This lawsuit arises from the ill-fated voyage of the Oxy Producer, a catamaran integrated tug barge. While en route to the Soviet Union with a cargo of chemicals, the linkage system that held the tug and barge together as a single unit failed. Efforts to repair the vessel while at sea proved fruitless and the tug sank in heavy weather off the Azores. This lawsuit ensued, replete with claims and cross-claims against and between the owner and insurers of the vessel and various parties who played a role in its construction.

On appeal, we affirm the district court's holding that the vessel was improperly mated and unseaworthy on delivery and that this was the sole cause of the damage to the vessel and the loss of the tug. We hold, however, that the economic loss rule adopted in the East River case precludes recovery in maritime tort for purely economic loss stemming from the negligent performance of a contract for professional services where those services are rendered as part of the construction of a vessel. The plaintiffs are therefore limited to their contractual remedies against the contract supervisor. While the maritime tort claims must consequently be dismissed, we retain pendent jurisdiction over the remaining claims.

We hold further that the contract supervisor's acceptance of the vessel in its improperly mated condition was not binding on the purchaser, and that the shipbuilder is therefore fully liable to the owner for breach of contract. We find, however, that the Construction Contract effectively limits the shipbuilder's liability to the cost of repairing or replacing deficiencies in the contract work.

Finally, we hold that the district court improperly dismissed two parties from the suit following its conclusion that they were not liable for damage to the Oxy Producer. While we affirm that finding, we hold that dismissal was premature and remand for specific findings regarding the liability of all defendants for the damage to the Oxy Producer's two sister ships.

Plaintiffs below were Suwannee River Lines, Inc., Suwannee River SPA Lines, Inc., and Suwannee River Phosphate Lines, Inc. (collectively, the "lines"), the bareboat charterers of, respectively, the Oxy Trader, the Oxy Producer, and the Oxy Grower (collectively, the "ships"); Suwannee River Chartering, Inc. ("Chartering"), the time-charterer of the ships; Occidental Export, Inc. ("Export"), the seller of certain chemicals transported by the ships; and Occidental Petroleum Corp. ("Occidental"), the parent corporation of all of the preceding plaintiffs. Additionally, the American underwriters and certain underwriters at Lloyds assert subrogated claims.

Lines, Chartering, Export, Chemical, and Occidental are referred to collectively as "Occidental" or as the "Oxy plaintiffs." Because this lawsuit focuses primarily on the sinking of the Oxy Producer, it will be referred to most often, and the Oxy Grower and Oxy Trader will be referred to as the "sister ships."

The defendants are J.J. Henry Co. ("Henry"), a naval architectural firm; Avondale Shipyards, Inc. ("Avondale"); Ogden Corp. ("Ogden"), guarantor and former parent of Avondale; Victoria Machine Works, Inc. ("Victoria"), the manufacturer and supplier of certain component parts for the ships; and Seabulk Transmarine I, Inc., Seabulk Transmarine II, Inc., Hvide Marine International, Inc., and Hvide Shipping, Inc. (collectively, "Hvide"), supervisors of the design and construction of the vessel. Hvide also provided the crew of the Oxy Producer and thus appears in this law suit in two roles.

In the early 1970's, Occidental entered an agreement to manufacture, sell, and transport superphosphoric acid ("SPA") to the Soviet Union. Shortly thereafter, Occidental arranged for the construction of three catamaran integrated tugbarges ("catug ITBs") to transport the SPA to the Soviet Union.1 The unique feature of a catug ITB is the interconnection system between the tug and barge units consisting of bumper pads, link arms, and greenheart-bearing surfaces which are designed to hold the tug and barge together as a single rigidly connected unit.

Defendant Hvide holds a patent on the catug design and was retained, because of its expertise with this type of vessel, to supervise the design and construction of the vessels for Occidental ("Supervision Agreement"). Hvide contracted in turn with J.J. Henry to prepare the plans and specifications for the vessels ("Henry Agreement"). Hvide assigned the Henry Agreement to Occidental. Occidental then engaged Avondale to construct the vessel ("Construction Contract"). Avondale entered into a subcontract ("Purchase Order") with Victoria to manufacture the bumper pads for the catug's interconnection system.

The vessels were completed and delivered between March and September of 1981. The Oxy Producer was delivered on June 9, 1981 and made one uneventful round-trip voyage between the United States and the Soviet Union. Its second voyage, however, was disastrous. The Oxy Producer embarked from Jacksonville, Florida on September 5, 1981. On the evening of September 11, the Oxy Producer encountered weather conditions more severe than any it had previously encountered. During the early morning hours of September 12, a crewmember on watch first noticed relative movement between the tug and the barge. The movement increased and the crew discovered, on examination, that parts of the linkage system were damaged. The crew attempted to make temporary repairs but the movement worsened and the linkage system deteriorated further. The captain of the Oxy Producer, Captain Kanellos, decided to divert the vessel to the Azores in order to make repairs. The vessel arrived at the Port of Ponta Delgada in the Azores on September 14 but was denied entry into the harbor. While the crew awaited the result of further efforts to obtain permission to enter the harbor, they effected further repairs to the ship which remained at anchor a half mile off the breakwater at Ponta Delgada. The weather forecast on September 18 was for heavy weather on September 20 due to tropical storm Harvey, passing to the southwest of the Azores. On the night of the 19th, Captain Kanellos evaluated possible responses to the predicted change in weather. Afraid of dragging anchor and spilling his hazardous cargo if the ship remained anchored near the breakwater, the captain decided early on the morning of the 20th to weigh anchor and maneuver the vessel away from the breakwater. Before the vessel could proceed, however, a second storm, coming from the north, passed over the area, creating confused seas and causing even greater movement between the tug and the barge. The movement of the barge tongue against the hulls of the tug ultimately opened large holes in the hulls, causing the tug to sink.

Following the sinking of the Oxy Producer, the Coast Guard revoked the inspection certificates on the Oxy Producer's two sister ships--the Oxy Trader and the Oxy Grower. The linkage systems on each of the sister ships were subsequently repaired and upgraded.

Occidental then brought this lawsuit to recover damages stemming from the loss of the Oxy Producer and from the recission of the certificates of inspection for the two sister ships.2 The Oxy plaintiffs asserted that the sinking of the Oxy Producer's tug was due to defendants' breaches of their contractual duties and to negligence in the performance of their contracts and that defendants are similarly responsible for the repairs to the sister ships. The claims against the various defendants were as follows:

Henry: The Oxy plaintiffs asserted below that Henry breached its warranty that the plans and specifications were seaworthy. The plaintiffs also alleged that Henry was negligent in performing its contract, particularly in failing to consult the patent, to conduct model tests, or to follow up on defects noted in its plan review.

Avondale: Plaintiffs asserted that Avondale breached its contract and its warranty and specifically that, when delivered, the Oxy Producer was not properly mated in accordance with the plans and specifications, that the link arms and bumper pads were defective, and that the vessel consequently was not seaworthy. The plaintiffs also alleged that Avondale was negligent in performing its contract and in delivering the vessel in an unseaworthy condition.

Avondale responded that it could not be held liable for any deficiency in the mating of the vessel because Hvide was Occidental's agent and authorized the mating procedure and accepted delivery of the vessel with full knowledge of the measurements of the fit which Occidental now claims were not in accordance with the plans and specifications. Avondale further asserted that the loss of the tug was due to the crew's negligence in failing to tighten the linkage system after the first voyage, and not to an initially improper mating. Avondale also claimed that once the problem was discovered, the tug would not have been lost if the captain had been sufficiently diligent in his efforts to secure entry into the harbor.

Victoria: Plaintiffs claimed that they were third party beneficiaries of the Victoria Purchase Order and that Victoria breached its contract and its warranty in two respects: first, the bumper pads were not sufficient to restrict relative movement between the tug and the barge, and second, the bumper pads were not vulcanized as required by the Purchase Order.

Hvide: Plaintiffs asserted that Hvide breached its contract and its warranty that the catug design was seaworthy and had been fully integrated into the plans and specifications. Plaintiffs also claimed that Hvide was grossly negligent in performing its contractual duties.

At the conclusion of a three and one half month bench trial, the district court concluded that the sole cause of the sinking of the Oxy Producer was that the vessel had not been properly mated and was therefore unseaworthy on delivery. The court found that Avondale had breached its contract and its express warranty of seaworthiness and had been negligent in the performance of its contract, but found that the Construction Contract effectively disclaimed tort liability. The court also found that Hvide had breached its Supervision Agreement and its warranty that the plans were seaworthy and that Hvide had furthermore been negligent in supervising the mating of the vessel. The court found that the Supervision Agreement did not limit Hvide's liability in tort, so that Hvide could be liable for damages beyond the $5 million limitation provided in the contract.

The district court found that the bumper pads and link arms did not cause or contribute to causing any of the damage to the Oxy Producer but were instead casualties themselves of the improper fitting. Because Victoria and Henry were not responsible in any way for the poorly mated condition in which the vessel was delivered, they were dismissed from the case.

The proceedings below were bifurcated and the district court has not yet addressed the issue of damages.

The Oxy plaintiffs appeal from the dismissal of Victoria and Henry. Hvide asserts on appeal that in light of the Supreme Court's decision in East River, the negligence claims against Hvide are not cognizable in maritime tort. Hvide also claims that the district court's finding that the improper mating of the vessel was the sole cause of its sinking is not supported by a preponderance of the evidence. Hvide argues further that even if the negligence claims are cognizable in maritime tort, the district court erred in holding that the limitation of liability contained in the Supervision Agreement did not apply to negligence claims as well as to contract claims. Hvide also asserts that the district court erred in imposing joint and several liability.

Going one step further than Hvide, Avondale urges that East River so clearly bars plaintiffs' negligence claims that the federal courts lack admiralty jurisdiction over this case. Avondale also challenges the dismissal of Henry, arguing that the evidence supports a finding that Henry's design of the linkage system was defective. Avondale further asserts that even if the vessel was improperly mated, the district court erred in finding that Hvide's acceptance of the vessel was not binding on Occidental. Avondale also contests the district court's finding that Avondale failed to prove that negligence of the vessel's captain or crew was an intervening or contributory cause in the damage to the vessel or in the loss of the tug. Finally, Avondale contends that even if it is liable for the improper mating of the vessel, the district court erred in concluding that Avondale's liability for breach of the warranty of seaworthiness was not limited by the guarantee deficiency clause of the Construction Contract. Avondale too contests the imposition of joint and several liability.

These claims comprise seven broad issues which we will address in turn: (1) the effect of the East River decision on this case, (2) whether the district court erred in finding that Avondale and Hvide breached their contracts by failing to deliver a properly mated and seaworthy vessel, (3) whether Hvide's acceptance of the fitting was binding on Occidental, (4) whether the district court erred in concluding that the Construction Contract created an express warranty of seaworthiness independent of the contract's limitations of remedies and liability, (5) whether the district court erred in holding that the Supervision Contract did not limit Hvide's liability in negligence, (6) whether the district court erred in holding Hvide and Avondale jointly and severally liable, and (7) whether the district court erred in dismissing Henry and Victoria from the suit.

The district court's findings of fact may not be set aside on appeal unless they are clearly erroneous. Fed.R.Civ.Proc. 52(a). A finding of fact is clearly erroneous only if "the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S. Ct. 1504, 1511, 84 L. Ed. 2d 518 (1985). The district court's conclusions of law, however, are freely reviewable on appeal. Inwood Labs v. Ives Labs, 456 U.S. 844, 855 n. 15, 102 S. Ct. 2182, 2189 n. 15, 72 L. Ed. 2d 606 (1982).

Defendants argue that in light of the Supreme Court's decision in East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 106 S. Ct. 2295, 90 L. Ed. 2d 865 (1986), the federal courts have no admiralty jurisdiction over this case. In East River, the Supreme Court adopted the established rule of the Courts of Appeal that concepts of products liability, grounded in both negligence and strict liability, are a part of general maritime law. Id. at 865, 106 S.Ct. at 2299. The Court held, however, "that a manufacturer in a commercial relationship has no duty under either a negligence or strict products-liability theory to prevent a product from injuring itself." Id. at 871, 106 S.Ct. at 2302. "Thus, whether stated in negligence or strict liability, no products-liability claim lies in admiralty when the only injury claimed is economic loss." Id. at 876, 106 S.Ct. at 2304.

The defendants contend that because the plaintiffs' negligence claims, like those of the East River plaintiffs, allege only economic loss, those claims do not sound in maritime tort and therefore do not provide a basis for admiralty jurisdiction.3

The plaintiffs, however, note correctly that East River 's holding has limited implications for the existence of admiralty jurisdiction. Whether a tort is maritime in nature, and therefore within the admiralty jurisdiction of the federal courts, turns on the application of the "situs" and "nexus" tests set forth in Executive Jet Aviation, Inc. v. City of Cleveland, 409 U.S. 249, 93 S. Ct. 493, 34 L. Ed. 2d 454 (1972). If those requirements are met, the court has jurisdiction. Whether the plaintiff may recover for those torts is not a question of admiralty jurisdiction but of substantive maritime law. In East River itself, the Supreme Court found that under the "locality" test the plaintiff's tort claims were within the admiralty jurisdiction.4 Applying substantive maritime law, the Court then affirmed the granting of summary judgment in favor of defendants based on its conclusion that the negligence claims were not cognizable in maritime tort.

Although defendants argue here that plaintiffs have failed to state a claim on which relief can be granted, the Supreme Court made clear in Bell v. Hood, 327 U.S. 678, 66 S. Ct. 773, 90 L. Ed. 939 (1946), that whether the court lacks subject matter jurisdiction and whether the plaintiff fails to state a claim on which relief can be granted are distinct questions:

Jurisdiction ... is not defeated ... by the possibility that the averments might fail to state a cause of action on which [the plaintiff] could actually recover. For it is well settled that the failure to state a proper cause of action calls for a judgment on the merits and not for a dismissal for want of jurisdiction. Whether the complaint states a cause of action on which relief could be granted is a question of law and just as issues of fact it must be decided after and not before the court has assumed jurisdiction over the controversy. If the court does later exercise its jurisdiction to determine that the allegations in the complaint do not state a ground for relief, then dismissal of the case would be on the merits, not for want of jurisdiction.

Id. at 682, 66 S.Ct. at 776. Bell recognized two exceptions to this rule. A suit may be dismissed for want of jurisdiction when (1) the allegations are clearly concocted for the sole purpose of obtaining federal jurisdiction, or (2) the claims are "wholly insubstantial and frivolous." Id.

Thus, the federal courts would lack subject matter jurisdiction over this suit only if the plaintiffs' tort claims are so clearly barred by the East River holding that they fall within one of the Bell exceptions. We do not think that the plaintiffs' negligence claims are "so patently without merit" as to deprive the federal courts of subject matter jurisdiction.5 Id. at 683, 66 S.Ct. at 776.

In East River, the Court expressly declined to decide "whether a tort cause of action can ever be stated in admiralty when the only damages sought are economic." 476 U.S. at 871 n. 6, 106 S. Ct. at 2302 n. 6. The East River decision thus stopped short of holding that a tort claim for purely economic loss would never be cognizable in maritime tort. Therefore, a maritime tort claim alleging purely economic loss should not be dismissed for want of subject matter jurisdiction where the requirements for admiralty jurisdiction are otherwise met if the facts of the case support a theory of recovery not clearly barred by East River or by other controlling authority.

In admiralty, as in other areas of subject matter jurisdiction, we have held that if the issues necessary to decide the question of subject matter jurisdiction are intertwined with the merits, the court should assume jurisdiction and proceed to the merits of the claim unless the maritime basis for the claim is "immaterial or is wholly insubstantial."6 See Parker v. Gulf Fisheries, Inc., 803 F.2d 828, 829 (5th Cir.1986); 14 Wright, Miller & Cooper Federal Practice & Procedure Sec. 3676 (Supp.1988) (citing Parker ).

In the instant case, we find that the plaintiffs' claim that Hvide was negligent in performing its obligations under the Supervision Agreement are not so clearly precluded by East River as to deprive the federal courts of admiralty jurisdiction.7 The district court held on remand that the claim against Hvide was distinguishable from the claims in East River because the Oxy plaintiffs alleged negligence in the performance of a contract for professional services. Defendants have countered that one of the claims in East River was similarly for negligent supervision--of the installation of a component part of the vessel. We note, however, that the economic loss rule adopted in East River applies specifically to claims against manufacturers and that the supervisor and the manufacturer in East River were one and the same.8 The East River decision does not address whether the economic loss rule in maritime tort applies to contracts for professional services9 where the provider of the services is a party other than the manufacturer itself.10

We therefore will not dismiss Occidental's negligence claims against Hvide for lack of subject matter jurisdiction. Rather, we hold that this case falls within the admiralty jurisdiction and will decide, on the merits, whether the plaintiffs' negligence claims are cognizable in maritime tort following the East River decision.

2. Are Plaintiffs' Negligence Claims Cognizable in Maritime Tort?

While we agree with the district court's characterization of the Supervision Contract as one for the provision of professional services, we do not agree that this answers the question whether plaintiffs' negligence claims are cognizable in maritime tort.11 Rather, this case raises an issue of first impression: Does the East River economic loss rule apply to contracts for professional services, rendered in connection with the manufacture or construction of a product, by a party other than the builder or manufacturer?12 In order to determine whether East River 's rationale should be extended to this context, we must review carefully the Court's reasoning and the possible arguments against limiting plaintiffs to their contractual remedies.

In deciding to limit the scope of products liability in the maritime tort context, the Supreme Court comprehensively reviewed the origins and purposes of the doctrine and its relationship to contract law. The Court noted that "[p]roducts liability grew out of a public policy judgment that people need more protection from dangerous products than is afforded by the law of warranty." 476 U.S. at 866, 106 S.Ct. at 2299. Expressing concern, however, "that if this development were allowed to progress too far, contract law would drown in a sea of tort," the Court answered in the negative the question that it posed at the outset of the case: "whether a commercial product injuring itself is the kind of harm against which public policy requires manufacturers to protect, independent of any contractual obligation." Id.

The Court reasoned that "[w]hen a product injures only itself the reasons for imposing a tort duty are weak and those for leaving the party to its contractual remedies are strong."13 Id. at 871, 106 S.Ct. at 2302. A manufacturer is liable without negligence under strict products liability because "public policy demands that responsibility be fixed wherever it will most effectively reduce the hazards to life and health inherent in defective products that reach the market." Id. at 866, 106 S. Ct. at 2299. (quoting Escola v. Coca Cola Bottling Co., 24 Cal. 2d 453, 462, 150 P.2d 436 (1944) (concurring opinion)). The manufacturer's duty of care was, for similar reasons, expanded to include protection against property damage. Id. at 867, 106 S.Ct. at 2300. While conceding that "damage to a product itself has certain attributes of a products-liability claim," the Court concluded that "the injury suffered--the failure of the product to function properly--is the essence of a warranty action, through which a contracting party can seek to recoup the benefit of its bargain." Id. at 867-68, 106 S.Ct. at 2300-01.

The Court reasoned that contract law provides adequate remedies in a commercial setting where the parties are generally of equal bargaining power. In this context, the parties are able to allocate between themselves the risks of defects. Id. at 872-73, 106 S.Ct. at 2302-03. Moreover, to the extent that the purchaser is unable to recover from the manufacturer the full measure of expectation damages that are available in a warranty or breach of contract action, it may insure against such losses. Id. at 873, 106 S.Ct. at 2303. "Society need not presume that [such] a customer needs [the] special protection" of an extracontractual remedy. "The increased cost to the public that would result from holding a manufacturer liable in tort for injury to the product itself is not justified." Id. at 872, 106 S.Ct. at 2302.

Plaintiffs argue that because Hvide contracted only to provide professional services and did not manufacture any part of the Oxy Producer,East River 's rationale for confining the parties to their contractual remedies does not apply. It is true that some jurisdictions recognize an exception to the economic loss rule when the underlying contract is for the provision of professional services.14 See Consol. Edison Co. v. Westinghouse Elec. Corp., 567 F. Supp. 358, 365 (S.D.N.Y.1983) (New York cause of action for negligent performance of contractual duties should not be applied outside context of negligence in the performance of services); Morse/Diesel, Inc. v. Trinity Indus., Inc., 664 F. Supp. 91 (S.D.N.Y.1987), rev'd on other grounds, 859 F.2d 242 (2d Cir.1988);15 cf. Republic Steel Corp. v. Penn. Engineering Corp., 785 F.2d 174, 182 n. 13 (7th Cir.1986) (not reaching question whether Illinois law recognized such an exception because contract found to be predominantly for sale of goods); Adams Labs v. Jacobs Engineering Co., 761 F.2d 1218, 1223 (7th Cir.1985) (whether Illinois would recognize exception to economic loss rule for design professionals unclear). But see Flinkote Co. v. Dravo Corp., 678 F.2d 942, 949-50 (11th Cir.1982) (Georgia courts would not recognize exception to economic loss rule for professional services--particularly where services were rendered in process of manufacturing or constructing a product).

The question before us is whether such an exception should be recognized in maritime tort. We conclude that East River 's broad concern for preserving the integrity of contract law in commercial settings applies equally to a case such as this where the professional services are an integral part of the manufacture or construction of a product and where the only injury alleged is to the product itself.

As in East River, the damage alleged here is purely economic. Thus, the public policy concerns which underpin the imposition of a duty in tort--the need to provide consumers with greater protection from personal injury and property damage than is afforded by warranty or contract--are not implicated.16 476 U.S. at 866, 106 S. Ct. at 2299; see also Prosser & Keeton on Torts 693 (5th ed. 1984).

The only remaining reasons for concluding that contract law does not provide an adequate remedy for a buyer of professional services who incur purely economic loss are (1) it may be more difficult to define in a contract what constitutes satisfactory performance of services and (2) contracts for services are not subject to the implied warranties of the Uniform Commercial Code.17 We find that neither of these considerations provides an adequate reason for imposing an extracontractual duty on one who contracts to provide professional services in a commercial context.

We recognize that in some cases it may be more difficult to define what constitutes the satisfactory performance of services than it is to define what constitutes a satisfactory product.18 See PPG Indus., Inc. v. Sundstrand Corp., 681 F. Supp. 287, 290 (W.D.Pa.1988). This problem is minimized, however, when the parties possess equal bargaining power. In such cases, the parties are capable of bargaining for a definition of adequate performance that focuses on either "outcome" or "effort." See Comment, Guidelines for Extending Implied Warranties to Service Markets, 125 U.Pa.L.Rev. 365, 382-86 (1976) (discussing differing effects of "effort-oriented" and "outcome-oriented" standards). The contract could incorporate a guarantee that the contract will be performed in a "workmanlike" manner.19 Alternatively, when the services are directly related to the manufacture of a product, the parties may impose a higher standard, defined with reference to the product itself.20

A more significant reason for imposing an extracontractual duty of care on sellers of services, but not on sellers of goods, may be that contracts for services are not governed by the U.C.C.21

There are particularly strong reasons for leaving to the U.C.C. commercial disputes over economic losses stemming from defective products because "[t]he maintenance of product value is precisely the purpose of express and implied warranties."22 East River, 476 U.S. at 872, 106 S. Ct. at 2302 see also Prosser & Keeton on Torts, supra at 708-09 (risk of harm to the product itself is type of risk that parties to purchase and sale contracts should be allowed to allocate pursuant to the terms of the contract--especially in the commercial context); Note, Privity Revisited: Tort Recovery by a Commercial Buyer for a Defective Product's Self-Inflicted Damage, 84 Mich.L.Rev. 517 (1985) (arguing that imposition of tort liability in cases where the parties are in privity and the product injures only itself does not achieve optimal allocation of risks). On the rationale of East River, the implied warranties provided by Article II of the U.C.C. are an adequate replacement for the imposition of a duty in tort when the defective product has injured only itself.

Arguably, because contracts for services are not subject to the implied warranties provided by the U.C.C., it is necessary to impose a duty of proper performance in tort in order to provide the buyer of services with analogous protection from economic loss.23 See Note, Extending Implied Warranties, supra, at 393 (because no implied warranties apply to contracts for services, an aggrieved buyer must rely on a tort remedy). This rationale is persuasive in a noncommercial context where the purchaser of services is not in a position to bargain for a specific guarantee of the quality of the service. See generally, id. (arguing for extension of implied warranties to certain service markets in order to protect consumers).

In a commercial context, however, parties are generally capable of allocating the risk of defective performance of a contract for services in the same way that they can allocate the risk of a defect in the product itself.24 While the commercial purchaser of services will not have the benefit of implied warranties imposed by the U.C.C., it may bargain--as mentioned above--for an express warranty of workmanlike performance or for an express warranty defined in terms of the quality of the finished product.25 The contract price would then turn in part on whether the provider of services is willing to guarantee that its performance of the contract will be satisfactory.

At least one district court has agreed with this analysis, finding East River to be persuasive authority for applying the economic loss rule to a commercial party's claim of negligent performance of a contract for professional services. In PPG Industries, a non-maritime case involving a dispute over an engineering agreement, the court noted that "the special non-contractual duties of professionals such as doctors, lawyers and architects enforced by tort law were created in part to make up for the lack of sophistication and bargaining power of those seeking these professional services." 681 F. Supp. at 290; see also Flinkote, 678 F.2d at 949-50 (finding no reason to except contractors or other professionals from Georgia economic loss rule).

The Supreme Court emphasized in East River that in a commercial context there are rarely disparities in the bargaining power of the parties that would justify the imposition of such extracontractual duties. 476 U.S. at 872-73, 106 S. Ct. at 2302-03. Like the court in PPG Industries, we find this to be equally true where the parties to a contract for services are sophisticated commercial entities, "adept at negotiating complex agreements and allocating risks between them." 681 F. Supp. at 290; see also Note, Privity Revisited, supra, at 532-39 (arguing that where parties are of equal bargaining power, as in most commercial cases, the parties themselves are best able to allocate the risk of defects).

Hvide and Occidental are both sophisticated commercial actors, capable of anticipating and allocating the risk of the type of economic loss that occurred in this case, and of insuring against the possibility that such losses may not be recovered in a breach of warranty or contract action. There is no reason for society to presume that a commercial entity such as Occidental "needs special protection." East River, 476 U.S. at 870, 106 S.Ct. at 2301; see also Note, Privity Revisited, supra at 532-39. Whether the negligence alleged is in the performance of a contract for services, or in a contract for the sale of goods, the resulting economic loss "is essentially the failure of the purchaser to receive the benefit of its bargain--traditionally the core concern of contract law." East River, 476 U.S. at 870, 106 S.Ct. at 2301.

We do not hold that a tort cause of action may never be stated in admiralty when the only damages sought are economic.26 Id. at 871 n. 6, 106 S. Ct. at 2302 n. 6. We hold only that a plaintiff may not recover purely economic losses on a theory of negligent performance of a contract for professional services when the services were rendered as a part of the manufacture or construction of a product. That is, a party that provides professional services as part of the manufacture or construction of a product has no duty in maritime tort, independent of its contractual obligations, to prevent the product from injuring itself.27 See id. at 876, 106 S. Ct. at 2304.

To hold otherwise would allow a plaintiff who contracts separately for "services" related to the manufacturing process--such as the design of the product or the supervision of the contract work--to recover in tort for purely economic losses from the provider of those services while East River would bar any similar recovery in cases in which those same services are performed by the manufacturer itself.28 Creating an exception to the economic loss rule for professional services when those services are performed "only in the process of manufacturing or constructing a product" would "effectively eviscerate the economic loss rule" adopted in East River. See Flinkote, 678 F.2d at 950.

We conclude then, that following East River, Occidental's negligence claims against Hvide are not cognizable in maritime tort. This holding does not, however, eliminate our jurisdiction over the claims remaining in this case. We may, within our discretion, retain jurisdiction over the pendent contract claims that would not otherwise be within the admiralty jurisdiction if "considerations of judicial economy, convenience and fairness to litigants" would be served by doing so.29 United Mine Workers v. Gibbs, 383 U.S. 715, 726, 86 S. Ct. 1130, 1139, 16 L. Ed. 2d 218 (1966); Ingram Corp. v. J. Ray McDermott & Co., 698 F.2d 1295, 1320 (5th Cir.1983).

Prior to East River, plaintiffs' negligence claims were, under the law of this circuit, clearly cognizable in maritime tort. Jig the Third Corp. v. Puritan Marine Insurance Underwriters Corp., 519 F.2d 171, 175-76 (5th Cir.1975). East River, which effectively overruled the Fifth Circuit rule, Shipco, 825 F.2d at 927, was decided two weeks after the district court had rendered its decision in this case, at the conclusion of a three and one half month bench trial. "Considerations of judicial economy, convenience and fairness to the litigants" thus weigh heavily against dismissing the pendent claims at this late date.30 Accordingly, we will retain jurisdiction over the remaining claims.

We turn now to the district court's resolution of those claims.

B. Did the district court err in finding that Avondale and Hvide breached their contracts by failing to deliver a properly mated and seaworthy vessel and that this was the sole cause of the sinking of the Oxy Producer?

After a lengthy bench trial, the district court concluded that the Oxy Producer had not been mated in accordance with the plans and specifications and that this failure had rendered the vessel unseaworthy on delivery. The district court found that Avondale breached its Construction Contract by failing to comply with the plans and specifications31 and that Hvide had breached its Supervision Agreement by failing to insure that the plans and specifications were followed.32 The district court also held that the improper mating of the vessel was the sole cause of the sinking of the Oxy Producer.

The district court's holding that the vessel was not properly mated is a finding of fact and will not be disturbed on appeal unless it is clearly erroneous. Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S. Ct. 1504, 1511, 84 L. Ed. 2d 518 (1985); McAllister v. United States, 348 U.S. 19, 75 S. Ct. 6, 99 L. Ed. 20 (1954) (clearly erroneous rule applies to review of judgment of trial court sitting in admiralty). Issues concerning breach of contract and warranty are also treated as fact and are therefore subject to the clearly erroneous standard of review. Automated Med. Laboratories v. Armour Pharm. Co., 629 F.2d 1118 (5th Cir.1980) (contract); Noel v. Kline, 325 F.2d 496 (5th Cir.1963) (contract); Martin v. Xarin Real Estate, 703 F.2d 883, 889 (5th Cir.1983) (warranty). Questions of negligence and causation are similarly treated as fact. Kratzer v. Capital Marine Supply, Inc., 645 F.2d 477 (5th Cir.1981) (negligence); Consolidated Grain & Barge Co. v. Marcona Conveyor Corp., 716 F.2d 1077 (5th Cir.1983) (causation).

"[A] finding is 'clearly erroneous' when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Anderson, 470 U.S. at 573, 105 S.Ct. at 1511. "If the district court's account of the evidence is plausible in light of the record viewed in its entirety, [we] may not reverse even though convinced that had [we] been sitting as the trier of fact, [we] would have weighed the evidence differently. Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous.... This is so even when the district court's findings do not rest on credibility determinations, but are based instead on physical or documentary evidence or inferences from other facts." Id. at 573-74, 105 S.Ct. at 1511.

For the reasons set forth below, we find no clear error in the district court's findings of fact.

The district court noted that the Barge Specifications contained detailed instructions regarding the amount of contact required between the tug and the barge along the greenheart surfaces.33 The specifications also provided that the contractor should measure the contact to ensure that the fit was proper. It was undisputed, however, that the measurements taken by a Hvide employee, Robert Bibbo, revealed that the specified amount of contact had not been achieved at the final mating. The district court concluded that "the Oxy Producer was delivered with virtually no greenheart contact and large gaps between the tug and the barge along its greenheart surfaces. The vessel therefore was not constructed in accordance with the plans and specifications."

The court further found that the damage sustained by the vessel on September 12, 1981 "was caused solely by the poorly mated condition in which Avondale delivered the vessel. Had the vessel been delivered with the percentage of contact between the tug and the barge along the greenheart surfaces required by the plans and specifications, no significant movement would have developed and no damage would have been sustained." The court held that these same factors were responsible for the sinking of the tug on September 20.

Avondale and Hvide dispute the district court's holding on several grounds. Avondale argues first, that Bibbo's measurements may not have been taken under the conditions required by the Barge Specifications. Second, Avondale notes that the specifications prescribe the percentage of contact to be achieved before sea trials and not at the final mating. Third, Avondale argues that because Hvide had extensive experience in the mating of ITBs, the district court should have deferred to Hvide's "interpretation" of the specifications. According to Avondale, the Oxy Producer's strong performance at sea trials was a better indication of the adequacy of the fit than were the measurements.

There is evidence in the record, however, to support each of the district court's findings. First, despite Avondale's post-hoc explanations for Bibbo's measurements, no evidence was presented that directly contradicted the measurements. The district court noted, moreover, that Carlton Ledet, the Avondale engineer responsible for mating the vessel, admitted that he did not take any steps to insure that there was sufficient contact before the vessel was delivered,34 even though the adequacy of contact could readily be measured. Ledet went so far as to testify that had he known of Bibbo's measurements, he would have found the fit-up inadequate. Certainly the district court could find that these factors undermined the credibility of Avondale's post-hoc explanations for the unfavorable measurements.

Second, although the specifications did not refer explicitly to the final mating, the court relied on the testimony of Roderick Hulla, a naval architect employed by J.J. Henry, who expressed the view that contact in the range of 85-90%, as provided in the specifications, was necessary to avoid rapid greenheart wear and sudden decompression of the linkage system. It was Hulla's opinion that failure to achieve the specified percentage of contact could cause the greenheart to wear down more rapidly, leading to a sudden loss of friction and relative movement between the tug and the barge. This theory supports the view that it was necessary to comply with the specifications at the final mating and not simply before the sea trials.

Hvide argues that Hulla's opinion regarding the consequences of a failure to comply with the specifications was pure speculation and did not provide an adequate basis for the court's finding that the improper mating of the vessel initiated the chain of events leading to the loss of the Oxy Producer.35

The fact that the trial judge relied heavily on Hulla's testimony does not, however, render his decision clearly erroneous. The trial judge stated in his memorandum opinion that "[e]ach party's experts presented a different theory of the casualty. These theories varied widely and were often marred by the experts' obvious bias. Their tendency to be advocates and to protect the parties which called them often made their explanations obscure and illogical." The ability to assess the credibility of witnesses is at the heart of the trial court's function and is not a matter for the appellate court to second guess.

The fact that Avondale and Hvide are able to produce examples of testimony that appear to contradict the district court's findings does not, therefore, persuade us that the findings are clearly erroneous. In sifting through a vast array of competing evidence, the trial judge must evaluate the credibility of the witnesses and determine whose account of the events is most persuasive: "[W]hen a trial judge's finding is based on his decision to credit the testimony of one of two or more witnesses, each of whom has told a coherent and facially plausible story that is not contradicted by extrinsic evidence, that finding, if not internally inconsistent, can virtually never be clear error." Anderson, 470 U.S. at 575, 105 S.Ct. at 1512.

The district court found Mr. Hulla to be the most "candid and responsive" of the expert witnesses. Hulla presented a "coherent and facially plausible" theory that was supported by the evidence. We therefore find no clear error in the district court's reliance on Hulla's testimony as a basis for its findings that the vessel was not properly mated on delivery. We agree that Avondale and Hvide breached their contracts with Occidental in failing to insure that the vessel was properly mated.

We will next address the district court's finding that the improper mating of the vessel was the sole cause of both the damage to the Oxy Producer on September 12 and the sinking of the tug on September 20.

a. Failure to Adjust the Fit

Defendants argued at trial that the relative movement between the tug and the barge which began on September 12 was due to Occidental's failure to tighten the fit following the first voyage. Again, the district court relied on Hulla's testimony in rejecting this argument. Hulla explained that if the vessel had been properly mated at the outset, the greenheart would wear down and, with periodic tightening, would achieve nearly 100% contact. If, however, the vessel was not properly mated, the greenheart would wear down too rapidly, causing a relatively sudden loss of friction. Referring to the testimony of the crew, and to Bibbo's measurements, the district court found that the events leading up to the sinking of the Oxy Producer were most consistent with the second theory. Bibbo's measurements disclosed that there was contact at only a few "high spots" in the greenheart, the situation that Hulla testified was likely to result in a sudden loss of friction. The theory was supported further by the crew's observations, prior to the 12th, that there had been significant bulges in the neoprene pads indicating that the pads were under compression and that the fit was satisfactory. Furthermore, the relative movement between the tug and the barge did not increase gradually, but increased suddenly when the vessel encountered heavy weather on September 12. The district court found that the sea conditions either knocked the vessel off of its high spots, or caused it finally to wear off of its high spots.

The defendant's objections to the district court's findings establish at most that there are several plausible explanations of the events. The district court's choice of one of several permissible views of the evidence cannot constitute clear error. Anderson, 470 U.S. at 574, 105 S.Ct. at 1511.

b. Negligence of the Captain

Avondale also argued at trial that even if the relative movement was caused initially by improper mating of the vessel, the negligence of the crew was an intervening or contributing cause in the damage sustained by the vessel on September 12 and in the sinking of the tug on September 20. The district court held that Avondale failed to carry its burden of proving this affirmative defense with respect to the events of both September 12 and September 20.36 The court's finding that the Captain acted reasonably in setting sail for the Azores in order to effect repairs is supported by the expert testimony and is not clearly erroneous.

The court also found that the Captain had been diligent in his attempts to obtain entry into the harbor at Ponta Delgada and had not acted unreasonably in setting out to sea on September 20.

While the harbor officials testified later that they would have permitted the Oxy Producer to enter the harbor if they had known that the vessel was in peril, the district court discounted this testimony as speculative. Given that the ultimate decision was not in the Captain's hands, and considering the range of factors that could affect the Harbor Master's decision whether to grant permission to enter, the district court's assessment of this evidence is certainly permissible.37 The district court properly concluded that the mere possibility that the Captain might have obtained permission to enter the harbor if he had been more insistent did not establish that he was negligent.

Avondale next argues that the district court judge failed to apply the proper legal standard to judge the Captain's conduct on September 20. The district court invoked the doctrine of in extremis which holds that "where, without prior negligence, a vessel is put in the very center of destructive natural forces and a hard choice between competing courses must immediately be made, the law requires that there be something more than mere mistake of judgment by the master in that decision in extremis." Boudoin v. J. Ray McDermott & Co., 281 F.2d 81, 84 (5th Cir.1960).

Avondale argues that the circumstances confronting the Captain on September 20 were not sufficiently severe to warrant application of the in extremis doctrine and that the Captain's conduct should have been judged according to the ordinary "prudent seaman" standard.

Avondale contends that a predicted storm does not constitute sudden peril because "it is the nature of the calling of the shipmaster to know the tempestuous forces of wind and tide and seas." Boudoin, 281 F.2d at 84 (application of in extremis doctrine inappropriate where storm tides from hurricane were predicted several days in advance).

The heavy weather predicted for September 20 was not, however, the only difficulty facing Captain Kanellos. His disabled vessel, which carried a hazardous cargo, had been denied entry into the harbor. Moreover, another storm moved into the area early on the 20th, exacerbating the heavy seas created by tropical storm Harvey.38 While these factors may not have placed the vessel in "sudden peril," we think that the district court was justified in finding that the combination of these factors presented "a situation of sufficient peril and immediacy to require application of a standard of law different from the standard of ordinary maritime negligence." M.P. Howlett Inc. v. Tug Michael Moran, 425 F.2d 619, 623 (2d Cir.), cert. denied, 400 U.S. 833, 91 S. Ct. 67, 27 L. Ed. 2d 65 (1970).

The district court properly evaluated the Captain's conduct in light of the principle that:

The master of a vessel caught in an emergency where he is forced to choose between risky alternatives, is entitled to a wide range of discretion in deciding what to do, provided it is a reasonable exercise of current standards of nautical knowledge and skill under the circumstances. It does not become negligence because the decision he makes may later, in the light of subsequent events revealed through hindsight, be shown to have been wrong.

Esso Standard Oil S.A. v. S.S. Gasbras Sul, 387 F.2d 573, 580 (2d Cir.1967), cert. denied, 391 U.S. 914, 88 S. Ct. 1808, 20 L. Ed. 2d 653 (1968).

In arguing that Captain Kanellos was imprudent, Avondale relies on our decision in Boudoin in which we held that a shipmaster's decision to remain docked in the face of an oncoming hurricane, rather than sailing upriver to a more protected harbor, was imprudent. A central factor in our holding in Boudoin, however, was that there was no showing that the tug master evaluated his options critically and made a conscious decision that it would be safer to remain at the dock rather than moving his vessel to another port. 281 F.2d at 86. The experts who testified in Boudoin all agreed that a prudent seaman would not have remained docked in light of the weather forecasts. Furthermore, there was no evidence that taking the vessel upriver would have been dangerous before the onset of the hurricane was imminent. Id. at 87.

The instant case is readily distinguishable from Boudoin. First, there is ample evidence that Captain Kanellos carefully considered his options (none of which could be guaranteed to succeed) and made a conscious decision that the risk of dragging anchor, running aground, and spilling the vessel's hazardous cargo outweighed the risk of attempting to maneuver the vessel away from the breakwater. Second, the experts who testified at trial did not agree on one prudent course of action.39 Finally, at least one expert agreed with Captain Kanellos that remaining at anchor could have been dangerous.40

The district court found that the expert testimony established, at most, that another course of action might have been successful and that this was not enough to establish that the Captain's actions had been unreasonable under the circumstances. We agree. "The standard of judging the exercise of prudent seamanship here was tempered by the requirement for decision under very difficult, abnormal circumstances and the error, if there was error, was not negligence." Tug Michael Moran, 425 F.2d at 623 (citations omitted). The district court did not err in holding that Avondale failed to establish that the imprudence of the Captain was an intervening or contributory cause in the loss of the Oxy Producer. The district court must, however, decide whether the events discussed in this section were foreseeable for purposes of determining damages for breach of contract. See supra note 36; Skibs A/S Gylfe v. Nat'l Cargo Bureau Inc., 438 F.2d 803, 805 n.1, 807-08 (6th Cir.1971) (distinguishing "superceding" and "intervening cause" as used in tort from "forseeability" in determining damages for breach of contract).

c. Negligence or Breach of Contract by Henry and Victoria

The district court also rejected the contention that the cause of the damage sustained by the Oxy Producer on September 12 was the defective design and manufacture of the interconnection system as a whole and the bumper pads and link arms in particular. The district court found that this theory was inconsistent with the physical evidence, with the testimony of every other expert in naval architecture and marine engineering, with the crewmembers' testimony regarding the fore and aft direction of the movement between the tug and barge, and with the fact that no lateral movement appeared before September 12. Again, we find no clear error in the district court's assessment of the evidence.

Having concluded that the sole cause of the damage to the Oxy Producer was the improper mating of the vessel, the district court held that Henry and Victoria were not liable to the plaintiffs for any damage to the Oxy Producer. Because we find no clear error in the district court's findings of causation, we agree with this conclusion. However, we address below in section G the propriety of dismissing Henry and Victoria from the lawsuit in light of the additional claims regarding the Oxy Producer's sister ships--the Oxy Grower and the Oxy Trader.

We affirm the district court's finding that both Avondale and Hvide breached their contracts with Occidental by failing to deliver a properly mated and seaworthy vessel. We furthermore affirm the district court's holding that the improper mating of the vessel was the sole cause both of the damage sustained by the Oxy Producer on September 12, and of the sinking of the tug on September 20.

C. Was Hvide's acceptance of the vessel binding on Occidental?

Avondale contends that even if the loss of the Oxy Producer was caused by the improper mating of the vessel, Hvide's acceptance of the fit-up was binding on Occidental because the Supervision Contract vested Hvide with the power to accept or reject work or materials provided by Avondale. Avondale essentially argues that Hvide's acceptance of the vessel insulated Avondale from liability for any deficiencies in its own work. This argument is implausible. While Hvide was engaged to supervise the construction of the vessel, Avondale undertook an independent contractual obligation to construct the vessel according to the plans and specifications. See supra note 31.

The district court correctly found that Hvide had no actual authority to unilaterally modify the requirements of the plans and specifications41 in a fashion that would be binding on Occidental because the Supervision Agreement expressly provided that Hvide was an independent contractor.42 2]

Avondale notes, however, that this holding did not necessarily dispose of the question whether Hvide had apparent authority to bind Occidental. The two inquiries are distinct:

While actual authority is the result of the principal's consent manifested to the agent, apparent authority is the result of consent manifested to the third party. The apparent authority for which a principal can be held liable must be traceable to him; it cannot be established by the unauthorized acts, representations, or conduct of the agent.

Strip Clean Floor Refinishing v. N.Y. District Council Brotherhood of Painters, 333 F. Supp. 385, 396 (E.D.N.Y.1971). Thus, Hvide's acceptance of the mating of the vessel would be binding on Occidental only if Occidental represented to Avondale that modifications of the plans and specifications by Hvide would be binding on Occidental and would relieve Avondale of its independent obligation to follow the plans and specifications.

A third party in Avondale's position may not assume the existence of such authority. Rather, a party who does business with an agent does so at his or her own peril: "[T]he principal will not be bound by the act of his agent in excess of his actual authority where the party doing business with the agent knows the extent of the latter's authority, or where the facts and circumstances are such as to put him on inquiry as to the power and good faith of the agent." Id. (emphasis in original); Legal Aid Soc'y of N.E.N.Y. v. Economic Opportunity Comm'n of Nassau, 132 A.D.2d 113, 521 N.Y.S.2d 833 (1987) (party dealing with an agent must make necessary effort to discover actual scope of agent's authority). The circumstances of this case indicate that Avondale should have taken steps to confirm the scope of Hvide's authority. It was clear from the terms of the Construction Contract that any deviation from the plans and specifications would expose Avondale to liability. The contract provides that Avondale should confer with the "Purchaser"--Occidental--in the event that it encountered any "discrepancy, error, omission or lack of clarity in the Vessel Plans and Specifications" and that any work performed by Avondale based on a "discrepancy, error, omission or lack of clarity" about which Avondale knew or should have known would be at Avondale's own risk unless Avondale had first received clarification from Occidental. In light of these factors, any reliance by Avondale on Hvide's "apparent" authority to bind Occidental by accepting work not in conformity with the plans and specifications, with no attempt to confirm that such deviations were acceptable to Occidental, was manifestly unreasonable and unjustified.43

We conclude that the district court properly found that Hvide's acceptance of the vessel was not binding on Occidental and therefore did not relieve Avondale of liability for its own breach of contract.

D. Avondale's Liability under the Construction Contract

The district court found that the specifications for the tug and the barge contained an express warranty that the vessel would be seaworthy on delivery which was incorporated into the Construction Contract44 and that this warranty was not disclaimed or subject to the provisions limiting Occidental's remedies or Avondale's liability. The district court then found that Avondale breached both its express warranty that the vessel would be constructed in accordance with the plans and specifications and its warranty that the vessel would be seaworthy upon delivery.

Avondale maintains first that the language in the plans and specifications referring to seaworthiness does not create an express warranty, and second, that if there is a warranty of seaworthiness, it is subsumed in the guarantee deficiency clause of the contract and is therefore subject to the exclusive remedy of repair and replacement.

The parties agree that the Construction Contract is governed by New York law. It is unclear whether, under New York law, contracts for the construction of a vessel are subject to the U.C.C. Compare In re American Export Lines, 620 F. Supp. at 515 (contract for the construction of a vessel is predominantly for services and is therefore not governed by the U.C.C.) with Silver v. Sloop Silver Cloud, 259 F. Supp. at 191 (applying U.C.C. to contract for construction of a vessel). Because our conclusions would be the same under either the New York U.C.C. or New York common law, we do not decide this issue.

Under New York law, "a warranty is an assurance by one party to a contract of the existence of a fact upon which the other party may rely."45 Pittsburgh Coke & Chemical Co. v. Bollo, 421 F. Supp. 908, 928 (E.D. N.Y.1976), aff'd, 560 F.2d 1089 (2d Cir.1977). We agree with the district court that the language in the specifications constituted an express warranty that the vessel would be seaworthy on delivery46 and that the warranty is incorporated into the Construction Contract by Article III(a) of the contract. The language of the specifications indicates that the object of the contract work is the building of a seaworthy vessel.

We find, however, that the warranty of seaworthiness is subsumed in the guarantee deficiency clause.47 "Guarantee Deficiency" is broadly defined as:

[A]ny weakness, deficiency, failure, breaking down or deterioration in workmanship or material produced or furnished by the Contractor in performing the Contract Work or any failure of any equipment, machinery or material produced or furnished by the Contractor or a vendor or subcontractor of the Contractor to function as prescribed by the Vessel Plans and Specifications.

Seaworthiness is a qualitative statement which may mean something more than the failure of the contractor to comply with the plans and specifications: not every such failure would render the vessel unseaworthy.48 Thus, a deficiency that causes the vessel to be unseaworthy may be more serious than one that does not.49 Nevertheless, the plain language of the guarantee deficiency clause sweeps broadly to include deficiencies of varying degrees of severity.50 Looking to the plain language of the contract, we cannot conclude that "any ... deficiency" does not include those deficiencies which render the vessel unseaworthy.51

The district court's finding that the vessel had not been mated in accordance with the specifications falls precisely within the definition of guarantee deficiency: Avondale's failure to mate the vessel properly was a "deficiency ... in workmanship ... in performing the Contract Work."

The fact that the contract narrowly restricts the remedies that are available for guarantee deficiencies to "repair or replacement" does not render this clause unconscionable, nor should it prompt a court to engage in tortured interpretation of the contract:52

Within the framework of this commercial transaction the Court perceives no valid legal reason why [the plaintiff] should not be held to the clear and express terms of the written agreement between the parties. Warranty and limitation of liability clauses such as found in the present contract, which restrict [the plaintiff's] remedies to the repair and replacement of non-conforming parts and limit [the defendant's] liability, regardless of its negligence in causing such nonconformities, are valid and enforceable and have been consistently upheld by the courts.

American Elec. Power Co. v. Westinghouse Elec. Corp., 418 F. Supp. 435, 453 (S.D.N.Y.1976) (quoting Potomac Elec. Power Co. v. Westinghouse Elec. Corp., 385 F. Supp. 572, 575 (D.D.C.1974), rev'd and remanded on other grounds, 527 F.2d 853 (D.C.Cir.1975)). The warranty of seaworthiness is no different from other express warranties of the quality or performance of goods which have, in other cases, been subject to a similar limitation of remedies.

a. Failure of the Exclusive Remedy

Plaintiffs maintain, however, that even if the warranty of seaworthiness is subsumed in the guarantee deficiency clause, the exclusive remedy provision is inoperative because circumstances have caused the remedy to fail of its essential purpose within the meaning of section 2-719(2) of the U.C.C. Section 2-719(2) provides that "[w]here circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act." 1A U.L.A. 493 (1976 & Supp.1988) The official comment provides further that "where an apparently fair and reasonable clause because of circumstances fails in its purpose or operates to deprive either party of the substantial value of the bargain, it must give way to the general remedy provisions of this Article." U.C.C. Sec. 2-719 comment 1, 1A U.L.A. 494.

Occidental argues that the purpose of the remedy was to bring the vessel into conformity with the plans and specifications. Because Avondale's initial failure to mate the vessel in accordance with the plans and specifications caused the tug to sink, the repair and replacement remedy was ineffective--the flaws in the mating of the vessel could not be corrected.

As noted above, it is not clear whether the Construction Contract is governed by the New York Uniform Commercial Code. It is therefore unclear whether section 2-719(2) of the U.C.C. is directly applicable.53 However, even if we were to reason by analogy to the U.C.C., we conclude that the express terms of the contract, limiting Occidental's recovery to the cost of repairing or replacing guarantee deficiencies, are effective.

Where a seller "has been guilty of willful and dilatory behavior in not honoring" its promise to repair or replace, there is no doubt that the remedy has failed of its essential purpose. See, e.g., Computerized Radiological Services, Inc. v. Syntex Corp., 595 F. Supp. 1495 (E.D.N.Y.1984), aff'd in part, rev'd in part, 786 F.2d 72 (2d Cir.1986); American Electric, 418 F. Supp. at 435-54. In such cases, the seller has not only failed to deliver goods conforming to its warranties, it has also breached its promise to repair, or attempt to repair, the defects.

Courts are divided on the question whether the seller's inability to repair causes the remedy to fail of its essential purpose. On one hand, several courts have concluded that a seller's inability to repair or replace defective parts or workmanship constitutes a failure of the remedy. Consolidated Data Terminals, Inc. v. Applied Digital Data Systems, 708 F.2d 385, 392 (9th Cir.1983); S.M. Wilson & Co. v. Smith Int'l, Inc., 587 F.2d 1363, 1375 (9th Cir.1978). On this view, the buyer has bargained to receive a product of a particular quality. If repairs cannot bring the product into compliance with the warranty, the remedy has failed of its essential purpose, the buyer has been deprived of the substantial benefit of its bargain, and the buyer must have recourse to alternative remedies.

Other courts have found, however, that the seller's inability to repair or replace does not cause the remedy to fail. Rather, a contract may anticipate the possibility that repairs would not be sufficient to correct all defects. Potomac Electric, 385 F. Supp. at 578-79; U.S. Fibres, Inc. v. Proctor & Schwartz, Inc., 358 F. Supp. 449, 457, 465 (E.D.Mich.1972), aff'd, 509 F.2d 1043 (6th Cir.1975). On this view, the buyer has bargained for the seller's efforts to bring the product into conformity with the warranties. The risk that such efforts would not succeed has been allocated to the buyer.

The instant case differs from both lines of cases in that there was no opportunity to effect repairs because the sinking of the tug made both actual or attempted repairs by Avondale--or anyone else--impossible. Assuming that these circumstances caused the remedy to fail of its essential purpose to actually repair guarantee deficiencies, our inquiry is not complete. The Construction Contract further provides that "[t]he Contractor shall not be liable to the Purchaser for any damage to the Vessel or its equipment or cargo or other property of such purchaser or for consequential damages of the Purchaser arising out of any such Guarantee Deficiency." Avondale argues that this clause operates as an independent limitation of its liability--effectively allowing Occidental to recover only the cost of repairing guarantee deficienies.

b. Limitation of Liability

It is well established that under New York law the failure of a remedy to achieve its essential purpose does not render ineffective all other limitations of liability: "A better reading is that the exclusive remedy clause should be ignored; other clauses limiting remedies in less drastic manners and on different theories would be left to stand or fall independently of the stricken clause." Computerized Radiological Services, 595 F. Supp. at 1510; American Electric, 418 F. Supp. at 457.

Whether a separate limitation of damages will survive the failure of the exclusive remedy will frequently depend on whether the damages excluded by the challenged clause have resulted from the seller's willful or dilatory conduct in failing to comply with the remedy provision. Indeed, most New York cases have upheld a separate limitation of consequential damages when those damages stem from the seller's inability to repair rather than from a refusal to repair. This case, however, presents a third situation because "the [direct and] consequential damages suffered precede[d] the failure of the limited remedy and bear no relation to it." Eddy, On the "Essential" Purpose of Limited Remedies: The Metaphysics of UCC Section 2-719(2), 65 Calif.L.Rev. 28, 88-89 (1977). That is, the direct and consequential damages suffered by Occidental are not due to Avondale's failure to repair the guarantee deficiency. Rather, it is the extent of damage--the sinking of the tug--that caused the remedy to fail.

The facts of this case resemble those of Henningsen v. Bloomfield Motors, 32 N.J. 358, 161 A.2d 69 (1960), a pre-code case discussed in Eddy's article. In Henningsen, a defective part caused the plaintiff's automobile to swerve from the road injuring the plaintiff and damaging the car. The contract limited remedies to the repair or replacement of defective parts and excluded consequential damages. Eddy concludes that when the consequential damages do not flow from the failure to repair, but precede any opportunity to repair, the limitation of consequential damages should not be invalidated as having failed of its essential purpose--although the limitation might properly be considered unconscionable. Eddy, supra at 88-89. This case differs from Henningsen, however, in two respects: First, Henningsen was a classic consumer case. Second, the Construction Contract would allow recovery of the cost of repair.

It is by no means clear that limiting Occidental to recovery of the cost of repairs would be unconscionable or deprive it of an adequate remedy. Whether application of the clause would deprive Occidental of the substantial value of its bargain depends manifestly on what Occidental bargained for.

The cases discussed above, involving a seller's inability to repair, are instructive on this point. From these two lines of cases, it is clear that whether "circumstances" have caused a remedy to fail depends on whether the contract anticipated and allocated the risk that the exclusive remedy would not cure all defects.54 Under the first line of cases, the court has concluded that the parties did not anticipate and allocate the risk that repairs would be unsuccessful--thus, the remedy fails of its essential purpose. Under the second line of cases, the court has concluded that the parties did anticipate, and allocate to the buyer, the risk that the repairs might not be effective--thus, the remedy does not fail of its essential purpose.

The question presented here is not simply whether the contract anticipates that efforts to repair may be ineffective, but whether it anticipates that repairs may be impossible.55

Although the circumstances which caused the repair remedy to fail had catastrophic results, those circumstances were not beyond the contemplation of the parties. The guarantee deficiency clause clearly recognizes the possibility that a deficiency could result in damage to the vessel and its cargo. The risk of such loss is allocated by the express terms of the contract to Occidental. If the damage to the Oxy Producer had been severe, but had not caused the tug to sink, the remedy would not have failed of its essential purpose and Avondale would be responsible, by the terms of the contract, only for the cost of repairing the underlying deficiency, not for any other damage caused by the deficiency--no matter how severe.

The fact that damage to the vessel caused it to sink, rendering the remedy of actual repair ineffective, does not require that the allocation of the risk of damage to the vessel be shifted to Avondale. The risk that the vessel would sink is only the most serious of the risks that the Construction Contract allocates by its plain terms to Occidental. While this allocation of risks may appear severe, it is not illogical.

One commentator has noted that "[a]s one moves into the realm of industry or commerce ... the goods sold become more complex and more frequently custom designed.... Where goods are not standardized or, in the extreme alternative, where they are experimental ... the reasonable expectations of the buyer become attenuated [and] the degree of risk imposed by an absolute construction of the repair duty becomes extensive." Eddy, supra, at 77, 80.

When the goods which are the subject of the contract are complex or innovative the contract may allocate the risk of defects differently than when the contract involves "standard" goods--such as automobiles. Id. at 80. Thus, in American Electric, the court emphasized that "the contract here in issue is not of the type entered into by the average consumer, but a commercial agreement painstakingly negotiated between industrial giants.... The rule that the agreed upon risk should not be disturbed is particularly appropriate where, as here, the warranted item is a highly complex, and in some ways experimental piece of equipment." 418 F. Supp. at 459.56

In the instant case, Avondale argues that because the design for the Oxy Producer was relatively novel, it was willing to assume only the most limited liability for possible defects. The contract reflects this allocation of risks. Occidental agreed that in the event of a guarantee deficiency, Avondale would be liable only for the cost of repairing or replacing deficiencies. It agreed that Avondale would not be liable for any damage to the vessel, its cargo, or its equipment, arising from such a deficiency. We will not disturb the agreed upon allocation of risks simply because the worst of those risks has materialized.

While this result may seem harsh, it is clear that two sophisticated commercial actors such as Avondale and Occidental could have allocated the risk of damage stemming from a guarantee deficiency differently. We note that the construction contract involved in Shipco provided that Avondale would be liable for damage to the vessel immediately caused by any guarantee deficiency. 631 F. Supp. 1123, 1126 n. 3 (E.D.La.1986) (quoting contract language) aff'd, 825 F.2d 925 (5th Cir.1987), cert denied, --- U.S. ----, 108 S. Ct. 1472, 99 L. Ed. 2d 701 (1988). Under the terms of that contract, Avondale might have been liable for the loss of the vessel. Occidental, however, did not secure a similar promise with respect to the Oxy Producer.

Occidental and Avondale are "commercial giants" of equal bargaining power. Their lengthy negotiations produced a detailed contract of nearly 100 pages in length. We will not rewrite this contract to substantially alter the allocation of risks to which the parties have consented. See American Electric, 418 F. Supp. at 440 n. 2.

The district court should therefore determine the extent of the damages that Occidental may recover consistent with this holding.

E. Hvide's Liability under the Supervision Contract

We held above that under the economic loss rule adopted in East River, the plaintiffs' negligence claim against Hvide is not cognizable in maritime tort. We therefore do not need to reach the issue whether the Supervision Contract limits Hvide's liability in negligence. The parties do not dispute that the Supervision Contract limits Hvide's liability for breach of contract to $5 million.

Because the district court has not yet determined the proportionate responsibility of Hvide and Avondale for the losses suffered by Occidental, and because our decision on appeal will affect the total amount of damages that can be recovered against each defendant, we decline to decide whether the imposition of joint and several liability is appropriate here. That question may be addressed after the district court has conducted proceedings to determine the extent and allocation of the damages.

We affirmed above the district court's finding that the improper mating of the vessel was the sole cause of the sinking of the Oxy Producer and that there were no defects in the design or manufacture of the linkage system as a whole, or in the link arms or bumper pads. This holding, however, does not eliminate plaintiffs' claims regarding the sister ships. Following the sinking of the Oxy Producer, the Coast Guard revoked the certificates of inspection for the Oxy Producer's sister ships--the Oxy Trader and the Oxy Grower. After an inspection revealed damage in the linkage systems of the sister ships, parts of the linkage system were redesigned and replaced. Occidental sought to recover the losses it sustained in repairing the sister ships.

Although the district court's opinion states only that "Henry and Victoria are not liable ... for any damage suffered by the Oxy Producer," and does not address the sister ships explicitly, the court dismissed Henry and Victoria from the entire lawsuit.

Occidental contends that the district court's dismissal of Henry and Victoria was improper--at least with respect to the claims regarding the sister ships. While we affirm the district court's holding that Henry and Victoria are not liable for any damage to the Oxy Producer, we do not think that the dismissal of Henry and Victoria was proper without specific findings regarding the sister ships. We therefore reverse the dismissal and remand to the district court for resolution of these claims consistent with our holdings in this case.

The decision of the district court is AFFIRMED in part, REVERSED in part, and REMANDED for determination of damages consistent with this decision, and for resolution of the claims regarding the sister ships.