Kirby Case: An Expanded Analysis

Friday, November 12, 2004

Following is a more expanded analysis of the recent U.S. Supreme Court decision than the short summary provided yesterday. This analysis was prepared by Chester Hooper or Holland & Knight.

THE SUPREME COURT INTERPRETS HIMALAYA CLAUSES LIBERALLY TO BRING UNIFORMITY TO MULTIMODAL TRANSPORTATION

On November 9, 2004, The Supreme Court of the United States decided Norfolk Southern Railway Co. v. James N. Kirby, Pty Ltd., docket No. 02­1028 (Nov. 9, 2004). The Court reversed the Eleventh Circuit and held that Himalaya Clauses in both an NVOCC's bill of lading, and in a VOCC's bill of lading extended the bill of lading COGSA package limitation or other protection to the participating land carrier, the Norfolk Southern Railway Co., which was hired by an affiliate of the VOCC. The opinion also upholds the limitations in the VOCC's bill of lading even though there was no strict privy of contract between Kirby, the cargo interest, and the VOCC.

The case involved a shipment of cargo from Australia to Athens, Alabama by way of Huntsville, Alabama. Kirby, the cargo interest, received a though, multimodal bill of lading from an NVOCC, International Cargo Control, for the carriage from Australia to Huntsville. The NVOCC in turn contracted with Hamburg Süd, the VOCC, to undertake to perform the carriage. The VOCC issued its through, multimodal bill of lading for the same carriage from Australia to Huntsville.

The cargo was discharged in good condition in Savannah, Georgia and was delivered to the Norfolk Southern Railway to carry the cargo from Savannah to Huntsville, Alabama. (A truck was to have carried the cargo from Huntsville to Athens.) The cargo was damaged during the rail carriage.

Kirby sued the railroad in tort and argued that the railroad could not limit its liability, because there was no contractual relationship between cargo and the VOCC carrier, which was necessary to give the railroad the Himalaya protection from the VOCC bill of lading. Cargo argued that the NVOCC bill of lading’s Himalaya Clause was not properly wording to extend its protection to the railroad.

The United States Court of Appeals for the Eleventh Circuit agreed with cargo interests’ theory and granted Kirby complete recovery against the railroad without the benefit of the COGSA and bill of lading package limitations.

The Supreme Court reversed that decision. The opinion written by Justice Sandra Day O'Connor is a very practical opinion. It explains that admiralty jurisdiction is not limited to the sea leg of a voyage, but that Court should use a "conceptual" rather than a "spatial" concept to determine when admiralty jurisdiction applies. In an appreciation of the importance of uniformity in the law of multimodal carriage, Justice O'Connor seemed to step back and use a common sense, practical approach:

(Cargo interests) emphasize that, at bottom, this is a diversity case involving tort and contract claims arising out of a rail accident somewhere between Savannah and Huntsville. We think, however, borrowing from Justice Harlan, that "the situation presented here has a more genuinely salty flavor than that." Kossick v. United Fruit Co., 365 U.S. 731, 742 (1961).

Slip op. at 5­6.

The Court held that whether a contract was an admiralty contract depended upon "'the nature and character of the contract' and the true criteria is whether it had 'reference to maritime service or maritime transactions.'" Slip op. at 7. North Pacific S.S. Co. v. Hall Brothers Marine Railway and Shipbuilding Co., 249 U.S. 119, 125 (1919).

After determining that admiralty law applied, the Court interpreted the Himalaya Clause in both the NVOCC bill of lading and the VOCC bill of lading liberally. It criticized lower Court decisions that have read Robert C. Herd & Co. v. Krawill Machinery Corp., 359 U.S. 297 (1959) and have interpreted Himalaya Clauses restrictively. The Supreme Court thus held that Himalaya Clauses in both the NVOCC and the VOCC bill of lading were sufficient to extend the respective carrier's defenses to the railroad.

Perhaps the most significant aspect of the opinion held that privity of contract was not necessary between cargo interests and the VOCC to allow the VOCC to enjoy the protection of the limitation amount of its own bill of lading. The Court reasoned that the NVOCC, although not an agent of cargo interests, did act as a limited agent of cargo for the purpose of accepting the liability limit in the contract with the VOCC. The Court held strict privity of contract between cargo and the VOCC was not necessary for three reasons:

(1) Binding the cargo interests to the limit its NVOCC negotiated with the VOCC tracked industry practices. The Court explained that in intercontinental multimodal shipments, carriers may not know whether they are dealing with an intermediary or the cargo owner. Even if the carriers do know that they are dealing with an intermediary, they might not know how many other intermediaries came before or what obligations might be outstanding amongst them. The task of gathering this information might be costly or even impossible.

(2) If the VOCC could not depend on its bill of lading limits, it would probably want to charge higher freight rates to NVOCC's to protect itself in the event that the VOCC was not protected in suits brought by cargo interests.

(3) The decision granting the VOCC the limitation and extending the VOCC's Himalaya Clause as well as the NVOCC's Himalaya Clause to the railroad produces an equitable result. The Court noted that cargo interests retained the option to sue the NVOCC for any loss suffered by cargo, because the NVOCC had allowed the VOCC to lower its liability limits below the limit agreed between cargo and the NVOCC. This significant opinion should go a long way to unify the United States law governing the multimodal carriage of goods. It should bring a practical breath of fresh air to the industry.

For more information please contact:

Chester D. Hooper

Telephone: 212/513-3444

Email: Chester.Hooper@hklaw.com

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