Second Circuit Holds Shipper Not Strictly Liable For Explosive Cargo
July, 2008
The United States Court of Appeals for the Second Circuit recently clarified the standard used to determine Carrier and Shipper liability when transporting hazardous cargo under the Carriage of Goods by Sea Act (“COGSA”). In re M/V DG HARMONY, 518 F.3d 106, 2008 A.M.C. 609 (2d Cir. 2008). A Shipper will not be strictly liable under COGSA for damages caused by hazardous cargo if the Carrier had general knowledge of the nature of the cargo prior to the shipment, even if the Carrier lacked specific information about the cargo’s risks. Id. In such cases, the Shipper’s liability will be determined based on a negligence standard. Where the Carrier alleges that the Shipper negligently failed to warn it about the characteristics of the shipment, the Carrier must show that the Shipper: (1) had a duty to warn, because the cargo presented dangers which the Carrier could not reasonably be expected to know; (2) failed to provide the adequate warning, and (3) a warning would have prevented the damage. Id.
On its voyage from the US to Brazil, the M/V DG Harmony caught fire when an explosion ripped through its third hold. Id. at 109. The fire, which burned for three weeks, resulted in a total constructive loss of the vessel and its cargo. Id. Among the cargo aboard the vessel were ten containers containing 16,000 kilograms of calcium hypochlorite (“Calhypo”). The Calhypo was manufactured and shipped by PPG Industries, Inc. (“PPG”). Id.
Calhypo is an industrial bactericide and is considered an unstable oxidizer. Id. at 109-110. It is prone to “thermal runaway,” a phenomenon in which heat naturally produced by the substance serves to heat it further generating more and more heat. Id. at 110. Calhypo is listed in the International Maritime Dangerous Goods Code (“IMDG”). Id. at 109-110.
PPG provided documentation with the containers identifying the cargo as Calhypo. Id. at 113. PPG also provided IMDG information and declared that the Calhypo was packed in accordance with IMDG code. Id. In addition, a Material Safety Data Sheet was provided, cautioning that Calhypo was unstable and should be stored “in a cool, dry, well-ventilated place . . . away from heat, sparks, flames, direct sunlight, and other sources of heat, including tobacco products.” Id.
Stevedores stowed PPG’s containers in the vessel’s third hold. Id. at 111. Three of the containers were placed adjacent to the “heated port side bunker [fuel] tank” and exposed directly to the bunker tank’s radiant heat, and the other two containers were block-stowed contiguously with those three containers. Id. The District Court held that the Calhypo caused the explosion. Id. at 118.
Following the loss, various parties filed litigation in the United States District Court for the Southern District of New York. Id. at 113. All claims were settled except the disputes between PPG and the ship-owning and cargo interests. Id. The ship-owning and cargo interests alleged that PPG was liable based upon theories of general negligence, negligent failure to warn and strict liability. Id. Following a bench trial, the District Court found PPG solely liable based upon the theories of negligent failure to warn and strict liability. Id. Thereafter, PPG filed this appeal. Id. at 114.
In its decision, the Second Circuit held that: (1) the Shipper was not strictly liable under COGSA for the explosion; and (2) the Shipper would be liable under COGSA under a negligent failure to warn theory, if a warning, if given, would have altered the Carrier’s stowage decision.
COGSA, Section 4(6), provides that a shipper of flammable, explosive or dangerous cargo “shall be liable for all damages and expenses directly or indirectly arising out of or resulting from such shipment.” Id. at 115. Citing the Second Circuit’s holding in Senator Linie GMBH & Co. KG v. Sunway Line, Inc., 291 F.3d 145 (2d Cir. 2002), the District Court held PPG strictly liable under COGSA. Id. In Senator Linie, the shipper was held strictly liable for damage caused by the spontaneous combustion of hazardous goods being shipped from Korea to the United States. Id.
The Second Circuit, however, reversed the District Court’s holding, stating that Senator Linie is limited to rare circumstances when neither the Shipper nor the Carrier know about the dangerous nature of the cargo. Id. at 115. In the case at bar, both PPG and the Carrier knew that Calhypo was hazardous. Citing its prior holding in Contship Containerlines, Ltd. v. PPG Indus., Inc., 442 F.3d 74 (2d Cir. 2006), the Second Circuit held that a Shipper cannot be held strictly liable for damage caused by hazardous cargo when the Carrier has general knowledge of the cargo’s hazardous nature, and despite this knowledge exposes the cargo to conditions that could produce a hazardous result. Id. In such cases, liability must be determined under a negligence standard, not a strict liability standard. Id. at 116.
The Second Circuit next reviewed the District Court’s holding that PPG was liable for failing to adequately warn the Carrier of the dangers in shipping the Calhypo. Id. The Second Circuit affirmed this holding, finding that PPG had a duty to warn the Carrier and breached its duty by failing to adequately warn the Carrier of the inherent dangers posed by the Calhypo and how it was packaged. Id. The Second Circuit also affirmed the finding that the danger posed by Calhypo, which the Carrier could not reasonably be expected to know, caused the explosion. Id. at 118. However, because the District Court did not determine whether a warning, if given, would have changed the Carrier’s stowage decision, and prevented the harm, the Second Circuit vacated the judgment and remanded for further proceedings. Id.
Learning Point
In the Second Circuit, a Shipper will not be held strictly liable for damages caused by hazardous cargo, when the Carrier is generally aware of the nature of cargo and nevertheless exposes the cargo to potentially dangerous conditions. A specific knowledge of the precise risk is not required. The Shipper’s liability will be judged on a negligence standard. The Carrier will need to demonstrate that the Shipper failed to warn the Carrier of the specific risk and/or acted negligently with respect to the cargo. Therefore, if a Carrier has general knowledge of the nature of a hazardous cargo, it must take extra measures to protect the cargo. If a Shipper has knowledge of a cargo’s hazardous nature, it must warn the Carrier of the specific risks associated therewith.
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