Otto Candies v. NKK

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DMC/SandT/03/36
Otto Candies v. Nippon Kaiji Kyokai Corp.
United States Court of Appeals for the Fifth Circuit: Judges Jones, Benavides and Kazen (sitting by designation): September 2003
Shipping: Classification society, negligent misrepresentation, classification certificates
Summary
In this case, the Fifth Circuit affirmed the district court’s decision to hold Nippon Kaiji Kyokai ("NKK"), a maritime classification society, liable to Otto Candies, L.L.C. ("Otto") for negligent misrepresentation, based on statements made in a vessel classification survey in connection with Otto’s purchase of the SPEEDER. NKK argued that Otto was neither entitled to bring nor prevail on a negligent misrepresentation claim. After reviewing the law concerning claims against classification societies, the Fifth Circuit held that "the general maritime law cautiously recognizes the tort of negligent misrepresentation as applied to classification societies." The Court then affirmed the district court’s decision that Otto had properly brought its claim for negligent misrepresentation and that NKK was liable for Otto’s losses sustained in reliance on NKK’s classification.

DMC Category Rating: Developed

Case Note contributed by Jana N. Byron, attorney with the law firm Healy & Baillie LLP. Healy & Baillie are the International Contributors to the website for the USA.

Facts/Background
The dispute between Otto and NKK arose in connection with the re-classification of the SPEEDER, a high speed, aluminum hull passenger vessel. The vessel was originally owned by Diamond Ferry Co., Ltd. ("Diamond") and was classified by NKK as a "coastal (Japanese Government) passenger vessel." In 1998, Diamond took the SPEEDER out of service and her NKK classification lapsed. In 1999, Otto entered into a Memorandum of Agreement ("MOA") with Diamond for the purchase of the SPEEDER. As a condition of the purchase, the vessel was to be re-classified by NKK free from any outstanding recommendations or deficiencies.

In January 2000, NKK issued a class certificate to Diamond indicating that the SPEEDER was certified within class with no outstanding recommendations or deficiencies. Otto thereafter completed its purchase of the vessel. The SPEEDER was then surveyed by the American Bureau of Shipping ("ABS") in order for Otto to transfer her classification from NKK to ABS.

The ABS surveyor, however, found numerous deficiencies that required repair before ABS would classify the SPEEDER. After effecting over US$325,000 in repairs to the vessel, Otto filed suit against NKK to recover the repair costs. The basis of Otto’s claim against NKK was the tort of negligent misrepresentation.

Judgment
The Fifth Circuit initially addressed whether Otto was eligible to bring a negligent misrepresentation claim against NKK. In order to demonstrate such eligibility, the Court required Otto to show that NKK provided the class certificate to Diamond with knowledge that the certificate would be provided to Otto for its guidance in determining whether to purchase the SPEEDER. Given the facts, the Court agreed with the district court that NKK actually knew at the time it re-classified the SPEEDER that the results of the classification survey would be conveyed to Otto for the purpose of influencing its decision to purchase the SPEEDER. Accordingly, the Court affirmed that Otto was entitled to bring its negligent misrepresentation claim.

In so holding, however, the Court specifically rejected "any implication that classification societies can be liable for negligent misrepresentation to parties, including without limitation seamen, longshoremen, passengers, cargo owners, and charterers that may rely upon a survey or class certificate, absent actual knowledge by the classification society that the certificate or survey report was being provided for the guidance and benefit of the party."

The Fifth Circuit went on to affirm the district court’s decision that NKK was liable to Otto for negligent misrepresentation. The Court agreed that Otto proved its claim for negligent misrepresentation because NKK’s certification that the SPEEDER was free of recommendations and deficiencies did not comply with NKK’s standards and rules for classification requiring the various deficiencies in the SPEEDER to be identified during the survey and certification process. The Court specifically noted that NKK was liable under its own standards and rules and not those of ABS.

Comments
Although this case permits recovery against a maritime classification society for negligent misrepresentation, the Fifth Circuit underlined that such claims must be limited by their facts. The Court stated that a classification society cannot be liable for negligent misrepresentation "absent actual knowledge by the classification society that the certificate or survey report was being provided for the guidance and benefit of the party."

 

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