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UNITED STATES v. WATERMAN S.S. CORP.

January 26, 1979

UNITED STATES of America, Plaintiff,
v.
WATERMAN STEAMSHIP CORPORATION, Defendant



The opinion of the court was delivered by: GESELL

FINDINGS OF FACT AND CONCLUSIONS OF LAW

This is a suit by the Government against Waterman Steamship Corporation ("Waterman") for damages arising out of several contracts for the carriage of goods. The case invokes the Court's admiralty and maritime jurisdiction. 28 U.S.C. § 1333. Waterman counterclaims. After a full trial and careful consideration of the briefs and arguments, the Court makes the following findings of fact and conclusions of law.

 In April 1975, Waterman's S.S. SAMUEL CHASE ("CHASE"), a dry cargo vessel of United States registry, prepared for a scheduled voyage to Saigon and other Far Eastern ports by loading numerous shipments financed by the Department of State, Agency for International Development ("AID"), for carriage to Saigon, South Vietnam. After taking fuel at Mobile, the CHASE proceeded to Baltimore, Philadelphia, and New York, loading AID shipments and other cargo at each of these ports. On April 29, while the ship was en route from New York to Houston, Saigon fell to the Viet Cong and the North Vietnamese. On April 30, after the CHASE arrived at Houston, AID issued a vesting order directing Waterman to discharge at New Orleans all AID-financed cargoes which the carrier had loaded for Saigon. New Orleans was the CHASE's last scheduled call before departing for the Far East. AID's vesting order was obeyed.

 At the time the Government issued its vesting order, AID had prepaid or was in the process of prepaying the entire cost of freight for the AID Saigon-bound shipments, except those still to be loaded at New Orleans. The sums paid had become due under the terms of Waterman's bills of lading and came to a total of $ 687,632.04, including $ 26,925.60 in war risk insurance and $ 80,817.55 in bunker fuel surcharges.

 The Government now contends that these amounts should be returned to it on the ground that Waterman did not act in good faith or use reasoned judgment when it accepted and loaded the cargoes. Plaintiff's position is that, in view of information contained in The New York Times or otherwise known to Waterman, the carrier could have predicted by April 1 that Saigon would fall to Communist forces well before the CHASE could arrive in Vietnam and, accordingly, that Waterman acted negligently, if not fraudulently, in having contracted for the carriage of, and loaded, any AID-financed goods for Saigon. *fn1"

 Waterman counters initially by contesting plaintiff's standing to sue in place of the actual shippers of the goods who, though financed by AID, are not before the Court. Alternatively, the defendant contends that the charges which plaintiff seeks to have returned were fully earned, under the unequivocal terms of its bill of lading, when the cargoes were tendered and that Waterman proceeded at all times in good faith and without knowledge that its call at Saigon would be frustrated.

 For the reasons stated fully below, the Court holds that the Government has standing to sue here but has failed to sustain its claim with respect to the great bulk of the freight and other charges it seeks to have returned.

 I.

 At the outset, it is necessary to outline the precise relationship which existed between the parties during the period at issue, for it was more than the traditional relationship of shipper to carrier. Regulations and documents peculiar to the transportation of AID-financed cargo, as well as the provisions of Waterman's standard bill of lading, must be examined.

 Part 201 of 22 C.F.R. contains the rules and procedures which governed the commodity transactions involved here. AID agreed with the Government of South Vietnam to finance the cost of various sales of commodities to Vietnamese importers by American business concerns. Pursuant to this arrangement, Vietnamese businesses placed orders with domestic United States "shippers" for the goods in question here. The shippers then prepared the goods for export and delivered them to Waterman at its several dock facilities. Upon such deliveries, "dock receipts" *fn2" were issued by Waterman and taken by the shippers. Thereafter, Waterman executed a "bill of lading" for the carriage of each batch of goods; this document contained the contract of carriage and, among other things, required the shipper to prepay the entire freight and other related charges.

 Under the regulatory scheme each shipper was then directly or indirectly reimbursed by AID for both the cost of the commodities and the cost of carriage. Reimbursement depended, however, upon the shipper tendering to AID or the intermediary bank various documents listed in 22 C.F.R. § 201.52. One such document crucial to the present controversy was a "Supplier's Certificate," signed by Waterman.

 The terms of each Supplier's Certificate executed for the shipments involved in this case were specified by regulation. See 22 C.F.R. Part 201, Appendix A. By signing the certificate, Waterman consented to the requirements laid out in 22 C.F.R. Part 201, and agreed that it would, "upon the request of AID, promptly make appropriate refund to AID, plus interest . . ., in the event of (a) His nonperformance, in whole or in part, under" the contract of carriage. Since each contract of carriage was memorialized by a bill of lading, this provision in effect incorporated into a Supplier's Certificate each bill of lading issued by Waterman for the AID-financed Saigon cargo. Through this means, AID obtained the right to hold Waterman to all the provisions of its standard bill of lading.

 Under this standard bill of lading and AID's regulations, Waterman and the Government respectively enjoyed several important rights and responsibilities. Waterman, by issuing its bill of lading, agreed to carry all the cargoes in question to Saigon. Balanced against this, Waterman's standard bill of lading contained a "freight-earned" clause, which provided that the carrier "completely earned on receipt *fn3" of the goods" by it "(full) freight to the named port of discharge and advance charges," the term "charges" being defined to include any expense payable by the shipper, E.g., war risk insurance and bunker fuel surcharges. This freight-earned clause was to be effective even if the "vessel and/or cargo (is) lost or damaged . . ., or the voyage changed, broken up, frustrated or abandoned." Nothing in AID's regulations derogated from or circumscribed the validity of this clause. Secondly, under the "liberties clause" in its standard bill of lading, Waterman reserved to itself the right to depart from its undertaking to carry the goods to Saigon in "any situation whether existing or anticipated before commencement of or during the voyage, . . . which in the carrier's judgment may give rise to risk of damages, delay or disadvantage to the vessel, . . . or make it imprudent to begin or continue the voyage or to enter or discharge at any port, or give rise to delay or difficulty in arriving, discharging or leaving any port or place, or in making due disposition or delivery of the goods . . .."

 Waterman's standard "dock receipt" states that the carrier has "(received) the above described merchandise . . . to be held and transported subject to all the terms and conditions contained in the regular form of bill of lading of the carrier which are incorporated herein and shall be considered a part hereof with the same force and effect as if set forth herein in full. The goods are received subject to delay or carrier's inability to carry due to" a lengthy series of conditions. This final qualification in the dock receipt suggests that Waterman's duty to carry the goods does not become full-blown until a bill of lading is executed. Also worth noting is that, under the Uniform Commercial Code, a carrier's duty to exercise reasonable care with respect to goods it undertakes to carry arises when it has "issue(d) a bill of lading." See U.C.C. § 7-309. Nothing in the Carriage of Goods by Sea Act, 46 U.S.C. §§ 1300-15, holds to the contrary. Finally, the Court is aware that Waterman's dock receipts and bills of lading are "contracts of adhesion," and as such must be strictly construed against the carrier. See Leather's Best Inc. v. S. S. Mormaclynx, 313 F. Supp. 1373, 1380 (E.D.N.Y.1970), Aff'd in part, rev'd in irrelevant respects, 451 F.2d 800 (2d Cir. 1971). In this light, the documents should not be read to allow Waterman to claim the benefit of its freight-earned clause until it actually assumes some obligation to carry the related goods. For all these reasons, the Court interprets the term "receipt" in Waterman's bills of lading as denominating the time when Waterman actually issues a bill of lading.

 On the Government's side, AID had the right to "require that a supplier (such as a carrier, See 22 C.F.R. § 201.01(r) & (i)) submit to A.I.D. for prior review any proposed sale of commodities or of commodity-related services which is to be financed by A.I.D." 22 C.F.R. § 201.33. Further, the regulations provided that "A.I.D. may direct that title to A.I.D.-financed commodities in transit to a cooperating country shall be vested in A.I.D. if in the opinion of A.I.D. such action is necessary to assure compliance with the provisions or purposes of any act of Congress." 22 C.F.R. § 201.44(a). Finally, "A.I.D. may direct the master or operator of a vessel . . . carrying the commodities to divert them away from the port or other destination specified in the shipping documents and to deliver them at such other destination as A.I.D. may designate." 22 C.F.R. § 201.44(a)(2). In the event any such "diversion" is ordered, AID is to "assume the responsibility for any extra costs (including the costs of marine insurance and handling) which are incurred . . .." 22 C.F.R. § 201.44(b)(2).

 Thus, AID does not stand as an ordinary shipper. By reserving to itself many special rights, AID's relation to Waterman is one which places Waterman substantially at its command.

 II.

 The Government has standing to sue because it enjoys an independent cause of action for the breach of any term in the Suppliers' Certificates. United States v. Waterman Steamship Corp., 471 F.2d 186, 188-89 (5th Cir. 1973) (alleged overcharges); United States v. Framen Steel Supply Co., 435 F. Supp. 681, 685 (S.D.N.Y.1977) (allegedly nonconforming goods sold); United States v. Emons Industries, Inc., 406 F. Supp. 355, 356-58 (S.D.N.Y.1976) (alleged breach of undertaking in certificate to conform with FDA law). As noted before, the Supplier's Certificates bound Waterman to the terms of its bills of lading.

 In claiming a breach of the Supplier's certificates, the Government of course carries the burden of proof. It asks the Court to infuse a reasoned judgment standard into the freight-earned clause of Waterman's bill of lading. More particularly, the Government argues that Waterman had to exercise reasoned judgment prior to executing each bill of lading; that, once Waterman concluded or should have reasonably concluded that the port of Saigon would be captured by the North Vietnamese prior to the CHASE's arrival, it could no longer proceed in good faith, sign bills of lading, and legitimately invoke its freight-earned clause. The Government would apparently justify the imposition of this standard by pointing to the way in which the Courts have historically interpreted liberties' clauses in carriers' bills of lading. It has been held that "such clauses are subject to the overriding obligation on the part of the carrier to use due care in respect to cargo . . . ." Orient Mid-East Lines, Inc. v. C. A. R. E., 284 F. Supp. 34, 43 (D.D.C.1967), Aff'd, 133 U.S.App.D.C. 307, 410 F.2d 1006 (1969). Accordingly, in considering liberties clauses the courts have held that "what those concerned have a right to demand of a master, when confronted with unexpected emergencies, is not an infallible, but a deliberate and considerate judgment. Mere good faith will not excuse him, if his decision turns out to have been wrong . . . . (The Court must) inquire whether the conduct . . . showed a reasonable exercise of judgment, having regard to the rights of the owners of the vessel and those of the several owners of cargo." The Styria, 186 U.S. 1, 9-10, 22 S. Ct. 731, 734-735, 46 L. Ed. 1027 (1902). Accord, The Wildwood, 133 F.2d 765 (9th Cir.), Cert. denied, 319 U.S. 771, 63 S. Ct. 1436, 87 L. Ed. 1719 (1943); The George J. Goulandris, 36 F. Supp. 827 (D.Me.1941).

 In support of its position that a reasoned judgment standard should be imposed upon a carrier with respect to its initial loading of cargo, as well as with respect to its exercise of any rights under a liberties clause, the Government is able to cite only one case. De La Rama S. S. Co. v. Ellis, 149 F.2d 61 (9th Cir. 1945). *fn4" This was a suit between a shipper and a carrier concerning whether or not the carrier had a right to full consideration under a freight-earned clause. The carrier had loaded the shipper's Manila-bound goods in New York on December 7 and 8, 1941, after hearing of the attack upon Pearl Harbor. By government decree, the voyage was ultimately frustrated; but the carrier insisted that it had earned the full freight. The District Court held for the shipper, but the Court of Appeals reversed. The appellate court found that the carrier did owe the shipper a duty to exercise reasoned judgment prior to loading the shipper's cargo, but found, unlike the District Judge, that the carrier had met this obligation. Id., 149 F.2d at 64. The court concluded that the carrier had had every intention to sail to the Philippines, that no shipper had requested the carrier to suspend its loading of the goods, that on December 7 and 8 "the public mind was unprepared for the swift deterioration which was to overtake allied fortunes in the Far East," and that the United States Coast Guard and Maritime Commission were at the time acting in a manner consistent with the belief that a Philippines voyage remained feasible. Id., 149 F.2d at 64-65.

 Whatever may be the possible right of a private shipper to impose this reasoned-judgment standard upon a carrier in derogation of the express terms of the freight-earned clause, the Court has concluded that such a standard should not be imported into the Supplier's certificates involved here. During April 1975, the Government, by virtue of its regulations and the supplier's certificates, stood in a different posture vis-a-vis the carrier than would have the typical commercial shipper. AID enjoyed the pre-screening, vesting and diversionary powers already noted. In addition, the situation in April 1975 was one with respect to which the Government must be presumed to have possessed far superior knowledge. As a result, the commercial bargain between AID and Waterman was not disproportionately balanced in favor of either party, as may in fact be the case in some private shipper bill of lading situations; and both parties entered into their agreement with an equal awareness of the possible risks. Therefore, the Court refuses to impute into the written documents a contractual term that the parties did not themselves place there.

 The Court must recognize, however, that a carrier's awareness of the likely risks may become so great prior to or while it is signing bills of lading that it may not legitimately execute further bills of lading, and then claim title to the full freight under those bills' freight-earned clauses. One should not be entitled as obligor to the full contract price because one's performance is frustrated by the occurrence of an impossibility which one knew at the time of contracting would arise. See A.L.I., Restatement of the Law of Contracts 2d, Tentative Draft No. 9 (April 8, 1974) § 286(1) ("Where, at the time a contract is made, a party's performance under it is impracticable without his fault because of a fact of which he has no reason to know and the non-existence of which is a basic assumption on which the contract is made, no duty to render that performance arises, unless the language or circumstances indicate the contrary."); The Wildwood, 133 F.2d 765, 767, 771 (9th Cir.), Cert. denied, 319 U.S. 771, 63 S. Ct. 1436, 87 L. Ed. 1719 (1943), (for a carrier properly to invoke its liberties clause, it has to be faced with a risk substantially greater than the risks anticipated at the time of contracting); Surrendra (Overseas) Private, Ltd. v. S. S. Hellenic Hero, 213 F. Supp. 97, 98-99, 102 ...


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