The Devil is in the Details

14 September 2011 Publication

Disputes between owners and ship repairers are not new. However, a new take on this old rivalry is shown in a recent case from the United States Court of Appeals for the Fifth Circuit, One Beacon Insurance Company v. Crowley Marine Services, Inc. v. Tubal-Cain Marine Services, Inc. No. 10-20417, 5th Circuit, Aug. 19, 2011. The underlying facts of the case are relatively simple, and to anyone who has put a vessel into a shipyard for repairs, depressingly familiar. The owner of a barge contracted with a Texas shipyard for repair work. A workman was injured during the repair work and sued all parties. The vessel owner sought indemnification from the shipyard owner and claimed coverage under the shipyard's insurance policy.

The issues before the Court were whether there was any contractual obligation on the part of the shipyard to indemnify the owner for costs and expenses arising out of the injury, whether the shipyard had a contractual obligation to add the vessel owner as an additional insured under its insurance policy and finally whether the vessel owner had, in fact, been named as an additional insured.

The District Court had ruled that the shipyard did have a contractual obligation to indemnify the vessel owner and also had a contractual obligation to insure the owner. However, the District Court found that the shipyard had not, in fact, taken all the steps necessary to add the vessel owner as an additional insured under its policy.

In deciding whether to affirm or reverse the District Court's decisions, the Appeals Court considered the state of the contractual relationship between the shipyard and the vessel owner as well as the steps necessary for the shipyard to place the vessel owner under its existing insurance.

To those in the ship repair and vessel owning business, it will not come as surprise to learn that there was no written contract between the shipyard and the vessel owner. Rather, the vessel was delivered to the shipyard, there were discussions between the shipyard's production superintendent and the owner's port engineer and sometime thereafter a work order was issued by the vessel owner and delivered to the shipyard. The work order was signed by neither the shipyard nor the vessel owner and it did not detail the terms and conditions under which the described repair work was to be done. Rather, the work order referred to the shipowner's standard terms and conditions for repair work and stated that they could be accessed on the vessel owner's website. Unfortunately, the instructions on how to access the terms and conditions in the work order were incorrect.

There is no statute of frauds in maritime law so the Court had no problem with the absence of a signed contract. The Court also noted that maritime law has a broad incorporation by reference rule so that the owner's terms and conditions on its website could become part of the repair contract between the parties. The Court also noted that it is well settled law that a contract to repair a vessel is a maritime contract. Interestingly, it is equally well settled that contracts for the construction of a vessel or the sale of a vessel are not maritime contracts. Go figure.

The Court noted that the reference in the work order to the method of accessing the terms and conditions was incorrect but decided that it was still possible for outsiders to access the terms and conditions by alternative means and that by these means such terms and conditions could be reviewed even if they were in four point type (for comparison, this alert is in 10 point type). Although the trial court had found that the shipyard had not actually accessed the website to determine the owner's terms and conditions, the Court held that it could have and was therefore bound by such terms and conditions. Further, the Court noted that the parties' relatively short course of dealing (eight prior minor repair jobs) in which the same reference to the website terms was used supported its holding that such terms constituted part of the contract.

The terms and conditions on the website required that the shipyard indemnify the shipowner against just the type of liability complained of in this case and also required the shipyard to name the vessel owner as an additional insured under its policies.

The Court then considered the procedures the shipyard's insurance company had established to add parties as named insureds and decided that the shipyard had not complied with these procedures. These procedures boiled down to informing the insurance company of the name and address of any parties to be made additional insureds.

Therefore, the Court decided that the shipyard did have a contractual indemnity obligation and that it also had a contractual obligation to add the vessel owner to its policy, which obligation it had breached. However, the insurance company was off the hook because of the shipyard's failure to comply with its procedures.

The moral of this story may be that in today's internet driven economy it is acceptable to incorporate standard terms and conditions into maritime contracts by reference to material available only on your corporate website. However, in order to avoid disputes as to how these materials can be accessed, it is probably best not to misstate in your purchase orders or work orders how the terms and conditions are to be accessed and it is probably not a good idea to put those terms and conditions in very small print.

On the other hand, although this case indicates that you can impose standard terms and conditions on counterparties to maritime contracts by reference to your website, if you want to make sure that those conditions dealing with insurance coverage have been complied with, you should get independent confirmation from the insurance company (or a broker) that the coverage has been properly placed.

Please contact Gardere Partner David Jungman ( or 713.276.5603) if you have questions or would like more information about this alert.

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