United States: Shippers, Freight Forwarders, NVOCCs And Carriers' Maritime Incident Warning Signs

Lessons Learned and Action Items for In-House Counsel

Christopher Nolan is a Partner and K. Blythe Daly is an Associate in our New York office.

Despite the alleged softening of the maritime industry since 2008-09, the volume of waterborne trade continues to rise. The ebbs and flows of the industry mean changing partnerships and alliances, more complicated logistics chains, increased customer demands and added competition to retain market shares in the face of decreasing profit margins. When companies are focused on their bottom lines, a patchwork of understandings, partnerships and daily practices between maritime shipping interests can emerge. The ambiguities in corporate relationships and weaknesses in internal practices may go unnoticed during daily commercial transactions. But when disaster strikes, it is too late to discern the strength of your corporate documentation process and policies.

Disaster did strike on July 14, 2012, when an explosion and fire broke out aboard the M/V MSC FLAMINIA (vessel) in the Atlantic Ocean (incident). The incident caused loss of life and significant damage to the vessel and cargo estimated at $275 million. In the subsequent five years, actions were initiated in various international jurisdictions in an effort to determine liability, compensate the decedents' families, and recover for cargo loss and damage. The vessel's owner filed the principal Limitation of Liability Act suit in the U.S. District Court for the Southern District of New York. To date, the action has required two full years of fact discovery, more than a year of expert discovery, and four different judges to adjudicate disputes. Several opinions have been issued, most recently in In re M/V MSC Flaminia, where the court granted in part and denied in part a freight forwarder's motion for summary judgment. Trial is set to begin in this fall.

This client alert addresses the types of claims and potential defenses a freight forwarder may be subject to in a marine casualty of this magnitude. In addition, the alert addresses the MSC Flaminia ruling and suggests certain steps shippers, freight forwarders, non-vessel operating common carriers (NVOCCs) and carriers can take now to better prepare for a marine casualty.

The Cargo Goods Document Chain

There are numerous companies and documents involved in the cargo logistics process before cargo is placed aboard a vessel. While the types of documents and responsibilities of parties vary depending on the goods being shipped, this alert will use the example of a dangerous goods chemical cargo like the one at the center of the MSC Flaminia dispute.

The documentation process from the booking to the vessel's departure is quick. Generally, the cargo shipper sends a booking request, together with cargo instructions, to the NVOCC and the freight forwarder. The NVOCC, in turn, books the cargo with the ocean carrier. The NVOCC, after confirming the booking with the ocean carrier, provides the shipper with a booking confirmation. The shipper then sends the freight forwarder its letter of instruction for preparation of the express bill of lading, the commercial invoice and certificate of origin. The letter of instruction typically provides chemical product handling warnings.

Upon receiving the shipper's letter of instruction, the freight forwarder generates the master bill of lading (or master bill of lading instructions). The freight forwarder also enters the information into the federal government automatic exporting system which provides a control number for the shipments which is subsequently affixed to documents. The freight forwarder then sends the master bill of lading to the NVOCC who in turn prepares the draft express bill of lading. The express bill of lading is sent by the NVOCC to the ocean carrier who in turn creates the sea waybill.

Cargo Breaking Bad and the Legal Claims That Follow

Not all cargo container shipments have happy endings. When an incident occurs, potential causes of action against a freight forwarder (and other cargo supply chain parties) include negligence, breach of contract, strict liability and indemnity. As in the M/V Flaminia action, this alert focuses on the negligence claim under federal maritime law as it covers a broad range of circumstances and factual scenarios.

  1. Negligence

In a maritime casualty action, claimants will allege negligence under a variety of theories: general negligence, negligent failure to warn and negligent misrepresentation. In order to succeed on a general negligence cause of action, claimants must show: 1) a duty (i.e., to warn), 2) a failure or breach of that duty, 3) causation, and 4) damages. The existence of a duty is a question of law. While the shipper of a cargo may have a duty under the Carriage of Goods By Sea Act (COGSA) to warn the ship owner "of the foreseeable hazards inherent in the cargo of which the ... ship's master could not reasonably have been expected to be aware," a freight forwarder has no such duty as a matter of law.

Articulating a negligent failure to warn theory under federal maritime common law is difficult when the claims against a freight forwarder do not concern COGSA or products liability. A freight forwarder is not the chemical product manufacturer nor is it the shipper.

A claim for negligent misrepresentation requires a showing that 1) defendant made misrepresentations of fact which it knew or should have known to be false, 2) defendant knew the recipient of the alleged misrepresentations would have relied upon the statements made, 3) there was justifiable reliance on the statements, and 4) the reliance resulted in damages. When a freight forwarder does not make any representations to claimants concerning bill of lading instructions, claimants cannot allege they relied upon the same.

In marine casualty actions, courts often address the negligence theories as one. The Second Circuit clarified freight forwarder duties and responsibilities under a negligence theory in a case last decade where the purchaser of an electric transformer retained a freight forwarder to facilitate the machine's transport from Italy to Iowa. The freight forwarder arranged for the transformer to be picked up, retained a customs broker and selected a stevedore to confirm it was lashed properly to the vessel. During heavy seas, the transformer broke loose and damaged other cargo. The freight forwarder moved for summary judgment dismissing the other cargo owner's direct action and the purchaser's fourth-party action. The court granted the purchaser's indemnity claim against the freight forwarder on the basis that the stevedore's negligence in lashing the transformer could be attributed to it. On appeal, the Second Circuit reversed the indemnification ruling finding that a freight forwarder who acted within its limited scope could not be held responsible for the negligent acts of the stevedore it selected.

The Second Circuit emphasized the limited role traditional freight forwarders play in the cargo chain and the legal protections afforded them in that capacity. A freight forwarder:

secure[s] cargo space with a steamship company, give[s] advice on governmental licensing requirements, proper port of exit and letter of credit intricacies, and arrange[s] to have the cargo reach the seaboard in time to meet the designated vessel.

A freight forwarder "simply facilitates the movement of cargo to the ocean vessel" or "generally makes arrangements for the movement of cargo at the request of clients." As it is not directly involved in transporting the cargo, "a freight forwarder does not issue a bill of lading, and is therefore not liable to a shipper for anything that occurs to the goods being shipped." Based on these narrow responsibilities, the Second Circuit made clear that a freight forwarder will not be held liable for marine incidents if it "limits its role to arranging for transportation." A freight forwarder satisfies its duty of care if it selects reputable companies to effectuate the transport.

Following Prima, the relevant inquiries are the conduct of a freight forwarder in carrying out its document functions and/or selecting cargo companies to effectuate transport. Claimants must allege and prove the forwarder is negligent in its selection of the transportation providers.

  1. The MSC Flaminia Freight Forwarder Ruling

The documentation process described above is similar to that in In re M/V MSC Flaminia. The key difference is that the NVOCC therein retained its own freight forwarder to act as its in-house document preparer and coordinator. The companies entered into a "Logistics Alliance Agreement" which provided the companies were to act as "partners" and jointly marketed in the industry, but with each entity having its own, defined role internally. From documentation, to pricing, to logistics vendors, the process was collaborative in nature to all "mutually agreed customers."

The contract is relevant because the NVOCC and freight forwarder handled logistics for the dangerous good divinylbenzene (DVB), which is one of the cargos alleged to have caused the incident. The shipper provided specific stowage instructions for the DVB to be kept away from heat sources and to stow above deck for temperature monitoring. These instructions were conveyed by the NVOCC to the ocean carrier for the preparation of the sea waybill. However, the NVOCC's freight forwarder admitted during deposition testimony that it neglected to notice that the stowage instructions were not included in the carrier's sea waybill.

The court considered the breach of contract and negligence causes of action brought by the shipper and the NVOCC against the NVOCC's freight forwarder and dismissed most of the claims. For the NVOCC's negligence claim, the court held that there was no triable issue of fact concerning the causation element. In particular, while there could have been a duty, there was no showing that the breach in neglecting to notice the lack of stowage instructions on the sea waybill was "causally related to the casualty aboard the vessel." The dangerous goods declaration - not sea waybill - determined how the ocean carrier stowed the DVB aboard the vessel.

Concerning the NVOCC's contract claim, its freight forwarder did not fare as well. The failure to notice the stowage instructions on the sea waybill constituted a breach of the duty owed as to document processing duties delineated in the contract between NVOCC and its freight forwarder. While the NVOCC still must overcome the difficult causation issue addressed by the court, the court accepted at the summary judgment stage that the negligent omission led to legal claims the NVOCC had to defend which increased its transaction costs and "litigation risks."

Concerning the shipper's contract claim, there was no contract between the shipper and the NVOCC's freight forwarder. However, the shipper claimed to be a third-party beneficiary of the NVOCC agreement. The court found credence in the argument that it was a disclosed principal and that the agreement states the parties will work as "partners" with "mutually agreed customers." However, its argument concerning damages was lacking. Unlike the NVOCC who alleged increased usage of resources and litigation risk because of the omission, the shipper did not and could not credibly claim breach of contract damages.

Lessons Learned and Action Items for In-House Counsel

Periodic maintenance of company documents is aspirational but often difficult for in-house counsel to undertake in light of the daily commercial and legal headaches that occur. In considering the issue, below are certain measured, cost-effective steps that can be taken to better protect the company.

  1. Confirm the Contractual Landscape Between Parties: The relationships among and between shippers, freight forwarders and NVOCCs are often informal and rely on a patchwork of terms and conditions sent at the time of shipment. When the terms conflict, which control? More importantly, do you want to be litigating this threshold, costly issue? Certainly not. Ensure that the parties have an agreement in place akin to the NVOCC and freight forwarder did in In Re M/V MSC Flaminia.
  2. Pressure Test the Agreement: The courtroom is not a good place to test the strength and weaknesses of an agreement, terms and conditions, or new language in a bill of lading for the first time. Invest the time and money in pressure testing your company's most critical agreements. Even if outside counsel drafted the agreement, it is prudent to have another set of eyes review the documents to uncover ambiguous or fuzzy language. Whether it be another outside counsel or the new law school intern, a different perspective can raise different potential weaknesses.
  3. Consider the Business Implications: Congratulations. You've convinced the powers that be that an agreement is sound. You've pressure tested it and made revisions to shore up your legal position. Done. Not yet. Talk to the company's underwriter or risk management person. Make sure the business people know the potential liabilities at stake and the potential issues that may impact insurance coverage. Note the Flaminia court's analysis of the term "partners" and "mutually agreed customers" when considering whether the shipper was a third-party beneficiary of the NVOCC or freight forwarder agreement. How would such a ruling impact insurance coverage when a non-contracting party is seeking relief? It's better the insurance team considers the issue now than after being subject to a judgment.
  4. Training Opportunity: The short ruling by the court can serve as a valuable training tool for the company's cargo documentation team. During a periodic or annual training session, it may be beneficial to provide a copy of the court's decision and emphasize the details used by the court to address the cargo document chain process, the alleged errors made, and the potential implications of these errors both for the company and individuals concerned.

The MSC Flaminia incident is the most recent reminder of the significant exposure a party can face notwithstanding the small margins for the work performed on each shipment. Good corporate document maintenance and pressure testing can make all the difference in disputes large and small.

Note: The authors served as counsel for a party in In re M/V MSC Flaminia before obtaining dismissals from parties with claims before trial.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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