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Construction Law

Admiralty Law’s Application to Construction Contracts
Can Affect Contractor’s Rights and Remedies

Stewart W. Karge

Early on April 13, 1992, basements throughout downtown Chicago began filling with water from the Chicago River. The conduit of the river’s water was the Chicago freight tunnel system, a vast underground network constructed in the early 1900s. As building after building connected to the tunnel succumbed to the river’s water, the story of the Great Chicago Flood began to unfold.

One chapter of this story closed when the U.S. Supreme Court ruled unanimously that Great Lakes Dredge & Dock Co., the contractor that allegedly breached the tunnel while performing a pile cluster replacement contract for the City of Chicago in September 1991, was entitled to have all claims asserted against it heard under admiralty law. The case of the Great Chicago Flood illustrates the potential impact of this seemingly arcane legal tributary in the wake of waterborne disasters and encourages construction attorneys to keep a weather eye for its application in disputes along our nation’s oceans, lakes, and river fronts.

Great Lakes consolidated all claims against it when it filed its petition for exoneration of and limitation of liability pursuant to admiralty law in the U.S. District Court for the Northern District of Illinois. The district court granted the city’s motion to dismiss on the basis that no admiralty jurisdiction existed. The Seventh Circuit, however, unanimously reversed the district court. The Supreme Court affirmed Great Lakes’s entitlement to the application of admiralty law.

Prior to 1972, the test of admiralty jurisdiction was a relatively simple location test. If the alleged tort occurred on navigable water, admiralty jurisdiction attached. The 1948 Admiralty Jurisdiction Act made clear that damages felt on land by water-based torts also invoked admiralty jurisdiction.

Beginning in 1972, the Court moved away from a simple location test and required the jurisdictional analysis to consider also whether the alleged tortious behavior bore a significant relationship to traditional maritime activity and had the potential to disrupt maritime commerce. In the Sisson case, the Court left open the question of whether admiralty law could govern in a situation where not all of the instrumentalities involved in the event were engaged in maritime activities.

In Grubart v. Great Lakes Dredge & Dock Co. the Supreme Court answered that open question in the affirmative. The Court purported to apply the three-part Sisson test. The situs element was easily satisfied. If Great Lakes was responsible for the flood, its liability could only have resulted from its pile-driving activities in the river, a navigable body of water.

Whether the incident had the potential to disrupt maritime commerce depended upon "a description of the incident at an intermediate level of possible generality." Characterizing the flood as resulting from "damage by a vessel in navigable water to an underground structure," the Court noted that the potential for disruption of maritime commerce by such an incident was not only possible, but had actually occurred. The river was closed to traffic for a month.

The Court satisfied the second prong of the maritime connection inquiry by concluding that barges engaged in repair activity similar to that of Great Lakes have generally been found to be substantially related to traditional maritime activity.

Without necessarily conceding it proximately caused the flood, the city nevertheless contended that the charges it failed to properly maintain the tunnel or warn building owners connected to the tunnel of the impending danger were nonmaritime activities that should preclude admiralty jurisdiction. In rejecting the city’s argument, the Court answered the open question from Sisson: "The substantial relationship test is satisfied when at least one alleged tortfeasor was engaging in activity substantially related to traditional maritime activity and such activity is claimed to have been a proximate cause of the incident." The fact that the city’s actions might ultimately be found to be the proximate cause of the flood did not undermine Great Lakes’s invocation of admiralty jurisdiction.

In his concurring opinion, Justice Thomas advocated abandoning any pretense that Sisson was good law and focused on whether a tort occurred on a vessel on the navigable water; in such cases admiralty jurisdiction would always attach. Although Justice Thomas’s jurisdictional analysis is simpler, it seems clear the entire Court sought to relieve the lower courts of difficult jurisdictional inquiries. Given the liberality of the application in Great Lakes, the Court appears to be encouraging courts to streamline the results of the Sisson jurisdictional tests—implying that generally, if a tort occurs on a vessel in navigable water, admiralty jurisdiction will attach.

For contractors that perform any water-based work, Great Lakes may provide the incentive for invoking admiralty jurisdiction when facing substantial liability claims. The benefits of admiralty jurisdiction could be significant and should be considered when work on navigable water results in multiple parties asserting negligence claims in excess of the value of the vessels involved.

Under admiralty law, vessel owners may file a complaint for limitation of liability not to exceed the value of the vessel and pending freight. Such limitation of liability is available for owners that are not "in privity" with the negligence of their vessel. Should Great Lakes prevail on this part of its admiralty claim, its liability would be limited to the value of the two barges, the tug boat, and the city contract (totaling approximately $633,000) compared to the $195 million in claims asserted in admiralty. The question of whether a vessel owner is "in privity" with the negligence becomes complicated in the case of a corporate owner. The Seventh Circuit’s opinion in Great Lakes noted that the contractor would be charged with privity and knowledge for purposes of the Limitation Act of only "certain managerial employees."

Limits on Class Actions and Municipal Tort Immunity. Another potential reason for invoking admiralty law rests in its requirement for a uniform application of rules. Any Rule of Civil Procedure that is inconsistent with the Supplemental Admiralty Rules will not apply. Class actions are considered inconsistent with admiralty rules and are not permitted. A further byproduct of the demand for uniformity is the unenforceability of tort immunity statutes applicable to municipalities. For contractors doing work with cities, this can have a tremendous impact on shifting liabilities of third parties solely from the contractor to a jointly negligent municipality that would otherwise have substantial or complete immunity from negligence claims.

Procedural Considerations. Proced-urally, once a Limitation Act case is properly commenced a stay is issued against any other court exercising jurisdiction over the admiralty petitioner. A monition period is then set within which time all claimants are required to file their individual claims. Anyone who fails to submit his or her claim within the monition period may be held to be in default. No jury is permitted in admiralty Limitation Act cases and the admiralty court is required to first determine whether the party seeking limitation is entitled to exoneration (i.e., whether the party is liable at all) and then move on, if necessary, to determine whether the party is entitled to limitation. Prior to trial on damages, an interlocutory appeal of the liability determination is permitted. If necessary, the damages of the claimants are then proved up, and if the petitioner is entitled to limitation, the limitation fund is distributed pro rata among the claimants. Even if the party seeking limitation is found to be in privity with the negligence and thus not entitled to limitation, the Supreme Court has held that the admiralty court should afford complete relief.

Stewart W. Karge is a partner in the Chicago office of McDermott, Will & Emery .

This article is an abridged and edited version of one that originally appeared in The Construction Lawyer, Spring 1996 (16:2).

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