Notes From The Editor: The Expansion of Admiralty Jurisdiction
July 2010 (No. 3)
In recent years, we have seen a trend of expansion of the federal court’s admiralty jurisdiction in a number of different areas. To a large degree, this has been an offshoot of two fairly recent decisions of the Supreme Court, which many have construed as representing a trend of widening the federal maritime jurisdiction.
In Exxon Corp. v. Central Gulf Lines, the Supreme Court reversed a nearly 150-year-old “bright line” rule that agency contracts were excluded from the admiralty jurisdiction, holding that such contracts should be considered maritime where “the services performed under the contract are maritime in nature.” Exxon involved a claim by a bunker supplier that supplied bunkers domestically and arranged bunkers internationally as an agent through local suppliers. Under the “traditional” rule, claims under the former arrangement were maritime, whereas claims under the latter were not. The Supreme Court reversed this rule, finding that the nature and subject matter of the two arrangements were essentially identical and holding that both were maritime. This ruling has reopened the possibility that many other kinds of agency contracts traditionally outside the maritime context might now be considered maritime.
In Norfolk Southern v. Kirby, the court considered the question of whether bills of lading issued for a multi-modal transport involving both an ocean carriage and an over-land carriage should be construed under the federal maritime law or state law when the cargo is damaged during the over-land portion of the carriage. The Court held that the multimodal carriage was “essentially maritime” even though it also involved an over-land leg, and thus the entire carriage was governed by the federal maritime law.
One fascinating side-effect of the recent and now deceased Rule B EFT-attachment craze was to put the development of maritime law concerning admiralty jurisdiction into “fast forward” mode. Since one of the two key requirements of Rule B is that a claim must be “maritime,” Rule B plaintiffs constantly strove to test the outer boundaries of the admiralty jurisdiction. Some of these attempts were, perhaps surprisingly, successful. Others were not but may well foreshadow future expansions by the Supreme Court.
Shipbuilding and Ship Constructions Contracts
People are often surprised to learn that contracts for the construction and for the sale of a vessel are not considered to be within the admiralty jurisdiction. Intuitively, it is difficult to see how either kind of contract is not “essentially maritime in nature” within the meaning of the Exxon and Kirby Supreme Court cases. But long standing precedent, from the Supreme Court in the case of shipbuilding contracts, and from the Circuit Courts of Appeal in the case of ship sale contracts, has held that these kinds of contracts are not maritime.
In Kalafrana Shipping Co. v. Sea Gull Shipping Co. Ltd, one brave district court judge concluded that Kirby and Exxon—as well as a recent Second Circuit decision that had applied their reasoning to construe a commercial general liability insurance policy as maritime based on the subject matter of what was being insured—gave her sufficient cover to announce a change in the rule insofar as ship sale contracts were concerned. Thus, she allowed a Rule B attachment in connection with a dispute under such a contract.
Numerous other district judges considering the identical question thereafter, however, declined to follow the decision in Kalafrana—not necessarily because they disagreed with its interpretation of Kirby, but on the grounds that they were constrained by prior precedent of the Second Circuit, which they concluded had not actually been overruled by Kirby and Exxon. This issue was on appeal to the Second Circuit in several cases at the time Shipping Corp. of India v. Jaldhi was announced and, as far as I understand, all of those appeals died an untimely death before this jurisdictional issue could be considered by the Second Circuit.
The Second Circuit did get the chance to consider the shipbuilding contract issue in Primera Maritime Limited v. Jiangsu Eastern Heavy Industry Co. Ltd. None of the district courts had been courageous enough to conclude that Exxon and Kirby had actually overruled the old Supreme Court precedent holding that a ship sale contract is not maritime, although the point was argued in several cases to the lower courts. On appeal, the Second Circuit observed that the plaintiff was “correct to point out that the conceptual approach taken in those cases suggests that modern principles disfavor per se admiralty rules based on the site of the contract’s formation or performance.” Ultimately, however, the Second Circuit was not prepared to conclude that the Supreme Court’s earlier precedent had been overruled, concluding in its “summary order” that “[u]ntil the Supreme Court declares that contracts for ship construction are maritime in nature, disputes arising from such contracts will not give rise to the federal courts’ admiralty jurisdiction.” So, perhaps this issue is just waiting for the right case to take all the way to the Supreme Court.
Forward Freight Agreements
Another area where Rule B drove the development of the law on maritime jurisdiction was in the context of Forward Freight Agreements, or FFAs. FFAs have been described as a contractual commitment to “pay the difference between a price agreed today and the future price of moving a product from one location to another, or for the future price of hiring a ship over a period of time.” FFAs are financial instruments that were created to allow maritime parties to hedge market risks in the shipping freight market, though of course there is no requirement that a buyer or seller of FFAs be a maritime party, and the ultimate obligation is to pay or receive money under the agreement, and never to actually operate a ship or carry cargo. Numerous district court decisions have found FFAs to be maritime contracts.
The Second Circuit has not had the opportunity to weigh in on this issue yet, but I think there are some who might legitimately question the correctness of those decisions. While it is true that FFAs are linked to ocean freight values and are certainly used by parties in the shipping industry to hedge their freight positions, FFAs are in their essence financial derivatives, not pegged to any actual carriage of cargo or other actual maritime commerce except insofar as it may impact indexed freight rates. And certainly, there is nothing that limits FFAs to use by the maritime industry. In any event, I think it is an open question whether the appeals courts will ultimately agree with the district courts on this issue.
Commodity Sales Contracts
Another area where the district courts got a bit giddy was with commodity sales contract. There were quite a few cases dealing with these kinds of contracts, and in most cases the dispute involved a contract for the sale of a given commodity in which the buyer had some involvement in nominating a vessel or, for instance, in undertaking to be responsible for demurrage at the discharge port. Plaintiffs argued that when disputes arose under the “maritime” component of the contract—e.g., over the buyer’s obligation to pay demurrage—that part of the contract at least was a maritime contract thus giving the court admiralty jurisdiction.
This argument met with mixed results in the district courts. The early trend seemed to be away from seeing these kinds of contracts as maritime, but as matters progressed it seemed that the tide turned and the decisions began to more uniformly agree that claims under the “maritime” terms of a sales agreement do give rise to maritime jurisdiction.
As with FFAs, a number of pending appeals suffered early termination as a result of Jaldhi. The Second Circuit did address this issue in Tradhol Int., S.A. v. Colony Sugar Mills Ltd., however, and found that the plaintiff in that case had failed to establish either how the “maritime” elements of the claim were severable or how the non-maritime elements were “incidental”. Only time will tell whether this burden can ever be met.
Multi-Modal Transport Contracts
The latest word on the subject of maritime jurisdiction came as recently as June 21, 2010, when the Supreme Court decided Kawasaki Kisen Kaisha Ltd. v. Regal-Beloit Corp. (“K-Line”). That decision answered the question—closely related to the issue decided in Kirby—of whether COGSA should govern in respect of a claim relating to a multi-modal carriage involving ocean carriage, where the cargo is damaged on an inland rail leg that ordinarily would be covered by another federal statute, the Carmack Amendment.
In K-Line, cargo was being shipped from China to Chicago under through bills of lading issued by the ocean carrier K Line. The carriage involved inland transport on a train operated by Union Pacific Railroad, arranged by K Line, and the UP train derailed in Oklahoma in April 2005 causing substantial damage. Suit was filed in California, and the district court found that the entire carriage was covered by COGSA and enforced a Tokyo forum selection clause in the bill of lading. The Ninth Circuit reversed, finding that by issuing a through bill of lading and contracting for a railroad to transport the goods from Long Beach to Chicago, K Line had “engaged in railroad transportation” governed by the Carmack Amendment. Thus, COGSA’s package limitation was inapplicable and the Carmack’s stricter forum selection regime invalidated the forum selection clause.
The Supreme Court reversed the Ninth Circuit’s ruling, finding its earlier decision in Kirby to be closely analogous and ruling that the Carmack Amendment does not apply to inland segments of a multi-modal shipment from overseas under a through bill of lading. Rather, “Congress considered such international through bills and decided to permit parties to extend COGSA’s terms to the inland domestic segment of the journey.”
Quoting Kirby, the K-Line Court observed that “[t]he international transportation industry clearly has moved into a new era—the age of multi-modalism, door-to-door transport based on efficient use of all available modes of transportation by air, water, and land.” Based on the decisions in Kirby and K-Line, it appears that this new era largely will be governed by maritime law.
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