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MARATHON INT. PETROLEUM v. I.T.I. SHIPPING

June 10, 1991

MARATHON INTERNATIONAL PETROLEUM SUPPLY CO., PLAINTIFF,
v.
I.T.I. SHIPPING, S.A., IN PERSONAM, M/T RUTH M., HER ENGINES, TACKLE, APPAREL, ETC., IN REM, AND SAYBOLT DE MEXICO, S.A., IN PERSONAM, DEFENDANTS.



The opinion of the court was delivered by: Sweet, District Judge.

OPINION

Plaintiff Marathon International Petroleum Supply Company ("MIPSCO") initiated this maritime action against defendants I.T.I. Shipping, S.A. ("ITI"), its vessel, the M/T RUTH M, and Saybolt De Mexico, S.A. ("Saybolt") for damages resulting from the presence of water in a shipment of oil from Rabon Grande, Mexico to the Louisiana Offshore Oil Port ("LOOP"). A bench trial was held on January 14 and 15, 1991 and final arguments were heard on March 7. Upon all the proceedings and the following findings of fact and conclusions of law, the complaint will be dismissed.

Prior Proceedings

On January 16, 1990 the motion of a third party defendant Petroleos Mexicanos ("Pemex") to dismiss the third party complaint against it filed by ITI was granted, and the third party complaint was dismissed for lack of jurisdiction under the Foreign Sovereign Immunities Act of 1976 ("FSIA"). On June 27, 1990 a memorandum opinion was filed denying the motion of ITI for reargument and to dismiss the complaint on the grounds of the absence of an indispensable party. 740 F. Supp. 984. Familiarity with those opinions is assumed.

The Facts

On July 1, 1981 MIPSCO and Pemex entered into a contract of sale for crude oil to be supplied by Pemex and to be carried aboard vessels nominated by MIPSCO (the "Contract"). The Contract also provided that title and risk of loss was to pass to MIPSCO at the time the crude oil passed the flange connection between Pemex's delivery hose and the vessel's cargo intake apparatus and further provided that "any loss of or damage to the oil during loading that is caused through fault of the vessel shall be for [MIPSCO's] account."

Article 9 of the Contract was titled "Verification and Measurement of Crude Oil and Products" and provided that the quality and quantity of crude oil was to be determined by sampling, testings and measurement conducted by an independent inspector appointed by both parties and by its certificate setting forth the quantity and quality of crude oil. The data contained in this certificate was to be binding and conclusive upon both Pemex and MIPSCO. The costs of such independent inspection were to be shared equally between Pemex and MIPSCO, and that the verification and measurement of crude oil delivered was to be conducted in accordance with the methods approved and accepted by the American Society for Testing and Materials ("ASTM") or the American Petroleum Institute ("API"). MIPSCO is a wholly owned subsidiary of Marathon Petroleum Company ("Marathon"). Under the Contract, MIPSCO lifted cargoes approximately twice a month from Mexico.

On June 11, 1980, Pemex had promulgated a regulation requiring all surveyors of crude oil cargoes to complete their sampling of the cargo at least two hours prior to the completion of loading of crude oil into any vessel. At a meeting in 1985, a Saybolt employee at Rabon Grande advised MIPSCO representatives of the restrictions concerning surveyors at Rabon Grande. From 1980 to 1986 MIPSCO lifted over 100 cargoes at Rabon Grande, including ten tanks of Maya crude oil.

On May 20, 1986, Hancock Shipping Company Ltd. ("Hancock"), another subsidiary of Marathon entered into a charterparty with ITI which owned the motor tanker RUTH M. In exchange for freight, the RUTH M was to carry a minimum of 125,000 long tons of crude oil from the east coast of Mexico to the United States Gulf. On or about May 20, 1986 MIPSCO nominated the RUTH M to transport two parcels of crude oil which would be supplied by Pemex. Pursuant to the contract, MIPSCO purchased 595,693 barrels of Maya crude oil.

The quantity and quality of crude oil under the Contract was to be determined by an independent inspector appointed jointly by MIPSCO and Pemex in accordance with the methods approved and accepted by the ASTM.

Cargoes of crude oil typically contain a quantity of water, which is deducted from the overall volume of cargo, to arrive at the net quantity of crude oil delivered. The water in cargoes of crude oil exists either as "free water," i.e., water which has precipitated out of the crude oil and is readily identifiable as water separate from the oil, or as "base sediment and water" ("BS & W"), i.e., emulsified water which is dispersed as a colloidal suspension within the oil. To determine the quantity of BS & W in the oil, a representative sample of the cargo must be taken by a petroleum inspector and subjected to laboratory analysis. The amount of water in suspension is then represented as a percentage of the overall volume of the cargo and deducted therefrom, together with the amount of free water, to determine the net quantity of crude oil delivered. With respect to the determination as to the presence of free water in the tanks, settling of tanks takes one hour before an accurate determination can be made.

On May 20, 1986, Saybolt was selected by MIPSCO and Pemex as the independent inspector to determine the quality and quantity of 595,693 barrels of Maya crude oil purchased under the Contract. On May 21, 1986, the RUTH M received orders from ITI's agent in New York, Maritime Overseas Corporation. These instructions directed the master of the RUTH M to provide information regarding the cargo of crude oil to MIPSCO or its representatives after loading. Among the information requested to be provided was the volume of oil loaded as recorded on the bills of lading, the free water observed in the RUTH M's tanks after loading had been completed, the sediment and water content of the cargo, and letters of protest, discrepancies, or comments noted by the crew of the RUTH M, if any.

On May 27, 1986 the RUTH M arrived at Rabon Grande, Mexico. As the RUTH M loaded, Saybolt's inspector, accompanied by the chief officer or other members of the crew of the RUTH M, took intermittent samples of crude oil from the cargo tanks. These samples were taken ashore and analyzed to determine quality and quantity. No samples were taken of the crude oil loaded in tanks 1C and 4C. The ship's chief officer, Sang Jae Lee, did not protest Saybolt's failure to take samples.

During or immediately after the Maya crude oil was pumped aboard, the chief officer and the Saybolt inspector, as they gauged (as opposed to sampling) tanks 1C and 4C discovered large amounts of free water in these two tanks, to wit, 1126 barrels in tank 1 center and 68 barrels in tank 4 center. The chief officer had never observed water in crude oil to such an extent and believed that water was separating from the crude oil. Neither Saybolt nor the ship undertook any further measures to discover the extent of the free water contamination or to advise MIPSCO's local agent of their findings at the time.

Saybolt performed an analysis of samples taken from the Maya crude oil and Isthmus crude oil loaded aboard the RUTH M in Mexico. With respect to the Isthmus crude oil, this analysis yielded a BS & W content of 0.15% and a water by distillation content of 0.25%. With respect to the Maya crude oil, the analysis by Saybolt yielded a BS & W content of 0.05% and a water distillation content of 0.10%.

A vessel gauging report for the RUTH M was issued by Saybolt on May 29, 1986. This report noted, inter alia, that 1126 barrels of free water were present in cargo tank 1 center and 68 barrels of free water were present in cargo tank 4 center of the RUTH M. Cargo tanks 1 center and 4 center were the last two cargo tanks of the RUTH M to be loaded in Mexico on May 29, 1986.

After loading the two cargoes of crude oil in Rabon Grande, the RUTH M issued two bills of lading. These bills of lading incorporated the charterparty of May 20, 1986. This charterparty, by clause 32, incorporated the Hague/Visby Rules, a regime governing the duties and liabilities of parties to a bill of lading. Article 3 of the Hague/Visby Rules, requires the carrier that issues a bill of lading to exercise due diligence to make the ship seaworthy, to man the ship properly, and to load, handle, carry, stow, keep, care for and discharge the cargo carefully.

The master of the RUTH M issued a letter of protest at Rabon Grande, stating that 1285 of water were loaded in the Maya crude and 483 barrels of water in the Isthmus crude, a protest which was given to the loading terminal and to MIPSCO agent. On May 30 the RUTH M telexed MIPSCO advising that water had been loaded, in error transposing the figures for the two types of crude.

On May 30, 1986, MIPSCO informed Marathon Marine, a subsidiary of Marathon, by telex that there were 142 barrels of free flowing water in the Maya crude oil loaded aboard the RUTH M and that the sediment and water content of the Maya crude oil was 0.05%. Saybolt also advised that the Isthmus crude oil loaded aboard the RUTH M contained 483 barrels of free flowing water and that the sediment and water content of the Isthmus crude oil was 0.15%. These calculations were in error.

The RUTH M, sailed upon completion of the loading on May 29 and departed Rabon Grande at 0100 hours on May 30, 1986. The vessel arrived at the LOOP on June 2, 1986.

Upon arrival of the RUTH M at LOOP on June 1, E.W. Saybolt & Co., Inc. ("E.W. Saybolt"), an affiliate of Saybolt, analyzed a sample of Maya crude oil which was identified as a "vessel composite" and also prepared its own sample for analysis. The "vessel composite" analysis yielded a water by distillation content of 0.15% and a water and sediment content of 0.05%. E.W. Saybolt's sample yielded a water by distillation content of 2.5%, and a water and sediment content of 2.4%.

E.W. Saybolt issued a letter of protest to the RUTH M at LOOP. This letter protested an increase in free water "measured under cargo onboard at discharge port compared with load port measurements . . ." of 12,696 barrels and further noted that the RUTH M loaded 596,350 barrels of crude oil and discharged 583,699.67 barrels for an in transit difference of 12,650.33 barrels, or 2.12% of the crude oil cargo carried aboard the RUTH M, the difference being free water. At $8.80 a barrel this represented a loss of $110,924 attributable to the free water taken on board at Rabon Grande. The loading and testing and the absence of any ...


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