SUPREME COURT DISOWNS 'PRELIMINARY CONTRACT' RULE	Download in MSWord
By Armand M. Paré, Jr.

The decision of the United States Supreme Court in Exxon v. Central Gulf Lines, Inc., 500 U.S. 603 (1991), rejected the longstanding rule that agency contracts were outside admiralty jurisdiction and provided broad guidance for determining what is a maritime contract. However, two significant issues remain in the area of maritime contract jurisdiction following Exxon. First, there is the question of the status of the 'preliminary contract' rule. Second, there is the fundamental issue of what type of transactions are of truly maritime 'nature and subject matter' to come within the Exxon test for an admiralty contract.

Under the 'preliminary contract' rule, services that are preliminary to, as opposed to being a part of a maritime contract, are said to be too remote to be heard as maritime claims. The lineage of this rule, however, is traceable only to cases in the Court of Appeals for the Second Circuit. As the Supreme Court noted in Exxon: 'The Court has never ruled on the validity of the preliminary contract doctrine . . . .' 500 U.S. at 613, n.7 (emphasis added). Notwithstanding this, the Court of Appeals for the Second Circuit stated in Shipping Financial Services Corp. v. Drakos, 140 F.3d 129 (2d Cir. 1998): 'the Supreme Court gives no hint as to whether the abolition of one per se rule requires the abolition of all per se rules as they apply in admiralty' and hence has continued to struggle with the 'preliminary contract' rule. It is submitted that this struggle continues needlessly.

In the first place, as noted, the Supreme Court has itself disowned the 'preliminary contract' rule. It is a rule created by the Second Circuit which therefore may itself dispose of the rule. Indeed, it is submitted that the constitutional mandate in Exxon and its progeny compels courts to reject all artificial, per se rules for determining admiralty jurisdiction and, instead, to determine admiralty jurisdiction solely by analyzing the 'nature and subject matter' of a transition through the prism of 'the purpose of the grant of admiralty jurisdiction', namely to 'protect maritime commerce.' Indeed, the recent decision in Pacific Growth S.A. v. AON Corp., New York Law Journal, October 18, 1999 at 35, has reached this same seemingly inescapable conclusion.

The more difficult lingering issue in the contract area is determining whether the nature and subject matter of a transaction are of the requisite maritime core. Exxon was an easy case since it involved the supply of fuel to a vessel. It would be difficult to imagine more important maritime nature and subject matter. More difficult questions continue for contracts involving shore-based transactions, including contracts to procure charters or procure marine insurance. The post-Exxon decisions appear conflicting and in need of a unifying philosophy concerning whether the present constitutional mandate is to protect ships and navigation or to protect maritime commerce, as a unique business.

In the Pacific Growth S.A. v. AON Corp. case, it was held that a contract to procure marine drilling rig contracts was not maritime. However, in Maritima Petroleo E Engenharia Ltda. v. Ocean Rig 1 AS, 1999 WL 796183 (S.D.N.Y. October 6, 1999), it was held that a contract to procure marine insurance was maritime. In the former, the court adopted the view that 'the subject matter of the contract must be directly and intimately related to the operation of a vessel and navigation' (emphasis added). In Ocean Rig 1 AS the court, by contrast, noted the importance of the contract to obtain insurance on the owner's fleet of vessels and, in finding the agreement to obtain insurance came within admiralty, noted the significance of the matter to owner's business: 'the result of defendants' alleged breach of the insurance brokerage agreement was loss of coverage and uncompensated damages to one of their vessels . . . .'

It is submitted that these two seemingly inconsistent cases are based on two different and conflicting jurisdictional philosophies. In the first, jurisdiction was premised on the operation and navigation of a vessel. In the second, jurisdiction was premised on the necessary business of shipping in that case to obtain hull insurance. It is further submitted that the latter view is more in keeping with the now accepted mandate of admiralty jurisdiction 'to protect maritime commerce'.