To many in transportation sometimes the law seems to lack practical logic.  Would you think that damage caused by a train wreck would be governed by maritime law?  According to the U.S. Supreme Court, it can be.

On November 9, 2004, the Supreme Court delivered a unanimous decision that clarified an issue of cargo liability that had previously created confusion among shippers, carriers and intermediaries.  The case involved the question of what law concerning cargo liability applies to movements that involve both international carriage by sea and land movements within the United States?  Can the law that governs the ocean portion of the movement also apply to the land portion?  The Supreme Court said “yes”.

The matter originated when an Australian manufacturer of machinery sold 10 containers of machinery to General Motors to be delivered to a GM plant near Huntsville, Alabama.  The Australian company hired a forwarder to make the transportation arrangements.  The forwarder issued a bill of lading to the shipper designating Savannah, Georgia as the discharge port from the ocean carrier and Huntsville as the ultimate destination.

As to cargo liability coverage, the Australian company agree with the forwarder for the lowest level of liability permitted under the Carriage of Goods by Sea Act (COGSA), which is $500 per package.  This was decidedly below the cargo’s real value.  It could have elected to ship it at a higher declared value, but did not.  Of course, declaring a higher value would have meant higher transportation charges.  The shipper did, however, obtain insurance at the true value of the machines.

The bill of lading issued by the forwarder contained what is known as a “Himalaya Clause”.  (The phrase has nothing to do with the mountains, but instead comes from a 1955 decision by a British court involving a ship named “The Himalaya”.)  Such a clause is intended to make the ocean carrier’s COGSA liability limit available to other downstream participants in the transportation service.

The forwarder then hired an ocean carrier, Hamburg Süd, to transport the machines from Australia to Savannah.  Hamburg Süd issued its own bill of lading to the forwarder and that bill of lading also contained a Himalaya clause.  Hamburg Süd hired the Norfolk Southern Railway to transport the cargo from Savannah to Huntsville.  A train derailment on the way to Huntsville caused $1.5 million in damages to the machines.

You guessed it.  Next came the law suit.  Who should pay?  The insurance company paid the shipper and then sued the railroad in the name of the shipper.

A federal court in Georgia held that the limits on liability contained in the two bills of lading were valid and that the liability of the railroad was limited to $500 per container.  The court of appeals, however, reversed and said that Norfolk Southern could not claim the protection of the Himalaya clauses.  Next stop, the Supreme Court.

The Supreme Court said that the railroad could take advantage of the Himalaya clauses.  It held that the movement in question was essentially maritime in nature because the primary purpose of the entire arrangement was to move the machines from Australia to the United States.  The Supreme Court reasoned that there would be confusion and inefficiency if one system of law applied to the ocean portion of a transportation arrangement and another system of law to the land portion.  After all, the Supreme Court said, when the transportation originally was contracted all parties knew the cargo was going to an inland destination.

It is interesting that the Supreme Court also said that while a transportation intermediary is not an agent for the beneficial shipper in all respects, it can enter into enforceable liability limits with carriers it engages in the transportation arrangement.  To this extent, the intermediary can make arrangements which are binding on the shipper.

The Supreme Court also reiterated the general rule as to what a bill of lading is.  It is a record that the carrier received the goods, contains the basic terms of carriage and is evidence of the contract of carriage.

The Supreme Court also pointed out that the machinery manufacturer had the opportunity to declare the full value in which case the forwarder could have been liable for the entire amount.  It also noted that the Norfolk Southern was protected by COGSA limitations even though neither the beneficial owner nor the forwarder selected it or had a direct contractual relationship with it.

In its opinion the Supreme Court predicts that in the future parties to international shipping arrangements may want to modify their contracts in light of this decision.  Accordingly, all involved in the transportation chain of international movements should consider carefully reviewing the shipping documents they utilize and sign.