Two paths to same goal

Two paths to same goal

A common thread of common sense seems to have woven itself through recent admiralty opinions of the U.S. Supreme Court and U.K. House of Lords and deliberations of the UNCITRAL Working Group III, which is drafting a new convention to govern the international carriage of goods. The common thread would unify, to a certain extent, the law governing multimodal carriage of cargo. It also would give parties to multimodal carriage the freedom to reach agreements that would make multimodal transportation more efficient.

Last November's Supreme Court decision of Norfolk Southern Railway Co. v. James N. Kirby, PTY Ltd. involved a contractual chain of carriers for 10 containers of machinery shipped from Sydney, Australia, to Huntsville, Ala. The cargo was damaged during the rail leg of the shipment between Savannah and Huntsville, and Kirby sued for damages. Norfolk Southern claimed its liability was limited to $5,000 - or $500 per container - under the ocean carrier's Himalaya clause, which extends the carrier's cargo-liability units to subcontractors that include inland transportation providers.

The Supreme Court applied admiralty law, and thus uniform law, to the entire multimodal carriage. The court overruled the line of cases that had stated that admiralty law would be applied to multimodal shipments only if land transportation was incidental to the overall move. Justice Sandra Day O'Connor explained the court's reasoning: "Conceptually, so long as a bill of lading requires substantial carriage of goods by sea, its purpose is to effectuate maritime commerce - and thus it is a maritime contract."

In the same case, the court also reasoned that each participant in carriage of the shipment should be protected by the liability limits in its contract, even if it were sued by a party with which it had not contracted. The court reasoned that an intermediary - a non-vessel-operating common carrier - had been given "limited agency" authority by cargo interests to bind cargo interests to a limitation of liability with a vessel-operating carrier and with any subcontractor. Any shipper that tenders its cargo to an NVO should be bound by the cargo-liability terms that the NVO negotiates with the vessel operator.

The court reached this result through a common-sense realization that an intermediary - the NVO - should be able to negotiate cargo-liability terms with the vessel operator, and that a shipper tendering cargo to the NVO should be bound by those terms.

The court reasoned that the shipper gave the intermediary limited agency authority to agree on liability limits with the various parties because:

1. The system tracks industry practice. Carriers may not know whether they are dealing with an intermediary. If the carrier is, it may not know how many intermediaries came before the one with whom it is dealing or the terms of the various contracts. It would be difficult and certainly impractical to search out the various terms.

2. If liability limits that a carrier negotiated directly with cargo interests were reliable, while limits negotiated with intermediaries were not, carriers might charge intermediaries higher freight rates than they would charge cargo interests. Different liability limits for the various parties would undermine the uniformity in per-package liability limits established by the Carriage of Goods by Sea Act.

3. The court also observed that the result of its decision would be equitable. The cargo interest could recover from the intermediary with which it contracted, no matter where in the multimodal carriage the damage occurred. It stands to reason that the intermediary should be responsible for the limit it agreed. If the intermediary agreed upon a lower limit with the party that caused the damage, the intermediary should suffer the loss that its contracting created. (We anticipate future arguments that this reasoning should apply to all terms of the contract, not just the liability limits.)

In the Kirby case, the Supreme Court rejected the notion that "a special degree of linguistic specificity is required to extend the benefits of a Himalaya Clause to an inland carrier." The court said that "contracts for carriage of goods by sea must be construed like any other contracts: by their terms and consistent with the intent of the parties . . . (T)here is no special rule for Himalaya clauses."

The U.K. House of Lords has used the same kind of practical common sense when deciding another aspect of a maritime contract of carriage. On Nov. 25, 2004, in a case involving Jindal Iron and Steel Co., the House of Lords permitted a carrier to delegate to a shipper the duty to load, stow and secure cargo.

U.S. case law does not permit this duty to be delegated. Under U.S. case law, a carrier would be liable to the consignee for improper loading, stowing or securing that had been performed or controlled by the cargo shipper.

The House of Lords noted that its long-standing precedent permitted a carrier to agree with a shipper to let the shipper take responsibility for loading, stowing and securing cargo. The House of Lords referred to the wisdom of Lord Mansfield written in 1774 in Vallejo v. Wheeler: "In all mercantile transactions, the great object should be certainty; and therefore, it is of more consequence that a rule should be certain, than whether the rule is established one way or the other. Because speculators in trade then know what ground to go upon."

It stands to reason that the shipper of a particularly sensitive cargo, about which the shipper has more knowledge than the carrier, should be able to load, stow and secure it. In such cases, the carrier would rely on the shipper's expertise and would not be responsible for resulting problems. The carrier could insert a clause in the bill of lading to indicate that the shipper loaded, stowed and secured the cargo. The purchaser of the bill of lading could look to the shipper rather than the carrier to recover any damage caused by the shipper.

The convention being drafted by UNCITRAL may codify both the Supreme Court decision and the House of Lords opinion. The House of Lords noted that UNCITRAL's effort to revise rules governing the carriage of goods by sea would take into account representations from all interested groups, including shipowners, charterers, cargo owners and insurers.

Although the Supreme Court's Kirby decision did not refer to the UNCITRAL work, the court obviously was well aware of it. It was mentioned during the court's oral argument.

The UNCITRAL instrument will probably apply the same law to the entire door-to-door, multimodal carriage, with one exception - the part of the land carriage governed by a mandatory treaty such as CMR (the European Road Convention) or CIM/COTIF (the European Rail Convention).

The UNCITRAL instrument will thus bring uniformity, the need for which was emphasized by the Supreme Court in Kirby, to the entire door-to-door multimodal carriage except for the European road or rail portion of the carriage.

Parties governed by the UNCITRAL instrument under a mandatory treaty will enjoy its defenses and limitations without the need of a Himalaya clause, which extends a carrier's liability to all subcontractors involved in the cargo's carriage. Parties not governed mandatorily by the instrument will be left to rely upon carriers to draft Himalaya clauses that will assist them.

The instrument may apply mandatorily to the contracting carrier and to all maritime performing parties - that is, any party that participates in the port-to-port carriage. It would not govern, for instance, a railroad operating outside the port.

Those non-maritime performing parties would have to rely on a Himalaya Clause for the instrument's defenses and limitation. By winning the Kirby case, the railroads achieved the result they would have achieved if COGSA had applied mandatorily to them. Nevertheless, the railroads do not want the UNCITRAL instrument to apply mandatorily to them, because it is unclear which liability limit would apply if a railroad's contact and a contracting carrier's bill of lading had different liability limits.

In addition to providing uniformity, the present draft of the UNCITRAL instrument may also codify the result reached by the House of Lords in Jindal Iron. It will probably permit a shipper to control the loading, stowing and securing of its cargo and to be responsible for those operations.

The participation by various interests in the multimodal industry, both as nongovernment organizations and as members of the delegations of several nations, should help reach the practical common-sense law that the industry needs.

The current drafts of the new instrument, WP. 32 and WP. 36, may be found at the UNCITRAL Web site, http://www.uncitral.org, at Working Group III, Transport Law.