Trains, Ships and Trucks

In disputes regarding damage to cargo transported over land and water, it is important for agents that are placing insurance to protect cargo against physical loss or damage understand the carrier’s limitation of liability. If the cargo owner, shipper, carrier – and/or their respective insurers, agents and brokers – misunderstand the rules surrounding application of limitation of liability provisions contained in the various bills of lading pertaining to the cargo, it could result in a miscalculation in the amount of recovery obtainable against the carrier. It may even lead to the failure to obtain adequate insurance to cover physical damage losses occurring during transport.

Confusion and misunderstanding are common in this area of law. It is so prevalent, in fact, that the U.S. Supreme Court was called upon recently in Norfolk Southern Railroad Company v. Kirby to provide clear rules for trial courts throughout the country. The case dealt with which law and limitation of liability rules to apply when the method of transport is “multi-modal” involving a combination of ocean vessels, railroad or motor carrier over land and sea.

When a shipment destined for the United States originates overseas, it is typically processed through a transportation intermediary known as a non-vessel owning common carrier. The NVOCC does not transport the cargo but handles logistics of booking transport from the point of origin in the foreign country, to delivery at a U.S. inland location. The NVOCC acts as an agent for the shipper in negotiating and entering into contracts of carriage or “bills of lading” with the ocean and inland carriers involved in the multi-modal journey.

The contractual obligations of the NVOCC to the shipper are set forth in the “through” bill of lading, issued to the shipper. The contractual obligation of various carriers to the shipper are set forth in the bills of lading each issues to the NVOCC. Typically, the bill of lading the NVOCC issues to the shipper contains a “Himalaya Clause,” extending the protections afforded the NVOCC vis-á-vis the shipper to each of its agents or servants performing the transportation services.

For years, courts were undecided about the contract governing the relationship of the carrier to the shipper. Should that contract, throughout the multi-modal journey be interpreted by maritime rules of law governing shipment of cargo, or should the applicable law depend on the geography where the incident occurs (i.e. on land or sea)?

Justice Sandra Day O’Connor stated in the Kirby case, “This is a maritime case about a train wreck,” signaling that the court was asked to decide when train wrecks (or truck accidents damaging cargo previously carried at sea) are maritime-related.

This is important because the Carriage of Goods by the Sea Act (COGSA) governs an ocean carrier’s obligations for cargo shipped into or out of U.S. ports in foreign trade. COGSA limits the liability of the carrier for any loss or damage to the goods in an amount not to exceed $500 per package or customary freight unit. The parties may not set a lower per package limitation, but the shipper may declare a higher value and obtain insurance covering the higher valuation.

The liability of motor carriers and railroads for damage or loss to cargo transported within the inland United States is typically covered by the Carmack Amendment to the Interstate Commerce Act. The Amendment contains provisions allowing surface carriers to limit liability for losses or damage to cargo, in a manner different than ocean carriers.

Under Carmack, surface carriers may limit liability to a “reasonable” extent if certain prerequisite conditions are met.

For the surface carrier to limit liability under Carmack, the shipper must be provided with the opportunity to opt for a higher declared cargo value. This is usually tied to a higher shipping fee. The shipper receives a rate that includes a fixed sum the carrier will pay if the cargo is damaged or destroyed.

The difference between COGSA and Carmack is this: Under Carmack an opportunity for the shipper to declare a higher value is mandated, and under COGSA it is not. When an NVOCC is involved in arranging transport logistics, under Carmack it may be difficult for the inland carrier to demonstrate the overseas shipper was given this opportunity.

Prior to Kirby, lower courts used an approach that attempted to consider whether the incident occurred during the maritime part of the multi-modal journey, or on land, and then to apply the relevant law.

The Kirby Court rejected this geographical approach and adopted an approach centered on whether the objective of the NVOCC’s bill of lading was maritime commerce, and whether the inland legs of the journey supported the maritime aspect. After deciding inland transport supports the maritime aspect, Justice O’Connor concluded, based on agency principles, the inland carriers were agents of the NVOCC. She said the $500 per package limitation was all the shipper’s subrogated cargo insurer could recover for damage to its policyholder’s $1.5 million machinery damaged during an inland train wreck.

Parties involved in overseas shipments must be alert that the liability of the carrier may be limited to modest amounts as prescribed under maritime law, even if the incident occurs inland. The Kirby decision demonstrates in matters of ocean carriage, maritime law takes precedence. This may impact the ability to recover compensation for damages occurring during the inland transportation part of the multi-modal journey.