Don't go down with the ship!

Loss and damage giving you that sinking feeling? A legal expert explains how to navigate the liability rules that govern ocean cargo.

By William J. Augello, Esq. -- Logistics Management, 7/1/2006

The fire earlier this year aboard the Hyundai Fortune in the Gulf of Aden, which resulted in the loss of numerous containers of merchandise, should prompt importers and exporters to consider how much they could recover from an ocean carrier if their shipments were caught in a similar catastrophe.

The answer to this question is not as simple as one would imagine. Today ships typically carry thousands of containers moving to and from many nations, and these countries may be party to different international treaties containing different liability clauses.

The generally applicable treaty governing international trade is known as the Hague Rules; the most commonly adopted version is the Hague-Visby Rules of 1968. The United States has not ratified that treaty; instead, it follows the Carriage of Goods by Sea Act (COGSA), which it enacted in 1936 as the U.S. version of the Hague Rules.

Ocean bills of lading generally contain a clause that makes whichever version of the Hague Rules has been enacted in the country of origin the governing law for goods in transit. (All ocean cargo shipped to or from a U.S. port, however, is subject to the terms of COGSA.) A single ship, therefore, may be subject to four or five different liability limitations. Further complicating matters is the fact that contract terms may be subject to court interpretations in the forum specified in the bill of lading, often in a distant foreign country.

The following explanation of the most common issues that lead to disputes between cargo owners and ship owners may help shippers narrow down the possibilities of recovery.

Ocean cargo laws and treaties contain many defenses to liability that are not found in liability laws covering domestic surface transportation.

COGSA, for example, includes 17 defenses to cargo losses: negligent navigation or mismanagement of the ship, fire, perils of the sea, acts of God, acts of war, acts of the public enemy, arrest or seizure of the ship, quarantine, acts or omissions of the shipper or owner of the goods, strikes or labor disturbances, riots, attempts to save life or property at sea, inherent vice of the goods, insufficient packaging, inadequate marks, latent defects not discoverable by due diligence, and the catch-all "any other cause without the actual fault of the carrier."

The Hague-Visby Rules and the 1979 Protocol thereto generally contain the same 17 defenses as those named in COGSA.

An ocean carrier may raise any one (or more) of these defenses and avoid paying for the loss aboard a ship. The fire defense, by the way, will not apply if there is evidence that the carrier's negligence caused the fire. If, for example, the fire aboard the Hyundai Fortuneproves to have resulted from a crew member'snegligence, the carrier will be held liable for damages caused by that fire. But if the cause cannot be determined, the carrier will not be held liable for the resulting damage.

The most unconscionable defense, from a cargo owner's standpoint, is "negligent navigation or mismanagement of the ship." It is probably the only law in the universe that gives an inducement to a carrier to prove that it was negligent! It violates one's sense of equity to such an extent that maritime interests engaged in negotiations to modernize international ocean-cargo liability laws have agreed to give up this defense. (But only after 25 years of pressure from cargo owners!)

Another type of defense, known as "general average," makes little sense to us today. When a vessel encounters a situation that threatens the ship or its cargo, the ship owner may declare general average. This requires the charterers and cargo owners to share the cost of preserving the ship and its cargo. In such cases, the owners of undamaged cargo will be billed for a proportionalshare of the total loss. The threat of being held liable for such an expense is a strong inducement to purchase cargo insurance containing protections against general average.

All ocean bills of lading contain limitations on the issuing carrier's liability. COGSA, the U.S. version of the Hague Rules, limits liability to $500 per package, or if not shipped in packages, to $500 per "customary freight unit" (one tank, one truck, one ton, and so forth).

The most frequently litigated question is, what constitutes a "package"? Whenever they have an opportunity to do so, carriers will contend that the entire 20- or 40-foot container is the package. Cargo owners, however, typically say that the smallest unit that is described on the bill of lading is the package.

Courts interpret the bills of lading strictly, therefore it is incumbent on shippers to clearly describe the smallestunit of packaging on the bill of ladingif they wish to recover the full value of their goods in the event of loss or damage. Thus, the proper description for recovery of full value would be "One 40-foot container containing 2,000 cartons of shoes on 20 pallets."

Why is diligence on this issue important? Because a U.S. federal district court has upheld the terms of an ocean carrier's bill of lading, even though the ocean carrier had changedthe pro forma bill of lading description!

The freight forwarder that submitted the bill of lading on behalf of the shipper had described the goods as "42 pallets STC 2,268 cartons + 2 cartons cosmetics." ("STC" stands for "said to contain.") The shipper's obvious intent was to declare each of the 2,270 cartons as a COGSA "package," with a maximum value of $500 for each carton. However, the ocean carrier changed the description to read "42 packages STC 2,268 cartons + 2 cartons." The court limited the carrier's liability to $22,000 ($500 x 44 packages—the sum of 42 pallets plus 2 cartons) instead of $500 x 2,270 cartons, or $505,190. The shipper argued that the carrier had issued the bill of lading after the ship sailed; therefore it did not receive the document from the carrier until after the ship had departed and did not detect the change to the description before the ship left port. The court rejected that argument, observing that the shipper had not complained when it did note the carrier's change of "pallets" to "packages." The court concluded that it therefore was the intent of both parties that the pallet be considered the "package."

This is illogical, of course. Why would a cargo owner have an intent that would result in a loss of nearly one-half milliondollars?

The lesson for ocean shippers (and their customs brokers and freight forwarders) is that they should study every bill of lading as soon as they have been received from ocean carriers, and they should protest any errors immediately.

Ocean cargo liability regimes typically do not change much over the years, but some important modifications may be forthcoming in the future.

Suppose cargo that was destroyed on the Hyundai Fortunewas moving between two countries that had ratified the Hague-Visby Rules of 1968 and its 1979 Protocol. That cargo would be subject to a per-package limitation of liability of 667 SDRs (special drawing rights, a relatively new basket of currencies). Translated into U.S. dollars, the carrier's limitation would be approximately $984.95 per package—almost double COGSA's per-package liability limitation.

If the Hague-Visby Rules' liability limit is so much more favorable for shippers, why hasn't the United States ratified that treaty? The answer is that for the past 25 years, U.S. shippers have been pressing the State Department to adopt other treaties—first the Hamburg Rules, and later the International Multimodal Transport Convention (IMTC)—that would increase carriers' liability even further. (For a comparison of liability limits under these treaties, see the table below.)

Under Hamburg, the limit would be 835 SDRs, and under the IMTC, it would be 920 SDRs. When the Hamburg Rules achieved treaty status in 1992, upon ratification by the 20th nation, ship owners feared that those rules might someday be ratified by the United States.

To prevent that from occurring, the ship owners softened their opposition to liability reform by offering to repeal the "negligent navigation" defense and urged adoption of the Hague-Visby limits, which are more favorable to the ocean carriers than are the Hamburg Rules or the IMTC.

The real breakthrough occurred, however, when the U.S. Supreme Court rocked the admiralty bar (the maritime legal establishment) by ruling that ocean bills of lading containing "foreign forum" clauses must be upheld. U.S. admiralty lawyers realized that as a result of that ruling, much of the litigation they handled would shift to foreign cities. Therefore they offered to support both the repeal of the negligent-navigation defense and an increase in the liability limitation to match that of the Hague-Visby Rules—if shippers would support an overturn of the Supreme Court's ruling in that case, which would keep litigation and arbitration in the United States. The Maritime Law Association then adopted a proposal to support these changes at the United Nations Commission on International Trade Law (UNCITRAL) conferences.

Those negotiations are continuing at the United Nations, and they may someday result in the modernization of the United States' ocean liability regime. Until then, shippers must continue to be vigilant and knowledgeable concerning the liability regimes that currently govern their shipments.