Supply chain professionals would be wise to examine their bills of lading carefully as fine print like a forum selection clause can have a big impact in dispute resolution, according to attorney Joe Pangaro.
Anyone who works in the transportation, shipping or logistics sectors knows how even the small details — sometimes especially the small details — can have a major impact on supply chains.
I will never forget an interaction I saw when I worked as a supply chain analyst some years ago. A supervisor came up to the newest member of our team and informed him that instead of shipping a 40-foot container full of chemicals to the Netherlands, he had actually shipped it to the Netherlands Antilles, more than 4,000 miles away.
The new team member’s exasperated reaction was priceless: “How many Netherlands can there possibly be?”
The thought of missing these kinds of details keep logistics and supply chain professionals up at night. Despite my years of training and experience in international logistics, it was not until I entered the practice of law that I began to appreciate just how significant the details of one routine shipping document — the bill of lading — be. Recently, the Third Circuit Court of Appeals issued a ruling on this very subject that logistics and supply chain professionals would do well to know.
The case, Liberty Woods Intl. Inc. v. The Motor Vessel Ocean Quartz, 16-4195, 2018 WL 2074549, at *1 (3d Cir. May 4, 2018), dealt with forum selection clauses in a bill of lading.
The plaintiff, Liberty Woods International (LWI), bought plywood veneer sheets and had them shipped to Camden, N.J. S.K. Shipping chartered the vessel moving the cargo, the Ocean Quartz, and issued a bill of lading that contained the following statement, commonly referred to as a forum selection clause: “Any claim, dispute, suit or action concerning goods carried under this bill of lading, whether based upon breach of contract, tort or otherwise shall be brought before the Seoul District Court in Korea.”
The goods arrived in Camden badly damaged, allegedly due to improper stowage. LWI threatened to arrest the vessel, and thereby prevent any further movement of the ship, until it could recover its losses. To prevent vessel arrest, the ship’s insurer issued a letter of undertaking to LWI. Essentially, a letter of undertaking is a document whereby the provider promises the receiver that it will reimburse the receiver for certain losses, under certain circumstances. In this case, LWI could use the letter of undertaking to satisfy a judgment of up to $2.75 million “against the Vessel in rem.”
It is important to note here the legal distinction between two kinds of jurisdiction: in personam jurisdiction and in rem jurisdiction. In personam jurisdiction basically means the court hearing the lawsuit has jurisdiction over the persons or corporations before it. By comparison, in rem jurisdiction occurs when the court asserts jurisdiction over a thing or piece of property.
Looking at the caption in this case, the defendant is the “Motor Vessel Ocean Quartz,” quite literally meaning that the lawsuit is against the ship itself, rather than the company that owns it. Further complicating matters, in rem jurisdiction is recognized in the United States but not in countries such as Greece, Germany and South Korea.
Herein lays the problem. The shipper’s bill of lading stipulated that all claims had to be brought “before the Seoul District Court” in South Korea, but South Korea does not permit in rem lawsuits.
As such, LWI found itself sailing between Scylla and Charybdis. The company could try to bring its lawsuit in the United States and hope the court ignored the forum selection clause or in South Korea and hope the court had a change of heart as to in rem jurisdiction. Presumably, LWI also could file a lawsuit seeking in personam jurisdiction, but if it did, its letter of undertaking for $2.75 million would be worthless because it was only against the vessel in rem.
LWI ultimately decided to file its suit in the United States and argued that the forum selection clause in the bill of lading was invalid because it violated the Carriage of Goods by Sea Act (COGSA).
The specific provision of COGSA that LWI cited read: “Any clause, covenant or agreement in a contract of carriage relieving the carrier or the ship from liability for loss or damage … or lessening such liability otherwise than as provided in this Act shall be null and void and of no effect” (note to 46 U.S.C. § 30701, Title I, Section 8). LWI argued that by requiring the lawsuit to be brought in South Korea, which does not recognize in rem jurisdiction, the bill of lading’s forum selection clause “relieves” or “lessens” the liability of the ship, which COGSA specifically forbids.
Unfortunately for LWI, however, the Third Circuit disagreed for two reasons.
First, the court looked at the plain language of the statute. Yes, the statute said a contract clause could not eliminate or lessen ship liability, but according to the ruling, COGSA does not guarantee “the right to an in rem suit. Rather, COGSA protects ship liability, not any particular vehicle for imposing it.”
In other words, the statute did not guarantee a right to certain type of lawsuit, and just because it might be “more costly or less convenient” for LWI to enforce ship liability without the option to bring an in rem lawsuit, that alone was not enough to establish that LWI was deprived of a right.
Second, the court explained that even though an in rem suit was not permitted in South Korea, that was not the only way LWI could have recovered its losses, adding that if LWI found itself boxed in, that was the company’s own fault.
“LWI’s inability to recover seems to be a consequence of its own deliberate inaction: First, it refused to file an in personam suit against S.K. Shipping in South Korea. Second, it did not obtain an LOU that would be applicable to an in personam suit. LWI’s own willful limitation of alternatives, not the forum selection clause, has eliminated its ability to recover,” the court said in its decision.
Based on this analysis, the Third Circuit dismissed the case.
So what can professionals in the transportation, shipping and logistics industries learn from this case?
The most important lesson here is to examine your bills of lading carefully. Forum selection clauses are standard fare in commercial contracts, and your bills almost certainly have a clause like this.
Further, using a forum selection clause to your advantage is smart business. Virtually every company in the logistics or supply chain industry deals with organizations across the country, if not across the world. Can you imagine being hauled into a court 10 states away? What if your organization is involved in two, three or even 10 lawsuits at the same time, all in different locations?
As the Liberty case shows, a well-considered forum selection clause can give you a significant strategic advantage if a dispute arises, and a failure to consider a forum selection clause can place you at a serious disadvantage if the outcomes of the clause are not carefully considered. A good forum selection clause also can help you to direct disputes to a forum that has familiarity with the type of legal issues you are more likely to deal with.
For instance, a large number of corporate disputes are decided in Delaware Chancery Court because of that court’s national reputation for excellence in corporate matters. Or as judge I used to work for in Philadelphia put it, “A good lawyer knows the law; a great lawyer knows the judge.”
A little research and some serious thought, including consulting with your general counsel or an experienced outside attorney, about what your forum selection clause should say can help avoid serious headaches down the road.
Joe Pangaro is a trial attorney with Duane Morris with experience in high-stakes cases involving a wide range of commercial issues, including class actions and breach of contract disputes. He may be reached by email at firstname.lastname@example.org.