that issues

formal certificates essential to commerce

that inspections have been properly done.

It is fully aware that a negligent

inspection may cause the loss of an entire

cargo. That is why parties to sales of

goods to be transported by sea require

such certificates. See generally Glanzer.

We see no reason whatsoever, therefore,

why SGS is not liable for Interore’s

consequential damages as a result of its

breach.

Our recent decision in Sundance Cruises

Corp. v. American Bureau of Shipping, 7

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

U.S. __, 114 S. Ct. 1399, 128 L.Ed.

2d 72(1994), is not to the contrary.

Sundance was an action for damages on a

contract for the classification for

insurance purposes of an ocean-going

passenger vessel. The court held that the

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disparity between the fee charged on the

contract and damages sought disclosed that

the parties did not foresee the risk of

such liability. However, the purpose of

the contractual obligation of the ship

classification society in Sundance

contrasts markedly with that of the

inspector in Vitol and in the present

case. Sundance likened the suit against

the classification society to a case in

which “one who causes a vehicle accident

. « « then sues the Motor Vehicle Bureau

for damages to his car because it issued

him a driver’s license that falsely

represented his fitness to drive. "7 F.3d

at 1084. In Sundance, the court therefore

concluded that "the purpose of the

classification certificate is not to

guarantee safety, but merely to permit

[the ship owner] to take advantage of the

insurance rates available to a classed

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vessel." Id. The purpose of the

inspection in this case, however, was

precisely to guarantee the condition of

the hold so as to insure the preservation

of the cargo. There is no other reason to

perform such an inspection and no other

reason to pay for one, whatever the

amount.

2. Failure to Cross-Appeal

[3] As noted, however, Interore failed

to cross-appeal from the dismissal of its

Claim for breach of contract. The general

rule in a case in which a party fails to

cross-appeal and an appellate court would

otherwise have held in its favor is that:

[A] party who does not appeal from a

final decree of the trial court cannot be

heard in opposition thereto when the case

is brought here by the appeal of the

adverse party. In other words, the

appellee may not attack the decree with a

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view either to enlarging his own rights

thereunder or of lessening the rights of

his adversary, whether what he seeks is to

correct an error or to supplement the de-

cree with respect to a matter not dealt

with below. But it is likewise settled

that the appellee may, without taking a

cross-appeal, urge in support of a decree

any matter appearing in the record,

although his argument may involve an

attack upon the reasoning of the lower

court or an insistence upon matter

overlooked or ignored by it.

United States v. American Ry. Express

Co., 265 U.S. 425, 435, 44 S. Ct. 560, 68

L. Ed. 1087 (1924). The Supreme Court

elaborated on the Railway Express rule in

Morley Construction Co. v. Maryland

Casualty Co., 300 U.S. 185, 57 S.Ct. 325,

81 L. Ed. 593 (1937), where it held that

an appellee who had not cross-appealed

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could not "’attack the decree with a view

- - »- to enlarging his own rights.’"

300 U.S. at 191, 57 S. Ct. at 328 (quoting

Railway Express, 265 U.S. at 435, 44 S.

Ct. at 564). Findings will, therefore,

not be altered on a non-cross-appealing

appellee’s behalf “where a revision of the

findings carries with it as an incident a

revision of the judgment." Jd. In short,

an appellate court may not "give a new

measure of relief" to the appellee. Id.

300 at 193, 57 S. Ct. at 328-29.

This rule has been modified in some

circuits by treating the requirement of a

cross-appeal as one of practice rather

than jurisdiction, allowing the court to

use its discretion to consider unappealed

grounds so as to exercise its "broad power

‘to make such disposition ... as justice

requires.’" In re Barnett, 124 F.2d 1005,

1009 (2d Cir. 1942) (ellipsis in original)

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(citation omitted). Compare Id. with

Shipp v. General Motors Corp., 750 F2d

418, 428 (5th Cir. 1985) (treating cross-

appeal requirement as jurisdictional) ;

Schildhaus v. Moe, 319 F.2d 587, 588 (2d

Cir 1963) (per curiam) (declining to

review district court’s findings without

cross-appeal). The Barnett court stressed

that it was sitting in equity. Generally,

however, these cases have involved

multiple parties where only one of several

plaintiffs or defendants failed to cross-

appeal. In each case, the court included

the non-cross-appellant in the amended

judgment so as to preserve "fairness."

Several of our recent decisions have

referred without elaboration to the

discretionary nature of our power to

disregard the cross-appeal requirement.

Texport Oil Co. v. M/V Amolyntos, 11 F.3d

361, 366 (2d Cir. 1993) (permitting late-

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filed cross-appeal); Finkielstain v.

Seidel, 857 F2d 893, 895 (2a Cir. 1988).

These cases conform to the general rule

that the appellee may seek to sustain a

judgment on any grounds with support in

the record. Jaffke v. Dunham, 352 U.S.

280, 281, 77 S. Ct. 307, 1L. Ed. 2a 314

(1957) (per curiam) (cross-appeal not

necessary to rule on admissibility of

affidavit stricken by district court) ;

Arlinghaus v Ritenour, 622 F.2d 629, 638

(2d Cir.) (substituting grounds for

affirmance without cross-appeal), cert.

denied, 449 U.S. 1013, 101 S. Ct. 570, 66

L.Ed. 2d 471, (1980); Kennecott Copper

Corp. v. Curtiss-Wright Corp., 584 F.2d

1195, 1206 (2d Cir. 1978) (observing that

grant of injunctive relief may be affirmed

on a Claim dismissed by district court).

This rule applies even when the alternate

grounds were not asserted until the

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court’s questioning at oral argument.

Arlinghaus, 622 F.2d at 638. We may,

therefore, uphold the finding of liability

on a breach of contract theory.

We do not believe, however, that, given

the present procedural circumstances,

Interore is entitled to its full damages.

Although an appellee who has not cross-

appealed may urge alternative grounds for

affirmance, it may not seek to enlarge its

rights under the judgment by enlarging the

amount of damages or scope of equitable

relief. See, e.g., Zapico v. Bucyrus-Erie

Co., 579 F.2d 714, 725 (2d Cir. 1978)

(non-cross-appealing defendant-appellee

cannot raise claim that judgments should

be reduced). We may, therefore, uphold

the present judgment but we may not

enlarge it to award Interore its full

contract damages.

Interore did cross-appeal from the

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finding that it was contributorily

negligent. Its sole claim in that regard

is that the record does not provide a

factual basis for that finding. Because

we believe that SGS’s liability is

grounded solely in contract rather than

tort, Interore’s contributory negligence

would be irrelevant. Arguably, we might

have the power to review the finding of

contributory negligence and, if we

concluded that it lacked support in the

record, vacate and restore to Interore the

full measure of damages suffered. The

restoration of the full measure, however,

would be on contract grounds and thus

would stretch the principles regarding

cross~appeals beyond the bounds of our

power.

We therefore affirm the judgment on

breach of contract grounds.

3. Rule 11 Sanctions

A-33

[6,7] We review the imposition of

sanctions under Rule 11 for abuse of

discretion. Cooler & Gell v. Hartmarx

Corp., 496 US. 384, 405, 110 S. Ct. 2447,

2461, 110 L.Ed. 2d 359 (1990). Such an

abuse would include "an erroneous view of

the law or .. . a clearly erroneous

assessment of the evidence." Id.

[8] Appellants Updike and Riemer

contend that the imposition of Rule 11

sanctions violated due process because

they were given neither notice nor an

opportunity to be heard. See Securities

Indus. Ass’n v. Clarke, 898 F.2d 318, 322

(2d Cir. 1990). However, they submitted

an affidavit in response to Interore’s

opposition to SGS’s motion for a new trial

and supplemental findings. Interore’s

opposition included a request for Rule 11

sanctions. In their affidavit appellants

made no mention of Interore’s request for

A-34

sanctions. Appellants thus had notice

from Interore’s motion, and an opportunity

to be heard by opposing the motion in the

affidavit submitted. Appellants having

failed to respond to the motion for

sanctions, the district court had no

reason to exercise its discretion to hold

an evidentiary hearing that had not been

requested.

[9] Appellants raise numerous

objections on the merits to the imposition

of sanctions, but, even viewing the record

in the light most favorable to them, we

cannot say that the district court abused

its discretion. The district court had

already ruled that fifty percent of the

damages would be attributable to SGS

because of Interore’s contributory

negligence. Appellants’ argument that

proximate cause was “associated with dam-

ages" and thus reserved for the second

A-35

phase of the trial was thus an

afterthought bordering on frivolousness.

Appellants rely upon Rule 59, which

governs amendment of judgments by the

district court. "The major grounds

justifying reconsideration" include "the

need to correct a clear error or prevent

manifest injustice." Virgin Atlantic

Airways v. National Mediation Bd., 956 F2da

1245, 1255 (2d Cir.) (citation omitted),

cert. denied, U.S. , 113 8. Ct. 67,

121 L. Ed. 2d 34 (1992). They claim that

the district court had never clearly ruled

on the proximate cause issue, and that

while they acknowledge that the issue had

been raised, they claim that "a formal

request was necessary to raise the issue

properly."

Although parties may certainly request

a new trial or amended findings where

A-36

ap ela

Shi oid

ele in ONE aE SAE NEGA Ned SE VAT Nites Ta SEINE SEN Sea be ARIES PAIS

9) 8 IDA DAN EY PERIL ES pict

clear errors or manifest injustice

threaten, in the absence of such

corruption of the judicial processes,

"where litigants have once battled for the

court’s decision, they should neither be

required, nor without good reason

permitted, to battle for it again."

Zdanok v. Glidden Co., 327 F.2d 944, 953

(2a Cir.), cert. denied, 377 U.S. 934, 84

S.Ct. 1338, 12 L. Ed. 2d 298 (1964). As

the district court noted, SGS’s arguments

regarding proximate cause and related

factual issues had received detailed

attention at several junctures including

SGS’s objection to the magistrate judge’s

report and recommendation and in a full

hearing before the district court on June

26, 1991. The district court’s conclusion

that SGS’s motion "caused unnecessary

delay to [the] proceedings and is not well

grounded either in fact or in a good faith

A-37

belief in the modification of existing

law," Interore III at 2, is therefore not

an abuse of discretion.

CONCLUSION

We have examined SGS’s other arguments

and find them meritless. We affirm the

judgment against SGS and the award of

sanctions.

MISHLER, District Judge, concurring in

part and dissenting in part:

I agree with the majority’s ruling on

the tort claim of International Ore &

Fertilizer Corp. ("Interore") based on SGS

Control Service’s ("SGS")

misrepresentation for issuing the

inaccurate certification of the

cleanliness and suitability of the

Adelina’s holds. I agree that the court

may consider Interore’s breach of contract

claim even though Interore failed to file

A-38

a. oe #

Sadek ond

a cross-appeal from the district court’s

dismissal of the contract claim. I also

agree with the affirmance of the Rule 11

sanctions. I disagree with the majority’s

holding that damages of $713,666.27

(reduced by 50% on a finding of Interore’s

contributory negligence) is the measure of

damages on the breach of contract claim.

DISCUSSION

FACT FINDINGS BY THE DISTRICT COURT

In denying recovery under Interore’s

breach of contract theory of liability,

Judge Tenney found that the disproportion

of the charge for the inspection, i.e.,

$150, and the damages sought;’ and the

informality at that determination. Judge

Tenney found that in addition to the

disparity between the contract price

and the damages . . . the parties

* Judge Tenney used the demand of

$2,400,000 in the complaint.

A-39

reach their agreement over the phone,

and the plaintiff simply confirmed it

with a one-page telex. The telex

merely requests defendant to perform

the various services and to issue a

series of documents. It is devoid of

any mention of liability. The low

control price and informal dealings

between the parties indicates that

they did not attempt to allocate all

of the risks. Therefore, the court is

justified in allocating them fairly.

Accordingly, it finds that plaintiff

should not recover compensatory

damages on the contract.

INTERNATIONAL ORE & FERTILIZER CORP. v.

SGS CONTROL SERVS., 743 F. Supp. 250, 257-

58 (S.D.N.Y. 1990) ("Interore I") (Drawing

its analysis from Restatement (Second) of

Contracts § 351 cmt. f (1979)).

The Restatement (Second) of Contracts §

A-40

351(3) (1981) notes the wide discretion

| that the trial court has in a breach of

contract claim in limiting damages for

foreseeable loss "if it concludes that in

Pe Nee PR OEE AAP Je

the circumstances justice so requires in

order to avoid disproportionate

compensation."

Comment f states:

SOT Sha i tg Sti ein TN EE SS bo

It is not always in the interest of

ie tar a RR iy

justice to require the party in breach

Te Menta ia!

to pay damages for all of the

foreseeable loss that he has caused.

There are unusual instances in which

it appears from the circumstances

either that the parties assumed that

one of them would not bear the risk of

a particular loss or that, although

there was no such assumption, it would

be unjust to put the risk on that

party. One such circumstance is an

extreme disproportion between the loss

A-41

and the price charged by the party

whose liability for that loss is in

question. The fact that the price is

relatively small suggests that it was

not intended to cover the risk of such

liability. Another such circumstance

is an informality of dealing,

including the absence of a detailed

written contract, which indicates that

there was no careful attempt to

allocate all of the risks. The fact

that the parties did not attempt to

delineate with precision all of the

risks justifies a court in attempting

to allocate them fairly.

Restatement (Second) of Contracts § 351

cmt. f (1981) (emphasis added).

Judge Tenney made the factual finding

that the damages were disproportionate to

A-42

the contract price.* JInterore I, 743 F

Supp. at 257. The court made this finding

because the great disparity between the

contract price and the damages indicated

that the parties did not intend to

allocate the risks.*° Additionally, the

court relied on the informality of the

contract to reach its conclusion. SGS and

Interore made an oral agreement that was

confirmed by a one-page telex. IJInterore

* This finding is not listed with the

other factual findings because it was

ultimately disposed of when Judge Tenney

dismissed the contract claim.

> In Sundance Cruises Corp. v.

American Bureau of Shipping, 799 F. Supp.

363, 376 (S.D.N.Y 1992), the district

court made the same factual finding that

the parties did not assume the risk of

loss in making a contract in which a great

disparity between the contract price and

the damages resulted. The Sundance

district court cited Interore I for making

the same factual finding. Id. The Second

Circuit adhered to the Sundance district

court’s factual finding. Sundance, 7 F.3d

at 1084.

A-43

I, 743 F. Supp. at 252, 257. The

agreement failed to specify the manner of

inspection or mention liability. Id. at

257. Judge Tenney concluded that the

parties did not have a "meeting of the

minds" regarding the scope of the

inspection and the parties did not

anticipate the risk of loss. Id. at 256-

58. These fact findings are binding on

this court unless they are clearly

erroneous. Fed. R. Civ. P. 52(a).

INTERPRETING SUNDANCE

Sundance Cruises Corp. v. American

Bureau of Shipping, 7 F.3d 1077 (2d Cir.

1993), cert. denied, U.S. _, 114 &.

Ct. 1399, 128 L. Ed. 2d 72 (1994) does not

support the majority’s analysis. The

court in Sundance denied compensatory

damages to Sundance, the ship owner. The

court agreed with Judge Knapp’s finding

that "Sundance had failed to show any

A-44

Vientiane

damage flowing from issuance of the

classification certificate." Id. at 1084.

In other words, Sundance failed to prove

causation. The court stated two

additional grounds for denying

compensatory damages to Sundance:

First, the great disparity between the

fee charged ($85,000) by ABS for its

services and the damages sought by

Sundance ($ 264,000,000) is strong

evidence that such a result was not

intended by the parties. We can only

conclude that the small fees charged

could not have been intended to cover

the risk of such liability; the ship

classification industry could not

continue to exist under such terms.

See, e.g., Vitol Trading S.A., Inc.,

v. SGS Control Servs., Inc., 874 F2d

76, 81-82 (2d Cir. 1989) (quoting

A-45

Restatement (Second) of Contracts §

351 cmt. f: "fact that price [charged)

is relatively small suggests that it

was not intended to cover the risk of

such liability").

Second, and probably most

Significantly, the shipowner, not ABS,

is ultimately responsible for and in

control of the activities aboard

SEs « 6 500% This ongoing responsi-

bility for the vessel is supplemented

by the maritime-law requirement that

the shipowner has a nondelegable duty

to furnish a seaworthy vessel. Great

American Ins. Co. v. Bureau Veritas,

338 F. Supp. 999 (S.D.N. Y 1972),

aff’d, 478 F2d 235 (2d Cir. 1973).

Id.

The reference in Sundance to the

damages sought and the fee charged as

"strong evidence that such a result was

A-46

set a ear para aa

at de

not intended by the parties," and that the

shipowner "is ultimately responsible for

and in control of the activities aboard

ship" indicates that the lack of causation

is not the sole basis for denying damages.

The Sundance court also cited § 351 of the

Restatement which allows a court to limit

damages for foreseeable loss "if it con-

cludes that in the circumstances justice

so requires in order to avoid

disproportionate compensation."

Restatement (Second) of Contracts § 351(3)

(1981). The very fact that the Sundance

court discussed § 351 reveals that the

court extended its reasoning to cases in

which causation is proven. In fact, § 351

is only applicable if the court first

finds that there were damages caused by

the breach. Only then would a court

decide whether to limit disproportionate

damages. Thus, the Sundance decision

supports the reasoning of Interore I that

a court, in the interests of justice, may

limit damages to avoid disproportionate

compensation, if causation is proven.

The additional grounds upon which the

Sundance court relied are analogous to

those in Interore I and therefore dictate

the same result. First, Judge Tenney

discussed the great disparity between the

contract price and the damages. Interore

sought damages of $2,400,000 on a contract

price of $150, a ratio of 16,000 to one.®

Interore I, 743 F. Supp. at 257. The

actual damages in this case were

$713,666.27 compared to a contract price

of $150, a ratio of 4,758 to one.

Second, the principle articulated in

Sundance that the shipowner is ultimately

responsible for the activities on a ship

© Although Judge Tenney based this

ratio on the pleadings, he acknowledged

that the actual damages may be much lower.

A-48

ONE a WE aa Ah RD ROE

is also applicable to lnterore, the

charterer of the Adelina. Sundance, 7

F.3d at 1084; Great American Ins. Co., 338

F. Supp. at 1015. As the charterer,

Interore was more likely than SGS to

anticipate the risk of liability.

Interore knew or had reason to know that

the New Zealand authorities would reject

the shipment if there had been minimal

contamination of the fertilizer. JInterore

I, 743 F Supp. at 260. Interore was in

the better position to avert the risk

because it was in the fertilizer business

and had shipped fertilizer to New Zealand

in the past. Id. Even though SGS was

responsible for assuring that the hold was

Clean, Interore could have minimized the

risk of loss by advising SGS of New

Zealand’s strict requirements. Id.

I would direct dismissal of the

complaint.

OPINION OF THE DISTRICT COURT,

DATED AUGUST 23, 1990, REPORTED

AT 743 F. SUPP. 250

A-50

INTERNATIONAL ORE & FERTILIZER CORP.,

Plaintiff,

Vv.

SGS CONTROL SERVICES,

INC., Defendant

No. 87 Civ. 6391 (CHT)

UNITED STATES DISTRICT COURT,

S.D. NEW YORK

August 23, 1990.

Kirlin, Campbell & Keating (Richard

Sommer, J. Scot Provan, Robert A. Milana,

Of Counsel), New York City, for plaintiff.

Schoeman, Marsh, Updike & Welt (Charles

B. Updike, Scott M. Reimer, Of Counsel),

New York City, for defendant.

OPINION

TENNEY, District Judge.

Plaintiff, International Ore and

Fertilizer Corporation ("lnterore"),

brings this breach of contract, breach of

warranty, negligence and misrepresentation

action against defendant, SGS Control

Services, lnc. ("SGS"), alleging that SGS

a a

improperly inspected and certified as

suitable the holds of a ship hired by

Interore to ship fertilizer from Tampa,

Florida to New Zealand. Specifically,

plaintiff contends that an SGS inspector

did not perform a workmanlike inspection

of the cargo holds in that he failed to

observe a residue of barley in each hold. .

Plaintiff claims that the barley

contaminated the fertilizer and ultimately

caused New Zealand authorities to reject

the cargo in those holds. The case was

bifurcated and the liability portion was

tried to the court which, for the reasons

set forth below, denies recovery under the

breach of contract claim but finds that

defendant is fifty percent liable on the

claim of negligent misrepresentation. The

following, including those additional

facts referred to in the Discussion,

constitutes the court’s findings of fact

A-52

and conclusions of law pursuant to Fed. R.

Civ. BP. $2(a).«

FINDINGS OF FACT

Background

1. Interore is a Delaware corporation

with its principal place of business in

New York, New York. It is a vendor of

fertilizer products in the international

market. Stipulated Fact 1; see Tr. 3-4.

2. SGS is a New York corporation with

its principal place of business in New

York, New York. It provides inspection,

testing and control services in connection

with the movement of bulk cargoes.

Stipulated Fact 2.

3. On or about May 29-30, 1985,

Interore entered into a contract to sell

22,202 metric tons of compound fertilizers

to East Coast Fertilizer Company Limited

("East Coast") for $4,118,287. See

Stipulated Fact 5.

A-53

4. Interore’s agreement with East

Coast was on a cost and freight basis,

whereby title to the product passed as

soon as it was loaded on the ship and East

Coast was responsible for securing its own

insurance for the product. Tr. 52.

5. This was the first such arrangement

that Interore had entered into with East

Coast, but it had provided fertilizer to a

buyer in New Zealand on one prior

occasion. Tr. 50.

6. On June 7, 1985, Interore entered

into a voyage charter party agreement to

charter the vessel M/V ADELINA to

transport the fertilizer from Landskrona,

Sweden and Tampa, Florida to Napier, New

Zealand. Pl. Exh. 2, Complaint @ 7.’

7 Under the voyage charter, the owner

of the vessel had an obligation under its

contract with Interore to provide a vessel

with clean holds. Pl. Exh. 2 4G 2, 31. The

shipowner is not a party to this action.

A-54

7. The agreement with East Coast

required Interore to secure the services

of a hold inspector. On June 19, 1985,

Interore entered into a contract with SGS

to inspect the holds of the ADELINA when

it arrived in Tampa to determine whether

they were suitable to load fertilizer, and

also to supervise the loading, sampling,

and chemical analyses of the fertilizer.

Stipulated Fact 5; Tr. 11. The loading

and sampling services were performed

without incident and are not part of this

complaint.

8. Interore had hired SGS to perform

similar services 200-400 times previously.

Tr. 12. As in the past, the oral

agreement between plaintiff and defendant

was memorialized in a telex sent by

Interore to SGS, which stated in pertinent

part:

Pls act our behalf performing inspection,

A-55

sampling and analysis. Pls issue flwg

docs: 1) Cert of hold inspection,

confirming vsls holds were clean, dry and

suitable.

Pl. Exh. 19; see Tr. 13-14.

9. Interore paid SGS $150 (three holds

at fifty dollars per hold) for the

cleanliness survey, and an additional

$1,859.92 for the other services. Pl.

Exh. 30.

oa aOR EGRESS RN A RE ER RARER SIS NE SN MMAR ETNA ENE TERM MRY SH Dyce /E6 =

The Ship and its Prior Cargos

10. The ADELINA is a 16,356 ton bulk

carrier of Greek registry built in 1977

and owned by Blue Falcon Shipping Corp.

The vessel has five cargo holds. Holds

two, three, four and five each measure

26.4 meters long, 24.6 meters wide, and

14.23 meters high. Hold one is slightly

narrower at the front. Tr. 176; Pl. Exh.

1; Def. Exh. C, D. The holds are

separated fore and aft by vertical

A-56

bulkheads. See Tr. 183.

11. At the aft end of each hold is an

"Australian" ladder, a staircase or step

ladder running at an angle rather than

vertically, with hand railings and steps

rather than rungs. See Pl. Exh. 21

(Picture 21). There is a standard

vertical ladder attached to the forward

bulkhead. Pl. Exh. 21 (Picture 21). The

Australian ladder is accessed through a

manhole cover on the deck of the ship.

Tr. 180-81.

12. On the port and starboard side of

each hold are vertical ribs protruding out

from the hull a distance of approximately

two feet. See Pl. Exh. 21 (Pictures l,

22). The ribs extend from the top of the

hold to about eight feet off the floor

where the lower section of the hold wall

runs off at a forty-five degree angle

toward the floor. Tr. 237, Def. Exh. D.

A-57

The angled portion of the hold’s wall

covers the ship’s wing tanks and measures

twelve feet from the floor of the hold to

the point at which it coins the side of

the hull.

13. Horizontal bars, called stringers,

are attached at regular intervals to the

front of the vertical ribs, forming a

checkerboard pattern on the port and

starboard side of each hold. Pl. Exh. 21

(Picture 1); Def. Exh. D. Stringers are

not commonly found in bulk carrie~s built

today, but are quite common in older ships

such as the ADELINA. Tr. 401.

14. Nested between some of the ribs

are vertical pipes running along the hull

from the top of the hold to the top of the

wing tank. Each pipe is protected by a

series of short, horizontal bars affixed

to the front of the two ribs between which

the pipe sits. Pl. Exh. 21 (Picture 1 ).

A-58

A

Ed

'

ré

4 3

E

~

:

Although they extend downward only as far

as the top of the wing tank, these short

horizontal bars resemble and can be used

as a ladder. Tr. 184-85.

15. At the top of each hold is a

square hatch opening. The dimensions of

the opening on hold one are 12.5m X 8.6m,

and 16.7m X 12m on holds two, three, four

and five. Def. Exh. C. Around the

opening of the hatch, supporting the deck

of the ship, are a series of deck beams.

These consist of a vertical beam

approximately three feet high with a

horizontal lip on the lower edge, which

protrudes out several inches on either

side of the vertical beam. See Tr. 182;

Pl. Exh. 20 (Picture 22).

16. On December 17, 1984, the ship

carried a full cargo of barley from

England to Iran. Pl. Exh. 13, 27, 28. The

holds were filled to the top with the

A-59

grain. Tr. 178,254. On April 30, 1985,

the vessel carried a cargo of iron ore and

coal from South Africa to Rotterdan,

Sweden. Pl. Exh. 13, 27, 28.

17. After the coal was discharged, the

crew of the ship cleaned and painted the

cargo holds. Tr. 166-67, 322-23. The

cleaning was inadequate because the crew

failed to remove a substantial amount of

barley grains from pockets behind the

stringers and the protruding lips of the

deck beams. In addition, the crew painted

over some of the barley that was left in

the hold, although a substantial amount of

barley remaining was not painted over.

Pl. Exh. 20 at 3-5.

The Inspection in Landskrona

18. The ADELINA arrived in Landskrona

on June 10, 1985, where it was to be

loaded with 7,353 metric tons of

fertilizer into holds one and four.

A~-60

Stipulated Fact 3.

19. Mr. Jan Litting, an inspector from

defendant’s affiliate in Sweden -- SGS

Skandinaviska Kontroll AB -- surveyed

holds one and four. He brought with him

an apprentice inspector, Mr. Ulf Svensson.

fr. 312-13.

20. Litting boarded the ship at

approximately 7:00 p.m. and spoke with the

first mate. He asked that the hatch cover

for hold one be opened halfway. Tr. 314,

336. While this was being done, he asked

the mate about the prior cargos of the

ship. Tr. 332, 334.

21. He then inspected the hatch covers

and proceeded to go down the Australian

ladder into the hold, stopping

periodically to inspect the deck beams and

condition of the paint. Tr. 315-16, 339.

22. When he reached the bottom of the

hold, he ordered the hatches all the way

A-61

open to see if the process of opening them

caused anything to fall from the covers,

which it did not. Tr. 316-17.

23. He then walked all around the tank

top (floor of the hold) and looked at the

stringers from below, Tr. 318, and climbed

the vertical ladder to inspect them from

the side, Tr. 344.

24. He and Mr. Svensson repeated this

process in hold four, spending about

twenty to twenty-five minutes in hold four

and twenty minutes in hold one, which is

smaller than hold four. Tr. 337.

25. Upon emerging from the second

hold, Litting spoke with the mate again,

asking him what kind of paint had been

used in the holds and who had painted

them. Tr. 322. He then approved the

holds as clean, dry and suitable to

receive the cargo. Tr. 327; Pl. Exh. 3.

26. The inspectors then went ashore

A-62

and Litting called his supervisor to

report his findings, making note of the

fact that the holds had been freshly

painted. Tr. 325. The ship departed

Landskrona on June 13, 1985, bound for

Tampa. Stipulated Fact 3.

Arrival in Tampa and Mr. Luard’s

Inspection

27. SGS hired a subcontractor, Captain

Peter Luard ("Luard"), to perform a hold

cleanliness inspection in Tampa for the

remaining holds. Luard had worked in the

maritime industry for many years but had

regularly performed hold inspections only

since 1981. Tr. 267-72. In 1981 he

worked for SGS in Savannah, Georgia,

performing hold inspections and draft

surveys exclusively for coal cargos. Tr.

273. SGS transferred him to Tampa in 1983

where he performed surveys almost entirely

for ships waiting to load fertilizer. Id.

A-63

In late April, 1985, he left SGS to form

his own company but did contract work

periodically for SGS. Tr. 274.

28. The ADELINA arrived in Tampa on

June 30, 1985. Stipulated Fact 4; Def.

Exh. Mat 1. After spending over a day at

anchor, the ship picked up a pilot at 9:45

p.m. on July 1, who guided it through the

harbor. Def. Exh. M at 2. At 1:20 a.m.

on July 2, two tug boats were secured to

the ship to bring it to the pier. Id. at

3. Between 1:20 and 1:45, the tugs moved

the ship alongside the pier and the

process of making the ship fast to the

dock began. Id. All lines were fastened

by 1:45. Id.

29. lLuard entered the ship along with

the plaintiff’s representative and United

States customs and immigration officials

between 1:30 a.m. and 1:45 a.m. See Id.;

1|

Tr. 85.°.

30. Upon entering the ship, Luard

requested that the hatch to hold five be

opened, which took apout five minutes. Tr.

291-92,304. Luard began to inspect the

hatch cover to the first hold at

approximately 1:45 a.m.

31. Luard then walked down the aft

8 Although the record does not

indicate precisely what happened between

1:20 and 1:45, the vessel would naturally

have been maneuvered to the pier by the

tugs, untied from them, and then secured

to the dock. It would seem virtually

impossible for Luard to have been aboard

the ADELINA before 1:30, as he contends is

the case. On the other hand, he may well

have been aboard prior to 1:45.

Defendant’s expert explained that a ship’s

gangway is frequently put down after just

a few lines are tied and that the time of

1:45 a.m. on the deck log and a variety of

other documents, see Def. Exh. M; Pl.

Exhs. 15, 16, 17, reflects the time that

all the lines on the boat were secured.

Defenaant’s expert testified that it could

take up to an hour to secure all the lines

on a vessel the size of the ADELINA. Tr.

384. The court therefore concludes that

Luard was on the ship between 1:30 and

1:45 a.m.

A-65

Australian ladder, stopping periodically

for a brief inspection of the stringers

and the overhead deck beams. Tr. 294-95.

He proceeded to walk around the floor of

the hold looking for foreign matter, and

then aimed his flashlight up onto the face

of the stringers anda the bottom of the

overhead beams. Tr. 295. He repeated

this process in holds two and three. Tr.

131. At no point during his inspection

did Luard attempt to look behind the

stringers. Tr. 297, 303. Nor was he able

to examine the upper surface of the lip of

the deck beams, except to the extent that

he attempted to observe the condition of

the beams nearest his vantage point on the

Australian ladder. Tr. 294-95.

32. He completed his inspection of the

holds at 2:15 a.m., having spent

approximately ten minutes in each hold.

Tr. 291-92; Def. Exh. M at 3. He then

A-66

spoke to the chief mate and had a cup of

coffee. Tr. 136.

33. In speaking with the mate, he

learned that the prior two cargos had been

barley and coal, respectively. He did not

return to the holds to reinspect them for

residue of either of these two materials.

Tr. 137, 299-300.

34. At 2:15 a.m., Luard completed a

document entitled "Certificate of

Readiness." This was a standard form that

had been prepared by SGS. It consisted of

typewritten text and blank spaces, which

Luard filled in by hand. He also

supplemented the typed text, as indicated

below in brackets. The completed form

stated in relevant part:

Certificate of Readiness

This is to certify that the undersigned

Marine Surveyor did, at the request of

on behalf of did attend on board

A-67

the M.V./Adelina of 16,356.78 Gross Tons,

Port of Registry Piraeus, whereof Capt.

Matselos P is Master and now lying at

Gardinier Terminal for the purpose of

surveying the following cargo nolds Nos.

2, 3, and 5. Said cargo compartments [fand

hatch covers] have been surveyed and found

suitable to load a cargo of Phosphate this

time and date.

DATE July 2nd 1985

TIME PASSED 0215

Peter F. Luard

SURVEYOR

for SGS CONTROL SERVICES INC.

i ee eee ee ee

ALL INSPECTIONS ARE CARRIED OUT TO THE

BEST OF OUR KNOWLEDGE AND ABILITY AND OUR

RESPONSIBILITY IS LIMITED TO THE EXERCISE

OF REASONABLE CARE

Pl. Exh. 14.

35. After Luard signed the

A-68

certificate, the vessel loaded 6,503

metric tons of fertilizer into hold two,

4,169 tons into hold three, and 4,175 tons

into hold five. Stipulated Fact 6.

The Voyage to Napier and the Condition

of the Cargo

36. The ship departed Tampa on July 4,

1985, and arrived at Napier, New Zealand

on August 1, 1985. Stipulated Facts 6, 7;

Def. Exh. M at 35.

37. The ship had experienced about a

week and one half of rough weather on the

voyage from Tampa to Napier. Tr. 223-26;

Def. Exh. M at 24-34.

38. When officials of the New Zealand

Ministry of Agriculture and Fisheries

("MAF") inspected the cargo in Napier,

they discovered that the fertilizer in

each hold was contaminated with barley.

Pl. Exh. 20 at 2.

39. Later tests revealed that the

A-69

barley was infected with Tilletia

Controversa (Dwarf Bunt) and Barley Stripe

Mosaic Virus. Id. at 7.

40. The MAF officials stated that they

would allow the fertilizer to be

discharged only if East Coast notified all

customers that the fertilizer was

contaminated and that it should not be

used where barley would be grown in the

season following application. East Coast

rejected this demand, asserting that it

would injure its professional reputation

as a supplier of fertilizer. Id. at 2;

Pl. Exhs. 10, 22.

41. After MAF’s initial inspection,

the plaintiff hired Dominion Adjusters

("Dominion") to conduct a survey of the

cargo and holds. Tr. 41. A

representative of Dominion inspected the

cargo and found barley lodged on the

overheads, stringers and hatch covering

A-70

returns. Pl. Exh. 20 at 3, 5.

42. Most of the contaminating grains

had fallen from the deck beams and hatch

covering returns as evidenced by the

distribution of grain in the hold. There

was little or no contaminant in the

“square of the hatches" (the square center

of each hold directly under the hatch) but

some quantity was present in the

fertilizer forming the periphery of the

square. id. at 3; Tr. 110, 118, 191.

43. All five holds had a similar level

of contamination. Id. at 5.

44. The MAF officials and the various

parties attempted over several days to

resolve the problem, but ultimately the

cargo was rejected. The officials

believed the barley was layered throughout

the heap and therefore refused the

suggestion that the crew simply pick up

the visible grain ears. Id. at 3.

A-71

45. The photographs taken by the

Dominion inspector show grain lodged

behind the stringers, some of it painted

over, Pl. Exh. 21 (Pictures 5-7, 11, 16

201, 24, 25, 28, 33,34, 36, 38, 43

and 42) and also scattered over the

fertilizer heap, Id. (Pictures 2, 3, 8,

12, 127, 26, 27, 32, 33, 329, 39 anm@ 40).

46. The cargo was ultimately resold to

a buyer in Antwerp, for less than the

contract price between Interore and East

Coast. Tr. 49.

DISCUSSION

A. Contract Liability

The telex that Interore sent SGS on

June 19, 1985, memorializes the agreement

between the parties in this case. It

requested SGS to perform a hold

cleanliness inspection and to issue a

certificate confirming that the holds were

clean. The telex did not specify the

A-72

manner in which the inspection was to be

carried out, but correspondence from SGS

to Interore, like the Certificate of

Readiness prepared by Mr. Luard, provides:

"All inspections are carried cut to the

best of our knowledge and ability and our

responsibility is limited to the exercise

of reasonable care." Pl. Exhs. &, 8, €

and 14. Considering the long history

between the parties, that degree of care

was incorporated in this contract as

well.’ The parties did not define

° Therefore, it is unnecessary to

determine whether defendant was also bound

by any implied warranty to _ provide

reasonable care. See Great American

Insurance Co. v. Bureau Veritas, 338 F.

Supp. 999, 1013-15 (S.D.N.Y. L972), aff'd,

478 F.2d 235 (2a Cir. A973) 3 Ryan

Stevedoring Co. v. Pan-Atlantic S.S.

Corp., 350 U.S. 124, 133-34, 76 S. Ct.

232, 100 L. Ed. 133 (1956); Note,

Liability of Marine Surveyors for Loss of

Surveyed Vessels: When Someone Other than

the Captain Goes Down with the Ship, 64

Notre Dame L.Rev. 246, 261-70 (1989);

McCormack, Warranties and Disclaimers, 62

Tul.L.Rev. 549, 560-68 (1988).

A-73

"reasonable care," but when a contract for

services requiring special skills does not

contain a provision describing how the

service is to be rendered, New York law

requires the service be performed in a

"workmanlike manner."*° Vitol Trading

S.A., Inc. v. SGS Control Services, Inc.,

680 F. Supp. 559, 567 (S.D.N.¥. 1987),

rev’d on other grounds, 874 F.2d 76 (2d

Cir. 1989); Lunn v. Silfies, 106 Misc. 2d

41, 44, 431 N.Y.S. 2d 282, 284 (Sup. Ct.

1980).

Generally speaking, how the service is

customarily performed in the industry will

be strong evidence of what is reasonable

or workmanlike. See W. Keelon,

D. Dobbs, R. Keeton, D. Owen, Prosser and

Keeton on Torts § 33 at 194-95 (5th ed.

1984) [hereinafter Prosser]. The parties

10 Both parties have assumed that New

York law controls.

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dispute what the standard in the industry

is concerning inspection of the stringers

and the overhead beams, the areas where

the grain was found. Defendant’s expert,

Captain Shore ("Shore") and plaintiff’s

expert, Captain Davenport ("Davenport")

agreed that a reasonable inspector, when

entering the hold, would stop periodically

on the access ladder tS direct the beam of

a flashlight onto the stringers and deck

beams, Tr. 186, 316, and would inspect

them again from the tank top. Tr. 186-87,

318, 400. Shore testified that inspectors

would thereafter climb the forward

vertical ladder to the top of the hold,

again stopping periodically to inspect the

stringers and deck beams visually. Tr.

186-87. Luard’s inspection was

substantially similar to the hypothetical

A~75

survey described by Shore.**

Davenport testified that an inspector

should take additional measures to check

behind the stringers. Specifically,

Davenport testified that when he performs

an inspection on a vessel with stringers,

he runs up the wing tanks and then climbs

the pipe guards, looking for contaminant

in the pockets formed by the stringers and

the vertical ribs. Tr. 238. Shore

testified that he does not run up the wing

tanks and knows of no inspector who does.

Tr. 380, 391. He added that he had once

attempted to run up the wing tank of a

11 Although the evidence suggests

that Luard did not climb the forward

vertical ladder, and spent only ten

minutes in each hold, see Findings of Fact

2933, the court will assume for the

‘purposes of this discussion that Luard

performed an inspection as thorough as

that described by Shore. This is because

the Swedish inspector substantially

performed such an inspection, see Findings

of Fact 20-25, but nevertheless failed to

detect the grain.

A-76

ship in doing a structural survey, but was

unable to do so. Tr. 404. Luard and the

Swedish inspector also testified that it

was not standard practice to run up the

surface of the wing tanks. Tr. 144, 282,

351.

The parties apparently did not have a

"meeting of the minds" on precisely what

the inspection would entail. Considering

their past relationship, each contemplated

that the defendant would exercise

reasonable care, which obligated it to use

workmanlike efforts. In determining what

steps this would actually require,

Plaintiff maintains that the court should

interpret "workmanlike conduct" by an

objective standard of reasonableness.

which would require the surveyor to

perform an inspection reasonably

calculated to find hidden contaminants.

Plaintiff asserts that the surveyor should

A-77

either climb the wing tanks as Davenport

does, or get a ladder from the crew to

enable him to inspect behind the

stringers. Plaintiff contends that

Shore’s inspection would be adequate in a

modern ship built without stringers, but

is inadequate and, therefore unworkmanlike

in a ship with stringers. See Prosser

§ 33 at 194 ("[C]ustoms which are entirely

reasonable under the ordinary

circumstances which give rise to them in

the first instance may become entirely

unreasonable in the light of a single fact

altering the situation in the particular

case.") Plaintiff argues that if the

industry standard is as defendant’s expert

describes, it is deficient. Plaintiff

cites The T.J. Hooper, 60 E.2d 737, 740

(2a Cir. 1932) (Hand, J.) for the

proposition that because an entire

industry may be negligent, industry custom

A-78

is only some evidence of what is

reasonable: the court must ultimately

decide whether the service in question was

performed negligently.

Defendant argues first that Davenport’s

testimony is not credible, claiming it is

virtually impossible to run up the wing

tanks and climb the pipe guards. Although

it may be a difficult procedure in some

types of holds, it is certainly not an

impossible task, especially in a hold

whose wing tanks are shorter and flatter

than others. See Tr. 238. Even if it

could be done, however, SGS claims that

the parties contracted only for the

standard industry inspection, which did

not involve any more extensive checking of

the stringers than that carried out by Mr.

Luard. See Vitol, 680 F. Supp. at 567;

Milau Assoc., Inc. v. North Ave. Dev.

Corp., 42 N.Y. 2d 482, 486, 368 N.E.2d

A-79

1247, 1250, 398 N.Y.S.2d 882, 885 (1977)

("(Rjeasonable care and competence owed

generally by practitioners in the

particular trade or profession defines the

limits of an injured party’s justifiable

demands."). Indeed, SGS claims that its

inspectors have performed inspections

without checking behind the stringers on

many prior occasions. Noting that

contract law allows the parties to agree

on whatever type of inspection they

choose, SGS argues that the interpretation

of the parties’ intent regarding the term

"reasonable" should be limited by the

custom and practices in the industry.

Although contract law provides a method

to resolve such disputes over

interpretation, see, e.g., A. Corbin,

Corbin on Contracts § 536 (1960 & Supp.

1990), the court need not reach the issue

of what “workmanlike efforts" would

A-80

entail. Whether it does, or should,

involve efforts as extensive as that

Suggested by plaintiff or could be

Satisfied by the inspection performed by

Luard, would not be determinative because

even if Luard violated his contractual

duties, SGS would not be required to pay

the full amount of damages plaintiff

seeks. The mere fact that one party to an

agreement has failed to satisfy a

contractual duty of care does not

necessarily mean that it will be held

fully liable for all resulting damages,

even if foreseeable.

It is not always in the interest of

justice to require the party in breach to

pay damages for all of the foreseeable

loss that he has caused. There are

unusual instances in which it appears from

the circumstances either that the parties

assumed that one of them would not bear

A-81

the risk of a particular loss or that,

although there was no such assumption, it

would be unjust to put the risk on that

party. One such circumstance is an

extreme disproportion between the loss and

the price charged by the party whose

liability for that loss is in question.

The fact that the price is relatively

small suggests that it was not intended to

cover the risk of such liability. Another

such circumstance is an informality of

dealing, including the absence of a

detailed written contract, which indicates

that there was no careful attempt to

allocate all of the risks. The fact that

the parties did not attempt to delineate

with precision all of the risks justifies

a court in attempting to allocate them

fairly.

Restatement (Second) of Contracts § 351

comment f (1979). Interore paid SGS fifty

A-82

dollars per hold or one hundred fifty

dollars to perform the cleanliness

inspection in Tampa, and seeks damages of

$2,400,000. Ina case very Similar to the

one at bar involving the same defendant,

Vitol Trading S.A., Inc. v. SGS Control

Services, 874 F.2d 76, 81 (2d Cir. 1989),

plaintiff sought damages in the amount of

$547,688 on a contract price of $220, a

ratio of approximately 2,500 to one. The

Second Circuit explained that if scs

intended to assume so great a risk, it

would have charged substantially more for

its services. Alternatively, it would

have turned down the plaintiff’s offer,

rather than risk so much for so little.

In this case, the disparity between the

contract price and the damages is even

greater. Plaintiff seeks damages of

$2,400,000 on a contract price of $150, a

A-83

ratio of 16,000 to one.** See Evra Corp

v. Swiss Bank Corp., 673 F.2d 951, 956

(7th Cir.) (difference between damages of

$2,100,000 too disproportionate to

contract price of $27,000), cert. denied,

459 U.S. 1017, 103 S. Ct. 377, 74 L. Ed.

2d 511 (1982); cf. Kenford Co. v. County

of Erie, 108 A.D.2d 132, 137 n. 5, 489

N.Y.S.2d 939, 944 n. 5 (App. Div. 1985)

(damages not out of proportion to profit

defendants could have made), aff’d, 67

N.Y.2d 257, 493 N.E.2d 234, 502 N.Y S.2d

131 (1986). In addition, the parties

reached their agreement over the phone,

and plaintiff simply confirmed it with a

one-page telex. The telex merely requests

“Admittedly this ratio is based on

the pleadings; the actual damages may be

much lower. Nevertheless, considering that

plaintiff will recover fifty-percent under

its tort cause of action, the court need

not decide how much, if any, it could also

recover under a contract theory.

defendant to perform the various services

and to issue a series of documents. It is

devoid of any mention of liability. The

low contract price and informal dealings

between the parties indicates that they

did not attempt to allocate all of the

risks. Therefore, the court is justified

in allocating them fairly. Accordingly,

it finds that plaintiff should not recover

compensatory damages on the contract.”

B. Tort Liability

The court’s denial of recovery under

the contract theory is based upon the

disparity between the contract price and

** As explained in the following

discussion, defendant’s erroneous

statement that the holds were clean

permits plaintiff to recover under the

tort theory of negligent representation.

Because the court has held that plaintiff

cannot recover under the contract theory,

it does not decide whether this incorrect

certification also violated any implied

warranty that the statements in the

"Certificate of Readiness" would be accurate.

A-85

the damages incurred. Nevertheless, that

consideration does not apply to the

analysis of defendant’s duties under

independent tort law.

When the duty of one person to another

exists solely by virtue of a negotiated

agreement, the relationship is normally

governed only by the law of contract. Sew

Niagara Mohawk Power Corp. v. Stone &

Webster Engineering Corp., 725 F. Supp.

656, 662 (N.D.N.Y. 1989); Carmania Corp.,

N.V. v. Hambrecht Terrell Int’l, 705 F.

Supp. 936, 938 (S.D.N.Y. 1989).

Accordingly, a violation of that duty does

not ordinarily give rise to a remedy in

ton. Niagara, 725 F. Supp. at 661-62.

Nevertheless, if the conduct of one party

would constitute a ton in the absence of

the contract, then that cause of action is

not extinguished simply because some

aspects of the relationship between the

A-86

parties happen also to be governed by an

independent agreement. Id.: Eaves Brooks

Costume Co., Inc. v. Y.B.H. Realty Corp.,

76 N.Y.2d 220, 556 N.E.2d 1093, 557

N.Y.S.2d 286 (1990) (plaintiff may

properly bring an action in ton when

defendant had assumed a duty to exercise

reasonable care 10 prevent foreseeable

harm to plaintiff).

Plaintiff has urged two theories under

ton law, negligence and negligent

representation. Plaintiff’s negligence

claim asserts that defendant unreasonably

failed to detect the presence of the

contaminating barley. Essentially,

Plaintiff argues that defendant had a duty

to perform a "reasonable" inspection,

which would have at least involved

inspecting the stringers on the sides of

the hold. Unfortunately, the duty to

inspect the hold arose only by virtue of

A-87

Ee

the contract. For example, without the

contract, there would have been no duty

requiring defendant to send a

representative to inspect plaintiff’s

ship. Similarly, defendant did not have a

duty to perform any particular kind of

inspection, except as required under the

contract. Indeed, nothing in the law of

tort would have imposed additional duties

on defendant if the parties had agreed

that the surveyor was supposed to conduct

only a limited inspection. Since the duty

to inspect arose only by virtue of the

contract, which was freely negotiated by

the parties, there can be no independent

tort liability for failing to take certain

steps as part of that inspection. See

Niagara at 662; Clark-Fitzpatrick, Inc. v.

Longlsland R.R. Co., 70 N.Y.2d 382, 389,

516 N.E.2d 190, 193-94, 521 N.Y.S.2d 653,

656-67 (1987).

A-88

That does not rule out liability for

negligent misrepresentation, however.

Under the law of negligent

misrepresentation, a person will be held

liable for damages arising from the

reliance by another on a representation

that the person knows, or should have

known, was not true. See White v.

Guarente, 43 N.Y.2d 356, 353, 372 N.E.2a

315, 319, 401 N.Y.S.2d 474, 478 (1977);

Ultramares Corp. v. Touche, 255 N.Y. 170,

181-82, 174 N.E. 441, 445 (1931). In

addition, "[a] representation made with an

honest belief in its truth may still be

negligent, because of lack of reasonable

care in ascertaining the facts." Prosser

§ 107 at 745. The agreement called for

Luard, after finishing his inspection, to

provide a document confirming that he had

performed an inspection and found the

holds to be suitable to receive the cargo.

A-89

a

As previously noted, the parties probably

did not have a meeting of the minds as to

exactly how, or how extensively, Luard

would inspect the holds. They _— knew,

however, that Luard’s inspection was to be

the last check before the fertilizer was

loaded. Moreover, Luard had the authority

to block the loading if he were not

satisfied with the condition of the hold.

In fact, all of the inspectors including

Luard have on occasion delayed the loading

of a cargo so that crews could properly

clean the holds. See Tr. 283-84,349,

408-09.

Therefore, defendant must have realized

that if it provided the certificate,

plaintiff would take no further steps to

determine the state of cleanliness of the

holds. Even if, as defendant argues, it

had no duty under contract or ton law to

do more than was the practice in the

A-90

industry, it must have been aware that in

entering into this agreement, plaintiff

was relying, if not on the actual

inspection itself, then at least on this

document for reassurance that the

fertilizer could safely be loaded.

Luard should also have known that his

representation about the cleanliness of

the holds might have been inaccurate. He

testified that he looked at the stringers

only from the vantage point of the

Australian ladder. Considering the

orientation of the stringers and their

distance from these ladders, the court is

skeptical that Luard could have adequately

observed whether they were clean. Even if

he could see those portions of the

stringers close to the ladders, he should

have known that this would not necessarily

be indicative of the portions further

away. For example, just like Luard, a

A-91

a

cleaning crew would have difficulty

reaching the center section of the

stringers, although it could more easily

access the areas by the ladders. See Tr.

300. As a matter of common sense, Luard

should have realized that the cleanliness

of easily accessed areas would not

necessarily reflect the condition of those

that were difficult to reach.

Both plaintiff’s and defendant’s

experts, as well as Luard, testified that

the back of the stringers is an area where

one would expect to find cargo residue.

Tr. 17879, 192, 298,401. Therefore, Luard

knew, or should have known, that his

limited inspection did not provide a valid

basis upon which to state that the hold

was, in fact, free of all possible

contaminants. Accordingly, he should not

have simply signed a certificate that

reasonably led plaintiff to assume it was

A-92

clean.

Instead, Luard should have reported to

Mr. Clemente Colon, plaintiff’s

representative on the ship, that there

were areas in the hold that he could not

inspect in the course of his routine

survey.** Colon had the ultimate

responsibility for deciding whether the

cargo would be loaded. Armed with this

information, Colon could have

intelligently decided how to proceed. See

Tr. 74, 93. For example, he might have

decided that a further delay was warranted

and asked defendant to secure a ladder to

check the stringers. Shore testified that

“This does not mean that an

inspector in lLuard’s position, must

actually meet with the plaintiff’s

representative. It would have been

equally acceptable if the Certificate of

Inspection had clearly stated that only

those areas actually inspected were found

to be clean, and had included a section

noting the areas that the inspector was

not able to examine.

A-93

it is normal to request a ladder whenever

an inspector wishes to see an area that

cannot otherwise be accessed. Tr. 408-09.

Indeed, in this case, if Luard had told

Colon that he could not attest to the

cleanliness of the hold, Colon would

likely have requested a ladder and this

loss would have been avoided. Even in the

case of a vessel with overhead beams and

no stringers, the plaintiff’s

representative could take further

investigatory steps such as inquiring of

the cleaning crew how the beams were

cleaned, if at all.** Since the risk of

+S If the situation were warranted,

the seller’s representative might even

take extraordinary measures such _ as

lowering a crew member down from the hatch

opening to inspect the beams. Although

such action was certainly not contemplated

to be pan of defendant’s inspection, the

failure to alert Colon to the possibility

of contamination prevented him making a

reasoned judgment as to what steps should

be taken to help determine how to proceed.

A-94

an incorrect decision to load might result

in a loss of several million dollars, it

would seem likely that Colon would have

wanted to take whatever additional steps

were reasonable under the circumstances to

protect the cargo.**

Although Luard was negligent in failing

to inform plaintiff that there remained a

risk of contamination, part of the reason

for his failure was because plaintiff had

not brought home to him the risks

involved. Tort law attempts, inter alia,

to put the risk of loss on the party best

able to avert it. See Prosser § 4.

*© The court does not address the

more difficult situation in which

defendant can prove that the plaintiff’s

representative would not have taken

additional steps after learning of the

potential risk. Nor does it address those

situations in which the inspector himself

has taken every reasonable step to

determine whether the hold was clean,

leaving nothing for the plaintiff’s

representative to do.

A-95

Interore was in the fertilizer business

and had previously shipped fertilizer to

New Zealand. In fact, Interore sent a

representative to New Zealand specifically

to handle this contract. Tr. 4, 31. The

inspector from Dominion notes in his

report that the New Zealand officials are

extremely strict regarding the importation

of foreign vegetable matter. Pl. Exh. 20

at 8. Since it was in the fertilizer

business and had dealings with New Zealand

authorities before, plaintiff was ina

better position than defendant to know

that even minimal contamination of grain

could result in rejection by the New

Zealand authorities. If it did not know,

it should have known because a reasonable

seller of fertilizer would have deter-

mined the requirements for bringing its

product into a foreign country.

When it retained defendant’s services,

A-96

plaintiff could easily have alerted it to

the strict standards of cleanliness that

were necessary. Had Luard been informed

that the slightest amount of foreign

matter could contaminate the cargo, he

would likely have performed a more

thorough inspection. That does not

diminish Luard’s negligence for

representing that the hold was clean, but

it illustrates that each party had

exclusive knowledge of facts that, if

communicated to the other, might well have

avoided the risk of loss. The court

therefore finds that the plaintiff and

defendant are equally responsible for the

barley not being discovered and apportions

fault at fifty percent each.

CONCLUSION

Defendant is liable for fifty percent

of the damages resulting from

contamination of the fertilizer. The

A-97

actual amount of damages will be

determined in the second phase of the

trial.

So ordered.

A-98

OPINION OF THE DISTRICT COURT,

DATED AUGUST 10, 1993, REPORTED

AT 828 F. SUPP. 1098

ae naar

A-99

INTERNATIONAL ORE & FERTILIZER

CORP., Plaintiff,

Vv.

SGS CONTROL SERVICES,

INC., Defendant.

No. 87 Civ. 6391 (CHT)

United States District Court,

S.D. New York

August 10, 1993.

OPINION and ORDER

TENNEY, District Judge:

In 1987, plaintiff International Ore

and Fertilizer Corp. ("Interore") brought

an action for breach of contract, breach

of warranty, negligence, and

misrepresentation against SGS Control

Services, Inc. ("SGS"). In 1985,

Interore contracted to sell fertilizer to

East Coast Fertilizer Co., Ltd. ("East

Coast"). Three of the holds of the M/V

ACDELINA were used to ship the fertilizer

from Tampa, Florida to New Zealand;

A-100

Interore hired SGS to inspect the holds

before the fertilizer was stored.

Although SGS had certified the holds as

clean, upon arrival in New Zealand the

fertilizer was found to be contaminated

with the remains of barley previously

stored in the holds. The Ministry of

Agriculture and Fisheries ("MAF") refused

to allow the fertilizer in the country,

and East Coast refused to accept it,

except at a significantly reduced price.

Interore ultimately shipped the fertilizer

to Antwerp and sold it there. This suit

followed.

The case was bifurcated and the

liability portion was tried before this

court. International Ore & Fertilizer

Corp. v. SGS Control Services, Inc., 743

F. Supp. 250 (S.D.N.Y. 1990). This court

held that compensatory damages were not

allowed, that SGS could not be held liable

A-101

on the theory of negligent inspection of

the holds where the duty arose solely by

virtue of contract, and that SGS would be

held 50% liable on the theory of negligent

misrepresentation for approving the holds

as suitable without alerting Interore that

there were areas of the ship’s holds that

SGS was not able to inspect. Interore was

found to share in the blame, because it

failed to notify SGS’s inspector of the

strict standard of cleanliness required

because of both the nature of the cargo

and New Zealand’s standards regarding the

importation of foreign vegetable matter.

Familiarity with the prior opinion is

assumed.

A three day trial on the damages

portion of this case was then heard before

Chief Magistrate Judge Nina Gershon. She

issued a report and recommendation on

March 31, 1993 (the “Report"), which is

A-102

attached as Appendix A. Pursuant to 28

U.S.C. § 636(b) (1) and Federal Rule of

Civil Procedure 72(b), the parties were

given ten days to submit written

objections to the report. By order of

this court dated April 12, the time was

extended. Both parties submitted timely

objections. For the reasons stated below

in discussing various objections raised,

this court now accepts and adopts all the

recommendations in the Report.

I. Objections to Evidence Heard and

Magistrate Judge’s Findings

SGS has objected on a number of grounds

that go to the narrowing of issues by the

magistrate judge at the damages phase. In

all respects, however, the magistrate

judge acted properly.?’

*” The court finds it difficult to

separate several of SGS’s objections that

stem from the same root: SGS has to pay

costs that it believes are

disproportionate to its degree of fault,

and it objects that it has been held

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A. Presentation of Proximate Cause Issue

SGS broadly objects that the magistrate

judge prevented it from defending on the

basis that its conduct was not the

proximate cause of the contamination of

the fertilizer. SGS claims that this

court’s opinion "clearly required the

second phase of the trial to determine the

damages ‘resulting from’ the contamination

of the fertilizer." Defendant’s

Objections to Report ("Def. Obj."), at 15.

SGS interprets this to imply that

liable for damages resulting from the

contamination. However, this court held

previously that SGS would share fault

equally with Interore, and its liability

was clearly established on the basis of

negligent mis-representation. Thus, the

magistrate judge was not at liberty to

reconsider liability issues, mut 60 s(t

calculate damages. She properly declined

to hear again the objections that SGS had

to this court’s previous opinion. While

each objection will be addressed and ruled

upon separately, see Fed. R. Civ. P.

72(b), those that address issues already

ruled upon by this court will not be

extensively discussed.

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proximate cause was an issue for

determination in the damages phase. sGsS

proposes either that a hearing now be held

specifically for the purpose of litigating

the proximate cause issue, or that

interore’s damages be Significantly

reduced.

While objections to specific monetary

figures will be addressed below, it should

be noted at the outset that the liability

phase of the trial did in fact address the

causation issues. As the magistrate judge

explained, there can be no liability

without proximate cause being established.

See Report at 2; 743 F. Supp. at 259.

Implicit in any finding of overall

negligence is the idea that causation --

one element of negligence -- has been

established. See Greyhound Exhibitgroup,

inc. v. E.L.U.L. Realty Corp., 973 F.2d

155, 159 (2a Cir. 1992), cert. denied,

A-105

U.S. , 113 S. Ct. 1049, 122 L. Ed. 2a

357 (1993); see also infra part II.A.

B. Frederick Phillips’s Testimony and

Economic Conditions

Along similar lines, SGS continues to

press its claim that the damages sought by

Interore were not caused by the

contamination, but rather by poor economic

conditions in New Zealand and the MAF’s

allegedly shocking rejection of the

fertilizer. SGS claims that it was barred

from presenting evidence at the hearing

that would have established this

causation.

The magistrate judge heard testimony

from SGS’s own witness, Frederick

Phillips, who testified as to market

conditions in New Zealand at the time of

delivery. While the magistrate judge

found that Phillips’s testimony "supported

the difficulties in salvaging the cargo in

New Zealand," Report at 6, she found that

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SGS’s attempt to tie East Coast’s refusal

to buy the fertilizer to market

conditions, rather than the contamination,

was "supported only by speculation." Id.

The fact that the magistrate judge did

not find this testimony convincing

obviously does not provide grounds for a

retrial or a hearing. SGS did not present

testimony from anyone at East Coast to

establish a causal link. Upon a review of

the record, this court agrees that the

evidence presented did not tie East

Coast’s rejection to market and economic

conditions.

SGS also objects that Phillips’s

testimony was not given the appropriate

weight by the magistrate judge. She

stated that his testimony did not prove

specifically any other reasons that East

Coast might have rejected the shipment.

Although Phillips was a member of the

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MAF, he did not handle any of the events

concerning the ADELINA. He did not

perform any testing on the barley seeds,

he only knew of the MAF’s test results on

the barley “by hearsay," and his only

involvement with the purchase of

fertilizer in New Zealand came from buying

small amounts for samples. Transcript

("Tr. "), dated 3/11/92, at 111-14.

Interore’s attorney asked Phillips

whether he had any personal knowledge "as

to why East Coast refused to buy the cargo

[in 1985]?" Phillips responded: "I have

some opinions. I have -- no. I could draw

a scenario but it’s not my job to do that.

No, I have no personal knowledge." Tr.,

dated 3/11/92, at 143. Given that

Phillips did not have any such knowledge

1@ Because the transcript of the

trial before the magistrate judge is not

consecutively paginated, references are

noted by the page within the transcript

and the date of the hearing.

A-108

(or if he did, SGS’s attorneys did not

elicit it during the trial), it follows

logically that his testimony on this point

was speculative and therefore unpersuasive

-- to both the magistrate judge and this

court.

C. David Ritchie’s Testimony and Barley

Contamination

SGS claims that the magistrate judge

"made an implicit finding that the sound

fertilizer could not be segregated from

the barley." Def. Obj. at 43. It asserts

that this conclusion was erroneous, and

that in coming to it the magistrate judge

relied too heavily upon the testimony of

Interore’s expert witness, David Ritchie.

First, SGS’s incorrect reading of the

report should be pointed out. Upon its

arrival in Antwerp, the fertilizer was

separated into two categories: "heavily

damaged" or "admixed with barley," and

A-109

"said to be sound."*’ The magistrate

judge stated:

The term "said to be sound" rather

than “sound" was used because, by

virtue of the nature of the cargo and

the possible layering of the

contaminant, no one was prepared to

guarantee that the "said to be sound"

cargo was in fact sound. Nonetheless,

Interore was able to sell the

fertilizer, in various lots, ata

substantial price.

Report at 7-8 (emphasis added). It

would require a creative reading to find

that this statement implicitly finds that

the barley was layered throughout the

cargo. The relevance of the statement is

*9 SGS argues that the term "heavily

damaged" was never used, but that the more

heavily contaminated fertilizer was

labelled “admixed with barley." In either

case, this category contained the

fertilizer in which barley was visible.

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that MAF officials in New Zealand believed

that barley was mixed in; this court made

such a finding previously, see 743 F.

Supp. at 255 (Finding of Fact 44), and scs

cannot mischaracterize the report to

object to that finding now.

SGS also objects that the magistrate

judge "relied heavily" on Ritchie’s

testimony: "Central to [Chief Magistrate]

Judge Gershon’s determination that

Interore mitigated its damages was her

finding that [SGS] did not establish that

the barley could have been removed from

the fertilizer and that this would have

been less costly than the method Interore

chose." Def. Obj. at 41.

SGS makes much of the fact that Ritchie

is now a member of the Board of Directors

of the successor to East Coast. It is not

at all apparent to this court that the

magistrate judge "relied heavily" on

A-111

Ritchie’s testimony. Her discussion

relating Ritchie’s understanding did no

more than this court’s opinion had done

previously -- find that the MAF believed

that the barley was layered throughout the

fertilizer.

II. Objections to Calculations

A. Interore’s Mitigation Costs

SGS argues that the factors leading to

Interore’s shipping to Antwerp were not

ones for which they should be responsible,

because they were not damages "resulting

from" the contamination of 3.7% of the

cargo.

SGS has long contended that New

Zealand’s particularly strict standards

concerning contaminated cargo made the

cargo difficult to sell in that country.

However, this argument -- as stated in the

Report -- was accounted for by this

court’s apportioning of damages equally

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between the two parties. See Report at 8

(citing Interore, 743 F. Supp. at 260).

The court found fault with Interore in

part because of its failure to inform SGS

of these standards.

Furthermore, SGS has failed to

recognize the primary reason that

Interore’s mitigation costs were assessed

against it and added into the final

formula of damages. While this court did

rule that SGS was not to be held

responsible for unforeseeable damages, it

did not provide that SGS should not be

held responsible for mitigation costs.

The costs that Interore expended en route

to Antwerp were not unforeseeable

consequential damages, but costs of

mitigation -- the costs of Salvage that

are properly deducted from the fair market

value formula.

It is reasonably foreseeable that a

A-i13

negligent misrepresentation could lead to

rejection of cargo, and that salvage may

reasonably only be obtainable in other

ports. See Report at 3. That this

specific event might transpire need not be

reasonably foreseeable; rather, the

general type of harm must be. See Parsons

v. Honeywell, Inc., 929 F. 2d 901, 905-06

(2a Cir. 1991) ("’foreseeability includes

the probability of the occurrence of a

general type of risk involving the loss,

rather than the probability of the

occurrence of the precise chain of events

preceding the loss .... "’ (quoting

Tucci v. Bossert, 53 A.D.2d 291, 293, 385

N.Y.S.2d 328, 331 (2a Dep’t 1976))).

B. Incorrect Formula Used for

Calculations

SGS has raised a number of objections

broadly complaining that the report "does

not reach a logical or equitable result."

Def. Obj. at 13. SGS bases this argument

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primarily on the fact that the invoice

value of the Tampa cargo minus the gross

sales proceeds shows that the value of the

cargo was diminished by a maximum of

$91,675.96. Yet such a calculation totally

ignores the costs of mitigation that

Interore incurred -- sales expenses and

Salvage. It seems obvious to this court

(as it did to the magistrate judge) that

these mitigation costs are to be factored

in when calculating damages based upon

differences in market value. See Ostano

Commerzanstalt v. Telewide Systems, IRC os

684 F. Supp. 1172, 1176 (S.D.N.Y. 1988),

modified, 880 F.2d 642 (2d Cir. 1989).

While the cost of salvage was high, the

ocean shipment of the goods was necessary.

Cc. Incorrect Application of Formula

SGS also claims that damages were

incorrectly calculated, even assuming that

the magistrate judge applied the correct

A-115

formula. It argues that damages “should

only include reduction in the value of

that portion of the fertilizer which could

not be segregated from visible barley, the

extra unloading costs incurred in making

the separation, and the demurrage costs in

New Zealand incurred when the MAF delayed

the unloading of the ship." Def. Obj. at

24. According to SGS, these damages total

$47,413.27. Upon review of the record, it

does not appear that SGS ever proposed

this particular breakdown of damages

calculation in the past. Nor is it a

sound proposal: it purports to sever the

damages to only apply mitigation costs to

the contaminated fertilizer, when Interore

was forced to move the entire shipment to

Antwerp.

D. Weight Loss of Tampa Cargo

Interore objects that the magistrate

judge awarded SGS a "weight loss" credit.

A-116

The contaminated cargo was found to be

short by a certain weight when it was

off-loaded at Antwerp. The pro rata value

of this shortage was $39,533. The

magistrate judge credited this sum to scs

because “when and how the weight loss

occurred is not clear from the

record. . . . While [SGS1 is properly

charged with reasonable Salvage expenses.

- it is not properly charged with damage

to the cargo not attributable to its

conduct." Report at 16.

According to Interore, "[t]he evidence

Clearly indicates, as well as common

sense, that the weight loss occurred

during [the] salvage process due to the

necessity for repeated handling."

Plaintiff’s Objections to Report at 6.

Consequently, Interore argues, the cost is

one that SGS should bear.

The magistrate judge did not accept

A-117

this argument. This court agrees upon a

review of the record that Interore failed

to prove that the weight loss must have

occurred during salvage. The burden was

on Interore to establish where the loss

occurred; they have failed to show even

that the salvage process, and the

"necessity for repeated handling,"

customarily causes any kind of weight

shortage. The magistrate judge

appropriately awarded SGS a credit for the

weight loss.

E. Interore’s Address Commission

Interore objects that in arriving at

the total of the salvage costs, the

magistrate judge did not account for the

“address commission" paid by Interore of

$9,874. 16.*° She stated that Interore

2° This amount is actually the pro

rata share apportioned to the cargo at

issue; the total address commission was

$14,764.

A-118

ennai iia

could not recover the amount as part of

its "ocean freight" charges, because it

actually did not pay the money as freight,

but retained it. The issue was discussed

at length at the hearing with Interore’s

witness, Michael Hefferen. He testified

that the payment -- which totalled $14,764

-- was called an address commission, but

was in fact applied toward the purchase of

liability insurance for the ocean voyage.

Interore claims that the money was an

insurance premium, ultimately paid out by

it "through an internal memo credit-debt

system," Obj. at 8, even though there was

not a specific accounting of the figure.

However, Hefferen testified on direct

examination that Interore retained the

$14,764. Tr., dated 3/10/92, at 29. When

asked by the court during cross-

examination to clarify whether the address

commission went back to Interore’s parent

A-119

company, Occidental Petroleum

("Occidental"), the following exchange

occurred:

THE COURT: May I just clarify

something because I think the question

earlier was, whether or not the address

commission goes back to the parent

[Occidental]?

HEFFEREN: No, it does not.

THE COURT: I thought you said essentially

it does?

HEFFEREN: No, it does not. It never goes

back to the parent.

THE COURT: That stays in your pocket?

HEFFEREN: That’s correct. We get charged

for charterer’s liability insurance at the

end of the year. It is figured in some

way with Frank B. Hall and Occidental

Petroleum and whatever it comes out to be,

we get charged for it accordingly.

Id. at 48. When attempting earlier to

A-120

aaa saan a

describe the work done by Hall, who

apparently was the insurance broker for

both Interore and Occidental, Hefferen had

stated: "I honestly don’t know all the

ramifications and how Frank B. Hall

figures out the cost of the charterer’s

liability insurance. I honestly don’t

know." Id. at 47.

It appears from testimony that Interore

retained the address commission. However,

even if a payment was ultimately made that

accounted for the money Interore claims

here, Interore failed to prove at trial

that any such amount was owed; Hefferen’s

testimony was inconclusive. Under these

circumstances, SGS is not required to pay

the commission.

F. Pre-Judgment Interest

1. SGS’s objection

SGS argues that Interore is not

entitled tc any prejudgment interest,

A-121

because "special circumstances" exist

here, namely that both parties were at

fault. Def. Obj. at 46. Pre-judgment

interest customarily is allowed in

maritime tort cases, and should be granted

absent exceptional circumstances. See

Mitsui & Co. v. American Export Lines,

Inc., 636 F.2d 807, 823 (2a Cir. 1981).

SGS refers to cases that have limited

pre-judgment interest because of "a mutual

fault collision in which both parties are

damaged." Iberian Tankers Co. v. Gates

Constr. Corp., 504 F.2d 747, 747 (2d Cir.

1974); see also Afran Transport Co. v. The

Bergechief, 285 F.2d 119 (2d Cir. 1960).

These cases base their reasoning upon The

Wright, 109 F.2d 699 (2d Cir. 1940). As

Judge Clark explained in that case,

admiralty cases in which both parties are

at fault, and both parties are damaged,

often create an exceptional circumstance.

A-122

"This is based on the uncertainty as to

the party which will have the ultimate

liability to make payment on determination

of the balance due." Id. at 702. That

is, where two vessels are damaged and

there is mutual fault, it is not clear

until ascertained by the court which party

is owed the greater amount of damages.

In this case, there was mutual fault

but injury only to one party, and the

damages were ascertainable from the

outset.** These are not the special

= Because damages were easily

ascertainable, SGS cannot successfully

argue that Interore’s damages claim was so

excessive that it precluded meaningful

settlement negotiations, creating a

special circumstance. It may be the case

where damages are speculative that a

defendant expects a plaintiff’s demand to

be reduced during negotiation, and that an

excessive claim precludes such meaningful

negotiations. Here, the damages claimed

were high, but they were easily

ascertainable. Moreover, SGS cannot argue

that the damages are excessive relative to

the contract price. Such an argument is

precluded because SGS was held liable not

based on the contract, but based on a

A-123

circumstances contemplated by the cases

that SGS cites, and this court is not

persuaded that the policy behind The

Wright should be extended.

2. Interore’s Objection

In her report, the magistrate judge

directed the Clerk of the Court to use the

interest rates paid each month on 52-week

United States Treasury bills during the

applicable period in calculating

pre-judgment interest. Interore complains

that the magistrate judge had indicated at

trial that she would apply the statutory

rate, which under New York law is 9%.

Other than a brief discussion in the

record, the issue was not discussed or

briefed. See Tr., dated 3/18/92, at

247-48.

However, in its pre-trial memorandum of

theory of negligent misrepresentation. See

supra note 1.

A-124

law, Interore relied on the precedent of

Ingersoll Milling Machine Co. v. M/V

BODENA, 829 F.2d 293 (2nd Cir. 1987),

cert. denied, 484 U.S. 1042, 108 S. Ct.

774, 98 L. Ed. 2d 860, (1988) for the

proposition that the interest rate used in

awarding pre-judgment interest rests

within the trial court’s discretion.

Interore claimed that this allowed the

court "to tailor the rate of interest to

the particular circumstances of the case

in order to achieve the purpose of making

the injured party whole." Plaintiff’s

Memorandum of Law in Support of Damages,

Submitted March 28, 1991, at 12. Interore

made no reference to New York statutory

rates or to state law.

In her report, the magistrate judge

relied on the broad discretion

afforded courts in determining the

rate of pre-judgment interest, tying

A-125

the interest in this case to Treasury

bill rates. See Ingersoll, 829 F.2d

at 311 (because of fluctuations in

Treasury bill rates over the relevant

period, the district court did not

abuse its discretion in applying a

rate based on an average for

pre-judgment interest); Independent

Bulk Transp., Inc. v. Vessel “MORANIA

ABACO", 676 F.2d 23, 25-27 (2d Cir.

1982) (plaintiff in admiralty action

is entitled to income that monetary

damages would have earned, which

ought to be measured by interest on

short-term, risk-free obligations).

She then adopted the Treasury bill

formula, because of the fluctuations

in interest rates over the long

period of time covering the

pre-judgment period, citing In re

Potomac Transport, Inc., Nos. 82 Civ.

A-126

0805 (JFK), 83 Civ. 4597 (JFK), 1993

U.S. Dist. LEXIS 418, 1993 WL 17206

(S.D.N.Y. Jan. 19, 1993). In that

case, the court vacated a judgment

prepared by the Clerk of the Court

that set the pre-judgment interest

rate in an admiralty action at 9%, in

compliance with N.Y. Civ. Prac. L. &

R. § 5004 (McKinney 1992).

Concluding that "federal law applies

in admiralty actions," the court

employed the "short-term, risk free

obligations" logic of Independent

Bulk Transp., and tied the

pre-judgment interest rates to

one-year Treasury bills.

This court agrees with the

recommendation in the Report. The

magistrate judge indicated from the bench

that she thought New York law would

provide the applicable pre-judgment

A-127

interest rate, as it provided the

underpinnings of negligent

misrepresentation, which was the initial

basis of liability. Tr., dated 3/18/92, at

247-48. However, in the Report, she

correctly relied on precedent applying

federal law to admiralty actions.

The court is not required to apply a

New York statute setting interest ina

case based solely on admiralty

jurisdiction, with no assertion of

diversity jurisdiction. Indeed, the

plaintiff points to no admiralty case in

which the New York statute has been

applied to pre-judgment interest. The

court therefore exercises its discretion

and adopts the formula for pre-judgment

interest suggested in the Report, finding

it to be in full agreement with the

precedent and practice of this circuit and

the principles of federal admiralty

A-128

jurisdiction.

G. Settlement Credit

SGS has also claimed that the Report

improperly failed to apportion the

proceeds of the settlement that has

already taken place between Interore and

East Coast.*? However, the settlement

provides that East Coast will pay

Interore, through its underwriter,

$400,000 in connection with other cargo --

not including the fertilizer -- on the

ship. SGS did not offer any evidence at

the trial of the damages portion of this

case to indicate that the settlement

agreement should not be accepted on its

face. As a rule, the court should look to

such an agreement on its face to determine

the intent of the settling panics. See

*2 Although SGS’s objection in this

regard consists of one sentence, see Def.

Obj. at 47, nonetheless it must be

addressed. See Fed. R. Civ. P. 72(b).

A-129

Hess Oil Virgin Islands Corp. v. UOP,

Inc., 861 F.2d 1197, 1208 (10th Cir.

1988). Yet SGS made no showing that there

was intent contrary to that made plain in

the settlement agreement. Because the

agreement did not cover damages to the

Tampa cargo, it should not be taken into

account.

Conclusion

For the above stated reasons, the

report of Chief Magistrate Judge Gershon

is adopted in full. Consequently,

Interore is entitled to receive from SGS

$479,687.72 in accordance with the Report,

and pre-judgment interest is to be

calculated according to the interest rates

paid each month on 52-week United States

Treasury bills during the relevant period.

Furthermore, in accordance with Federal

Rule of Civil Procedure 58, the court

orders the Clerk of the Court to prepare a

A-130

final judgment in accordance with this

opinion.

SO ORDERED.

A-131

4.

OPINION OF THE DISTRICT COURT,

DATED OCTOBER 23, 1993

(UNREPORTED)

A-132

INTERNATIONAL ORE & FERTILIZER CORP,

Plaintiff, v. SGS CONTROL SERVICES, INC.,

Defendant.

INTERNATIONAL ORE & FERTILIZER CORP v. SGS

CONTROL SERVS. 87 Civ. 6391 (CHT)

UNITED STATES DISTRICT COURT FOR THE

SOUTHERN DISTRICT OF NEW YORK 1993 U.S.

Dist. LEXIS 15198

October 28, 1993, Decided

October 28, 1993, Filed

OPINION AND ORDER

TENNEY, District Judge,

This action arises out of an admiralty

claim brought by [International Ore and

Fertilizer Corp. ("Interore") against SGS

Control Services, Inc. ("SGS"). See

International Ore & Fertilizer Corp. v. SGS

Control Serv., Inc., (S.D.N.Y., Aug. 10,

1993) (No. 87 Civ. 6391) ("Interore II");

International Ore & Fertilizer Corp. v SGS

Control Serv., Inc., 743 F. Supp. 250

(S.D.N.Y. 1990) ("Interore I"). SGS moves

the court for a new trial under Fed. R.

A-133

Civ. P. 59 and for amended or supplemental

findings of fact under Fed. R. Civ. P. 52.

Interore opposes the motion and requests

sanctions against defense counsel pursuant

to Fed. R. Civ. P. 11. The court denies

SGS’s motion, and imposes sanctions against

the law firm of Schoeman, Marsh & Updike to

reimburse plaintiff for attorney’s fees and

costs incurred in responding to this

groundless and frivolous motion.

SGS moves for a new trial on the issue

of proximate causation. SGS argues that

it has not had the opportunity to argue

the issue of proximate causation before

this court. Memorandum of Law in Support

of Motion to Amend Findings and for a New

Trial at 4; Affidavit of Charles Updike in

Support of Motion for New Trial at 7-8.

This court and a magistrate judge have

specifically addressed the issue of

proximate causation in this matter on

A-134

several occasions. See Interore a4, at

4-5, 9-10; Interore I, 743 F. Supp. at

260; Report of Chief Magistrate Judge

Gershon, Mar. 31, 1993 at 2. Interore

I established that Interore and SGS shared

blame for the loss of value to the cargo.

Interore I, 743 F. Supp. at 260. As we

noted in our opinion in Interore II,

proximate cause was properly addressed at

the liability phase of the trial, not at

the later damages phase of the trial.

Interore II, at 5; see, Greyhound

Exhibitgroup, Inc. v. E.L.U.L. Realty

Corp., 973 F.2d 155, 159 (2d Cir. 1992),

cert. denied, 122 L. Ed. 2d 357, 113 S.

Ct. 1049 (1993). SGS has failed to

establish any persuasive reason consistent

with Fed. R. Civ. P. 59 for the court to

reopen this previously addressed issue.

Simple disagreement with the court’s

findings does not constitute grounds for a

A~135

new trial. Geshwind v. Garrick, 738 F.

Supp. 792, 793 (S.D.N.Y 1990).

SGS also asks this court to amend its

earlier findings of fact. Specifically,

SGS challenges the court’s finding that

the New Zealand Ministry of Agriculture

and Fisheries ("MAF") refused to allow the

fertilizer into New Zealand. According to

SGS, this finding is unsupported by the

record, directly contradicts the evidence,

and is clearly erroneous. Updike Aff. PP

3-5. The court begs to differ.

Abundant evidence supports the fact

that the MAF prevented unloading of the

cargo for its intended purpose.

Defendant’s own exhibits demonstrate

unambiguously that the MAF refused the

shipment in its original condition. See

Exhibit 22. SGS’s own prior pleadings

concede that the MAF "prohibited discharge

until the grain was examined and declared

A-136

free of contamination" and that the MAF

eventually only "permitted the fertilizer

to be discharged subject to removal and

destruction of the visible barley grain."

Defendant’s Pre-Trial Memorandum of Law in

Opposition to Plaintiff’s Claim for

Damages at 6. April 19, 1991: see

Objections of SGS to Magistrate’s Report

at 11.

The court believes sanctions

appropriate due to the groundless and

repetitive nature of defense counsel’s

motion. The court’s 1990 Opinion in

Interore I held that SGS was liable for

50% of the damages. Interore I limited

the second phase of the trial to a

determination of the actual amount of

damages, and was not intended to permit

relitigation of the elements of the

liability claim.

Supp. at 260. Almost continually during

A-137

this action, defense counsel has argued

that it has not received an adequate

opportunity to address the proximate cause

issue. In fact, this court held a full

hearing two years ago on whether the issue

of proximate causation had received

sufficient attention. See Transcript of

Hearing, June 26, 1991. The court

concluded that there was no need to reopen

the question of proximate causation, but

that SGS would be permitted to introduce

evidence of Interore’s mitigation of

damages before the magistrate judge. The

parties then introduced evidence relating

to mitigation of damages before the

magistrate judge, which should have been

the end of the issue. See Magistrate

Judge’s Report and Recommendation at 4-9.

Receiving an unfavorable ruling on the

mitigation issue, defense counsel once

again attempts to raise the issue under

A-138

the guise of proximate Causation.

Counsel has raised this issue at every

possible juncture of this case. SGS’s

current motion is substantively identical

to several previous motions, most recently

its Objections to the Magistrate’s Report,

filed May 24, 1993. Sanctions serve as

deterrence and punishment for reasserting

arguments that have been rejected

unambiguously and repeatedly by the court.

See Vekris v. Peoples Express Airlines,

Inc., 707 F. Supp. 679, 682 (S.D.N.Y.

1988). Defense counsel has crossed the

line between zealous representation and

frivolousness. The court finds that SGS’s

current motion has caused unnecessary

delay to these proceedings and is not well

grounded either in fact or in a good faith

belief in the modification of existing

law. Where, as here, counsel repeats its

earlier arguments without introducing new

A-139

evidence, and fails to support its

allegations of manifest errors of law or

fact, the court does not believe that

plaintiff should bear the costs of

responding to the motion. See Sassower v.

Field, 138 F.R.D. 369, 375-77 (S.D.N.Y.

1991), aff’d in relevant part, 973 F.2d 75

(2a Cir. 1992), cert. denied, 113 S. Ct.

1879 (1993); Vekris, 707 F. Supp. at 682.

Plaintiff to submit an affidavit of

reasonable costs and attorney’s fees

within 20 days of entry of this order.

SO ORDERED.

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APPENDIX A. REPORT AND

RECOMMENDATION OF THE CHIEF

MAGISTRATE JUDGE, DATED

MARCH 31, 1993

UNITED STATES DISTRICT COURT FOR THE

SOUTHERN DISTRICT OF NEW YORK

INTERNATIONAL ORE & FERTILIZER CORP.,

Plaintiff,

-against-

SGS CONTROL SERVICES, INC.,

Defendant.

March 31, 1993, Decided

REPORT AND RECOMMENDATION

87 Civ. 6391 (CHT

GERSHON, Chief Magistrate Judge:

The Honorable Charies H. Tenney,

District Judge, following a non-jury

trial, has found defendant SGS Control

Services, Inc. ("SGS") liable to plaintiff

International Ore and Fertilizer

Corporation ("Interore") for negligent

representation. 743 F. Supp. 250

(S.D.N.Y. 1990). In 1985, Interore entered

into a contract to sell fertilizer to East

Coast Fertilizer Company Limited ("East

A-142

Coast"). The fertilizer was loaded in

Landskona, Sweden and in Tampa, Florida

and transported on the M/V Adelina, which

Interore chartered. This suit involves

only the Tampa cargo, which Was carried in

three holds of the vessel.

SGS issued a certificate of Cleanliness

as to the holds of the M/V Adelina. The

holds in fact were not free of barley

(which had been transported from England

on a prior carriage). In the case of

fertilizer, barley is a contaminant. Judge

Tenney found that SGS’s inspector "knew,

Or should have known, that his limited

inspection did not provide a valid basis

upon which to state that the hold was, in

fact, free of all possible contaminants.

Accordingly, he should not have simply

Signed a certificate that reasonably led

Plaintiff to assume it was Clean." 743 F.

Supp. at 259. Judge Tenney further found

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that plaintiff shared the blame, in that

it failed to notify SGS’s inspector of the

strict standards of cleanliness required;

plaintiff, Judge Tenney found, knew or

should have known that even the slightest

amount of foreign matter could contaminate

the cargo and cause rejection by the New

Zealand authorities, who impose extremely

strict standards on the importation of

foreign vegetable matter. Id. at 260. For

that reason, SGS was held liable only for

fifty percent of "the damages resulting

from contamination of the fertilizer." Id.

Trial of the actual amount of the damages

sustained was referred to me. This Report

constitutes my findings of fact and

conclusions of law under Rule 52 of the

Federal Rules of Civil Procedure.

Before turning to the facts, certain

preliminary legal issues will be

addressed. First, Judge Tenney’s

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post-trial finding of liability

established that SGS’s negligent

representation proximately caused Interore

to be damaged. "With regard to liability,

the concept of proximate cause supplies

the legal nexus between act and injury,

and provides a necessary basis for

awarding compensation." Greyhound

Exhibitgroup, Inc. v. E.L.U.L. Realty

Corp., 973 F.2d 155, 159 (2a Cir. 1992),

cert. denied, 122 L. Ed. 2a ee7¢ 243 &.

Ct. 1049 (1993). SGS now seeks to argue

that its negligence was not the proximate

cause of Interore’s loss. [Its arguments

go to "the legal nexus between act and

injury." They should have been presented,

if at all, at the liability phase of the

trial.

SGS also argues that the damages sought

were not reasonably foreseeable. As Judge

Tenney has already noted (and as I find

A-145

would be obvious to anyone in the

industry, including SGS), “the risk of an

incorrect decision to load night result in

a loss of several million dollars...."

743 F. Supp. at 259. Clearly, a negligent

representation that a hold is clean could

lead to contamination of the cargo to be

stowed in the hold. It is also

foreseeable that, if a cargo is rejected

because of contamination, it may become

necessary to salvage it by selling it to

other parties and, further, that it may be

necessary to ship it elsewhere to obtain a

reasonable salvage price, as happened

here.

SGS correctly notes that plaintiff is

not entitled to consequential damages

flowing from a breach by its buyer, East

Coast, of its contract with Interore. SGS

argues that the damages Interore should be

awarded should be no greater than those

A~-146

Interore could obtain from a carrier who

failed to comply with its obligations of

carriage, generally, the difference

between the fair market value of the cargo

at destination in the condition in which

it should have arrived and the fair market

value in the condition in which it did

arrive, less salvage. See Kanematsu-Gosho

Ltd. v. M/T Messiniaki Aigli, 814 F.2a

115, 118 (2d Cir. 1987): Encyclopedia

Britannica, Inc. v. S.S. Hong Kong

Producer, 422 F.2d 7, 18 (2d Cir. 1969),

cert. denied, 397 U.S. 964 (1970). In

effect, this is what plaintiff seeks. It

takes as its starting point the invoice

value of the Tampa cargo, and deducts from

that its gross salvage recovery, reduced

by its sales expenses and other expenses

of mitigation.

Plaintiff of course has the obligation

to mitigate its damages, but "the burden

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of shoving that a plaintiff unreasonably

failed to minimize damages rests with the

wrongdoer." Federal Ins. Co. v. Sabine

Towing & Transportation Co., Inc., 783

F.2d 347, 350 (2d Cir. 1986): accord

Sutton River Services, Inc. v. Inland Tugs

Co. 1985 A.M.C. 858, 862 (S.D. Ill. 1984).

Moreover, plaintiff was required only to

act reasonably to minimize its damages.

It was not required to take extraordinary

measures to mitigate nor even measures

which, in hindsight, might have been more

successful. See, e.g., Federal Ins. Co.,

783 F.2d at 350; Ellerman Lines, Ltd. v.

The President Harding, 288 F.2d 288,

289-91 (2d Cir. 1961). Plaintiff is

entitled to recover "costs incurred in

reasonable attempts to mitigate damages."

Ostano Commerzanstalt v. Telewide Systems,

Inc., 684 F. Supp. 1172, 1176 (S.D.N.Y.

1988), modified, 880 F.2d 642 (2d Cir.

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1989).

On arrival of the vessel at Napier, New

Zealand on August 1, 1985, the New Zealand

Ministry of Agriculture and Fisheries

("MAF") found the fertilizer to be

contaminated with barley. On the same

day, Interore’s buyer, East Coast, refused

to take delivery of the fertilizer. Davia

W. Ritchie, a New Zealand Sexes ana

chairman of New Zealand’s Federated

Farmers, which exercised great control

over the entry of farm products into the

country, testified, wholly credibly, as

both an expert in New Zealand farming

activities and from personal knowledge of

the reaction of New Zealand’s farmers to

the arrival of the vessel bearing

contaminated fertilizer on New Zealand’s

Shores. In 1985, Ritchie had been the

chairman of the Agricultural Section of

the Federated Farmers. There was concern

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both that the barley was diseased and

that, even undiseased, the barley would

lead to contamination of barley seed

production and the downgrading of New

Zealand’s malting barley crop.

At the end of August, the MAF cleared

the cargo for landing in New Zealand, in

the following language: "The barley in and

with the fertilizer cargo in the M.V.

Adelina at Napier may be introduced

subject to all visible barley being

removed and destroyed under supervision of

an inspector before the cargo of the

fertilizer is discharged." This did not

change Ritchie’s view or that of the

Federated Farmers that the cargo should

not be landed. It was Mr. Ritchie’s

understanding at the time that the barley

could not be separated out from the

fertilizer. According to Mr. Ritchie, the

fertilizer could not be salvaged except at

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a substantial discount. (He noted that

under similar circumstances a later cargo

of fertilizer had been destroyed.) In his

view, its sole use was for pastoral

farming, that is, for animal grazing

purposes and, since pastoral farmers

generally do not purchase high analysis

fertilizer which this was, the price would

have to have been substantially

discounted.

William J. Hueston, who in 1985 was a

senior vice-president of plaintiff in

charge of trading, described Interore’s

efforts to mitigate its damages. After

the MAF released the cargo for landing in

New Zealand, Interore attempted to

renegotiate the price with East Coast, but

East Coast offered only an unacceptably

low salvage price of less than 50%.

Interore then sought other potential

buyers in New Zealand and Australia but

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received no offers to purchase the cargo.

Frederick Phillips, a New Zealand

economist and government employee, called

by SGS, who was not a farmer and had no

personal involvement in the events,

described the economic climate in New

Zealand in 1985. His testimony supported

the difficulties in salvaging the cargo in

New Zealand. He speculated as to other,

market reasons why East Coast may have

rejected the fertilizer, but no such

reasons were proved. In sum, SGS’s

argument that the unwillingness of either

of the two main buyers of fertilizer in

New Zealand, East Coast and Ravenswood, to

offer a substantial price for the

fertilizer was the result of fluctuations

in the currency exchange rate and a drop

in demand rather than the reduction in

value of the cargo as the result of

contamination is supported only by

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speculation.

SGS’s argument that Interore was

unreasonable in not dispatching someone to

assist John Hayes, its sales

representative in New Zealand, in the

effort to sell the cargo in New Zealand is

not supported by the evidence. Hayes was

in telephonic communication with

headquarters. The failure of Interore to

locate a buyer in New Zealand was not the

result of an unreasonable failure on the

part of Interore to have physically sent

someone else to New Zealand.

When the cargo could not be sold in New

Zealand, potential buyers in Australia and

Southeast Asian countries were approached,

but this effort also was unsuccessful.

Interore also considered discharging the

fertilizer and warehousing it for a short

time for sale in lots to buyers in New

Zealand or Southeast Asia, but it

A~-153

concluded that this would not be cost

effective.

Ultimately, Interore transported the

fertilizer on the M/V Adelina to Antwerp,

where it had a major marketing staff,

where storage facilities were readily

available, where there was a market for

each of the fertilizer blends contained in

the shipment and where it could be sold in

smaller quantities to maximize the price

obtained. Also, the barley was of English

origin (see 743 F. Supp. at 252) and

apparently of less concern in the European

market. The M/V Adelina sailed from

Napier on September 27, 1985 and arrived

at Antwerp on November 9, 1985.

Alex Etien, Interore’s senior shipping

and traffic manager, operating from

Interore’s headquarters in Belgium, had

the responsibility to arrange for the

discharge operation in Antwerp. He

A~-154

organized a survey at which all interested

parties, including SGS, were represented.

Water damage was discovered in Hold No. 5

of the ship.

During discharge, the cargo was divided

into two categories, heavily damaged (by |

barley contamination) and "said to be

sound." The term "said to be sound"

rather than "sound" was used because, by

virtue of the nature of the Cargo and the

possible layering of the contaminant, no

one was prepared to guarantee that the

"said to be sound" cargo was in fact

sound. Nonetheless, Interore was able to

sell the fertilizer, in various lots, ata

substantial price.

REASONABLENESS OF MITIGATION.

Applying the standard of mitigation set

forth above to the facts, I satisfied that

Interore acted reasonably in its efforts

to mitigate its damages. The

A-155

circumstances it faced were unusual, but

it acted with reasonable expedition and

efficacy to reduce its injury.

SGS makes much of the fact that the

refusal of East Coast to accept the cargo

at an adjusted price was contrary to prior

experience. But East Coast did ultimately

agree to accept the cargo at a reduced

price; the problem was that the reduced

price was so low that it made economic

sense for Interore to transport the

fertilizer to Antwerp, with the attendant

shipping and other costs, rather than to

accept East Coast’s proposal. SGS has not

disputed that Interore’s damages are less

because of its decision not to accept East

Coast’s reduced price. Moreover, the

extent to which the unusually strict

nature of New Zealand’s attitude toward

the importation of even minimally

contaminated foreign vegetable matter may

A-156

have enhanced the damages, in that it

affected East Coast’s response to the

cargo and the response of the other

potential New Zealand buyer, forcing

plaintiff to seek more distant buyers, is

accounted for in Judge Tenney’s

determination to apportion the damages

equally between SGS and Interore. See 743

F. Supp. at 260.

The reliance by SGS on M. Golodetz

Export Corp. v. S/S Lake Anja, 751 F.2d

1103, 1112 (2d Cir.), cert. denied, 471

U.S. 1117, 86 L. Ed. 2a 4261, 105 &S. Ct.

2361 (1985), is misplaced. There, the

goods at destination, though

nonconforming, were marketable, but

Plaintiff allowed the goods to sit and, by

their nature, lose value, for eighteen

months while it tried to force acceptance

through arbitration, rather than

attempting to mitigate through third-party

A-157

sales. Here, in contrast, Interore spent

a reasonable time attempting to clear the

goods for landing at Napier and convince

its buyer to accept them, but then moved

to obtain other buyers.

SGS also argues that it would have been

easy to remove the barley, and presumably

make it acceptable in the New Zealand

market, but the evidence does not

establish that the effort needed to

accomplish this would ultimately have been

less costly, and have led to less damage

to plaintiff, than the method Interore

chose. While ultimately Interore was

quite successful in selling the fertilizer

in Europe, a “substantial amount of barley

grains" were in the cargo holds, 743 F.

Supp. at 252, a surveyor at Napier found

"barley lodged on the overheads, stringers

{horizontal bars extending down the sides

of the holds] and hatch covering returns,"

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Id. at 255, and it was "believed the

barley was layered throughout the

heap. ... " Id. Moreover, in addition

to the cost of removing the barley,

plaintiff would have had other expenses,

including the expenses of discharge and

warehousing, and it had no assurance that

the fertilizer would be sold in Napier.

It cannot be said that Interore’s decision

to transport the fertilizer to Antwerp was

unreasonable.

VALUE OF GOODS AT DESTINATION.

Interore reasonably takes as its

starting point in determining damages the

invoice value of the Tampa cargo,

$2,691,003.96. In the absence of

non-speculative, persuasive evidence that

the invoice value did not fairly reflect

the fair market value of the cargo in the

condition in which it should have arrived

at Napier, the invoice value will be

A-159

accepted. See, e.g., Terman Foods, Inc.

v. Omega Lines, 707 F.2d 1225, 1228 (11th

Cir. 1983); M. Prusman Ltd. v. M/V

Nathanel, 684 F. Supp. 372, 374 (S.D.N.Y.

1988); C. Itoh & Co. (America), Inc. v.

Hellenic Lines, Ltd., 470 F. Supp. 594,

598 (S.D.N.¥. 1979).

SALES PROCEEDS ON SALVAGE.

The gross proceeds of the Tampa cargo

sold at Antwerp was $2,599,328.00.

Undisputed sales expenses of $280,211.00

were incurred on the Tampa cargo, yielding

net sales proceeds for the Tampa cargo of

$2,319,117.00.

SGS argues that, since, upon discharge

at Antwerp, only a small fraction of the

cargo was found to be heavily damaged with

barley, the cargo should be found not to

have lost value except to the extent of

that fraction. This argument is

unpersuasive. That plaintiff was able to

A-160

obtain a good recovery for the cargo at

Antwerp does not belie the extreme

reduction in value of the cargo at its

place of destination, Napier. The good

recovery obtained by plaintiff at Antwerp

ultimately inures to SGS’s benefit by

reducing plaintiff’s damages.

Defendant, also argues, citing Trade

Arbed, Inc. v. M/V Swallow, 688 F. Supp.

1095, 1106 (E.D. La. 1988), that when it

is possible to segregate sound from

damaged cargo, a carrier is liable only

for the diminished value of the damaged

portion. But it has not been established

"that a discrete, identifiable portion of

the cargo was not actually damaged." 688

F. Supp. at 1106. Defendant has not

established that plaintiff could have

achieved a better economic result had it

separated the cargo into “heavily damaged"

and "said to be sound" lots in Napier.

A~-161

"Said to be sound" fertilizer apparently

was acceptable in Europe, but there is no

showing that the New Zealand farmers would

have accepted it as uncontaminated. On

the contrary, it is clear that they would

not. The evidence does not support the

conclusion that it would have been

economic to discharge, store, clean and

then attempt to sell the fertilizer at

Napier, much less that it was unreasonable

for Interore to have made the choice it

made.

EXPENSES OF SALVAGE.

Demurrage.

Interore seeks $93,485.66 in demurrage

expense for 58 days in which the ship

remained at Napier. For nearly a month

after the ship arrived at Napier and the

cargo was rejected by East Coast, Interore

pursued efforts to have East Coast accept

the cargo; when that failed, efforts were

A-162

——

made to salvage it through other bvyers.

SGS is entitled to a reduction of the sum

requested by $24,225.00, an amount already

received by Interore from its insurer,

Firemen’s Fund, for demurrage incurred at

Firemen’s Fund request so that

representatives of Firemen’s Fund could

inspect the cargo at Napier. That

demurrage is not properly chargeable to

SGS, and Interore has in any event already

been reimbursed for it. That Firemen’s

Fund is plaintiff’s subrogated insurer

does not alter this result. No proof was

offered that the period of delay

attributed to Firemen’s Fund in any way

contributed to the mitigation effort or is

otherwise properly chargeable to SGS.

In addition, since the balance of

$69,260.66 ($93,485.66 - $24,225.00)

represents demurrage for the entire ship,

which was carrying both the Tampa cargo

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involved in this litigation and the

Swedish cargo, the demurrage should be

prorated by weight. The parties have

agreed that the Tampa cargo constituted

66.88% of the total. Therefore, the

amount of demurrage reasonably attributed

to Interore’s mitigation efforts is

$46,321.53.

Ocean Freight.

Interore seeks to recover ocean freight

charges of $575,813.00 plus a $14,764.00

sum described as an "address commission,"

which Interore retained, for a total of

$590,577.00, for transporting the Tampa

cargo on the M/V Adelina from Napier to

Antwerp. First, Interore is not entitled

to the $14,764.00, which it did not in

fact pay as freight, but retained. Second,

according to the charter party covering

the voyage, the freight was calculated on

a per ton basis, and the Swedish cargo was

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also on board. Therefore, as with the

demurrage, Interore’s ocean freight

expense should be prorated by weight to

$385,103.88 ($575,813.00 x 66.88%). So

reduced, the ocean freight is properly

deducted from the salvage proceeds as

necessary to effect plaintiff’s mitig-tion

of its damages.

Marine Insurance.

Although Interore did not insure the

cargo from Tampa to New Zealand, because

it did not consider itself to have title,

after East Coast refused to take delivery,

Interore insured the Tampa cargo from New

Zealand to Antwerp, at a prorated cost of

$29,599.67. This expense was reasonably

incurred as part of the salvage operation

and therefore is properly deducted from

the salvage proceeds.

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Surveyor Fees.

SGS argues that the surveyor fees were

not reasonably related to the salvage

operation, but rather were litigation

costs. Interore’s position is that they

were incurred to determine the amount of

damage in New Zealand and to record and

assist the salvage at Antwerp.

The evidence supports that some, but

not all, of Interore’s survey expenses

were reasonably incurred as part of its

effort to mitigate its damages. The

following expenses are found to be

reasonable:

$1,191.00 to Beckman & Jorgensen

$ 5,521.67 to Dominion Adjusters

$ 53.72 to SGS Van Bree

$1,642.16 to Yves de Grave

$1,631.25 to Dr. Thomas Carroil

The total, $10,039.80, must be prorated by

weight (66.88%), which yields $6,714.62.

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Warehouse Costs.

Interore paid $83,523.84 for

warehousing the Tampa cargo in Antwerp

during the salvage operation. This

expense was reasonably incurred in order

to effectuate mitigation of plaintiff’s

damages. SGS argues that the sum of

$21,487.00, included in that amount, which

was a surcharge negotiated by Mr. Etien,

should be excluded as unreasonabl:. Based

upon Mr. Etien’s testimony, this expense

was necessary and reasonable and therefore

is fairly charged to SGS as an expense of

Salvage.

Discharge Costs.

Interore incurred discharge, i.e.,

stevedoring, costs of $86,551.64 at

Antwerp for the Tampa cargo and seeks to

reduce its salvage recovery by that sum as

a reasonable expense of salvage. SGS

argues that, since Interore would have had

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discharge expenses at the port of

destination, it cannot deduct the

discharge expenses incurred in Antwerp.

Interore responds that, since its contract

with East Coast was “free out," meaning

that East Coast and not Interore bore

discharge expenses, Interore may properly

deduct its discharge expenses from its

salvage recovery.

Without regard to whether Interore or

East Coast was responsible for discharge

at Napier, since Interore’s ability to

salvage the cargo depended on its

discharging the cargo -- and presumably

the price it obtained from its buyers

reflected the fact that Interore paid for

off-loading -- it is reasonable to deduct

Interore’s discharge expenses from its

Salvage recovery.

Inland Freight.

It is undisputed that Interore was

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invoiced and paid $6,320.98 for inland

freight for the Tampa cargo during the

salvage of the Tampa cargo. This amount

is reasonably deductible from the salvage

proceeds.

Miscellaneous Expenses.

It is undisputed that Interore was

invoiced and paid $714.63 for bank and

miscellaneous expenses relating to the

salvage of the Tampa cargo. This amount

is reasonably deductible from the salvage

)

;

proceeds.

CREDITS TO DEFENDANT.

SGS seeks "credit," i.e., a reduction

in the damages, for weight loss to the

entire Tampa cargo and water damage to the

cargo in Hold No. 5, and it seeks to share

in a recovery which Interore received ina

settlement with East Coast.

Weight Loss.

When the cargo was off-loaded in

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Antwerp, it was determined to be short.

Defendant argues that it is entitled toa

weight loss credit of $39,533.00

reflecting the pro rata value, by weight,

of the shortage. Plaintiff’s sole

argument in response is that, since title

had passed to East Coast as soon as the

cargo was loaded on the ship, East Coast

was at risk for the weight loss, not

plaintiff; therefore, plaintiff would have

been paid the total invoice value, had the

cargo not been contaminated.

To begin with, when and how the weight

loss occurred is not clear from the

record. Plaintiff argues that it occurred

of necessity because of the handling

involved in the salvage operation, but the

evidence does not establish that. In any

event, SGS is simply not responsible for

weight shortage. While defendant is

properly charged with reasonable salvage

A-170

expenses, since they reduce plaintiff’s

salvage recovery, it is not properly

charged with damage to the cargo not

attributable to its conduct. It is one

thing to say that Interore can use the

invoice value as the starting point for

determining fair market value at the point

of destination. It is another to say, as

Interore in effect does here, that SGS

bears the risk of weight loss as if it

stands in the shoes of the buyer and is

liable on the contract. Thus, the total

damages to Interore must be reduced by the

weight loss.

Water Damage.

Similarly, $17,829.31 worth of the

Tampa fertilizer was found to be water

damaged upon arrival at Antwerp. SGS is

entitled to have the damages reduced by

this amount, because it is not responsible

for that damage. interore argues that the

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water damage occurred during the salvage

operation and therefore is reasonably

chargeable to SGS. I disagree. Whether

viewed as nonforeseeable, or as caused by

an intervening agency, the water damage

cannot fairly be attributed to SGS’s

conduct. Interore’s argument that the

water damaged fertilizer also contained

barley does not save its position, for

plaintiff simply assumes, without

establishing, that that fertilizer was

nonsalvageable had there been no water

damage. Interore’s witness, Mr. Etien, was

unable te state whether, had the

fertilizer in Hold No. 5 not been water

damaged, any of it could have been

salvaged as “said to be sound." According

to Etien’s Report, there was only a small

amount of grain in Hold No. 5 and, in

light of the water damage, no attempt was

made to segregate that portion of the

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water damaged fertilizer which contained

it. Under these circumstances, SGS may

not be charged with any of the loss of the

water damaged cargo in Hold No. 5.

Settlement Credit.

The Settlement Agreement with East

Coast arises out of litigation in New

Zealand between East Coast, Interore and

various insurers of East Coast in which

Interore and East Coast asserted claims

against the other arising out of the

Swedish and Tampa cargos. The Agreement

provides that East Coast’s underwriter

will pay Interore $400,000 "relating to

the [Swedish] cargo" and allocates

payments of any recoveries the parties to

the Agreement may receive from prosecuting

claims against other parties. The

Settlement Agreement further provides that

it releases all signatories as to all

claims arising out of the alleged sale,

A-173

transportation and salvage of all of the

cargo, whether loaded at Tampa or Sweden.

SGS acknowledges that Interore was free

to seek recovery from any parties

responsible to it and that the potential

liability of East Coast does not bar

Interore from seeking damages from SGS.

However, SGS argues, since Interore

received $400,000.00 to settle all of its

disputes with East Coast, including its

disputes over the Tampa cargo, the

allocation in the Settlement Agreement

must be viewed as “illusory” and SGS given

a credit of $261,360.00, based upon an

apportionment by value of the Swedish ana

Tampa cargos. (It is undisputed that the

Tampa cargo represented 65.34% of the

total value of the two cargos).

SGS offers no legal authority for

looking behind the terms of the Settlement

Agreement and no factual basis for

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determining that the settlement proceeds

should be allocated other than as set

forth in the Settlement Agreement. Cf.

Hess Oil Virgin Islands Corp. v. UOP,

Inc., 861 F.2d 1197, 1208 (10th Cir. 1988)

(court "must look to the settlement

[agreement] to determine the intent of the

settling parties as to what damages and

claims are covered").*?? Under these

circumstances, SGS’s request for a credit

based upon the Settlement Agreement should

be denied.

CALCULATION OF DAMAGES

Invoice Value $2,691,003.96

Gross Sales Proceeds $2,599,328.00

Less Sales Expenses ($ 280,211.00)

” Interore’s potential claims

against East Coast were not identical to

those against SGS, nor were the measures

of damages identical. Interore here

obtains damages for negligent

representation, not breach of contract,

and has been awarded only half of those

damages in any event.

A-175

Net Sales Proceeds $2,319,117.00

Less Expenses of Salvage Operation

Demurrage ($ 46,321.53)

Ocean Freight ($ 385,103.88)

Marine Insurance ($ 29,599.67) :

Surveyor Fees : ($ 6,714.62)

Warehouse Costs ($ 83,523.84)

Discharge Costs ($ 86,551.64)

Inland Freight (S$ 6,320.98)

Misc. Costs ($ 714.63)

Total (S$ 644,850.79)

Net Proceeds of Mitigation ($1,674,266.21)

Total Damages $1,016,737.75

Less Damages for Which SGS is

Not Responsible, i.e.,

Weight Loss, $39,533.00

Water Damage, $17,829.31 ($ $7,362.31)

Total for Which SGS Shares

Responsibility $ 959,375.44

Divided by 2 Yields $ 479,687.72

In sum, plaintiff is entitled to a

A-176

damage award against SGS in the amount of

$479,687.72.

Prejudgment Interest.

Plaintiff is also entitled to

pre-judgment interest on its damages. The

parties agree that there is no diversity

jurisdiction in this case and that the

case therefore arises solely under the

court’s admiralty jurisdiction. In the

absence of special circumstances, which do

not exist here, prejudgment interest is

recoverable for commercial maritime torts,

E.g., Sutton River Services, Inc. v.

Inland Tugs Co., supra, 1985 A.M.C. at

864. This principle is not affected by

plaintiff’s shared fault. See Alkmeon

Naviera, S.A. v. M/V "MARINA L", 633 F.2d

789, 798 n.12 (9th Cir. 1980). As stated

in Independent Bulk Transport, Inc. v.

Vessel "Morania Abaco”, 676 F. 2d 23, 25

(2a Cir. 1982):

A-177

Although it is an abuse of discretion

to deny prejudgment interest in admiralty

cases except under extraordinary

circumstances, see Mitsui & Co. Vv.

American Export Lines, Inc., 636 F.2d 807,

823 (2d Cir. 1981), the district court has

broader discretion to determine when

interest commences and what rate of

interest to apply. See The Hygrade No. 24

v. The Dynamic, 233 F.2d 444, 448 (2d Cir.

1956).

Here, neither plaintiff nor defendant

has proposed a particular rate. Plaintiff

simply ash the Court to exercise its

discretion. Since the pre-judgment

interest in this case covers a long period

of time, during which interest rates

varied considerably, the Clerk should be

directed to use the interest rates paid

each month on 52-week United States

treasury bills during the applicable

A-178

period, In re Potomac Transport Inc., Nos.

82 Civ. 0805 (JFK), 83 Civ. 4597 (JFK),

1993 WL 17206 (S.D.N.Y. Jan. 19, 1993).

See Independent Bulk Transport, Inc., 676

F.2d at 27 ("Plaintiff is entitled to the

income which the monetary damages would

have earned, and that should be measured

by interest on short-term, risk-free

obligations."). I recognize that the

interest rate I propose is identical to

that used in fixing post-judgment interest

and that the pre-judgment rate should not

necessarily be the same. In this case,

however, that rate is the appropriate one

to apply. Finally, in the absence of a

single date from which damages flowed, a

reasonable intermediate date, February 1,

1986, should be used.

Copies of this report are being mailed

today to plaintiff’s and defendant’s

counsel who are hereby put on notice that

A-179

any objections to this report must be made

in conformity with 28 U.S.C. § 636(b) (1)

and Rules 72(b), 6(a) and 6(e) of the

Federal Rules of Civil Procedure. Thus, a

party must serve and file, with a copy to

me, specific written objections to the

report within ten (10) days after being

served with a copy of this report. A

party that fails to file timely objections

waives the right to further judicial

review, including appellate review, of the

decision. Small v. Secretary of HHS, 892

F.2d 15, 16 (2d Cir. 1989). See Thomas v.

Arn, 474 U.S. 140, 148-53, 88 L. Ed. 2d

435, 106 S. Ct. 466 (1985); Wesolek v.

Canadair Ltd., 838 F.2d 55, 58 (2d Cir.

1988). Any requests for extensions of

time to file objections should be made to

Judge Tenney.

Respectfully submitted,

NINA GERSHON

A-180

Chief Magistrate Judge

Dated: New York, New York

March 31, 1993

A-181

5. ORDER OF THE COURT OF APPEALS

DENYING REHEARING, DATED

JANUARY 20, 1995

A-182

UNITED STATES COURT OF APPEALS

FOR THE

SECOND CIRCUIT

At a stated term of the United States

Court of Appeals for the Second Circuit,

held at the United States Courthouse, in

the City of New York, on the 20th day of

January one thousand nine hundred and

ninety-five.

DOCKET NO.: 93-9046

Filed January 20, 1995

INTERNATIONAL ORE & FERTILIZER CORP.,

Plaintiff-Appellee-Cross-Appellant,

Vv.

SGS CONTROL SERVICES INC.,

Defendant-Appellant-Cross~Appellee.

A Petition for rehearing containing a

suggestion that the action be reheard in

banc having been filed by Appellant SGS

CONTROL SERVICES INC.

Upon consideration by the panel that

decided the appeal, it is ordered that

said petition for rehearing is DENIED.

It is further noted that the suggestion

for rehearing in banc has been transmitted

to the judges of the court in regular

active service and to any other judge that

heard the appeal and that no such judge

has requested that a vote be taken

thereon.

For the Court,

George Lance III, Clerk

By:

Carolyn Clark Campbell

Chief Deputy Clerk

A-184

6. TRANSCRIPT OF ORAL ARGUMENT

IN COURT OF APPEALS ON

APRIL 24, 1994

#- ---

A-185

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

INTERNATIONAL ORE & FERTILIZER CORP.,

PLAINTIFF-APPELEE~CROSS~-APPELLANT

-against-

SGS CONTROL SERVICES, INC.,

DEFENDANT-APPELLANT~-CROSS

APPELEE.

DATE OF ARGUMENT: April 24, 1994

DATE TRANSCRIBED: March 20, 1995

ORAL ARGUMENT held in the above

matter, at the United States Court of

Appeals for the Second District, 40 Foley

Square, New

York, New York

DIAMOND REPORTING -718-624-7200- 16 Court

St., B’klyn, NY

A-186

APPEARANCES:

KIRLIN, CAMPBELL, MEADOWS & KEATING, ESQS.

Attorneys for the Plaintiff

14 Wall Street

New York, New York 10005

BY: RICHARD H. SOMMER, ESQ.

SCHOEMAN, MARSH & UPDIKE, ESOS.

Attorneys for the Defendant

60 East 42nd Street

New York, New York 10165

BY: MICHAEL E. SCHOEMAN, ESQ.

CHARLES B. UPDIKE, ESQ.

A~-187

JUDGE A: International Ore &

Fertilizer Corp. against SGS Control.

Wait a minute. There should be another

ticket, too. There is two appeals.

There should be another one. It is

down as two.

VOICE: Consolidated.

JUDGE A: But they’ve only got--I got

to give them much more time than this.

VOICE: According to the

calendar--

JUDGE A: According to the

calendar, International Ore-- are you for

International? You’re for SGS.

MR. SCHOEMAN: I’m for SGS, sir.

JUDGE A: And you’re on the

sanctions point, also?

MR. SCHOEMAN: Mr. Updike will be on

the sanctions.

JUDGE A: Well, I want to hear this all

together.

A-188

MR. SCHOEMAN: Yes, Your Honor.

JUDGE A: So, you have to split 25

minutes between you.

MR. SCHOEMAN: Yes, I understand.

JUDGE A: And the other side gets 20

minutes. We have down here-- and we don’t

have all the numbers either. Come here

for just a second. These two cases are

being heard together. This 20/15 and 25.

We only have 15 down.

VOICE: 15 minutes for Mr. Schoeman and

then ten minutes, that’s 25 total.

JUDGE A: Where’s the ten?

VOICE: (inaudible).

JUDGE A: I see. Okay. I

misunderstood the--good. Thanks. Thanks.

Okay. Go ahead.

MR. SCHOEMAN: All right. Your Honor,

just so I understand the procedure before

we start, will I go first, then Mr.

Updike?

A-189

JUDGE A: I don’t care. You can do it

in whatever order you want. It just seems

to me that sanctions issue and the merits

are intertwined, and I don’t know why

you’re splitting arguments--splitting it

up.

MR. SCHOEMAN: That was assigned to us

by the clerk’s office.

JUDGE A: No. Anybody can make the

argument. I mean, I don’t care if you--

you could have taken the whole time and

included the sanctions point.

MR. SCHOEMAN: I understand.

JUDGE A: I mean, the issue of what

proximate cause meant and whether the

sanctions were appropriately issued, also

go to the merits. I just didn’t see any

point in trying to divide this into a

lot-- into an argument of the appeal from

the judgment and a separate thing on

sanctions, because they are interrelated.

A-190

MR. SCHOEMAN: Your Honor, I would like

to take 12 minutes and reserve three.

Mr. Updike--

JUDGE A: I’m trying to tell you guys

that you got 25 between you.

MR. SCHOEMAN: Yes, sir. Thank you.

Your Honor, my name is Michael--

JUDGE A: Now, you’re reserving three

minutes rebuttal? Okay.

MR. SCHOEMAN: And I believe Mr. Updike

will then take eight minutes if he wants

to.

JUDGE A: The clock starts running now.

They are to stop it after 22 minutes.

MR. SCHOEMAN: Thank you, sir.

JUDGE A: When you give up to Mr.

Updike is up to you.

MR. SCHOEMAN: Thank you, sir. This is

a maritime case. My name is Michael

Schoeman. And I’m here for SGS Control

Services.

I think the threshold question in this

maritime case is whether the law permits

one party to a commercial contract to sue

another for negligent misrepresentation in

the performance of the contract where the

laws is, essentially, economic.

JUDGE A: Well, what if we agreed with

that proposition, but agreed with it

because we thought the judge was dead

wrong in dismissing the contract point?

MR. SCHOEMAN: The contract claim--

JUDGE A: What happens then?

MR. SCHOEMAN: As I understand it,

Judge, the contract claim has not been

appealed because the briefs for Inter’ Ore

do not argue the contract point.

JUDGE A: Certainly don’t.

MR. SCHOEMAN: So, I think the contract

point is foreclosed at this stage in the

proceeding.

JUDGE B: But I think now if the case

A-192

—

were to go back to the District Court, it

wouldn’t be foreclosed, would it?

MR. SCHOEMAN: Well, I would think

having abandoned it here, Your Honor, I

don’t think they could raise it again.

They had that choice. It was an easy

thing to raise here.

JUDGE B: I understand this. My

question is: Because they have not argued

on appeal, we’re not going to pass on a

contract issue now. But assuming, for the

argument, that we thought the district

judge had made a mistake and we’re going

to send it back to him, in my opinion, the

contract issue will be wide opened again.

And I think you should bear that in mind

when you’re arguing for reversal.

You might get a contract cause of

action; instead of getting stuck for 50

percent, you get stuck for 100 percent. I

just mention that possibility to you. But

A-193

go ahead.

MR. SCHOEMAN: Well, I understand Your

Honor. If you send it back, it may be

better than where it is now. But I don’t

think you should send it back on the

contract claim, because I think the

contract claim is correct. If Your Honor

wishes me to address that. But let me

first deal with the negligent

misrepresentation. But it does flow from

the contract. The contract is supposed to

provide a proper resolution for a contract

dispute between commercial contracting

parties. And that seems to be what this

Court seems to say in Sundance and other

places.

Judge Tenny analyzed the contract claim

quite properly. He said, you have a very

casual relationship, a phone call followed

by a very brief Telex, $15¢° price. We are

not going to assume in that circumstance

A-194

that the parties assumed that there could

be liability for 2.4 million dollars

arising out of that.

JUDGE B: Why not, Counsel?

JUDGE A: Yeah. Why?

MR. SCHOEMAN: Because it is just so

disproportionate, Your Honor, to the price

that the parties fixed.

JUDGE B: Disproportionate? Your

client knew exactly what risk he was

taking, did he not?

MR. SCHOEMAN: I don’t think so, Your

Honor.

JUDGE B: Well, why do they ask to have

the hulls inspected and cleaned?

MR. SCHOEMAN: The Certificate of Hull

Inspection was a document that was

required in a document transaction.

JUDGE B: I understand. But why? Why

do they do that?

MR. SCHOEMAN: That--

A-195

JUDGE B: To protect, to protect

whatever the cargo is going to be; isn’t

that why they do it? What other reason

would there be for having the hulls

inspected?

MR. SCHOEMAN: That--

JUDGE B: To protect whatever cargo is

going to go in.

MR. SCHOEMAN: That was--

JUDGE B: All right. So, if the cargo

is damaged because of a faulty inspection,

how can you legitimately argue that that

wasn’t foreseeable and that it is out of

line?

MR. SCHOEMAN: I’m saying that the

range of liability was not foreseeable had

the parties understood that a two and a

half million dollar-- 2.4 million dollar

liability claim might arise out of this,

it seems to me they would have arranged

different terms. I think the court has

A-196

dealt with it--

JUDGE A: Are you telling me--

JUDGE B: Well, they should have

Counsel. They probably should have. They

probably should had more insurance. But

that’s no reason why you can legitimately

argue that the damage was not foreseeable,

is it?

MR. SCHOEMAN: Judge, it was--

foreseeability is a peculiar word with

different meanings.

JUDGE A: I want to get--

MR. SCHOEMAN: I--

JUDGE A: Is your point that this

judgment would have been too high under

the contract, but a smaller judgment would

have been all right under the contract

theory? Is that your theory?

MR. SCHOEMAN: No. My theory is that

the parties did not contemplate

consequential damage arising out of the

A-197

damage to the cargo.

JUDGE A: What if the consequential

damages were $300? Judge Tenny’s argument

that the contract price was too far from

the judgment was just far gone out the

window.

MR. SCHOEMAN: If the damages--

somewhere there is a line, I agree.

JUDGE A: Well, there’s a line. The

line is in the, apparently, in your view--

I-- I don’t mean to be attacking you as

"in your view." You’re relying, and Judge

Tenny did, on the opinion of this Court

that was concurred by one judge. The

other two did not concur and it is yet to

become the law in this Circuit. But it

is-- it goes-- I mean, this argument that

you can get consequential damages up to a

point, but damn, it goes too far beyond,

because the contract price was too small,

I just find silly.

A-198

MR. SCHOEMAN: Well, Your Honor, this

Court referred to that argument

unanimously in the Sundance case and

seemed to accept it there.

JUDGE A: In dictum.

MR. SCHOEMAN: Well, it was one of the

grounds of decision. I don’t know if you

can call that dictum, Your Honor. But it

is not silly.

It is a concept that’s embodied in the

restatement as well, Restatement of

Contracts; where the damages are grossly

disproportionate to the price of the

contract, there’s an assumption that the

parties did not intend that liability to

follow.

JUDGE B: There might be an

assumption, Counsel, but in this case, I

think the assumption is unwarranted. I

just don’t understand how your client can

say, I didn’t realize, I didn’t realize

A-199

that this-- that this cargo would be

spoiled if there were impurities in the

hulls. How could he-- how could he

legitimately say it and realize

that?

MR. SCHOEMAN: Let me express it

differently. The person primarily liable

for all of this is the vessel.

JUDGE B: Oh, no. Counsel.

MR. SCHOEMAN: Because it is the

vessel--

JUDGE B: The person primarily

responsible for this particular action is

the inspector who didn’t do his job.

JUDGE A: Who didn’t inspect.

MR. SCHOEMAN: No, sir. Let me tell

you why.

The vessel is responsible for providing

a clean hull. That’s in the charter. And

it was the vessel that had carried the

barley and apparently had not cleaned it

A-200

all out, and it was the vessel that had

painted over the barley, apparently, so

nobody could see it.

The vessel, however, was not a party to

the action and, consequently, Judge Tenny

allocated liability on his tort theory as

between the two parties who were there

without any consideration to the fact that

in these transactions, the remedy of the

person who owns the cargo is against the

vessel, not against the inspector.

JUDGE B: Had the vessel owner had been

sued in this, Counsel, here, he would have

brought a Third-Party action against your

client and you would be right back where

you are now. Because the vessel owner is

entitled to rely on your client the same

as the shipper, isn’t he?

MR. SCHOEMAN: I think it is the other

way around, Judge. The vessel owner is

the one with the primarily responsibility.

A-201

They can’t pass that off to us.

JUDGE A: Why? That’s why they hired

you for.

MR. SCHOEMAN: The vessel owner didn’t

hire us.

JUDGE A: Well, that’s what

somebody hired you for.

MR. SCHOEMAN: Inter’ Ore hired us.

They had a time charter. But the vessel

owner was the person at fault here, and it

is true, apparently, that there is some

questions as to whether we properly

performed the inspection. Judge Tenny

doesn’t decide that issue, as a matter of

fact. He doesn’t decide whether it was

workman-like or whether it was not

workman-like.

JUDGE B: You mean to dispute us to

whether your client did a good job? You

mean that barley flew from in from the sky

someplace?

A-202

MR. SCHOEMAN: No, Judge. Because an

inspection job depends on the nature of a

job. Our evidence was that the Customs

report was followed. This was the kind of

inspection we always did. This is what

everybody should expect from such an

inspection. If we-- if we had been told

the peculiar requirements in New Zealand,

that you can’t have grain on there,

why, we would have done a different

inspection.

JUDGE B: You would have done a better

job; is that what you’re telling us?

MR. SCHOEMAN: Yes. And so is Judge

Tenny.

This text is long and has been trimmed here. Open the source document for the complete record.