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The Importance of a Good Cargo Contract

The Importance of a Good Cargo Contract

The Transportation Newsletter
(July 1, 2011)

In January 2011, Rob Moseley tried a cargo case in Arkansas that once again demonstrates the importance of a carrier having in place a good contract with the shipper or broker to control its exposure for cargo loss.

In Bay Machinery Services, Inc. v. Codan Forsikring A/S, a Danish manufacturer imported wind turbines into the United States. In late 2004, the manufacturer shipped a nacelle for a wind turbine from Denmark to Tiskalaw, Illinois. To effect the shipment, the manufacturer arranged for ocean carriage with a steamship company and inland carriage with a logistics company. The logistics company contracted with a heavy-haul motor carrier, to move the freight from the Port of Beaumont, Texas to Illinois. While being transported in Arkansas, the nacelle came unsecured from the trailer, fell to the side of the road, and sustained damage. Codan, the manufacturer’s subrogated insurer, compensated the manufacturer for the loss then brought suit against the logistics company and motor carrier to recover its loss, which it claimed exceeded $1 million.

A primary issue in the case was the extent of the exposure of the motor carrier for the loss. As with any motor carrier, it had three opportunities to limit its exposure: its contract with the shipper and/or broker; the bill of lading; and its tariff. The motor carrier did not have a tariff, and it did not issue its own bill of lading. In addition, because the ocean carrier did not arrange for inland transport under a through bill of lading, it could not benefit from any limitations in the ocean bill of lading issued by the steamship line. That left only the contract with the logistics company.

Unfortunately, the broker-carrier contract did not contain an explicit statement limiting the motor carrier’s liability, such as standard language stating that “In no event shall Carrier’s liability for cargo loss exceed $100,000.” That forced the motor carrier to argue that because the contract required it to carry insurance in the amount of $100,000 or the declared value of the machinery, the contract contemplated that the broker would notify the motor carrier if the cargo’s value exceeded $100,000 in order to allow the motor carrier to comply with the increased insurance requirement. The motor carrier further argued that in the industry, it is not unusual for a motor carrier like it to purchase increased cargo insurance for specific loads. The motor carrier also pointed out that $100,000 is the standard amount of cargo insurance in the industry unless the carrier is informed that the cargo exceeds this amount, triggering the need for additional insurance.

The motor carrier also relied on the load confirmation sheet, assigning the nacelle to it for shipment, which indicated that “A minimum of $100,000 cargo insurance is required unless otherwise indicated.” Because no notice was given to the motor carrier that the machinery had a value exceeding $100,000, the motor carrier argued that its liability was capped at that amount.

The problem for the motor carrier was that its contract with the broker also provided that the motor carrier agreed to be liable for “full actual loss.” The motor carrier argued, however, that this language is not inconsistent with a corresponding released rate or limitation on liability. For example, assume cargo is a total loss during transit. If the cargo had an invoice value of $75,000 as sold, but the shipper is able to substitute another item to satisfy its obligation to its customer, then the shipper has not lost the sale, but only the cost to produce the replacement item (which is $50,000). Therefore, the motor carrier argued that, under the terms of the contract, the carrier cannot argue that costs of production are the proper value because the contract defines “full actual loss” as invoice value. Thus, the motor carrier argued, “Full actual loss” is completely consistent with having a released rate of $100,000 per shipment.

Ultimately, the Court held that while the broker-carrier contract did not limit the motor carrier’s liability, the load confirmation provided by the broker to the motor carrier did. That document’s reference to a requirement for $100,000 of insurance coverage “unless otherwise indicated” was dispositive in the Court’s mind. As the Court held, “It is undisputed that the standard in the trucking business at the time was for cargo insurance coverage of $100,000, and [the motor carrier’s] uncontroverted testimony was that if the particular load is more valuable than the standard insurance coverage, it is routine and usually required for [it] to obtain supplemental cargo insurance.” Because the broker never informed the motor carrier that the cargo was more valuable than typical cargo, the motor carrier’s liability was limited to $100,000.

Although the motor carrier prevailed in its attempt to limit its liability to $100,000, it was only by virtue of the fortuitous language the broker inserted into the load confirmation. Had the motor carrier had in place a tariff limiting its liability, a bill of lading containing limiting language, or a contract with the shipper or broker capping its liability at $100,000, the motor carrier’s argument would have been much easier to assert. Thus, although a victory for the motor carrier , the case illustrates once again the importance of having the right documents in place ahead of time to help control the carrier’s exposure to cargo loss and defense cost.

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

C. Fredric Marcinak
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