Revisiting Kirby — Shippers and NVOs

Revisiting Kirby — Shippers and NVOs

The U.S. Supreme Court is being asked to consider whether the Carmack Amendment, which governs certain rail and motor transportation by common carriers within the U.S., applies to the inland rail leg of an intermodal shipment where the shipment was made under a “through” bill of lading issued by an ocean carrier. This would extend application of the Carriage of Goods by Sea Act to the otherwise domestic leg of the journey.

This seems an opportune time to revisit the Supreme Court’s landmark opinion on modern intermodal shipping and its impact on the transportation community.

In the 2004 Norfolk Southern Railway v. Kirby case, the court was presented with the following story: Kirby wanted to ship cargo from Australia to Huntsville, Ala. Kirby contracted with ICC, a non-vessel- operating common carrier, for the through move. The NVOCC contracted with an underlying ocean carrier, Hamburg Sud, which transported the cargo for the ocean leg to Savannah, Ga., and, in turn, subcontracted with Norfolk Southern to carry the cargo via rail from Savannah to Huntsville.

ICC issued a “house” bill of lading to Kirby, and Hamburg Sud issued a through bill of lading to ICC for the ocean and inland delivery of the cargo. This is how, of course, transportation of hundreds of thousands of containers to the U.S. are contracted for every year. The court in its opinion noted, “This is a maritime case about a train wreck.”

That COGSA applies to the rail carrier was one of the primary holdings in Kirby, and will be revisited in the new case this month.

However, the contractual relationship between ocean carriers and NVOCCs is not before the court and has only gained in relevance in the ensuing years. Like traditional carriers, NVOCCs issue bills of lading and assume responsibility for transporting cargo from its point of origin to its destination. However, NVOCCs do not operate vessels and so do not physically transport cargo. Instead, they facilitate the transportation of cargo by entering into separate bills of lading with traditional carriers.

The rights and liabilities of parties involved in intermodal contracts most often are governed by the terms and conditions contained on the back of bills of lading issued by carriers. The court in Kirby found that the “Himalaya Clause” in an ocean carrier’s bill of lading, issued to an NVOCC, protects the ocean carrier’s subcontractors from liability to the intermediary’s customer to the same extent that the bill of lading protects the ocean carrier, regardless of the terms of the NVO’s contract with its customer.

The court said an NVOCC acts as an agent for a shipper when contracting with the underlying ocean carrier for the limited purpose of accepting limitation of liability provisions in an ocean carrier’s bill of lading.

The Kirby decision extends liability limitations agreed upon by the shipper and NVOCC to the underlying carriers and allows intermediaries and ocean carriers to agree to new limitations without the knowledge of the shipper.

Finally, if the carrier’s bill of lading with the NVOCC contains a clause paramount, other parties involved in the transportation of the cargo can take advantage of the liability limitation. The result is that a shipper whose goods are damaged in transit may find that his ability to recover from downstream actors has been limited, perhaps without his knowledge.

The court rejected shipper arguments suggesting disastrous results for the international shipping community if shippers are bound to limits of liability agreed by an NVOCC. If carriers could not rely on their contract without inquiring about the status of the contracting party, the court said, carriers would incur great expense and difficulty learning whether they were dealing with an intermediary. Carriers could be forced to navigate a plethora of intermediaries, in order to ensure that everyone was fully protected.

Moreover, if liability was limited in ocean carrier-shipper contracts, but not limited in agreements between ocean carriers and NVOCCs, carriers would want to charge intermediaries higher freight rates.

As we reconsider Kirby, it now appears ocean carriers’ interests are clearer when an NVOCC is involved. In the case of inconsistency between bill of ladings, an ocean carrier may rely on the terms of its bill of lading and, therefore, needs no knowledge of other contracts of carriage involved.

However, for cargo interests, the Kirby decision suggests prudent shippers must be more proactive in their dealings with NVOCCs to protect their interests. Shippers entering into service contracts with NVOCCs should negotiate the limitations of liability.

As sophisticated shippers know, carriers and NVOCCs can contract for terms that increase the liability of the carrier/NVOCC beyond the limitations afforded by COGSA. If realistic, the shipper should participate with the NVOCC in the selection of the carrier and be familiar with the terms of the bill of lading.

NVOCCs are important and useful participants in international shipping, and shippers who use them should keep the Kirby decision in mind and plan accordingly.

Marc G. Marling and Michael Hipps are attorneys specializing in maritime and transportation law at Williams Mullen in Norfolk, Va. The firm can be contacted through mmarling@williamsmullen.com.