Appeals Court Says B/Ls Can Force Shippers to Directly Sue Carriers for Subcontractor Losses
Carriers are allowed to insert “exoneration clauses” into through bills of lading that force shippers to sue the carrier for cargo loss instead going to the subcontractors that may have been directly responsible, said the U.S. Court of Appeals for the 2nd Circuit in a decision issued Aug. 6. Although the insurance company for the shipper of merchandise damaged in a train derailment wanted to sue the railroad to recoup its losses, the court ruled valid a clause in the through bill of lading issued by the ocean carrier that subcontracted out the inland transportation for a shipment from China to Georgia.
Sign up for a free preview to unlock the rest of this article
If your job depends on informed compliance, you need International Trade Today. Delivered every business day and available any time online, only International Trade Today helps you stay current on the increasingly complex international trade regulatory environment.
The merchandise had been damaged on a Norfolk Southern train when it derailed near Dallas. Two of the shipments had been arranged for transportation from China to Georgia with a non-vessel operating common carrier (NVOCC), Nippon Express, which used ocean carrier Yang Ming to handle ocean transportation and arrange for subsequent movement by land. Another shipper dealt directly with Yang Ming. After being sent across the Pacific on a Yang Ming ship, the carrier then transferred the cargo to the ill-fated Norfolk Southern train bound for Georgia.
The through bill of lading issued by Yang Ming contained an exoneration clause that provided that, “other than the Carrier, no Person, firm or corporation or other legal entity whatsoever (Including the Master, officers and crew of the vessel, agents, Underlying Carriers, SubContractors and/or any other independent contractors whatsoever utilized in the Carriage) is, or shall be deemed to be, liable with respect to the Goods as Carrier, bailee or otherwise.” The Southern New York U.S. District Court had taken the clause to mean the shippers’ insurance companies, Sompo Japan and Nipponkoa, couldn’t sue the railroad for the loss but had to go directly to Yang Ming.
On appeal, the insurance companies argued that the District Court’s interpretation went against the intent of the parties to the bill of lading and against industry practice, under which it “has always been routine” to settle directly with the subcontractor regardless of any exoneration clause. They also said allowing exoneration of the subcontractors would be bad policy because it would completely shield them from liability, making for lazy subcontractors and a difficult road for shippers pursuing cargo loss claims.
But the 2nd Circuit affirmed the District Court in all respects. Because the language of the exoneration clause was unambiguous, the court had to read it literally and couldn’t consider intent or industry practice, it said. And the exoneration clause doesn’t insulate Norfolk Southern from liability; it only requires suits to go through Yang Ming before getting to the railroad. “Understood in context, the clause is simply an ordering mechanism,” it said. It serves to regulate who will be responsible to whom.” In this case, although the shipper can only sue Yang Ming, Yang Ming could then turn around and sue the railroad. Although that may make the lawsuit more difficult for the shipper, there is no reason why “parties to a shipping contract should be prohibited, as a matter of public policy, from channeling claims for damage to cargo through the carrier that issues the through bill of lading,” said the 2nd Circuit.
The Appeals Court also found that, under a 2004 Supreme Court decision, a NVOCC can enter a shipper into such an arrangement without the shipper’s knowledge. In this case, the insurers argued that because Nippon Express didn’t have an exoneration clause in the bill of lading it issued to the shippers, it didn’t have the authority to enter the shippers into such an arrangement with Yang Ming. But in Norfolk Southern v. Kirby, the Supreme Court found that when a shipper contracts with an NVOCC to transport a shipment, the NVOCC becomes the shipper’s agent. That includes the authority to agree to exoneration clauses, said the 2nd Circuit.
(Sompo Japan v. Norfolk So. Railway, 2d. Cir. 13-3416/13-3501, dated 08/06/08, Judges Jacobs, Sack and Lynch)