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Editor: Rod Sullivan
Profession: Maritime Attorney

Category: General

Background:

In 1882, over 120 years ago, the International Law Association, and specifially the International Bills of Lading Committee, held a meeting in Liverpool, England the goal of which was to find a way to prevent ocean carriers from screwing cargo owners. The way that shipowners were screwing cargo owners was by inserting in the microscopic print on the backs of their bills of lading exoneration clauses, benefit of insurance clauses, and limitation of liability clauses. Since then, national legislatures around the world have succeeded in protecting cargo owners for the most part, except in the United States, where the Courts have fairly consistently intervened to permit the screwing to go on.

The fact that U.S. courts protect shipowners and permit them to screw cargo owners is somewhat of a wonder. The United States has virtually no indigenous merchant marine anymore and while the country prides itself on a long commercial maritime tradition, that tradition is largely product of the national imagination inspired by privateers during the war of 1812 and a vast shipbuilding surge during the Second World War. Other than those historical aberrations, by and large, the United States has always been a country of importers and exporters, not carriers and shipowners.

Consequently, U.S. courts, by permitting shipowners to screw cargo owners, are causing a shift in national income from U.S. importers and exporters, and their predominantly domestic insurers, to foreign shipowners and the predominantly foreign protection and indemnity clubs. However, U.S. courts appear to be oblivious to the effects of their rule-making.

How the Screwing Takes Place: Exoneration Clauses, Benefit of Insurance Clauses, and Limitation of Liability Clauses

Exoneration clauses were simple. They simply said that the shipowner was accepting the cargo, but was absolved from liability if the cargo got damaged in transit. They still exist for some cargoes like livestock and goods carried on deck pursuant to an "on deck" bill of lading (caution: If the goods are on deck but the cargo owner hasn't agreed to on deck carriage, then it is considered a deviation). However, by and large clear-cut exoneration clauses are hard to find today. Carriers have become far more clever about screwing the unaware cargo owner.

Benefit of insurance clauses are more difficult to spot and have also fallen out of use. They say things like "the shipper shall purchase insurance for the benefit of the carrier" or "the shipper waives subrogation on behalf of its insurance carrier." These clause shift the burden of damage caused by negligence from the shipowner to the cargo owner's insurance company. They are specifically prohibited by the Carriage of Goods by Sea Act so they have fallen out of favor. Section 1303(8) of COGSA says: A benefit of insurance in favor of the carrier, or similar clause, shall be deemed to be a clause relieving the carrier from liability.

The Current Method of Screwing Cargo Owners: the $500 per package limitation

The Carriage of Goods by Sea Act permits shipowners to limit their liability to $500 per package. While no sane person believes that an ocean shipping container, supplied by the carrier and having dimensions of 8 feet wide by 8 feet high and coming in lengths of 20 feet and 40 feet is the type of "package" that Congress was thinking of when it permitted shipowners to limit their liability to $500 "per package", the 11th Circuit Court of Appeals in Atlanta enacted a rule that if the number "1" were inserted in a column on the bill of lading entitled "Number of Packages" then the container would be the package. That case is called Hayes-Leger, Inc. v. M/V Oriental Knight, 765 F.2d 1076 (11th Cir. 1985). Later, the 11th Circuit jettisoned the requirement that there be a "Number of Packages" column on the bill of lading at all and said that even if the number "1" were inserted into a bill of lading column labeled "Quantity" that was good enough for them. The shipowner's liability for loss of the container was $500.

Now an average 40 foot container can hold $1.8 million of photographic film, $500,000 of garments like Levi jeans, J.C. Penney blazers etc., or even $18 million of antiques and historical Buddha statues.

How absurd are the results produced by the rule in the Hayes-Leger case? Well, here is a real life example.

Here are two descriptions of a shipment:

1. "5000 men's jackets in one container"

vs.

2. "one container with 5000 men's jackets"

In example 1, the limitation is $500 per jacket or $2.5 million. If the container is lost at sea, the shipowner must pay the cargo owner the full value of the shipment. In example 2, if the container is lost at sea, the carrier has to pay the cargo owner $500. That's not a misprint. Let me write it out for you: Five Hundred Dollars. That's all.

Manipulating Bills of Lading to Take Advantage of Hayes-Leger

So what do shipowners do, now that they have the benefit of Hayes-Leger? You guessed it---they always put the number "1" in the "Number of Packages" or "Quantity" column on their bills of lading.

Some cargo owners have even gone to far as to put on the shipping documents "THIS SHIPMENT CONSISTS OF 5000 PACKAGES UNDER THE CARRIAGE OF GOODS BY SEA ACT." Does it do any good? Not so far it hasn't.

The Harter Act, 46a USC 190-198 may offer a way to get carriers to stop this practice though. Section 194 provides for a fine of up to $2000 per bill of lading if the carrier refuses to issue a proper bill of lading to a shipper upon request.

Cargo Owners Fight Back with the Harter Act

Here are some questions which have yet to have been answered:

Question: Can a shipowner be liable under Section 194 if it issues a bill of lading which doesn't declare the number of packages listed by the shipper in the shipping documents?

Section 194 of the Harter Act provides:

For a violation of any of the provisions of sections 190 to 196 of this Appendix the agent, owner, or master of the vessel guilty of such violation, and who refuses to issue on demand the bill of lading herein provided for, shall be liable to a fine not exceeding $2,000. The amount of the fine and costs for such violation shall be a lien upon the vessel, whose agent, owner, or master is guilty of such violation, and such vessel may be libeled therefor in any district court of the United States, within whose jurisdiction the vessel may be found. One-half of such penalty shall go to the party injured by such violation and the remainder to the Government of the United States.

Section 193 of the Harter Act provides:

It shall be the duty of the owner or owners, masters, or agents of any vessel transporting merchandise or property from or between ports of the United States and foreign ports to issue to shippers of any lawful merchandise a bill of lading, or shipping document, stating, among other things, the marks necessary for identification, number of packages, or quantity, stating whether it be carrier's or shipper's weight, and apparent order or condition of such merchandise or property delivered...

The shipowners take the position that if they issued a bill of lading which accurately describes the cargo as, to continue with the example above, "1 container s.t.c. 5000 pieces of men's jackets" they cannot be liable under Section 194. However, cargo owners say that if they demand a bill of lading which describes the cargo as "5000 packages of men's jackets in container #________" the Harter Act requires that the carrier issue "the bill of lading herein provided for" which requires it to declare the number of packages in the shipment if the number of packages is declared to it.
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Question: If shipowners attempt to evade the provisions of Section 190 of the Harter Act by manipulating the description of the cargo on the bill of lading to effectively exonerate themselves from liability for cargo damage by setting the limitation at a nominal or de minimus amount, is that a violation of Section 194?

Section 190 of the Harter Act says:

It shall not be lawful for the manager, agent, master, or owner of any vessel transporting merchandise or property from or between ports of the United States and foreign ports to insert in any bill of lading or shipping document any clause, covenant, or agreement whereby it, he, or they shall be relieved from liability for loss or damage arising from negligence, fault, or failure in proper loading, stowage, custody, care, or proper delivery of any and all lawful merchandise or property committed to its or their charge. Any and all words or clauses of such import inserted in bills of lading or shipping receipts shall be null and void and of no effect.

The Imperial Shipping Committee report of 25 February 1921 noted that one of the purposes of any Convention should be "to prevent evasion of the general liability by any system of low or nominal agreed values." [See Sturley, The Legislative History of the Carriage of Goods by Sea Act and the Travaux Preparatoires of the Hague Rules, Littleton, Colorado, 1990 Vol. II, p. 127]. Cargo owners argue that limiting a carrier's liability to $500 for a shipment valued at millions of dollars is really an exoneration, not a limitation, and that it violates Section 190.

What will happen? No one really knows. In general, the Courts don't care, Congress doesn't care, and the Maritime Law Association of the United States, which is primarily run by attorneys who represent shipowners, has been unable to reach any agreement on how the law should be changed.

Perhaps some court, somewhere, will fix the problem. One can only hope.