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ARMADA SUPPLY v. S/T AGIOS NIKOLAS

July 25, 1985

ARMADA SUPPLY, INCORPORATED, Plaintiff,
v.
S/T AGIOS NIKOLAS, her engines, boilers, etc., and against LACE, LIMITED, BLACK BARNETT SHIPPING CORPORATION, BLACK BARONETT SHIPPING CORPORATION, BLACK COUNT SHIPPING CORPORATION, MAGELAN, INC., MAGELEN MARITIME, INC., SHIPPING AND TRADING INTERNATIONAL CORPORATION, and ANASTASIOS KARAVAIAS, Defendants



The opinion of the court was delivered by: CONNER

OPINION AND ORDER

CONNER, D. J.:

This is an admiralty action commenced by Armada Supply, Incorporated ("Armada"), the owner and consignee of an ill-fated cargo of fuel oil shipped from Rio de Janeiro to New York city aboard the S/T Agios Nikolas ("the Agios Nikolas") in late 1982. Plaintiff seeks compensatory and punitive damages from the charterers, operators and agents of the vessel, alleging that these defendants were responsible for a shortage, contamination and conversion of the cargo. *fn1" The matter was tried before the Court sitting without a jury, and this Opinion and Order incorporates the Court's findings of fact and conclusions of law pursuant to Rule 52, F.R.Civ.P. For the reasons below, judgment will be entered in favor of plaintiff.

 Background

 It became apparent shortly after the commencement of this action that an intriguing tale was likely to unfold if the matter were to go to trial; that early expectation was not disappointed. As reflected, perhaps, in the very fact that plaintiff's claims could not be resolved without a trial, this is no "run-of-the-mill" cargo case. It involves charges of cargo hijacking and blackmail, ransom and deceit -- all the elements of a good high seas drama, short of mutiny.

 The trial of this matter consumed three days. Plaintiff's evidence, as accurately described in its post-trial statement of the facts, can be summarized as follows:

 On November 16, 1982, the vessel Agios Nikolas began loading a cargo of No. 6 fuel oil at the terminal of Petroleo Brasiliero, S.A. ("Petrobras") in Rio de Janeiro. Petrobras, through a Brazilian government entity called "Fronape," had entered into a charter party with defendant Black Baronett Shipping Corporation, for carriage of the cargo to New York. The oil belonged to Armada, a buyer and trader of crude oil and petroleum products, which had purchased it from a Petrobras subsidiary on C.I.F. terms, under an irrevocable letter of credit. Armada had contracted to sell the entire shipment to the Sun Oil Trading Company ("Sun Oil") for a price of $30.55 per barrel, on the following conditions: delivery had to be made to Sun Oil in New York on or before December 10, 1982; the bottom sediment and water content ("BS&W") of the oil was not to exceed one percent by volume; and the pourpoint was not to exceed 60 degrees F.

 Tests performed by the oil cargo surveying firm of E. W. Saybolt & Co. ("Saybolt") on samples drawn from Petrobras's five shore tanks just before the oil was loaded onto the vessel showed only small traces of BS&W in three of the tanks, 0.1% in the fourth, and 0.2% in the fifth. The pourpoints measured between 37 degrees F. and 48 degrees F. Pl.Ex. 58 at 4-5. Saybolt performed an analysis of the cargo after it was loaded as well. A composite sample collected from the ship's various cargo tanks after loading showed a BS&W of 0.1% and a pourpoint of 48 degrees F. Pl.Ex. 58 at 5. As was customary in the industry, additional samples from the shore tanks and the ship tanks were drawn and placed in bottles, which were labelled, sealed with wax to prevent tampering, and given to the ship's master.

 After the vessel finished loading, the ship's sea valves were closed and the master issued a clean bill of lading reflecting receipt of 348,614.572 barrels of No. 6 fuel oil in good order and condition. Pl.Ex. D-3C. Although the ship's own records apparently indicated that only 340,693.497 barrels were loaded, the bill of lading was issued without any notation of a discrepancy. According to one of plaintiff's witnesses, the ship's master would have asked to make an exception on the bill of lading had there been something wrong with the cargo. (Tr. at 207).

 Late in the evening of November 16th, the Agios Nikolas departed Rio de Janeiro. For reasons not entirely clear from the record, the vessel took considerably more time than expected in making its way to New York. *fn2" At some point during the voyage, plaintiff realized that the cargo would not reach its destination by December 10th, as required by the Sun Oil contract. This was a distressing prospect because the price of oil had dropped substantially after the contract was negotiated, and Armada knew that Sun Oil would be looking for any available reason to refuse delivery. Armada's agents therefore agreed to pay a "speed bonus" of $20,000 to the vessel's agent, defendant Shipping and Trading International.

 The Agios Nikolas sped onward and arrived at a terminal off Staten Island on December 9, 1982. There, it tendered a notice of readiness to discharge its cargo. Pursuant to an agreement between Armada and Sun Oil, Saybolt surveyors went aboard immediately to measure and sample the quantity and quality of cargo. Complete analysis of the samples took several days. In the meantime, Sun Oil directed the vessel to discharge approximately 50,000 barrels of oil into a barge, and then to stand by for orders to discharge the remainder at a terminal in Bayonne, New Jersey.

 On either December 10th or December 11th, Armada representatives first learned that the cargo did not meet contract specifications. Ken Griffin, Armada's president, recalled that he became aware of problems when the barge was loaded. John Decker, another Armada employee, testified in a deposition that he received a call from Saybolt on or about December 11th. In any event, on December 14th, Saybolt telexed a report of its preliminary findings; the telex indicated that the ship arrived carrying only 340,484 barrels of oil, that a composite sample of oil drawn from the various cargo tanks yielded a BS&W of 1.6% by volume, and that the pourpoint on arrival was 65 degrees F. Saybolt had found, in addition, a total of 1663 barrels of free water in the cargo tanks. *fn3" Based on a chemical analysis, Saybolt later determined that most of this was seawater. The telex also indicated that the vessel's sea valves had been open upon arrival in New York, and Saybolt had sealed them.

 After receiving Saybolt's report, Sun oil immediately informed Armada that it was rejecting the cargo for non-conformance with the contract specifications. Pl.Ex.6-5G. Armada then entered into negotiations with Sun Oil to reach a reduced purchase price. On December 16th, Sun Oil agreed to pay Armada $27.65 per barrel for the entire cargo

 In the meantime, a second survey was performed. On December 15th, representatives of the cargo underwriters, the vessel's owners, Armada and Petrobras conducted a joint survey. See Pl.Exs. 24, 26; Lace Ex.S. The results of this survey confirmed that three of the ship's seven cargo tanks contained oil with a BS&W of greater than 1%.

 On or about December 17th, attorneys for plaintiff's cargo insurers contacted defendant Shipping and Trading International and the vessel's P & I Club, requesting that they post a bond in an amount sufficient to cover plaintiff's claim for shortage and contamination. When the request was refused, the cargo insurers instituted suit and obtained a warrant for the arrest of the vessel. Early the next day, before the warrant could be executed, the Agios Nikolas advised the Coast Guard that it was going on sea trials and fled the jurisdiction. Later that day, Emmanuel Karavaias sent a telex to plaintiff from Greece. Emmanuel Karavaias, along with his son defendant Anastasios Karavaias, was a principal of defendants Shipping and Trading International, Black Count and Black Baronett. *fn4" In this telex, Karavaias characterized the claim of water contamination as a "charade," demanded that the ship be granted immunity from arrest, and further demanded payment of freight charges by December 20, 1982. Karavaias advised that he had a lien against the cargo for the freight and demurrage, and that if his demands were not met, he would order the vessel to sail away and sell the cargo elsewhere to satisfy the lien. Pl.Ex. 46. When Sun Oil learned of the vessel's disappearance, it rejected the remainder of the cargo. Pl.Ex.6-5B.

 During the next several weeks, the Agios Nikolas remained outside territorial limits while plaintiff negotiated with the Karavaias interests for return of the cargo. Plaintiff insisted that it was not responsible for freight payment because the price it paid to Petrobras included freight charges, but Karavaias would not yield. Finally, in mid-January, Armada paid the freight demanded into a Bermuda bank account designated by counsel for defendants, and furnished a written guarantee that the vessel would not be arrested upon re-entry into the port of New York. Anastasios Karavaias executed a guarantee that the vessel would return and discharge its cargo, Pl. Ex. 27, and on January 13, 1983, the Agios Nikolas returned to port.

 Surveyors went aboard immediately to measure and sample the cargo, but they could not do so because the oil had not been heated while the ship was away. Moreover, because the cargo was cold, it could not be discharged. The ship's master had to take on fresh water to steam-heat the cargo before it could be measured and discharged; he advised the surveyors that during the ship's twenty-six day absence, no fresh water, bunker fuel or provisions had been brought aboard.

 On January 17th, after the cargo had been heated, a survey was conducted by representatives of the various interests. The quantitative and qualitative analyses of the cargo revealed that there was substantially less cargo on board, and substantially more sea water in that cargo, than there had been when the vessel departed New York harbor in December. The surveyors immediately requested permission to resample the cargo in order to verify their findings, and the ship's master reluctantly agreed.

 The final survey was performed on January 18th. As part of the inspection, Saybolt's surveyor examined the ship's pump rooms. There, beneath the floor plates, he found an improper connection between the vessel's cargo system and its bunker system. (Tr. at 210). On the basis of this evidence, plus calculations indicating that the Agios Nikolas could not have steamed from Rio de Janeiro to New York and then maneuvered outside United States territorial waters for twenty-six days with the quantity of bunkers allegedly on board, surveyors representing the cargo underwriters concluded that "the vessel had repeatedly transferred cargo through [the] illegal connection into its bunker tanks and replaced the pilferred [sic] cargo with water." Pl.Ex.26 at p.13.

 The surveyors also obtained the bottled load port samples from the ship's master in order to have them analyzed. The wax seals on all of the bottles had been broken, however, and all the parties therefore agreed that no reliable readings could be taken. An analysis was performed nonetheless, and it revealed BS&W measurements of more than 2.0% in four of the five samples drawn from shore tanks in Rio de Janeiro. The bottle containing a composite of samples drawn from the ship's cargo tanks yielded a BS&W reading of 8.6%.

 Upon the ship's return to New York, plaintiff leased storage space at a warehouse in Bayonne. On January 18th, the cargo was discharged from the Agios Nikolas into barges for transfer to the storage facility. The net quantity of contaminated cargo delivered to plaintiff, including the 50,000 barrels removed by barge upon the vessel's initial arrival in New York in December, was approximately 333,254 barrels. Pl.Ex. 26 at p.19.

 Plaintiff made efforts to sell the severely contaminated cargo, but could find no buyers. It thereafter undertook to recondition the oil by various methods, including conventional water decanting and chemical treatment. During February and March of 1983, Armada did manage to make several spot salvage sales at depreciated prices. However, it asserts that it ultimately suffered a loss reflected by the difference between the amount it would have received if the cargo had arrived sound and the amount it actually realized, plus the costs it actually incurred in recovering and reconditioning the oil cargo. Armada produced invoices, receipts and other documents reflecting ...


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