Second Circuit Holds Carmack Applies To Domestic Leg Of International Transport Over COGSA Extension In "Through" Bill Of Lading
December, 2006
The United States Court of Appeals for the Second Circuit, in a case of first impression, recently held that the Carmack Amendment applied to the domestic leg of an international shipment originating in a foreign country, despite the “through” bill of lading provision extending the Carriage of Goods by Sea Act (“COGSA”)’s reach. Sompo Japan Insurance Company of America v. Union Pacific Railroad Company, 456 F.3d 54 (2d Cir. 2006). Accordingly, the rail carrier’s liability was not limited to the $500.00 per package COGSA limitation.
In July 2002, Plaintiff Sompo Japan Insurance Company of America’s (“Sompo”) insured, Kubota, hired an ocean shipping company to transport its cargo, a shipment of thirty-two tractors, from Japan to Georgia. Sompo, 456 F.3d at 56. As evidence of the agreement, the shipping company issued three bills of lading. Id. The bills of lading were “through” bills, meaning they covered the entire transport including both ocean and land legs. Id. In addition, the bills were intermodal, meaning they included ocean and rail carriage. Id. When the cargo arrived in the U.S., it was transferred to a subcontractor, Defendant Union Pacific Railroad Company (“Union Pacific”), for rail carriage to Georgia. Id. at 56. While Union Pacific was transporting the cargo, the train derailed in Texas and the cargo was damaged. Id.
Kubota collected the full value of its tractors from Sompo. Sompo then filed a subrogation action against Union Pacific in the Southern District of New York. Id. at 55. Union Pacific argued that pursuant to the bills of lading, its liability should be limited to $500.00 per package. Id. at 56. Union Pacific relied on two provisions in the bills: (1) the “clause paramount” that identified COGSA as the governing law for the ocean leg of the journey and also included a “period of responsibility clause” - - a contractual provision that extended COGSA’s application, whether loss or damage to the cargo occurred at sea or not; and (2) a “himalaya clause” - - a contractual provision extending the benefit of the defenses and limitations contained in the bills of lading to third-parties, including subcontractors, such as Union Pacific. Id. at 56-57.
Since the bills were “through” bills of lading containing period of responsibility and himalaya clauses, Union Pacific argued that its liability as a subcontractor was limited to $500.00 per tractor. Id. at 57. The District Court granted partial summary judgment in favor of Union Pacific, holding that the COGSA limitation of liability, which was incorporated in the bills of lading, was effective for the land leg of the transport. Id. This appeal followed.
On appeal, Sompo argued that the Carmack Amendment to the Interstate Commerce Act of 1887 governed Union Pacific’s liability, not COGSA. Id. at 57. In this case of first impression, the Second Circuit agreed.
Sompo asserted that the Carmack Amendment and the Staggers Rail Act of 1980 should take precedence over the COGSA limitation that the bills of lading extended to Union Pacific. Id. While the “through” bills attempted to extend COGSA’s application inland, the Second Circuit ruled that the extension was contractual and lacked the force of statute. The Second Circuit therefore held that the Carmack Amendment applied. Id. The Second Circuit further held that the bills, incorporating COGSA, fell short of meeting the Staggers’ prerequisite for limiting a rail carrier’s Carmack liability. Id. (Staggers allows rail carriers to limit their liability under Carmack if the shipper is offered alternative terms. 49 U.S.C. 10502(e) and 11706(a), (c)(3)).
In its analysis, the Second Circuit considered the complex federal statutes that govern different aspects of international commerce. The Second Circuit noted that by its terms, COGSA only applies to “‘the period from the time when the goods are loaded on to the time when they are discharged from the ship.’” Id. at 58 (quoting 46 U.S.C. app. §1301(e)). The statute contemplates, however, agreements extending its terms beyond this period. Id. COGSA does not prevent a carrier from extending COGSA’s application to the entire period of transport, including inland transport, in a bill of lading. Id. (citing Norfolk S. Ry. Co. v. Kirby, 543 U.S. 14, 125 S.Ct. 385 (2004)).
“Carmack applies to common carriers ‘providing transportation or service subject to the jurisdiction of the [Surface Transportation] Board.’” Id. at 60 (quoting 49 U.S.C. §11706(a)). The Board’s jurisdiction applies to “‘transportation in the United States between a place in . . . the United States and a place in a foreign country.’” Id. at 60 (quoting 49 U.S.C. §10501 (a)(2)(A) & (F)). The Second Circuit noted that where COGSA establishes liability akin to negligence, Carmack imposes something closer to strict liability, making a carrier liable for the actual loss to the property it transports. Id. at 59.
Sompo further argued that “if the domestic rail transport is part of a larger transportation originating in a foreign country, then it fits the statutory requirement that it is a shipment between a place in the United States and a foreign country, and Carmack is applicable to it.” Id. at 61. Union Pacific disagreed, arguing that “[t]he Carmack Amendment is generally inapplicable where a through bill of lading contemplated inland transportation of goods.” Id.
The Second Circuit recognized that these “arguments reflect a difference of opinion in the courts regarding Carmack’s applicability to a through bill of lading covering a shipment of goods originating in a foreign country.” Id. at 61 (citations omitted). For the Second Circuit, it was an issue of first impression. Id.
The Second Circuit noted that most courts have followed the Eleventh Circuit’s holding in Swift Textiles v. Watkins Lines, Inc., 799 F.2d 697 (11th Cir. 1986), that “‘when a shipment of foreign goods is sent to the United States with the intention that it come to final rest at a specific destination beyond its port of discharge,’ . . . then Carmack applies only if there is a separate bill of lading covering the inland portion of the shipment.” Id. (quoting Swift, 799 F.2d at 701). The Second Circuit, however, stated that Swift’s holding was “fatally flawed,” because it does not follow from its analysis. Id. at 61-63.
Nevertheless, the Second Circuit agreed with the Swift analysis. Id. at 63. Under the analysis, the first step is to determine whether the shipment is a single continuous intermodal shipment or multiple shipments consisting of separate ocean and domestic legs. Id. The second step is to determine whether Carmack applies to the shipment at issue. Id.
In this case, the Second Circuit noted that the shipment from Japan to Georgia was fixed at the time it began, and was therefore a single continuous intermodal shipment. Id. The question at issue, therefore, was “whether Carmack applies to the domestic rail portion of a single, continuous shipment of goods originating in a foreign country.” Id. at 67.
After a thorough analysis of the construction and various interpretations of the statute (id. at 64-69), the Second Circuit held in accord with its holding in Project Hope v. M/V IBN SINA, 250 F.3d 67 (2d Cir. 2001). In Project Hope, the Second Circuit held that Carmack applied to the domestic motor carriage portion of an international shipment originating in Virginia and destined for Egypt. Id. at 67, FN 13. Although Project Hope involved motor carriage, rather than rail, Carmack’s applicability, post-codification, is identical regardless of the mode of transport. Id. Thus, the Second Circuit bound itself by its Project Hope holding, which “effectively extended Carmack’s applicability to international shipments involving non-adjacent foreign countries.” Id. The Second Circuit therefore concluded that Carmack applied to the domestic leg of the shipment at issue. Id. at 69.
The Second Circuit next addressed the potential conflict between its holding that Carmack applied and the fact that the period of responsibility and himalaya clauses in the bills of lading extended COGSA’s application. Id. at 69. The Second Circuit concluded that the conflict was not between two federal laws but rather between one federal law (Carmack) and a contract (the bills of lading). Id. The Second Circuit explained that although a carrier may extend COGSA’s reach in its bills of lading, courts have consistently held that when COGSA is extended by contract, “the statute does not apply of its own force, but rather as a contractual term.” Id. (citations omitted). Courts have routinely held that contracts extending COGSA’s reach must give way to conflicting law. Id. at 71 (citations omitted). Accordingly, the Second Circuit concluded that the contractual provision extending COGSA’s reach must yield to Carmack. Id. at 73. The Second Circuit held, therefore, that Carmack governs Union Pacific’s liability in this case. Id.
The next issue was whether Union Pacific provided the shipper an opportunity, consistent with Staggers, to receive full Carmack liability coverage as well as “alternative terms.” Id. at 75. If so, then under Carmack and Staggers, such alternative terms would limit Union Pacific’s liability. Id. at 75. If not, and in the absence of any other defense, then Union Pacific would be liable for the full value of the cargo. Id. The Second Circuit held that while the bills of lading provided the option of full coverage under COGSA, they did not provide the option of full coverage under Carmack. Id. at 76. The Second Circuit would not assume that the shipper was given the opportunity to receive full Carmack liability coverage as well as “alternative terms”, accordingly, it held that the bills of lading did not satisfy Staggers. Id.
The Second Circuit concluded that Carmack, not COGSA, governed Union Pacific’s liability. Id. at 76. The Second Circuit further concluded that the bills of lading did not satisfy Staggers and remanded this case to the District Court to consider any additional arguments that Union Pacific might raise that it complied with the requirements of Carmack and Staggers. Id.
Learning Point:
Navigating the various complex federal statutes that govern international and domestic transportation of cargo can be complicated. It is important to analyze the specific language incorporated into the bill of lading, as well as all potentially applicable statutes. Knowledge of the varying opinions held in different judicial circuits is wise. Whether you are a subrogating insurer or a defendant carrier, this is especially true when limitations of liability are at issue. It can be the difference between a $500.00 per package limit of liability or the potential for full value liability.
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