Supply Chain Chokeholds & Cargo Contamination Liability

Supply chain ensnarement is a headache caused by a confluence of events arising out of geopolitical issues in many areas. While I can bore you with the transportation aspects of the delay, most people just hope they get fixed. Indeed, most people are not focused on the liability issues arising from these supply chain delays. But company folks with perishable goods being shipped in containers are acutely focused on these issues. Who pays for the damages when high-end seafood is stuck in a container being carried by a container vessel sitting idly by off the coast of Long Beach, California, for weeks longer than was expected because there is no space to offload at the discharge port? To solve this question, a lawyer needs to study maritime documents like a bill of lading or a contract of affreightment or a charter party and know a little about a cargo damage statute that dates back to 1920, the U.S. Carriage of Goods by Sea Act (COGSA), reprinted in the note following 46 U.S.C. § 30701.

Let’s consider a typical cargo contamination damage scenario as a baseline. Earlier this year, an ocean cargo container carrier issued a bill of lading for a refrigerated container containing 966 cases of frozen high-end seafood (the Cargo). The Cargo was laden on a vessel in Ningbo, China, to be transported to Savannah, Georgia. The set temperature provided for on the bill of lading was -35° C. When the vessel arrived in Savannah, inspections and surveys of the Cargo indicated damage due to elevated temperature for a prolonged period: the standard being that the Cargo must be discarded if exposed for more than 72 hours to temperatures above -20° C. The invoice value of the Cargo is $3 million.

To begin to unpack the legal issues, focus on the bill of lading, which describes the goods being shipped. The following terms of the bill of lading will be relevant to your analysis:

• The face of the bill of lading: “No. of Pkgs – 966,” then under “Description of Goods” on the same line: “Cases.”
• Clause 1 (Definitions): “‘US COGSA’ means the United States Carriage by Sea Act, 46 U.S.C. App. § 1330 et seq. as enacted 1936 and any subsequent recodification thereto.”
• Clause 6(1) (Carrier’s Responsibility and Clause Paramount/Port-to-Port Shipment): “Notwithstanding anything else in this Bill of Lading to the contrary, on shipments to or from the United States (as defined by US COGSA), the rights and liabilities of the parties shall be subject exclusively to US COGSA.”
• Clause 8(4) (Liability Provisions/US COGSA limitation to U.S. carriage): “When the Carriage is to or from the United States of America as stipulated in Clause 6(1)…the Carrier’s limitation of liability in respect of the Goods, shall not exceed USD 500.00 per Container, package, bundle, pallet or other unit….”

With this baseline, one must be mindful of a 1920 U.S. statute that provides a statutory package limitation for goods damaged of $500 per package. The word “package” is not defined in the COGSA, which leaves courts to determine the issue by generally considering the intent of the contracting parties when that intent can be reasonably discerned. Typically, disputes arise as to the number of packages for limitation purposes or whether the arrangement of the goods (e.g., arranged in a manner specific for shipment or loose) constitutes a package. Indeed, the primary focus of the courts in resolving such issues is the information set out in the applicable bill of lading.

In our scenario, there is likely to be no ambiguity found as to the number of packages and what constitutes a package. The “No. of Pkgs” column lists “966,” and the corresponding line under the “Description of Goods” column lists “cases.” The term “cases” is accepted and recognized in ocean shipping as a customary means to hold and transport goods, such as the frozen seafood here. On this point, if the adjudicating court applies COGSA to this claim, then the package limitation total using simple math is $483,000 (966 x 500 = 483,000). With an invoice value of $3 million, can the poor restauranteur who expected to sell that seafood for invoice price or higher be limited to $483,000? Possibly. The cargo interest may well have insurance to fill the gap between invoice value and COGSA recovery. In that case, the insurance may make the cargo owner near whole, minus the deductible, and its subrogated insurer would take the claim to court to seek relief (or most likely settle on best terms).

How can a cargo interest or subrogated insurer help its settlement position regarding this less-frozen-than-hoped cargo? If the cause of the cargo contamination were truly the supply chain delay, it would be tough. Another clause often cited in bills of lading concerns the disclaiming of losses caused by delay. This is not absolute. If a vessel is delayed because it deviated from its intended voyage, which then caused increased risk or danger to the cargo, an exception exists to the $500 package limitation. Exceptions keep maritime lawyers employed and insurance companies in need of good advice. These issues will be sorted out in some instances pre-lawsuit or early into discovery. With experienced maritime practitioners, the parties will exchange documents and look to discuss a reasonable resolution that keeps litigation costs manageable and live to fight another day.

With these concepts, you’ll be more than ready to handle the next cargo loss coming to a port near you. And with a bit of help from your friends at the ABA TIPS admiralty committee, that is. Happy hunting.