United States: Navigating Cargo Claims - Part 2

The "Q Clause" Defense

COGSA's last and 17th exception in Section 4(2) is enumerated in 4(2)(q) and thus known as "the Q Clause." The Q Clause protects ocean carriers from liability for cargo damage arising without the actual fault of the carrier or its agents. The exception is a catch-all defense for those situations not covered under the sixteen exceptions listed above it. The provision states:

This defense, however, is particularly difficult for the carriers to prove. The burden of proving it rests on the carrier and requires the carrier to prove (a) it was free from any fault relating to the damage, and (b) what caused the cargo damage.

The Calavan Foods case (Appeal No. 4649), in the San Francisco Superior Court of Appeals demonstrates the perils of the Q Clause when relying on the perils of the sea defense. The case involved cargo damaged when a vessel unexpectedly encountered a typhoon on a voyage from Hong Kong to San Francisco. The trial court found that the wind speed of 47 knots were too low to validate the peril of the sea defense. On appeal, the court reversed the finding of liability against the carrier, not on the basis of the peril of sea defense but on the basis of the Q Clause. The court of appeals agreed with the trial court that the typhoon was not a peril of the sea. However, the court found that the shipowner had established the following Q Clause elements: (1) the vessel was free from fault in that the carrier took all reasonable steps to safeguard the cargo, and (2) the actual cause of the cargo damage was the storm, i.e., the unpredicted change of the typhoon's course. Thus is it possible to defeat the perils of the sea defense but be caught with a viable Q clause defense.

Other Defenses

Other exceptions related to human force include: acts of war; acts of public enemies; arrest or restraint of princes; seizure under legal process; quarantine restrictions; riots and civil commotions; strikes; lockouts or stoppages of work; acts or omissions of the owner or shipper of the goods; losses arising from inherent defect of the goods or insufficiency of packing.

CONFLICTS BETWEEN COGSA AND CARMACK

As noted above, COGSA applies to international shipments only. However, most international shipments to the United States will involve transport between states. Interstate shipments are typically governed by COGSA. The question often arises whether COGSA applies or Carmack applies when the cargo is damaged while en route from one American state to another.

The issue was addressed in Norfolk Southern Railway Co. v. James N. Kirby, 543 U.S. 14 (2004), which considered whether COGSA's $500-per-package limitation of liability provision applied when the cargo was damaged in the United States. The $500 limitation applied to the bill of lading because the reverse side of the bill of lading referred to the Himalaya and Paramount Clauses. This was true of both the ocean carrier's bill of lading and the freight forwarder's bill of lading. There was no other bill of lading discussed in the decision. The Kirby decision held that this limitation applied to the inland portion of the travel as well as the ocean portion of the travel. The court thus took a "conceptual" approach to maritime law as opposed to a "spatial" approach to the jurisdictional analysis.

Since then, however, a split has occurred between the circuit courts as whether the impact of the Carmack Amendment alters the effect of a COGSA provision in a bill of lading. On the one hand, in Sompo Japan Ins. Co. of America v. Union Pacific Railroad Co., 456 F.3d 54 (2nd Cir. 2006), the Second Circuit considered the $500 limit of liability as to the shipment of 32 tractors traveling from Tokyo, Japan to Swanee, Georgia via Los Angeles, California. The tractors were damaged in the course of a train derailment during the trip from California to Georgia. The rail carrier sought to impose the $500 limit of liability because the intermodal bill of lading included the Himalaya and Paramount Clauses, which under Kirby extend the reach of COGSA to the entire shipment throughout the cargo's movement. The Second Circuit took a turn from Kirby, however, and held that a contractual provision extending the reach of COGSA to also include the inland portion of an intermodal movement could not trump the application of the Carmack Amendment. The Second Circuit remanded to the district court for a determination of whether the rail carrier was entitled to a limitation of liability under the Carmack Amendment and the district court ultimately determined that the rail carrier was entitled to no limitation of liability because of the ambiguous nature of its transportation documentation.

On the other hand, the Eleventh Circuit in Altadis USA, Inc. f/u/b/o Fireman's Fund Ins. Co. v. Sea Star Line, LLC, 458 F.3d 1288 (11th Cir. 2006), held the exact opposite way from Sompo. Altadis involved the intermodal transportation of a shipment of cigars from Puerto Rico to Tampa, Florida, via Jacksonville, Florida. The cigars were stolen during the inland truck movement from Jacksonville to Tampa. The question was whether the two-year time bar under Carmack or the one-year time bar under COGSA applied ot the inland movement. In ruling that the one-year time bar applied to the trucker, the Eleventh Circuit reasoned that since there was no separate bill of lading governing the inland portion of the intermodal movement, then the contractual provisions – including the Himalaya and Paramount Clauses – on the reverse side of the intermodal bill of lading would govern. Since the Paramount Clause incorporated by reference the terms and conditions of COGSA (including the one-year time bar) and the Himalaya Clauses extended the defenses under the bill of lading to the ocean carrier's subcontractors (including the trucker), the trucker was able to dismiss the complaint as being time barred. If a separate bill of lading or contract of carriage had been issued for the inland movement, the Eleventh Circuit would have found that Carmack and its two-year time bar would have applied.

What is known as a "Clause Paramount" is a statement in a bill of lading that such bill is subject to the provisions of the Carriage of Goods by Sea Act (46 U.S.C.A. § 1300 et seq. [1936]), the federal legislation that governs the rights, obligations, and liabilities arising out of the relation of issuer to holder of the ocean bill of lading, in regard to the loss or damage of goods.

What is known as a "Himalaya clause" is a clause benefiting a third party (usually a stevedore) in maritime matters. The term comes from the English case of Adler v. Dickson (The Himalaya), [1954] 2 Lloyd's Rep. 267, [1955] 1 Q.B. 158 (C.A.). Mrs. Adler was a passenger on the S.S. Himalaya. She was injured when a gangway fell, throwing her 16 feet to the quay below. The passenger ticket contained a clause exempting the carrier from responsibility. Mrs. Adler sued the master and the boatswain. The Court of Appeal upheld the clause, holding that the carrier can protect not only himself but also those whom he engaged to carry out the contract.

This particular clause was discussed in The Cleveland (Eisen und Metall A.G. v. Ceres Stevedoring Co., Ltd. and Canadian Overseas Shipping Ltd., [1977] 1 Lloyd's Rep. 665 (1977) and The Eurymedon (New Zealand Shipping Co. Ltd. v. A.M. Satterthwaite & Co. Ltd., [1974] 1 Lloyd's Rep. 534; [1975] A.C. 154 at p. 165 (P.C.).

The US Court of Appeals for the Ninth Circuit ruled in Regal-Beloit v. Kawasaki Kisen Kaisha, No. 06-56831 (9th Cir., February 4, 2009) that the Carmack Amendment, rather than COGSA, applies to goods damaged in the United States even though originally shipped from overseas to an inland location in the United States. The shipment was under a through bill of lading covering both the oceanic and the rail portions of the transport. The goods were damaged on land when the train on which they were being carried derailed. When the shippers filed claims, defendants asserted that the dispute had to be litigated, if at all, in Tokyo as provided in the through bill of lading, which had incorporated the Carriage of Goods at Sea Act (COGSA). The shippers contended that the liberal forum selection provision of COGSA did not apply; rather, venue was restricted by the Carmack Amendment. The district court granted the carriers' motion to dismiss and the shippers appealed. Recognizing a split in the circuits, the appellate court reversed, holding that the Carmack Amendment applied in the case. The matter was remanded to the district court to determine whether there had been compliance with the applicable provisions of the Carmack Amendment. Note: This issue may now be ripe for the US Supreme Court.

AIR TRANSPORT CARGO CLAIMS

THE WARSAW CONVENTION

The Warsaw Convention is an international convention which regulates liability for international carriage of persons, luggage or goods performed by aircraft. Originally signed in 1929 in Warsaw, it was amended in 1955 at The Hague and in 1975 in Montreal. United States courts have held that, at least for some purposes, the Warsaw Convention is a different instrument from the Warsaw Convention as Amended by the Hague Protocol.

In particular, the Warsaw Convention:

• mandates carriers to issue passenger tickets;
• requires carriers to issue baggage checks for checked luggage;
• creates a limitation period of 2 years within which a claim must be brought (Article 29); and limits a carrier's liability to at most:
• 250,000 Francs or 16,600 Special Drawing Rights (SDR) for personal injury;
• 17 SDR per kilogram for checked luggage and cargo,
• 5,000 Francs or 332 SDR for the hand luggage of a traveller.

Freight Forwarders (Consolidators) can be considered Indirect Air Carriers if they issue an airway will. If not, they are generally deemed to be simply freight forwarders, similar to travel agents.

The sums limiting liability were originally set in Francs (defined in terms of a particular quantity of gold). These sums were amended by the Montreal Additional Protocol No. 2 to substitute an expression given in terms of SDR's. These sums are valid in the absence of a differing agreement (on a higher sum) with the carrier. Agreements on lower sums are null and void.

The amount generally set is $20.00 per kilogram or $9.08 per pound. These limitations could avoided by showing that the air carrier was guilty of Wilful Misconduct. The French word "dol". This has never been shown for a cargo case.

Another way to avoid the limitation is by showing that the air carrier failed to identify and/include on the air waybill a stopping place. This called the "agreed stopping place doctrine". It has no viablity under the Montreal Convention.

THE MONTREAL CONVENTION

The Montreal Convention, signed in 1999, will replace the Warsaw Convention system, once Montreal has been ratified by all states. Until then, however, there will be a patchwork of rules governing international carriage by air, as different states will be parties to different agreements (or no agreement at all).

The 'Montreal Convention', is a treaty adopted by member states in 1999. It amended important provisions of the Warsaw Convention regime concerning compensation for the victims of air disasters. The Convention reestablishes uniformity and predictability of rules relating to the international carriage of passengers, baggage and cargo. It protects the passengers by introducing a modern two-tier liability system and by facilitating the swift recovery of proven damages without the need for lengthy litigation.

Under the Montreal Convention, air carriers are strictly liable for proven damages up to 100,000 Special Drawing Rights (SDRs), a mix of currency values established by the International Monetary Fund (IMF), approximately $138,000 per passenger at the time of its ratification by the United States in 2003. (As of January 2007, the value has risen to roughly $149,000.) For damages above 100,000 SDR's, the airline must show the accident that caused injury or death was not due to their negligence or was attributable to the negligence of a third party. The Convention also amended the jurisdictional provisions of Warsaw and now allows the victim or their families to sue foreign carriers where they maintain their principal residence, and requires all air carriers to carry liability insurance.

The Montreal Convention also changes and generally increases the maximum liability of airlines for lost baggage to a fixed amount 1000 SDRs (the amount in the Warsaw Convention is based on weight of the baggage). For cargo, the limitation was increased from $20 per kg to about $23 per kg.

Montreal convention was brought about mainly to amend liabilities to be paid to families for death or injury while on board an aircraft.

CONCLUSION

Cargo claims require a heightened sensitivity to key documents, notice requirements, and deadlines. Phrases such as "dead in the water" or "lost at sea" or "rough waters" come to mind if these are missed. Cozen O'Connor stands ready to assist you in navigating those waters.

www.cozen.com

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.