La Esperanza De P.R., Inc. v. Perez Y Cia. De Puerto Rico, Inc.

• Decision Date: 07 May 1997
• Docket Number: 96-1905,Nos. 96-1904,s. 96-1904
• Citation: 124 F.3d 10
• Parties: LA ESPERANZA DE P.R., INC., Plaintiff, Appellant, v. PEREZ Y CIA. DE PUERTO RICO, INC., Defendant, Appellee. LA ESPERANZA DE P.R., INC., Plaintiff, Appellee, v. PEREZ Y CIA. DE PUERTO RICO, INC., Defendant, Appellant. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 10

124 F.3d 10

1998 A.M.C. 21

LA ESPERANZA DE P.R., INC., Plaintiff, Appellant, v. PEREZ Y CIA. DE PUERTO RICO, INC., Defendant, Appellee.

LA ESPERANZA DE P.R., INC., Plaintiff, Appellee, v. PEREZ Y CIA. DE PUERTO RICO, INC., Defendant, Appellant.

Nos. 96-1904, 96-1905.

United States Court of Appeals First Circuit.

Heard May 7, 1997.

Decided Aug. 13, 1997.

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.

Before STAHL, Circuit Judge, ALDRICH, Senior Circuit Judge, and CYR, Senior Circuit Judge.

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. ¹ For its part, the shipowner accepts the district 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 sail schooner built in 1896 in Antwerp, Belgium. ² 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. ³ This drillhole 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 by Vaello, which had the responsibility for designing the procedures for Coast Guard approval. ⁴

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 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.

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 shipowner 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 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.

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,...