The U.S. Supreme Court last month heard arguments in a transportation case that could redefine liability responsibilities in the supply chain. Because of the impact on international shipping, the nation's highest court agreed to take up a case involving the extent to which a carrier can limit itself from damages when handling a multimodal shipment.

At issue are two questions: Is a cargo owner that contracts with a freight forwarder under a house bill of lading bound by the terms of contracts the forwarder later makes with carriers to transport the goods? And is a forwarder acting as an agent of the shipper when it enters into a contract with an ocean carrier and is named as the shipper on that bill of lading?

The case, Norfolk Southern Railway Co. v. James N. Kirby, centers on Kirby, an Australian shipper that sued the rail carrier for damages sustained in a derailment in the United States. In 1997, Kirby hired International Cargo Control Pty Ltd. (ICC), an Australian freight forwarder, to facilitate the movement of 10 containers of machinery to a General Motors plant in Huntsville, Ala.

ICC issued its own house bill of lading (B/L), which named Kirby as the shipper and ICC as the carrier. That practice is standard procedure for ocean consolidators, known as NVOCCs.

ICC then contracted with Hamburg Süd to move the containers, specifying Sydney as the port of loading, Savannah, Ga., as the port of discharge, and Huntsville as the place of delivery. Under the banner of Columbus Line, Hamburg Süd issued a master bill of lading that identified ICC as the "shipper/exporter" and incorporated the Carriage of Goods by Sea Act (COGSA), which governs ocean carriers' liability obligations, including a clause limiting the carrier's liability to $500 per package. Kirby was not named in that document.

Hamburg Süd hired Norfolk Southern to take the containers from Savannah to Huntsville. But its train later derailed en route, causing about $1.5 million in damage to Kirby's cargo.

Kirby sued Norfolk Southern for damages in the U.S. District Court for the Northern District of Georgia. The railroad countered that the COGSA provisions incorporated into the Columbus Line bill of lading limited its liability to $500 per "customary shipping unit," or $5,000.

Kirby's lawyers argued that their client was not a party to the second bill of lading, and thus was not bound by its terms. But the court sided with Norfolk Southern, saying that ICC acted as a freight forwarder—an agent of the shipper—when it contracted with the ocean carrier, and thus Kirby was by inference a party to the master B/L. The court also noted that a "Himalaya clause" (which allows an ocean carrier to extend its liability limitations to subcontractors) in the master B/L specifically encompassed inland carriers.

Kirby appealed that decision to the 11th Circuit Court of Appeals in Atlanta. The appellate court reversed the lower court's ruling on two counts: First, the court said, the master B/L did not limit Norfolk Southern's liability because ICC—named as the shipper in its contract with Hamburg Süd—was not acting as an agent of the original shipper, and thus Kirby was not a party to that contract. Second, although the B/L issued by ICC to Kirby included a Himalaya clause, that version of the clause did not apply to inland carriers.

Some observers believe there is another issue at stake. If the Supreme Court rules that ICC acted as an agent and therefore liability limitations in the master B/L apply to all carriers, regardless of whether they have a direct contractual relationship with the original shipper, it would conflict with the Ocean Shipping Reform Act (OSRA), which defines NVOCCs as carriers, not forwarders. But Kirby's lawyers disagree. "There are no federal maritime law principles here. It's a tort (civil action) case," said David C. Frederick, who argued the case on Kirby's behalf.

Should the high court uphold the appellate court ruling, shippers will gain additional protections when forwarders subcontract movements. "Shippers will benefit from the Supreme Court's decision upholding the 11th Circuit's decision as it will free them from provisions in an ocean carrier's bill of lading negotiated by the freight forwarder as the 'shipper,'" said transportation law expert William J. Augello. "Such a decision will shield shippers from limitations that are not disclosed to them in the initial contract with a freight forwarder."

During oral arguments, the Supreme Court justices questioned whether state or federal law governs the dispute. That raises the possibility that the high court could decide that the case belongs in state court.

The Supreme Court is expected to issue its ruling next spring.