ADMIRALTY LAW - ANOTHER WAY IN: SECOND CIRCUIT GRANTS ADMIRALTY JURISDICTION TO FORWARD FREIGHT AGREEMENTS - d'Amico Dry, Ltd. v. Primera Mar.

• Date: 01 January 2019
• Author: Woods, Dylan

In the same stroke as it created the Supreme Court, Congress granted original subject matter jurisdiction to the courts to hear all maritime disputes. (1) Courts have consistently answered the question of whether or not a maritime contract is enforceable in the United States under admiralty jurisdiction. (2) The prima question before the Second Circuit in d'Amico Dry, Ltd. v. Primer a Mar. (Hellas), Ltd.? centered around the enforceability of a non-maritime contract as it pertained to two shipping entities. (4) The Second Circuit held that the Forward Freight Agreement (FFA) between the parties was subject to admiralty jurisdiction and thus a case on the merits should be heard by the Southern District Court of New York. (5)

At the time leading up to and during the litigation between these two parties, the plaintiff-appellant, d'Amico Dry, Limited (Plaintiff), was involved primarily in the dry bulk shipping market. (6) The defendant-appellee, Primera Maritime (Hellas) Limited (Defendant), is a ship management company incorporated in Liberia. (7) In September 2008, the parties entered into a FFA (d'Amico/Primera FFA) in order to potentially profit from fluctuation in the freight futures market. (8) The FFA market is essentially based on an index (BPI) published by the Baltic Exchange in London, and trades on the market do not necessarily involve any actual maritime activity. (9)

According to the decision in the original suit, the district court concluded that the FFA between the parties was a derivatives agreement and had no direct bearing on either company's actual maritime business. (10) The 2008 financial crisis caused a significant aftershock that affected numerous financial markets, including the FFA derivatives and futures market. (11) Specifically, the 2008 crash left Defendant insolvent, and thus they were forced to default on payments owed to Plaintiff. (12) As a result, without any possible recourse from a third-party clearinghouse, Plaintiff sought and received a judgment from the High Court of Justice in England. (13) Following the English judgment, Plaintiff then sought to enforce the d'Amico/Primera FFA in the Southern District of New York, which was denied for lack of subject matter jurisdiction. (14) Plaintiff then appealed the decision to the Second Circuit Court of Appeal, and the Second Circuit then vacated the decision of the district court and remanded for further proceedings. (15)

From a historical perspective, the Judiciary Act of 1789 significantly narrowed the jurisdiction of admiralty courts. (16) The Supreme Court initially limited the application of admiralty jurisdiction to cases specifically citing some type of injury incurred on the water or in specific reference to a vessel. (17) Traditionally, admiralty cases revolved around disputes where the potential damages were physical vessels or cargo. (18) Despite this focus on physical aspects of maritime activities, the early federal admiralty courts often entertained contract disputes, but were primarily focused on criminal actions that had occurred on the ocean or on waterways of some variation. (19)

Federal courts typically limited application of admiralty jurisdiction to tortious or criminal claims that occurred in the course of maritime activities. (20) It is well settled that the grant of admiralty authority stems from both Article III of the United States Constitution as well as Title 28 of the United States Code [section] 1333(f). (21) It is a far more simple analysis in the case of a maritime tort case to determine whether or not the United States can enforce a foreign judgment. (22) In contrast, where the dispute centers around a breach of contract claim, the analysis then turns to whether or not the agreement in question was maritime in nature. (23)

Following this proposition, courts analyzing these types of dispute have attempted to develop tests in order to determine the nature of the agreement as it relates to maritime commerce. (24) This jurisdictional focus delineated a departure from the normal "form" analysis of maritime contract disputes and choice of law selection litigation. (25) Courts are indeed trending away from requiring a showing of tangible connections to real maritime activity and more so determining maritime jurisdiction based off of the purported benefit to the actor's maritime commercial interests. (26) Furthermore, courts have disregarded the fact that some of these financial instruments involve third parties that have no role in the shipping or maritime industries. (27)

In d'Amico Dry, Ltd. v. Primera Mar. (Hellas), Ltd., the Second Circuit construed the d'Amico/Primera FFA as subject to maritime jurisdiction due to an analysis of the character and nature of the agreement. (28) The Court repeatedly highlighted the language from precedent dictating that the principal objective of the constitutional grant was to protect maritime commerce. (29) In support of this line of reasoning, the Court noted that within the d'Amico/Primera FFA itself, and in prior proceedings between the parties that a multitude of vessels had been attached as collateral. (30) Following this logic, the Court suggested that this fact alone creates an inference that the contract was subject to maritime jurisdiction. (31) The Court further bolstered its position by analogizing similar past decisions granting federal maritime jurisdiction to maritime insurance contracts. (32) The primary concern with the district court's ruling centered around its inconsistency, as an FFA could be used for hedging and additional valid purposes. (33) Furthermore, the Second Circuit starkly disagreed with the proposition that the contract or company involved had to mention specific effects on actual shipping vessels to qualify for maritime jurisdiction. (34)

The decision in d'Amico Dry, Ltd. v. Primera Mar. (Hellas), Ltd. significantly broadened the umbrella of maritime jurisdiction by construing the d'Amico/Primera FFA as subject to maritime jurisprudence. (35) This decision signaled an important furthering of precedent, allowing a foreign judgment not made under maritime law to be enforced in a United States court under maritime jurisdiction. (36) The subsequent litigation will likely be increased given the range of agreements that could potentially fall under the umbrella of admiralty law. (37)

Despite the departure from older precedent construing FFAs, the Second Circuit followed the spirit of maritime jurisprudence by allowing enforcement of generally land-based contracts. (38) In large part, this decision follows logically, although in a strict reading of the d'Amico/Primera FFA mentions little to nothing in reference to physical aspects of the shipping industry. (39) It does have an indirect but vital effect on the shipping industry at large, as well the individual parties involved. (40)

The holding in this case demonstrates a real departure from precedent not only in its construction of FFAs but also in a departure from the "case-by-case" analysis used in prior decisions. (41) The Court also highlighted Plaintiffs identity as an active member of the shipping industry to further its characterization of the agreement. (42) Instead of an analysis on the putative benefits to the physical shipping market aspects, now the analysis will turn on relation to the effect on maritime commerce. (43) The primary issue at hand in this case was the enforcement of a foreign judgment in the American court system under maritime jurisdiction. (44) The Second Circuit's decision in d'Amico Dry, Ltd. was appropriate given the natural progression of maritime jurisprudence as being inclusive of most any contract relating to the maritime industry. (45)

In closing, the Second Circuit has correctly concluded that admiralty jurisdiction should be applied to this case. Maritime jurisdiction has traditionally been applied to all claims either based on maritime laws, or arising out of a principal objective to further maritime commerce. This was clearly the primary purpose of the d'Amico/Primera FFA, therefore, granting admiralty jurisdiction to FFAs was proper.

(1.) See U.S. CONST, art. Ill, [section] 2, cl. 1 (granting power to courts to hear cases regarding maritime disputes). Article III, [section] 2 states in pertinent part:

The judicial Power shall extend to all Cases, in Law and Equity, arising under the Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority;--to all Cases affecting Ambassadors, other public Ministers and Consuls;--to all Cases of admiralty and maritime Jurisdiction;--to Controversies to which the United States shall be a Party;--to Controversies between two or more States;--between a State and Citizens of another State;--between Citizens of different States;--between Citizens of the same State claiming Lands under Grants of different States, and between a State, or the Citizens thereof, and foreign States, Citizens or Subjects. Id. See also Penhallow v. Doane's Adm'rs., 3 U.S. 54, 54 (1795) (holding admiralty courts have authority to enforce judgments issued by foreign counterparts). The dispute in Penhallow centered around a judgment awarding damages due to a ship that had been captured by licensees, privateers, of the United States government. Id. The judgment was enforced by the New Hampshire District Court, which had recently been granted admiralty jurisdiction by Congress. Id. at 56-57. When the jurisdictional authority of the district court was called into question, the Supreme Court accepted the case to reinforce the authority of the newly formed district court. Id. The complainants had no other capable remedy available to them, and thus a court sitting in admiralty was the appropriate venue. Id. See also S. Pac. Co. v. Jensen, 244 U.S. 205, 215-16 (1917) (holding all federal admiralty courts should apply admiralty laws uniformly). The holding in Jensen restated the general rule...