Revisiting COGSA vs. Carmack

Q: Can you clarify why the Supreme Court ruled the way it did in the so-called “K” Line case?

The goods in that case were destroyed when they were moving on a railroad. Why, then, did the court hold that ordinary railroad (Carmack Amendment) liability didn’t apply, but only the much lesser maritime (COGSA) liability? I simply don’t understand.

A: The case was Kawasaki Kisen Kaisha v. Regal-Beloit, ___ U.S. ___ (2010), and the majority’s decision was based on something I keep stressing in this column: The paper matters.

“K” Line, a Japanese ship line, moved the goods from Australia on a through international bill of lading to an inland U.S. destination. It subcontracted the haul from the California port of entry to the destination via rail under that same B/L, and a derailment destroyed the shipment.

Maritime liability under the so-called Hague Rules — codified in the U.S. as the Carriage of Goods by Sea Act — is, well, pretty minimal. Railroad liability under the Carmack Amendment to the Interstate Commerce Act (49 U.S.C. 10705) is a lot stiffer. The injured shippers, naturally, preferred Carmack, and wanted to apply it.

It’s that international through bill that stymied them. Maritime carriers commonly use a so-called Himalaya Clause (after a vessel of that name, not the mountain range) to apply COGSA liability to the entire movement, including the inland connection. The shippers challenged that.

Just as it had in an earlier case — Norfolk Southern R. Co. v. James N. Kirby, 543 U.S. 14 (2004) — the court upheld the B/L. It said the through international bill trumped the law that would otherwise apply to railroads, and that therefore only COGSA applied.

Sure, the court acknowledged, if there’d been no through international bill — if the railroad had issued a separate and independent B/L for the inland chunk of the move — Carmack and its more stringent carrier liability regime would have applied.

But that wasn’t how the paperwork read, the court pointed out. The papers said it was a through international move all the way to destination, under COGSA principles, and therefore that’s what it was, with railroad liability for the derailment limited according to the much lower standards of COGSA.

Yeah, there was a dissent (the Supreme Court gets the toughies, and the members don’t always agree). The dissenters said the through bill didn’t matter, because the shipment was destroyed when it was moving by rail and therefore normal railroad (Carmack) liability should apply.

But dissents are only that, and they don’t carry the day. The majority view is the law of the land, and the majority said basically that you get what you buy and that’s all you get; if you sign onto a bill that provides through service based on a certain liability standard, that standard applies all the way.

It’s a point I keep stressing. That bill of lading, which so many carriers and shippers take for granted as an innocuous adjunct to the transportation process, is a key document — is almost assuredly the key document — in the transaction.

A bill of lading is a contract, no less than the contract by which you bought your house, your car, your business, whatever. It says that Party A has thus-and-such obligations, those of Party B are this-and-that, and that’s all. And once you sign on — you agree to the contract terms — escaping that commitment is far from easy.

To be sure, contracts are subordinate to the law. You can’t contract for something that’s expressly illegal. But law is generally deemed to override contractual agreements only when there’s a pre-eminent issue of “public policy” to be protected.

Here there was no such issue; it was simply a choice between two liability regimes. Having accepted one of them by agreeing to the through B/L, the shipper (as well as all other parties with an interest in the goods) was stuck with its choice.

In fact, as the court majority pointed out, through international bills wouldn’t be feasible without this standardization of liability. Maintaining a dual standard depending on where loss or damage occurred would be unworkable.

The court deliberately avoided the question of liability on exports (shipments originating in the U.S. and destined abroad under a through international B/L). On imports, though, its ruling means the price of a through bill is the Himalaya-dictated liability limit on the U.S. inland portion.

Consultant, author and educator Colin Barrett is president of Barrett Transportation Consultants. Send your questions to him at 5201 Whippoorwill Lane, Johns Island, S.C. 29455; phone,843-559-1277; e-mail, BarrettTrn@aol.com. Contact him to order the 536-page compiled edition of past Q&A columns, published in 2001, at $80 plus shipping.
 

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