USCA1 Opinion
For the First Circuit
____________________
No. 96-1904
LA ESPERANZA DE P.R., INC.,
Plaintiff, Appellant,
v.
PEREZ Y CIA. DE PUERTO RICO, INC.,
Defendant, Appellee.
No. 96-1905
LA ESPERANZA DE P.R., INC.,
Plaintiff, Appellee,
v.
PEREZ Y CIA. DE PUERTO RICO, INC.,
Defendant, Appellant.
____________________
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Gilberto Gierbolini-Ortiz, Senior U.S. District Judge]
____________________
Before
Stahl, Circuit Judge,
Aldrich, Senior Circuit Judge,
and Cyr, Senior Circuit Judge.
___________________
Harry A. Ezratty for La Esperanza de P.R., Inc.
Juan A. Lopez-Conway
, with whom
Paul E. Calvesbert
and
Calvesbert,
Alfaro
&
Lopez-Conway, were on brief for Perez y Cia. de Puerto Rico,
Inc.
____________________
August 13, 1997
____________________
STAHL, Circuit
Judge. This consolidated admiralty
case involves a dispute between a shipowner and a shipyard over
repairs to a vessel, S/V LA ESPERANZA, that were begun but
never completed. It comes to us on cross-appeals following a
bench trial in which the district court entered judgment,
first, in favor of Perez y Cia de Puerto Rico, Inc. ("the
shipyard" or "Perez") in the amount of $10,999 in its
collection action for unpaid work performed pursuant to
contract, and, second, in favor of La Esperanza de Puerto Rico,
Inc. ("the shipowner") in the amount of $220,000 in its
separately brought action for damages resulting from Perez's
negligence and breach of contract. See Perez Y Cia. de P.R.,
Inc. v. S/V La Esperanza, 899 F. Supp. 861 (D.P.R. 1995).
On appeal, Perez argues that the district court's
findings of fact and conclusions of law are erroneous. It
contends that the district court erred in finding that it was
negligent and in breach of its contractual obligations and
argues both that the shipowner's contributory negligence caused
the damages that are in issue here and that the ship was
worthless when it first arrived at the shipyard, thereby
obviating the district court's award of damages in favor of the
shipowner. For its part, the shipowner accepts the district
1. We note that LA ESPERANZA was sold at public auction by the
U.S. Marshals Service in July 1996 pursuant to its status as
the in rem defendant in the Perez shipyard's cause of action.
The district court granted the shipyard's motion for
confirmation of sale and ordered the Marshals Service to issue
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court's findings of fact, but seeks to ascribe error to the
district court's conclusions of law. Its argument on appeal is
that the court erred in enforcing a "red letter clause" in the
ship repair contract that limited the shipyard's liability by
precluding recovery for loss of use and loss of profits in the
event of a breach. The shipowner argues that the liability
limitation clause was vitiated on the facts found by the
district court because the shipyard's actions, on such facts,
constituted gross negligence, not ordinary negligence as the
district court concluded. Finally, both parties take issue
with the district court's measure of damages. The shipyard
argues that the district court erred by ordering it to pay too
much; the shipowner, on the contrary, argues that the district
court erred by not ordering the shipyard to pay more.
As we do not believe that the district court's
determinations were clearly erroneous, we affirm.
Background and Prior Proceedings
We state the facts consistent with the district
court's findings. See id. at 862-65.
The S/V LA ESPERANZA ("the vessel" or "the ship") is
an eighty-eight foot, steel-hulled, diesel-powered, auxiliary
a bill of sale conveying title to LA ESPERANZA to one Jose L.
Novas Debien. Our use of the word "shipowner" in this opinion
refers exclusively to La Esperanza de Puerto Rico, Inc.
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sail schooner built in 1896 in Antwerp, Belgium. Her hull
consists of an older type of steel, akin to wrought iron, that
is no longer used in the construction of ships. The seams of
the ship's hull and frames are rivetted and welded.
Julio R. Matos and Enrique Cardona (the principals of
La Esperanza de Puerto Rico, Inc.) bought LA ESPERANZA in 1990
for $40,000 with the apparent purpose of refitting her as a
passenger vessel for use as a tourist attraction and for
sightseeing harbor tours of San Juan, Puerto Rico. To this
end, the ship underwent extensive reconstruction and repairs at
Vaello Shipyard in Puerto Rico from 1990 to 1992. This work
was overseen and approved by the U.S. Coast Guard, which is
charged by law to inspect passenger vessels and to certify them
for operation. Among the many other things done while the ship
was at Vaello, the thickness of the ship's hull was tested in
accordance with applicable Coast Guard guidelines by drilling
holes at various points to determine those areas that were
"wasted" (i.e., excessively deteriorated or corroded) and in
need of either immediate or eventual replacement.
This drill-
2. The district court's opinion lists the ship's length as 122
feet. However, the Coast Guard certificate of inspection and
the relevant marine surveys of the vessel contained in the
record indicate a length of eighty-eight feet. While our
review fails to account for the discrepancy between these
figures, we note that it is of no consequence to the legal
result in this case.
3. The Coast Guard considers deficiencies in the thickness of
hull plating to be a safety concern for steel-hulled vessels
because such deterioration, much like buckling, cracks, or
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hole gauging indicated that various parts of the hull were in
fact wasted. On the basis of these findings, eight hull plates
were replaced in accordance with welding procedures developed
fractures, "may affect the strength or integrity of the hull to
an extent which would make it unseaworthy." See United States
Coast Guard, Navigation and Vessel Inspection Circular No. 7-
68;
Enclosure
(1)--Notes
on
Inspection
and
Repair
of
Steel
Hulls at 1 (1968) [hereinafter
NAVIC]. Coast Guard inspection
guidelines provide that the present thickness of hull plates is
to be compared to their original thickness as a means of
gauging their present condition. Id. at 3-4. "Wastage" refers
to the percentage of the original thickness that has
deteriorated. Thus, a plate with twenty-five percent wastage
has lost twenty-five percent of its original thickness.
Id. at
4.
Under Coast Guard guidelines, "a local thickness
deterioration of up to about 25 percent may be accepted before
replacement is necessary," id. at 7, but this is not a hard-
and-fast rule. "[I]n the application of this percentage,
considerable judgment is called for depending upon the location
and extent of wasted material. Localized wastage of some
portions of plates . . . in excess of 25 percent may be
accepted in many cases, if the condition of the adjacent
material is sufficiently good to maintain an adequate margin of
strength." Id. Indeed, Coast Guard inspectors are afforded a
wide latitude of discretion in dealing with the various hull
deficiencies they may encounter upon inspection of a vessel.
They must "first evaluate if seaworthiness is compromised or
not" by these deficiencies, a decision that calls for
"considerable discretion because the line of demarcation
between what is seaworthy and what is not, is necessarily
approximate and subject to some range of interpretation." Id.
at 2. Among the factors that Coast Guard inspectors "must"
weigh in evaluating a particular vessel's hull is "[w]hether
the repair work contemplated is necessary to restore
seaworthiness or is a maintenance measure to insure prolonged
utilization of the vessel." Id. "In the first case, repair
must be required. In the second case, the details of the
condition should be reconsidered at a future inspection and,
possibly, called to the attention of the owner so that he may
exercise his own good judgement." Id.
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by Vaello, which had the responsibility for designing the
procedures for Coast Guard approval.
LA ESPERANZA's overhaul was completed during the
summer of 1992. The total cost of the refitting was financed
by loans totalling almost $2,175,000. The refurbished ship had
a replacement value of $4.8 million, a physical value of $3.5
million, and an estimated value of $2.8 million. For
accounting purposes, the vessel's book value was listed as
$1,704,000.
The Coast Guard issued a certificate of inspection
for the vessel, which indicated the route that LA ESPERANZA was
permitted to run and conditions on the manner of her operation.
Specifically, the Coast Guard limited LA ESPERANZA,
inter
alia,
to carrying no more than seventy-five passengers and restricted
her passage to "the protected waters of Bahia de San Juan . .
. within one mile of shore . . . . [and] to the waters
shoreward of buoys 5 and 6 of the Anegado Channel." The
certificate of inspection further provided that the ship, when
operating its sails, could only set her inner and outer jibs
while passengers were on board, but also indicated that up to
4. Coast Guard guidelines require that hull replacements, and
in particular, the welding and rivetting procedures used in
marrying new steel plates to existing older plates, conform
with applicable standards and gain Coast Guard approval. See,
e.g., NAVIC at 24-35 (discussing proper welding and rivetting
procedures).
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6
150 passengers were allowed on deck when the ship "operate[d]
as a moored attraction vessel."
Under these conditions, the vessel thereafter began
its passenger service around San Juan Bay. On average, LA
ESPERANZA made two trips per day on weekdays and made three or
four daily runs on weekends. She was also available for rent
for private events.
On March 4, 1994 the shipowner took LA ESPERANZA to
the Perez shipyard in San Juan for repairs to her rudder deemed
necessary by the Coast Guard. Seeing as the vessel would be
dry-docked for the rudder repair, the shipowner decided to
accelerate an overall hull inspection that was scheduled for
the following month. The Coast Guard inspected the hull and,
on March 10, indicated that all hull plates with wastage in
excess of fifty percent had to be replaced. The shipyard
subcontracted with another firm to perform ultrasonic gauging
of the hull in order to identify the candidate plates for
replacement. This audio gauging revealed that eighty percent
of the ship's hull was wasted twenty-five percent or more from
its original thickness. In view of the test results, the Coast
Guard required that eighty percent of the hull be replaced, but
agreed to allow the shipowner to do the replacement work in
stages. As an immediate matter, the shipowner was required to
replace the twelve hull plates that were wasted fifty percent
or more.
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7
On March 17, the shipowner and the shipyard signed a
contract for repairs, with the shipowner paying a deposit of
$40,000. The shipyard's quoted estimate of $71,947.20
included, among other things to be done, the replacement of
twelve hull plates. The contract encompassed an attached list
of conditions. Under section 3(a) of that list, "[t]he Yard
commits itself to use materials and execute work to standard
ship repair practice." Section 3(b) provided the shipyard the
right to "make good at its own workshops and expense any
defective work or material [that it] supplied," although the
shipowner retained an option to demand, in lieu of such
performance, "a sum equal to the cost of such repair."
Finally, section 5 provided that "[t]he yard shall in no case
be held responsible for the damages resulting from any loss of
use or profit of the vessel."
The shipyard hired welders to do the hull replacement
work. Despite the fact that the welders did not know the type
of steel used in LA ESPERANZA's hull, or the fact that it was
an older type of steel no longer used in ship construction, on
March 18 they began cutting into the ship's hull with torches
in order to remove five of the twelve plates slated for
replacement. This work caused a fire with resulting damage to
the ship's electrical system. While the method used to remove
the hull plates did not require Coast Guard approval, the
method for their replacement did. After initial plans were
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8
rejected by the Coast Guard, the shipyard's contract manager,
Miguel Nin, together with the yard's welding subcontractor,
drafted another set of welding procedures that they gave to the
shipowner to present to the Coast Guard for approval, but the
Coast Guard did not approve the newly submitted procedures. As
a consequence, all hull replacement work on the vessel stopped
pending development of new welding procedures.
It rapidly became apparent, however, that the Perez
shipyard did not possess the ability to perform the hull
replacement work on LA ESPERANZA. Nevertheless, on April 6,
the shipyard welded five temporary doubler plates onto the hull
areas where plates had already been removed. This welding was
done too quickly and with excessive heat, causing the older
steel of the hull to crack and rivets to loosen.
During this period, the shipowner and shipyard met to
discuss the welding procedure problem. The parties met one
last time on May 20, 1994 to discuss what arrangements would be
made for the vessel in light of the welding difficulties.
Although no solution to LA ESPERANZA's predicament was
forthcoming, the shipyard produced a bill for $73,999 for the
unfinished hull work and other repairs that it had already done
on the ship. Subtracting the $40,000 deposit that the
shipowner had previously paid, the shipyard demanded payment
for the remaining balance of $33,999.
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The shipowner refused to pay. On May 22, 1994,
anxious to get other ships into its only dry dock facility,
which LA ESPERANZA had now occupied for some two months, the
shipyard moved the ship from the dry dock and refloated it.
Perez then moved the vessel, operating under its own power, to
its tender dock area, an area akin to a floating junk yard.
The shipyard recommended two welding experts that the shipowner
could hire to develop a welding plan for Coast Guard approval.
The shipyard hired one of the two recommended experts, but the
expert failed to produce a plan.
Meanwhile, the refloated vessel was taking on water
through the cracks in her hull caused by the faulty plate
removal and the welding of the temporary plates. The ship was
once again removed from the water, water was pumped out, and
soft patches using rubber and metal were used to plug leaks,
though these too soon began to develop cracks. Surveys
conducted at about this time, May and June 1994, revealed that
the vessel was tilting to one side because the ballast
initially removed in order to gain access to the hull plates
for the removal operation had never been replaced. Indeed,
when the shipyard refloated LA ESPERANZA, it had placed
concrete blocks on the upper deck in lieu of the ship's
ballast. During this period, the damaged upper deck itself
collected about an inch of water. The surveys revealed that
the cost of repairing the vessel to correct the problems with
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10
the hull, to repair the damaged upper deck, and to replace
damaged wiring, electrical equipment, and carpeting would be
between $180,000 and $220,000, not including any possible
hidden damages that could not be readily detected while the
ship was still in the water.
The shipyard subsequently filed a collection action
in federal district court, in personam against the shipowner
and
in
rem against the vessel itself, for the money it alleged
it was owed for the repair work it had performed on LA
ESPERANZA. The shipowner filed a separate action against the
shipyard for the damages it alleged it suffered as a result of
the shipyard's negligence in performing the repair contract.
A consolidated trial before the district court sitting in
admiralty without a jury was held in September 1995. The court
awarded the shipyard $10,999 on its contract collection claim,
an amount corresponding to the work that the shipyard actually
did on the vessel, minus the amount billed for the defective
hull replacement work. The court similarly awarded the
shipowner $220,000 for the damages it sustained as a result of
the shipyard's negligence in performing the repair work, an
amount corresponding to the cost needed to repair the damages
to the vessel and to return LA ESPERANZA to the condition it
was in before it entered the Perez shipyard. The parties filed
motions for additional findings of fact and conclusions of law
that were denied by the court. These cross-appeals followed.
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Standard of Review
We review a district court's bench trial findings of
fact for clear error. See Fed. R. Civ. P. 52(a);
McAllister v.
United States
, 348 U.S. 19, 20 (1954);
Puerto Rico Ports Auth.
v. M/V
Manhattan
Prince, 897 F.2d 1, 3 (1st Cir. 1990). We
deem a finding to be clearly erroneous "only when, after
reviewing the entire record, we are 'left with the definite and
firm conviction that a mistake has been committed.'" Clement
v. United
States, 980 F.2d 48, 53 (1st Cir. 1992) (quoting
Deguio v. United
States, 920 F.2d 103, 105 (1st Cir. 1990)
(quoting United
States v. United
States
Gypsum
Co., 333 U.S.
364, 395 (1948))).
Likewise, "[w]e review questions of negligence"
decided in a bench trial "under the clearly erroneous
standard." Id. (citing
Goudy & Stevens, Inc.
v.
Cable Marine,
Inc., 924 F.2d 16, 19 (1st Cir. 1991)), Deguio, 920 U.S. at
105, and Obolensky v. Saldana
Schmier, 409 F.2d 52, 54 (1st
Cir. 1969)). In using this standard, our practice accords with
the Supreme Court's characterization of negligence and
causation as issues of fact,
see
McAllister, 348 U.S. at 20-23,
and is consonant with the rule applied in virtually all our
sister circuits, which similarly treat a bench trial finding
that a party was negligent as a question of fact, or mixed
question of fact and law, and thus do not reverse such a
finding unless clearly erroneous. See generally Charles Alan
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12
Wright & Arthur Miller, 9A Federal
Practice
and
Procedure S
2590 at 620-28 (2d. ed. 1995) (discussing cases); Steven Alan
Childress & Martha S. Davis, 1 Federal
Standards
of
Review S
2.28 at 2-220 to 2-227 (2d. ed. 1992) (same). But see Mamiye
Bros. v.
Barber S.S. Lines, Inc.
, 360 F.2d 774, 776-78 (2d Cir.
1966) (per Friendly, J.) (distinguishing McAllister as a
causation case and holding that clear error standard does not
apply to trial court's determination of negligence).
Negligence, or No Negligence?
On appeal, the shipyard contends that the district
court erred in finding that it was negligent and in breach of
contract. It argues that the shipowner is really to blame for
the damages to LA ESPERANZA and for the fact that the hull
repairs were never completed. It thus contends that the
shipowner was not entitled to the $220,000 awarded by the
district court. Even if it was negligent, the shipyard
insists, the ship was worthless, thus making the district
court's measure of damages erroneous.
The shipowner counters that the district court's
error consists in not realizing that the facts it found
constituted gross negligence, not ordinary negligence. Because
the district court incorrectly decided the gross negligence
issue, the shipowner argues, it also incorrectly concluded that
the shipyard's liability did not extend to loss of the vessel's
use and loss of profit because of the red letter clause
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13
contained in the repair contract. That clause, the shipowner
argues, precludes recovery for loss of the vessel's use and
loss of profits in instances involving ordinary negligence, but
not in circumstances involving gross negligence.
We address the parties' various claims under federal
maritime law because "[a]dmiralty jurisdiction brings with it
a body of federal jurisprudence, largely uncodified, known as
maritime law." In re Ballard Shipping Co.
v.
Beach Shellfish
,
32 F.3d 623, 625 (1st Cir. 1994) (citing
East River S.S. Corp.
v. Transamerica
Delaval, 476 U.S. 858, 864 (1986)); see also
Yamaha
Motor
Corp.,
U.S.A. v. Calhoun, 116 S. Ct. 619, 623
(1996). While a contract to construct a ship falls outside
federal admiralty jurisdiction because it is "a contract made
on land, to be performed on land,"
People's Ferry Co.
v.
Beers,
61 U.S. (20 How.) 393, 402 (1858), contracts for repairs to a
vessel or for its substantial reconstruction come under the
scope of admiralty jurisdiction. See Kossick v. United Fruit
Co., 365 U.S. 731, 735 (1961) (contrasting ship repair and
construction); New Bedford Dry Dock Co. v. Purdy, 258 U.S. 96
(1922); see also 28 U.S.C. S 1333 (granting exclusive federal
jurisdiction in "[a]ny civil case of admiralty");
cf. Thomas J.
Schoenbaum, 1 Admiralty
and
Maritime
Law at 111-12 (2d ed.
1994). In the absence of a relevant statute, the judicially-
developed norms of the general maritime law, "an amalgam of
traditional common-law rules, modifications of those rules, and
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14
newly created rules," govern actions in admiralty. East River
S.S., 476 U.S. at 865.
We thus must evaluate the merits of the parties'
claims against "substantive rules and precepts peculiar to the
law of the sea." Schoenbaum,
supra, at 156 (discussing cases).
Under this body of law, a shipowner may sue in either tort or
contract for negligent repairs to his vessel. See Todd
Shipyards Corp.
v.
Turbine Serv., Inc.
, 674 F.2d 401, 412 (5th
Cir. 1982); Alcoa
S.S.
Co. v. Charles
Ferran
&
Co., 383 F.2d
46, 50 (5th Cir. 1967). A ship repairer potentially faces
three sources of liability for repairs he performs improperly
on a vessel. He may be liable in contract for a breach of his
expressly assumed obligations or for a breach of an implied
warranty of workmanlike performance that attaches to admiralty
contracts under the rule of Ryan
Stevedoring
Co. v. Pan
Atlantic S.S. Corp., 350 U.S. 124 (1956). See Alcoa S.S. Co.
at 50; see also Employers Ins. of Wausau v. Suwanee River Spa
Lines,
Inc., 866 F.2d 752, 763 n.17 (5th Cir. 1989). A ship
repairer may also be liable for the maritime tort of
negligence. See Alcoa
S.S., 383 F.2d at 50. See generally
Schoenbaum,
supra, at 183-84 (collecting cases). Importantly,
negligence causes of action in admiralty invoke the principles
of maritime negligence, not those of the common law. See
Pope
& Talbot, Inc.
v.
Hawn, 346 U.S. 406, 408-09 (1953). Moreover,
while the implied warranty of workmanlike performance
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15
"parallel[s] a negligence standard rather than imposing [the]
strict liability" that attaches to implied warranties in land-
based contracts under the Uniform Commercial Code, see
Employers Ins.
, 866 F.2d at 763 n.17, "a shipowner may receive
indemnity from a marine contractor for breach of implied
warranty of workmanlike service, albeit that such performance
was done without negligence." SS Amazonia
v.
New Jersey Export
Marine Carpenters, Inc., 564 F.2d 5, 8 (2d Cir. 1977) (citing
Italia
Societa v. Oregon
Stevedoring
Co., 376 U.S. 315, 324
(1964) and Ryan, 350 U.S. at 133). Finally, federally
developed maritime law applies both when a court construes the
terms of a repair contract and when it construes the standard
of performance due thereunder. See
Alcoa S.S.
, 383 F.2d at 50
(citing
Booth S.S. Co.
v.
Meier & Oelhof Co.
, 262 F.2d 310 (2d
Cir. 1958) and Southport Transit Co. v. Avondale Marine Ways,
Inc., 234 F.2d 947 (5th Cir. 1956)).
In this case, the shipyard argues that it was not
negligent or in breach of contract because the shipowner, not
it, was really at fault for the fact that the hull repairs were
never completed. The crux of the shipyard's theory is that the
Coast Guard did not disapprove the welding plans for the twelve
plates it was supposed to replace because of the method by
which the shipyard proposed to do the job, but rather because,
at the insistence of the shipowner, an insufficient number of
plates were to be removed. The shipyard argues that it cannot
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be faulted for the fact that the Coast Guard found the scope of
the hull replacements inadequate or for the fact that the
shipowner failed to provide the Coast Guard with a
comprehensive plan detailing how and when a full eighty percent
of the hull with wastage of twenty-five percent or more would
be replaced -- as the Coast Guard was requiring. The
shipyard's theory, in short, is that it could not act to repair
the vessel until the Coast Guard approved the repairs, and the
Coast Guard would not approve the repairs until the shipyard
acted by submitting a comprehensive plan for replacing eighty
percent of the hull, not just the twelve plates scheduled for
removal and replacement under the contract.
The record simply does not support this argument. In
the first place, contrary to the shipyard's contentions, the
record does not substantiate the view that the Coast Guard
disapproved the welding procedures notwithstanding the
shipyard's submission of proper welding procedures. Neither
does the record support the shipyard's alternative argument
that the Coast Guard "neither approved or disapproved" welding
procedures that it submitted because the Coast Guard was not
about to deliberate in the absence of a comprehensive plan for
additional repairs to LA ESPERANZA. In his deposition, Lt.
Comdr. Randal B. Sharpe, the Coast Guard officer in charge of
marine safety in San Juan during the relevant period of this
dispute, was asked to describe the purpose of the welding
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procedures submitted to the Coast Guard. He answered that
"the purpose of that document was to show us, the Coast Guard,
how the shipyard intended to weld the new plate to the old iron
hull." When asked whether that proposal met Coast Guard
requirements, Lt. Comdr. Sharpe responded, "Parts of the
proposal do, yes; parts of the proposal do not." The parts of
the proposal that were acceptable, he continued, were those
above the load water line, thereby indicating that those below
the water line (which presumably were of greater significance
to the vessel's seaworthiness) were not acceptable. Thus, even
if Lt. Comdr. Sharpe's deposition substantiates the
uncontroverted fact that no comprehensive plan was submitted
(which it does in parts not reproduced here), it also
substantiates other record evidence that the shipyard's method
of work, in any event, did not pass muster.
Furthermore, Lt. Comdr. Sharpe's deposition supports
the view of other witnesses at trial that the shipyard bore the
responsibility of furnishing the Coast Guard with appropriate
welding procedures because it was a matter of "technical
nature," meaning that it was something that "would normally
have been submitted either by the shipyard or by the welding
contractor who was going to perform the work." Finally, his
deposition supports a finding that the shipyard's inability to
5. We note that both parties took Lt. Comdr. Sharpe's
deposition knowing that he would be unavailable to testify at
trial.
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18
devise appropriate welding procedures precluded the shipowner
from submitting a comprehensive repair plan for the ship's hull
with the Coast Guard, not the other way around. "Basically
what we were looking for," Sharpe explained in discussing the
requirements for approval of the repairs to LA ESPERANZA, "was
a proposal on how to repair all of the wasted steel. . . .
[T]hat repair proposal . . . was supposed to include
what areas
of plate would be replaced; a time-line for replacement, and
how the plate would be replaced." (emphasis added). Because
neither the shipyard nor its welding contractor ever devised a
welding plan that was acceptable to the Coast Guard on the
issue of how the first set of hull plates would be replaced, it
is difficult to see how the shipowner, the shipyard, or anyone
else could have compiled a comprehensive plan detailing a
schedule for the more protracted process of taking out and
replacing yet other hull sections. It would thus appear that
the shipyard's successful development of a welding procedure
acceptable to the Coast Guard was a constructive condition
precedent to formulation of a comprehensive plan, and overall
Coast Guard approval, rather than vice versa. In any event, we
detect no clear error in the district court's implicit
allocation of blame on this issue.
Accordingly, the shipyard's contention that it was
not liable for negligent performance of the contract cannot
withstand close scrutiny. Here, one witnesses a ship that came
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in for repairs under her own power. Pursuant to a valid,
written contract, the shipyard began to make the repairs, but
somewhere, somehow, something went wrong. Although the
shipyard manager, Miguel Nin, knew that LA ESPERANZA's hull was
of an older type steel, and despite the fact that the
undisputed evidence revealed that the special quality of LA
ESPERANZA's steel should have been readily apparent to any
reasonably competent ship repair professional, the welders that
Perez hired to cut into LA ESPERANZA did not know what type of
steel they were dealing with when they cut into the ship's hull
with torches. The method of cutting they employed caused
damage to the ship and, to condense a long story, the
contracted-for repairs were never completed. Instead of
remedying the error and giving the vessel back to the
shipowner, the shipyard patched the holes it had already made
by welding on temporary plates, causing even more damage to the
hull. The shipyard then refloated the ship, which by now was
in worse condition than it was prior to arriving for repairs,
and placed the ship in its tender dock area. Finally, seeking
to extricate itself from a predicament of its own making, the
shipyard told the shipowner, essentially, that it (the
shipowner) had a problem on its hands, and maybe it should
consider hiring a special welding consultant.
This attempt to evade responsibility and escape
liability is unavailing. Where the shipyard, like Perez here,
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20
"held itself out as a competent shipyard skilled in" doing the
type of work requested by the shipowner, the latter "had a
right to rely on the expertise of [the shipyard] and had reason
to expect a stable seaworthy vessel upon completion of the
repairs, regardless of the condition of the boat[] prior to
repairs." Empacadora
del
Norte,
S.A., v. Steiner
Shipyard,
Inc., 469 F. Supp. 954, 962 (S.D. Ala. 1979). The contract
between the parties does not evince any manifestation of an
intent to deviate from this principle. On the contrary, under
section 3(a) of the appended list of conditions, "[t]he Yard
commit[ted] itself to use materials and execute work to
standard ship repair practice." This contractual clause
manifests an intent to bind the shipyard expressly to the
otherwise implied warranty of workmanlike performance in marine
contracts. In any event, "[t]his warranty need not be express
to bind the ship repairer to use the degree of diligence,
attention and skill adequate to complete
the
task." Little
Beaver
Enters. v. Humphreys
Rys.,
Inc., 719 F.2d 75, 78 (4th
Cir. 1983) (emphasis added) (citing Coffman v. Hawkins
&
Hawkins Drilling Co.
, 594 F.2d 152 (5th Cir. 1979) and
Tebbs v.
Baker-Whiteley Towing Co.
, 407 F.2d 1055 (4th Cir. 1969)). The
shipyard's failure to complete the hull replacement repairs
thus constituted a breach of an express and implied contractual
obligation, particularly in view of the fact that evidence in
the record substantiates that similarly situated ship repairers
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21
could have devised appropriate welding procedures and replaced
the hull plates in question. On this record, we cannot ascribe
any clear error to the district court's determination that the
shipyard was negligent in its manner of performing the
contracted-for repairs.
Negligence or Gross Negligence?
We turn next to the shipowner's argument that the
shipyard's actions amounted to gross negligence, not ordinary
negligence, and thereby vitiated the red letter clause in the
contract limiting the shipyard's liability by precluding
recovery for loss of the vessel's use and loss of profit.
Whatever else may be said here, we are not convinced that the
district court committed clear error when it determined that
the shipyard, though negligent, was not grossly negligent in
how it undertook to repair the vessel or in how it dealt with
it while in its custody.
While exculpatory clauses -- commonly referred to as
red letter clauses -- were traditionally disfavored by courts
sitting in admiralty, see, e.g., Bisso v. Inland
Waterways
Corp., 349 U.S. 85 (1955) (refusing to enforce a clause
absolving a towing company from all liability for its negligent
acts), such clauses are today routinely enforceable. See
East
River
S.S., 476 U.S. at 873 (indicating that a marine
contractor "can restrict its liability within
limits by
disclaiming warranties or limiting remedies" (emphasis added)).
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22
Accordingly, courts today will enforce red letter clauses that
are expressed clearly in contracts entered into freely by
parties of equal bargaining power, provided that the clause not
provide for a total absolution of liability. See Edward
Leasing Corp.
v.
Uhlig & Assocs., Inc.
, 785 F.2d 877, 888 (11th
Cir. 1986); Todd
Shipyards, 674 F.2d at 410; Alcoa
S.S., 383
F.2d at 46. The rationale for upholding such clauses, "so long
as no overreaching is found,"
Edward Leasing
, 785 F.2d at 888,
"is predicated upon the consideration that businessmen can
bargain over which party is to bear the risk of damage and set
the price accordingly, thus achieving a more rational
distribution of the risk [and allocation of price] than the law
would otherwise allow." Jig The Third Corp.
v.
Puritan Marine
Ins.
Underwriters
Corp., 519 F.2d 171, 176 (5th Cir. 1975).
However, parties may not totally absolve themselves of all
liability and, more substantively, the prospective wrongdoer's
"'potential liability'" should be enough to "'deter
negligence.'" Edward Leasing, 785 F.2d at 888 (quoting Alcoa
S.S., 383 F.2d at 55). A red letter clause, finally, may not
limit liability on a marine contract for gross negligence
because "'harm wilfully inflicted or caused by gross or wanton
negligence,'" operates to "invalidate an exemption from
liability." Todd Shipyards
, 674 F.2d at 411 (quoting 6A Corbin
On Contracts S 1472 (1964 ed.)).
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23
The shipowner submits that the shipyard knew that LA
ESPERANZA was made of older steel, but nevertheless hired
welding subcontractors who proceeded to cut into the vessel's
hull without knowing the nature of the steel they were working
on, causing damage to the ship. Moreover, after the shipyard
failed to provide welding plans acceptable to the Coast Guard
and after it became apparent that the shipyard did not have the
expertise to devise such plans (as the district court found),
the shipyard nonetheless proceeded to weld temporary plates
onto LA ESPERANZA's hull to cover the holes that had been
already made, thereby rendering even more damage to the ship by
causing the steel in the hull to crack and rivets to loosen.
The shipyard then refloated the vessel to get it out of dry
dock, repairs still uncompleted, and moored it with cracks that
allowed water to seep into the hull. The shipowner also argues
that the shipyard, among other things, improperly moored the
vessel without shock-absorbing fenders, improperly secured it
against vandals who made off with several radios and liquor
from the ship's liquor cabinet, and improperly protected the
ship's decks from damaging debris from a sandblasting operation
performed near LA ESPERANZA.
As our previous discussion indicates, there was no
clear error on the district court's part in determining that
such actions breached the shipyard's duty of care to the
shipowner. A more difficult question to be resolved is the
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24
finding necessary to the district court's determination that
the liability limitation clause in question was enforceable,
viz., that the shipyard's actions did not amount to gross
negligence. While the district court concluded that the Perez
shipyard "did not have the expertise to perform the hull
replacement work adequately," we cannot say that it was clearly
erroneous for the court to conclude that Perez did not act in
such a way as to wilfully inflict harm on LA ESPERANZA or to
cause her damage in wanton and gross disregard of the vessel or
the shipowner's interests in it. See
Todd Shipyards
, 674 F.2d
at 411.
The shipyard's subcontracted welders admittedly did
not know the quality of the steel on which they were working
when they cut into LA ESPERANZA, and because of that failed to
adopt the proper heat mixture, causing damage to the ship.
But, the record substantiates that the circumstances of this
misstep more closely approximate a failure to exercise due
care, rather than some modicum of reckless abandon. Nor did
the shipyard completely ignore its contractual duties. All
indications in the record are that it strove in good faith to
devise acceptable welding procedures, even if it was
unsuccessful and ultimately unable to do so. Moreover, it is
not clear that it was unreasonable for the shipyard to believe
that it could repair the ship's hull. The shipyard manager,
Miguel Nin, had considerable training and experience in marine
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25
repair, including advanced degrees in relevant fields of naval
architecture. Moreover, as indicated above, at least some
portions of the plans that the shipyard submitted met Coast
Guard requirements. In addition, while the shipyard damaged
the ship's hull somewhat when it welded on temporary plates, it
attempted to rectify the short-term damage to the vessel's
seaworthiness by applying soft patches to plug leaks and
coordinated efforts with the ship's captain to remove water
that succeeded in entering the vessel. This feature of the
record, too, militates against a finding of gross negligence.
Finally, while it became apparent that the shipyard eventually
abandoned any effort to make good on its contractual
undertaking to repair the vessel, we cannot agree that a
material breach of contract is tantamount in this case to gross
negligence.
Because nothing in our full review convinces us that
a finding of gross negligence was necessitated on these facts,
we cannot ascribe clear error to the district court's
determination that the liability limitation clause in the
contract between the parties was enforceable on its terms.
Thus, no recovery was available to the shipowner for loss of
the vessel's use or loss of profits because the contract
unambiguously provides that "[t]he yard shall in no case be
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26
held responsible for the damages resulting from any loss of use
or profit of the vessel."
Damages
Having determined the liability issues as to the
parties, we turn finally to the question of remedies, where all
of the parties "unite in attacking the district court's basis
for assessing damages." Todd Shipyards, 674 F.2d at 412. On
our full review of the record we find no merit in either
party's challenge to the damages awarded by the district court.
We note that "[t]he trial court, as a fact-finder,
possesses considerable discretion in fixing damages, and its
decision will be upheld absent clear error." Little
Beaver
Enters., 719 F.2d at 79 (citing Thompson v. National
R.R.
Passenger
Corp., 621 F.2d 814, 823 (6th Cir. 1980)). As a
threshold requirement, however, the trial court "must expose
6. We need not consider at any great length the shipowner's
argument that the district court erred in refusing rebuttal
testimony to that of the shipyard's manager, Miguel Nin. The
shipowner sought to have a former Perez employee, Carlos
Claudio, testify that he had informed Nin of the special
qualities of LA ESPERANZA's steel and had given Nin a welding
plan, which Nin rejected and ignored. The purpose of rebuttal
testimony is to meet and reply to any new evidence offered by
an opponent. See
United States
v.
Tejada, 956 F.2d 1256, 1266-
67 (2d Cir. 1992). Determinations regarding what constitutes
proper rebuttal evidence are committed to the "sound
discretion" of the trial court.
See
Lubanski v.
Coleco Indus.,
Inc., 929 F.2d 42, 47 (1st Cir. 1991). Here, we can discern no
apparent error because Nin, who testified that he was in fact
aware that the vessel's hull was made of a special older-type
steel, never testified that Claudio had not informed him of the
steel's quality nor did he testify that Claudio had not
presented him with a welding plan.
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27
'the measure of damages and method of computation,' both to
inform the litigants of the basis for its findings and to
afford the appellate court 'a possibility of intelligent
review.'" Id. at 79-80 (quoting
Safer v.
Perper, 569 F.2d 87,
100 (D.C. Cir. 1977)).
We turn first to consider the $10,999 awarded the
shipyard. While the shipowner on appeal asks whether the
district court erred in granting the shipyard this relief, the
shipowner does not succeed in demonstrating that the court's
action in doing so was clearly erroneous. On the contrary, the
shipowner concedes that the district court differentiated
between negligent work performed and work properly done to the
vessel and awarded the shipyard $10,999 for satisfactorily
completed non-hull repair work. In fact, the district court's
opinion stated that it would disallow any recovery by the
shipyard for the hull replacement work that it either failed to
do or negligently performed and would allow recovery only for
the other work that it had adequately performed pursuant to the
contract. It thus deducted $23,000 from the shipyard's $33,999
invoice, an amount equal to what the shipyard was seeking for
hull replacement work, and determined that the shipyard was
entitled to recovery on its collection action in the amount of
$10,999. See
Perez Y Cia. de P.R.
, 899 F. Supp. at 866. This
determination was not clearly erroneous and, therefore, the
shipowner's argument is unavailing.
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28
Similarly, we see no clear error in the court's
decision to award the shipowner $220,000. For its part, the
shipyard argues that the district court erred in accepting
valuations of the ship's worth from the shipowner's expert
witness, rather than its own expert witness, who testified that
LA ESPERANZA was only worth her "scrap value," i.e., was
basically worthless. The gist of the shipyard's contention
here is that its expert was more qualified to render an
appraisal value than the shipowner's expert, who was not an
appraiser per se, but rather a marine surveyor. The record
substantiates, however, that marine surveyors like the
shipowner's expert routinely inspect and value ships for
insurance coverage purposes, prospective sales, and so forth,
and are fully competent to offer their professional opinion as
to what a vessel is worth. This is a classic case of dueling
experts and it is not reversible error that the district court
was more persuaded by the range of valuations offered by the
shipowner's expert rather than the other way around.
The shipowner, meanwhile, argues that the district
court should have awarded more than $220,000 because it was
entitled to loss of use and interest paid on loans taken out to
refit and repair LA ESPERANZA. The shipowner's expert opined
that the cost of repairs to the vessel would have been in the
range of $180,000 to $220,000 plus possible "hidden damages"
that were not easily ascertained while the ship was still in
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29
the water. The district court did not commit reversible error
in accepting the range of figures offered to it by the
shipowner's expert, in selecting the upper-most figure in that
range, and then declining to exceed that figure based on
speculation about costs to repair damage that might or might
not exist. To the extent that the shipowner is heard to
complain that it should not bear the burden of interest, loans,
and loss of use, we believe that the red letter clause and the
district court's generous award as to actual damages precludes
a determination of clear error on appeal.
Conclusion
Having carefully reviewed the record in this case, we
believe that the district court's determinations as to
liability and the proper measure of damages recoverable by the
respective parties in this dispute were not clearly erroneous.
We thus discern no cause to disturb the judgments rendered
below.
Affirmed. No costs.
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