                                                          United States Court of Appeals
                                                                   Fifth Circuit
                                                                F I L E D
                       REVISED OCTOBER 8, 2003                 September 17, 2003

                   UNITED STATES COURT OF APPEALS            Charles R. Fulbruge III
                        FOR THE FIFTH CIRCUIT                        Clerk
                       _______________________

                             No. 02-30842
                       _______________________

                         OTTO CANDIES, L.L.C.,

                                                    Plaintiff-Appellee,

                                 versus

                  NIPPON KAIJI KYOKAI CORPORATION,

                                                   Defendant-Appellant.

________________________________________________________________

           Appeal from the United States District Court
               for the Eastern District of Louisiana

_________________________________________________________________


Before JONES and BENAVIDES, Circuit Judges, and KAZEN, District
Judge.*

EDITH H. JONES, Circuit Judge:

           Appellant Nippon Kaiji Kyokai Corporation (“NKK”) appeals

from the judgment in a negligent misrepresentation case based on

statements NKK made in a classification survey of the M/V SPEEDER

that was a prerequisite to the vessel’s sale.      We hold that general

maritime   law   cautiously    recognizes    the   tort   of    negligent

misrepresentation as applied to classification societies and that



     *
        Chief District Judge of the Southern District of Texas, sitting by
designation.
on the specific facts presented in this case, NKK owed a legal duty

to   Otto    Candies.      Finding   no       error   in   the   district   court’s

judgment, we affirm.

                                  BACKGROUND

              The SPEEDER is a high speed, aluminum hulled passenger

vessel      built   by   Austal   Pty     Ltd.        Diamond    Ferry   Co.,   Ltd.

(“Diamond”) took delivery of the SPEEDER in April 1995.                          The

SPEEDER was registered in Japan and was classified by NKK as a

“coastal (Japanese Government) passenger vessel.” Diamond operated

the SPEEDER as a coastal passenger ferry from 1995 to 1998 in

Japan.      In 1998, Diamond took the SPEEDER out of service, and her

NKK classification lapsed.           On December 22, 1999, Otto Candies

entered into a Memorandum of Agreement (“MOA”) with Diamond to

purchase the SPEEDER.        As a condition of sale, a clause in the MOA

required that NKK restore and make current the SPEEDER’s coastal

classification free from any outstanding recommendations.

              On January 5, 2000, NKK issued a Class Maintenance

Certificate to Diamond that indicated the SPEEDER was certified

within class as a coastal passenger ferry with no outstanding

deficiencies.       This condition of the MOA being satisfied, Otto

Candies paid for the SPEEDER and it was transported from Japan to

Port Everglades, Florida aboard a heavy lift ship.                       From Port

Everglades, the SPEEDER was towed to the Bender Shipyard in Mobile,

Alabama. Once the SPEEDER arrived in Mobile, Otto Candies arranged

for a survey by the American Bureau of Shipping (“ABS”) so that the
                                          2
vessel’s classification could be transferred from NKK to ABS.

           The ABS surveyor, Demetri Stroubakis, discovered a number

of significant deficiencies that required repair before ABS would

classify the SPEEDER.      In particular, Stroubakis noted damaged and

wasted overhead spool piping sections that connect the cooling

system machinery to the hull; a hull fracture in the port-aft main-

engine exhaust connection to the hull; fractured hull brackets,

wasted cooling piping, leaks in the port and starboard stabilizer

fins; excessive movement in the starboard stabilizer shaft; leaks

in the port-forward main-engine sea strainer that filters the water

used to cool the engines; disconnected and missing bilge pumps; gas

and water leaks in the exhaust system; a faulty circuit breaker for

the   starboard   generator;      severe   damage   to   the   port-aft     main

propulsion gear; exterior and interior leaks in the main reduction

gear oil coolers; damage to the starboard-forward main engine;

damage and deterioration in the ventilation system for the port-aft

engine; corroded    hose    and    pipe    connections   for   the   main    and

auxiliary engine fuel and lube oil systems that created a severe

fire hazard; leaking water-jet pump shaft seals; a heavily corroded

port and starboard water-jet pump-bladder accumulator-block valve;

and that the engine oil was sooty, black, and contained particulate

matter which suggested problems with the machinery. In response to

Stroubakis’s report, Otto Candies had the SPEEDER repaired at the

Bender shipyard at a cost of $328,096.43.                When repairs were

completed, ABS issued an interim class certificate.

                                      3
            Otto Candies filed the instant suit against NKK to

recover the costs of repairs needed for the SPEEDER to obtain a

class certificate from ABS.         Otto Candies’s sole claim against NKK

was based on the tort of negligent misrepresentation as stated in

the ALI Restatement (Second) of Torts § 552.              The district court

held a two day bench trial, after which it found that NKK owed a

duty   to   Otto   Candies    and   that   NKK   was   liable   for   negligent

misrepresentation.     The court awarded Otto Candies damages for the

repair costs.      NKK timely appealed.

                             STANDARD OF REVIEW

            In admiralty cases we review the district court’s legal

conclusions de novo.         Lake Charles Stevedores, Inc. v. Professor

Vladimir Popov MV, 199 F.3d 220, 223 (5th Cir. 1999).                 We review

the district court’s factual findings for clear error.                  Houston

Exploration Co. v. Halliburton Energy Servs., Inc., 269 F.3d 528,

531 (5th Cir. 2001) (citing Fed. R. Civ. P. 52(a)).               Findings of

negligence are factual findings.           Jackson v. OMI Corp., 245 F.3d

525, 528 (5th Cir. 2001).           “Under a clear error standard, this

court will reverse ‘only if, on the entire evidence, we are left

with the definite and firm conviction that a mistake has been

made.’”     Walker v. Cadle Co. (In re Walker), 51 F.3d 562, 565

(5th Cir. 1995) (quoting Allison v. Roberts (In re Allison),

960 F.2d 481, 483 (5th Cir.1992)).




                                       4
                               DISCUSSION

            NKK is one of the world’s largest maritime classification

societies. Classification societies are “organized societies which

undertake   to   arrange   inspections    and   advise   on   the   hull   and

machinery of a vessel from its initial stages in new building and

thereafter.      The societies produce a certificate concerning the

vessel's seaworthiness in accordance to the trade within which it

is intended to, or does, work.”         Damien L. O’Brien, The Potential

Liability of Classification Societies to Marine Insurers Under

United States Law, 7 U.S.F. Mar. L.J. 403, 403 (1995) (quoting Eric

Sullivan, The Marine Encyclopedia Dictionary 78 (1980)).               These

certificates are widely relied upon by all sectors of the maritime

industry as an indication that a vessel is reasonably fit for its

intended use.      Machale A. Miller, Liability of Classification

Societies from the Perspective of United States Law, 22 Tul. Mar.

L.J. 75, 77 (1997); Hannu Honka, The Classification System and its

Problems with Special Reference to the Liability of Classification

Societies, 19 Tul. Mar. L.J. 1, 3 (1994) (noting that “certificates

are important not only to insurers, but also to charterers, cargo

owners, buyers, and bankers, among others, who are required to know

the ship’s condition at a specific time”).

            Citing a previous decision of this court, the parties

assumed that NKK can be held liable under general federal maritime

law for the tort of negligent misrepresentation. Coastal (Bermuda)



                                    5
Ltd. v. E. W. Saylott & Co., 826 F.2d 424 (5th Cir. 1987).1              It is

true that Coastal (Bermuda) applied the principles of Section 552

of the Restatement (Second) of Torts to a cargo purchaser’s damage

claim    against   a   petroleum   products     surveyor,    and   reversed   a

judgment for the purchaser, but that ruling does not automatically

translate    to    the   relations    between     maritime    classification

societies like NKK and their clients or third parties.                 Indeed,

this court earlier reversed and remanded a case to ascertain what

duties a classification society may owe its shipowner clients, in

contract or tort, for negligent inspection of a damaged ship. Gulf

Tampa Drydock Co. v. Germanischer Lloyd, 634 F.2d 874 (5th Cir.

1981).

            A handful of cases in other jurisdictions has explored

the duty of classification societies, yielding one definitive court

of appeals holding that a classification society cannot be liable

in contract or tort to a shipowner for a negligent survey regarding

vessel seaworthiness.         Sundance Cruises Corp. v. The American

Bureau of Shipping, 7 F.3d 1077 (2d Cir. 1993).              The court noted

that “a shipowner is not entitled to rely on a classification



      1
          The parties assumed, and so do we arguendo, that general federal
maritime law, not state law, applies to this case. This is because we normally
do not address choice of law issues sua sponte. Am. Int’l Trading Corp. v.
Petroleos Mexicanos, 835 F.2d 536, 540 (1987) (“It is well established that
‘parties generally are bound by the theory of law they argue in the district
court, absent some “manifest injustice.”’”) (quoting Shelak v. White Motor Co.,
581 F.2d 1155, 1160 (5th Cir. 1978)). Since the district court’s jurisdiction
in this case is based upon the diversity of citizenship of the parties pursuant
to 28 U.S.C. 1332 (2000), whether this tort arises under general maritime law or
state law does not affect jurisdiction.

                                       6
certificate as a guarantee . . . that the vessel is soundly

constructed.”      7 F.3d at 1084.      The shipowner, not the classifi-

cation society, must remain ultimately responsible for the ship’s

condition.

            With respect to an injured third party “who relied on the

classification or safety certificates,” however, the Second Circuit

suggested a different result might obtain.2             In cases before and

after Sundance, parties have sought to recover from classification

societies after they suffered loss or damage allegedly attributable

to defective classification certificates.                One case from the

Southern District of New York assumed arguendo, following the

Sundance dicta, that a maritime claim for negligent representation

exists against a classification society on behalf of cargo owners.

Cargill, Inc. v. Bureau Veritas, 902 F. Supp. 49 (S.D.N.Y. 1995).

In Cargill, the cargo owner lost, because there was no evidence

that it actually relied on the classification certificates.                   In

another    case,   a   classification      society    was   held   liable    for

negligent misrepresentation to a ship charterer for whose benefit

it furnished an incorrect Suez Canal special tonnage certificate.


      2
          A year later, the Second Circuit held an independent hold inspector
liable, as a matter of contract, not tort law, to its client Cargill for
defectively certifying the condition of a ship’s hold for the carriage of
Cargill’s fertilizer. The court distinguished the purpose of the hold survey
from that of a classification certificate to a shipowner, the latter being
intended “merely to . . . take advantage of the insurance rates available to a
classed vessel.” International Ore and Fertilizer Corp. v. SGS Control Services,
Inc., 38 F.3d 1279, 1285 (2d Cir. 1994), quoting Sundance, supra, 7 F.3d at 1084.
In Coastal (Bermuda), by contrast, the plaintiff was a third party to the fuel
oil inspection report prepared by Saybolt for the cargo’s seller, rendering tort
principles applicable.

                                       7
The certificate was used, inter alia, to calculate fees for passage

through the Suez Canal.            Somarelf v. The American Bureau of

Shipping, 720 F. Supp. 441 (D.N.J. 1989).           The theory behind this

case   predates,   but     is   consistent   with   the   court’s     dicta    in

Sundance.

            The district court’s adjudication of liability against

NKK    therefore   moves    this   court   into   novel   but   not   entirely

unchartered territory.          Although the verdict was appropriate in

this case, we emphasize that a claim for negligent misrepresen-

tation in connection with the work of maritime classification

societies should be strictly and carefully limited. The societies’

surveys and certificate system are essential to maintaining the

safety of maritime commerce, yet their activities should not

derogate from shipowners’ and charterers’ nondelegable duty to

maintain seaworthy vessels.           Imposition of undue liability on

classification societies could be harmful in several ways.                    The

societies could be deterred by the prospect of liability from

performing work on old or damaged vessels that most need their

advice. The spreading of liability could diminish owners’ sense of

responsibility for vessel safety even as it complicates liability

determinations.     Ultimately, broader imposition of liability upon

classification societies would increase their risk management costs

and rebound in higher fees charged to the societies’ clients

throughout the maritime industry.          Whether such risk-spreading is


                                       8
cost-efficient in an industry with well-developed legal duties and

insurance requirements is doubtful.               The distinctions articulated

in caselaw to date recognize the care with which claims against

classification societies must be studied.

           After noting this essential caveat, we proceed to the

merits of the case.     To prevail on a cause of action for negligent

misrepresentation under section 552 of the Restatement (Second) of

Torts, Otto Candies had to establish that (1) NKK, in the course of

its profession, supplied false information for Otto Candies’s

guidance in a business transaction; (2) NKK failed to exercise

reasonable care in gathering the information; (3) Otto Candies

justifiably relied on the false information in a transaction that

NKK intended to influence; and (4) Otto Candies thereby suffered

pecuniary loss.    Coastal (Bermuda) Ltd., supra at 428-29 (citing

Grass v. Credito Mexicano, S.A., 797 F.2d 220 (5th Cir. 1986)).

           Additionally,         a         plaintiff      claiming      negligent

misrepresentation must be a “person, or a member of a ‘limited

group’ of persons, for whose benefit and guidance the defendant

either   intends   to   supply       the    information    or   knows   that   the

recipient intends to supply it."               Great Plains Trust Co. v. Morgan

Stanley Dean Witter & Co., 313 F.3d 305, 318 (quoting Scottish

Heritable Trust, PLC v. Peat Marwick Main & Co., 81 F.3d 606, 612

(5th Cir. 1996)).       Thus, Otto Candies must establish that NKK

provided the class certificate to Diamond and knew that Diamond



                                           9
intended it for Otto Candies’s guidance and benefit.3

           This    is   because   “[t]he    Restatement      expressly    limits

liability to a select group of nonclients who the misinformer

actually knows will receive inaccurate information . . . .”               First

Nat’l Bank of Commerce v. Monco Agency Inc., 911 F.2d 1053, 1061

(5th Cir. 1990) (emphasis added).            The fact that it was merely

possible   or    foreseeable    that   a    nonclient   of    the   information

supplier would rely on the information is insufficient.                 Scottish

Heritable Trust, PLC, 81 F.3d at 612; First Nat’l Bank of Commerce,

911 F.2d at 1059-60.           Furthermore, the information supplier’s

liability under section 552 is limited to those persons whom the

engagement is intended to benefit.           First Nat’l Bank of Commerce,

911 F.2d at 1059; Bily v. Arthur Young & Co., 834 P.2d 745, 769

(Cal. 1992).

           Diamond engaged NKK to certify the SPEEDER pursuant to

the terms of the MOA, and the court found that NKK was aware

(1) that its certification of the SPEEDER was directly related to

the pending sale of the SPEEDER to Otto Candies and (2) that the

certification would be used to guide Otto Candies’s decision to buy

the SPEEDER.     NKK challenges these findings as clearly erroneous.

They are not.

           The    district     court   admitted    into      evidence    written

correspondence from James Aitkenhead, a ship broker, to Otto


     3
         Neither party contends that NKK directly provided the certificate to
Otto Candies.

                                       10
Candies directly supporting the court’s findings.                   Aitkenhead’s

communications reveal that NKK was aware of the pending sale of the

ship;   that      NKK’s   reclassification        of    the   SPEEDER   free    of

recommendations was a condition of the agreement under which the

SPEEDER was to be sold; and that Otto Candies’s purchase of the

SPEEDER would be based on NKK’s classification of the ship free of

recommendations.

            NKK    argues   that   the    correspondence       is   inadmissible

hearsay and that the correspondence was withdrawn after being

offered and was not admitted into evidence.                   NKK’s argument is

baseless.      According to NKK, the Index to Otto Candies’s trial

exhibits indicates the correspondence was not admitted.                  On the

contrary, the copy of the index found in the record notes that the

district court admitted the exhibits at issue into evidence during

the first day of the bench trial.

            Additionally,     despite         NKK’s   representations   to     this

court, there is no indication in the record that NKK objected at

trial to the documents at issue.              For the first time in its reply

brief, however, NKK objects, but it furnishes no legal analysis

supporting its argument that the correspondence is hearsay.                  Thus,

any argument NKK may have had is waived.               Cavallini v. State Farm

Mut. Auto Ins. Co., 44 F.3d 256, 260 (5th Cir. 1995) (issues first

raised in a reply brief will not be considered).




                                         11
               NKK also argues that it could not have known that its

certification report would be supplied to Otto Candies because it

had no direct communication with Candies.               Direct communication is

unnecessary.        Section 552 requires instead that the information

supplier actually know the parties to whom and for whose explicit

guidance the information is to be supplied.

               The mere foreseeability that third parties may rely on

such reports or certificates is also insufficient for purposes of

section 552.       See First Nat’l Bank of Commerce, 911 F.2d at 1061

(the       Restatement    explicitly   limits      an   information     supplier’s

liability to third parties the supplier “actually knows” will

receive the information and will be influenced in their decisions

regarding a business transaction).                Comments to section 552 make

clear       that   even    parties   that     customarily      rely    on   certain

information are not entitled to bring a section 552 claim unless

the    information        supplier   knew    at   the   time   it     supplied   the

information that it was for their benefit and guidance.4                    As the


       4
            See, e.g., the following illustrations:

       10. A, an independent public accountant, is retained by B Company to
       conduct an annual audit of the customary scope for the corporation
       and to furnish his opinion on the corporation's financial
       statements. A is not informed of any intended use of the financial
       statements; but A knows that the financial statements, accompanied
       by an auditor's opinion, are customarily used in a wide variety of
       financial transactions by the corporation and that they may be
       relied upon by lenders, investors, shareholders, creditors,
       purchasers and the like, in numerous possible kinds of transactions.
       In fact B Company uses the financial statements and accompanying
       auditor's opinion to obtain a loan from X Bank. Because of A's
       negligence, he issues an unqualifiedly favorable opinion upon a
       balance sheet that materially misstates the financial position of B
       Company, and through reliance upon it X Bank suffers pecuniary loss.

                                        12
California Supreme Court notes:

     [b]y confining what might otherwise be unlimited
     liability to those persons whom the engagement is
     designed to benefit, the Restatement rule requires that
     the supplier of information receive notice of potential
     third party claims, thereby allowing it to ascertain the
     potential scope of its liability and make rational
     decisions regarding the undertaking.

Bily, 834 P.2d at 769.          Thus, in this context, we reject any

implication    that   classification         societies    can   be   liable   for

negligent     misrepresentation         to     parties,    including    without

limitation 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.

            We conclude that Otto Candies is eligible to bring a

negligent misrepresentation claim against NKK under the facts of

this case because NKK actually knew at the time it reclassified the

SPEEDER that the results of the classification survey were to be

conveyed to    Otto   Candies     for    the    purpose   of    influencing   its


     A is not liable to X Bank.

     12. In 1934, A Company, a firm of surveyors, contracts with B to
     make a survey and description of B's land. A Company is not informed
     of any intended use of the survey report but knows that survey
     reports are customarily used in a wide variety of real estate
     transactions and that it may be relied upon by purchasers,
     mortgagees, investors and others. The survey is negligently made and
     misstates the boundaries and extent of the land. In 1958 C, relying
     upon the report that B exhibits to him, purchases the land from B,
     and in consequence suffers pecuniary loss. A Company is not liable
     to C.

Restatement (Second) of Torts § 552 cmt. h, illus. 10, 12 (1977).

                                        13
decision to purchase the SPEEDER. The remaining issues are whether

the district court clearly erred in finding that NKK supplied false

information to Otto Candies, that NKK failed to exercise reasonable

care in gathering the information, that Otto Candies reasonably

relied on the information, and that as a result of relying on the

false information Otto Candies suffered pecuniary loss.

           The   district   court   found   that   NKK     provided   false

information by issuing a class certificate free of recommendations

in light of the various defects in the hull and machinery of the

SPEEDER.   NKK argues that the district court clearly erred in

making this finding.    We disagree.

           Before   a   classification      society      issues   a   class

certificate free of recommendations, it must be satisfied that the

certified vessel complies with the society’s rules and standards

for ships of the relevant class.     See Machale A. Miller, Liability

of Classification Societies from the Perspective of United States

Law, 22 Tul. Mar. L.J. 75, 77-81 (1997) (describing the class

certification process).     By issuing a class certificate free of

recommendations, a classification society necessarily represents

that the vessel so complies.        Cf. Great Am. Ins. Co. v. Bureau

Veritas, 338 F. Supp. 999, 1011-12 (S.D.N.Y. 1972) (when a society

undertakes to classify a vessel it accepts a duty to survey and

classify the vessel in accordance with society’s own rules and

standards), aff’d, 478 F.2d 235 (2d Cir. 1973). The certificate or

survey in no way guarantees a vessel’s seaworthiness, however, but

                                    14
extends only as far as the nature of the survey performed.

                In this case, expert witnesses presented by both parties

testified that the various items of damage and deterioration found

by Stroubakis were relevant to and would affect the SPEEDER’s NKK

classification.           Ian Smith, NKK’s expert witness, testified that

the deficiencies of the type noted by Stroubakis should be noted by

a surveyor performing a class survey.                   Furthermore, Ben Haveman,

Otto       Candies’s      expert     witness,     testified      that     the     various

deficiencies should have been addressed during NKK’s certification

process.          Based     on    their    testimony,    the     fact    finder    could

reasonably infer that NKK’s certification of the SPEEDER free of

recommendations constituted false information because the SPEEDER

did    not      comply    with     the    society’s    rules     and    standards    for

classification at the time of the survey. Thus, the district court

did    not      clearly     err     in    finding     that     NKK     provided     false

information.5

                Haveman’s        testimony   also     sufficiently       supports     the

district court’s finding that NKK failed to exercise reasonable

care       in   gathering    the    information       relevant    to    the     SPEEDER’s

certification. Haveman testified that the NKK surveyor should have

found the various deficiencies in the SPEEDER’s hull and machinery




       5
         NKK is not being held liable, as it contends, for the vessel’s failure
to satisfy ABS standards after being shipped to the U.S.

                                             15
– many of them open and obvious – that Stroubakis discovered during

his inspection.

           NKK also challenges the district court’s finding that

Otto   Candies    actually    and      justifiably     relied   on   the   false

information.     We hold that the district court did not err in making

this finding.     Otto Candies, Jr., the chief executive officer of

Otto Candies, L.L.C., testified that but for NKK’s certification of

the SPEEDER as a coastal passenger vessel free of recommendations,

the company would not have purchased the SPEEDER. Furthermore, the

district court did not err in finding Otto Candies’s reliance on

the certificate to be reasonable.               NKK is one of the world’s

largest classification societies.            In addition, NKK is a member of

the International Association of Classification Societies (“IACS”)

which prescribes        certain   minimum     standards   for   classification

societies.       Only   eleven    of   the   world’s    fifty   classification

societies qualify for membership in IACS.                 Machale A. Miller,

supra, 22 Tul. Mar. L.J. 75, 77 n.6 (1997).

           Finally, NKK argues that the district court erred in

finding that Otto Candies suffered pecuniary loss as a result of

the false information.       The district court awarded Otto Candies as

damages the cost to repair the deficiencies noted by Stroubakis.

Whether this is a proper measure of damages is uncertain, but

because NKK did not brief its reasons for contesting the damage

award, the contention is waived.



                                        16
                            CONCLUSION

          Based on the foregoing discussion, we agree with the

district court that Otto Candies could properly bring a negligent

misrepresentation claim against NKK and that the district court did

not clearly err in finding that NKK was liable for negligent

misrepresentation.   The judgment is AFFIRMED.




                                17
