IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
BP NORTH AMERICAN PETROLEUM,
a division of BP Exploration & Oil, Inc.
SOLAR ST, her engines, tackle, boilers,
furniture, apparel, etc., in rem;
AHL SHIPPING COMPANY
Appeal from the United States District Court
Eastern District of Louisiana
May 14, 2001
JOLLY and BENAVIDES, Circuit Judges.
E. GRADY JOLLY, Circuit Judge:
Defendant AHL Shipping Company ("AHL") contaminated
a portion of the oil cargo it transported for plaintiff BP North American
Petroleum ("BP") while discharging the fuel from its vessel, the S/T SOLAR.
Following a bench trial, a damage award was ordered in favor of BP. BP
appeals the amount of the award. It argues that, in ordering a modified
"expected profit" award, the district court employed an improper formula
in calculating damages. We agree and hold that the traditional measure
of damages in damaged goods cases--the "market value" measure--should have
been applied in this case. Because this formula was not utilized, we REMAND
the case to the district court for a determination of damages using an
estimated market value of the damaged oil on the discharge date.
We begin with the facts. BP owned a cargo
of diesel oil and regular unleaded gasoline. AHL owned and operated the
SOLAR. BP contracted to sell the oil to Colonial Oil for $0.62945 per gallon.
AHL agreed to deliver the cargo from Corpus Christi, Texas, to the Colonial
Oil Terminal in Savannah, Georgia. The cargo was uncontaminated when it
was delivered to AHL and placed in the SOLAR on August 20-21, 1996.
Upon reaching Savannah, the SOLAR began discharging
the diesel oil on August 25, 1996. During the discharging process, a portion
of the diesel oil was contaminated with unleaded gasoline. The evidence
later revealed that the contamination was the direct result of negligence
on the part of AHL and the SOLAR.(2)
The market price of sound diesel on the day
of contamination was $0.62039 per gallon. On September 10, 1996, about
two weeks after the contamination, a Richmond slop reprocessor offered
to purchase the contaminated oil from BP at a discount of $0.10 below market
value, not including freight costs. Including freight, BP could have sold
the contaminated fuel for $0.125 per gallon below the market price of sound
oil. According to BP, it could not accept the offer because no transportation
for delivery of the oil was available at that time.
On October 20, 1996, about seven weeks after
the contamination, BP sold the contaminated oil for $0.62 per gallon. However,
the market value of uncontaminated diesel oil had risen to $0.74539 per
gallon since the original date of contamination. Therefore, during the
time that BP held the contaminated oil, the price of oil had risen by about
$0.125 per gallon.
Immediately after discovering that its cargo
of diesel oil was contaminated, BP traded in the futures market in order
to hedge against market price fluctuations in oil pending BP's disposition
of the contaminated oil.(3) Specifically,
BP sold futures contracts in the identical number of gallons of oil that
had been contaminated in an attempt to "lock-in" the value of this oil
pending disposition. The purpose of this transaction, of course, was to
prevent BP from losing money if the market price of oil had fallen before
it could sell the contaminated shipment. However, because the market price
rose by twenty percent, BP suffered a loss on these futures contracts equal
to the change in the price of oil--$0.125 per gallon. At the same time,
however, BP was able to take advantage of this increase in the price of
oil by selling the contaminated oil for a higher price in October.
BP sued for damages and was awarded only the
difference in the initial contract price for sound oil ($0.62945) minus
the price BP eventually received seven weeks later for the contaminated
oil ($0.62)--an award of only $0.009 per gallon. BP now appeals the district
court's calculation of damages, contending that the district court neglected
to calculate BP's actual losses by miscalculating the fair market value
of the contaminated oil and, in the alternative, by failing to consider
BP's losses in the futures market.
As we have just noted, the district court
calculated BP's loss by subtracting the profit BP eventually received for
the polluted oil from the profit BP would have received under its original
Colonial contract. Stating that "the goal is to place the injured cargo
owner in the same position it was in before the damage," the court found
that BP was not required to "speculate" in the futures market as a result
of the oil contamination, and refused to award BP additional damages. In
essence, the district court awarded BP damages based on its profit expectations
at the time it made the contract, ignoring the fact that oil prices had
risen dramatically between the time BP's oil was contaminated and the time
BP eventually sold the polluted oil; the district court further ignored
BP's losses in the futures market.
BP argues that the district court, in assessing
damages, should have calculated the difference between the market value
of the sound oil and the market value of the polluted oil at the date
of discharge, instead of using the price at which BP actually sold
the contaminated oil seven weeks later. Because the price of oil rose twenty
percent over those seven weeks, the price at which BP eventually sold the
contaminated oil was almost equal to the price of sound oil at the time
of discharge. In the alternative, BP contends that it should be reimbursed
for its futures losses and not be punished for attempting to hedge its
position by trading on the futures market. It argues that the district
court misunderstood the nature of "hedging," consistently referring to
BP's activities as "speculation." BP says it did nothing more than protect
itself from price fluctuations, and in doing so prevented itself from both
taking a loss or making a profit.
AHL, in turn, argues that the district court's
calculation was correct because there was no market for contaminated oil
at the time of discharge, and it is therefore difficult to calculate the
price of polluted oil at that time. AHL contends that the district court's
use of the price that BP eventually received for the contaminated oil was
a reasonable means of determining BP's loss at the time of discharge. AHL
further asserts that, had BP not engaged in futures trading, it would have
been placed in the same position it was in before the contamination. AHL
argues that it should not be forced to pay for BP's losses in the futures
Both parties argue the issue of BP's losses
in the commodity futures market, with AHL arguing that these losses are
unrecoverable and BP asserting that it should be compensated for those
losses because they are legitimate related losses inasmuch as hedging is
an acceptable form of risk reduction for an oil producer. The district
court disagreed with BP, finding that its futures trading was "speculation"
and concluding that "BP was not required to speculate in the futures market
as a result of the contamination." The court reasoned:
In engaging in speculation in the oil futures
market, BP was taking a chance in the hopes of recouping a profit. Had
the market moved in the other direction, it would certainly not have offered
to pay its futures market profits to AHL.
The district court's characterization of BP's
futures trading was somewhat inaccurate, and this mischaracterization was
the starting point from which the court jettisoned the traditional method
of calculating damages in damaged cargo cases and awarded damages based
on a more ad hoc calculation of BP's expected profits. First, BP was a
hedger in the futures market, not a speculator, as the district court asserted
in its opinion.(4) BP's actions were designed
only to protect itself from financial loss after AHL contaminated the diesel
oil. Had BP not hedged its position, and the price of oil had dropped
twenty percent pending disposition, BP would have lost considerable money
by retaining the oil while the price fell. As a hedger, BP could not have
"profited" from its futures trading, as the district court suggests, in
the sense that any money made in futures trading would have been offset
by an equivalent fall in the price BP received for the contaminated oil
on the date of disposal.
Although the district court mischaracterized
the hedging activity by BP and the relevance of those futures transactions
to a damages calculation here, BP is also mistaken in its argument that
it must be compensated for futures losses. Indeed, we think that under
established law, BP's futures trading is irrelevant to a proper calculation
of damages in this case. We turn now to discuss the proper method of calculating
damages in diminution of cargo value cases--the traditional "market value"
We think that the law in this circuit is settled:
The traditional "market value rule" should be applied when calculating
damages for spoiled cargo in carrier cases. See Minerais U.S.
Inc. v. M/V MOSLAVINA, 46 F.3d 501, 502 (5th Cir. 1995) (finding that
"where cargo is downgraded but not completely destroyed, this Court has
held the market-value rule to be both a convenient and accurate means of
measuring damages"). This rule "requires that damages be calculated using
market values at the time the cargo is discharged." Id.
Damages awarded under the market value rule
are normally computed by utilizing "the difference between the market value
of the cargo in the condition in which it would have arrived had the carrier
performed properly, and the cargo's market value in its damaged state on
arrival at port of destination." Cook Industries, Inc. v. Barge
UM-308, 622 F.2d 851, 854 (5th Cir. 1980) (emphasis added). The district
court took a different approach in calculating BP's damages, relying on
Central v. Crail, 281 U.S. 57 (1930). In that case, the Supreme Court
held that "[t]he test of market value is at best but a convenient means
of getting at the loss suffered. It may be discarded and other more accurate
means resorted to, if for special reasons, it is not exact or otherwise
not applicable." Id. at 64-65. Citing Illinois Central, and
citing Minerais for the proposition that "[t]he goal is to place
the injured cargo owner in the same position it was in before the damage,"
the district court rejected the market value rule and calculated damages
based on the price BP eventually received for the contaminated oil. As
we have noted, the district court also rejected BP's claim that its futures
losses were legitimate and compensable.
We think that the district court erred in
the method of calculating damages in this case, and that the court's reliance
Illinois Central to reject an application of the market value
rule was misplaced. In Illinois Central, the rail carrier of the
plaintiff's coal cargo arrived at the delivery point with a shortage of
5,500 pounds of coal. At the time of delivery, the purchaser of the coal
had not contracted to sell any of the coal and intended to simply add the
coal to his current stock. The plaintiff sued, arguing that the market
value rule required that he be awarded the $13 per ton retail value of
the undelivered coal. Noting that the plaintiff purchaser "lost no sales
by reason of [the delivery shortage]," and finding that he could have purchased
like coal at the $5.50 per ton wholesale price, the court awarded damages
based on the wholesale market price. Thus, the question in
Central was not whether the market value rule would be applied, but
market value would be utilized in the calculation--the wholesale market
or the retail market. Reading that case as a whole, therefore, Illinois
Central does not undermine the validity of the market value rule--the
court in that case only decided to compensate the plaintiff based on the
market price of coal instead of the retail market price, finding
that "[i]t is not denied that a recovery measured by the wholesale market
price of the coal would fully compensate the respondent, or that the retail
price . . . includes costs of delivery to retail consumers which respondent
did not incur, and a retail profit which he had not earned by any contract
Id. at 63. We also note that later Fifth Circuit cases
have explicitly rejected Illinois Central's more ad hoc approach
to the market value calculation in cases where goods set for resale are
damaged by a seller or carrier. See Minerais, 46 F.3d at
502 ("Illinois Central was a shortage-in-delivery case, not a damaged-goods
case"); Cook Industries, 622 F.2d at 856 (rejecting application
of Illinois Central in this damaged-goods case).
Assuming the district court's reliance on
Central in rejecting the market value rule was misplaced, AHL argues
that applying the market value rule as it was applied in Minerais
demonstrates that the price BP received for the contaminated oil seven
weeks after the date of contamination could properly be used as a reasonable
estimation of the market value of the oil on the date of discharge. In
the cargo owner had sold the damaged goods between two and eight weeks
after the discharge date, and the court, in calculating the fair market
value of the cargo, held that "the sales price close in time to the discharge
date is nevertheless sufficient to establish the market value of the downgraded
product at the time of discharge." Id. AHL argues, therefore, that
the district court's use of the price at which BP sold its contaminated
oil seven weeks after the discharge date, subtracted from the contract
price BP expected to receive for the oil, was an acceptable damages calculation
under Minerais. However, the court in Minerais specifically
noted that the market price of high grade ferrochrome (the cargo in Minerais)
had changed very little between the discharge date and the disposal date.
Id. at 502-03. Moreover, the cargo owner had sold the damaged goods
in multiple sales, beginning as early as one or two weeks after the discharge
date. The court found that, because several of those sales over a month-long
period valued the damaged material at $0.99 per pound, "[t]hese contemporaneous
sales provide sufficient evidence from which to apply the market-value
rule." Id. at 503. Thus, although the price of the cargo in Minerais
evidently fluctuated over the period the cargo owner possessed the goods,
those fluctuations were nothing like the clearly identifiable twenty percent
rise in oil prices seen in BP's case. Moreover, the district court here
was presented with evidence of the value of the contaminated oil that is
more contemporaneous to the discharge date than the price BP received on
the date of disposal, including the price BP was offered in September 1996
for the contaminated oil ($0.12 below market price).
The market value rule clearly requires courts
to compensate based on the value of the damaged goods "at the time of discharge,"
which in this case was August 25, 1996. Minerais, 46 F.3d at 503.
The price of oil rose twenty percent between the date of discharge and
the date of disposal in this case. Therefore, we cannot accept AHL's claim
that the price BP received for the contaminated oil on October 20 is an
accurate measure of the value of the contaminated oil seven weeks earlier,
following a twenty percent rise in oil prices. Indeed, the price BP eventually
received for the contaminated oil was virtually identical to the value
uncontaminated oil on the date of discharge (a difference of
only $0.009), while the record contains evidence that the polluted oil
was valued at approximately $0.12 less than uncontaminated oil.(6)
As we have noted, because of the applicability
of the market value rule to this case, any futures trading by BP following
the date of discharge does not affect a proper damages calculation. Because
the market value rule considers the diminished value of the cargo on the
date of discharge, later price fluctuations or changes in value beyond
the date of discharge are irrelevant to the damages calculation. This principle
was stated about as well as it can be said in 1878 by a California district
court in The Compta, 6 F.Cas. 233, 234 (D. Cal. 1878)(No. 3070):
Where goods are delivered in a damaged condition,
the damage sustained is the difference between their market value, if sound,
and their market value in their unsound condition. Both values to be ascertained
as of the time when the goods were, or should have been, delivered. . .
. If the shipper has seen fit to hold the goods for a better market, he
has entered into a speculation the result of which can in no way affect
the liability of the ship. If he has obtained a higher price than could
have been realized at the time of the breach, the ship's liability is not
thereby diminished. If he has sold them at a lower price, her liability
is not increased.
In sum, BP's futures trading is inapposite
to a "market value" damages calculation in this case, and BP's damages
should be calculated as the difference between the market value of sound
oil on the date of discharge and an estimated valuation of the contaminated
oil on the date of discharge.(7)
To sum up, we hold that the district court
erred in its damages calculation in this case by failing to apply the market
value rule.(8) Indeed, the appropriateness
of the market value rule is illustrated in this case, where BP understood
that it needed to protect itself from further financial loss as soon as
the oil cargo was contaminated and the damage was realized. In this way,
the market value rule provides much-needed assurance to parties involved
in transactions gone awry as to compensation for any damages inflicted.
Because the court had evidence before it indicating
an estimated value of the contaminated oil on the date of discharge, the
court erred when it calculated damages based upon the price BP received
for the contaminated oil seven weeks after contamination--after the price
of oil had risen twenty percent. Because we can find no undisputed evidence
in the record establishing the market value of contaminated oil on the
date of discharge, we leave it to the district court to determine the value
of BP's polluted oil on the discharge date.(9)
The damages award should be the difference between this estimated value
of the contaminated oil and the market value of sound oil on that date.
The case is therefore REMANDED for a calculation of damages and any other
necessary proceedings that are not inconsistent with this opinion.
R E M A N D E D
1. Circuit Judge of the Eleventh
Circuit, sitting by designation.
2. This appeal involves
the issue of damages only. No party disputes the determination of liability.
3. BP sold a quantity of
October and November 1996 oil futures equal to the quantity of contaminated
oil it possessed. The intention of BP, like all hedgers, was to protect
itself against fluctuations in the price of oil pending its disposal of
the contaminated oil. BP intended to "lift" its hedge as soon as it disposed
of the contaminated oil by buying the same quantity on the futures market
in the same futures month in which it had previously sold. In BP's case,
if the price of oil on the cash market had fluctuated either up or down,
the gain or loss to BP would have been offset by its corresponding loss
or gain in the futures market.
4. There are two distinct
classes of players in the futures market. Hedgers are interested in the
commodities themselves. They can be producers, like oil drillers, or users,
like BP (an oil distributor). Hedgers are interested in protecting themselves
against price changes that will undercut their profit.
Speculators, on the other hand, trade futures
strictly to make money in the futures market itself. A futures trader that
uses the commodity itself is a speculator. Speculators buy and sell
contracts, depending on which way they think the market will fluctuate.
This characterization of the futures market
has been accepted by the Supreme Court. In Merrill Lynch v. Leist,
456 U.S. 353 (1982), the Court outlined the difference between "hedging"
and "speculating" in the futures market, and extolled the benefits of the
futures market to producers and processors (like BP):
Those who actually are interested in selling
or buying the commodity are described as 'hedgers'; their primary financial
interest is in the profit to be earned from the production or processing
of the commodity. . . . A farmer who takes a 'short' position in the futures
market is protected against a price decline; a processor who takes a 'long'
position is protected against a price increase. Such 'hedging' is facilitated
by the availability of speculators willing to assume the market risk that
the hedging farmer or processor wants to avoid.
Id. at 358-59.(5)
5. The Court gleaned its
understanding of the nature of the futures market from congressional reports,
Court of Appeals decisions, and pleadings in that case. See id.
at 356, n.6. - - - - " " ' ""
6. The two offers BP received
to buy the contaminated cargo both valued the polluted oil at between $0.10
and $0.12 less than the value of sound oil. Indeed, BP sold the contaminated
oil in October 1996 for $0.62 per gallon--$0.12 less than the $0.74539
market value of sound oil at that time.
7. BP argues that its damages
should be calculated using the contract price for which it was planning
to sell the oil instead of the market value of the oil on the date of discharge.
The record reveals that the contract price BP had with Colonial Oil was
slightly higher than the market price of oil on the date of discharge.
However, this contract price is irrelevant to any calculation of damages
against AHL. AHL was obligated to deliver the oil from Corpus Christi to
Savannah. Under Minerais, BP's damages arising from AHL's negligence
are properly measured as the difference between the market value and contaminated
value of the oil on that date. The BP/Colonial contract price is irrelevant
because BP could have purchased oil at market price on the date of discharge
and sold it to Colonial at the higher price pursuant to its original contract.
8. As a final matter, AHL
argues that, under the Carriage of Goods by Sea Act ("COGSA"), 46 U.S.C.
§§ 1300-1315, BP can only recover "for the amount of damages
actually sustained." § 1304(5). AHL asserts that BP cannot recover
for losses in the futures market, because those losses were not actually
caused by the defendant. BP responds that this court has defined "damage
actually sustained" to mean "damage computed on the basis of the fair market
value of the goods at destination as of the date of arrival." Holden
v. S/S KENDALL FISH, 262 F.Supp. 862, 863 (E.D. La. 1968), aff'd
395 F.2d 910, 912 (5th Cir. 1968).
As described above, BP is not being reimbursed
for its futures losses--its reimbursement is for its actual loss, as measured
from the date of discharge by the market value reimbursement rule.
9. Although the record
contains evidence that the contaminated oil was valued at approximately
$0.10 to $0.12 less than sound oil, the district court should make a reasonable
estimation of this value based on the entirety of the evidence presented
by the parties.