Dispute’s character is what matters
A recent 2nd Circuit decision could strengthen the hand of shippers or carriers that use derivatives such as forward freight agreements (FFAs) to enforce contracts. (D’Amico Dry Limited v. Primera Maritime. 2nd Cir. No. 11-3473-cv June 12.)
D’Amico operates dry-bulk ships. A slowdown in trade could result in lower rates, fewer voyages, and ships sailing partly empty or even idled. (The cost of maintaining an unemployed panamax dry bulker is about $12,000 per day.)
So D’Amico uses FFAs to hedge.
The 2nd Circuit explained FFAs work by specifying “a base rate for a hypothetical shipment of specified goods over specified routes and future dates for comparison of the contract rate with the market rates on such future dates. If on a specified future date the market rate is above the contract rate, then the party that took the downside of the agreement must pay the other party the difference. If on the future date the market rate is below the contract rate, the party that took the upside of the contract must pay the other party the difference.”
In D’Amico’s case, gains from FFAs would counteract losses from underemployment in a weak market. If rates rose, the losses on such contracts would have decreased its net revenues.
In September 2008, Luciano Bonaso, D’Amico’s chief executive officer, realized his fleet had 280 unchartered days in the first quarter of 2009. Believing he would be unable to book cargo for all those days, he entered into a FFA with Primera.
As D'Amico predicted, the market rate declined significantly, and Primera was obligated to pay his company. On Jan. 30, 2009, D'Amico invoiced Primera for $795,963.20 under the terms of the FFA, but Primera failed to pay.
D'Amico then brought suit in England at the High Court of Justice, Queen's Bench Division, to enforce the agreement. That court is subdivided into multiple divisions, and the case was heard by the Commercial Court, and not the Admiralty Court.
The 2nd Circuit explained “it appears that FFAs are not considered to be maritime contracts under English law because they involve a theoretical, rather than an actual shipment of goods by sea.”
The English court entered a judgment in D’Amico’s favor in the amount of $1,766,278.54, which included interest and other components. Primera did not pay.
D'Amico then sought to enforce the English judgment in U.S. District Court under a statute that gives the federal district courts exclusive jurisdiction to hear any civil case of admiralty or maritime jurisdiction.
Primera moved to dismiss for lack of subject matter jurisdiction, and the district court agreed, concluding it lacked admiralty jurisdiction because the English judgment was not rendered by an admiralty court and the claim underlying the judgment was not deemed maritime in English law.
The district court also turned down a request for reconsideration in which D’Amico argued enforcement of the English judgment lies within the federal court’s admiralty jurisdiction, because the claim on which the judgment was rendered would have come within federal admiralty jurisdiction if brought in the U.S. courts.
The 2nd Circuit reversed. It noted federal admiralty jurisdiction is as old as the nation—found in Article III, section 2 of U.S. Constitution and the Judiciary Act of 1789. (Today, it’s found in 28 U.S.C. §1333.)
Federal admiralty jurisdiction includes the ability to enforce judgments of foreign admiralty courts. In the 1795 decision Penhallow v. Doane’s Administrators Supreme Court Justice James Iredell wrote “a Court of Admiralty in one nation, can carry into effect the determination of the Court of Admiralty of another.”
The 2nd Circuit said “there is some recent, but scant, precedent supporting a related proposition that the federal admiralty jurisdiction provided by §1333 should also accommodate suits to enforce foreign judgments based on claims of maritime character.
“Extending federal admiralty jurisdiction to suits to enforce foreign judgments adjudicating maritime claims undoubtedly serves the purposes intended by the Penhallow rule,” it said, adding that “these policies all relate far more to the maritime character of the underlying dispute than to the classification of the court that rendered the judgment.”
The 2nd Circuit said it disagreed with the district court’s reading of its 1987 decision in Victrix S.S. Co. v. Salen Dry Cargo.
“The district court construed our Victrix dictum as meaning that the maritime nature of the claim must be determined by reference to the law of the nation that rendered the judgment,” the 2nd Circuit said.
It also said there were both theoretical and practical reasons for assessing the maritime nature of claims under U.S. admiralty standards.
“Although, as a general proposition, there is widespread agreement throughout the world [about] which kinds of matters are maritime and which are not, there is no assurance that some other nation might not define its own maritime jurisdiction more broadly, or more narrowly, than we do,” the court noted. “It seems reasonable to assume that the Framers of the Constitution and Congress wanted to ensure that matters deemed maritime under our laws have access to our federal courts.
“The fact that some nation, unlike ours, does not reserve a special jurisdiction for maritime matters, or classify maritime matters as subject to a discrete body of laws, does not derogate from the policies of our law to provide for the adjudication of matters we regard as maritime in our federal courts,” it added.
It said a suit to enforce an English judgment comes within the admiralty jurisdiction of §1333 if the underlying claim on the FFA is deemed maritime under the standards of U.S. law, and remanded the case to the district court to make that determination.
Thomas Tisdale, D’Amico’s attorney, said the decision “almost definitely” makes it easier for shippers and carriers, including those using container derivatives to enforce contracts.
“I expect that all FFAs are subject to English law and jurisdiction. To be able to have those judgments recognized in federal court opens numerous avenues for prejudgment and post-judgment opportunities,” he said.
This column was published in the August 2014 issue of American Shipper.