The U.S. Carriage of Goods by Sea Act, 46 USC §30701, et seq. (“COGSA”), allows ocean carriers to limit their liability to a minimum of $500/package. Unfortunately, the statute doesn’t define the term “package.” Because it can make a huge difference as to ultimate liability, parties to cargo claims have made considerable efforts to increase or decrease the number of accountable “packages” in a lost/damaged load. Carriers usually argue fewer, and shippers argue more (at least one legendary case found a shipper arguing that each shrimp should constitutes a package!).
When it’s not otherwise obvious, courts have come to define the term “package” based on quantities forming the basis of calculated freight charges, or “customary freight units.” A federal court in New York recently addressed a dispute in which a series of related carriers quoted their shipper, Pasternak Baum & Co, a “flat rate” for a large load of peanut oil. Contrary to agreed shipper’s instructions, the carriers allegedly transported a chemical that ruins peanut oil in its preceding haul in the same vessel used for Pasternak Baum’s load. When the consignee learned this, it reject the delivery.
The shipper’s subrogated insurer, Vigilant, sued the carrier’s vessel to recover the peanut oil’s $231,963.34 value, and the carriers sought to limit their liability to $500 per COGSA and an incorporating term in the bill of lading. At issue was the definition of “package.” Vigilant, which had paid full value to Pasternak Baum & Co, urged that each one of the designated 303.736 metric tons in the shipper’s order constituted a “package,” and that the carriers calculated the freight rate on that basis. But the parties had a course of dealing whereby the carrier quoted flat rates which weren’t adjusted even when the freight tonnage tendered differed from what was ordered. The bill of lading unambiguously quoted a flat rate, and parol evidence as to how it was calculated wasn’t admissible. On that basis, the court concluded that the entire load consisted of one COGSA package, and the carriers liability was limited to peanuts.
On a separate but related note, this case addressed the concept of “deviation” as the basis for destroying a carrier’s otherwise effective limitation of liability. When a carrier alters its intended routing – usually for its own economic reasons – and cargo loss follows, courts have held them fully liable even if they might otherwise be able to limit their liability. The concept has been extended to include a carrier’s deviation from cargo stowage plans, such that carriers become fully liable for cargo they stow on deck despite under-deck terms specified to the shipper. In this case, Vigilant argued that deviation from the agreement regarding prior loads should destroy the carrier’s limited liability. The court refused to extend the doctrine to that new extent, given that deviation by improper stowage is a narrow doctrine that hasn’t been expanded despite numerous opportunities for courts to do so.
The United States appears to be lined up to join its major trading partners in a new cargo liability regime treaty that was negotiated and drafted by the United Nations Committee on International Trade Law. Colloquially referred to as the “Rotterdam Rules” (see July-October 2009 Legal Lookout articles), the new treaty will revamp limitation of liability. Package definition issues will remain, but a carrier’s minimum liability would go up (let’s face it - $500 was a lot more in 1936 when COGSA was enacted than it is now).
Under the Rotterdam Rules, a carrier’s liability will be limited to 875 SDRs (“special drawing rights,” which are an artificial value set by the International Monetary Fund that currently is around $1,500) or 3 SDRs per kilogram of weight (about $2.20 pound), whichever is higher. The weight option would be significant to break bulk shippers of cargo that might otherwise constitute a single package, as was the case in the Pasternak Baum case. Clearing up some confusing issues also apparent from this case, a “package” for limitation of liability purposes will be the smallest unit definitively listed on a bill of lading, even if it is palletized with other packages. Limited liability will not be available to a carrier if its owner (i.e., not just some deckhand) recklessly or knowingly caused the loss.
The Rotterdam Rules have been adopted by the requisite umber of countries, but some of them are awaiting ratification by parliamentary and legislative bodies. They could be passed into law next year. If Pasternak Baum’s shipment had moved a couple years later, there might have been a different result in court.
Ref: Vigilant Ins. Co. v. M/T “Clipper Legacy,” et al., 656 F.Supp.2d 352 (SDNY 2009); Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea, available at http://www.uncitral.org/uncitral/en/commission/working_groups/3Transport.html
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