Title Grupo Portexa, S.A. v. All American Marine Slip
Date 1992
By Alito
Subject Misc
Contents
Page 1
221 of 238 DOCUMENTS
GRUPO PORTEXA, S.A., a Company organized under the laws of the Republic of Mexico, and CONDUX, S.A. de C.V., a company organized under the laws of the Republic of Mexico Appellants in 90-6048 v. ALL AMERICAN MARINE SLIP, a division of MARINE OFFICE OF AMERICA CORPORATION, a New York Corporation; AFIA, a Delaware Corporation; and GIGNA, a Delaware Corporation Appellants in 91-5109
Nos. 90-6048 and 91-5109
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
954 F.2d 130; 1992 U.S. App. LEXIS 133; 1992 AMC 1227
June 13, 1991, Argued
January 8, 1992, Filed
SUBSEQUENT HISTORY: Rehearing Denied
February 3, 1992, Reported at 1992 U.S. App. LEXIS
1531.
PRIOR HISTORY: **1 ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (D.C. Civil No. 86-04212)
CASE SUMMARY:
PROCEDURAL POSTURE: Appellant shipowner sought review of an order of the United States District Court for the District of New Jersey, which entered judg- ment in favor of appellee insurers, holding that appellees were not liable for recovery of costs incurred by appellant for the removal of appellant's sunken vessel.
OVERVIEW: Appellant shipowner sought review of a trial court order which entered judgment in favor of ap- pellee insurers, holding that appellees were not liable for costs incurred by appellant for the removal of appellant's sunken vessel. The trial court found that the removal of the vessel was not compulsory by law and that, even if it had been, appellant was not entitled to recover because it had breached its duty to act as a prudent uninsured. The court reversed, holding that removal was considered com- pulsory by law if it was directed by governmental order, statute, or regulation, or if removal was reasonable under a cost-benefit analysis comparing the probable cost of the removal versus the likelihood and amount of liability which could be imposed for failure to remove the wreck. The court remanded the case for a finding as to whether the removal had been directed by a valid order. The court further held that on remand the trial court should make findings on what costs, under the insurance policy, appel- lant was precluded from recovering for its failure to act
as a prudent uninsured during the removal operation. OUTCOME: The court reversed, holding that the trial court erroneously determined that the removal of appel- lant shipowner's vessel was not compulsory by law. The court remanded the case to the trial court for a finding as to whether the removal had been directed by a valid order, which, therefore, would have made it compulsory by law. LexisNexis(R) Headnotes
Admiralty Law > Finds & Salvage
HN1 Removal is considered compulsory by law if ei- ther 1) the removal is directed by governmental order, statute, or regulation, or 2) if removal is reasonable under a cost-benefit analysis taking into consideration the prob- able cost of removal and both the likelihood and amount of liability which could be imposed for failing to remove the wreck.
COUNSEL: RIKER, DANZIG, SCHERER, HYLAND
& PERRETTI, Headquarters Plaza, One Speedwell Avenue, Morristown, New Jersey 07960, Of Counsel: GERALD A. LILOIA, ESQ. On the Brief: KENNETH M. VAN DEVENTER, ESQ., (Argued) GLENN D. CURVING, ESQ., Attorneys for Grupo Protexa, S.A. and Condux, S.A. de C.V.
LIDDELL, SAPP, ZIVLEY, HILL & LaBOON, Texas Commerce Tower Houston, Texas 77002, Of Counsel: HAROLD K. WATSON, ESQ., (Argued) GREGORY F. BURCH, ESQ., Attorneys for All American Slip, AFIA and CIGNA
JUDGES: Before: BECKER and ALITO, Circuit Judges and HUYETT, * District Judge
954 F.2d 130, *; 1992 U.S. App. LEXIS 133, **1;
1992 AMC 1227
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* Hon. Daniel H. Huyett 3rd, United States District Judge for the Eastern District of Pennsylvania, sit- ting by designation.
OPINIONBY: ALITO
OPINION:
*131 OPINION OF THE COURT
ALITO, Circuit Judge:
Assureds under a marine insurance policy sought to recover the cost of removing a sunken vessel. The marine insurance policy covered removal costs if the removal was
"compulsory by law." Two insurance companies denied the claim. After a bench trial, the district court entered judgment for the insurance companies, holding that the removal was not "compulsory **2 by law" and that the assureds had not acted as prudent uninsureds when proceeding with the removal of the wreck. Because we hold that the district court's judgment rests on incorrect conclusions of law, we will reverse and remand for further proceedings.
*132 I.
In December 1985, the Huichol II, a diving sup- port vessel, sank during a violent storm in the Bay of Campeche, approximately 50 miles off the coast of Mexico. More than 27 Mexican seamen were killed. The wreck of the Huichol II came to rest 1.5 miles within the eastern border of the Petroleos Mexicanos ("PEMEX") oil exploratory zone. n1
n1 PEMEX is a decentralized public agency of the Mexican Federal Government. It has rights to explore for oil and gas reserves in the exclusive eco- nomic zone. More than 50 oil drilling platforms and related structures belonging to PEMEX are located and operated in this zone.
The Huichol II was owned by Condux S.A. de C.V.
("Condux"), a wholly owned subsidiary of Grupo Protexa S.A. ("Protexa"). Both companies are organized under the **3 laws of Mexico. Protexa is in the business of constructing and servicing the pipelines, platforms, and related structures needed by PEMEX. Protexa devel- ops and manages maritime construction projects through Condux. For convenience, we will refer to the companies collectively as "Protexa."
The Huichol II was insured under a marine insur- ance policy placed by Protexa's broker, Energy Insurance International ("EII") of Houston, Texas. Keith Mollman
("Mollman") was the manager assigned to Protexa's ac-
count. Under the policy, five percent of the risk was placed with a Mexican company. In addition, the policy had two separate layers of coverage. The four primary-layer un- derwriters were liable for the first $2,500,000 of cov- ered loss. If any single loss exceeded $2,500,000, the excess-layer underwriters would be liable. There were three excess-layer underwriters: All American Marine Slip ("AAMS"), which carried 30% of the excess layer; various Lloyds/London underwriters, which carried 65% of the excess risk; and SIGNA/AFIA, which had 5% of the excess layer. The insurance policy contained a standard wreck removal provision covering expenses the assureds became liable to pay on account of **4 "removal of the wreck of the vessel . . . when such removal is compulsory by law." App. at 1671 (emphasis added).
The day after the vessel sank, EII was notified of the incident. Acting as liaison between the underwriters and the claimants, EII called in Rush Johnson Associates
("RJA"), a worldwide firm of marine surveyors and ad- justors, to survey the damage, adjust the loss, and prepare a written report for the underwriters. n2 RJA appointed Theo Tyssen ("Tyssen"), the vice-president in charge of its marine department, to handle the claim. Tyssen arrived at the scene of the wreck on December 16, 1985. On the same day, EII notified the underwriters on the policy, in- cluding AAMS and CIGNA/AFIA, that the Huichol II had sunk and that RJA's representative, Tyssen, had been sent to the wreck location.
n2 Underwriters generally receive their infor- mation from surveyors/adjustors who are hired to act as their operative at the scene of the wreck. In situations involving multiple underwriters the sur- veyor usually files general reports with the broker who in turn contacts the underwriters. Under no circumstances, however, is the surveyor authorized to enter into contracts on behalf of the underwrit- ers or to commit underwriters to pay any sums in satisfaction of a claim.
**5
When Tyssen reached the wreck location, he met with various parties concerning the situation. Because the wreck lay in a PEMEX zone of heavy drilling activ- ity and because he believed that the Mexican government would want to remove the bodies of the deceased seamen and conduct an investigation, he concluded that the ves- sel would definitely have to be removed. Mollman sent a telex to Protexa dated December 17, 1985, suggesting that if the wreck were to be raised and moved, an imme- diate investigation should commence to determine if the removal was compulsory by law. The telex advised that a valid order of removal would have to be in writing and
954 F.2d 130, *132; 1992 U.S. App. LEXIS 133, **5;
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issued by an authorized governmental authority. Immediately after the sinking, the Mexican
Procuraduria General de la Republic ("PGR"), ordered an investigation due to the great loss of life involved. On December 17, 1985, the Mexican Port Captain for *133 Ciudad del Carmen and the offshore port of Cayo Arcas issued a written order that, according to the English trans- lation, required Protexa to post a bond "to guarantee the cleaning up of the area and the salvaging of the Vessel." App. at 1407. All underwriters, including AAMS and CIGNA/AFIA, were **6 notified of the order by EII. Protexa interpreted the Port Captain's order as requir- ing immediate removal of the wreck. The Port Captain's order was referred to Protexa's legal counsel, Jorge Uriarte, for review. After a 45-minute review, Uriarte concluded that "it was clear beyond a doubt that the order had to be complied with." App. at 1166. Uriarte visited the office of the Port Captain in an effort to obtain suspension or rescission of the order but was informed that any such relief would have to be sought from officials in Mexico City. He was also informed that the Port Captain expected removal to begin without delay or the navy would take over the removal and Protexa would be punished to the full extent of the law. In addition to providing Protexa with an opinion as to the validity of the removal order, Uriarte listed five potential consequences that could result from noncompliance: 1) if Protexa did not begin removal of the vessel immediately, the Mexican government could arrange to have the wreck removed and could present Protexa with the bill; 2) Protexa faced the potential for catastrophic liability to third parties for any damage re- sulting from movement of the wreck within **7 the oil field; 3) Protexa would face potential sanctions or fines, which could be imposed on a sliding scale, for failure to comply with the removal order and cooperate with the investigation; 4) Protexa risked forfeiture of the vessel and the bond; and 5) Protexa risked the destruction of its goodwill with the government and with PEMEX if it failed to comply with the order. After concluding that the removal order was valid and after weighing the po- tential consequences of non-compliance, Protexa did not
challenge the order.
On the same day that the order was issued, Pablo Cruz
("Cruz"), Protexa's representative, notified Mollman and requested an immediate meeting so that EII could present the removal order to the underwriters. Cruz also wanted to present Protexa's proposal to perform the removal without resort to a third-party salvor.
Mollman, Tyssen, and Cruz met in Houston on December 18, 1985. They all agreed that it appeared that the removal was required and that Protexa's proposed plan was sound. In Mollman's opinion, it made sense for
Protexa to remove the wreck, since the project primarily involved diving and lifting and he considered Protexa to have an abundance of expertise **8 and equipment for this type of operation. Mollman also was aware that pre- liminary reports indicated that the Huichol II was quickly sinking into the mud. Mollman attempted to telephone the underwriters but was able to contact only three of them. He was not able to reach AAMS or the Lloyds/London underwriters. To those underwriters that were reached, Mollman explained the circumstances of the removal or- der and the need for beginning wreck removal without delay in order to minimize expenses. These underwriters agreed to waive any requirement that Protexa obtain a sec- ond or third salvage bid and advised that Protexa should begin work immediately to avoid further complications and costs. n3
n3 Prior to this meeting and telephone contact with the underwriters, Mollman sent Protexa a telex strongly suggesting that Protexa obtain at least one, and preferably two, outside bids for the salvage of the vessel. He also reminded Protexa of its obliga- tion to act as a prudent uninsured.
Protexa presented the underwriters with two **9 al- ternatives regarding the costs of removal: 1) a fixed-sum bid to remove the wreck for $3,785,000 or 2) a daily rate of $224,608 for an estimated period of 24 days, resulting in a cost of approximately $5.4 million. Tyssen sent these orders to the underwriters by telex on December 19, 1985. By December 20, 1985, all of the underwriters ex- cept AAMS and CIGNA/AFIA had agreed to the lump- sum bid assuming *134 that there was a consensus in favor of this option. AFIA took no position and AAMS, instead of accepting either of the alternatives posed by Protexa, responded by advising that all necessary steps should be taken to minimize the loss and expressed its desire to have a third-party salvor involved, as much as possible, in the removal of the wreck. Since AAMS and CIGNA/AFIA had not approved the lump-sum basis, Mollman and Tyssen told Protexa that it should consider
the job to be on a day-rate basis.
The wreck removal operation began on December 19,
1985, and Tyssen initially estimated that it would take about three weeks to remove the vessel and transport it to an approved location. Protexa's original plan involved passing slings under the wreck using cranes, but problems developed. **10 According to Cruz, a ship passing through the area during a storm snagged the Huichol II with its anchor, the wreck shifted, and debris lodged under the wreck, making passage of the slings underneath im- possible. Protexa then decided to tunnel under the wreck
954 F.2d 130, *134; 1992 U.S. App. LEXIS 133, **10;
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in order to pass the slings, but progress was exceedingly slow.
During mid-January, AAMS transmitted a series of telexes voicing concern about the expense of the wreck removal, and AAMS's adjuster at the scene recommended that the salvage operation be placed out for competitive bids. A third-party salvor, Smit International, contacted RJS and Mollman and offered to perform the removal. However, Smit was not invited to bid until late January, at which time it offered to perform the removal under an agreement calling for it to receive $1.125 million if the job was successfully completed. On the recommen- dation of AAMS's adjuster on site, a professional salvage master, Alex Rynecki, Inc., was hired to assist Protexa. A Rynecki employee found that the basic salvage plan was sound, but he criticized its implementation, and he made a number of recommendations that were never car- ried out. He advised Cruz that the only way to determine
**11 the reasonable cost for the wreck removal opera- tion would be to secure competitive bids, and he estimated that a commercial salvor would bid between $1.1 million and $2.9 million.
After struggling with the removal operation for about
45 days, Protexa finally lifted and suspended the wreck in a crane on February 10. Recovery of the bodies began but was interrupted by bad weather. Eventually the wreck was placed back on the sea bottom in shallow water outside the PEMEX oil exploratory zone.
After removal was completed, RJA prepared its final proof of loss and forwarded copies to all underwriters. The total adjusted loss was $12,121,726. The first $2,500,000 of that loss was paid by the primary-layer underwriters, leaving a balance of $9,631,726, 5% of which remained with the Mexican insurer. The Lloyds/London underwrit- ers, which satisfied Protexa's claim, owed 65% of 95% of $9,631,726, or $5,947,591. Thus, AAMS, if liable, would owe 30% of 95% of $9,631,726 or $2,745,042. CIGNA/AFIA would owe 5% of 95% of $9,631,726, or
$507,000. As part of its final report, RJA again reviewed the authority of the Mexican government to order removal and was convinced that the order was valid **12 and required the plaintiff to remove the wreck. Both AAMS and CIGNA/AFIA, however, denied Protexa's claim.
Protexa filed a complaint in the United States District Court for the District of New Jersey. Protexa subsequently moved for summary judgment, contending that the re- moval costs were recoverable because the removal was
"compulsory by law." Relying on cases construing this standard policy language, Protexa argued that the Port Captain's order alone established conclusively that the re- moval was "compulsory by law." Protexa also maintained that the "act of state" doctrine precluded the court from
deciding whether the Port Captain possessed the authority to order this removal.
The insurance companies filed cross-motions for summary judgment. They argued that the cases adopted
"a balancing test of reasonableness in which three fac- tors: the likelihood of exposure, the sanctions for failure to remove, and the cost of emoval, must all be examined in order to determine *135 if removal was, in fact,
'compulsory by law.'" App. at 40. Thus, they maintained that even a valid removal order would not conclusively show that removal was "compulsory by law." They ar- gued, however, that the Port Captain's **13 order in this case was invalid, and that therefore "the likelihood of exposure to sanctions for failure to remove should be considered a nullity." Id. at 40-41. They also contended that the act of state doctrine did not apply under the cir- cumstances of this case.
The district court denied both motions for summary judgment and adopted an intermediate interpretation of the phrase "compulsory by law." Under the court's in- terpretation, neither the validity nor the invalidity of the Port Captain's order was dispositive, and consequently the court concluded that it was unnecessary to confront the order's validity or the act of state doctrine. Instead, the court held that removal was "compulsory by law" if a reasonable shipowner would have concluded that the cost of the removal was less than the probable sanctions for nonremoval. The court concluded that, in assessing the probable sanctions for nonremoval, it was necessary to take into account the likelihood that the Port Captain's order would have been sustained if challenged. Id. at 41. After a bench trial, the court entered judgment for the insurance companies on two independent grounds. The court first held that the removal was **14 not
"compulsory by law" under the formula it had previously adopted. The court stated that "no phrase in the body of the Port Captain's Order directed wreck removal." Grupo Protexa, S.A. v. All American Marine Slip, 753
F. Supp. 1217, 1232-33 (D.N.J. 1990). Instead, the court observed, the order required the posting of a bond. Id. at
1233. The court suggested that Protexa did not adequately consider the possibility of challenging the Port Captain's order, since Uriarte had no training in the applicable areas of law, did not obtain expert advice, concluded that the order was valid after only cursory review, and was not properly prepared when he met with the Port Captain. Id. at 1233-34. In addition, the court found that the poten- tial sanctions for noncompliance with the order and the potential liability to third parties were much less than the cost of removal. Id. at 1236; see also id. at 1235. Finally, the court suggested that factors other than legal compul- sion -- pressure from the families of the deceased seamen
954 F.2d 130, *135; 1992 U.S. App. LEXIS 133, **14;
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and the possible commercial consequences of noncompli- ance -- influenced **15 Protexa's decision not to resist the Port Captain's order. Id. at 1232.
The court next held that, even if the removal had been
"compulsory by law," Protexa was not entitled to recover due to a policy provision that the court interpreted to mean that Protexa lost all right to recovery if it breached its duty to act as a prudent uninsured. The court found that Protexa violated this duty "when it acted as its own salvor." Id. at
1237. Among other things, the court noted that "Protexa had no experience in deep water wreck removal opera- tions," ignored AAMS' request that a third-party salvor be involved as much as possible, ignored bids by experi- enced salvors that were much lower than Protexa's costs, did not properly execute its removal plan, and failed to implement recommendations by an experienced salvor. Id. at 1237-39. Protexa appealed. We have jurisdiction under 28 U.S.C. § 1291. n4
n4 The district court entered an order extending the time within which the plaintiffs could file a no- tice of appeal, and the insurance companies filed a cross-appeal from this order. By prior order, we de- nied the insurance companies' request for dismissal of the plaintiffs' appeal on jurisdictional grounds.
**16 II.
The first question that we must decide is whether the removal of the Huichol II was "compulsory by law." In addressing this question, both sides rely primarily on four cases decided by the courts of appeals construing the phrase "compulsory by law" as used in a standard clause in marine insurance contracts. Both sides appear to agree, as the insurance companies argue, that these decisions
"were well-known in the marine insurance community and had *136 been thoroughly discussed in the marine insurance literature." Appellees' Br. at 24. Consequently, the parties to the insurance policy at issue here "will be presumed to have intended these words to have their proper legal meaning and effect, in the absence of any contrary intention appearing in the instrument." Raulie v. United States, 400 F.2d 487, 521 (10th Cir. 1968) (quoting
17A C.J.S. Contracts § 586.
After reviewing the decisions on which the parties rely, we conclude that Protexa's construction of the phrase
"compulsory by law" is correct and that the district court's construction is mistaken. It is abundantly clear that the district court's interpretation is inconsistent with that of the Second Circuit **17 in Seaboard Shipping Corp. v. Jocharanne Tug Boat Corp., 461 F.2d 500 (2d Cir. 1972).
In that case, a barge carrying gasoline went aground in Lake Ontario immediately offshore Oswego, New York, and began leaking gasoline into the water and onto the adjacent shoreline. The Second Circuit rejected the argu- ment that "the pressure from the Coast Guard and other governmental authorities in the Oswego area made the removal of the barge compulsory." Id. at 504. The court held that "'compulsory removal' is a term of art referring to a situation in which a hull . . . pursuant to government order . . . must be removed from navigable waters." Id. Since no such government order had been issued in that case, the court held that the costs of removal were not re- coverable under the insurance policy. In the present case, by contrast, if we assume, as the district court did, that the order of the Port Captain was a valid order requir- ing removal, then the cost of removal would clearly be recoverable under the Second Circuit's interpretation.
The Fifth Circuit adopted a different interpretation of the phrase "compulsory by law" in Progress Marine, Inc. v. Foremost Ins. Co., 642 F.2d 816 **18 (5th Cir.), cert. denied, 454 U.S. 860, 70 L. Ed. 2d 158, 102 S. Ct. 315 (1981). In that case, a barge sank about eleven miles off the Louisiana coast. Although no government order was issued requiring removal, the "hurricane season was approaching and the submerged barge posed a threat to neighboring oil production facilities and workers." Id. at 817. Moreover, the barge "lay only eight feet below the surface of the water and posed a threat to navigation in the area, as the barge owner was clearly informed by the Coast Guard." Id. (footnote omitted). The insur- ance company argued that "the removal, although perhaps compelled by prudence, was not 'compulsory by law' as required by the express terms of the policy." Id. The Fifth Circuit rejected this argument. The court disagreed with the Second Circuit's view that "removal 'compulsory by law' requires a peremptory order by an authoritative gov- ernment agency." Id. at 819 (emphasis added). The court added that this phrase "should not be viewed as restricted to situations in which an express direct order from a gov- ernmental body directs removal." Id. at 820 (emphasis added). **19 The court stated:
Removal occasioned by an unarticulated or unreasonable apprehension of criminal or civil liability could not be considered "compelled by law." On the other hand, where removal was reasonably required by law, or where fail- ure to remove would have reasonably exposed an insured to liability imposed by law sufficiently great to justify the expense of removal, then, we believe, such removal could be considered "compelled by law" for purposes of recovery.
Id.
954 F.2d 130, *136; 1992 U.S. App. LEXIS 133, **19;
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Finally, the court observed that an assured would have to possess "a subjective belief . . . that removal was reasonably necessary." Id. The court remanded the case before it for application of this new standard.
We do not interpret the Fifth Circuit's opinion in this case as rejecting the Second Circuit's view that removal is
"compulsory by law" when required by a direct govern- ment order. Rather, we interpret the Fifth Circuit's opinion to mean that removal may also be considered "compul- sory by law" in the absence of such an order when a ship owner subjectively and reasonably believes that removal is necessary based on a comparison of the probable cost of removal *137 against the probable liability if **20 removal is not undertaken. In the present case, therefore, if the Port Captain's order was a valid removal order (as the district court assumed), then the removal of the Huichol II would satisfy the first prong of this test.
Two years after Progress Marine, the Fifth Circuit, sit- ting in banc, returned to the same question in Continental Oil Co. v. Bonanza Corp., 706 F.2d 1365 (5th Cir.
1983). In that case, Conoco time-chartered a vessel from Bonanza Corporation, which retained exclusive control of the vessel. While maneuvering the vessel near a Conoco oil drilling rig in an area leased from the United States, the captain negligently caused the vessel to sink directly beneath the rig. Conoco subsequently removed the vessel and attempted to recover the removal costs under an in- surance policy containing a clause similar to that at issue in the present case.
The in banc Fifth Circuit reaffirmed the interpreta- tion set out in Progress Marine, with one exception not relevant here. Again rejecting the Second Circuit's inter- pretation, the Fifth Circuit stated that " restricting 'com- pulsion' to the mandate of a governmental agency rather than according it the **21 usual significance of the generalized command of a statute or judicial decision narrows the meaning of the term considerably and, we think, unjustifiably." Continental Oil, 706 F.2d at 1369
(emphasis added). "Compulsion," the court wrote, "is not exerted only by direct command." Id. (emphasis added). The court stated that it was "unable to restrict the meaning of 'compulsory' to acts performed in response to order." Id. (emphasis added). Rather, the court stated:
Practical considerations also indicate that removal should not be considered compulsory by law only after specific mandate has issued. If removal were compulsory by law only after competent governmental authority had given its edict, then the vessel owner who removed a vessel he had negligently sunk could not recover the costs of removal even after other vessels had run aground on the wreck until some governmental agency gave the peremp-
tory command. The owner (and consequently its insurer) would be exposed to repeated damage claims without be- ing able to rely on policy coverage to eliminate the hazard, unless a governmental agency ordered removal. . . .
Thus, the clause **22 should be so construed that removal does not become compulsory by law only when a court has rendered judgment requiring it or when an official has issued a fiat. This does not mean that any re- moval undertaken to minimize possible exposure to legal liability is covered. . . . To be compelling, the duty must be clear and the sanctions for its violation both established and sufficiently severe to be impelling, that is to warrant the cost of removal. . . .
In determining whether removal is legally compelled, we look to the state of affairs as they would appear to a reasonable owner under the circumstances.
Id. at 1369-70 (emphasis added).
The in banc court made only one alteration in the test adopted in Progress Marine; it eliminated the require- ment that the insured subjectively believe that removal was reasonably necessary. Id. at 1371.
Applying this test to the case before it, the court con- cluded that the removal carried out by Conoco was not
"compulsory by law" as a result of Conoco's obligations under its lease agreement or under the federal regulations in force at the time. Id. at 1371-72. Among other things, the **23 court observed that "the regulations imposed no present duty to remove the wreck." Id. at 1371. The court also held that there was no settled principle of law on which Conoco, as the mere time charterer of the vessel, could be held liable by any potential claimant for damage subsequently caused by the vessel and that the probabil- ity that any such damage would occur was "slight." Id. at
1373.
We interpret the in banc opinion in Continental Oil, like the earlier panel opinion in Progress Marine, to im- pose a two-part test under which HN1 removal is con- sidered compulsory by law if either 1) the *138 removal is directed by governmental order, statute, or regulation or
2) if removal is reasonable under a cost-benefit analysis taking into consideration the probable cost of removal and both the likelihood and amount of liability which could be imposed for failing to remove the wreck.
We addressed the meaning of the phrase "compul- sory by law" in East Coast Tender Serv., Inc. v. Robert T. Winzinger, Inc., 759 F.2d 280 (3d Cir. 1985). In that case, Winzinger obtained a license from the New Jersey Department of Environmental Protection **24 ("DEP") to operate two barges on the Delaware River as a tempo- rary loading facility. In February 1979, while covered by
954 F.2d 130, *138; 1992 U.S. App. LEXIS 133, **24;
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an insurance policy containing a clause similar to that at issue here, the barges were damaged in a storm. The policy expired at the end of March 1979, but Winzinger continued to operate the barges as a loading facility un- til September. In April 1980, Winzinger "received formal notice from the DEP" to remove the barges, which by that time had sunk into the river. Id. at 283.
In analyzing Winzinger's right to recover removal costs under the insurance policy, we adopted "the Fifth Circuit's more expansive interpretation of the term 'com- pelled by law.'" Id. at 286. We wrote that this phrase
"in the context of this type of insurance policy should not be restricted to situations in which an express order from a governmental body directs removal." Id. (empha- sis added). We held that Winzinger was not entitled to recover, however, because he did not incur any legal obli- gation to remove the barges until after the policy term had expired. Id. at 286-87.
In sum, we interpret all of the decisions described above **25 to mean that removal is "compulsory by law" if it is directed by government order. Our decision in East Coast Tender Serv., and the two earlier Fifth Circuit decisions interpret this phrase to encompass additional cases, viz., those in which removal is required by statute or regulation and those in which a reasonable shipowner at the relevant time would determine that the probable cost of removal would be less than the probable tort liability if removal was not undertaken. Accordingly, if the Port Captain's order in this case was a valid removal order, Protexa was entitled to recover under the policy provision in question.
III.
A. Under the correct interpretation of the phrase "com- pulsory by law," the meaning and validity of the Port Captain's order are critical factors. Relying on several statements in the district court opinion, the insurance com- panies contend that the district court "clearly concluded that the Port Captain's directive was not an order to re- move the wreck." Appellees' Br. at 22. We disagree with this interpretation of the district court's opinion. The dis- trict court's opinion states expressly that the court would
"assume, without deciding, that the Port **26 Captain's removal order was valid" ( Grupo Protexa, 753 F. Supp. at 1228), and the portions of the district court opinion on which the insurance companies rely do not find that the order did not require removal. Rather, these portions of the opinion merely point out -- correctly that the English translation of the order does not expressly re- quire removal. It seems clear that the meaning of the Port Captain's order under Mexican law cannot be determined solely on a literal reading of the English translation, and we do not interpret the district court's opinion as taking
such an approach.
Since the district court made no finding regarding the precise meaning of the Port Captain's order, we must re- mand for a finding on this question. In light of the parties' arguments on appeal concerning the admission of expert testimony about this order, we note that under Fed. R. Civ. P. 44.1, expert testimony may be received regarding Mexican law to aid in interpreting the Port Captain's or- der. Merck & Co., Inc. v. U.S. Int'l Trade Comm'n, 774
F.2d 483, 227 U.S.P.Q. (BNA) 779 (Fed. Cir. 1985).
B. If the Port Captain's order, as understood under Mexican law, directed removal **27 of the wreck, then the validity of the order may be dispositive. The insur- ance *139 companies argue that under Mexican law and the United Nations Convention on the Law of the Sea
(UNCLOS) (21 I.L.M. 1261), which Mexico has signed, the Port Captain lacked the authority to order the removal of the Huichol II from the location where it sank. In response, Protexa argues that the act of state doctrine pre- cludes an American court from judging the validity of the order. See W.S. Kirkpatrick & Co. v. Environmental Tectonics Corp., 493 U.S. 400, 107 L. Ed. 2d 816, 110
S. Ct. 701 (1990), aff'g, Environmental Tectonics v. W.S. Kirkpatrick, Inc., 847 F.2d 1052 (3d Cir. 1988). The in- surance companies contend, however, that the act of state doctrine does not apply here because Protexa chose to sue in the United States rather than Mexico, where the valid- ity of the order could have been fully litigated; because the Huichol II sank outside Mexico's territorial waters and the act of state doctrine does not apply to extraterritorial acts; and because unambiguous provisions of UNCLOS are controlling because they establish that the Huichol II is located outside Mexican jurisdiction. **28
The district court has not addressed any of these ques- tions, and we believe it would be premature for us to do so now. As noted above, it is still unsettled whether the Port Captain's order in fact directed the removal of the wreck. n5 Until this preliminary question is decided, we should not decide (a) whether the act of state doctrine prohibits an American court from deciding whether the Port Captain possessed the authority to order removal of the wreck or (b) whether the Port Captain possessed such authority.
n5 The act of state doctrine does not pre- clude a court from determining whether in fact a government official directed certain action. See Kirkpatrick Co., 493 U.S. at 409; Interamerican Refining Corp. v. Texaco Maracaibo, Inc., 307 F. Supp. 1291, 1301 (D. Del. 1970) ("whether or not a foreign official 'ordered' certain conduct is an evi- dentiary question" not prohibited by the act of state
954 F.2d 130, *139; 1992 U.S. App. LEXIS 133, **28;
1992 AMC 1227
Page 8
doctrine).
IV.
The district court's second, independent reason for en- tering judgment **29 for the insurance companies was that Protexa breached its duty to exercise the care of a prudent uninsured with respect to the removal operation. The court held that this breach prevented Protexa from recovering any removal costs under the policy, even the costs that would have been incurred had the removal been performed by a professional salvor. In reaching this con- clusion, the district court relied primarily on a provision of the "protection and indemnity" portion of the policy. In passing, the court also cited one case for the proposition that an insured has a duty to exercise the care of a prudent uninsured under a "sue and labor" clause. Grupo Protexa,
753 F. Supp. at 1236-37. On appeal, both sides agree that cases involving "sue and labor" clauses are not relevant here. Thus, we turn to the policy provision on which the district court relied.
As noted, this provision appears in the "protection and indemnity" portion of the policy. App. at 1670-
74. The provision follows the heading "GENERAL CONDITIONS AND/OR LIMITATIONS" and is cap- tioned in the left margin "Settlement of claims." Id. at
1673. The provision reads as follows (the language on which the **30 district court relied is highlighted):
The Assured shall not make any admission of liability, either before or after any occurrence which may result in a claim for which the Assurer may be liable. The Assured shall not interfere in any negotiations of the Assurer, for settlement of any legal proceedings in respect of any oc- currences for which the Assurer is liable under this policy; provided, however, that in respect of any occurrence likely to give rise to a claim under this policy, the Assured are obligated to and shall take steps to protect their (and/or the Assurer's) interests as would reasonably be taken in the absence of this or similar insurance. If the Assured shall fail or refuse to settle any claim as authorized by Assurer, the liability of the Assurer to the Assured shall be limited to the amount *140 for which settlement could have been made.
Whenever required by the Assurer the Assured shall aid in securing information and evidence and in obtain- ing witnesses and shall cooperate with the Assurer in the defense of any claim or suit or in the appeal from any judgment, in respect of any occurrence as hereinbefore provided.
Id.
Unlike the district court and the insurance **31
companies, we do not interpret the highlighted language to mean that the assured's entire right to recover is con- ditioned upon the assured's acting at all times and in every respect as a prudent uninsured. First, it is sig- nificant that this language appears in a paragraph cap- tioned "Settlement of claims." This placement suggests that whatever duty was created by the disputed language is restricted to the settlement of claims. Second, it is sig- nificant that the language in question appears in a proviso. This placement suggests that the language qualifies the duty imposed by the language preceding the proviso, i.e., the insured's obligation not to "interfere in any negotia- tions" carried on by the insurer. Thus, the most reasonable interpretation of the bare policy language was that Protexa was obligated to act as a prudent uninsured would with respect to any claims asserted by third parties. In other words, the proviso appears to be a cooperation clause. See Martin v. Travelers Indem. Co., 450 F.2d 542, 553 (5th Cir. 1971); L. Buglass, Marine Insurance and General Average in the United States, 391 (2d ed. 1981); J.A. Appleman & J. Appleman, Insurance Law and **32 Practice, § 4774 (1981). While the parties could have intended this provision to have some other meaning, no evidence establishing such an intent has been called to our attention. n6 Accordingly, we hold that this provision does not mean that Protexa's failure to act as a prudent uninsured during the removal operation would totally de- feat Protexa's right to recover any removal costs.
n6 The insurance companies point to trial tes- timony by Pablo Cruz, Protexa's risk manager, and Keith Mollman, who was assigned as Protexa's ac- count manager by Protexa's insurance broker. But assuming that these witnesses were competent to testify about Protexa's intent or the generally under- stood meaning of a clause of this nature in the in- dustry, neither witness stated that this clause meant that the assured's right to any recovery was condi- tioned on acting at all times as a prudent uninsured. Cruz merely stated that Protexa had a general duty to act as a prudent uninsured, but he did not state that the consequence of any breach of this duty was the denial of all recovery. Mollman first stated that the policy did not expressly impose a general duty to act as a prudent uninsured but that this duty was understood. App. at 381. After the insurance com- panies' attorney pointed out the policy provision in question, Mollman agreed that the duty contained in the provision was "the same duty we were talk- ing about." App. at 383. Without a contrary finding by the trial court, we are unwilling to interpret this testimony to mean anything more than that the pol- icy provision in question embodied the duty to act as a prudent uninsured in the limited context of the
954 F.2d 130, *140; 1992 U.S. App. LEXIS 133, **32;
1992 AMC 1227
Page 9
settlement of claims.
**33
It does not follow, however, that Protexa is entitled un- der the policy to recover all the costs that it incurred from what the district court found to be an extremely inefficient removal operation. Although the policy provision on re- moval does not expressly state that Protexa may recover only reasonable removal costs and expenses, "an inter- pretation which makes a contract or agreement fair and reasonable will be preferred to one which leads to harsh and unreasonable results." 4 S. Williston, A Treatise on the Law of Contracts § 620 (3d ed. 1961); see also 3 A. L. Corbin, Corbin on Contracts § 552 (1960); G. J. Couch, Couch on Insurance 2d § 15:16 (rev. ed. 1984). Thus, the policy provision on removal may well be restricted to reasonable removal costs, and it is not apparent from Protexa's briefs that it disputes such an interpretation. On remand, the district court should determine the meaning of this provision and, if the provision is limited to reason- able costs, make findings regarding the amount of those costs. n7 The *141 district court has already found that Protexa's removal operation was highly inefficient, and we hold that those findings are not clearly erroneous.
**34
n7 Protexa also contends that the district court erred in dismissing its waiver and estoppel defense with respect to its alleged breach of the cooperation clause. Because we hold that this clause does not apply to the manner in which Protexa conducted the removal operation, we need not address this argument. Finally, Protexa argues that it was not permitted to introduce evidence that the insurance companies waived or should be estopped from as- serting the affirmative defense of failure to mitigate. The rulings to which Protexa refers appear to have been based on the district court's interpretation of the policy provisions discussed above. Thus our decision regarding the meaning of these provisions appears to obviate any need to address these rulings further.
.V
In conclusion, we hold that the removal of the Huichol II was "compulsory by law" if removal was directed by a valid order of the Port Captain and that Protexa's ineffi- cient removal operation does not totally preclude recov- ery of removal costs. We will therefore **35 reverse the judgment of the district court and remand for further proceedings.
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