Cargo Claims – Developments in the United States

March 1997

1.      Burden of Proof

The majority of circuits in the United States have held a carrier liable for unexplained losses once a cargo plaintiff has established a prima facie case. The Ninth Circuit recently followed this majority for the first time in American Home Insurance Co. v. APL (44 F3d 774 1994).

The carrier shipped a consignment of fruit from the West Coast to Hong Kong in refrigerated containers. Delivery to the consignees took place within 5 hours of the containers leaving the carrier's terminal. Two hours later, the consignments were inspected by surveyors for both the consignee and the carrier and the fruit was found to be partially frozen. Subrogated underwriters commenced an action against the carrier.

It is well established that, under COGSA, the plaintiff bears the initial burden of proof to show that the cargo was damaged in transit. This burden is normally satisfied by showing that the cargo was tendered to the carrier in good order and delivered by the carrier in bad order. The plaintiffs, relying on clean bills of lading and the survey reports, established a prima facie case and hence overcame the initial burden of proof.

The carrier was then obliged to show that one of the COGSA exceptions applied or that it had exercised due diligence in making the ship seaworthy and had properly stowed and cared for the shipment. The carrier's defence was threefold. Firstly, it relied on its records to show that the temperatures inside the containers never reached freezing point and that the containers were inspected before and after the voyage and found to be in sound condition. Thus the damage could not have occurred whilst the fruit was in its custody. Secondly, the carrier invoked the defence of latent defect of cargo; and thirdly the defence under Section 4 (2)(q) of COGSA (any other cause arising without actual fault and privity of the carrier).

Each of these defences was rejected by the District Court Admiralty Judge, and the carrier appealed to the Circuit Court of Appeal.

The Court upheld the First Instance decision, and found that the carrier could not establish the exercise of due diligence nor the applicability of any of the COGSA exceptions if it could not show how the fruit became damaged. Without providing proof of what actually had caused the fruit to partially freeze, the carrier was liable for the damage.

2.     Hague Rules v. Hague-Visby Rules

A number of Courts have applied the Hague-Visby Rules enacted in the country of shipment to cases tried in the United States (e.g. "Arktis Sky" 1991 AMC 1499). The District Court for the Southern District of New York addressed the issue in JCB Sales Ltd. v. New Holland North America Inc. (The "Seijin") (LMLN 437).

Plaintiff cargo owners sued the owners and the charterers in respect of damage to cargo carried from England and Belgium to Baltimore. The relevant contracts of carriage, though expressly stated as not being documents of title, incorporated on their face the Hague Rules "and any compulsorily applicable national enactment of these Rules" and referred, on their reverse side, to the Hague Rules "as enacted in the country of shipment". The defendants argued that the lower Hague Rule package limitation should apply rather than the higher limit to be found in the Hague-Visby Rules.

The Court held that COGSA was irrelevant since the contracts of carriage were not the bills of lading, which were expressly described as not being documents of title. Further, although COGSA applied to all contracts for carriage by sea to and from ports in the United States, the Court held that the provisions of 46 US S1306 enabled parties to reach agreement under regimes outside U.S. law.

The Court considered the effect of the words "as enacted in the country of shipment" and concluded that, not only did they represent the intentions of the parties to incorporate the Hague-Visby Rules, but also that "as enacted" meant the foreign law then in force in the country of shipment. Since both the United Kingdom and Belgium gave effect to the Hague-Visby Rules, and the 1979 SDR Protocols, the Court held that the Plaintiff was entitled to the higher Visby package limitation.

3.     Forum Selection Clauses

This subject was discussed in "Sea Venture" Vol. 14 page 33 and Vol. 12 page 99. Since then the U.S. Supreme Court has upheld the validity of foreign arbitration agreements contained in bills of lading that are subject to COGSA. In "Vimar Seguros y Reaseguros S.A. v. m.v. Sky Reefer" (1995 U.S. Lexis 4067), the Court held that forum selection clauses in Bills of Lading which provide for jurisdiction of claims in foreign courts are valid and enforceable.

A Japanese time charterer issued a bill of lading in respect of a consignment of fruit carried from Morocco to Massachusetts which provided , inter alia, that disputes arising under it would be referred to arbitration in Tokyo and subject to Japanese law. The cargo interests argued that this foreign arbitration agreement was invalid under Section 3(8) of COGSA which provided that any clause in a contract of carriage which relieved the carrier from liability for loss of or damage to cargo resulting from the carrier's negligence was null and void. They claimed that the arbitration clause in the bill of lading lessened COGSA liability by increasing the plaintiff's transaction costs of proceeding in a foreign country, giving rise to the risk that foreign arbitrators would not apply COGSA, but instead the Japanese Hague Rules under which the carrier's liability was substantially reduced.

The Supreme Court rejected the cargo interests' arguments, and held that Section 3(8) of COGSA did not nullify a foreign arbitration clause. The Court noted that none of the countries which were parties to the Hague Rule Convention had interpreted Section 3(8) to prohibit foreign forum selection clauses.

It would appear therefore that, on the one hand, carriers and their liability underwriters may bargain for foreign arbitration clauses so as to avoid litigation in the United States whilst, on the other, cargo interests and their insurers will negotiate for the inclusion of U.S. jurisdiction clauses in contracts of carriage.

4.     Effect of Deviation under COGSA

The 11th Circuit Court of Appeal recently considered whether a carrier's delivery of cargo without production of the bill of lading from the receiver was a deviation such that the carrier could not rely on the one year time bar and the $500 package limitation under COGSA.

In Unimac Co. Inc. v. C.F. Ocean Service Inc. (1995 LMLN 411), cargo interests shipped two separate consignments of washing machines from the United States to Australia, instructing the carrier not to release either cargo until the receiver had paid for them. The carrier's bill of lading contained a COGSA clause paramount, and express provision for a $500 package limitation and a one year time bar.

Despite the receiver's failure to pay for either consignment, the carrier delivered both, even though the receivers did not produce the relevant bills of lading. Cargo interests sued the carrier for damages for breach of contract and misdelivery.

The District Court at First Instance found for the carrier, holding that the claim in respect of the first shipment was time barred, because the action was commenced over 12 months after delivery had taken place, and that the claim in respect of the second shipment was limited to $500 per package.

The cargo plaintiff appealed to the U.S. Court of Appeal, arguing that the delivery of the consignments without the receivers producing the bill of lading constituted a deviation which prevented the carrier from relying on COGSA package or time limitations.

The Court of Appeals affirmed the District Court's decision, holding that misdelivery was not a deviation and that the $500 package limitation did apply because the carrier had given the cargo interests adequate notice of the package limitation by including the clause paramount and express provisions in the bill of lading that provided cargo interests with a fair opportunity to make an "ad valorum" declaration.