Bailey Shipping acquired the drybulk carrier Max on Aug. 16, 2007 from Wave Navigation, an entity which owned the vessel since 2000. (Wave was not a party to this lawsuit.)
The American Bureau of Shipping surveyed the ship before the sale in February-March 2006 at Piraeus, Greece, and again in February 2007 at Rotterdam. During 2006, ABS issued a certificate of classification for the vessel, as well as safety certificates pursuant to international conventions on Load Lines, Safety of Life at Sea (SOLAS), and Prevention of Pollution from Ships (MARPOL).
The survey reports and the certificate attested Max complied with the relevant specifications for the class to which ABS certified the vessel.
In March 2008, the vessel sailed to Turkey for a periodic classification survey and scheduled repairs.
Bailey said the survey revealed wear and tear to Max above and beyond any attributable to the ship sailing under Bailey’s ownership. It said the additional corrosion and wear was “in direct conflict” with the vessel’s certificates and the results of the surveys conducted by ABS before Bailey bought the ship.
Inspections at shipyards in Greece and Turkey found more extensive corrosion and repairs took more than a year to complete.
Bailey filed two actions against ABS and associated individuals in Greece.
It said it was impossible the wear and corrosion discovered in 2008 occurred during its ownership of the ship. It contended the condition of Max at the time of the sale was worse than attested in the surveys and certificates issued by ABS. It alleged ABS was liable:
- In accordance with Greek consumer protection law, which it said is one of strict liability in that the consumer only has the burden of proving its damage and the causative link with the services rendered by the service provider and does not have to prove the service provider acted with negligence or in breach of law or contract.
- For violating duties stated under the international shipping conventions, saying they impose a “general duty of care and protection” on classification societies and those duties were further ratified into Greek law by statute and presidential decree.
- Because “ABS breached its duty under Greek law to accurately survey and report the condition of the vessel.”
In the Greek proceeding, the shipowner sought $9,015,500 in damages for the repair costs, expenses, loss of hire and profits; a prison sentence of one year against each individual defendant named in the suit as a means of enforcing monetary damages; and a penalty of 50,000 euros against each individual defendant.
Several months after the Greek action started ABS said it believed the complaints were subject to arbitration in New York in accordance with the rules of the Society of Maritime Arbitrators.
On Aug. 3, 2012, the shipowner filed a complaint in federal court in New York (Bailey Shipping Ltd. v. American Bureau of Shipping, et al. S.D.N.Y. No. 12-5959. Sept. 23.), seeking a declaratory judgment that it was not bound by any arbitration agreement with ABS and an injunction against ABS pursuing arbitration.
While the declaratory judgment was pending, the shipowner appointed its member to the arbitration panel under protest and without waiving its objections to arbitration.
ABS opposed the motion, and cross-moved seeking to compel arbitration. It argued the plaintiff could not rely on a contract as the basis for its claims of negligent misrepresentation while rejecting an arbitration clause contained in that contract.
The shipowner contended no contract existed in the first place. Even if one had, the shipowner said it was null and without effect under Greek law due to the misrepresentations contained in the surveys and class certificate; because its claims sounded in tort under Greek law, not in contract; and because it received no benefit at all from the underlying services ABS rendered to the prior owner of the vessel.
Nor did the shipowner accept it benefited from the contract by relying on it as the basis for its claims. The plaintiff alleged its claims were not based on the disputed surveys and certificates, but were “primarily premised on the defendants’ violations of Greek law and international conventions,” which it claimed provided independent bases for the suit.
The shipowner argued its claims did not depend on interpreting the contract under which the surveys and certificates were issued because it did not allege ABS had violated merely its own internal rules but also numerous Greek and international laws. Therefore, it said, it should not be bound by the contract’s arbitration clause.
Contrary to the characterization, ABS said it was not relying on the underlying contract to provide its case because its claims were not solely for negligent misrepresentation, but rather derived from statutory violations, and the main thrust of the Greek action was for the consumer protection violation.
The plaintiff accepted that, were its claims exclusively based on negligent misrepresentation, it would be bound by the arbitration provision, but maintained the “statutory violations” and the Greek “consumer protection cause of action” were independent of any negligent misrepresentation claim.
Defendants argued the same acts gave rise to all alleged causes of action, and if there was a violation of one of the conventions, it was a result of the alleged negligent misrepresentation.
A federal court may enjoin a party from pursuing litigation in a foreign court, but prior decisions say this power should be used sparingly.
Relying on a 1987 decision by the Second Circuit, China Trade & Dev. Corp. v. M.V. Choong, (837 F.2d 33, 35), the district court here said ABS satisfied the traditional test for preliminary injunctions with respect to the latter two of its three claims. But it said the plaintiff was free to litigate its claim arising from Greece’s consumer protection statute.
It said the injunction would remain in place until the arbitrators render an award.