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Matter of Hess Corporation v. Dorado Tanker Pool, Inc.

United States District Court, S.D. New York

March 4, 2015

In the matter of the Arbitration Between HESS CORPORATION, Petitioner,

James D. Kleiner, Esq., Hill, Betts & Nash LLP, New York, NY, Attorney for Petitioner.

Michael Fernandez, Esq., Michael E. Unger, Esq., Gina M. Venezia, Esq., Freehill, Hogan & Mahar LLP, New York, NY, Attorneys for Respondent.



Petitioner Hess Corporation ("Hess") petitions to confirm an arbitration award of $1, 192, 021.25 in its favor and against respondent Dorado Tanker Pool, Inc. ("Dorado"). Dorado opposes the petition and moves to vacate the award on the ground that it reflects manifest disregard of the law of damages. For the reasons stated herein, we conclude that there was no manifest disregard of the law, and we confirm the award.


Dorado does not dispute the arbitration panel's factual findings for present purposes. Accordingly, we rely on those factual findings, supplemented only as necessary to illuminate the parties' current dispute.

A. Underlying Facts

This case arises out of the contamination of a parcel of jet fuel belonging to Hess at the port of St. Croix, U.S. Virgin Islands. On July 30, 2011, the M/T SWARNA MALA (the "Vessel") arrived at St. Croix, pursuant to a charter party between Hess and Dorado, the Vessel's time charter owner, to take on two cargoes of clean petroleum products sold there by Hovensa LLC ("Hovensa") to Hess. Award at 2. The Vessel's initial orders were to carry the cargoes to Bayonne, New Jersey, but revised orders providing for final discharge at other United States and Canadian ports were contemplated. Id . One of the cargoes was jet fuel, and the other was No. 2 heating oil (or "No. 2 oil"), a product of lower grade than jet fuel. Id . The quantity of jet fuel sold by Hovensa to Hess was 112, 289.69 barrels ("bbl").[2] Id. at 9.

The next day, after the cargoes were loaded on board the Vessel, independent inspectors discovered discrepancies suggesting that a portion of the No. 2 oil had been erroneously transferred into the tank containing the jet fuel. Award at 2. A comparison between land and ship tank cargo measurements revealed a gain of 3, 812.62 bbl in the tanks designated for jet fuel and a corresponding shortage of 3, 007.80 bbl in the tanks designated for No. 2 oil. Id . Apparently, the jet fuel had been contaminated in loading. Id.

Hovensa refused a request to take the apparently contaminated product back ashore. Id . Hess revised its voyage orders and directed the Vessel to proceed to New York harbor, where it arrived on Saturday, August 6, 2011. Id. at 2-4. The arbitration panel summarized the events that transpired after the Vessel arrived in New York as follows:

Following sampling at the anchorage, the Vessel discharged the contaminated jet fuel parcel into two barges which in turn delivered the product ashore into Hess Newark Tank 309 and its First Reserve Tank 235. From those tanks Hess subsequently moved the product about to other of its tanks and through a myriad of barge transfers, product blends and sales in an attempt to mitigate its damages. The damaged product was ultimately disposed of some three months later.

Id. at 3.

B. The Arbitration

Hess commenced two proceedings to recover for loss that it claimed to have incurred as a result of the contamination of the jet fuel parcel (hereafter called the "Contaminated Fuel"). The first, a civil action in this Court against the Vessel and its owner, was stayed pending the arbitration of Hess's claim against Dorado. See Stipulation and Order, Hess Corp. v. Shipping Corp. of India Ltd., No. 12 Civ. 6037 (NRB) (S.D.N.Y. Jan. 16, 2013), Doc. 5. The second was the arbitration between Hess and Dorado that resulted in the award now under review.

The arbitration was conducted in New York before a panel of three arbitrators (the "Panel"). Award at 3. Because Dorado conceded liability for the contamination of the jet fuel at St. Croix, id., the principal issue before the Panel was to determine the amount of damages. The Panel conducted six evidentiary hearings, in which it heard the testimony of three witnesses and received voluminous documentary evidence. Id . In a reasoned decision of thirteen pages, exclusive of an appendix, the Panel awarded some but not all of Hess's claimed damages and also granted a Dorado counterclaim.

In its post-hearing briefing, Hess asked the Panel to find that it incurred three categories of damages. The arguments of the parties as to each of these categories, and the conclusions of the Panel, may be summarized as follows.

1. Downgrade of the Contaminated Fuel

Hess's principal damages claim was for the diminution in value, or downgrading, of the Contaminated Fuel caused by the contamination itself. Hess argued that the Panel should calculate this loss according to the "market value rule, " defined as "the difference between the sound and damaged market values of the jet product.... at the time of delivery." Award at 4-5; see, e.g., Hess Post-Hearing Br. at 2-3, 38-40. Applying that rule, Hess argued that the Contaminated Fuel's sound market value (i.e., the value that it would have had if it had not been contaminated) would have been that of "low sulfur jet/kerosene"; that the damaged market value of the Contaminated Fuel was that of No. 2 oil; and that the appropriate values for each of these grades of fuel were the market prices published by Platts for August 5, 2011 (the last business day before the Vessel arrived at New York), viz., $3.1091 per gallon ("gal") for low sulfur jet/kerosene and $2.9361 per gallon for No. 2 oil. Award at 3-4. Based on the $0.173/gal price difference, Hess argued that the downgrade of 112, 289.69 bbl of Contaminated Fuel cost it $815, 896.87. Id. at 9.

In response, Dorado argued that "Hess sustained no loss from the contamination" whatsoever. Award at 5; see, e.g., Dorado Post-Hearing Br. at 1. Specifically, Dorado argued that the evidence showed that when Hess purchased the Contaminated Fuel, that fuel "met the specifications for CPL 54 grade jet, " and that all of the Contaminated Fuel was ultimately either "sold or otherwise utilized by Hess as CPL 54 grade jet" and thus "was never simply downgraded to 2 oil." Dorado Post-Hearing Br. at 3; see Award at 5.[3] Dorado argued that instead of calculating damages according to the market value rule urged by Hess, the Panel should instead apply the "remediation rule, " Dorado Post-Hearing Br. at 15, under which "any damages awarded to Hess must only reflect the costs incurred by Hess in reconditioning the allegedly contaminated fuel, " id. at 17. Dorado further argued that "Hess has failed to provide such costs." Id.

The Panel accepted Hess's arguments, finding that the Contaminated Fuel had the "quality parameters of a low sulfur jet/kerosene" in its sound condition and the value of No. 2 oil in its distressed condition. Award at 9; see id. at 7. Emphasizing the availability of "a published market reference for the goods" (i.e., the Platts prices), and rejecting Dorado's contention that special circumstances justified a departure from the market value rule, the Panel concluded that "the appropriate measure of damages in this case is the difference between the fair market value of the cargo at its destination in the condition in which it should have arrived and the ...

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