The ship repair industry is an integral part of international shipping

Ships require constant maintenance and repair to operate properly. Routine repairs are often carried out by the ship’s crew while a vessel is under way. However, because of the unique characteristics of ships (i.e., size, complex equipment, scarcity of replacement parts, etc.), major repairs are performed by shoreside repair yards. These highly specialized facilities have the expertise, equipment and skilled labor force necessary to solve ship repair problems.

Contracts to repair vessels can be either oral or written.

If the contract is oral, there is an implied warranty that the repair will be carried out in a workmanlike manner. If the repairer is negligent and breaches the warranty, the vessel owner may sue for all foreseeable damages that result from the breach.

If the contract is written, the ship repairer often will limit his liability by using a limitation of liability clause (often called “red letter clause”) that is printed on standard repair contract forms.

The recent Nathaniel Shipping case (920 F.2d 1256) raises interesting questions concerning the liability of ship repairers.

The principle issue on appeal in the Nathaniel case concerned whether a shipowner’s claim against a negligent subcontracted repairman, with whom it had no contractual relationship, would be barred by the economic loss doctrine promulgated in 1986 by the Supreme Court in its East River decision (478 US 858).

The facts in the Nathaniel case are as follows: A thrust block, which absorbs the action of the ship’s propeller in the main engine of a vessel, fractured during a voyage. The vessel owner contracted with a repair facility to replace the block. The repair facility subcontracted the job to a subcontractor who failed to perform its duties in a workmanlike manner. Extensive remedial repairs were required and additional expenses were incurred by the shipowner, including the loss of the vessel’s use for 56 days.

The trial court found that the subcontractor negligently performed its work and awarded the shipowner $229,342, mostly for economic losses.

On January 15, 1991, in a two-to-one decision, the Fifth Circuit Court of Appeals reversed the trial court and held that the shipowner could not recover damages for the loss of use of the vessel. This result was based upon an expansion of the Supreme Court’s East River economic loss doctrine.

The East River case held that a product manufacturer has no duty under tort principles to prevent a product from injuring itself. When the injury involves the failure of a product to function properly, the only losses that occur are economic. Damages that are purely economical (as opposed to injuries to person or property) can only be recovered under contract principles. Parties are free, of course, to allocate risks and liabilities in their contracts with warranties or disclaimers.

On February 19, 1991, a petition for rehearing was filed in the Nathaniel case on the ground that the economic loss doctrine should not be expanded to cover ship repair contract disputes.

It is argued that if the doctrine is expanded, the long-established implied warranty of workmanlike performance associated with maritime service and repair contracts will be eliminated. If this happens, it is argued that the only thing a shipowner can do to prevent economic losses associated with ship repairs is to establish written contracts with all repair contractors and extract written warranty protection from all of them.

It remains to be seen if other circuits will follow the Fifth Circuit’s lead in expanding the economic loss doctrine to ship repair disputes. However, at present, the Nathaniel case is the law in the Fifth Circuit and shipowners’ economic losses are not recoverable in ship repair disputes in that circuit.