Sea Grant Law Center

Federal Maritime Jurisdiction Pushes Inland

Norfolk Southern Railway Co. v. Kirby, 125 S. Ct. 385 (2004).

Benjamin 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 manufacturer’s 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 Kirby’s freight forwarder, ICC was responsible for contracting with a cargo carrier to transport Kirby’s 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 Huntsville).

ICC’s contract with Hamburg Sud to ship Kirby’s 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 Kirby’s equipment.

The Lawsuit
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 company’s 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 Kirby’s 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 ICC’s 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.

Federal Maritime Law
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 Kirby’s 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 Kirby’s 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 Circuit’s 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.

Limited Agency Rule
ICC’s shipping contract with Kirby provided for a higher limitation rate for inland carriers while Hamburg Sud’s 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 Sud’s Himalayas clause, thereby limiting liability to $500 per package. The Court reviewed whether Kirby was subject to ICC’s 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 Southern.
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 (1961).
2. Great Northern R. Co. v. O’Connor, 232 U.S. 508 (1914).
3. Norfolk Southern Railway Co. v. Kirby, 125 S. Ct. 385, 399 (2004).


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