Enforcement of Red-Letter Clauses in Maritime Contracts

Individuals and businesses in the maritime industry must understand the questionable legality of maritime contracts purporting to release parties from their own liabilities. Take, for example, the unfortunate case of a significant fire at the Yacht Club of St. Louis adjudicated by the United States Court of Appeals for the Eighth Circuit in Sander v. Alexander Richardson Inv., 334 F.3d 712 (2003). Ronald and Martha Jessup moored a houseboat at the yacht club and noticed a fuel leak near their starboard engine fuel pump. They started the engine a few days after getting it repaired, but the boat exploded and caused a fire. The owners of two neighboring vessels damaged by the blaze filed negligence claims in federal court against the Jessups and the yacht club. Those claims put the enforceability of the yacht club’s release language in its maritime contracts with the other parties squarely at issue. Id. at 713–15.

Marinas customarily incorporate language releasing themselves from liability in maritime contracts—so-called “exculpatory clauses” or “red-letter” clauses. Federal admiralty law governs their enforceability. The United States Supreme Court generated a long line of admiralty precedents holding that red-letter clauses in towage agreements are unenforceable. Dixilyn Drilling Corp. v. Crescent Towing & Salvage Co., 372 U.S. 697, 698 (1963) (per curiam); Boston Metals Co. v. The S/S Winding Gulf, 349 U.S. 122, 127 (1955); Bisso v. Inland Waterways Corp., 349 U.S. 85, 94 (1955). The Court expressed its disfavor of red-letter clauses in other contexts posing a risk of overreach or unequal bargaining power. The Court’s examples included service monopolies, common carriers, and similar relationships like those between bailors and bailees, employers and employees, and public service companies and their customers. Bisso, 349 U.S. at 90–91.

There is a division among lower federal courts on how to scrutinize the enforceability of red-letter clauses in maritime contexts Bisso did not address. This division represents a clash between two competing public policies: the freedom of contract and the prohibition against absolving yourself from your own liabilities. Sander, 334 F.3d at 719. The United States Courts of Appeals for the Fifth, Eighth, and Ninth Circuits form a plurality regime upholding the enforceability of red-letter clauses in maritime contracts. See generally Sander, 334 F.3d at 712; Royal Ins. Co. of Am. v. Sw. Marine, 194 F.3d 1009, 1016 (9th Cir. 1999); Arcwel Marine, Inc. v. Sw. Marine, Inc., 816 F.2d 468, 471 (9th Cir. 1987); Theriot v. Bay Drilling Corp., 783 F.2d 527, 540 (5th Cir. 1986); M/V Am. Queen v. San Diego Marine Constr. Corp., 708 F.2d 1483 (9th Cir. 1983); Todd Shipyards Corp. v. Turbine Serv., Inc., 674 F.2d 401, 410–11 (5th Cir. 1982); Morton v. Zidell Explorations, Inc., 695 F.2d 347, 350 (9th Cir. 1982); Hall-Scott Motor Co. v. Univ. Ins. Co., 122 F.2d 531, 534, 539 (9th Cir. 1941).

Courts under the plurality regime will only hold red-letter clauses unenforceable if they are ambiguous, absolve a party from its own intentional misconduct or gross negligence, or predicate on unequal bargaining power or overreaching. See M/V Am. Queen, 708 F.2d at 1488–1490; Sw. Marine, 194 F.3d at 1016; Todd Shipyards Corp., 674 F.2d at 410–11; Morton, 695 F.2d at 351. The Eighth Circuit, for example, upheld the red-letter clause at issue in Sander. The panel tracked a line of cases flowing from Bisso, inferring that the policy against exculpating a party from its own negligence is only dispositive in “limited circumstances involving relationships similar to towage agreements, such as bailment, employment, or public service relationships.” The panel exercised judicial restraint and declined to adopt that broad inference as the law of the Eighth Circuit. It announced a more limited rule of law instead: unambiguous red-letter clauses governing marina liability are enforceable if untainted by overreaching or unequal bargaining power. Sander, 334 F.3d at 719–21.

The United States Court of Appeals for the First and Eleventh Circuits form a minority regime upholding red-letter clauses to a narrower extent. See generally Broadley v. Mashpee Neck Marina, Inc., 471 F.3d 272 (1st Cir. 2006); La Esperanza de P.R., Inc. v. Perez y Cia. De P.R., Inc., 124 F.3d 10, 19 (1st Cir. 1997); Mount Sage, Ltd. v. Rolls-Royce Com. Marine Inc., 635 Fed. App’x 833, 836 (11th Cir. Jan. 5, 2016); Diesel “Repower,” Inc. v. Islander Invs. Ltd., 271 F.3d 1318 (11th Cir. 2011); Edward Leasing Corp. v. Uhlig & Assocs., Inc., 785 F.2d 877, 888 (11th Cir. 1986). But see Martin v. Metro. Yacht Club, Inc., 388 Fed. App’x 6 (1st Cir. Aug. 5, 2010) (enforcing a red-letter clause in a yacht club’s bylaws because the plaintiffs were members of, voluntarily assented to, and benefited from that association).[1]

Courts under the minority regime will void red-letter clauses that are ambiguous, absolve parties of their own intentional misconduct or gross negligence, or predicate on unequal bargaining power or overreaching. Courts under the minority regime are stricter, however, because they also void red-letter clauses absolving parties from their own liabilities. These courts also require that red-letter clauses deter mere negligence to be enforceable. See Diesel, 271 F.3d at 1324; Edward Leasing Corp., 785 F.2d at 888.

There remains substantial uncertainty in other jurisdictions that did not formally adopt either regime, like the United States Court of Appeals for the Fourth Circuit. The Fourth Circuit obliquely touched on this issue in at least two cases. It enforced a red-letter clause against negligence claims in a pre-Bisso dispute arising from a fire aboard the steamship America. Newport News Shipbuilding & Dry Dock Co. v. United States, 34 F.2d 100, 101 (4th Cir. 1929). It also enforced a red-letter clause against negligence claims arising from a post-Bisso maritime affreightment contract dispute. See Kerr-McGee Corp. v. Law, 479 F.2d 61, 64 (4th Cir. 1973); Allied Chem. Corp. v. Gulf Atl. Towing Corp., 244 F. Supp. 2d (E.D. Va. 1964) (citing Tex. Co. v. Lea River Lines, 206 F.2d 55 (3d Cir. 1953)).

There is a line of district court decisions in the Fourth Circuit holding that red-letter clauses are enforceable if they are unambiguous as well. See Com. Union Ins. Co. v. Bohemia R. Assocs., Ltd., 855 F. Supp. 802, 806 (D. Md. 1991); Rogers v. Yachts Am., Inc., Case No. Y-81-2495, 1982 WL 195641, at **1, 2 (D. Md. June 9, 1982); cf. Cornell v. Council of Unit Owners Hawaiian Village Condominiums, Inc., 983 F. Supp. 640 (D. Md. 1997) (noting that terrestrial exculpatory clauses are presumptively valid under Maryland public policy favoring freedom of contract (quoting Adloo v. H.T. Brown Real Estate, Inc., 344 Md. 254, 259, 686 A.2d 298 (1996))).

Neither Newport News, Kerr-McGee Corp., nor any of the district court decisions mentioned above formally surveyed the circuit split on maritime red-letter clause enforcement. None of those cases affirmatively adopted either regime. The balance of these precedents, however, suggests that the Fourth Circuit leans heavily towards the plurality regime. Other jurisdictions appear to lean towards the plurality regime as well. The United States District Court for the District of Delaware, for example, affirmatively adopted the wider regime in In re Wechsler, 121 F. Supp. 2d 404, 432–33 (D. Del. 2000). That decision appears to align with the Third Circuit’s enforcement of a red-letter clause against negligence claims arising from a maritime affreightment contract in Tex. Co., 206 F.2d at 55. The United States District Court for the Eastern District of New York affirmatively adopted the plurality regime as well. Com. Union Ins. Co. v. Blue Water Yacht Club Ass’n, 239 F. Supp. 2d 316 (E.D.N.Y. 2003).[1]

Commentators split just as the circuits do. Compare generally Matthew J. Bauer, Making Sense of Maritime Exculpation Clause Jurisprudence, 22 T.M. Cooley L. Rev. 309 (2005), with Michael A. Orlando, Circuit Split Widens over Exculpatory Clauses in Maritime Contracts, IRMI (Feb. 2004). Competing public policies favoring freedom of contract and prohibiting you from absolving yourself of your own liabilities represent important interests and values. Individuals and businesses in the maritime industry must be especially careful to consider their jurisdiction’s attitudes towards balancing these interests and values when negotiating and drafting maritime contracts. They should, for example, explicitly disclaim the specific liabilities they wish to release when incorporating red-letter clauses. Courts do not necessarily require “magic words” like “negligence” to enforce red-letter clauses. Cf. Adloo, 344 Md. at 266, 686 A.2d at 304. But it is wise to include them anyway.

[1] The United States Court of Appeals for the Eleventh Circuit explicitly articulated a discrete three-step test for determining the enforceability of red-letter clauses in maritime contracts: a red-letter clause must clearly and unambiguously state the intentions of the parties; 2) a red-letter clause must not absolve all liability and deter negligence; and 3) the parties must have equal bargaining power to prevent overreaching. Mount Sage, Ltd. v. Rolls-Royce Com. Marine Inc., 635 Fed. App’x 833, 836 (11th Cir. Jan. 5, 2016).

[2] The United States District Court for the Eastern District of New York applied New York state law following its determination that New York state law and federal admiralty law did not conflict on the enforceability of red-letter clauses in maritime contracts. Com. Union Ins. Co. v. Blue Water Yacht Club Ass’n, 239 F. Supp. 2d 316, 320 (E.D.N.Y. 2003).

Written by associate Joshua T. Carback, Esq.