A recent Eighth Circuit decision involving a fire at a marina highlights and widens the current split among federal circuits over the enforceability of "red-letter" clauses.
The recent case of Sander v Alexander Richardson Investments d/b/a Yacht Club of St. Louis, 334 F3d 712 (8th Cir 2003), highlights and widens the current split among the federal circuits over the enforceability of exculpatory (sometimes called "red-letter") clauses in maritime contracts. The case involves a fire at a marina and the interpretation of a release from liability clause in a slip rental agreement. Few would argue with the court's finding that the slip rental agreement was a maritime contract and thus governed by admiralty law. However, there is much room for argument, though, as to the court's ultimate holding that the exculpatory clause was enforceable and acted as a complete release for the marina's negligence relating to the fire that caused substantial damage to several boats. Some, including the author, would argue that the Sander case is wrongly decided.
The factual context of the Sander case is fairly simple. Mr. and Mrs. Jessup owned a houseboat, the A-OK, which, pursuant to a written slip rental agreement, they moored at the Yacht Club marina. Mr. Jessup noticed a fuel leak. He asked the Yacht Club service department to repair it and was told they could not do it in the time frame requested, but the general manager suggested that Mr. Jessup hire one of the Yacht Club's maintenance workers, Mr. Shulte, to repair the fuel leak. The general manager assured Mr. Jessup that Mr. Shulte was qualified to do the repair work.
Mr. Shulte determined the fuel pump needed replacing and put in a new one. A few days later, Mr. Jessup started the boat, and it caught fire. The fire spread to other boats and other docks of the marina.
The Jessups filed a limitation of liability suit in federal court. The other boat owners whose vessels were damaged filed claims in that proceeding, as did the Yacht Club. The Jessups and the Yacht Club each filed negligence claims against the other.
The Exculpatory Clause
One of the Yacht Club's defenses was based on an exculpatory clause printed on the back of each boat owners' slip rental agreement purporting to release the Yacht Club for any liability for damages such as were incurred due to the subject fire. The clause provided:
- 19. INSURANCE: TENANT AGREES that he will keep the boat fully insured with complete marine insurance, including hull [property] coverage and indemnity and/or liability insurance.
- THE LANDLORD DOES NOT CARRY INSURANCE covering the property of the TENANT. THE LANDLORD WILL NOT BE RESPONSIBLE for any injuries or property damage resulting, caused by or growing out of the use of dock or harbor facilities; that the TENANT RELEASES AND DISCHARGES THE LANDLORD from any and all liability for loss, injury (including death), or damages to person or property sustained while in or on the facilities of LANDLORD, including fire, theft, vandalism, wind storm, high or low waters, hail, rain, ice, collision or accident, or any other Act of God, whether said boat is being parked or hauled by an Agent of LANDLORD or not.
The Trial Court Ruling
After a bench trial, the district court found that the Jessups were not negligent, that the Yacht Club was negligent, and that the exculpatory clause did not release the Yacht Club from liability for its own negligence because "exculpatory clauses that completely absolve a party of all liability are invalid" (334 F3d at 714 (quoting from district court)). An alternative holding of the district court was the exculpatory clause did not clearly and unequivocally state that it released the Yacht Club for its own negligence, and that the clause was overreaching due to the unequal bargaining power of the parties. Judgment was entered for the boat owners against the Yacht Club.
The Yacht Club appealed, arguing that the clause was sufficiently clear to release it from its own negligence, and asked the Eighth Circuit Court of Appeals to adopt the positions of the courts of appeal for the Fifth and Ninth Circuits, in the circuit split over this issue. In agreeing with the Yacht Club as to the enforceability of the exculpatory clause, the Eighth Circuit thus went against the views of the First and Eleventh Circuits. 1
The Appellate Court Ruling
Before reaching the ultimate issue of enforceability of the exculpatory clause, the court had to determine whether the clause was sufficiently clear to absolve the Yacht Club of liability for its own negligence "for it is universally agreed that exculpatory clauses, whether fully exonerating a party from its own negligence or not, must 'be clearly and unequivocally expressed.'" [Citations omitted.]
On the issue of whether the clause clearly and unequivocally released the Yacht Club for its own negligence, the boat owners argued that nowhere in the clause does it plainly state that the Yacht Club is being released for its own negligence or fault. 2 However, the Eighth Circuit ruled that when looking at the contract as a whole, the risk of loss was shifted to the boat owners to carry the insurance and the terms "any and all" were all-encompassing. Quoting an inapposite case—presumably for its dramatic effect, as it clearly has no bearing on this case—the Eighth Circuit states: "In short, 'all' means all." Id. at 716.
More importantly, though, the court uses smoke and mirrors to support the "all means all" mantra by quoting from other circuit cases that provide absolutely no support for such a finding relating to the clause in this case. Use of the La Esperanza holding relating to a clause concerning release for consequential damages is plainly no support, as courts have never interpreted clauses releasing consequential damages under the same microscopic lens used to view full exculpatory clauses. The contra position noted by the court from the Fifth Circuit case of Randall v Chevron USA, Inc., 13 F3d 888, 905 (5th Cir 1994), in fact, is strong support for finding that the claim involved in this case would not pass muster.
Where then does the Eighth Circuit get support for its "all means all" in the context of exculpatory clauses under maritime law? In the author's view, there is none and this case accordingly is premised on an unsupportable base, as it started with the proposition that exculpatory clauses must be clear and unequivocal. Here, in going where no other circuit court applying maritime law has gone before, the Eighth Circuit is simply substituting its own judgment that this clause was a clear and unequivocal expression of a release from one's own fault, when the clause does not say that.
With a faulty finding as its starting point, the court next examines whether the clause is enforceable by reviewing whether it contravenes public policy. The court begins the inquiry by noting that the circuits are in agreement that while exculpatory clauses are generally disfavored by admiralty courts, such clauses are routinely enforced when bargained for by businessmen to achieve a more rational distribution of the risk.
The court notes that the First and Eleventh Circuits follow the rationale expressed against enforcement of exculpatory clauses as addressed in the U.S. Supreme Court case of Bisso v Inland Waterways Corp., 349 U.S. 85, 90-91 (1995). It goes on to note that, under admiralty law, the doctrine prohibiting a party from contracting for a release for its own negligence is limited to relationships similar to towage agreements such as bailment, employment, or public service relationships. The court then cites the counter-veiling policy of freedom of contract. In another less-than-satisfactory argument for support that a marina/boat owner relationship should allow for freedom of contract, the Eighth Circuit Court cites to a Ninth Circuit case which in dicta finds a slip rental exculpatory clause to be valid. 3
The Eighth Circuit also cites two district court cases in support of its public policy position, one from the Eastern District of New York and one from the District of Maryland, both of which held the slip rental exculpatory clauses involved in each were not sufficiently clear to release the marinas from their own fault. To add insult to the injured legal analysis, the Eighth Circuit then cites a district court case from Delaware taking the Ninth Circuit's "approach" on the basis that the boat owner could have attempted to negotiate with the marina, or moved the boat to a different marina with more favorable terms. One might argue that if this is all the support the Eighth Circuit could find for its public policy position, then really there is none.
To complete its analysis on public policy, the Eighth Circuit states that the First and Eleventh Circuit cases can be distinguished on the basis that both involved ship repair contracts as opposed to slip rental agreements. The reason given—that a ship repairer takes control of the vessel to perform the work—is merely a results-oriented "reason" that lacks adequate legal foundation and would seem to cut against a true understanding of the "relationship" issue. Unquestionably, John Q. Public boat owner is in no position to get any marina to take the exculpatory clauses out of the typical form contracts. While Donald Trump, with his multi-hundred-foot yacht may be able to have a "businessmen's" relationship with a marina, 99.99 percent of boat owners cannot.
As further "proof" for the results-oriented approach, on the issue of overreaching, the court then substitutes its judgment for that of the trial court even though it notes that the facts addressing the issue were not well developed in the record. In the author's view, the court should have remanded the matter for retrial on the issue of overreaching. Fairness dictates that when "new law" is being created as was done in the Eighth Circuit, the parties should be allowed to work-up their facts and issues with the new law in mind.
The Author's View
Who was to predict that the Eighth Circuit was going to side with the Fifth and Ninth Circuits? The record would most likely have been well-developed if the court had sided with the First and Eleventh Circuits. In the name of freedom of contract, the Eighth Circuit gave the public a part of the boat—the shaft—rather than a good steering mechanism. Unfortunately, a certiorari petition was not filed with the U.S. Supreme Court, so we must wait for another case in which the U.S. Supreme Court will hopefully make a pronouncement that gives greater guidance to all concerned on the enforceability of exculpatory clauses in maritime contracts.
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