A recent decision that affirmed two decisions by the U.S. District Court for the Southern District of New York (Sompo Japan v. Norfolk Southern et al. and Nipponkoa Insurance v. Norfolk Southern, et al. 2nd Cir. Nos. 13–3416, 13–3501. Aug. 6.) are the latest in a line of cases that could make it more difficult for shippers and their insurers to recover in cargo cases.
An April 2006 derailment near Dallas destroyed much of a train’s cargo.
The shipments originated in Asia and were moved using through-bills of lading from Yang Ming and in other cases by non-vessel-operating common carrier Nippon Express that had hired Yang Ming as the ocean carrier.
Yang Ming had used Norfolk Southern to arrange inland rail transport; NS, in turn, hired Kansas City Southern to assist.
After the derailment, Sompo and Nipponkoa, subrogees of the cargo owners and shippers, filed lawsuits against NS and KCS.
The litigation was originally pursued under the Carmack Amendment, which addresses carrier liability for goods lost or damaged during an interstate shipment.
Carmack, the 2nd Circuit noted, “is a favorite among shippers because it imposes something close to strict liability on covered carriers.” Once the shipper shows cargo was delivered in good condition, arrived damaged and the amount of damage, the carrier is liable for the actual loss or injury to the property it transports—unless the carrier can establish it was free of negligence and the loss or damage was caused by one of five excusable factors.
The bills of lading here contained per-package caps on carrier liability and “Himalaya clauses” that extend the liability-limiting provisions in the bills of lading to downstream carriers.
Prior to these cases being initiated, the 2nd Circuit had held Carmack applied to the domestic rail leg for a continuous intermodal shipment originating overseas such as those at issue here. So a lower court granted summary judgment to the plaintiffs in this case.
But while an appeal of that decision was pending, the ground shifted. The Supreme Court in 2010 found in Regal–Beloit Corp. (561 U.S. 89) that Carmack “does not apply to a shipment originating overseas under a single through bill of lading.”
So this case went back to district court, and this time the court granted summary judgment to the railroads, finding the exoneration clause enforceable, except in the case of one shipment insured by Nipponkoa, because of language in an agreement between NS and Yang Ming.
On appeal, the 2nd Circuit upheld the lower court’s summary judgment on behalf of the railroads in the Sompo decision, and in favor of Nipponkoa in the other case.
Sompo argued the exoneration clause was ambiguous and should be construed against the railroads, but the court said “the only reasonable interpretation of the clause is that the carrier that issued the bill of lading—Yang Ming—and no one else, shall be liable to the cargo owners and those subrogated to the cargo owners’ interests.”
Sompo also argued the clause was unenforceable, because it “violates the public policy against permitting a common carrier to stipulate to immunity for the negligence of itself or its agents,” upsetting a principle established for over a century by the Supreme Court and other federal court decisions.
The 2nd Circuit said “while that principle is as well-established as Sompo claims, its application to a clause like the instant one is not. Indeed, with the exception of a single district court case, none of the cases cited by Sompo involve provisions even remotely similar to the Exoneration Clause in the Yang Ming bill of lading.”
Rather than exonerating the carriers the 2nd Circuit saw the clause as an “ordering mechanism” that “designates Yang Ming, and only Yang Ming, as the entity responsible for loss of or damage to a shipment caused by itself or any entity involved in the transportation of the cargo. It thereby concentrates all liability to the cargo owner in the issuing carrier, essentially requiring the cargo owner to sue the issuing carrier, and no one else, for damage to or loss of the cargo.”
David Maloof of Maloof, Brown & Eagan, the attorney for Sompo and Nipponkoa, said the parties reached a settlement after the decision, but believes the 2nd Circuit was wrong. He points to a series of Supreme Court decisions that he said, while dated, were also emphatic in holding “a common carrier cannot exonerate themselves from liability. They can limit it, we all knew they could limit it, but it said you cannot exonerate yourself.
“The public policy behind that,” he added, “was, once you exonerate yourself by contract, you no longer have an incentive to be as careful as society would like or shippers would like.”
Maloof said this ruling is part of a line of similar holdings “that the question of whether you can exonerate yourself is really shaped by how the contracts are worded, as opposed to an all-out black letter principle—a common carrier cannot exonerate themselves from liability, period.
“In the old days, the shipper was seen as someone to be protected, there was a floor.
They allowed freedom of contracts, don’t get me wrong, contracts mattered, but there was a fairness floor. The fairness floor is now gradually disappearing. I don’t want to say it’s completely gone but it’s looking awfully flimsy,” Maloof said.
Shippers “need to be proactive and understand that they are going to have higher marine insurance premiums or they’re going to have to more aggressively negotiate with their carrier,” he warned.
This column was published in the November 2014 issue of American Shipper.