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Contracts: Look at the Big Picture

Contracts: Look at the Big Picture

The Transportation Newsletter
(October 18, 2011)

For many motor carriers, when a cargo claim is presented, the first document that is referenced is the motor carrier’s tariff. This is appropriate, and the tariff oftentimes contains the most applicable terms for how the claim is to be handled. However, it is equally important for the motor carrier to keep in mind the big picture for the entire shipment from which the claim arose and to review all the shipping documents relevant to that shipment.

This Big Picture view was illustrated by the recent case of Mattel, Inc. v. BNSF Railway Co., 2011 U.S. Dist. Lexis 495 (C.D. Cal. Jan. 3, 2011). In this case, a cargo claim arose out of a shipment of toys from China to Fort Worth, Texas. Mattel claimed to be the shipper and beneficial owner of the goods. It contracted with an agent, CMA-CGM, S.A., to arrange for the shipment. CMA contracted with various shippers, including an ocean carrier and a railway. The shipment was moved by ocean from China to the United States. CMA issued a through bill of lading for the entire shipment, and it contracted with BNSF to move the shipment by rail from Long Beach, California to Fort Worth. The BNSF train carrying the shipment derailed in Texas, generating the cargo claim. Mattel brought suit against BNSF to recover for its cargo loss.

The CMA bill of lading contained a clause extending application of the Carriage of Goods by Sea Act (“COGSA”) to the inland leg of the shipment. The bill of lading also contained a Himalaya clause containing standard terms, and a separate clause governing subcontract in indemnity. This latter clause provided that:

  1. The Carrier shall be entitled to subcontract the Carriage on any terms whatsoever.
  2. The Merchant undertakes that no claim or allegation shall be made against any Person whomsoever by whom the Carriage is performed or undertaken (including all Sub-Contractors of the Carrier), other than the Carrier, which imposes or attempts to impose upon any such Person, or any vessel owned by any such Person, any liability whatsoever in connection with the Goods or the Carriage of the Goods, whether or not arising out of negligence on the part of such Person and, if any such claim or allegation should nevertheless be made, to indemnify the Carrier against all consequences thereof. Without prejudice to the foregoing every such Person shall have the benefit of every right, defense, limitation and liability of whatsoever nature herein contained or otherwise available to the Carrier as if such provisions were expressly for its benefit; and in entering into this contract, the Carrier, to the extent of these provisions, does so not only on his own behalf but also as agent and trustee for such Persons.

BSNF moved to dismiss the lawsuit on the basis of this clause, which provided that Mattel was prohibited from suing subcontractors of CMA, such as BSNF. The Court first concluded that BSNF was entitled to enforce the terms from the through bill of lading because it fell within the definition of the parties covered by the Himalaya clause in the bill of lading. Norfolk Southern Railway Co. v. Kirby, 543 U.S. 14, 30 (2004). Next, the Court concluded that the covenant not to sue BNSF that was contained in the through bill of lading was permissible under Section 1303(8) of COGSA. Therefore, the covenant not to sue was effective and binding on Mattel, and the suit against BNSF was dismissed.

Court concluded that the covenant not to sue BNSF that was contained in the through bill of lading was permissible under Section 1303(8) of COGSA. Therefore, the covenant not to sue was effective and binding on Mattel, and the suit against BNSF was dismissed.

Under the principles announced in Kirby and by the later case of Kawasaki Kisen Kaisha Ltd. v. Regal-Beloit Corp., 130 S.Ct. 2433 (2010), and also the Second Circuit’s decision in Royal and Sun Alliance Insurance, PLC v. Ocean World Lines, Inc., 612 F.3d 138 (2nd Cir. 2010), the reasoning of Mattel v. BNSF would apply equally to a cargo claim that arises from transport by a motor carrier. In that situation, when the claim is first presented to the motor carrier, the common procedure would be for the motor carrier to examine its own tariff, any bill of lading that it may have issued, any shipping contract that it may have with the shipper, and other such documents.

As noted, this is the appropriate first step for the motor carrier to take.

However, for an international, multi-modal, air, brokered, interlined, or like shipment, the motor carrier should also seek to learn what other documents have been issued relevant to the shipment. As in Mattel, these documents will oftentimes contain terms that are beneficial to the carrier. In Mattel, this took the form of a covenant not to sue. In other cases, such as with a shipment that begins as an international air shipment, the air waybill will oftentimes contain terms incorporating and enforcing limitations permitted by the Warsaw or Montreal Conventions, which terms oftentimes will be extended to apply to the motor carrier handling the ground segment of the shipment. These terms can significantly limit the period for filing claims and suits and can also significantly limit the liability of the motor carrier for any loss to the shipment. For example, under the Montreal Convention, governing air shipments, the claims period can be reduced to 14 days, and under COGSA, the limitation on liability can be reduced to $500 per package. As a result, the carrier can achieve a dramatic success, as in Mattel, where the suit was dismissed outright, or it can achieve a significant limitation on any amount it must pay to the shipper or consignee.

We often advise motor carriers to develop tariffs, contracts, and bills of lading for use in their shipments. This is always important. However, what Mattel demonstrates is that it is equally important to know the contracts that apply to other portions of the shipment and, as best the motor carrier can, to determine those terms as well. Not only does this enable the motor carrier to benefit from terms contained in the upstream contract, it also has a bearing on the motor carrier’s ability to enforce its own contract terms. At the end of the day, motor carriers must always look at the big picture and and go beyond the documents concerning the motor carrier’s limited exposure to the freight.

Click here to view the full Fall 2011 edition of the Transportation Industry Newsletter.

C. Fredric Marcinak
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Associated Attorneys
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