Opinion ID: 517632
Heading Depth: 4
Heading Rank: 3

Heading: Negligence or Breach of Contract by Henry and Victoria

Text: 91 The district court also rejected the contention that the cause of the damage sustained by the Oxy Producer on September 12 was the defective design and manufacture of the interconnection system as a whole and the bumper pads and link arms in particular. The district court found that this theory was inconsistent with the physical evidence, with the testimony of every other expert in naval architecture and marine engineering, with the crewmembers' testimony regarding the fore and aft direction of the movement between the tug and barge, and with the fact that no lateral movement appeared before September 12. Again, we find no clear error in the district court's assessment of the evidence. 92 Having concluded that the sole cause of the damage to the Oxy Producer was the improper mating of the vessel, the district court held that Henry and Victoria were not liable to the plaintiffs for any damage to the Oxy Producer. Because we find no clear error in the district court's findings of causation, we agree with this conclusion. However, we address below in section G the propriety of dismissing Henry and Victoria from the lawsuit in light of the additional claims regarding the Oxy Producer's sister ships--the Oxy Grower and the Oxy Trader. 93 We affirm the district court's finding that both Avondale and Hvide breached their contracts with Occidental by failing to deliver a properly mated and seaworthy vessel. We furthermore affirm the district court's holding that the improper mating of the vessel was the sole cause both of the damage sustained by the Oxy Producer on September 12, and of the sinking of the tug on September 20. 94 C. Was Hvide's acceptance of the vessel binding on Occidental? 95 Avondale contends that even if the loss of the Oxy Producer was caused by the improper mating of the vessel, Hvide's acceptance of the fit-up was binding on Occidental because the Supervision Contract vested Hvide with the power to accept or reject work or materials provided by Avondale. Avondale essentially argues that Hvide's acceptance of the vessel insulated Avondale from liability for any deficiencies in its own work. This argument is implausible. While Hvide was engaged to supervise the construction of the vessel, Avondale undertook an independent contractual obligation to construct the vessel according to the plans and specifications. See supra note 31. 96 The district court correctly found that Hvide had no actual authority to unilaterally modify the requirements of the plans and specifications 41 in a fashion that would be binding on Occidental because the Supervision Agreement expressly provided that Hvide was an independent contractor. 42 2] 97 Avondale notes, however, that this holding did not necessarily dispose of the question whether Hvide had apparent authority to bind Occidental. The two inquiries are distinct: 98 While actual authority is the result of the principal's consent manifested to the agent, apparent authority is the result of consent manifested to the third party. The apparent authority for which a principal can be held liable must be traceable to him; it cannot be established by the unauthorized acts, representations, or conduct of the agent. 99 Strip Clean Floor Refinishing v. N.Y. District Council Brotherhood of Painters, 333 F.Supp. 385, 396 (E.D.N.Y.1971). Thus, Hvide's acceptance of the mating of the vessel would be binding on Occidental only if Occidental represented to Avondale that modifications of the plans and specifications by Hvide would be binding on Occidental and would relieve Avondale of its independent obligation to follow the plans and specifications. 100 A third party in Avondale's position may not assume the existence of such authority. Rather, a party who does business with an agent does so at his or her own peril: [T]he principal will not be bound by the act of his agent in excess of his actual authority where the party doing business with the agent knows the extent of the latter's authority, or where the facts and circumstances are such as to put him on inquiry as to the power and good faith of the agent. Id. (emphasis in original); Legal Aid Soc'y of N.E.N.Y. v. Economic Opportunity Comm'n of Nassau, 132 A.D.2d 113, 521 N.Y.S.2d 833 (1987) (party dealing with an agent must make necessary effort to discover actual scope of agent's authority). The circumstances of this case indicate that Avondale should have taken steps to confirm the scope of Hvide's authority. It was clear from the terms of the Construction Contract that any deviation from the plans and specifications would expose Avondale to liability. The contract provides that Avondale should confer with the Purchaser--Occidental--in the event that it encountered any discrepancy, error, omission or lack of clarity in the Vessel Plans and Specifications and that any work performed by Avondale based on a discrepancy, error, omission or lack of clarity about which Avondale knew or should have known would be at Avondale's own risk unless Avondale had first received clarification from Occidental. In light of these factors, any reliance by Avondale on Hvide's apparent authority to bind Occidental by accepting work not in conformity with the plans and specifications, with no attempt to confirm that such deviations were acceptable to Occidental, was manifestly unreasonable and unjustified. 43 101 We conclude that the district court properly found that Hvide's acceptance of the vessel was not binding on Occidental and therefore did not relieve Avondale of liability for its own breach of contract. 102 D. Avondale's Liability under the Construction Contract 103 The district court found that the specifications for the tug and the barge contained an express warranty that the vessel would be seaworthy on delivery which was incorporated into the Construction Contract 44 and that this warranty was not disclaimed or subject to the provisions limiting Occidental's remedies or Avondale's liability. The district court then found that Avondale breached both its express warranty that the vessel would be constructed in accordance with the plans and specifications and its warranty that the vessel would be seaworthy upon delivery. 104 Avondale maintains first that the language in the plans and specifications referring to seaworthiness does not create an express warranty, and second, that if there is a warranty of seaworthiness, it is subsumed in the guarantee deficiency clause of the contract and is therefore subject to the exclusive remedy of repair and replacement. 105 The parties agree that the Construction Contract is governed by New York law. It is unclear whether, under New York law, contracts for the construction of a vessel are subject to the U.C.C. Compare In re American Export Lines, 620 F.Supp. at 515 (contract for the construction of a vessel is predominantly for services and is therefore not governed by the U.C.C.) with Silver v. Sloop Silver Cloud, 259 F.Supp. at 191 (applying U.C.C. to contract for construction of a vessel). Because our conclusions would be the same under either the New York U.C.C. or New York common law, we do not decide this issue. 1. Warranty of Seaworthiness 106 Under New York law, a warranty is an assurance by one party to a contract of the existence of a fact upon which the other party may rely. 45 Pittsburgh Coke & Chemical Co. v. Bollo, 421 F.Supp. 908, 928 (E.D. N.Y.1976), aff'd, 560 F.2d 1089 (2d Cir.1977). We agree with the district court that the language in the specifications constituted an express warranty that the vessel would be seaworthy on delivery 46 and that the warranty is incorporated into the Construction Contract by Article III(a) of the contract. The language of the specifications indicates that the object of the contract work is the building of a seaworthy vessel. 2. The Guarantee Deficiency Clause 107 We find, however, that the warranty of seaworthiness is subsumed in the guarantee deficiency clause. 47 Guarantee Deficiency is broadly defined as: 108 [A]ny weakness, deficiency, failure, breaking down or deterioration in workmanship or material produced or furnished by the Contractor in performing the Contract Work or any failure of any equipment, machinery or material produced or furnished by the Contractor or a vendor or subcontractor of the Contractor to function as prescribed by the Vessel Plans and Specifications. 109 Seaworthiness is a qualitative statement which may mean something more than the failure of the contractor to comply with the plans and specifications: not every such failure would render the vessel unseaworthy. 48 Thus, a deficiency that causes the vessel to be unseaworthy may be more serious than one that does not. 49 Nevertheless, the plain language of the guarantee deficiency clause sweeps broadly to include deficiencies of varying degrees of severity. 50 Looking to the plain language of the contract, we cannot conclude that any ... deficiency does not include those deficiencies which render the vessel unseaworthy. 51 110 The district court's finding that the vessel had not been mated in accordance with the specifications falls precisely within the definition of guarantee deficiency: Avondale's failure to mate the vessel properly was a deficiency ... in workmanship ... in performing the Contract Work. 111 The fact that the contract narrowly restricts the remedies that are available for guarantee deficiencies to repair or replacement does not render this clause unconscionable, nor should it prompt a court to engage in tortured interpretation of the contract: 52 112 Within the framework of this commercial transaction the Court perceives no valid legal reason why [the plaintiff] should not be held to the clear and express terms of the written agreement between the parties. Warranty and limitation of liability clauses such as found in the present contract, which restrict [the plaintiff's] remedies to the repair and replacement of non-conforming parts and limit [the defendant's] liability, regardless of its negligence in causing such nonconformities, are valid and enforceable and have been consistently upheld by the courts. 113 American Elec. Power Co. v. Westinghouse Elec. Corp., 418 F.Supp. 435, 453 (S.D.N.Y.1976) (quoting Potomac Elec. Power Co. v. Westinghouse Elec. Corp., 385 F.Supp. 572, 575 (D.D.C.1974), rev'd and remanded on other grounds, 527 F.2d 853 (D.C.Cir.1975)). The warranty of seaworthiness is no different from other express warranties of the quality or performance of goods which have, in other cases, been subject to a similar limitation of remedies. 114 a. Failure of the Exclusive Remedy 115 Plaintiffs maintain, however, that even if the warranty of seaworthiness is subsumed in the guarantee deficiency clause, the exclusive remedy provision is inoperative because circumstances have caused the remedy to fail of its essential purpose within the meaning of section 2-719(2) of the U.C.C. Section 2-719(2) provides that [w]here circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act. 1A U.L.A. 493 (1976 & Supp.1988) The official comment provides further that where an apparently fair and reasonable clause because of circumstances fails in its purpose or operates to deprive either party of the substantial value of the bargain, it must give way to the general remedy provisions of this Article. U.C.C. Sec. 2-719 comment 1, 1A U.L.A. 494. 116 Occidental argues that the purpose of the remedy was to bring the vessel into conformity with the plans and specifications. Because Avondale's initial failure to mate the vessel in accordance with the plans and specifications caused the tug to sink, the repair and replacement remedy was ineffective--the flaws in the mating of the vessel could not be corrected. 117 As noted above, it is not clear whether the Construction Contract is governed by the New York Uniform Commercial Code. It is therefore unclear whether section 2-719(2) of the U.C.C. is directly applicable. 53 However, even if we were to reason by analogy to the U.C.C., we conclude that the express terms of the contract, limiting Occidental's recovery to the cost of repairing or replacing guarantee deficiencies, are effective. 118 Where a seller has been guilty of willful and dilatory behavior in not honoring its promise to repair or replace, there is no doubt that the remedy has failed of its essential purpose. See, e.g., Computerized Radiological Services, Inc. v. Syntex Corp., 595 F.Supp. 1495 (E.D.N.Y.1984), aff'd in part, rev'd in part, 786 F.2d 72 (2d Cir.1986); American Electric, 418 F.Supp. at 435-54. In such cases, the seller has not only failed to deliver goods conforming to its warranties, it has also breached its promise to repair, or attempt to repair, the defects. 119 Courts are divided on the question whether the seller's inability to repair causes the remedy to fail of its essential purpose. On one hand, several courts have concluded that a seller's inability to repair or replace defective parts or workmanship constitutes a failure of the remedy. Consolidated Data Terminals, Inc. v. Applied Digital Data Systems, 708 F.2d 385, 392 (9th Cir.1983); S.M. Wilson & Co. v. Smith Int'l, Inc., 587 F.2d 1363, 1375 (9th Cir.1978). On this view, the buyer has bargained to receive a product of a particular quality. If repairs cannot bring the product into compliance with the warranty, the remedy has failed of its essential purpose, the buyer has been deprived of the substantial benefit of its bargain, and the buyer must have recourse to alternative remedies. 120 Other courts have found, however, that the seller's inability to repair or replace does not cause the remedy to fail. Rather, a contract may anticipate the possibility that repairs would not be sufficient to correct all defects. Potomac Electric, 385 F.Supp. at 578-79; U.S. Fibres, Inc. v. Proctor & Schwartz, Inc., 358 F.Supp. 449, 457, 465 (E.D.Mich.1972), aff'd, 509 F.2d 1043 (6th Cir.1975). On this view, the buyer has bargained for the seller's efforts to bring the product into conformity with the warranties. The risk that such efforts would not succeed has been allocated to the buyer. 121 The instant case differs from both lines of cases in that there was no opportunity to effect repairs because the sinking of the tug made both actual or attempted repairs by Avondale--or anyone else--impossible. Assuming that these circumstances caused the remedy to fail of its essential purpose to actually repair guarantee deficiencies, our inquiry is not complete. The Construction Contract further provides that [t]he Contractor shall not be liable to the Purchaser for any damage to the Vessel or its equipment or cargo or other property of such purchaser or for consequential damages of the Purchaser arising out of any such Guarantee Deficiency. Avondale argues that this clause operates as an independent limitation of its liability--effectively allowing Occidental to recover only the cost of repairing guarantee deficienies. 122 b. Limitation of Liability 123 It is well established that under New York law the failure of a remedy to achieve its essential purpose does not render ineffective all other limitations of liability: A better reading is that the exclusive remedy clause should be ignored; other clauses limiting remedies in less drastic manners and on different theories would be left to stand or fall independently of the stricken clause. Computerized Radiological Services, 595 F.Supp. at 1510; American Electric, 418 F.Supp. at 457. 124 Whether a separate limitation of damages will survive the failure of the exclusive remedy will frequently depend on whether the damages excluded by the challenged clause have resulted from the seller's willful or dilatory conduct in failing to comply with the remedy provision. Indeed, most New York cases have upheld a separate limitation of consequential damages when those damages stem from the seller's inability to repair rather than from a refusal to repair. This case, however, presents a third situation because the [direct and] consequential damages suffered precede[d] the failure of the limited remedy and bear no relation to it. Eddy, On the Essential Purpose of Limited Remedies: The Metaphysics of UCC Section 2-719(2), 65 Calif.L.Rev. 28, 88-89 (1977). That is, the direct and consequential damages suffered by Occidental are not due to Avondale's failure to repair the guarantee deficiency. Rather, it is the extent of damage--the sinking of the tug--that caused the remedy to fail. 125 The facts of this case resemble those of Henningsen v. Bloomfield Motors, 32 N.J. 358, 161 A.2d 69 (1960), a pre-code case discussed in Eddy's article. In Henningsen, a defective part caused the plaintiff's automobile to swerve from the road injuring the plaintiff and damaging the car. The contract limited remedies to the repair or replacement of defective parts and excluded consequential damages. Eddy concludes that when the consequential damages do not flow from the failure to repair, but precede any opportunity to repair, the limitation of consequential damages should not be invalidated as having failed of its essential purpose--although the limitation might properly be considered unconscionable. Eddy, supra at 88-89. This case differs from Henningsen, however, in two respects: First, Henningsen was a classic consumer case. Second, the Construction Contract would allow recovery of the cost of repair. 126 It is by no means clear that limiting Occidental to recovery of the cost of repairs would be unconscionable or deprive it of an adequate remedy. Whether application of the clause would deprive Occidental of the substantial value of its bargain depends manifestly on what Occidental bargained for. 127 The cases discussed above, involving a seller's inability to repair, are instructive on this point. From these two lines of cases, it is clear that whether circumstances have caused a remedy to fail depends on whether the contract anticipated and allocated the risk that the exclusive remedy would not cure all defects. 54 Under the first line of cases, the court has concluded that the parties did not anticipate and allocate the risk that repairs would be unsuccessful--thus, the remedy fails of its essential purpose. Under the second line of cases, the court has concluded that the parties did anticipate, and allocate to the buyer, the risk that the repairs might not be effective--thus, the remedy does not fail of its essential purpose. 128 The question presented here is not simply whether the contract anticipates that efforts to repair may be ineffective, but whether it anticipates that repairs may be impossible. 55 129 Although the circumstances which caused the repair remedy to fail had catastrophic results, those circumstances were not beyond the contemplation of the parties. The guarantee deficiency clause clearly recognizes the possibility that a deficiency could result in damage to the vessel and its cargo. The risk of such loss is allocated by the express terms of the contract to Occidental. If the damage to the Oxy Producer had been severe, but had not caused the tug to sink, the remedy would not have failed of its essential purpose and Avondale would be responsible, by the terms of the contract, only for the cost of repairing the underlying deficiency, not for any other damage caused by the deficiency--no matter how severe. 130 The fact that damage to the vessel caused it to sink, rendering the remedy of actual repair ineffective, does not require that the allocation of the risk of damage to the vessel be shifted to Avondale. The risk that the vessel would sink is only the most serious of the risks that the Construction Contract allocates by its plain terms to Occidental. While this allocation of risks may appear severe, it is not illogical. 131 One commentator has noted that [a]s one moves into the realm of industry or commerce ... the goods sold become more complex and more frequently custom designed.... Where goods are not standardized or, in the extreme alternative, where they are experimental ... the reasonable expectations of the buyer become attenuated [and] the degree of risk imposed by an absolute construction of the repair duty becomes extensive. Eddy, supra, at 77, 80. 132 When the goods which are the subject of the contract are complex or innovative the contract may allocate the risk of defects differently than when the contract involves standard goods--such as automobiles. Id. at 80. Thus, in American Electric, the court emphasized that the contract here in issue is not of the type entered into by the average consumer, but a commercial agreement painstakingly negotiated between industrial giants.... The rule that the agreed upon risk should not be disturbed is particularly appropriate where, as here, the warranted item is a highly complex, and in some ways experimental piece of equipment. 418 F.Supp. at 459. 56 133 In the instant case, Avondale argues that because the design for the Oxy Producer was relatively novel, it was willing to assume only the most limited liability for possible defects. The contract reflects this allocation of risks. Occidental agreed that in the event of a guarantee deficiency, Avondale would be liable only for the cost of repairing or replacing deficiencies. It agreed that Avondale would not be liable for any damage to the vessel, its cargo, or its equipment, arising from such a deficiency. We will not disturb the agreed upon allocation of risks simply because the worst of those risks has materialized. 134 While this result may seem harsh, it is clear that two sophisticated commercial actors such as Avondale and Occidental could have allocated the risk of damage stemming from a guarantee deficiency differently. We note that the construction contract involved in Shipco provided that Avondale would be liable for damage to the vessel immediately caused by any guarantee deficiency. 631 F.Supp. 1123, 1126 n. 3 (E.D.La.1986) (quoting contract language) aff'd, 825 F.2d 925 (5th Cir.1987), cert denied, --- U.S. ----, 108 S.Ct. 1472, 99 L.Ed.2d 701 (1988). Under the terms of that contract, Avondale might have been liable for the loss of the vessel. Occidental, however, did not secure a similar promise with respect to the Oxy Producer. 135 Occidental and Avondale are commercial giants of equal bargaining power. Their lengthy negotiations produced a detailed contract of nearly 100 pages in length. We will not rewrite this contract to substantially alter the allocation of risks to which the parties have consented. See American Electric, 418 F.Supp. at 440 n. 2. 136 The district court should therefore determine the extent of the damages that Occidental may recover consistent with this holding. 137 E. Hvide's Liability under the Supervision Contract 138 We held above that under the economic loss rule adopted in East River, the plaintiffs' negligence claim against Hvide is not cognizable in maritime tort. We therefore do not need to reach the issue whether the Supervision Contract limits Hvide's liability in negligence. The parties do not dispute that the Supervision Contract limits Hvide's liability for breach of contract to $5 million. F. Joint and Several Liability 139 Because the district court has not yet determined the proportionate responsibility of Hvide and Avondale for the losses suffered by Occidental, and because our decision on appeal will affect the total amount of damages that can be recovered against each defendant, we decline to decide whether the imposition of joint and several liability is appropriate here. That question may be addressed after the district court has conducted proceedings to determine the extent and allocation of the damages. G. The Dismissal of Henry and Victoria 140 We affirmed above the district court's finding that the improper mating of the vessel was the sole cause of the sinking of the Oxy Producer and that there were no defects in the design or manufacture of the linkage system as a whole, or in the link arms or bumper pads. This holding, however, does not eliminate plaintiffs' claims regarding the sister ships. Following the sinking of the Oxy Producer, the Coast Guard revoked the certificates of inspection for the Oxy Producer's sister ships--the Oxy Trader and the Oxy Grower. After an inspection revealed damage in the linkage systems of the sister ships, parts of the linkage system were redesigned and replaced. Occidental sought to recover the losses it sustained in repairing the sister ships. 141 Although the district court's opinion states only that Henry and Victoria are not liable ... for any damage suffered by the Oxy Producer, and does not address the sister ships explicitly, the court dismissed Henry and Victoria from the entire lawsuit. 142 Occidental contends that the district court's dismissal of Henry and Victoria was improper--at least with respect to the claims regarding the sister ships. While we affirm the district court's holding that Henry and Victoria are not liable for any damage to the Oxy Producer, we do not think that the dismissal of Henry and Victoria was proper without specific findings regarding the sister ships. We therefore reverse the dismissal and remand to the district court for resolution of these claims consistent with our holdings in this case.