Case of the Day: Flame S.A. v. Freight Bulk Pte. Ltd.
Posted on August 8, 2014
The case of the day is Flame S.A. v. Freight Bulk Pte. Ltd. (4th Cir. 2014). Flame was a Swiss shipping and trading company. It entered into forward freight swap agreements with Industrial Carriers, a firm organized under an unspecified country’s law that did business in New York. “What’s a forward freight swap agreement,” I hear you ask? Here is a description from D’Amico Dry ltd. v. Primera Maritime (Hellas) Ltd., a recent Second Circuit case:
A major risk of an ocean carrier’s business is that a slowdown in worldwide commercial activity will lead to diminution in shipments of cargo, causing vessels to make expensive voyages partially empty or, in more extreme circumstances, to lay idle. The rates carriers charge for carriage of goods fall during such slowdowns.… As a way of offsetting losses from its vessels being underemployed or idle during such a slowdown, [a carrier may] enter [ ] into futures contracts on international shipping rates. These contracts, sometimes called “forward freight agreements” or “FFAs,” specify a base rate (the “contract rate”) for a hypothetical shipment of specified goods over specified routes and future dates for comparison of the contract rate with the market rates on such future dates. If on a specified future date the market rate is above the contract rate, then the party that took the downside of the agreement must pay the other party the difference. If on the future date the market rate is below the contract rate, the party that took the upside of the contract must pay the other party the difference. Profits realized from such contracts as rates fall will increase [the carrier’s] revenues when demand is low, counteracting its losses from underemployment. Conversely, the losses on such contracts will decrease [the carrier’s] net revenues when demand is high and rates rise.
When freight rates fell in 2008, ICI got into financial trouble and filed a bankruptcy petition in Greece. This constituted an event of default under its agreements with Flame. Flame sued ICI in the High Court in England, which ultimately entered judgment against ICI for nearly $20 million.
Flame sought and obtained recognition of the English judgment in the Southern District of New York, and pursuant to the statute governing registration of the judgments of any US District Court in any other district, 28 U.S.C. § 1963, Flame registered the judgment in the Eastern District of Virginia. Flame then filed a verified complaint and sought an order permitting the attachment of the M/V Cape Viewer, which was then docked in Norfolk, Virginia, under Rule B of the Supplemental Admiralty Rules. The Cape Viewer was owned by Freight Bulk, and Flame’s theory was that Freight Bulk was ICI’s alter ego. The judge allowed the attachment. Freight Bulk moved to vacate the attachment on the grounds that the court lacked subject matter jurisdiction.
Here’s the issue. The only basis for jurisdiction that Flame asserted was the admiralty and maritime jurisdiction: under 28 U.S.C. § 1333, “The district courts shall have original jurisdiction, exclusive of the courts of the States: of (1) Any civil case of admiralty or maritime jurisdiction, saving to suitors in all cases all other remedies to which they are otherwise entitled.” It is settled that this jurisdiction extends to the recognition and enforcement of foreign admiralty judgments. Penhallow v. Doane’s Adm’rs, 3 U.S. (3 Dall.) 53 (1795). But it was clear that under English law, the action for breach of the forward freight swap agreements was not considered an admiralty action. On the other hand, the court determined that under United States law, an action for breach of the forward freight swap agreement would be considered an admiralty action. So the question was whether the court should look to the law of the foreign state or to US law in making the determination whether the case falls within the admiralty jurisdiction.
The court held that US law governed. This seems correct under ordinary conflict of laws principles, because the question is really about allocation of functions among different courts, which is a procedural question to be decided under the law of the forum.
Judge Wilkinson went farther in his concurring opinion, noting that the question was not just a procedural question but a jurisdictional question:
Therefore, a court could theoretically import foreign procedure, just as it might use foreign substantive law as its rule of decision. Strictly speaking, however, it is incoherent to speak of adopting foreign law to decide the jurisdictional question. Jurisdiction is the sovereign grant of authority to make legally binding rules or determinations in a particular situation. To allow foreign law to dictate the availability of subject-matter jurisdiction would be to divest the Constitution and Congress of their sovereign authority to decide the extent of the power of the judicial branch. In other words, federal courts would no longer be acting as courts of the United States, since their power would be exercised pursuant to a grant of authority from a different sovereign—here, the foreign jurisdiction. It would, as Justice Story recognized in a related context, “annihilate the sovereignty and equality of the nations,” and violate the principle that “every nation must judge for itself, what is its true duty in the administration of justice.”
But at the same time, he was careful to point out that the foreign law is not necessarily irrelevant:
To be sure, foreign law is not irrelevant to the determination of whether federal admiralty jurisdiction exists. The status of the contract or judgment under foreign law informs the inquiry in important ways. The question of whether a legal issue is maritime in nature is not an exercise in logic chopping wholly internal to the conceptual schemas of American jurisprudence; instead, it asks whether, as a practical matter, the principal objective of [the] contract is maritime commerce. The reasoned judgments of experienced jurists, foreign or domestic, on this issue are due respectful consideration by federal courts. Additionally, whether other countries characterize a contract as maritime might have collateral consequences that may affect its real-world impact on maritime commerce—for example, in terms of how the contract is interpreted overseas or what procedures its interpretations are afforded.