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Carmack and COGSA – Clarity on the Liability Regimes in International Cargo Transport

In its 2006 opinion in Norfolk Southern Railway v. Kirby, the Court initiated a debate about the appropriate liability regime to govern international, multi-modal transport of cargo in the United States. It is a discussion which is ongoing, with the issues evolving as different factual scenarios have developed in the lower courts. What is at stake is whether shippers and carriers will have available to them the liability rules of a single statutory system of federal law to govern international multi-modal shipments, with the enhanced predictability that such a unified approach would bring. While Kirby and some of its progeny suggest a preference for allowing shippers and carriers to choose the Carriage of Goods by Sea Act by contract to govern all phases of international multi-modal transport by means of a through bill of lading, some recent case law has called this into question.

Transportation in international commerce has become a tightly organized process, which has developed its own customs and practices governing the relationships between carriers and shippers. Goods are very often transported in stages from their point of origin to their destination, utilizing rail, air, motor truck and ocean carriage. These different modes of transportation are often subject to widely variant schemes for determining a carrier’s liability for cargo loss or damage.  This is an obvious source of potential confusion and disruption in the shipping industry, which is nowhere more apparent than in the marked contrast between the United States Carriage of Goods by Sea Act (COGSA) and the Carmack Amendment to the ICCTA (Carmack).

By their own terms, these statutes apply to discretely different types and phases of cargo shipment. COGSA applies to the ocean transport of cargo to or from ports in the United States, and its provisions apply to regulate the terms and conditions of contracts of carriage (generally reduced to the form of a bill of lading) for such ocean shipment COGSA applies “tackle-to-tackle,” meaning that it only applies from the time the goods are loaded on board the vessel until the time they are discharged, although the parties to the contract of carriage are free to extend COGSA shoreward by contract. COGSA is negligence based containing several enumerated defenses and limitations, including a provision limiting the carrier’s liability to $500 per package.

Carmack, on the other hand, imposes a system involving what has been described as strict liability for the carriers subject to it.  It applies to interstate rail and motor transport subject to the jurisdiction of the Surface Transportation Board. It categorizes carriers as “receiving” “intermediary” and “delivering” carriers. Receiving carriers (those to which the shipper delivers the cargo for shipment at the point of origin) are obligated by Carmack to issue a bill of lading to the shipper, which effectively renders the receiving carrier strictly liable to the shipper for loss of or damage to the cargo wherever it occurs during a multi-modal shipment, subject only to certain very narrow (and difficult to prove) exceptions.

The long and short of all this is that COGSA provides a more carrier-friendly liability program than Carmack, which has led to the practice of inserting provisions in the ocean carrier’s bill of lading extending the reach of COGSA as far shoreward as possible. These provisions, referred to as Himalaya clauses, are generally enforceable and work to extend COGSA by contract to all sub-contractors of the ocean carrier coming within its ambit, including stevedoring companies and inland rail and motor carrier engaged by the ocean carrier. The inclusion of this type of provision in international, multi-modal through bills of lading involving some portion of its inland transportation in the United States has given rise to the question of the extent to which the competing liability regimes of Carmack and COGSA apply in such situations. It is against this backdrop that Kirby and its progeny must be understood.

Kirby, in fact, did not directly deal with the Carmack/COGSA dichotomy. In Kirby, a cargo was shipped on a through bill of lading from Sydney, Australia to Huntsville, Alabama. The cargo was damaged in a derailment during the inland rail leg from Savannah, Georgia to Huntsville, a transit which would be squarely within the terms of Carmack. The shipper and its subrogated cargo underwriter sued the rail and ocean carriers in federal court, in diversity alleging causes of action involving state law tort and contract claims, but there does not appear to have been any Carmack claim made.  The Supreme Court held that because the relevant bills of lading incorporated the COGSA $500/package limitation and because the railroad was properly included as a beneficiary of the contract by means of a valid Himalaya clause, the inland rail carrier was entitled to limit its liability regardless of the state law claims made by the shipper.

Kirby led to a split among the circuit courts, principally on the question of whether the requirements of an overall regulatory scheme embodied in federal law (i.e. Carmack), would be ousted by a contractual limitation contained in a through bill of lading. This controversy upped the ante somewhat, because now the issue became one of policy, that is, would enforcement of the Himalaya clause in such circumstances effectively undermine the regulatory policy embodied in Carmack.

A partial answer to this conundrum came last year, in the Court’s opinion in Kawasaki Kisen Kaisah v. Regal-Beloit. In that case, the ocean carrier issued a through bill of lading for carriage from China to various destination points in the United States. The bill of lading also included a Himalaya clause, which included the inland rail carrier engaged by the ocean carrier for the inland leg of the voyage. The cargo was damaged due to derailment during the inland phase of the shipment, and the rail carrier sought to enforce the forum clause contained in the bill of lading, which required all disputes arising under the contract of carriage to be decided in a Tokyo forum.

The Supreme Court held that the forum clause was enforceable by both the ocean carrier and the railroad. Importantly, the Court found that the policy underlying Carmack did not trump the contract, at least not in the specific context the Court found in front of it. The majority opinion emphasized that the delivering rail carrier was not a receiving carrier, as it did not obtain the cargo from the shipper at the point of origin. According to the majority, to characterize the rail carrier as a “receiving” carrier subject to Carmack, because it “received” the cargo for domestic shipment, would contravene the policy underlying Carmack. It would tend to atomize the determination of when an intermediate carrier was a “receiving” carrier and it would undermine the efficiency and predictability provided by a through bill of lading.

The question left open by Regal-Beloit is the extent to which Carmack is ousted by the through bill of lading covering export shipments. In a recent case from the Southern District of New York, the court found that Carmack was applicable to a rail carrier which received the cargo for through shipment from Illinois to Australia. The railroad had been engaged by the ocean carrier to transport the cargo from the rail carrier’s Illinois terminal to the ocean terminal in California for oncarriage to Australia. There was a derailment in California, prior to delivery to the ocean carrier, which resulted in damage to the cargo.

The rail carrier sought partial summary judgment limiting its liability to $500 per package pursuant to the terms of the bill of lading. The district court denied the motion, finding Carmack applied to the rail carrier because the railroad was in fact a “receiving carrier” under Carmack which was required to issue its own bill of lading for the domestic leg of the transport. Significantly, the court found that Regal-Beloit was limited to finding that Carmack does not apply to a shipment originating overseas under a single through bill of lading.  The district court’s interpretation appears to be that Regal-Beloit involved merely a question of statutory definition, that is, whether under the given circumstances the inland carrier was a “receiving carrier” or not, rather than one of policy determination.

The overall problem here is one of reasonable expectations. Shippers, carriers and their insurers have to make crucial decisions as to how to properly set rates and allocate resources for overseas shipments based upon the predictable risks involved. What liability regime will apply is clearly a major consideration which must be taken into account in making these decisions, and the court’s failure to provide clear guidance on this point is an invitation to chaos. While the language used by the majority in Regal-Beloit could justify the interpretation reached in Panalpina, it is submitted that this is unfortunate because it reduces the power of the parties to apply whatever liability scheme they want, a power which the Supreme Court emphasized in both Kirby and Regal-Beloit.

Robert O'Brien is a Partner in the Admiralty and Maritime Department of Niles, Barton & Wilmer, LLP.

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