Cross-appeals from a judgment of the United States District Court for the Southern District of New York, Charles L. Brieant, Judge, awarding plaintiffs $210,186.63, representing, with adjustments not relevant on this appeal, $1,025,000.00 indemnity to plaintiffs against defendants under two liability insurance policies plus $89,708.14 in reimbursed legal fees, less an offset for restitution of $900,000.00 by plaintiffs to defendants based on the rescission, ordered sua sponte by the court, of an agreement between plaintiffs and defendants. Reversed as to restitution; affirmed in all other respects.
Before: VAN GRAAFEILAND and PRATT, Circuit Judges, and MORRIS E. LASKER, Senior District Judge for the Southern District of New York, sitting by designation.
This case arises out of the sinking of a cargo ship on the high sea with the loss of all crew members and passengers. The issues, of course, are over money: to what extent shall plaintiffs Luria Brothers & Company, Inc., et al., hereinafter collectively referred to as "Luria", who were charterers of the ill-fated vessel, recover from defendants Alliance Assurance Co., Ltd. et al., hereinafter collectively referred to as "underwriters", for financial burdens resulting from the loss and the events leading up to it. Luria, having settled with the cargo owners and the personal representatives of those who lost their lives in the sinking, sought in the court below indemnity from the underwriters for the settlement payments made and for attorneys fees incurred in the settled cases. The underwriters denied any obligation to Luria.
The district court, after a nonjury trial, found Luria to be entitled to the claimed indemnity. But, for reasons soon to be explained, it also sua sponte ordered restitution to the underwriters of a $900,000 ex gratia payment they had earlier made to Luria.
Luria appeals from the order of restitution. The underwriters cross-appeal from the award to plaintiffs of indemnity and legal fees.
Luria, an international dealer in scrap metal, regularly charters vessels to export the scrap. In connection with its export business, Luria purchased various insurance policies to cover its liability as a charterer and loading stevedore ("liability policies") as well as possible loss or damage to its cargo ("cargo policies"). Frank B. Hall & Co. of New York, Inc., ("Hall"), a New York insurance broker, placed and serviced these policies for Luria through Luria's Belgian broker, Henrijean & Cie of Brussels ("Henrijean").
Three insurance policies are relevant here: the primary liability policy, H 3110, the first excess liability policy, H 3111, and the cargo policy, H 3222. J. Haenecour & Co. of Brussels and Antwerp ("Haenecour") acted as underwriting agent and lead underwriter on behalf of the underwriters who subscribed to one or more of the three polices. As lead underwriter Haenecour was entrusted with authority to deal with all matters of rating, conditions, and settlement of claims in connection with the policies.
In July 1979 Luria entered into a time charter with Evimeria Compania Naviera, S.A., Panama, ("shipowner"), owner of a 17-year-old bulk carrier, Agios Giorgis. Under the terms of the charter party, Luria could employ the vessel to carry "scrap, excluding motor blocks and including turnings which, if loaded shall be chemically treated."
On August 22, 1979, the Agios Giorgis commenced loading 14,586 long tons of Luria's metal turnings at the port of Chicago. Luria admits that the cargo was loaded against the advice of its loading inspector, without being chemically treated, and that the vessel sailed with the turnings temperature in excess of permitted regulations. Further, Luria concedes that this resulted in breach of certain warranties in the cargo and liability policies that rendered coverage on those policies null and void for the voyage from Chicago to Newark, New Jersey.
On September 17, 1979, the vessel arrived at New Haven, Connecticut, to load additional scrap cargo on top of the turnings. The next day a fire was discovered in the turnings in the No. 5 hold of the vessel. Since the port of New Haven is devoted primarily to the discharge and storage of petroleum products, the harbor master ordered the burning Agios Giorgis to leave New Haven to avert potential disaster. She did so, and arrived at Luria's terminal at port Newark, New Jersey, on September 22. In these few days, the fire had spread throughout all of the vessel's holds, and despite attempts to extinguish the fire, temperatures eventually reached in excess of 1100 degrees fahrenheit.
After discussions among Luria, the shipowner, and other parties, it was decided to discharge all the turnings and scrap, an operation that was completed on November 9, 1979.
While the discharge was proceeding, representatives of Luria, Hall, Henrijean, and Haenecour met in Belgium in October. All present conceded that in view of the breach of warranties, the policies did not cover Luria's liability for loss and discharge of the cargo, for consequent delays, for damage to the vessel, or for possible third-party claims. Nevertheless, Luria requested from the underwriters an ex gratia payment-a voluntary contribution not required by the policies-to help Luria bear the loss.
In support of its request, Luria specifically dwelt upon the extensive business relationship between the parties over the past twenty years and suggested that it could direct additional future insurance business at profitable rates to the underwriters, if Haenecour would make the requested ex gratia payment. Although no agreement to make such a payment was reached at the October meeting, Haenecour told Luria to come back with a business proposition at a future meeting.
After discharge of the cargo and cleanup of the vessel, Luria decided to sent the Agios Giorgis on a second voyage, this time to Japan with a cargo of heavy scrap from port Newark. Luria had a good reason to send the vessel to Japan since repairs for the damage caused by the fires, for which was liable to the shipowner, could be had more cheaply in Japan.
Luria sought liability coverage for the voyage, and Henrijean negotiated a limited reinstatement of insurance with Haenecour on a new policy; on November 13, the reinstatement was made subject to "no aggravation of risk" by the proposed addendum to the charter party that would cover the second voyage.
Three days later, Luria and the shipowner formally agreed, by executing the addendum to the existing charter party, to employ the Agios Giorgis for the second scrap voyage to Japan. The shipowner warranted that "the vessel [was] in class ready to commence loading". Henrijean reviewed the addendum and forwarded it to the underwriters on November 26, 1979.
Loading of the scrap for the second voyage was completed on November 29, 1979, and the vessel set sail for Japan the following day. On board was a crew of 27, including the captain's wife, infant son, and three other members of his family. The vessel passed through the Panama Canal, bunkered at Los Angeles, and continued across the Pacific.
On January 7, 1980, the vessel M/S Nichirin Maru received an urgent distress call from the Agios Giorgis, reading in relevant part: "Indicate crack at hold No. 5 stop water under control stop*** please attend master." The Nichirin Maru hastened to aid the vessel and sighted the Agios Giorgis the following day. The Agios Giorgis advised that she intended to continue her voyage under the escort of the Nichirin Maru, that she had sustained two large cracks in the plates at her No. 5 hold, that she was listing four to five degrees, and that her pumps had the sea water coming through the cracks under control.
Several hours later, the Agios Giorgis sent a distress message indicating that one crack had enlarged to between four and five feet. But after the Nichirin Maru indicated the next day that it must soon abandon escort due to diminishing bunkers and supplies, the Agios Giorgis responded that conditions on the damaged vessel had stabilized and authorized the cessation of rescue efforts. The Nichirin Maru then altered her course and returned to Japan.
The following day, the vessel Hoegh Miranda received an emergency distress signal from Agios Giorgis. As the Hoegh Miranda sped to assist, the Agios Giorgis informed her that water was rushing into two holds and that the vessel was beginning to list toward the right. At that time the winds were blowing up to full gale force, the sea was stormy, and the waves had reached a height of ten meters. A short time later, in the early hours of January 11, while within sight of the Hoegh Miranda, the Agios Giorgis sank, leaving no survivors.
About one month later, on February 7, 1980, with knowledge that the Agios Giorgis had sunk, representatives of Luria, Hall, Henrijean, and Haenecour met again in Belgium. Following that meeting representatives of Henrijean and Haenecour met alone and agreed to a final figure of $900,000 for the ex gratia payment to Luria. Their agreement was embodied in a telex summary of the meeting dated February 8, 1980, sent by Henrijean to Haenecour, who approved and confirmed the agreement in a telex also dated February 8. The first telex read, in pertinent part, as follows:
re: Luria-open cover 3222
hereunder agreement was reached on 7 February 1980 during meeting held in antwerp being under- stood that leader of cover is only engaging his own line and that we have to convince each and every co-underwriters [sic] to follow the same commercial approach. ***
referring to ***"aegis [sic] giorgis" (voyage chicago to port newark) the breach of warranties spelled out i open cover render coverage null and void. however, in view of long standing relationship, it was agreed, subject to here-above remark, to contribute ...