Coastal (Bermuda) Ltd. v. E.W. Saybolt & Co., Inc.

• Decision Date: 11 September 1987
• Docket Number: No. 86-3489,86-3489
• Parties: COASTAL (BERMUDA) LTD., Plaintiff-Appellee Cross-Appellant, v. E.W. SAYBOLT & CO., INC., Defendant-Appellant, Cross-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 424

826 F.2d 424

1988 A.M.C. 207

COASTAL (BERMUDA) LTD., Plaintiff-Appellee Cross-Appellant, v. E.W. SAYBOLT & CO., INC., Defendant-Appellant, Cross-Appellee.

No. 86-3489.

United States Court of Appeals, Fifth Circuit.

Sept. 11, 1987.

Rehearing Denied Oct. 27, 1987.

Francis A. Courtnay, Jr., A. Gill Dyer, Julianne Owens, Courtenay, Forstall, Grace & Hebert, New Orleans, La., for defendant-appellant, cross-appellee.

Terriberry, Carroll & Yancey, M.D. Yager, New Orleans, La., for Equity Shipping Corp.

Robert M. Contois, Jr., New Orleans, La., for Coastal.

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

Before WRIGHT, ^* GEE and JOLLY, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

In this action Coastal (Bermuda) Ltd. ("Coastal"), a dissatisfied purchaser of 60,000 metric tons of "No. 6" fuel oil, filed suit against the independent surveyor of the oil cargo, E. W. Saybolt & Co., Inc. ("Saybolt"), seeking damages based on tort and contract theories. Following a one day bench trial, the district court rejected Coastal's contract theory, but held that under Section 552 of the Restatement (Second) of Torts, Saybolt was liable for supplying false information upon which others relied in a business transaction. More specifically, the district court held that Saybolt negligently failed to disclose on a laboratory analysis report of the oil cargo that the single set of test results represented a composite sample of the various tanks of oil sold to Coastal. Finding no negligence on the part of Saybolt in the performance of its analyses, nor in the preparation or communication of its test reports, and, further, finding no reliance by Coastal on the specific wording of the report at issue, we reverse.

I

This saga began in December 1981 when the M/T HALKI, a vessel owned by Equity Shipping Corporation ("Equity"), arrived at the Mississippi River oil processing refinery of GHR Energy Corporation ("GHR"). GHR, who had chartered the HALKI from Equity, loaded the vessel with residual fuel oil from five separate storage tanks at the GHR terminal. The oil had been processed in different units at the GHR refinery. The fuel oil, designated as "No. 6 oil" ¹ by GHR, had been purchased by Armada Transport and Refining Company, Ltd. ("Armada") and was destined for Amsterdam, Holland. GHR hired Saybolt, a cargo inspection company that regularly worked for GHR, to determine the amount of oil loaded onto the vessel and to perform quality analyses on oil samples before, during and after the loading. Saybolt drew and analyzed four separate preloading samples, in accord with GHR's instructions. Two samples were taken from shoretanks numbered 150-17 and 150-20; and two were taken from barges Nos. TT7006 and TT7007. Of the four samples taken, three produced results which fell outside the acceptable range for No. 6 fuel oil specifications. ² Also in accord with GHR's orders, Saybolt performed a "final ship" or composite sample of the total oil cargo loaded on the HALKI. This final sample, performed according to industry practice, was taken by hand blending samples from each tank of oil on the HALKI and weighting them according to the amount of oil in each tank. The results yielded an oil viscosity of 252 seconds on the Saybolt Furol Scale at 122? Fahrenheit. ³ This result was within the acceptable American Society for Testing Materials ("A.S.T.M.") standard range for No. 6 oil. ⁴

While the tanker plied toward Amsterdam, Armada sold the cargo of No. 6 fuel oil to Coastal. A Coastal oil trader in London, David Robinson, negotiated the purchase with a Paris broker. Robinson asked the broker about the nature of the cargo, the specifications, the HALKI's estimated time of arrival, and the cargo's size. Because Coastal required an independent analysis of all oil cargoes prior to purchase, Robinson inquired which inspection company had performed the oil analyses. The broker informed him that Saybolt had performed the tests. Robinson's superior, Mr. Bowman, concluded the deal by telephone with the Paris broker later that afternoon. The broker sent Coastal a confirmation Telex, which stated that Saybolt's analysis was final and binding to the buyer and the seller. Neither Robinson nor Bowman saw copies of any Saybolt test report during the negotiations. Neither asked nor was told whether the report stated that the test was "composite."

Upon arrival in Amsterdam, the fuel oil was too cold to discharge or even to test. ⁵ It required twelve days of heating the vessel's holds before the oil could be discharged into four shoretanks (Nos. 201, 202, 811 and 813). Saybolt-van Duyn, a related corporation of the defendant, tested the oil after discharge, and its results were comparable to those obtained by Saybolt upon loading. Approximately 340 cubic meters of oil could not be discharged and remained on board the HALKI. Coastal originally refused the shipment, complaining of the oil's high viscosity and excess water. The dispute was submitted to arbitration, and by a court order of the Southern District of New York, GHR, Equity, Armada and Coastal were compelled to participate in the arbitration proceedings. In January 1983, GHR filed a Chapter 11 petition in bankruptcy, which stayed all arbitration.

On June 10, 1983, Coastal filed suit against Saybolt in the United States District Court for the Eastern District of Louisiana, alleging in its original complaint that Saybolt had breached a contract with Armada to survey and analyze the fuel oil. Coastal claimed that Saybolt had issued materially erroneous reports of its test results knowing that subsequent purchasers of the oil cargo would rely on these reports. Coastal sought damages from Saybolt on the theory that it was a third-party beneficiary of the alleged Armada-Saybolt contract. Saybolt then filed a third-party claim in rem against the HALKI and its owner, Equity, and tendered those parties to Coastal as additional defendants, pursuant to Fed.R.Civ.P. 14(c).

The district court, sua sponte, stayed Coastal's suit pending the outcome of the New York arbitration proceedings, to which Saybolt was not a party. Coastal appealed the stay, and this court dismissed the appeal for lack of jurisdiction on the ground that stays in admiralty are nonappealable interlocutory orders. Coastal (Bermuda) Ltd. v. E.W. Saybolt & Co., 761 F.2d 198, 200 (5th Cir.1985).

The district court then modified its stay order and permitted Coastal's claim against Saybolt, but not Equity, to proceed. A bench trial was held on May 29, 1986, and the court awarded judgment for Coastal in the amount of $521,847.27 plus costs and interest from the date of judgment.

Saybolt noticed an appeal before any posttrial motions were filed. On June 11, 1986, Coastal moved to amend the judgment to add prejudgment interest and also moved for entry of final judgment. The district court denied Coastal's motion to amend, but entered final judgment in favor of Coastal on July 17, 1986. The district court then denied Saybolt's motion for a new trial, and Saybolt filed its second notice of appeal. Coastal appealed the district court's denial of its motion for prejudgment interest.

II

Coastal presented two theories of liability before the district court: one in contract and a second in tort. With respect to Coastal's third-party beneficiary contract theory, the district court held that the "plaintiff has not carried its burden of proof." ⁶

However, the district court found that Coastal had stated a valid cause of action in tort, based on section 552 of the Restatement (Second) of Torts. ⁷ Citing Vicon, Inc. v. CMI Corp., 657 F.2d 768 (5th Cir.1981), and Royal Embassy v. Ioannis Martinos, 1986 A.M.C. 769 (E.D.N.C.1984), the district court held that

a firm which in the course of its business provides information for the guidance of others in business transactions is responsible for damage caused by reliance upon that information, if the firm fails to exercise the care and competence in obtaining and communicating the information which the recipient is justified in expecting, and if the harm is suffered by a person for whose guidance or upon whose reliance the information was supplied or could be expected. That is clearly the situation which confronts the defendant in this case.

Record, Vol. VII at 15-16.

The district court concluded that Saybolt was negligent because the words "composite sample" did not appear on Saybolt's final ship test report. See supra note 3. Coastal had argued to the district court that without the word "composite," the test report indicated that each tank on the HALKI contained uniformly blended No. 6 oil with the exact specifications described in Saybolt's final ship report. The district court accepted Coastal's argument and held that absent the word "composite" or, at least, a range of minimum and maximum values for the properties analyzed, Saybolt's report failed to accurately describe the cargo, which was unblended, nonuniform lots of oil, some of which did not meet the minimum specifications for No. 6 fuel oil. ⁸

While there is no argument that the test report in question (Plaintiff's Exhibit No. 16) did not contain the word "composite," Saybolt contends that the report was nonetheless marked "final ship," which indicated to GHR and to other persons in the industry that the sample had been taken after the ship was loaded and was a composite sample of the oil in all the ship's tanks.

In order to state a cause of action for negligent misrepresentation under section 552 of the Restatement (Second), the plaintiff must allege that: (1) the defendant, in the course of its profession, supplied false information for the plaintiff's guidance in a business transaction; (2) the defendant failed to exercise reasonable care in gathering the information; (3) the plaintiff relied on the false information in a transaction that the defendant intended the information to influence;...