The 2nd Circuit Court of Appeals affirmed a district court decision that found a vessel liable in rem for damage to pipe that was shipped in 2006 from China to the United States (MAN Ferrostaal, Inc. v. M/V Akili. 2nd Circuit. 11-0486-cv(L). Dec. 6.)
A friend of the court brief filed by the Chamber of Shipping of America had cautioned the 2nd Circuit that not reversing the lower court decision “would adversely affect the ability of parties involved with the transportation of cargo by sea to contract for the carriage of cargo to or from the United States. It would change the long-standing case law that has allowed parties to transportation contracts to rely on the terms of the charterparty contracts and other contracts that they have negotiated. It would allow sub and sub-sub charterers of ships, and parties to other contracts, to bypass contracts they have entered by suing vessels directly on the terms of bills of lading issued between charterers rather than on the terms of the contracts that they negotiated and to which they agreed.”
MAN Ferrostaal (now operating as Coutinho & Ferrostaal) procures steel from international suppliers, and arranges transportation. It purchased 9,960 pipes manufactured in China by Zhongqing Petroleum Steel Pipe Co. for a U.S. pipe coating business and arranged for them to be shipped to New Orleans aboard the Akili.
Some of the pipe was damaged and the district court found the plaintiff had carried its burden in showing it had a claim for damage against the Akili, saying the ship was liable in rem. Akili, the shipowner and manager appealed, saying the district court had erred.
The 2nd Circuit upheld the district court’s decision, though it’s said its analysis was different from that of the district court.
Before the cargo was loaded on Akili, a number of charters and sub-charters were executed:
- Akela time-chartered Akili to Seyang Shipping Ltd. That charter specified that all bills of lading issued under the charter would incorporate a “clause paramount.”
- Seyang, in turn, sub-chartered the vessel to S.M. China for a voyage from Shanghai to Houston and New Orleans.
- S.M. China executed a part-cargo charter with Ferrostaal for the carriage of the pipe from Shanghai to New Orleans.
The Ferrostaal-S.M. China voyage charter agreement placed responsibility for loss “caused by improper or negligent stowage, or discharge, or care of the goods” on the “owners” of the vessel. It further specified that stowage “is to be under the master’s supervision and responsibility as owners’ agent.” The “owner” was defined as S.M. China. The agreement also contained a “free-in-and-out” provision that stated the handling of cargo was to be “free of risk… to the vessel.”
The voyage charter party between Ferrostaal and S.M. China also contained a “clause paramount,” which stated in part, “(n)otwithstanding any other provisions in this contract, any claims for loss or damage to cargo shall be governed by the Hague-Visby rules.” In the United States, the Carriage of Goods by Sea Act (COGSA) embodies the Hague-Visby rules.
A bill of lading was issued by China Ports International Shipping Agency Ltd., as the agent of S.M. China, to Zhongqing, the shipper, and then was transferred to Ferrostaal through banking channels pursuant to the “cash against documents” term of the purchase order. The bill of lading contained a clause paramount that incorporated the Hague-Visby rules.
Upon arrival in New Orleans, it was discovered the steel pipes had been placed at the bottom of a cargo hold and damaged when heavier pipes were placed on top. The pipes were repaired by Houston Tubulars Inc., which was paid $286,078.32 by Ferrostaal.
Ferrostaal filed complaint in rem against the Akili and in personam against Akela, Almi, and S.M. China. Akela and Almi filed a cross-claim against S.M. China. The lower court held the Akili liable in rem and dismissed the claims for in personam liability against Akela and Almi.
The 2nd Circuit said the suit boiled down to two issues. The first was whether an in rem proceeding rendering the Akili liable for damage to, or loss of, cargo was unavailable in this matter because a vessel is not a “carrier” within the meaning of COGSA. The appellants argued that because a “vessel” is not a carrier under COGSA, the Akili cannot be liable in rem for damage to, or loss of, cargo, but the court disagreed. The 2nd Circuit said a vessel’s in rem liability for damage to cargo exists under maritime common law, not COGSA, for a violation of a carrier’s contractual or statutory — COGSA’s — obligations
The second issue was whether the free-in-and-out provision in the voyage charter party agreement between Ferrostaal and S.M. China purportedly absolving the Akili of in rem liability was enforceable. The court resolved the second issue against enforcement of the free-in-and-out provision so far as it might be construed to prevent in rem liability of the vessel.
“In doing so, we do not decide whether COGSA applied as a matter of law to this voyage because, even if it did not, the Voyage Charter Party’s Clause Paramount contractually incorporates the Hague-Visby rules prohibiting a carrier from contracting for a waiver of its obligations regarding damage to cargo,” the court said.
Attorney Vince DeOrchis, the owner for Akili, its owner, and charterer said “at the end of the day the owner is still paying for the losses, even though he himself has been held not personally liable… It’s a kind of perverted logic to hold a man is not liable, but then his property is.
“It definitely creates problems because what you may very well see in the future is more subcharterers and sub-subcharterers are going to be taking direct action against the vessel rather than wasting their time with the charterers who in this financial climate may not be doing very well,” they said.
The Chamber of Shipping of America also expressed concern in its amicus brief that the lower court decision could affect the liner trade if upheld because it “could allow parties to a series of service contracts to avoid the terms of the contracts by suing the vessel in rem on the terms of a bill of lading.
“The change in law brought by the opinion below could deprive a party from the benefits of the terms of a service contract it had negotiated,” the chamber said.
