Maritime Jurisdiction Pushes Inland
Southern Railway Co. v. Kirby, 125 S. Ct. 385 (2004).
N. Spruill, 2L, Roger Williams School of Law
In November 2004,
the United States Supreme Court ruled that Norfolk Southern Railway
Company can limit its liability to approximately $500 per package after
a train derailment caused an estimated $1.5 million in damage to auto
machinery shipped by an Australian manufacturer. The decision is noteworthy
as it extended federal admiralty jurisdiction inland by holding that
inland cargo carriers can limit their financial responsibility for damage
incurred during transport pursuant to the Carriage of Goods by Sea Act
(COGSA), provided that the agreement to transport goods is a maritime
contract and that the contract evidences an intent to extend limitation
of liability to the various carriers.
International maritime commerce is characterized by shipping contracts
that link ocean shipping lines with road, rail, and air transportation.
Shippers often enter into a single contract for the transportation of
goods across sea, land, and air. Generally, a manufacturer faced with
intermodal transport will enter into a through contract
with a freight forwarder. A freight forwarder, something akin to a travel
agent for cargo, arranges for the transportation of goods by contracting
with a cargo carrier to move the goods. The cargo carrier may then additionally
contract with a downstream carrier to complete a rail, road,
or air leg of the transport. Using a single through shipping contract,
a manufacturer in China can efficiently arrange for the transportation
of clothes from a remote Chinese factory to a retail warehouse in Ohio.
Although the Australian manufacturer in this case, James N. Kirby Pty.
Ltd. (Kirby), entered into a single contract to ship goods from departure
to final destination, other shipping contracts existed between the manufacturers
freight forwarder, cargo carriers, and downstream carriers.
Kirby entered into a through contract with International Cargo Control
(ICC) for the transportation of automobile machinery from Sydney, Australia
to Huntsville, Alabama. An ocean voyage was arranged with a German carrier,
Hamburg Sud, to take the goods from Sydney to Savannah, Georgia. The
336-mile inland voyage to Huntsville was to be carried out by rail on
the Norfolk Southern line.
Contracts for the shipment of goods via ocean transport between foreign
and American ports are classified as maritime contracts and are governed
by the COGSA, a federal uniform body of law for regulating maritime
contracts and settling disputes. When cargo is damaged during transportation,
the COGSA allows a carrier to limit its liability for any fault giving
rise to the damaged goods. The default limitation rate is $500 per package;
however, parties can negotiate a different rate. Himalayas clauses
extend the limitation of liability to agents or independent contractors
of the initial cargo carrier that contracted with the freight forwarder;
parties known as downstream carriers, which can include inland carriers
such as Norfolk Southern.
As Kirbys freight forwarder, ICC was responsible for contracting
with a cargo carrier to transport Kirbys automobile machinery.
In their contract, Kirby and ICC agreed on the COGSA default limitation
of liability rate for any potential accidents arising from the ocean
leg of the journey. A Himalayas clause was incorporated into the shipping
contract, but the parties negotiated a higher limitation rate for potential
accidents arising during the inland leg of the journey (Savannah to
ICCs contract with Hamburg Sud to ship Kirbys equipment
from Sydney to Savannah also adopted the COGSA limitation default of
$500 per package. A Himalayas clause extended the $500 per package limitation
to all downstream carriers. Hamburg Sud arranged for the downstream
carrier, Norfolk Southern, to complete the inland leg of the journey.
While the ocean leg of the journey was completed without harm, the Norfolk
Southern train derailed en-route to Huntsville, causing an estimated
$1.5 million in damage to Kirbys equipment.
Kirby, claiming tort and contract damages, brought suit against Norfolk
Southern in the District Court for the Northern District of Georgia.
The court found Norfolk Southern protected by both Himalayas clauses
and limited the companys liability to $500 per package. However,
on review, the Eleventh Circuit found that the limitation of liability
did not extend to Norfolk Southern and that Kirby was not bound by the
Himalayas clauses. The court reasoned that Norfolk Southern was not
covered by Kirbys through contract with ICC because at the time
the agreement was entered into, Norfolk Southern had not been contracted
as the downstream carrier, and therefore lacked the necessary relationship
with the contracting parties. Second, Kirby was not bound by the Himalayas
clause in the ICC and Hamburg Sud shipping contract because ICCs
negotiations did not extend to Kirby. On review, the United States Supreme
Court found that, pursuant to federal maritime law, both Himalayas clauses
extended limitation of liability protection to Norfolk Southern.
Whether downstream, inland carriers are protected by limitation of liability
clauses in maritime shipping contracts depends on the applicable law.
Outcomes can vary widely depending on whether state or federal law governs
the dispute. Federal maritime law applies when there is a maritime
contract and the dispute is not inherently local. A maritime contract
is determined by the nature and character of the business and whether
the principle objective of the contract is to further maritime commerce.1
In this case, the Court easily concluded that the primary objectives
of both Kirbys through contract and the ICC/Hamburg Sud shipping
contract were to accomplish transportation of goods by sea. The land
portion of the journey, although significant because it was required
to complete delivery of Kirbys automobile machinery, did not render
an intercontinental ocean voyage non-maritime. The true essence of the
shipping contracts were maritime in nature.
As for the local nature of the dispute, the Supreme Court reasoned that
when a state interest overlaps a federal interest, such as preserving
the uniformity in the interpretation of maritime contracts, the federal
law governs. The purposes of the COGSA, to facilitate the creation of
maritime shipping contracts and promote efficient maritime commerce,
would be defeated if clauses in contracts were interpreted differently
depending upon the applicable party and the leg of the journey. Specifically,
if downstream carriers cannot rely on courts to uniformly enforce Himalayas
clauses, shipping rates would likely increase because limitation of
liability would not be guaranteed.
Himalayas Clauses Do Not Require Privity of Contract
The Court disagreed with the Eleventh Circuits finding that since
Norfolk Southern did not have a relationship with a contracting party
when Kirby and ICC negotiated the through shipping contract, Norfolk
is not protected by the limitation of liability clause extended to downstream
carriers. The Court rejected a relationship or privity requirement and
applied a traditional contract analysis, stating that the COGSA shipping
contracts must be construed by their terms, consistent with the intent
of the parties.
The expansive terminology of the Himalayas clause easily covered a downstream
railroad carrier. A finding of coverage, the Supreme Court held, was
consistent with the intent of Kirby and ICC; it was clear during the
formulation of the maritime shipping contract that inland travel was
required to deliver the equipment to the General Motors plant.
ICCs shipping contract with Kirby provided for a higher limitation
rate for inland carriers while Hamburg Suds shipping contract
extended the default $500 per package limitation to all downstream carriers,
including inland carriers. The Supreme Court held that Norfolk Southern
is entitled to the protection of Hamburg Suds Himalayas clause,
thereby limiting liability to $500 per package. The Court reviewed whether
Kirby was subject to ICCs negotiated shipping contract with Hamburg
Sud. Kirby contended that ICC was not acting on behalf of Kirby as an
agent during the formulation of the Hamburg Sud shipping contract; therefore,
Kirby cannot be bound by the lower limitation rate extended to Norfolk
Ruling in favor of the lower limitation rate, the Supreme Court reinforced
an exception to traditional agency law for freight forwarders and cargo
carriers.2 Although it was clear that ICC was not speaking
on behalf of Kirby during its negotiations with Hamburg Sud, intermediaries,
entrusted with goods are agents only in their ability to contract for
liability limitations with carriers downstream, thereby ensuring
the reliability of downstream contracts for liability limitations.3
Thus, a manufacturer may be bound by limitation rates where it had no
part in negotiating the rate.
The Court reasoned that holding otherwise would increase shipping rates
because downstream carriers would be forced to investigate whether freight
forwarders and cargo carriers had other contractual agreements on limitation.
Additionally, the Supreme Court feared that downstream carriers might
unlawfully discriminate against freight forwarders and cargo carriers
by charging higher rates to insure against unreliable limitation clauses.
Consistent with its previous decisions, the Supreme Court held that
limitation clauses can be contractually extended to downstream carriers
such as Norfolk Southern. This ruling, however, has extended the maritime
jurisdiction of the federal courts inland. When a voyage is multi-legged,
but conditioned on a maritime shipping contract, inland carriers can
enjoy the benefits of limitation of liability pursuant to the COGSA.
Limitation of liability and federal maritime jurisdiction could potentially
extend thousands of miles from the ocean, and may also protect rail,
air, and auto carriers, and in those hard to reach locales, donkeys.
1. Kossick v. United Fruit Co., 365 U.S. 731
2. Great Northern R. Co. v. OConnor, 232
U.S. 508 (1914).
Norfolk Southern Railway Co. v. Kirby, 125 S. Ct. 385, 399 (2004).