20-20 hindsight
A carrier should not be punished if its attempts at mitigating a customer's cargo charges were reasonable, not if they possibly could have been better, concluded an appeals court, overturning a decision in a case involving containers of garlic that ended up rotting on a dock. (APL Co. Pte. Ltd. v. Blue Water Shipping U.S. Inc., Second Circuit, 08-1516, Jan. 8.)
APL was hired to ship 29 refrigerated containers of garlic to the port of Los Angeles, where the garlic was to be picked up by the non-vessel-operating common carrier Blue Water and delivered to its ultimate purchaser, Akata Food Trading Co. APL unloaded successive shipments of the garlic onto its dock from March 31 and April 22, 2003 and APL notified Blue Water that the garlic was ready for Blue Water's transshipment to Akata.
Meanwhile, a number of holds were placed by federal agencies, and U.S. Customs and Border Protection levied antidumping tariffs on the cargo.
In the end, Blue Water never came to collect the garlic, which passed into constructive custody of CPB while remaining at APL's terminal in the reefer containers.
Critically, APL's bill of lading stated that its cargo obligations ceased once the garlic passed to Customs' control, and the district court found Blue Water, not APL, was responsible for resolving all cargo holds, including the ones placed by Customs, and for paying demurrage charges until the garlic was offloaded from APL's reefers.
APL and Blue Water employees communicated about picking up the cargo, including Blue Water's April 21 plea for a 'few more days' while it and Akata attempted to resolve holds affecting reefers that had arrived first.
On May 7 APL informed Blue Water that about $75,000 in demurrage had accrued on 26 of the reefers. Surmising the demurrage likely exceeded the value of the garlic, APL asked Blue Water if there was any reason that Akata would pick up the garlic if it was not worth it to them, an idea with which Blue Water said it agreed.
When Blue Water requested more time to resolve the dilemma with Akata, it was rebuffed by APL, which declared that the garlic had to be collected by May 9 or be sent to auction. The ultimatum went unanswered, but APL did not immediately seek to auction the garlic.
APL said it was unaware of regulatory requirements relating such auctions and said through discussions with low-level Customs employees it came to believe the cargo would have to remain at the terminal for six months and that Blue Water would have to file a 'letter of abandonment' before the cargo could be disposed of.
Then on June 5 a more senior Customs employee told APL there was no six-month requirement. But on June 11, APL was told an FDA inspection of the garlic was needed before the garlic was sold and Customs directed APL to a bonded warehouse company to handle the sale. Although an APL survey done on May 23 had determined otherwise, the FDA found in a series of tests completed on July 11 that the garlic was unfit for sale.
The last of the garlic was not destroyed until Aug. 25. APL sought $474,072.18 in damages, including $402,700 in demurrage charges. The district court found Blue Water liable in the contract, but also concluded APL had failed to reasonably mitigate its damages and entered judgment for APL for only $184,910.
The trial court faulted APL for failing to ask the warehouseman and Customs for a quick sale, unreasonable delay in asking the warehouseman to fill out forms, and failure to 'pressure' the warehouseman and Customs. Had APL acted reasonably, the court contended, Customs and the warehouse would have 'likely' completed a quick sale by May 30.
From the May 23 cargo survey, the court inferred the garlic would still have been saleable, though it also acknowledged the sale might have been delayed past May 30 and some garlic would have rotted. The court 'resolved this tension by holding that Blue Water was not liable for either the demurrage charges that accrued after June 7 or for the eventual costs of disposal.'
In reversing the trial court, the Second Circuit noted that under 'well-settled principles of contract law' a party injured by a breach is entitled to recover damages that are the 'natural and probable consequence of the breach,' but that the injured party, 'bears an obligation to make reasonable efforts to mitigate its damages and failure to do so may cause a court to lessen the recovery.'
The district court had said an injured party does not have to be successful in mitigating damages, but if it takes action within the 'range of reason' then the breaching party remains liable even if mitigation attempts fail. And the standard of what reason require of an injured party is lower than in other branches of law, the court said, citing the case Ellerman Lines Ltd. v. The Steamship President Harding, 288 F.2d 288, 290 (2d Cir. 1961).
But while the trial court cited Ellerman, it did not apply it correctly, the Second Circuit said. For example, the trial court found unreasonable delay resulted from the mistaken understanding about Customs requirements for a quick sale. But the appeals court said, 'the fact that APL could have been more effective in its efforts to arrange a quick sale ' does not end the inquiry. It merely provides texture for examination of the reasonableness of APL's mitigation efforts.'
The appeals court said, 'all of the faults and missteps the trial court assigns to APL came after APL had fully completed its performance.' Missing from the trial court was 'an analysis of these shortcomings against the more forgiving standard accorded a party that has fully performed all of its contract obligations and is thrust into the shoes of the breaching party.'
The appeals court said there was nearly a complete absence of factual findings or assessment by the district court of Blue Water, which had 'greater financial interest in securing the retrieval or disposal of the rotting garlic.
'As the breaching party, Blue Water was not entitled simply to shift any expenses or costs associated with the cargo disposal delay to APL,' the circuit court said.
'Blue Water's own knowledge of Customs rules and regulations and its post-breach conduct perhaps provide a yardstick by which to measure the reasonableness of APL's mitigation efforts,' the court said, noting the NVO did not direct APL to auction the garlic until 18 days after the trial court found that APL should have known to request a quick sale through Customs.
'The circumstances that led Blue Water, an apparently sophisticated player in the industry, to dither about requesting an auction sale could shed some light on the reasonableness of the delays the trial court charged to APL,' the court said.
The court vacated the portion of the trial court's judgment that reduced the amount of damages awarded APL for failure to mitigate its loss and remanded the matter back to the district court.