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Legal Watch: Volume 7

Prepared by William H. Bode
Bode & Grenier, LLP
1150 Connecticut Ave., NW
Washington, D.C. 20036
Telephone: 202-862-4300 | Email: wbode@bode.com

CSX NOT REQUIRED TO PAY WHEN IT DELIVERS WRONG LIQUID INTO TERMINAL TANK CONTAINING METHYL ESTER

Case Summary: Southside River Rail Terminal, Inc. operates a rail terminal that stores bulk liquid products. Southside entered an agreement with CSX for the construction and use of a private sidetrack in Cincinnati, Ohio. The sidetrack permits Southside to more readily tender rail freight to CSX for delivery on CSX's main line and also to receive shipments from CSX. The Agreement provides that the parities "jointly agree to defend and bear equally Losses arising from their joint or concurring negligence." The Agreement also provides that Southside must procure Commercial General Liability Insurance insuring liability under the Agreement in an amount not less than $3,000,000. Sometime in June of 2000, CSX notified Southside that a tank car, purportedly from Southside's client Cognis, was ready for delivery. Southside received the tank car after verifying that the number on the tank car matched the number provided by CSX. Southside began to pump the contents of the car into a large storage tank reserved for Cognis's methyl ester. Southside soon realized, however, that the substance in the tank was not methyl ester, but rather an inedible fatty acid. The Bill of Landing accompanying the shipment identified the customer as Peter Cremer North America, but Southside did not read the BOL prior to receiving the shipment. The methyl ester in the tank was ruined and Cognis asserted a claim against Southiside for the loss. The insurance company paid $547,000, and Southside paid $45,000. Both companies then sued CSX for indemnity and contribution. The trial court dismissed the case. The appeals Court held that the dismissal of the case was consistent with Ohio law. Specifically, the Court ruled that the insurance provision meant that both parties meant to absolve themselves from liability and to look solely at the insurance carriers for recovery. The Court declined to apply the law in the minority of jurisdictions and to apply the provisions assigning liability equally.

LESSON: Joint agreements to "equally bear liability" can be trumped by a provision in the same agreement requiring one of the parties to obtain general comprehensive liability insurance. In the majority of jurisdictions, the party required to procure the insurance will be liable for all damages. (Southside River Rail Terminal, Inc. v. CSX Transportation, Inc.)

OIL RIG OWNER DENIED INDEMNIFICATION FROM CHARTERER AS A RESULT OF OWNER'S BREACH OF SEAWORTHINESS WARRANTY

Case Summary: Phillip Comeaux sued the owner and charterer of the M/V MIKE MARTIN ELEVATOR, a jack-up rig operating in the South Pass 27 in the Gulf of Mexico, after Mr. Comeaux was injured while servicing the rig. As a result of built-up pressure, the rig erupted in flames, and Mr. Comeaux was injured. Mr. Comeaux's injuries were exacerbated as a result of the lack of working fire extinguishers on the MIKE MARTIN ELEVATOR. The MIKE MARTIN ELEVATOR was owned by Elevating Boats, LLC ("Elevating Boats"), and chartered by Energy Partners Ltd. ("Energy Partners"). Mr. Comeaux sued both Elevating Boats and Energy Partners, and alleged that the companies violated their duties to provide him with a safe workplace. Mr. Comeaux settled his claims against both companies. Elevating Boats subsequently sought indemnification from Energy Partners for its portion of the settlement pursuant to the knock-for-knock indemnity provision contained in their charter agreement. Elevating Boats brought the indemnification action against Energy Partners, Mr. Comeaux's statutory employer, in the Federal District Court in Eastern Louisiana. The Court ruled that, despite the clear knock-for-knock indemnity clause contained in the charter agreement, Elevating Boats was not entitled to indemnification for injuries that occurred as a result of the lack of operative fire extinguishers onboard the MIKE MARTIN ELEVATOR. The Court stated that the lack of operative fire extinguishers onboard the MIKE MARTIN ELEVATOR violated Elevating Boats' warranty of seaworthiness. Further, the Court held that the knock-for-knock indemnity clause was superseded by a charter agreement clause which excludes warranty breaches from indemnification.

LESSON: Knock-for-knock indemnity provisions may not provide full protection against liability. Knock-for-knock indemnity provisions provide some protection against potential suits brought by the employees of a charterer or operator. However, the agreement containing the indemnity provision must be carefully reviewed to ensure that property owners are not surprised by liability stemming from exceptions to the knock-for-knock indemnity clause. (Comeaux, et al., v. Coil Tubing Services, et al.)

VESSEL MUST BE TURNED OVER TO STEVEDORES IN REASONABLY SAFE CONDITION TO AVOID LIABILITY IN BARGE CLEANING ACCIDENTS

Case Summary: Rufus Martin, an employee of Jore Marine Services, drowned after the Bobcat he was operating plunged from a barge into the Duwamish River at the Port of Seattle. Mr. Martin was performing barge cleaning pursuant to Jore Marine's contract with Alaska Cargo Transport, the barge's bare-boat charterer. He was sweeping the deck of the barge with the sweeper attachment of a 5,500 pound Bobcat. The Bobcat made contact with a wire and post fence surrounding the deck, destroyed the fence, and plummeted into the Duwamish River, drowning Mr. Martin. Mr. Martin's estate alleged that Alaska Cargo Transport turned over the barge to Jore Marine in unsafe condition because the wire and post fence was not strong enough to prevent Mr. Martin's Bobcat from falling from the barge. The Court stated that Alaska Cargo Transport had a responsibility under the Longshore & Harbor Workers Act to turn over the barge to Jore Marine in a condition under which barge cleaning could be performed with reasonable safety. However, the Court did not impose liability on Alaska Cargo Transport, because the wire and post fence was obviously not strong enough to stop a Bobcat, and Mr. Martin operated the Bobcat in an unsafe manner.

LESSON: Vessels must be turned over to stevedores for cleaning and unloading in reasonably safe condition. It is vital to establish via contract whether the vessel owner, the charterer, the company who owns the transported goods has responsibility for this "turnover duty." If a terminal operator has the responsibility for this turnover duty, it must ensure that the vessel is provided to stevedores in reasonably safe condition. (Martin, et al. v. City of Seattle, et al.)

FACILITY OPERATOR'S EXERCISE OF PURCHASE OPTION AT CONCLUSION OF LEASE UPHELD

Case Summary: In June 1995, IFC Credit Corporation leased gasoline tanks and other equipment to Bulk Petroleum for use at Bulk's gasoline facilities. The lease included an option to purchase the equipment at the end of the lease's 72-month term. The option to purchase was priced at $31,419.40 or the fair market value of the equipment. IFC's interest in the lease was later transferred to Finova Capital Corp. Prior to the conclusion of the lease term, Bulk, IFC, and Finova negotiated regarding the fair market value of the equipment, but did not reach an agreement. Immediately prior to the expiration of the lease, Bulk sent Finova a check for $31,419.40, and noted on the check and in an accompanying letter that the check represented full payment of the purchase option. Finova deposited the check, and did not return the tendered funds, but sued Bulk more than one year later alleging breach of the lease agreement. The Court found that Bulk did not breach the lease agreement, because the price of the purchase option was in dispute, Bulk sent the check and letter to the proper Finova representative, and Finova accepted the payment as full compensation.

LESSON: It is important to schedule negotiations regarding purchase options well in advance of the lease conclusion date. Even if a terminal operator is not able to reach an agreement with the lessor, a tender of funds may protect the operator's interest in the leased equipment. Terminal operators should consult counsel prior to any unilateral tender of funds relating to a purchase option, as there are numerous legal requirements that must be observed to protect the operator's rights under the lease. (IFC Credit Corp. v. Bulk Petroleum Corp., et al.)

Please address any comments or questions to Mr. Bode at 202-862-4300 or wbode@bode.com.

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