Ninth Circuit Holds that Language of Charterparty Reigns Supreme

Milos Product Tanker Corporation v. Valero Marketing and Supply Company, --- F.4th --- 2024 WL 4220689 (9th Cir. 2024); 2024 U.S. App. LEXIS 23688 (9th Cir. 2024, Hinderaker, D.J.).

            Plaintiff-Appellee, Milos Product Tanker Corporation (“Milos”), and Defendant-Appellant, Valero Marketing and Supply Company (“Valero”), were involved in this lawsuit to decide whether Valero owes payment for unpaid freight costs owed to Milos.[1] Valero appealed the Central District Court of California’s grant of summary judgment in favor of Milos on the basis that Valero did not breach an express or implied contract to pay for transportation costs.[2]

            In June of 2020, GP Global (“GP”) entered a maritime transportation contract (the “Charterparty”) with Milos for the transportation of jet fuel aboard the SEAWAY MILOS, a vessel owned by Milos.[3] The Charterparty listed GP as the “Charterer” and Milos as the “registered owner” of the vessel.[4] According to the contract, GP agreed to pay Milos for the transportation of the fuel (“freight”).[5] The Charterparty also allowed GP to direct the vessel to change speeds which would result in GP reimbursing Milos for any additional bunkers consumed.[6] The agreement deviated from usual practice of cargo being released only to a party that presents an original bill of lading[7] and provided that, upon instructions from GP, the fuel may be released to a party in exchange for a letter of indemnity from GP.[8]

            On July 14, Valero entered into a fuel purchase agreement with Koch. The fuel purchase agreement was based on “cost and freight” terms whereby Koch paid and arranged for the transportation of the jet fuel to the port of delivery, while Valero assumed title and the risk of loss as soon as the jet fuel was loaded onto the carrier at the point of origin.[9] The fuel purchase agreement also required Valero to pay any demurrage costs directly to Koch.[10] Neither GP nor Milos were a party to the fuel purchase agreement.[11]

            On July 19-20, fuel was loaded onto the SEAWAY MILOS and the two relevant bills of lading listed Valero as the party to notify when the shipment arrived in Los Angles, California.[12] The bills of lading also outlined that the freight was payable “as Per the Charter Party.”[13] On July 20, the SEAWAY MILOS left it’s port of origin and began its journey to the U.S., expecting to arrive in Los Angeles on August 14.[14] The negotiated delivery window however was August 3-7 and even still the SEAWAY MILOS would arrive late on August 21. Nearing arrival at the port, Milos representatives communicated with Koch and Valero about freight payments to be made upon the discharge of the cargo.[15] A bill of lading was unavailable upon the discharge of the fuel which was released to Valero under a letter of indemnity from GP.[16]

            Valero later paid Koch over $15 million in lump sum for both the fuel and associated freight charges.[17] A dispute ensued between Valero and Milos in large part due to GP filing Chapter 11 bankruptcy.[18] Milos demanded that payment of freight was overdue to them and owed by Valero.[19] The district court granted Milos’s Motion For Summary Judgment and held that Valero had, by virtue of its conduct, consented to, and subsequently breached, the Charterparty.[20] The district court largely based this decision on States Marine International, Inc. v. Seattle-First National Bank, which held that implied obligations existed to pay transportation costs based on a receipt of the cargo.[21]

            On appeal, the Ninth Circuit held that, although the shipper or consignor is primarily liable to the carrier for freight costs, a contract creates a more controlling relationship between the parties because the default terms are intended to apply only in the absence of a contract.[22] Further, the appellate court narrowed the scope of the States Marine application to only railroad to ocean carriers only to the extent that they are both common carriers.[23] Central to this narrowing of States Marine principal was a determination of the need for parties to receive notice of terms and costs in the contract and not to bind parties that lacked such opportunities.[24] The appellate panel determined that no express contract existed between Valero and Milos that rebutted the presumption that the shipper alone would pay the freight.[25] On the contrary, it was determined that the Charterparty provided that GP exclusively was liable for the freight costs associated with the voyage.[26]

            Separately, the Ninth Circuit, analyzed the bills of lading and determined that Valero’s conduct did not show it agreed to be bound by the bills of lading.[27] Important to this determination was the fact that Valero did not sue on the bills of lading, Valero had no longstanding dealings with Milos; and there was no assertion that Valero negotiated the bills of lading through GP.[28] The fuel was released by Milos to Valero not upon a presentation of a bill of lading but under a letter of indemnity provided by GP which did not alter the Charter Party terms of payment.[29]

            Milos’s arguments of implied obligation on the part of Valero were distinguished from prior cases of A/S Dampskibsselskabet Torm v. Beaumont Oil Ltd.[30] and States Marine.[31] In the case of Beaumont Oil, the bill of lading did not address who would pay freight and thus not applicable to this case  in which the bill of lading and Charterparty both specifically provide for what parties pay freight costs and to whom.[32] The States Marine case was distinguishable because, as previously mentioned, the case law is narrowly applied to common-carrier situations.[33]

T            he court also determined that Valero was not jointly and severally liable with GP because there is a specific contractual allocation of freight payment that supersedes the default rules, and such a holding would contravene parties’ right to freedom of contract.[34]

            Ultimately, the appellate panel decided that because Milos and GP had an explicit contractual allocation of freight costs that did not involve Valero, and that as Valero did not sufficiently involve itself in the prior negotiations or voyage, Valero did not enter an implied obligation to pay freight. The Ninth Circuit has now narrowed the States Marine decision to encompass only common-carrier cases.

           By Fraser Mitchell, J.D. Candidate 2025 Loyola College of Law. The views herein are the author’s alone.

           Please see a copy of the opinion attached.

[1] Milos Product Tanker Corporation v. Valero Marketing and Supply Company, --- F.4th --- 2024 WL 4220689 at *2 (9th Cir. 2024).

[2] Id.

[3] Id.

[4] Id.

[5] Milos, 2024 WL 4220689 at *2 (Demurrage is an agreed-upon charge for costs and damages incurred due to the failure to unload cargo from a vessel within a specified time).

[6] Id.

[7] See C-ART, Ltd. V. Hong Kong Islands Line Am., S.A., 940 F.2d 530, 532 (9th Cir. 1991).

[8] Milos, 2024 WL 4220689 at *2-3.

[9] Id. at *3 (citing BP Oil Int’l, Ltd. V. Empresa Estatal Petroleos de Ecuador, 332 F.3d 333, 338 (5th Cir. 2003)).

[10] Id.

[11] Id.

[12] Id.

[13] Milos, 2024 WL 4220689 at *3.

[14] Id.

[15] Id.

[16] Id.

[17] Id.

[18] Milos, 2024 WL 4220689 at *3.

[19] Id.

[20] Id.

[21] Id. at *2.

[22] Id. at *4, (States Marine International, Inc. v. Seattle-First National Bank, 524 F.2d 245, 248 (9th Cir. 1975) (citing Louisville & Nashville R.R. Co. v. Cent. Iron & Coal Co., 265 U.S. 59, 67 (1924))).

[23] Milos, 2024 WL 4220689 at *6.

[24] Id. at *7.

[25] Id.

[26] Id.

[27] Id. at *8.

[28] Milos, 2024 WL 4220689 at *8.

[29] Id.

[30] 927 F.2d 713 (2d Cir. 1991).

[31] Milos, 2024 WL 4220689 at *8.

[32] See id.

[33] Id.

[34] Id. at *9.