Texaco Export, Inc., and Chevron Oil Sales Co., Plaintiffs-appellants, v. Overseas Tankship Corp., Defendant,andgetty Tankers Ltd., Defendant-appellee.united Steamship Corp., Defendant-third-party Plaintiff-appellee, v. Getty Oil Co., Third-party Defendant-appellant, 573 F.2d 717 (2d Cir. 1978)

The transactions which form the basis of these appeals illustrate the Byzantine complexity of international oil dealings as practiced by the major oil companies, the so-called "Seven Sisters." Beneath the corporate mosaics, however, lie relatively simple damage claims which, in the case of the principal appeal, turn upon questions of contractual interpretation and, in the case of the third party appeal, are readily solved by well-recognized principles of damage calculation. On the principal appeal, we reverse and remand to the United States District Court for the Southern District of New York, Edmund L. Palmieri, Judge, with instructions to make, or to refer to the special master to make, specific factual findings on the terms of the two charters involved to determine whether appellants' damages include freight costs. With regard to the third party appeal, we affirm the award of lost voyage profits since they are not too speculative or remote.

The S/T Wafra was stranded and subsequently destroyed pursuant to governmental authority off the coast of South Africa in February or March, 1971, resulting in a total loss of its cargo of crude oil in bulk. One-half of the cargo was owned by Chevron Oil Sales Co. (Chevron) and one-half by Texaco Export, Inc. (Texaco). They were the plaintiffs below and are the appellants here. The owner of the vessel, defendant-appellee (cross-claim defendant below) was Getty Tankers Ltd. (Getty Tankers). The Wafra was operating under a long-term time charter to Getty Oil Co. (Getty Oil), third party defendant-appellant. By a time charter dated April 7, 1970, Getty Oil subchartered the vessel to United Steamship Corp. (United), defendant below and third party plaintiff-appellee here, for five years. United, in turn, subchartered the Wafra to Overseas Tankship Corp. (Overseas), defendant below, under a twelve-month consecutive voyage charter. In January, 1971, Overseas as disponet owner entered into an oral subcharter with Chevron as charterer for the entire capacity of the vessel (Overseas/Chevron charter), for the carriage of a full cargo of crude oil from Ras Tanura, Saudi Arabia, to Capetown, South Africa. Thereafter, Chevron agreed to an oral charter for one-half of the vessel's carrying capacity with Texaco (Chevron/Texaco charter) at the same rate of freight that Chevron was obligated to pay Overseas under the Overseas/Chevron charter.

After suit was commenced, the parties reached a settlement on the merits in November, 1975. Getty Tankers agreed to pay 62.5% of the provable damages incurred by Chevron and Texaco from the loss of their cargo.¹  Additionally, Getty Tankers and Getty Oil agreed to pay United 62.5% of its provable damages. Herbert M. Lord was appointed special master to ascertain the damages sustained by Chevron, Texaco and United. The parties thereafter agreed on most of the damage calculations, with the exception of the two questions which constitute the issues on appeal.

The principal dispute centered on whether Chevron's and Texaco's damages included freight charges which they in fact paid to Overseas. Resolution of this issue, in turn, necessitated determination of another disputed question whether the Overseas/Chevron or Chevron/Texaco charters, or both, provided that freight would be earned irrevocably upon loading. If both, Chevron was legally obligated to pay Overseas for the carriage of the entire cargo, and Texaco was legally obligated to pay Chevron for the carriage of Texaco's share of the cargo. With regard to the third party appeal, the parties disagreed on whether United was entitled to include in the calculation of its damages profits lost on the voyage in progress at the time of Wafra's destruction.

The special master found against Chevron and Texaco, recommending to the district court that the freights be excluded from their damage computations. Without a hearing, the district court approved the special master's conclusions in a memorandum decision. Accordingly, it awarded Texaco and Chevron $463,736.94 (representing 62.5% of the invoice value of the cargo ($737,129.89), plus 62.5% of the fees of a salvage master ($4,849.23)), which did not take into account the freights paid. The district court also followed the special master's report on the third party claim, and awarded United $187,871.01 (representing 62.5% of $164,326.71 lost profits plus 62.5% of $136,266.96 out-of-pocket expenses).

Chevron and Texaco urge that under the terms of both the Overseas/Chevron and the Chevron/Texaco oral charters the freights were earned and became nonreturnable once the cargo was loaded. That is, at the time of loading, Chevron was obligated to pay the freight charges to Overseas for the carriage of the entire cargo, whether or not the ship and its contents later arrived at the destination; similarly, Texaco was obligated to pay Chevron one-half of the freight charges. All parties agree that if the charters contained an earned prepaid freight provision,²  the freights should be included in the computation of appellants' damages.³  Conversely, in the absence of such an agreement freight is not earned until the cargo is delivered, and thus appellants' damages would not include freight. E. g., The Kimball, 70 U.S. (3 Wall.) 37, 44-45, 18 L. Ed. 50 (1865); Hellenic Lines, Ltd. v. United States, 512 F.2d 1196, 1203, 1209 (2d Cir. 1975); see The Nat Sutton, 62 F.2d 787, 790-91 (2d Cir. 1933).

Appellant's chief contention before the special master was that the Overseas/Chevron agreement is governed by two prior, formally executed contracts still in force. Both contracts incorporated an earned-on-loading freight provision, thereby making the freight actually paid to Overseas ($316,667.52)⁴  an element of Chevron's damages. A complete understanding of the relationship between these prior agreements and the Overseas/Chevron charter requires a brief genealogical review of Standard Oil of California (Standard Oil) and some of its affiliates.

Chevron, whose function is to market crude oil outside of the United States, is a Standard Oil affiliate. A Standard Oil subsidiary formerly named California Transport Corp., now named Chevron Transport Corp. (California), is a tanker company. Overseas is also a Standard Oil subsidiary and a tanker company. Both of these tanker companies are managed by Chevron Shipping, see note 4 supra, another Standard Oil subsidiary.

On April 1, 1959, Standard Oil and California executed a tanker transportation agreement (the 1959 contract) whereby the latter agreed to furnish tankers to Standard and its affiliates, including Chevron, for the transportation of petroleum cargoes.⁵  On June 1, 1970, California and Overseas entered into a transportation contract (the 1970 contract). Under this agreement, Overseas contracted to provide vessels in performance of California's obligations to Standard Oil under the 1959 contract, on the terms and conditions specified in the 1959 agreement. Both contracts incorporated by reference the terms of Part II of the "Warshipoilvoy"⁶  form of tanker voyage charter which oblige the charterer to pay freight irrevocably on loading, "ship and/or cargo lost or not lost."⁷ 

Appellants contend specifically that the Wafra was chartered by Overseas to Chevron, Standard Oil's affiliate, pursuant to the terms of the 1970 contract. They further assert that since the 1970 contract expressly incorporated the terms of the 1959 contract, and since the 1959 contract expressly incorporated the irrevocable freight-on-loading provision of the Warshipoilvoy form of charter, "it follows, as the night the day," Brief for Appellants at 21, that the oral Overseas/Chevron charter incorporated by reference the freight payment clause of the Warshipoilvoy charter.⁸  Accordingly, the argument runs, Chevron was obligated to pay full freight to Overseas on the entire cargo at the time of loading, thereby entitling Overseas to retain the freight despite the loss of appellants' cargo.

In holding that there was no enforceable oral agreement requiring appellants to pay freight irrevocably to Overseas upon loading, the special master focused solely on the activities of Chevron and Texaco with respect to their oral charter. By the time of the Overseas/Chevron charter, Chevron and Texaco had negotiated draft transportation agreements dealing with destination sales, as the one involved here. See note 3 supra. However, the draft agreements had not been executed when the Wafra shipment was made.⁹  These unexecuted contracts provided that freight was earned on loading. Appellants argued that the existence of these clauses in all of the drafts was an important indicator that the parties had agreed on freight irrevocably earned upon loading. The special master, however, concluded that an equally plausible inference from the fact that the documents were not executed was that at least one of the plaintiff-appellants (Texaco) was unwilling to assume this freight risk on the cargo shipments.¹⁰  Chevron and Texaco disputed this interpretation. Their witnesses testified that the only point of disagreement related to the handling of backhauls and deadfreight,¹¹  and that both appellants believed they were operating under an earned freight provision. Nevertheless, the special master found that the "plaintiffs (had) not sustained (their) rather heavy burden of establishing that there was an enforceable oral agreement pertaining to the WAFRA shipments which committed them to pay freight irrevocably to Overseas."

The special master's report, however, does not refer to the 1959 agreement between Standard and California or to the 1970 agreement whereby Overseas agreed to furnish vessels to carry out California's obligations under the 1959 agreement with Standard Oil and its affiliates. Nor does the report at any point discuss the significance of the Warshipoilvoy charter form included in those agreements. It thus appears that the special master either did not consider the question whether the oral charter between Chevron and Overseas incorporated by reference the 1959 and 1970 agreements and their earned prepaid freight clauses, or, in addressing the question, erroneously failed to distinguish the different bases of the alleged respective obligations of Chevron and Texaco irrevocably to pay freight. Regardless of the terms of the separate transportation agreement between Chevron and Texaco, resolution of their mutual obligations is not determinative of the provisions contained in the Overseas/Chevron charter. For if the Overseas/Chevron charter included the Warshipoilvoy provision, then the freight charges on the entire shipment would be includable in Chevron's damages.¹² 

We are thus left without any findings by the special master on this key mixed question of law and fact, other than his conclusion, based on an entirely separate contract, that appellants did not sustain their burden of proof. At the very least, we must require that specific findings be made on the terms of the Overseas/Chevron charter.

Similarly the district court did not distinguish the Overseas/Chevron charter from the Chevron/Texaco charter. In adopting the special master's report, the judge concluded that "(t)here was no explicit written agreement on the subject" of earned prepaid freight. Texaco Export, Inc. v. Overseas Tankship Corp., No. 72 Civ. 463, at 4-5 (S.D.N.Y., filed May 17, 1977). The district court further noted that "the actions of the parties were appropriately construed by the Special Master to have been inconsistent with any such oral agreement or with their prior dealings." Id. at 5.

The district court's conclusions are problematic for several reasons. First, it is clear that there were prior written agreements on the subject of earned prepaid freight with regard to the Overseas/Chevron charter. The issue is whether they were incorporated in the charter. Second, it is unclear what "actions" of Overseas and Chevron concerning their charter were "inconsistent" and how they were inconsistent. It appears from our reading of the evidence that the parties' conduct was compatible with their assertion that the Overseas/Chevron charter provided for irrevocable freight on loading. Mr. Macauley, vice-president of Chevron Shipping, the management company for California and Overseas, see note 4 supra, testified that the Wafra was chartered by Overseas to Chevron on the basis of the 1970 agreement which was executed to carry out, and incorporated, the 1959 agreement. He further testified that the billing to Chevron and Texaco for the freight was made pursuant to these earlier contracts. Moreover, the freight invoices submitted by Chevron Shipping state that they were "in accordance with transportation agreement." The evidence suggests that this reference was either to the 1970 agreement, as Mr. Macauley testified, or to the 1967 transportation agreement, both of which provided for irrevocable freight on loading. See notes 7 & 9 supra. Finally, Chevron's payment of its freight charge to Overseas without complaint or undue delay after the cargo was lost, without ever having taken steps to recover the payment from Overseas, bolsters the conclusion that the Overseas/Chevron agreement provided for prepaid freight.¹³ 

Our brief review of the evidence is not an attempt conclusively to find the facts surrounding the terms of the Overseas/Chevron charter ourselves. It does, however, support our suspicion that there was confusion below between the two distinct charters. Not even appellee Getty Tanker's brief satisfactorily meets the point that the terms of the Overseas/Chevron charter present a different issue from the terms of the Texaco/Chevron agreement.¹⁴  In sum, we cannot agree, on the basis of the findings below, that the Overseas/Chevron charter did not include an irrevocable freight-on-loading provision. We therefore remand to the district court for findings on the subject, in view of appellants' contentions, which seem plausible and reasonable enough to warrant the most serious consideration.

Given the omission below explicitly to distinguish between the two charters in issue, we believe that in the interests of justice, reconsideration of the terms of the Chevron/Texaco charter is also called for. Not unmindful of the great weight accorded to the findings of both the special master and the district court, we are persuaded that with a better understanding of the Overseas/Chevron arrangement as well as of the events which prompted Chevron to charter vessels for its oil sales to Caltex, the factfinder would view the evidence supporting the existence of an irrevocable freight-on-loading provision in the Chevron/Texaco charter in a different light.

If, as we suspect, and Chevron evidently believed,¹⁵  the Overseas/Chevron agreement provided for freight earned on loading, it is verging on the inconceivable that Chevron, a "partner" with Texaco, see note 9 supra, would have entered into an agreement whereby Texaco would not assume a similar obligation. See note 10 & accompanying text supra. With the unlikelihood of this omission in mind, the factfinders below might well have been persuaded by the various witnesses who testified to appellants' interpretation of the contract. The nonexecution of the draft destination sales agreements, on which the special master and the district court so heavily relied, evidently "troubled" the master. But appellants certainly presented viable explanations to meet the special master's doubts. See notes 9-11 & accompanying text supra. Similarly, appellants presented a satisfactory explanation for Texaco's delay in paying Overseas its share of the earned prepaid freight, see note 13 & accompanying text supra, the only other reason articulated by the master in support of his conclusion that neither charter provided for earned freight on loading.

We therefore remand for reconsideration, with the aid of any additional insights this opinion may seem to present into the terms of the Overseas/Chevron charter, the question whether the Chevron/Texaco agreement provided for freight irrevocably earned on loading.

The special master's report, adopted by the district court, allowed United's third party claim for lost profits¹⁶  against Getty Oil, which had subchartered the vessel to United for five years (Getty Oil/United charter). The amount awarded is an estimate of the profits United would have reaped from the Wafra's aborted voyage (Voyage 3), had the vessel not been destroyed, based on United's profits from the first two voyages under its one-year charter with Overseas.

We agree with the special master and the district court that there is nothing speculative about the amount that United would have earned on this voyage.¹⁷  Thus, the case falls within the definition of permissible recoveries enunciated in Polar Steamship Corp. v. Inland Overseas Steamship Corp., 136 F.2d 835, 840-41 (4th Cir.), cert. denied, 320 U.S. 774, 64 S. Ct. 83, 88 L. Ed. 464 (1943). See Putnam v. Lower, 236 F.2d 561, 571-72 (9th Cir. 1956); 11 S. Williston, A Treatise on the Law of Contracts §§ 1345-46A (W. Jaeger 3d ed. 1968). Getty Oil argues, however, that it was incorrect to utilize profits solely from the early portion of the five-year Getty Oil/United charter to measure damages. Rather, it asserts, the expected profits (or losses) to be sustained over the remaining four years and seven months of the charter also should have been included in the calculation; United, the assertion continues, having ignored the remaining period, failed to prove any lost profits.

The simple response to Getty Oil's argument is two-fold. First, there was evidence tending to show that United would have made profits over the remaining period of its charter with Getty Oil,¹⁸  and though given the opportunity by the special master, Getty Oil failed to produce any contrary evidence. Second, by limiting its claim to profits lost on Voyage 3, United was under no legal obligation to establish that it would have continued to make profits during the remaining period of its charter with Getty Oil. Getty Oil had the burden of establishing that losses over this period would have diminished or eliminated the Voyage 3 profits. See L. Albert & Son v. Armstrong Rubber Co., 178 F.2d 182, 190-91 (2d Cir. 1949). Having failed to produce proof in this regard, Getty is foreclosed from claiming that the damages of United were too speculative or remote.

The cases relied on by Getty Oil do not support its position. In fact, The Umbria, 166 U.S. 404, 422-23, 17 S. Ct. 610, 41 L. Ed. 1053 (1897), held that damages occasioned by a vessel's destruction include, in addition to the value of the vessel, what the vessel would have earned on the voyage during which it was lost. Thus, it sustains the award to United. Skou v. United States, 478 F.2d 343, 346-47 (5th Cir. 1973), likewise does not fortify Getty Oil's argument. There the shipowner was precluded from recovering alleged profits lost while making collision repairs unless he could show that he had employment for the ship at the end of the collision voyage.¹⁹  United, however, does not seek estimated profits from subsequent voyages. And it presented concrete evidence of the profits lost on the voyage in question.

Judgment on the principal appeal reversed and remanded for findings in accordance with this opinion; judgment on the third party appeal affirmed.

VAN GRAAFEILAND, Circuit Judge, concurring:

Although I agree with the majority that this matter should be returned to the Special Master for further findings, I am unable to adopt much of Judge Oakes' broad opinion. I am especially unable to join in his "suspicion" that the Overseas/Chevron charter contained a freight earned provision. If we are sending this case back for further fact-finding, I believe we should let the Special Master do that free from our "additional insights". I also think that we would be better off to refrain from unnecessary speculation of the sort found in footnote 12, supra.

I concur in the result.