In One Beacon Insurance Co. v. Crowley Marine Services, Inc., a dispute arose among a ship repair contractor, barge owner, and insurance company over the terms of a ship repair service contract and marine insurance policy. 648 F.3d 258 (5th Cir. 2011). A ship repair contract was formed between the vessel owner and the repair contractor by the combination of an oral agreement, repair service order (RSO), and subsequent invoice. The RSO conspicuously provided that the Terms and Conditions contained on the vessel owner’s website were incorporated into the contract, unless otherwise agreed in writing. Those Terms and Conditions required the contractor to indemnify the ship owner for any injuries which occurred during the repair work, including injuries caused by the vessel owner’s negligence. It also required the contractor to obtain insurance on the vessel owner’s behalf. During the repair work, a subcontractor’s employee was injured after suffering electrical shock and a fall. The worker sued the contractor and the ship owner. The ship owner sought to invoke the exculpatory clause and demanded defense and indemnity as an additional insured from contractor’s insurer. The trial court held that the Terms and Conditions were enforceable against the contractor, but that the vessel owner was not an additional insured under the contractor’s policy. United States Court of Appeals for the Fifth Circuit affirmed the trial court’s holdings in all respects.
The contractor claimed it was not bound by the exculpatory clause in the Terms and Conditions, arguing the RSO merely intended to confirm the oral agreement and the exculpatory clause was unconscionable because it was not clear and conspicuous on the face of the RSO. This was the eighth repair contract in six months between the parties, and each RSO contained an identical reference to the same Terms and Conditions, in all CAPS on the front page of the RSO. The contractor also argued it did not receive the RSO containing the terms until after the work was completed, and that the terms were “hidden” on the ship owner’s website in four-point font. The court noted that, as was done here, it was the common practice of the ship repair industry to agree to repairs orally and subsequently prepare the RSO and invoice. The contractor did not ever attempt to locate and read the Terms and Conditions and believed it was “unnecessary” to utilize its sophisticated contract review process, which would have included a review of the terms.
Although the RSO was provided only after performance began, the court found a prior course of dealing between the parties and enforced the terms based on the eight prior jobs. “Under general maritime law, terms and conditions contained in subsequently-issued purchase orders may supplement an oral agreement if there is evidence of a prior course of dealing between the parties from which a court may infer that the parties were aware of and consented to those additional contractual terms,” where they are accepted without objection.
The contractor relied heavily on Orduna v. Zen-Noh Grain Corp., 913 F.2d 1149 (5 Cir. 1990), where an exculpatory clause incorporated by reference was not enforceable. In Orduna, the berth application purported to incorporate the terms of a dock tariff; however, the berth application did not make specific reference to the date or number of the dock tariff containing the term. The Crowley court distinguished Orduna on this fact, finding that a reasonable person would have been able to locate the Terms and Conditions on the “easily navigated” website, although a specific URL was not provided. Further, the Terms and Conditions were sufficiently legible despite appearing in four-point font, because the default font could be enlarged on the screen. Thus, the contractor had notice of and access to the location of the terms, and the continued course of conduct between the parties manifested assent. The exculpatory clause was therefore not unconscionable.
In addition, the contractor’s insurer claimed that the ship owner was not entitled to defense and indemnification under the policy, arguing that it was not expressly listed as an additional insured, as required by the clear language of the policy. As a stranger to the policy, an additional insured has the burden of proving both (1) that another party is obligated by an “insured contract” to include them as an additional insured; and (2) they are specifically identified in the endorsement as an additional insured. The policy here extended coverage to additional insureds, “NAME AND ADDRESS TO BE ADVISED.” The court agreed that the contractor was required to add vessel owner as an insured, and breached the contract by not doing so. However, the insurer was not required to provide defense and indemnity because the contractor failed to list the vessel owner on the endorsement. The court emphasized the importance of giving “meaning to every sentence, clause, and word to avoid rendering any portion inoperative.”
Parties with sophisticated contract review mechanisms in place cannot avoid the terms of their contracts by ignoring them. Clients should be advised to always review terms and conditions incorporated by reference and closely examine invoices, purchase orders, and other paperwork for such references. Then, consider objecting to any unfavorable terms or conditions before a “course of conduct” can be established, which implies the term in future contracts.