Morton v. Zidell Explorations, Inc., 81-3194

Citation695 F.2d 347
Decision Date27 October 1982
Docket NumberNo. 81-3194,81-3194
Parties12 Fed. R. Evid. Serv. 331 B.H. MORTON and Thomas Kent, Plaintiffs-Appellants, v. ZIDELL EXPLORATIONS, INC., Defendant-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Carl R. Neil, Lindsay, Hart, Neil & Weigler, Portland, Or., for plaintiffs-appellants.

Ridgway K. Foley, Jr., Schwabe, Williamson, Wyatt, Moore & Roberts, Portland, Or., for defendant-appellee.

Appeal from the United States District Court for the District of Oregon.

Before SNEED and SKOPIL, Circuit Judges, and COUGHENOUR, * District Judge.

PER CURIAM:

Morton and Kent ("appellants"), owners of a tugboat, contracted with Zidell Explorations, Inc. ("Zidell"), a shipyard, to convert their tug into a fish-processing vessel. During the course of the conversion the ship was almost completely destroyed by fire. Appellants sued for negligence, judgment was entered for Zidell, and Morton and Kent appealed. Two questions are presented here. First, is an exculpatory clause in a marine repair contract enforceable under the Supreme Court's decision in Bisso v. Inland Waterways Corp., 349 U.S. 85, 75 S.Ct. 629, 99 L.Ed. 911 (1955)? We conclude that it is. Absent evidence of overreaching, exculpatory clauses in ship repair contracts are enforceable in this Circuit. Hall-Scott Motor Car Co. v. Universal Insurance Co., 122 F.2d 531 (9th Cir.), cert. denied, 314 U.S. 690, 62 S.Ct. 360, 86 L.Ed. 552 (1941). Second, did the trial court err in allowing Zidell to introduce evidence that appellants' vessel was insured at the time of the fire? We conclude that it did not. We affirm.

I. FACTS AND PROCEEDING BELOW

Appellants purchased an old tugboat and orally contracted with Zidell, a marine repair and construction company, to convert it into a fish freezer-processor for use in the Bristol Bay fishery. The conversion work began in the fall of 1978. By January 1979 appellants owed Zidell approximately $200,000 for work performed. Zidell refused to continue with the work until arrangements were made to eliminate this debt and to ensure partial payments as future work progressed. To that end the parties, on January 25, 1979, executed a written fixed-price contract to govern the balance of the conversion. The agreement, drafted by Zidell's attorney, contained a "red-letter" clause exculpating Zidell from "all risks of loss or damage ... under any circumstances whatsoever." 1

The jury found that the written contract between the parties was in effect on May 2, 1979, the date of the fire. There was evidence presented at trial from which the jury could conclude that the "red-letter" clause was placed in the first paragraph of the contract to assure its prominence, that appellants were knowledgeable businessmen, and that they read and signed the agreement without expressing any reservations.

Appellants did not secure interim financing and satisfy their $200,000 indebtedness to Zidell until early March 1979. Under the contract, Zidell was not obligated to proceed with the conversion until such payment was made and, in fact, Zidell stopped work on the boat until appellants brought the account current in March, whereafter work resumed.

In January 1979 appellants purchased a builders' risk insurance policy on the vessel. Although it was undisputed that the policy became effective on January 26, 1979, the day after the execution of the contract for the vessel's conversion, there was conflicting evidence presented on appellants' motives for acquiring the insurance, and on when appellants first sought to obtain the policy.

On May 2, 1979, while appellants' vessel was lying at the Zidell dock, a Zidell employee welding on one of her bulkheads ignited combustible material on the opposite side of the bulkhead, causing a fire which nearly destroyed the vessel. Appellants sued Zidell for negligence, alleging damages of approximately $300,000 to the vessel and other personal property, plus additional damages of $1,200,000 for loss of use of the vessel in the Alaska fishing season immediately following.

The parties stipulated to a bifurcated trial before United States Magistrate Edward Leavy, with the liability issues tried first to a jury. In answers to special interrogatories the jury found that Zidell's negligence was 96 percent responsible for the fire, and that appellants' negligence accounted for the balance. The jury also answered a special interrogatory concerning the efficacy of the January 25th contract, and found the agreement to have been in effect at the time of the May 2nd fire. Appellants moved for a judgment notwithstanding the verdict on the grounds that the "red-letter" clause was unenforceable as against public policy, and that the clause could not exculpate Zidell from its own negligence because it did not specifically refer to negligence or tort liability. Appellants did not renew the latter argument on appeal.

Magistrate Leavy, applying federal admiralty law, 2 denied the motion for judgment n.o.v. In so doing he found expressly that the appellants were not the victims of overreaching or unequal bargaining power. He further found that no evidence had been adduced from which it could be concluded that Zidell wielded any monopoly power in the shipyard business, nor which would allow the conclusion that appellants could not have had the subject repairs performed elsewhere. Accordingly, appellants' motion was denied and judgment was entered for Zidell. Morton and Kent appeal from that judgment.

II. THE "RED-LETTER" CLAUSE

The Supreme Court has held a "red-letter" clause in a tugboat towing contract to be void as against public policy. Bisso v. Inland Waterways Corp., 349 U.S. 85, 75 S.Ct. 629, 99 L.Ed. 911 (1955); Boston Metals Co. v. The S/S Winding Gulf, 349 U.S. 122, 75 S.Ct. 649, 99 L.Ed. 933 (1955); Dixilyn Drilling Corp. v. Crescent Towing and Salvage Co., 372 U.S. 697, 83 S.Ct. 967, 10 L.Ed.2d 78 (1963). 3 In Bisso, Inland Waterways contracted to tow Bisso's oil barge up the Mississippi. The barge collided with a bridge pier and sank. Bisso sued, alleging negligent towing. Inland sought to avoid liability, in part, in invoking a provision in the towage contract which provided that Bisso assumed "sole risk" of the towage. The Supreme Court, applying federal admiralty law, invalidated the clause. Mr. Justice Black, writing for the Court, stated the reasons for the invalidation: "(1) to discourage negligence by making wrongdoers pay damages, and (2) to protect those in need of goods or services from being overreached by others who have power to drive hard bargains." 349 U.S. at 91, 75 S.Ct. at 632. This Court has applied such a rule in the context of towage contracts. D.R. Kincaid, Ltd. v. Trans-Pacific Towing, Inc., 367 F.2d 857, 858-59 (9th Cir.1966).

In their arguments both here and below the parties hotly dispute the applicability of Bisso and its progeny to shipyard repair cases. Appellants rely on First Circuit authority which invokes Bisso principles in invalidating "red-letter" clauses, while appellees seek support from Fifth Circuit decisions which uphold exculpatory clauses in the absence of evidence of overreaching. In declining to invalidate the "red-letter" clause in the contract at issue here, the trial court, finding no evidence of overreaching, followed the Fifth Circuit.

This Circuit has addressed and resolved this question. In Hall-Scott Motor Car Co. v. Universal Insurance Co., 122 F.2d 531 (9th Cir.), cert. denied, 314 U.S. 690, 62 S.Ct. 360, 86 L.Ed. 552 (1941), the Court framed the issue as follows: "Can the parties to a maritime contract to repair a vessel validly stipulate that the repairer may be freed from the consequences of his negligence damage to the vessel in his custody for repairs?" 122 F.2d at 534. The Court concluded that they could. The relevant facts of that case are essentially identical to those before the Court here. The owner of a pleasure boat had delivered it to Hall-Scott for the installation of a new engine, under a contract which provided in part that "Hall Scott will not be held responsible for any damage to [the vessel] ... while the engine installation is being made." 122 F.2d at 533. During the course of the conversion the boat was virtually destroyed by fire. The owner's insurer paid him and sued Hall-Scott for, inter alia, negligence. This Court, applying federal admiralty law, reversed a judgment for the insurer and ordered judgment for Hall-Scott on the basis of the "red-letter" clause. It held that a clause which exculpates a party to a contract...

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