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A SCOTUS case about contracts!

It’s not every day that the Supreme Court weighs in on a contract dispute. That happened yesterday in a maritime case in which an oil tanker, in the last 900 feet of its 1,900-mile journey, ran over a submerged anchor abandoned on the floor of Delaware River, puncturing the tanker’s hull and resulting in an oil spill of some 246,000 gallons — with cleanup costs of more than $135 million. CITGO Asphalt Refining Co. v. Frescati Shipping Co., 589 U.S. _, No. 565 (Mar. 30, 2020) (Sotomayor, J.).

The decision itself was not especially surprising: The Court granted cert to resolve a circuit split — siding with the Second and Third Circuits, the Court held that the safe-berth term in question was an express warranty with strict liability. See id., slip op. at 5. The contract apparently was governed by maritime law and thus by general principles of contract law. See id.

For contract drafters, here are some key points of interest in the Court’s decision; again, they’re unsurprising, but it could be a nice teaching case:

  • The term “warranty” encompasses a statement of fact about a material matter: “It is well settled as a matter of maritime contracts that statements of fact contained in a charter party agreement relating to some material matter are called warranties, regardless of the label ascribed in the charter party.” Id. at 7 (cleaned up).
  • Materiality can sometimes be determined on summary judgment: See id. at 7-8 & n.4.
  • The word “warranty” isn’t necessary: Under the tanker charter agreement, the party that chartered the tanker was required to select a “safe” berth for the ship — and even though the provision didn’t use the terms warrant or warranty, that was the legal effect. Id. at 6-7.
  • Breach of contract is a strict-liability matter: “Under elemental precepts of contract law, an obligor is liable in damages for breach of contract even if he is without fault.” Id. at 9 (cleaned up, citation omitted).
  • Expressio unius est exclusio alterius: Other provisions of the contract expressed limited the breaching party’s liability; that weighed against interpreting the “safe berth” provision as likewise being one of limited liability. Id. at 9-10.

Justice Thomas dissented, joined by Justice Alito, “conclud[ing] that the plain meaning of the safe-berth clause does not include a warranty of safety.” Dissent at 2.

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The tanker’s unfortunate accident so close to the end of its journey brought to mind the 1983 grounding in San Francisco Bay of my former ship, the USS Enterprise, a mere half-mile from its home pier, after a months-long overseas deployment. That was several years after I’d left the ship and the Navy to attend law school.

USS Enterprise passing under the Golden Gate Bridge, Oct. 1985
https://commons.wikimedia.org/wiki/File:USS_Enterprise_(CVN-65)_passing_under_the_Golden_Gate_Bridge_-_DN-SC-86-03238.jpg
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In class this week we talked about the potential dangers of appointing a contracting party as your “agent.” Here’s a Seventh Circuit opinion issued yesterday: “[A] district judge concluded that DISH Network and its agents committed more than 65 million violations of telemarketing statutes and regulations. The penalty: $280 million.” United States v. DISH Network LLC, No. 09-3073, slip op. at 1 (7th Cir. Mar. 26, 2020) (cleaned up; emphasis added). 

The court noted: “The contract [between DISH and its representatives] asserts that it does not create an agency relation, but parties cannot by ukase negate agency if the relation the contract creates is substantively one of agency.” Id.,, slip op. at 5 (italics in original, bold-facing added).

Judgment affirmed, mostly. (The damages award was vacated and remanded for reconsideration for unrelated reasons.)

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From the 9th Circuit, in a case under Hawai’i law: “[T]he terms of a contract alone cannot require a court to grant equitable relief. In doing so, we adopt the accepted rule of our sister circuits that have addressed the question.” Barranco v. 3D Sys. Corp., No. 18-1608, slip op. at 16 (9th Cir. Mar. 12, 2020) (reversing grant of disgorgement remedy) (citing cases).

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Amazon “fires” distribution company

As a real-world example of a contract termination: Amazon terminated its contract with a delivery company, Bear Down Logistics — which led to Bear Down closing some of its facilities and laying people off.

Presumably Bear Down took this “what if” possibility into account when negotiating its contract with Amazon — and that’s an area where lawyers can add value: by nudging the business people to think about unpleasant possibilities (because sometimes business people might look only on the bright side of life).

Ultimately the responsibility for business planning is on the client, of course. But it can’t hurt to try to help clients think ahead.

(Shorthand: Think like a CEO — but remember that you’re not.)

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In researching something, TIL (Today I Learned) that when Texaco got hit with a $10.3 billion damages verdict back in the mid-1980s (for tortiously interfering Pennzoil’s acquisition of Getty Oil), Texaco couldn’t find anyone to finance the required appeal bond in the same amount, and it even had trouble getting routine working capital, because of the high-handed way it had treated others in the past. As one author recounts:

When Texaco was doing well, it had played hardball with its lenders as well as with other oil companies. Now that it was in trouble, these lenders and oil companies may have been looking to exact a little revenge. At a minimum, they were unwilling to take any risk to do a favor for someone who had refused to do favors for them. The New York Times quoted a New York banker as saying, “If it were Exxon or Mobil, all the big banks would rally around it.”

Robert M. Lloyd, Pennzoil v. Texaco, Twenty Years After: Lessons for Business Lawyers, Transactions: Tenn. J. Bus. L. 330, 349-50 (2005) (footnotes omitted).

I’m going to add this to the wounded-tiger post.

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