The Maritime Case About a Train Wreck: How it Changed the Legal - - PDF document

The Maritime Case About a Train Wreck: How it Changed the Legal Landscape and our Practices by Marc S. Blubaugh Benesch, Friedlander, Coplan & Aronoff LLP 41 South High Street, Suite 2600 Columbus, Ohio 43215 Direct Telephone: (614) 223-9382 Facsimile: (614) 223-9330 e-mail: mblubaugh@beneschlaw.com On November 9, 2004, the United States Supreme Court issued a unanimous decision in Norfolk Southern Railway Company v. James N. Kirby, Pty Ltd., 543 U.S. 14 (2004) that appeared to provide much needed certainty to both the providers and commercial users of international ocean shipping services. The case generated voluminous analysis and extensive discussions among members of the transportation bar as well as intermodal industry stakeholders. Most significantly, the Court found that ocean carriers as well as

• cean transportation intermediaries may limit an inland surface carrier’s liability for cargo claims by way
• f a Himalaya Clause contained in a through bill of lading. In addition, the Court recognized that admiralty

jurisdiction governs disputes where the transportation in question is substantially by ocean. Perhaps most notably, however, the Court acknowledged that practical, real-world considerations affecting the ocean shipping industry help drive the outcome of this seminal decision. Factual Background James N. Kirby, Pty Ltd. (“Kirby”), the shipper, sold ten (10) ocean containers of high-value machinery (the “Machinery”), worth in excess of $1.5 million, to a General Motors plant located near Huntsville, Alabama. Kirby hired International Cargo Control (“ICC”), an ocean transportation intermediary, to arrange for the transportation of the Machinery from Australia to Alabama. Kirby and ICC did not have an existing master transportation agreement in place. As a result, the parties’ relationship was memorialized in a through bill of lading (the “ICC Bill of Lading”) issued by ICC, naming Sydney, Australia as the point of origin, Savannah, Georgia as the port of discharge, and Huntsville, Alabama as the ultimate destination. Kirby had the opportunity on the ICC Bill of Lading to declare the value of the ten (10) containers

• f machinery. However, Kirby declined to do so. As a result, pursuant to the terms of the ICC Bill of

Lading, Kirby would be subject to a $500 per package limitation of liability authorized by the Carriage of Goods by Sea Act (“COGSA”). Naturally, the fee charged by ICC to Kirby was lower because ICC’s liability exposure was limited. As is the case with many shippers, Kirby’s interest in obtaining cost- effective transportation likely trumped any concern about ICC’s limitations of liability, particularly since Kirby had insured the Machinery up to its true, full value through Allianz Australia Insurance Ltd. (“Allianz”). The ICC Bill of Lading also contained a marginally more generous limitation of liability for inland transportation equivalent to 666.67 Special Drawing Rights per package or unit or two Special Drawing Rights per kilogram of gross weight of the goods lost or damaged, whichever is higher. Finally, the ICC Bill of Lading also contained a Himalaya Clause that read:

These conditions [for limitations on liability] apply whenever claims relating to the performance of the contract evidenced by this [bill of lading] are made against any servant, agent or other person (including any independent contractor) whose services have been used in order to perform the contract. ICC then proceeded to select Hamburg Südamerikanische Dampfschiflahrts-Gesellschafft Eggert & Amsinck (“Hamburg Sud”) to serve as the ocean carrier that would perform the actual ocean transportation of the Machinery. The relationship between ICC and Hamburg Sud was memorialized by an ocean bill of lading issued by Hamburg Sud to ICC (the “HS Bill of Lading”). Like the ICC Bill of Lading, the HS Bill of Lading named Sydney, Australia as the point of origin, Savannah, Georgia as the port of discharge, and Huntsville, Alabama as the ultimate destination. The HS Bill of Lading also contained the $500 per package limitation of liability authorized by COGSA and included a Himalaya Clause extending the benefit of the Hamburg Sud limitation of liability to “all agents . . . (including inland) carriers . . . and all independent contractors whatsoever.” Hamburg Sud retained Norfolk Southern Railroad (“Norfolk Southern”) to transport the containers holding the Machinery from the port in Savannah, Georgia, to final destination in Huntsville, Alabama. Unfortunately, while the Norfolk Southern was transporting the Machinery, the train derailed en route to destination, causing significant damage to the Machinery. Procedural Background Upon learning of the accident, Kirby made a claim with its own insurer, Allianz, and was eventually reimbursed in the amount of $1.5 million. Kirby and Allianz then sued Norfolk Southern in the United States District Court for the Northern District of Georgia on various tort and contract theories. Norfolk Southern defended the action by, among other things, claiming that the plaintiffs could not recover in excess

• f the limitations of liability contained in the ICC Bill of Lading and the HS Bill of Lading. The District

Court eventually entered summary judgment in favor of Norfolk Southern on this issue, finding that Norfolk Southern’s liability was in fact limited to $500 per container. Kirby and Allianz appealed to the United States Court of Appeals for the Eleventh Circuit, where a divided panel reversed the District Court. The Court of Appeals narrowly construed the two bills of lading and also concluded that ICC had not been acting as Kirby’s agent when Hamburg Sud issued the HS Bill of Lading. The U.S. Supreme Court accepted certiorari and unanimously reversed the Court of Appeals—finding that Norfolk Southern’s maximum exposure for the $1.5 million loss was $5,000 (i.e., $500 per container). Himalaya Clauses Need Not Be Strictly Construed The Court began its analysis of the two bills of lading by noting that federal law would control the contract interpretation due to the “more genuinely salty flavor” of the transaction. In other words, because the transportation was substantially by ocean, and the dispute was not inherently local, federal law applied. The Court determined that both the ICC Bill of Lading and the HS Bill of Lading were maritime contracts because their primary purpose was to accomplish ocean transportation of the Machinery. Local interests in Australia or Alabama, while present, were not adequately articulated by Kirby. Moreover, the Court placed significant weight on the need for uniformity. As the Court noted, the rules and limits of maritime law should not be determined by the fifty states. Otherwise, international, intermodal commerce is subject to confusion and inefficiency.

The Court first examined the ICC Bill of Lading and concluded that it protected Norfolk Southern. The Court considered this to be a “very simple” matter of contract construction. The Court of Appeals had relied in part on the decision in Robert C. Herd & Co. v. Krawill Machinery Corp., 359 U.S. 297 (1959) for the proposition that Himalaya Clauses needed to be strictly construed. The Court rejected that interpretation

• f the Herd decision and held that “no special rule for Himalaya Clauses” exists. The plain language of the

ICC Bill of Lading used the phrase “any . . . independent contractor.” The Court observed that the word “any” has an expansive meaning. Since Huntsville was disclosed as the destination on the ICC Bill of Lading, and is several hundred miles inland, the Court concluded that the parties necessarily had contemplated inland surface carriers like Norfolk Southern providing service. The Court next examined the HS Bill of Lading and concluded that it, too, protected Norfolk

• Southern. However, the Court noted that the HS Bill of Lading analysis was “more difficult” and required

the Court to set an efficient default rule for certain shipping contracts – a “task that has been a challenge for courts for centuries.” Reviewing its precedent regarding common carriage, the Court held that when an intermediary (like ICC) contracts with an ocean carrier (like Hamburg Sud), the cargo owner (like Kirby) is subject to the liability limitation to which the intermediary and the ocean carrier agreed. In other words, the intermediary is essentially a limited agent for the shipper for purposes of negotiating and agreeing upon limitations of liability. Although the Court did not want to infringe upon traditional agency principles, the Court determined that the need for reliability in downstream limitations of liability was of dispositive value. So, as with the ICC Bill of Lading, the Court enforced the HS Bill of Lading. Why Was Kirby a Watershed Decision in Transportation Law? Transportation lawyers, particularly those representing the interests of transportation providers, hailed the Kirby decision as a common-sense, real-world, industry-oriented road map from the U.S. Supreme Court. Notably, the Court’s analysis focused in large part on public policy considerations, and the Court even concluded with the following observation: It is not, of course, this Court’s task to structure the international shipping industry. Future parties remain free to adapt their contracts to the rules set forth here, only now with the benefit of greater predictability concerning the rules for which their contracts might compensate. In other words, the Court was largely guided by its desire to provide greater predictability to all parties involved in international, intermodal transportation while remaining sufficiently flexible to permit the industry to continue to evolve. Throughout the course of its opinion, the Court identified a number of policy reasons why it believed that the outcome was justified.

• Containerization. The Court expressly adopted a “conceptual” approach to admiralty jurisdiction

and rejected a more traditional “spatial” approach. The Court concluded that the mere fact that each of the two bills of lading called for certain transportation to be performed by land should not render moot the

• therwise essentially maritime nature of the contracts. By extending admiralty jurisdiction to certain land-

based transportation, the Court was recognizing the commercial reality that multimodal transportation was a developing norm:

While it may once have seemed natural to think that only contracts embodying commercial

• bligations between the ‘tackles’ (i.e., from port to port) have maritime objectives, the

shore is now an artificial place to draw a line. Maritime commerce has evolved along with the nature of transportation and is often inseparable from some land based obligations. The international transportation industry ‘clearly has moved into a new era–the age of multimodalism, door-to-door transport based on efficient use of all available modes of transportation by air, water, and land.’ 1 Schoenbaum 589 (4th ed. 2004). The cause is technological change: Because goods can now be packaged in standardized containers, cargo can move easily from one mode of transport to another. Ibid. See also NLRB v. Longshoremen, 447 U.S. 490, 494 (1980) (‘[C]ontainerization may be said to constitute the single most important innovation in ocean transport since the steamship displaced the schooner’ (citation omitted)); G. Muller, Intermodal Freight Transportation 15—24 (3d ed. 1995). The Court further noted that “through bills of lading” reflect this new technology of containerized cargo, and that it is to the benefit of shippers like Kirby that they can negotiate one contract covering all modes of transportation from origin to destination rather than have to contract piecemeal with the various modes

• involved. In other words, ocean transportation intermediaries and ocean carriers alike provide a host of

non-maritime services to their customers, but the provision of those services should not and does not defeat

• r alter the essential maritime character of the parties’ relationship. Admiralty jurisdiction now

presumptively exists with respect to ocean carriage.

• Uniformity. As noted above, the Court recognized the inherent value in having uniform principles

governing international shipping. Among other things, the Court noted that COGSA itself was aimed at implementing uniformity and expressly permits parties to extend the protections of COGSA to periods before or after the “tackle-to-tackle” portion of the transportation. The Court reasoned that parties who avail themselves of that option should be able to achieve the desired result. Hamburg Sud would not have been able to enjoy the efficiencies of COGSA if the liability limitation that it chose did not apply equally to all legs (regardless of mode) of the transportation. The Court concluded that COGSA’s apparent purpose in facilitating efficient contracting would be defeated absent the outcome in Kirby. Harmony with Other Industry Practices. In holding that ocean transportation intermediaries are limited agents of their shippers, the Court found that such a holding would track industry practices. Ocean carriers frequently do not know if the party who is contacting them to book a load is in fact the beneficial cargo owner or an ocean transportation intermediary. Even when dealing with an ocean transportation intermediary, the ocean carrier will not necessarily know if the intermediary’s customer is the beneficial cargo owner or yet another intermediary of some sort. Unless the Court reversed the Court of Appeals, the Court feared that ocean carriers would need to obtain more information before contracting with any party because the ocean carrier would need to have confidence that its limitation of liability would be enforceable. This task would be costly and impractical in light of the fact that cargo can change hands many times in the course of intermodal transportation. Nondiscrimination Between Cargo Owners and Intermediaries. The Court also concluded that, absent its ruling in Kirby, ocean carriers would likely charge more for services when dealing with ocean transportation intermediaries than when dealing directly with beneficial cargo owners since limitations of liability would remain subject to attack if the ocean carrier contracted with an intermediary. As noted above, the strength and magnitude of a provider’s limitation of liability is directly related to the amount that the provider will charge for its services. Federal law (decisional and statutory) promotes non- discrimination in common carriage.

An Equitable Commercial Result. The Court pointed out that the outcome in its decision was equitable and just in that Kirby could have contracted for more protection with ICC or sued ICC (rather than Norfolk Southern). Indeed, ICC had in fact commenced litigation in Australia against ICC. While the Court obviously did not rule on Kirby’s claims against ICC, the Court did note that ICC was the only party that definitely knew about what was in both bills of lading, and that “it seems logical” that ICC should bear responsibility for a gap in the limitation of liability between each bill of lading. Conclusion The Kirby decision was a watershed decision in that it recognized intermodal industry developments and real-world commercial considerations and used those points to shape the legal landscape governing intermodal transportation. Unfortunately, while Kirby was thought at the time to be a fairly definitive statement on the proposition that COGSA governed cargo liability from origin to destination (regardless of mode) when incorporated as part of a through bill of lading, lower courts began to interpret Kirby narrowly by applying the Carmack Amendment, rather than COGSA, to the inland leg of intermodal

• moves. Even after the U.S. Supreme Court revisited the principles outlined in Kirby and unequivocally

affirmed and ratified Kirby’s underlying public policies with a tight statutory analysis in Kawasaki Kisen Kaisha, Ltd., et al. v. Regal-Beloit Corp., 130 S.Ct. 2433 (2010), lower courts continue to try to poke holes into the underlying policies and overall legal reasoning. Nevertheless, Kirby remains a bright and reliable guide star to those navigating the world of intermodal transportation.