Otto Candies, L.L.C. v. Nippon Kaiji Kyokai Corporation

Nippon Kaiji Kyokai Corp. ("NKK"), a classification society, appealed from an adverse judgment in a negligent misrepresentation case based upon a classification survey that was a prerequisite to the sale of a vessel. From 1995 to 1998 the vessel was operated in Japan, and classified by NKK, as a coastal ferry. In 1998, the owner took the vessel out of service and her NKK classification lapsed. On 12/22/99, Otto Candies ("OC") entered into a Memorandum of Agreement ("MOA") to purchase the vessel. As a condition of sale, the MOA required that NKK restore and make current the vessel’s coastal classification free of any outstanding recommendations. On 1/5/00, NKK certified the vessel within class as a coastal ferry with no outstanding deficiencies. OC then paid for the vessel which was then transported to a shipyard in Alabama where it was surveyed by the American Bureau of Shipping ("ABS") so as to transfer the classification from NKK to ABS. The ABS surveyor discovered deficiencies requiring repair before ABS would classify the vessel. OC enacted the repairs and ABS issued an interim class certificate.

OC sued NKK to recover the costs of repairs needed to obtain the ABS class certificate. OC’s sole claim against NKK was negligent misrepresentation. The trial court ruled that NKK owed a duty to OC and that NKK was liable for negligent misrepresentation. The Court of Appeals found the verdict appropriate in this case but emphasized that a claim for negligent misrepresentation as to the work of classification societies should be strictly and carefully limited. While the societies’ surveys and certificate system are essential to the safety of maritime commerce, their activities should not derogate from the shipowners’ and charterers’ nondelegable duty to maintain seaworthy vessels.

To prevail on a claim for negligent misrepresentation, OC was required to established that (1) NKK supplied false information for OC’s guidance in a business transaction; (2) NKK failed to exercise reasonable care in gathering the information; (3) OC justifiably relied on the false information in a transaction that NKK intended to influence; and (4) OC thereby suffered pecuniary loss. OC was also required to establish that NKK provided the class certificate to the owner and knew that the owner intended it for OC’s guidance and benefit. Liability is expressly limited to a select group of nonclients who the misinformer actually knows will receive inaccurate information. Mere possibility or foreseeability that a nonclient of the information supplier would rely on the information is insufficient. The information supplier’s liability is limited to those persons whom the engagement is intended to benefit.

The trial court admitted into evidence communications revealing that NKK was aware of the pending sale of the vessel, that NKK’s reclassification of the vessel free of recommendations was a condition of the sale, and that OC’s purchase of the vessel would be based upon NKK’s classification of the ship free of recommendations.

The Court of Appeals specifically rejected any implication that classification societies can be liable for negligent misrepresentation to parties, including seamen, longshoremen, passengers, cargo owners, and charterers that may rely upon a survey or class certificate, absent actual knowledge by the classification society that the certificate or survey report was being provided for the guidance and benefit of the party. The Court of Appeals affirmed the judgment finding that OC could properly bring a negligent misrepresentation claim against NKK and held that the District Court did not clearly err in finding that NKK was liable for negligent misrepresentation.