International Ore & Fertilizer Corp. v. SGS Control Services, Inc.

• Decision Date: 24 October 1994
• Docket Number: D,Nos. 1480,1481 and 1709,s. 1480
• Citation: 38 F.3d 1279
• Parties: INTERNATIONAL ORE & FERTILIZER CORP., Plaintiff-Appellee-Cross-Appellant, v. SGS CONTROL SERVICES, INC., Defendant-Appellant-Cross-Appellee, and Charles B. Updike, Esq. and Scott M. Riemer, Esq., Appellants-Cross-Appellees. ockets 93-9046, 93-9332 and 94-7084.
• Court: U.S. Court of Appeals — Second Circuit

Page 1279

38 F.3d 1279

30 Fed.R.Serv.3d 492

INTERNATIONAL ORE & FERTILIZER CORP. Plaintiff-Appellee-Cross-Appellant, v. SGS CONTROL SERVICES, INC., Defendant-Appellant-Cross-Appellee and Charles B. Updike, Esq. and Scott M. Riemer, Esq. Appellants-Cross-Appellees.

Nos. 1480, 1481 and 1709, Dockets 93-9046, 93-9332 and 94-7084.

United States Court of Appeals Second Circuit.

Argued April 25, 1994.

Decided Oct. 24, 1994.

Michael E. Schoeman and Charles B. Updike, New York City (Scott M. Riemer, Schoeman, Marsh & Updike, of counsel), for defendant-appellant-cross-appellee SGS Control Services, Inc. and appellants-cross-appellees Charles B. Updike and Scott M. Riemer.

Richard H. Sommer, New York City (J. Scot Provan, Robert A. Milana, Kirlin, Campbell, Meadows & Keating, of counsel), for plaintiff-appellee-cross-appellant.

Before: VAN GRAAFEILAND and WINTER, Circuit Judges, and MISHLER ^*, District Judge.

WINTER, Circuit Judge:

SGS Control Services, Inc. ("SGS") appeals from Judge Tenney's order awarding $713,666.27 to International Ore & Fertilizer Corp. ("Interore") on the grounds that SGS negligently misrepresented the cleanliness of three ship's cargo holds resulting in contamination and other damage to the cargo. Interore cross-appeals from the district court's finding of contributory negligence and the consequent halving of damages. SGS's counsel also appeal from the district court's award of Fed.R.Civ.P. 11 sanctions for the making of repetitive motions.

We affirm but on rather different grounds. We believe that any duty that SGS owed to Interore arose from a contract between the parties to inspect the cargo holds and that SGS is not liable in tort. However, we also conclude that SGS breached its contract with Interore and that Interore would ordinarily be entitled to full damages. However, there has been no cross-appeal from the district court's dismissal of the contract claim, and we therefore leave the smaller judgment in place. We affirm the imposition of Rule 11 sanctions.

BACKGROUND

Interore, a Delaware corporation with its principal place of business in New York City is, as its name suggests, an international corporation specializing in the trading of fertilizer products. Interore contracted to sell 22,202 metric tons of compound phosphate fertilizers to East Coast Fertilizer Company Ltd. ("East Coast"), a New Zealand corporation, on a cost and freight basis for $4,118,287. Interore chartered the M/V ADELINA to transport the fertilizer from Sweden to Tampa, Florida, and from Tampa to Napier, New Zealand. The agreement with East Coast required Interore to have an independent hold inspector certify the condition of the holds prior to loading the fertilizer. Interore contracted with SGS, as it had several hundred times previously, to inspect the ADELINA's holds and provide such a certificate. Interore confirmed the oral contract by telex, which read in relevant part: "PLS ACT OUR BEHALF PERFORMING INSPECTION, SAMPLING AND ANALYSIS. PLS ISSUE FLWG DOCS: 1) CERT OF HOLD INSPECTION, CONFIRMING VSLS HOLDS WERE CLEAN, DRY AND SUITABLE...." Interore paid SGS $150 for the inspection of the ADELINA's three holds loaded at Tampa.

The ADELINA has five cargo holds, each approximately eighty-one by eighty-seven feet square and forty-seven feet high, separated fore and aft by vertical bulkheads. The most forward hold, hold one, is slightly narrower. On the port and starboard sides of each hold are vertical ribs protruding two feet from the side of the hull and extending from the top of the hold to where an angled section of the hold begins approximately eight feet from the floor. Horizontal bars, called stringers, are attached at regular intervals to the front of the vertical ribs, and vertical pipes are nested between some of the ribs, each protected by horizontal bars fastened to the front of the ribs. Each hold has a large, square hatch opening at the top, measuring approximately forty-one by twenty-eight feet on hold one and fifty-five by thirty-nine feet on the other holds.

The ADELINA's previous cargo was coal, but the penultimate cargo had been barley. Although the crew cleaned and painted the holds following the discharge of the coal, they failed to remove a substantial amount of barley grains trapped in the pockets behind the stringers. The inspection of holds one and four in Sweden, performed by SGS's Swedish affiliate, lasted approximately forty-five minutes, during which the inspector descended into the holds and inspected the stringers and the hatch covers from below. The inspector also inquired of the crew as to the vessel's prior cargoes. The inspector certified holds one and four as clean, dry, and suitable for loading.

SGS's subcontractor, Captain Peter Luard, who had four years of experience in hold inspections, performed the Tampa inspection of holds two, three, and five in the early morning hours of July 2, 1985. Between 1:45 a.m. and 2:15 a.m., Luard inspected the three holds, spending approximately ten minutes in each hold. He climbed down the aft ladders and walked the floors, inspecting the stringers and overhead deck beams. Luard did not attempt to look behind the stringers. Following his visual inspection, he was informed of the previous cargoes by the crew but did not return to the holds. At 2:15 a.m., Luard completed a document on SGS letterhead titled "Certificate of Readiness" which read:

Certificate of Readiness

THIS IS TO CERTIFY that the undersigned Marine Surveyor did, at the request of ______ on behalf of ______ did attend on board the M.V. Adelina of 16356.78 Gross Tons, Port of Registry PIRAEUS, whereof CAPT. MATSELOS P. is Master and now lying at GARDINER TERMINAL for the purpose of surveying the following cargo holds Nos 2, 3 and 5.

Said cargo compartments AND HATCH COVERS have been surveyed and found suitable to load a cargo of PHOSPHATE this time and date.

DATE July 2nd 1985

TIME PASSED 0215

PETER F. LUARD

for SURVEYOR

SGS CONTROL SERVICES INC.

VALID ONLY AT PORT OF ISSUANCE

Member of the SGS Group

ALL INSPECTIONS ARE CARRIED OUT TO THE BEST OF OUR KNOWLEDGE AND ABILITY AND OUR RESPONSIBILITY IS LIMITED TO THE EXERCISE OF REASONABLE CARE [italics designate handwriting]

Following Luard's issuance of this certificate, the ADELINA loaded holds two, three and five with fertilizer and sailed for New Zealand.

Upon arrival in New Zealand on August 1, 1985, officials of the New Zealand Ministry of Agriculture and Fisheries ("MAF") discovered that the fertilizer was contaminated with barley and barred its discharge unless East Coast notified all buyers of the contamination and took steps to prevent it from being used in barley-growing areas. East Coast refused to do so or to accept the shipment, and the fertilizer remained aboard the ADELINA. Interore hired New Zealand surveyors who found the barley lodged in the stringers and hatch covers. Following futile attempts to find other buyers in Australia or Southeast Asia, Interore shipped the fertilizer to Antwerp, Belgium, where it was sold off in small lots. During this process Interore incurred damages in costs and lost value of $959,375.44.

Interore brought the present action against SGS alleging breach of contract, breach of warranty, negligence, and negligent misrepresentation. In a pre-trial order, the district court bifurcated the trial into, first, a bench trial generally concerning liability issues, and, second, a hearing before Chief Magistrate Judge Gershon concerning "[a]ll issues associated with damages." The order lists the issues to be tried in the first phase as:

whether the inspection of holds 2, 3, and 5 by SGS/Peter Luard which resulted in the issuance by SGS Control Services of a Certificate that those holds were clean, dry and fit for the intended cargo was conducted in a proper and workmanlike manner using reasonable care and professional skill; whether SGS Control Services breached its contract with Interore to conduct a proper and workmanlike hold survey: whether SGS breached any warranties owed to Interore and whether SGS misrepresented the condition of holds 2, 3, and 5 as clean, dry and fit for the intended cargo.

Following the bench trial, the district court held that under New York law Interore could not recover on its contract claim because, "[t]he low contract price and informal dealings between the parties indicates that they did not attempt to allocate all the risks. Therefore, the court is justified in allocating them fairly." International Ore & Fertilizer Corp. v. SGS Control Servs., 743 F.Supp. 250, 257-58 (S.D.N.Y.1990) ("Interore I "). In so holding, the district court relied upon the opinion in Vitol Trading S.A. v. SGS Control Services, 874 F.2d 76, 81 (2d Cir.1989). The district court rejected Interore's negligence claim because SGS "did not have a duty to perform any particular kind of inspection, except as required under the contract," and therefore, "there can be no independent tort liability for failing to take certain steps as part of that inspection." Interore I, 743 F.Supp. at 258. However, the district court held that SGS was liable for negligent misrepresentation for issuing the inaccurate certification of the cleanliness and suitability of the holds, but apportioned half of the liability to Interore for its failure to inform SGS that "the slightest amount of foreign matter could contaminate the cargo" in the eyes of the vigilant New Zealand MAF. Id. at 259-60.

Following this ruling, Chief Magistrate Judge Gershon held a conference at which the parties disputed whether the district court had resolved the issue of proximate cause. Chief Magistrate Judge Gershon then referred the case back to the district court. The district court stated that Chief Magistrate Judge Gershon could "take into consideration whether the plaintiff took reasonable steps to diminish any damages," and could consider, "[i]f the plaintiff's partial fault contributed to the damages,...