Reflections on the Admiralty Prospects of Mixed Policies

Transcription

1 From the SelectedWorks of Graydon S. Staring December, 2005 Reflections on the Admiralty Prospects of Mixed Policies Graydon S. Staring Available at:

2 REFLECTIONS ON THE ADMIRALTY PROSPECTS OF MIXED POLICIES By Graydon S. Staring Introduction With admiralty jurisdiction comes the application of substantive admiralty law. 1 The existence of admiralty jurisdiction determines not only access to a federal court sitting in admiralty, but also, when suit is brought elsewhere, the law to be applied. The recent Kirby decision 2 in the Supreme Court and Folksamerica decision 3 in the Second Circuit open the prospect of a more liberal access to admiralty jurisdiction and to the law of marine insurance, where the policy applies, or may apply, to non-marine risks. These sensible decisions are probably more than welcome to most maritime lawyers, as simplifying procedure and procedural risks in marine insurance disputes. In looking where we re going it may be useful to see where we ve been and how we got here, by a short review of the jurisdictional history of so-called mixed contracts, with special reference to insurance policies. We may then try to foresee the opportunities and limitations presented by Kirby and Folksamerica. Classification It will be observed that throughout the history of this subject whatever could be called a maritime contract by those with authority to classify it lay within the admiralty jurisdiction. Classification, therefore, always determines the jurisdiction, and the subjects of conceptual disputes are the rules or methods of classification, and incidentally who will do it. One might have considered classifying mixed contracts according to the superior weight of maritime or non-maritime issues and interests but there has never been any scale capable of weighing them and such a formula would solve no problems. The presence of substantial elements on one side or the other would be no better. A practical solution from the administrative point of view has been to favor one court or the other with the power to classify the contract as its own if it finds significant elements of its own jurisdiction in the dispute. That was done from long ago in England, in favor of the common law and through its superior power, and the specific consequences of its rules, without their former causes, were continued here. The importance of the recent decisions may be viewed as a change in the power of classification. The English Heritage The jurisdictional boundary in England arose from what was obviously intended to be a practical distribution of power. In the counties the high sheriffs enforced the law, 1 East River Steamship Co. v. Transamerica Delaval Inc., 476 U.S. 858, , 1986 AMC 2027, (1986). 2 Norfolk Southern Railway Co. v. James N. Kirby, PTY Ltd., 543 U.S. 14, 125 S.Ct. 385, 160 L.Ed.2d 283, 2004 AMC 2705 (2004) (referred to hereafter as Kirby). 3 Folksamerica Reinsurance Co. v. Clean Water of New York, Inc., 413 F.3d 307, 2005 AMC 1747 (2 nd Cir. 2005). 1

3 with broad powers and responsibilities, and presided in the county courts, but had no means to enforce the law in territorial waters. 4 The lord high admiral and his vice admirals had, on the waters, the functions of sheriffs, although never so-called, exercising jurisdiction in parts out of the reach of the common law. 5 (Compare the U.S. Coast Guard s functions of regulation and law enforcement today.) Hence the geographical lines of demarcation between the tidal waters and the counties. By English law, the admiralty was allowed no jurisdiction of a contract made on land to be performed at sea or made at sea to be performed on land, however concerned with maritime commerce, but only contracts made at sea and to be performed there and, of course, concerned with maritime matters. 6 The King s Bench imposed these restrictions by extravagantly narrow interpretation of two statutes of King Richard 7 and enforced them by writs of prohibition. The jurisdiction of contracts, like that of torts, was therefore controlled largely by geography, a regulation lamented by enlightened scholarly judgment even in those times, on the ground that reason would dictate very different limits. 8 As the King s Bench had power to issue writs of prohibition in the King s name, binding on the High Court of Admiralty, it could and did decide what was or was not a maritime contract and enforce its decision. 9 The classification of the contract was therefore determined by the finding of anything in or about it that the common law courts could call their own. How We Got to 2004 While the litigious greed of the English common law court is suspected to have been based more on judicial remuneration than constitutional requirement, in the United States admiralty has been free to evolve rationally, although slowly, along geographical, commercial and industrial lines of interest. Justice Story, in his celebrated essay in De Lovio v. Boit, considered that, while tort jurisdiction is necessarily bounded by locality, 10 the jurisdiction depends, or ought to depend, as to contracts, upon the subject matter, i.e. whether maritime or not 11 and described the requisite subject matter as relat[ing] to the navigation, business, or commerce of the sea. 12 Not everybody agreed with Story then or for years later. Chancellor Kent, 13 for one, disagreed and thought the requirement of purely maritime subject matter was supportable in the United States by the constitutional protection of trial by jury in Suits at common law. 14 Fortunately, this view never gained much headway; the constitutional precept shouldn t arise until a suit at 4 See 1 William Blackstone, COMMENTARIES ON THE LAWS OF ENGLAND (1765). 5 3 William Blackstone, COMMENTARIES ON THE LAWS OF ENGLAND (1765). 6 See De Lovio v. Boit, 7 F. Cas. 418, 431 (No. 3776), 1997 AMC 550, 578 (C.C.D. Mass. 1815) (hereinafter De Lovio); Grant v. Poillon, 61 U.S. (20 How.) 162, 168, 15 L.Ed. 873 (1858). 7 See De Lovio, 7 F. Cas at , 1997 AMC at Arthur Brown, CIVIL LAW AND THE LAW OF THE ADMIRALTY, 72 (2d ed. 1802). 9 See Nicholas J. Healy and David J. Sharpe, CASES AND MATERIALS IN ADMIRALTY 4-5 (2d ed. 1986). 10 De Lovio, 7 F. Cas. at 444, 1997 AMC at Id., 7 F. Cas. at 440, 1997 AMC at Id., 7 F. Cas. at 444, 1997 AMC at James Kent, COMMENTARIES ON AMERICAN LAW 352 (1826 and later editions). 14 U.S. CONST., amend. VII. 2

4 common law exists, when the jurisdiction will usually be supported by the Saving to Suitors Clause. 15 In Waring v. Clarke 16 in 1847, the Supreme Court said at length that the constitutional grant of admiralty jurisdiction to the federal courts was broader than in England and free of the statutory restrictions and those imposed by the jealousy of the common law courts there. Although that view had been expressed earlier, there were those who opposed it with spirit even then as encroachment on the common law and common law courts. 17 While the general view expounded in Waring has prevailed in the long run, it did not immediately squelch the narrower view of the encroachment even in the Supreme Court. 18 Some of the texts that remained current through much of the 19 th century probably also contributed to its persistence. 19 In the event, notwithstanding reaffirmations of the broad view, some of the arbitrary English restrictions have survived for years by reiterated stare decisis before being specifically refuted by judicial analysis 20 or Congressional direction. 21 Indeed, the one we are concerned with here survived almost to the present day. For 150 years judicial opinions have repeated the rubric that admiralty jurisdiction demands that contracts be wholly, entirely or purely maritime. 22 This doctrine was the holding of the Supreme Court in 1858 in Grant v. Poillon. 23 Occasional early citations for the doctrine referred back to that case but in later cases up to the present day it U.S.C Waring v. Clarke, 46 U.S. (5 How.) 441, , 12 L.Ed. 226 (1847); see The Blackheath, 195 U.S. 361, 365, 49 L.Ed. 236, 2005 AMC (1904) (Holmes: as broad a jurisdiction as it has in England or France ). 17 See, e.g., Ramsay v. Allegre, 25 U.S. (12 Wheat.) 611, 614, 6 L.Ed. 746 (1827) (concurring opinion of Justice Johnson concurring in the result but complaining for 27 pages of the assumption of admiralty jurisdiction of the supplier s claim denied by the court on other grounds: the silent and stealing progress of the admiralty in acquiring jurisdiction to which it has no pretensions ). 18 See, e.g., Jackson v. The Steamboat Magnolia, 61 U.S. (20 How.) 296, 15 L.Ed. 909 (1857) (Justice Daniel dissenting from jurisdiction of a collision beyond tidal waters, at 311: constant attempts at encroachment upon the principles and genius of the common law, and of our republican and peculiar institutions ; by separate opinion, at 322, Justice Campbell dissented on similar grounds ). 19 See, e.g., 1 James Kent, COMMENTARIES ON AMERICAN LAW 352 (1826 and later editions) (doubting constitutional admiralty and maritime jurisdiction meant anything beyond English practice when constitution adopted); 2 Theophilus Parsons, TREATISE ON MARITIME LAW 512 (1859) (doubt about marine insurance as contract made on land); l Alfred Conkling, JURISDICTION, LAW AND PRACTICE OF THE COURTS OF THE UNITED STATES IN ADMIRALTY AND MARITIME CASES 8, (1848) (contract jurisdiction doubtful where part performance on non-tidal waters) 20 See The Genesee Chief, v. Fitzhugh, 53 U.S. (12 How.) 443, 13 L.Ed. 1058, 1999 AMC 2092 (1851) (jurisdiction not limited to tidewaters). 21 Compare Detroit Trust Co. v. The Thomas Barlum, 293 U.S. 21, 55 S.Ct. 31, 79 L.Ed. 176, 1934 AMC 1417 (1934) (jurisdiction directed by Preferred Ship Mortgage Act, 46 U.S.C ) with Bogart v, Steamboat John Jay, 58 U.S. (17 How.) 399, 15 L.Ed. 95 (1854) (no jurisdiction of ship mortgage); compare The Plymouth, 70 U.S. (3 Wall.) 20, 18 L.Ed. 125, 1999 AMC 2403 (1865) with the Extension of Admiralty Jurisdiction Act, 46 U.S.C. app See, e.g., In re: Balfour MacLaine, 85 F.3d 68, 1996 AMC 2266 (2 nd Cir. 1992); Flota Maritima Browning De Cuba v. Ciudad De La Habana, 335 F.2d 619, 1966 AMC 1999 (4 th Cir. 1964), cert. denied 385 U.S. 837, 87 S.Ct. 82, 17 L.Ed. 71 (1966) and cases cited. 23 Supra note 6. 3

5 appears as a truism. The claim in Grant was for freight on a cargo of lumber by the several owners of the vessel against the several owners of a lumber company with the master of the vessel a member of each company and also the consignee of the cargo, so that there were counterclaims and the need for an accounting. A freight claim by itself would have presented no difficulty but the necessary accounting between the interlocking partnerships was viewed as a matter for chancery and the case was held properly dismissed. The opinion is short. The court said: That it [this case] would not be within the admiralty jurisdiction in England is clear. In general, contracts upon land, though to be executed on the sea, and contracts at sea, if to be executed on the land, are not cognizable by the English admiralty. There are some exceptions to this rule in that country but none, it is believed, which affect the question now before us. The court then cited three opinions on the lack of admiralty jurisdiction of certain issues and announced: The jurisdiction of courts of admiralty is limited, in matters of contract, to those, and to those only, which are maritime. 24 The court went on to say that, [a]n agreement by the master of a vessel to pay wages, may be sued upon in the admiralty; but a stipulation in the same contract to pay a sum of money in case the voyage should be altered or discontinued, can be enforced only at common law 25. It appears therefore that the court was not simply reiterating that the case must be maritime but rather that the matters of contract involved must be maritime, and possibly implying separability for jurisdictional purposes in cases more appropriate than the one before it. In any event, it focused sharply on the distinction between an obligation to be performed at sea and one probably to be performed if at all on land, both, however, undoubtedly relative to a maritime venture. A doctrine of separability was shortly recognized by Chief Justice Taney, sitting on circuit, who said that when a maritime contract is connected inseparably with another contract over which the court has no jurisdiction, and they are so blended together that the court cannot decide one, with justice to both parties, without disposing of the other, the party must resort to a court of law, or a court of equity, as the case may require, and the admiralty court cannot take jurisdiction of the controversy. 26 The relevance of locality was positively renounced by the Supreme Court in the same case that established admiralty jurisdiction of marine policies, 27 and the criterion was stated as the nature and subject matter, but the rule of purety remained standard, with the added qualification of possible separability Id., at Id. 26 Turner v. Beacham, 24 F. Cas. 346, 348 (No. 14,252) (1858). 27 New England Mutual Marine Ins. Co. v. Dunham, 78 U.S. (11 Wall.) 1, 26, 20 L.Ed. 90, 1997 AMC 2394, 2401 (1871). 28 See, e.g., The Ada, 250 F. 194 (2 nd Cir. 1918); Flota Maritima Browning De Cuba, S.A. v. The Ciudad De La Habana, supra note 22; Jack Neilson, Inc. v. Tug Peggy, 428 F.2d 54, 1970 AMC 1490 (5 th Cir. 1970); Rex Oil, Ltd. v. M/V Jacanth, 873 F.2d 82, 1990 AMC 373 (5 th Cir. 1989). 4

6 Two other developments have contributed to admiralty s increased hospitality to contracts. Following the merger of equity and law and then the consolidation of the civil and admiralty sides of the courts under the Federal Rules of Civil Procedure in 1966, the power of the admiralty to grant equitable remedies has been increasingly recognized. 29 This has obviated the refusal of jurisdiction on the ground that relief must be sought in an action in equity, for which the same court may not have had diversity jurisdiction to entertain the suit in equity. The other is the codification and increased exercise of supplemental jurisdiction, by which a federal court with jurisdiction of a claim may entertain closely related claims otherwise outside its jurisdiction. 30 This power is exercised in admiralty but only in the court s discretion, 31 and presumably subject to jury trial of supplemental claims. These developments, valuable in themselves, may have subtly influenced impressions of the breadth of admiralty jurisdiction but fall very short of a right to bring closely related claims together for efficient resolution. The Kirby Test for Mixed Contracts Kirby was not an admiralty case, but the question, answered affirmatively, was whether it could have been one and was therefore governed by maritime law. The bills of lading were for through carriage from Australia including rail carriage from the U.S. west coast to the east coast and it was the long railroad trip that posed the question. The court started with the proposition, quoted from the Kossick case, 32 that the boundaries of admiralty jurisdiction over contracts as opposed to torts or crimes [are] conceptual rather than spatial It then held that the bills are maritime contracts because their primary objective is to accomplish the transportation of goods by sea from Australia to the eastern coast of the United States and that under a conceptual rather than spatial approach [the journey by rail] does not alter the essentially maritime nature of the contracts. 33 In support of this conclusion, the court reiterated the (doubtful) proposition that the fundamental interest giving rise to maritime jurisdiction is the protection of maritime commerce, quoting its cumulative reiterations in recent cases [citations omitted]. It then focused inquiry on whether the principal objective of a contract is maritime commerce, explained how [m]aritime commerce has evolved along with the nature of transportation and is often inseparable from some land-based obligations, rejected the holdings of lower courts that long inland transport vitiated the maritime nature of through bills, and discussed the undesirability of leaving such contracts subject to the inconsistencies of state laws See Pino v. Protection Maritime Ins. Co., 599 F.2d 10, 1979 AMC 2459 (1 st Cir.), cert. denied 444 U.S. 900 (1979) and authorities cited; Farrell Lines Inc. v. Ceres Terminals Inc., 162 F.3d 115, 1999 AMC 305 (2 nd Cir. 1998) and authorities cited U.S.C See, e.g., Metropolitan Wholesale Supply, Inc. v. M/V Rainbow, 12 F3d 58, 1994 AMC 1435 (5 th Cir. 1994) (jurisdiction accepted); Murphy v. Florida Keys Electric Cooperative Ass n, Inc., 329 F.3d 1311, 2003 AMC 1217 (11 th Cir. 2003) (jurisdiction declined). 32 Kossick v. United Fruit Co., 365 U.S. 731, 735, 1961 AMC 833, 837 (1961) U.S. at, 160 L.Ed.2d at 295, 2004 AMC at , U.S. at, 160 L.Ed.2d at , 2004 AMC at

7 The court stated, without direct reference to bills of lading, that the answer depends upon... the nature and character of the contract, and the true criterion is whether it has reference to maritime service or maritime transactions, 35 quoting from a 1919 case deciding only that a contract to repair a vessel hauled out on a marine railway was maritime, and not involving the corollary of purity that was stated in and continued to prevail in lower court cases long afterward. 37 With reference to the principle that the test is not spatial but conceptual, Justice O Connor, declared that the concept was the purpose... to effectuate maritime commerce, 38 and by this test validated jurisdiction of the through bills. These words, or perhaps alternatively or cumulatively, whether the principal objective is maritime commerce, look like the last words on the general test. To that test, the court recognized exceptions. The old exception for matters maritime but local would be continued. 39 Much more importantly, the court inverted the old rule admitting jurisdiction when the common law elements were merely incidental, under which any but very minor involvement of common law elements would bar jurisdiction unless they were separable. The new formula classifies the contract as maritime unless the maritime components are insubstantial. 40 Since maritime components are likely to be identified by the court with its maritime hat on and from a maritime point of view, control of the issue is shifted away from common law considerations, as a practical matter. Is the doctrine of purity dead? Probably. Does this mean that the involvement of common law claims will no longer defeat admiralty jurisdiction? No The test is much more accommodating. It remains subjective, however, as it no doubt must, without a bright line to define the critical quantities of maritime and other components. The only requirement of quantity is that the maritime components be substantial. Its Application to Marine Insurance The only practical application the court discussed in Kirby was that presented by through bills of lading. Professor Sturley thought it hard to see why the result [in Kirby] would be any different in a marine insurance case, but entertained the thought of some qualification, 41 although some words in the coda of the movement on jurisdiction appear deliberately more general than the application to bills of lading. 42 The Second Circuit has eight months later led off very positively on that question in Folksamerica, dealing with a U.S. at, 160 L.Ed.2d at 294, 2004 AMC at 2711, (quoting North Pacific S.S. Co. v. Hall Brothers Marine Railway & Shipbuilding Co., 249 U.S. 119, 125 (1919)). 36 The Eclipse, 135 U.S. 599, 608 (1890). 37 See note 22 supra U.S. at, 160 L.Ed.2d at 296, 2004 AMC at U.S. at, 160 L.Ed.2d at 294, 2004 AMC at U.S. at, 160 L.Ed.2d at 296, 2004 AMC at Michael F. Sturley, Rewriting Maritime Law: The Supreme Court s November Surprise, 2 BENEDICT S MAR. BULL. 295, 301 (Fourth Quarter 2004) U.S. at, 160 L.Ed.2d at 298, 2004 AMC at 2714 (quoting American Dredging Co. v. Miller, 510 U.S. 443, 451, 1994 AMC 913, 919 (1994)). 6

8 modified Comprehensive General Liability policy issued to a marine tank cleaning business, covering a number of clearly maritime risks, and combined with a Ship Repairers Legal Liability policy. The policies also covered non-marine risks. More particulars can be found in James E. Mercante s discussion in an earlier issue of this Bulletin. 43 The court had in earlier cases employed a threshold inquiry into the subject matter of the dispute, as distinct from the subject matter of the contract. It saw that there was a question whether that practice could survive Kirby but left that for another day, as the dispute clearly passed over the threshold. Recognizing the Kirby test of focusing on whether the principal objective of a contract is maritime commerce, the court adapted this formula to insurance by framing it as whether the primary or principal objective of the contract is the establishment of policies of marine insurance, 44 and examined the policies from that standpoint. Rejecting any relevance of the form (CGL) commonly used in non-marine policies, and looking at its substance, the court found several risks covered that arise in marine operations and observed also that the policy and its endorsements in that respect appeared to cover gaps of marine risk in and around the conventional marine coverage of the assured s hull and P&I policies. The ship repairers liability section of the policy was a shoo-in. Considering also that the policy was issued to meet the needs of a marine operator, the court held that the primary objective of the policy was to establish marine insurance and the district court therefore had admiralty jurisdiction of the insurer s declaratory action. Thus has one of the country s leading commercial courts dealt with the generality of the Kirby test. Kirby is a unanimous opinion reaching a judicially practical conclusion and it is fair to assume that the Supreme Court will not take up the subject again unless there is a serious conflict about it below, which one would reasonably hope to be averted. Conflicts between Folksamerica and earlier cases should be irrelevant unless another circuit chooses to follow its earlier contrary precedent. Conclusion The Kirby and Folksamerica cases open the prospect of a much more predictable admiralty jurisdiction of marine insurance (and other) contracts with more efficient use of judicial resources 45 and greater assurance of uniformity. Putting aside maritime but local instances, which are unlikely in connection with marine insurance, the following observations may be made about access to admiralty and to maritime law in cases of mixed policies: 43 James E Mercante, Shore-Side CGL Policy Held to be Maritime Contract, 3 BENEDICT S MAR. BULL. 258 (Third Quarter 2005) F.3d at 316, 2005 AMC at 1755 (citation omitted). 45 Cf. Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 593, 1991 AMC 1697, (1991) ( sparing litigants the time and expense of pretrial motions to determine the correct forum and conserving judicial resources ). 7

9 The old dispensation is abandoned, except possibly for the device of separability discussed below. The burden of proof has, as a practical matter shifted from the proponent to the opponent. The subjectivity in the question is concentrated now in the substantiality of maritime components. Not its name or form, but the risks assumed, are relevant to the classification of a marine policy. The maritime components of the policy must be substantial, but only substantial. N.B. This is a measure of quality rather than quantity (as sometimes used colloquially). 46 Equitable remedies such as injunction or specific performance are available in the admiralty action on the rare occasions of need. Jurisdiction of composite policies, now common, may be facilitated, although the maritime aspects of large industrial policies should not be expected to wag the whole dog. Separate premiums will facilitate jurisdiction of marine parts or parts with substantial marine components. It is not to be assumed that the doctrine of utmost good faith would be applied to the whole policy. The device of separability of common law components has not been explicitly discarded and may have some use in dealing with composite policies, where utmost good faith or breach of warranty is an issue or where performances are not contemporaneously due and need not be considered in the same action. Supplemental jurisdiction will probably not be of further use, since substantial maritime components will ordinarily carry the whole contract and, if inadequate, will leave nothing to supplement. 46 See, e.g., OXFORD ENGLISH DICTIONARY. 8