U.S. Package Limitation - What Constitutes A Package And Who Can Claim Limitation?

August 2005

In one of the first decisions examining the interrelationship between an ocean carrier's bill of lading, its tariff and a confidential service contract, the U.S. District Court in New York upheld the contractual package limitation and applied it to either the single 40-foot shipping container or to each of 44 pallets inside the container. The court rejected the cargo underwriter's argument that the limitation should be applied to each of 2,156 cases of cargo packed onto the 44 pallets. The court's decision thus limits the carrier's potential liability for a claimed loss of US$1,381,632.00 to either US$1,000.00 or US$44,000.00. 

The carriage involved in the suit was from Puerto Rico to Jacksonville, Florida by vessel and then to Memphis, Tennessee, by truck. U.S. COGSA does not apply as a matter of law to the shipment because it was between two U.S. ports. The ocean carrier delivered a sealed container to the trucker it had hired for delivery to Memphis. Unfortunately, after taking possession of the container, the truck driver decided to stop-off for the night at home to play with his grandchildren, leaving the container at a public truck stop. When the driver was ready to continue the trip, he discovered that the container with its cargo of pharmaceuticals was missing. The subrogated cargo insurer subsequently sued the ocean carrier and the trucker for the loss. 

The contractual relationship between the ocean carrier and the shipper was based upon a confidential service contract which specifically provided that the carrier would issue a bill of lading for each shipment. During the course of the contract, however, the parties agreed to not issue a bill of lading. The shipper would transmit the particulars of the shipment to the carrier in a "shipping instruction" which was prepared on a standard bill of lading form, signed by the shipper. The carrier would use this same document to prepare its freight invoice. The shipping instructions in the case listed "44 skids containing 2,156 cs." The invoice, following the carrier's standard practice, only listed the number of cases. 

To further confuse the record, after the loss, the shipper requested a bill of lading, which the carrier provided by partially filling-out a standard bill of lading form, listing only the number of cases. In making cross motions for summary judgment, the subrogated underwriter first argued that as no bill of lading was issued, then the carrier was not entitled to limit its liability. Alternatively, the underwriter argued that the carrier is bound by the partially completed bill of lading that was printed after the loss, which only lists the number of cases. The carrier countered with two alternative arguments, one of which was that as no bill of lading was issued, the limitation defaulted to the "customary freight unit" which in this case was a lump-sum for each container. The other argument advanced by the carrier was that as the shipper decided to list the number of pallets on the initial shipping instructions, then it was bound to that number for limitation purposes. 

In a well reasoned opinion, the court held that while the service contract provided that a bill of lading was to be issued for each shipment, the parties had modified that provision by their course of dealing which eliminated the need for the physical issuance of a bill of lading. The service contract was clear that all cargo moving under the contract was moving subject to the terms of the carrier's tariff and bill of lading. In rejecting the underwriter's argument that application of the bill of lading's terms and conditions was contingent upon the physical issuance of the document, the court held that such an interpretation would render other sections of the service contract meaningless. The court reasoned that the absence of a physical document did not affect the application of the terms and conditions of the bill of lading, which were incorporated into the service contract.

 The court noted, in dicta, that two "external factors" supported its holding that the service contract incorporated the terms and conditions of the carrier's bill of lading. The court recognized that as the parties had maintained their relationship for an extended period of time, without issuing bills of lading, therefore, the physical document was not essential to the contract. Perhaps more significantly, the court reasoned that by seeking its own cargo insurance, the shipper had tacitly acknowledged that there was a limitation that applied to the cargo under the service contract. If there was no limitation, there would be no need for the shipper to secure cargo insurance because the carrier would be acting as a de facto insurer. 

Once the court found that the terms of the bill of lading controlled, the analysis shifted to a determination of what was the "package" to which the limitation would be applied: the 2,156 cases; the 44 pallets or the single 40-foot container. The court rejected the underwriter's argument that the limitation should be applied to each of the 2,156 cases. The court held that applying the limitation to each case would mean that the carrier was acting as the insurer of the cargo because the limitation amount would be more than the claimed loss. Clearly, this was not intended by the parties because the carrier agreed to transport the container from Puerto Rico to Memphis for only US$1,620.00. The court also noted that the carrier was never able to verify that the cargo was in the shipper loaded and sealed container. The court concluded that the carrier would not agree to be liable for US$1,000 X 2,156 cases, "without ever actually seeing, much less counting, the cargo itself." 

The court, however, could not determine whether the limitation should apply to each of the 44 pallets or to the single shipping container. The court concluded that this was a disputed material fact and therefore, must be tried. 

The court held that the carrier's Himalaya Clause clearly extended the bill of lading protections to the trucker which contracted to carry the cargo from Jacksonville, Florida to Memphis. The court reasoned that as the Himalaya Clause covered any subcontractor which performs any part of the carriage under the contract, and as the carrier was strictly an ocean carrier, therefore, both parties knew that the land portion of the carriage was to be preformed by a subcontractor. 

The plaintiff, underwriter, has asked the court to reconsider its decision. As of press time, the court has not taken any action on the plaintiff's motion.

American Home Assurance Co. v. CSX Lines, Inc., 2005 U.S. Dist. LEXIS 4326 (S.D.N.Y. March 18, 2005).

 

With thanks to Vincent M. De Orchis and John A. Orzel of De Orchis & Partners, LLP., New York, for preparing this article.