In many civil disputes, the application of choice of law principles as well as the jurisdiction in which the lawsuit is filed can have a significant impact on the outcome of a case. This is especially true where one of the parties conducts business in the maritime industry and the other does not. Some parties may prefer that state law be applied to the dispute because of a favorable state statute (such as a statute of limitations) or because the state’s courts have rendered decisions that support the parties’ position on a substantive issue. Others may prefer that federal law apply where it is more advantageous to a party given the facts of the case. Of course, some parties prefer to litigate in federal court rather than state court, or vice versa, for cost or other reasons.
There is a small subset of cases in which the question of whether maritime or admiralty law should be applied arises. One of the most significant decisions addressing that question is Norfolk Southern R. Co. v. James N. Kirby Pty, Ltd., 543 U.S. 14 (2004). In Kirby, the U.S. Supreme Court held that the liability of a rail carrier that transported over land cargo that was brought to the United States from Australia on board ships, through bills of lading calling for carriage from Australia to Huntsville, Alabama, via the Port of Savannah, Georgia, for damage to the cargo that occurred during that leg of the journey should be determined by applying maritime law, because the entire contract of carriage, and not just the ocean segment of it, constituted a maritime contract. More specifically, the court in Kirby determined that the default liability rule in the Carriage of Goods by Sea Act (“COGSA”) ($500 per package) applied to a train wreck that allegedly caused $1.5 million in damages.
In determining this type of choice of law question—that is, whether maritime law applies to a particular dispute —a court would likely analyze this issue through the lens of Kirby and, depending on which side of a dispute your client is on, the conclusion the court reaches can have important consequences. The determination of this question requires a case-by-case and very fact-sensitive analysis; rarely is this question black and white. However, the sooner this analysis is undertaken in a case, or even before a lawsuit is filed, the better an entity can be prepared to manage expectations and pursue an appropriate and effective litigation or resolution strategy.
What Is a Maritime Contract?
In cases in which a contract is at issue, and at least one of the parties does business in the maritime industry, the first step in determining whether maritime law applies to the case is to review the terms of the parties’ contract. Doing so, however, does not always yield a clear-cut answer. If it does not, a more thorough analysis of the relevant facts, the respective parties’ business operations, and the parties’ obligations under the contract must be conducted.
It is also important to note that, “[i]n order for a contract to fall within the federal admiralty jurisdiction, it must be wholly maritime in nature, or its non-maritime elements must be either insignificant or separable without prejudice to either party.” Inbesa Am., Inc. v. M/V Anglia, 134 F. 3d 1035, 1036 (11th Cir. 1998). “To qualify as maritime, moreover, the elements of a contract must pertain directly to and be necessary for commerce or navigation upon navigable waters….The test we apply in deciding whether the subject matter of a contract is necessary to the operation, navigation, or management of a ship is a test of reasonableness, not of absolute necessity.” Id. (quoting Nehring v. Steamship M/V Point Vail, 901 F. 2d 1044, 1048 (11th Cir. 1990)) (internal quotation marks omitted). As another court explained, “[i]t is the character of the work to be performed under a contract that determines whether it is maritime, not the identity of the parties to the contract.” Beyel Bros., Inc. v. Canaveral Port Auth., 2006 WL 2864387, *2 (M.D. Fla. Oct. 5, 2006); see also Exxon Corp. v. Central Gulf Lines, Inc., 500 U.S. 603, 610 (1991) (analyzing whether agency contract fell within admiralty jurisdiction).
In some cases, a contract may have both maritime and non-maritime elements and the court must resolve what law applies to such a “mixed contract.”
How Do Courts Approach the Issue?
Before the Kirby decision, courts applied a fairly straightforward test to resolve choice of law or jurisdictional issues concerning “mixed contracts.” Under that test, a court could exercise admiralty jurisdiction in and apply maritime law to a mixed contract dispute where the non-maritime portion(s) of the contract: 1) is merely incidental to the overall contract, or 2) can be separated from the maritime portion of the contract. See, e.g., Steelmet, Inc. v. Caribe Towing Corp., 779 F.2d 1485, 1488 (11th Cir. 1986). On the other hand, if this test was applied to situations and contracts where the maritime and non-maritime portions or terms are bound together and cannot be separated, the court will not be able to exercise admiralty jurisdiction or apply maritime law.
The Kirby decision fundamentally changed the way courts approach whether or not they can exercise admiralty jurisdiction over a certain dispute. The rule the Supreme Court established in Kirby focuses on the maritime portions of a mixed contract. If the maritime portions of the contract are substantial, even where the dispute centers on non-maritime elements of the contract, the court can exercise admiralty jurisdiction and apply maritime law. If the maritime elements are not substantial, however, and the primary purpose of the contract has nothing to do with the operation, management, or navigation of a ship, then the contract would likely be deemed non-maritime in nature, and the court would decline to exercise admiralty jurisdiction or apply maritime law.
That determination can have a huge impact on the outcome of a lawsuit, as it affects various stages of and motions filed in a case, including motions to dismiss or for summary judgment. Indeed, a party’s legal position in a case will be largely dictated by whether maritime or non-maritime law governs the dispute.
Even as early as at the contract drafting stage, entities should be very careful with respect to whether maritime law or non-maritime law would apply to a given contract and to any future disputes that may arise regarding that contract. Parties would be best served to consider these issues at the negotiation and formation stages of the contract, because whether maritime law applies will affect a wide variety of issues and questions, including but not limited to the applicability of insurance coverage for the claims at issue, indemnification rights and obligations, forum selection, and even whether the contract needs to be in writing and signed by the parties, or an oral agreement will suffice and be enforceable.
While maritime entities doing business with each other may be less concerned about these choice of law issues, they can arise and become problematic when maritime entities are absorbed by non-maritime entities or do business with non-maritime vendors or customers whose attorneys assume that state law will apply to the agreement—or negotiate for state law to apply to all disputes. Thus, carefully analyzing and negotiating contract terms and choice of law issues at the outset is not only recommended, but will also help the contract parties know what to expect if a dispute arises—and could help avoid costly litigation down the road.