Otto Candies, L.L.C. v. Nippon Kaiji Kyokai Corp.

• Decision Date: 17 September 2003
• Docket Number: No. 02-30842.,02-30842.
• Citation: 346 F.3d 530
• Parties: OTTO CANDIES, L.L.C., Plaintiff-Appellee, v. NIPPON KAIJI KYOKAI CORPORATION, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 530

346 F.3d 530

OTTO CANDIES, L.L.C., Plaintiff-Appellee, v. NIPPON KAIJI KYOKAI CORPORATION, Defendant-Appellant.

No. 02-30842.

United States Court of Appeals, Fifth Circuit.

September 17, 2003.

Rehearing Denied October 28, 2003.

COPYRIGHT MATERIAL OMITTED

Alfred J. Rufty, III (argued), Rufus C. Harris, III, Harris & Rufty, New Orleans, LA, for Plaintiff-Appellee.

Ralph E. Smith (argued), New Orleans, LA, for Defendant-Appellant.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before JONES and BENAVIDES, Circuit Judges, and KAZEN, District Judge.^*

EDITH H. JONES, Circuit Judge:

Appellant Nippon Kaiji Kyokai Corporation ("NKK") appeals from the judgment in a negligent misrepresentation case based on statements NKK made in a classification survey of the M/V SPEEDER that was a prerequisite to the vessel's sale. We hold that general maritime law cautiously recognizes the tort of negligent misrepresentation as applied to classification societies and that on the specific facts presented in this case, NKK owed a legal duty to Otto Candies. Finding no error in the district court's judgment, we affirm.

BACKGROUND

The SPEEDER is a high speed, aluminum hulled passenger vessel built by Austal Pty Ltd. Diamond Ferry Co., Ltd. ("Diamond") took delivery of the SPEEDER in April 1995. The SPEEDER was registered in Japan and was classified by NKK as a "coastal (Japanese Government) passenger vessel." Diamond operated the SPEEDER as a coastal passenger ferry from 1995 to 1998 in Japan. In 1998, Diamond took the SPEEDER out of service, and her NKK classification lapsed. On December 22, 1999, Otto Candies entered into a Memorandum of Agreement ("MOA") with Diamond to purchase the SPEEDER. As a condition of sale, a clause in the MOA required that NKK restore and make current the SPEEDER's coastal classification free from any outstanding recommendations.

On January 5, 2000, NKK issued a Class Maintenance Certificate to Diamond that indicated the SPEEDER was certified within class as a coastal passenger ferry with no outstanding deficiencies. This condition of the MOA being satisfied, Otto Candies paid for the SPEEDER and it was transported from Japan to Port Everglades, Florida aboard a heavy lift ship. From Port Everglades, the SPEEDER was towed to the Bender Shipyard in Mobile, Alabama. Once the SPEEDER arrived in Mobile, Otto Candies arranged for a survey by the American Bureau of Shipping ("ABS") so that the vessel's classification could be transferred from NKK to ABS.

The ABS surveyor, Demetri Stroubakis, discovered a number of significant deficiencies that required repair before ABS would classify the SPEEDER. In particular, Stroubakis noted damaged and wasted overhead spool piping sections that connect the cooling system machinery to the hull; a hull fracture in the port-aft main-engine exhaust connection to the hull; fractured hull brackets, wasted cooling piping, leaks in the port and starboard stabilizer fins; excessive movement in the starboard stabilizer shaft; leaks in the port-forward main-engine sea strainer that filters the water used to cool the engines; disconnected and missing bilge pumps gas and water leaks in the exhaust system; a faulty circuit breaker for the starboard generator; severe damage to the port-aft main propulsion gear; exterior and interior leaks in the main reduction gear oil coolers; damage to the starboard-forward main engine; damage and deterioration in the ventilation system for the port-aft engine; corroded hose and pipe connections for the main and auxiliary engine fuel and lube oil systems that created a severe fire hazard; leaking water-jet pump shaft seals; a heavily corroded port and starboard water-jet pump-bladder accumulator-block valve; and that the engine oil was sooty, black, and contained particulate matter which suggested problems with the machinery. In response to Stroubakis's report, Otto Candies had the SPEEDER repaired at the Bender shipyard at a cost of $328,096.43. When repairs were completed, ABS issued an interim class certificate.

Otto Candies filed the instant suit against NKK to recover the costs of repairs needed for the SPEEDER to obtain a class certificate from ABS. Otto Candies's sole claim against NKK was based on the tort of negligent misrepresentation as stated in the ALI Restatement (Second) of Torts § 552. The district court held a two day bench trial, after which it found that NKK owed a duty to Otto Candies and that NKK was liable for negligent misrepresentation. The court awarded Otto Candies damages for the repair costs. NKK timely appealed.

STANDARD OF REVIEW

In admiralty cases we review the district court's legal conclusions de novo. Lake Charles Stevedores, Inc. v. PROFESSOR VLADIMIR POPOV MV, 199 F.3d 220, 223 (5th Cir.1999). We review the district court's factual findings for clear error. Houston Exploration Co. v. Halliburton Energy Servs., Inc., 269 F.3d 528, 531 (5th Cir.2001) (citing Fed.R.Civ.P. 52(a)). Findings of negligence are factual findings. Jackson v. OMI Corp., 245 F.3d 525, 528 (5th Cir.2001). "Under a clear error standard, this court will reverse `only if, on the entire evidence, we are left with the definite and firm conviction that a mistake has been made.'" Walker v. Cadle Co. (In re Walker), 51 F.3d 562, 565 (5th Cir.1995) (quoting Allison v. Roberts (In re Allison), 960 F.2d 481, 483 (5th Cir.1992)).

DISCUSSION

NKK is one of the world's largest maritime classification societies. Classification societies are "organized societies which undertake to arrange inspections and advise on the hull and machinery of a vessel from its initial stages in new building and thereafter. The societies produce a certificate concerning the vessel's seaworthiness in accordance to the trade within which it is intended to, or does, work." Damien L. O'Brien, The Potential Liability of Classification Societies to Marine Insurers Under United States Law, 7 U.S.F. Mar. L.J. 403, 403 (1995) (quoting Eric Sullivan, The Marine Encyclopedia Dictionary 78 (1980)). These certificates are widely relied upon by all sectors of the maritime industry as an indication that a vessel is reasonably fit for its intended use. Machale A. Miller, Liability of Classification Societies from the Perspective of United States Law, 22 Tul. Mar. L.J. 75, 77 (1997); Hannu Honka, The Classification System and its Problems with Special Reference to the Liability of Classification Societies, 19 Tul. Mar. L.J. 1, 3 (1994) (noting that "certificates are important not only to insurers, but also to charterers, cargo owners, buyers, and bankers, among others, who are required to know the ship's condition at a specific time.").

Citing a previous decision of this court, the parties assumed that NKK can be held liable under general federal maritime law for the tort of negligent misrepresentation. Coastal (Bermuda) Ltd. v. E.W. Saybolt & Co., 826 F.2d 424 (5th Cir.1987).¹ It is true that Coastal (Bermuda) applied the principles of Section 552 of the Restatement (Second) of Torts to a cargo purchaser's damage claim against a petroleum products surveyor, and reversed a judgment for the purchaser, but that ruling does not automatically translate to the relations between maritime classification societies like NKK and their clients or third parties. Indeed, this court earlier reversed and remanded a case to ascertain what duties a classification society may owe its shipowner clients, in contract or tort, for negligent inspection of a damaged ship. Gulf Tampa Drydock Co. v. Germanischer Lloyd, 634 F.2d 874 (5th Cir. 1981).

A handful of cases in other jurisdictions has explored the duty of classification societies, yielding one definitive court of appeals holding that a classification society cannot be liable in contract or tort to a shipowner for a negligent survey regarding vessel seaworthiness. Sundance Cruises Corp. v. The American Bureau of Shipping, 7 F.3d 1077 (2d Cir.1993). The court noted that "a shipowner is not entitled to rely on a classification certificate as a guarantee ... that the vessel is soundly constructed." 7 F.3d at 1084. The shipowner, not the classification society, must remain ultimately responsible for the ship's condition.

With respect to an injured third party "who relied on the classification or safety certificates," however, the Second Circuit suggested a different result might obtain.² In cases before and after Sundance, parties have sought to recover from classification societies after they suffered loss or damage allegedly attributable to defective classification certificates. One case from the Southern District of New York assumed arguendo, following the Sundance dicta, that a maritime claim for negligent representation exists against a classification society on behalf of cargo owners. Cargill, Inc. v. Bureau Veritas, 902 F.Supp. 49 (S.D.N.Y.1995). In Cargill, the cargo owner lost, because there was no evidence that it actually relied on the classification certificates. In another case, a classification society was held liable for negligent misrepresentation to a ship charterer for whose benefit it furnished an incorrect Suez Canal special tonnage certificate. The certificate was used, inter alia, to calculate fees for passage through the Suez Canal. Somarelf v. The American Bureau of Shipping, 720 F.Supp. 441 (D.N.J.1989). The theory behind this case predates, but is consistent with the court's dicta in Sundance.

The district court's adjudication of liability against NKK therefore moves this court into novel but not entirely unchartered territory. Although the verdict was appropriate in this case, we emphasize that a claim for negligent misrepresentation in connection with the work of maritime classification societies should be strictly and carefully limited. The societies' surveys and certificate system are essential to maintaining the safety of maritime commerce, yet their activities should not...