United States Court of Appeals Fifth Circuit F I L E D REVISED OCTOBER 8, 2003 September 17, 2003
UNITED STATES COURT OF APPEALS Charles R. Fulbruge III FOR THE FIFTH CIRCUIT Clerk _______________________
No. 02-30842 _______________________
OTTO CANDIES, L.L.C.,
Plaintiff-Appellee,
versus
NIPPON KAIJI KYOKAI CORPORATION,
Defendant-Appellant.
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Appeal from the United States District Court for the Eastern District of Louisiana
_________________________________________________________________
Before JONES and BENAVIDES, Circuit Judges, and KAZEN, District Judge.*
EDITH H. JONES, Circuit Judge:
Appellant Nippon Kaiji Kyokai Corporation (“NKK”) appeals
from the judgment in a negligent misrepresentation case based on
statements NKK made in a classification survey of the M/V SPEEDER
that was a prerequisite to the vessel’s sale. We hold that general
maritime law cautiously recognizes the tort of negligent
misrepresentation as applied to classification societies and that
* Chief District Judge of the Southern District of Texas, sitting by designation. on the specific facts presented in this case, NKK owed a legal duty
to Otto Candies. Finding no error in the district court’s
judgment, we affirm.
BACKGROUND
The SPEEDER is a high speed, aluminum hulled passenger
vessel built by Austal Pty Ltd. Diamond Ferry Co., Ltd.
(“Diamond”) took delivery of the SPEEDER in April 1995. The
SPEEDER was registered in Japan and was classified by NKK as a
“coastal (Japanese Government) passenger vessel.” Diamond operated
the SPEEDER as a coastal passenger ferry from 1995 to 1998 in
Japan. In 1998, Diamond took the SPEEDER out of service, and her
NKK classification lapsed. On December 22, 1999, Otto Candies
entered into a Memorandum of Agreement (“MOA”) with Diamond to
purchase the SPEEDER. As a condition of sale, a clause in the MOA
required that NKK restore and make current the SPEEDER’s coastal
classification free from any outstanding recommendations.
On January 5, 2000, NKK issued a Class Maintenance
Certificate to Diamond that indicated the SPEEDER was certified
within class as a coastal passenger ferry with no outstanding
deficiencies. This condition of the MOA being satisfied, Otto
Candies paid for the SPEEDER and it was transported from Japan to
Port Everglades, Florida aboard a heavy lift ship. From Port
Everglades, the SPEEDER was towed to the Bender Shipyard in Mobile,
Alabama. Once the SPEEDER arrived in Mobile, Otto Candies arranged
for a survey by the American Bureau of Shipping (“ABS”) so that the 2 vessel’s classification could be transferred from NKK to ABS.
The ABS surveyor, Demetri Stroubakis, discovered a number
of significant deficiencies that required repair before ABS would
classify the SPEEDER. In particular, Stroubakis noted damaged and
wasted overhead spool piping sections that connect the cooling
system machinery to the hull; a hull fracture in the port-aft main-
engine exhaust connection to the hull; fractured hull brackets,
wasted cooling piping, leaks in the port and starboard stabilizer
fins; excessive movement in the starboard stabilizer shaft; leaks
in the port-forward main-engine sea strainer that filters the water
used to cool the engines; disconnected and missing bilge pumps; gas
and water leaks in the exhaust system; a faulty circuit breaker for
the starboard generator; severe damage to the port-aft main
propulsion gear; exterior and interior leaks in the main reduction
gear oil coolers; damage to the starboard-forward main engine;
damage and deterioration in the ventilation system for the port-aft
engine; corroded hose and pipe connections for the main and
auxiliary engine fuel and lube oil systems that created a severe
fire hazard; leaking water-jet pump shaft seals; a heavily corroded
port and starboard water-jet pump-bladder accumulator-block valve;
and that the engine oil was sooty, black, and contained particulate
matter which suggested problems with the machinery. In response to
Stroubakis’s report, Otto Candies had the SPEEDER repaired at the
Bender shipyard at a cost of $328,096.43. When repairs were
completed, ABS issued an interim class certificate.
3 Otto Candies filed the instant suit against NKK to
recover the costs of repairs needed for the SPEEDER to obtain a
class certificate from ABS. Otto Candies’s sole claim against NKK
was based on the tort of negligent misrepresentation as stated in
the ALI Restatement (Second) of Torts § 552. The district court
held a two day bench trial, after which it found that NKK owed a
duty to Otto Candies and that NKK was liable for negligent
misrepresentation. The court awarded Otto Candies damages for the
repair costs. NKK timely appealed.
STANDARD OF REVIEW
In admiralty cases we review the district court’s legal
conclusions de novo. Lake Charles Stevedores, Inc. v. Professor
Vladimir Popov MV, 199 F.3d 220, 223 (5th Cir. 1999). We review
the district court’s factual findings for clear error. Houston
Exploration Co. v. Halliburton Energy Servs., Inc., 269 F.3d 528,
531 (5th Cir. 2001) (citing Fed. R. Civ. P. 52(a)). Findings of
negligence are factual findings. Jackson v. OMI Corp., 245 F.3d
525, 528 (5th Cir. 2001). “Under a clear error standard, this
court will reverse ‘only if, on the entire evidence, we are left
with the definite and firm conviction that a mistake has been
made.’” Walker v. Cadle Co. (In re Walker), 51 F.3d 562, 565
(5th Cir. 1995) (quoting Allison v. Roberts (In re Allison),
960 F.2d 481, 483 (5th Cir.1992)).
4 DISCUSSION
NKK is one of the world’s largest maritime classification
societies. Classification societies are “organized societies which
undertake to arrange inspections and advise on the hull and
machinery of a vessel from its initial stages in new building and
thereafter. The societies produce a certificate concerning the
vessel's seaworthiness in accordance to the trade within which it
is intended to, or does, work.” Damien L. O’Brien, The Potential
Liability of Classification Societies to Marine Insurers Under
United States Law, 7 U.S.F. Mar. L.J. 403, 403 (1995) (quoting Eric
Sullivan, The Marine Encyclopedia Dictionary 78 (1980)). These
certificates are widely relied upon by all sectors of the maritime
industry as an indication that a vessel is reasonably fit for its
intended use. Machale A. Miller, Liability of Classification
Societies from the Perspective of United States Law, 22 Tul. Mar.
L.J. 75, 77 (1997); Hannu Honka, The Classification System and its
Problems with Special Reference to the Liability of Classification
Societies, 19 Tul. Mar. L.J. 1, 3 (1994) (noting that “certificates
are important not only to insurers, but also to charterers, cargo
owners, buyers, and bankers, among others, who are required to know
the ship’s condition at a specific time”).
Citing a previous decision of this court, the parties
assumed that NKK can be held liable under general federal maritime
law for the tort of negligent misrepresentation. Coastal (Bermuda)
5 Ltd. v. E. W. Saylott & Co., 826 F.2d 424 (5th Cir. 1987).1 It is
true that Coastal (Bermuda) applied the principles of Section 552
of the Restatement (Second) of Torts to a cargo purchaser’s damage
claim against a petroleum products surveyor, and reversed a
judgment for the purchaser, but that ruling does not automatically
translate to the relations between maritime classification
societies like NKK and their clients or third parties. Indeed,
this court earlier reversed and remanded a case to ascertain what
duties a classification society may owe its shipowner clients, in
contract or tort, for negligent inspection of a damaged ship. Gulf
Tampa Drydock Co. v. Germanischer Lloyd, 634 F.2d 874 (5th Cir.
1981).
A handful of cases in other jurisdictions has explored
the duty of classification societies, yielding one definitive court
of appeals holding that a classification society cannot be liable
in contract or tort to a shipowner for a negligent survey regarding
vessel seaworthiness. Sundance Cruises Corp. v. The American
Bureau of Shipping, 7 F.3d 1077 (2d Cir. 1993). The court noted
that “a shipowner is not entitled to rely on a classification
1 The parties assumed, and so do we arguendo, that general federal maritime law, not state law, applies to this case. This is because we normally do not address choice of law issues sua sponte. Am. Int’l Trading Corp. v. Petroleos Mexicanos, 835 F.2d 536, 540 (1987) (“It is well established that ‘parties generally are bound by the theory of law they argue in the district court, absent some “manifest injustice.”’”) (quoting Shelak v. White Motor Co., 581 F.2d 1155, 1160 (5th Cir. 1978)). Since the district court’s jurisdiction in this case is based upon the diversity of citizenship of the parties pursuant to 28 U.S.C. 1332 (2000), whether this tort arises under general maritime law or state law does not affect jurisdiction.
6 certificate as a guarantee . . . that the vessel is soundly
constructed.” 7 F.3d at 1084. The shipowner, not the classifi-
cation society, must remain ultimately responsible for the ship’s
condition.
With respect to an injured third party “who relied on the
classification or safety certificates,” however, the Second Circuit
suggested a different result might obtain.2 In cases before and
after Sundance, parties have sought to recover from classification
societies after they suffered loss or damage allegedly attributable
to defective classification certificates. One case from the
Southern District of New York assumed arguendo, following the
Sundance dicta, that a maritime claim for negligent representation
exists against a classification society on behalf of cargo owners.
Cargill, Inc. v. Bureau Veritas, 902 F. Supp. 49 (S.D.N.Y. 1995).
In Cargill, the cargo owner lost, because there was no evidence
that it actually relied on the classification certificates. In
another case, a classification society was held liable for
negligent misrepresentation to a ship charterer for whose benefit
it furnished an incorrect Suez Canal special tonnage certificate.
2 A year later, the Second Circuit held an independent hold inspector liable, as a matter of contract, not tort law, to its client Cargill for defectively certifying the condition of a ship’s hold for the carriage of Cargill’s fertilizer. The court distinguished the purpose of the hold survey from that of a classification certificate to a shipowner, the latter being intended “merely to . . . take advantage of the insurance rates available to a classed vessel.” International Ore and Fertilizer Corp. v. SGS Control Services, Inc., 38 F.3d 1279, 1285 (2d Cir. 1994), quoting Sundance, supra, 7 F.3d at 1084. In Coastal (Bermuda), by contrast, the plaintiff was a third party to the fuel oil inspection report prepared by Saybolt for the cargo’s seller, rendering tort principles applicable.
7 The certificate was used, inter alia, to calculate fees for passage
through the Suez Canal. Somarelf v. The American Bureau of
Shipping, 720 F. Supp. 441 (D.N.J. 1989). The theory behind this
case predates, but is consistent with the court’s dicta in
Sundance.
The district court’s adjudication of liability against
NKK therefore moves this court into novel but not entirely
unchartered territory. Although the verdict was appropriate in
this case, we emphasize that a claim for negligent misrepresen-
tation in connection with the work of maritime classification
societies should be strictly and carefully limited. The societies’
surveys and certificate system are essential to maintaining the
safety of maritime commerce, yet their activities should not
derogate from shipowners’ and charterers’ nondelegable duty to
maintain seaworthy vessels. Imposition of undue liability on
classification societies could be harmful in several ways. The
societies could be deterred by the prospect of liability from
performing work on old or damaged vessels that most need their
advice. The spreading of liability could diminish owners’ sense of
responsibility for vessel safety even as it complicates liability
determinations. Ultimately, broader imposition of liability upon
classification societies would increase their risk management costs
and rebound in higher fees charged to the societies’ clients
throughout the maritime industry. Whether such risk-spreading is
8 cost-efficient in an industry with well-developed legal duties and
insurance requirements is doubtful. The distinctions articulated
in caselaw to date recognize the care with which claims against
classification societies must be studied.
After noting this essential caveat, we proceed to the
merits of the case. To prevail on a cause of action for negligent
misrepresentation under section 552 of the Restatement (Second) of
Torts, Otto Candies had to establish that (1) NKK, in the course of
its profession, supplied false information for Otto Candies’s
guidance in a business transaction; (2) NKK failed to exercise
reasonable care in gathering the information; (3) Otto Candies
justifiably relied on the false information in a transaction that
NKK intended to influence; and (4) Otto Candies thereby suffered
pecuniary loss. Coastal (Bermuda) Ltd., supra at 428-29 (citing
Grass v. Credito Mexicano, S.A., 797 F.2d 220 (5th Cir. 1986)).
Additionally, a plaintiff claiming negligent
misrepresentation must be a “person, or a member of a ‘limited
group’ of persons, for whose benefit and guidance the defendant
either intends to supply the information or knows that the
recipient intends to supply it." Great Plains Trust Co. v. Morgan
Stanley Dean Witter & Co., 313 F.3d 305, 318 (quoting Scottish
Heritable Trust, PLC v. Peat Marwick Main & Co., 81 F.3d 606, 612
(5th Cir. 1996)). Thus, Otto Candies must establish that NKK
provided the class certificate to Diamond and knew that Diamond
9 intended it for Otto Candies’s guidance and benefit.3
This is because “[t]he Restatement expressly limits
liability to a select group of nonclients who the misinformer
actually knows will receive inaccurate information . . . .” First
Nat’l Bank of Commerce v. Monco Agency Inc., 911 F.2d 1053, 1061
(5th Cir. 1990) (emphasis added). The fact that it was merely
possible or foreseeable that a nonclient of the information
supplier would rely on the information is insufficient. Scottish
Heritable Trust, PLC, 81 F.3d at 612; First Nat’l Bank of Commerce,
911 F.2d at 1059-60. Furthermore, the information supplier’s
liability under section 552 is limited to those persons whom the
engagement is intended to benefit. First Nat’l Bank of Commerce,
911 F.2d at 1059; Bily v. Arthur Young & Co., 834 P.2d 745, 769
(Cal. 1992).
Diamond engaged NKK to certify the SPEEDER pursuant to
the terms of the MOA, and the court found that NKK was aware
(1) that its certification of the SPEEDER was directly related to
the pending sale of the SPEEDER to Otto Candies and (2) that the
certification would be used to guide Otto Candies’s decision to buy
the SPEEDER. NKK challenges these findings as clearly erroneous.
They are not.
The district court admitted into evidence written
correspondence from James Aitkenhead, a ship broker, to Otto
3 Neither party contends that NKK directly provided the certificate to Otto Candies.
10 Candies directly supporting the court’s findings. Aitkenhead’s
communications reveal that NKK was aware of the pending sale of the
ship; that NKK’s reclassification of the SPEEDER free of
recommendations was a condition of the agreement under which the
SPEEDER was to be sold; and that Otto Candies’s purchase of the
SPEEDER would be based on NKK’s classification of the ship free of
recommendations.
NKK argues that the correspondence is inadmissible
hearsay and that the correspondence was withdrawn after being
offered and was not admitted into evidence. NKK’s argument is
baseless. According to NKK, the Index to Otto Candies’s trial
exhibits indicates the correspondence was not admitted. On the
contrary, the copy of the index found in the record notes that the
district court admitted the exhibits at issue into evidence during
the first day of the bench trial.
Additionally, despite NKK’s representations to this
court, there is no indication in the record that NKK objected at
trial to the documents at issue. For the first time in its reply
brief, however, NKK objects, but it furnishes no legal analysis
supporting its argument that the correspondence is hearsay. Thus,
any argument NKK may have had is waived. Cavallini v. State Farm
Mut. Auto Ins. Co., 44 F.3d 256, 260 (5th Cir. 1995) (issues first
raised in a reply brief will not be considered).
11 NKK also argues that it could not have known that its
certification report would be supplied to Otto Candies because it
had no direct communication with Candies. Direct communication is
unnecessary. Section 552 requires instead that the information
supplier actually know the parties to whom and for whose explicit
guidance the information is to be supplied.
The mere foreseeability that third parties may rely on
such reports or certificates is also insufficient for purposes of
section 552. See First Nat’l Bank of Commerce, 911 F.2d at 1061
(the Restatement explicitly limits an information supplier’s
liability to third parties the supplier “actually knows” will
receive the information and will be influenced in their decisions
regarding a business transaction). Comments to section 552 make
clear that even parties that customarily rely on certain
information are not entitled to bring a section 552 claim unless
the information supplier knew at the time it supplied the
information that it was for their benefit and guidance.4 As the
4 See, e.g., the following illustrations:
10. A, an independent public accountant, is retained by B Company to conduct an annual audit of the customary scope for the corporation and to furnish his opinion on the corporation's financial statements. A is not informed of any intended use of the financial statements; but A knows that the financial statements, accompanied by an auditor's opinion, are customarily used in a wide variety of financial transactions by the corporation and that they may be relied upon by lenders, investors, shareholders, creditors, purchasers and the like, in numerous possible kinds of transactions. In fact B Company uses the financial statements and accompanying auditor's opinion to obtain a loan from X Bank. Because of A's negligence, he issues an unqualifiedly favorable opinion upon a balance sheet that materially misstates the financial position of B Company, and through reliance upon it X Bank suffers pecuniary loss.
12 California Supreme Court notes:
[b]y confining what might otherwise be unlimited liability to those persons whom the engagement is designed to benefit, the Restatement rule requires that the supplier of information receive notice of potential third party claims, thereby allowing it to ascertain the potential scope of its liability and make rational decisions regarding the undertaking.
Bily, 834 P.2d at 769. Thus, in this context, we reject any
implication that classification societies can be liable for
negligent misrepresentation to parties, including without
limitation seamen, longshoremen, passengers, cargo owners, and
charterers that may rely upon a survey or class certificate, absent
actual knowledge by the classification society that the certificate
or survey report was being provided for the guidance and benefit of
the party.
We conclude that Otto Candies is eligible to bring a
negligent misrepresentation claim against NKK under the facts of
this case because NKK actually knew at the time it reclassified the
SPEEDER that the results of the classification survey were to be
conveyed to Otto Candies for the purpose of influencing its
A is not liable to X Bank.
12. In 1934, A Company, a firm of surveyors, contracts with B to make a survey and description of B's land. A Company is not informed of any intended use of the survey report but knows that survey reports are customarily used in a wide variety of real estate transactions and that it may be relied upon by purchasers, mortgagees, investors and others. The survey is negligently made and misstates the boundaries and extent of the land. In 1958 C, relying upon the report that B exhibits to him, purchases the land from B, and in consequence suffers pecuniary loss. A Company is not liable to C.
Restatement (Second) of Torts § 552 cmt. h, illus. 10, 12 (1977).
13 decision to purchase the SPEEDER. The remaining issues are whether
the district court clearly erred in finding that NKK supplied false
information to Otto Candies, that NKK failed to exercise reasonable
care in gathering the information, that Otto Candies reasonably
relied on the information, and that as a result of relying on the
false information Otto Candies suffered pecuniary loss.
The district court found that NKK provided false
information by issuing a class certificate free of recommendations
in light of the various defects in the hull and machinery of the
SPEEDER. NKK argues that the district court clearly erred in
making this finding. We disagree.
Before a classification society issues a class
certificate free of recommendations, it must be satisfied that the
certified vessel complies with the society’s rules and standards
for ships of the relevant class. See Machale A. Miller, Liability
of Classification Societies from the Perspective of United States
Law, 22 Tul. Mar. L.J. 75, 77-81 (1997) (describing the class
certification process). By issuing a class certificate free of
recommendations, a classification society necessarily represents
that the vessel so complies. Cf. Great Am. Ins. Co. v. Bureau
Veritas, 338 F. Supp. 999, 1011-12 (S.D.N.Y. 1972) (when a society
undertakes to classify a vessel it accepts a duty to survey and
classify the vessel in accordance with society’s own rules and
standards), aff’d, 478 F.2d 235 (2d Cir. 1973). The certificate or
survey in no way guarantees a vessel’s seaworthiness, however, but
14 extends only as far as the nature of the survey performed.
In this case, expert witnesses presented by both parties
testified that the various items of damage and deterioration found
by Stroubakis were relevant to and would affect the SPEEDER’s NKK
classification. Ian Smith, NKK’s expert witness, testified that
the deficiencies of the type noted by Stroubakis should be noted by
a surveyor performing a class survey. Furthermore, Ben Haveman,
Otto Candies’s expert witness, testified that the various
deficiencies should have been addressed during NKK’s certification
process. Based on their testimony, the fact finder could
reasonably infer that NKK’s certification of the SPEEDER free of
recommendations constituted false information because the SPEEDER
did not comply with the society’s rules and standards for
classification at the time of the survey. Thus, the district court
did not clearly err in finding that NKK provided false
information.5
Haveman’s testimony also sufficiently supports the
district court’s finding that NKK failed to exercise reasonable
care in gathering the information relevant to the SPEEDER’s
certification. Haveman testified that the NKK surveyor should have
found the various deficiencies in the SPEEDER’s hull and machinery
5 NKK is not being held liable, as it contends, for the vessel’s failure to satisfy ABS standards after being shipped to the U.S.
15 – many of them open and obvious – that Stroubakis discovered during
his inspection.
NKK also challenges the district court’s finding that
Otto Candies actually and justifiably relied on the false
information. We hold that the district court did not err in making
this finding. Otto Candies, Jr., the chief executive officer of
Otto Candies, L.L.C., testified that but for NKK’s certification of
the SPEEDER as a coastal passenger vessel free of recommendations,
the company would not have purchased the SPEEDER. Furthermore, the
district court did not err in finding Otto Candies’s reliance on
the certificate to be reasonable. NKK is one of the world’s
largest classification societies. In addition, NKK is a member of
the International Association of Classification Societies (“IACS”)
which prescribes certain minimum standards for classification
societies. Only eleven of the world’s fifty classification
societies qualify for membership in IACS. Machale A. Miller,
supra, 22 Tul. Mar. L.J. 75, 77 n.6 (1997).
Finally, NKK argues that the district court erred in
finding that Otto Candies suffered pecuniary loss as a result of
the false information. The district court awarded Otto Candies as
damages the cost to repair the deficiencies noted by Stroubakis.
Whether this is a proper measure of damages is uncertain, but
because NKK did not brief its reasons for contesting the damage
award, the contention is waived.
16 CONCLUSION
Based on the foregoing discussion, we agree with the
district court that Otto Candies could properly bring a negligent
misrepresentation claim against NKK and that the district court did
not clearly err in finding that NKK was liable for negligent
misrepresentation. The judgment is AFFIRMED.