Focus on cargo claims

ONE of the more vexing and difficult problems in recent arbitrations is determining if, how and where a cargo loss occurred. This is especially true in trades where the ship's officers do not have an opportunity to see the cargo to determine if it is in apparent good order and condition upon loading.

Upon discharge or often shortly thereafter, the consignee asserts that the cargo is damaged and is "off-spec". Assuming that the loss occurred on the vessel (which is a big "if"), then the next issue is whether the owner is liable for the resulting damage. In a close case where the evidence is evenly divided, the result may well turn upon the exact wording of the charter and what clauses have been incorporated by reference.

Before dealing with the wording of the charter, it must be emphasised that the cargo interests initially have the burden of persuading the trier of fact that the cargo was delivered on to the vessel at the port of loading in good order and condition and delivered by the owner at the port of destination in a damaged condition. If the cargo interests cannot prove this, they lose. There is no need to discuss the owner's obligation under the contract of carriage. It is only when the goods are damaged while in the custody and control of the owner that the trier of fact must examine the owner's obligations under the contract of carriage.

This article focuses on the common arrangement involving a cargo claim arising under a voyage charter - a typical case of private carriage. The evidence is evenly divided or inconclusive on causation. The case comes down to whether the cargo has the burden of proving actual breach or whether the owner has the burden of proving lack of breach.

The seminal case in the US is Commercial Molasses Corp v New York Tank Barge Corp (314 US 104 (1941). This was a classic case of private carriage, and the issue before the Supreme Court was whether the barge's liability should be decided in accordance with the burden of proof rules for common carriage, or a lesser standard used in private carriage. It was also classic in the sense that the evidence was evenly divided and the issue was of real importance to the parties and the maritime community in general. The facts were as follows.

Commercial Molasses had a five-year contract of affreightment with New York Tank Barge for barging molasses in New York harbour, primarily from ships to its shore terminal. During one such lightering operation, the nominated barge, while alongside the ship, suddenly lurched and thereafter sank in calm weather. Despite extensive evidence at trial, the judge could not determine the cause of the sinking, and found the evidence evenly divided on the issue.

The contract contained a typical warranty of seaworthiness and also provided that the charterer would have to maintain insurance for the owner's account. The trial court held that, since the evidence was divided, the owner had failed to prove that the barge was seaworthy. It further held that, as the charterer had failed to take out the required insurance, the owner's warranty of seaworthiness was negated, and therefore dismissed the cargo claim.

Judge Learned Hand, a noted maritime lawyer and judge, speaking for the Court of Appeals, held that in cases of private carriage the cargo interests had the burden of proving breach of the warranty of seaworthiness and had failed to do so and therefore affirmed the district court's dismissal without having reached the second issue.

The Supreme Court affirmed in a five-to-four decision. There was common ground between the majority and the dissent that under the common law there was a difference between the burden of proof between private and common carriage. They further agreed that this was a case of private carriage. Under private carriage the burden was on the bailor to prove the breach, while in common carriage the burden was on the bailee to prove there was no breach. The majority then applied this common law rule to the facts of the case and held that the cargo interests had failed to prove that the loss arose out of the owner's breach of the warranty of seaworthiness. The dissent, relying on prior maritime cases, said this reasoning was wrong as a matter of public policy when dealing with the warranty of seaworthiness. The dissent made the point that since virtually all the evidence was in the hands of the owner, it should be held to the more stringent standard of a common carrier.

However, the distinction made by the majority has stood the test of time and is still valid law. It is its application to diverse contractual and factual circumstances that has been difficult.

The next major case was Metropolitan Coal Co v Howard (155 F2d 780, 2nd Cir 1946). Judge Hand again delivered the opinion of the second circuit court. In this case, a barge carrying coal from Edgewater, New Jersey, to Chelsea, Massachusetts, foundered and sank in heavy, but not exceptional, weather in Block Island Sound. The charter party incorporated the Harter Act and also had a clause which limited the implied warranty of seaworthiness to the exercise of due diligence before the vessel commenced the voyage. The owner argued that, since this was private carriage, cargo had the affirmative burden of proving the breach of that limited warranty. Therefore the owner had no obligation to submit any evidence on this point.

The court rejected that argument and stated: "…[W]hen parties to a contract of private charter lift words out of the Harter Act, they must accept the interpretation which the courts have put on them. Under Section 3 of the Harter Act, the owner has the burden of proof to show due diligence, as a condition of limitation upon his duties."

The court further found that the owner had made no effort to prove that it had exercised due diligence at the commencement of the voyage. In the circumstances, the second circuit affirmed the lower court finding that the owner had failed to sustain its burden of proving the exercise of due diligence.

It is worth noting that, in Metropolitan, unlike Commercial Molasses, the owner made no effort to bring all the facts in its possession and control before the trial court, which made it easy for the court to find that it had failed to sustain its burden under either rule. But the court did base its opinion on the finding that incorporation of the Harter Act brought into the contract of carriage the burdens of proof associated with common carriage.

The next case in time was Pannell v United States Lines Company (263 F2d 497, 2nd Cir 1959). The issue was package limitation not seaworthiness. A yacht had been carried on deck and damaged during discharge. COGSA does not apply to deck carriage. However, the bill of lading incorporated COGSA by reference and it also had a definition of the word "package" to include "pieces and articles of any description".

Several court decisions had held that such a broad definition of "package" was invalid under COGSA. The precise issue was whether the definition of the word "package" as stated in the bill of lading should prevail over the general incorporation of COGSA. The trial court said yes and the second circuit affirmed.

The court stated, "Where a statute is incorporated by reference its provisions are merely terms of the contract evidenced by the bill of lading… Our task therefore is to construe the contract to give consistent effect, if possible, to all of its terms." In other words, the words of COGSA would be given no greater weight than the definition of package in the bill of lading. Finding that the specific prevailed over the general, it limited recovery to $500. In dicta, the court stated that the result would have been different if COGSA had applied as a matter of law and not contract.

The issue of which rule should apply was vividly brought forward in the disappearance of the Marine Sulphur Queen while on a voyage from Beaumont, Texas to Norfolk, Virginia with a cargo of molten sulphur. (460 F2d, 2nd Cir 1972). The vessel sailed on February 7, 1963, and nothing was ever heard from it again. After extensive official investigations and voluminous evidence at trial, no-one could determine the cause of loss. The cargo was carried under a long-term consecutive voyage charter which had been the subject of extensive negotiations between the owner and charterer. The charter incorporated some, but not all, of the provisions of COGSA, as well as the typically broad general exceptions clause.

The trial court found in favour of the cargo interests because there was some evidence that the vessel was unseaworthy when it sailed. The second circuit reversed and dismissed the cargo claim. It stated that since this was a contract of private carriage the burden was on the cargo interests to prove that the loss occurred by an event which was a breach of the owner's obligation under the charter and this they did not do.

There was no proof that any unseaworthiness had been the cause of the loss. It was just as logical that the loss had occurred from an excepted peril such as fire or explosion or some act of god. The court followed the rule in Commercial Molasses and distinguished Metropolitan Coal on the basis that the charter incorporated only parts of COGSA and not the entire Act.

The court said, "When a statute is incorporated by reference, its terms become the terms of that part of the charter parties, but limited incorporation does not trigger the entire Act."

In Shell Oil Co v M/T Gilda (790 F 2d 1209, 5th Cir 1986), the cargo interests made out a prima facie case but could not show the precise cause of loss. After reviewing the above cases, the fifth circuit held that if there is an incorporation of the entire COGSA into a contract of private carriage "…[the] case is governed by COGSA, including the rules allocating the burden of proof under that Act". Since cargo had made out a prima facie case and the owner could not show that it was free from negligence or that the loss was caused by an exception under the Act, cargo prevailed.

From the above cases, certain guidelines can be drawn. A charter party is a contract of private carriage and the parties can negotiate whatever terms they want. They are free to define words (such as "package" or "seaworthiness") or include terms (such as a six-month "time bar") that would be invalid under COGSA and the courts will uphold those negotiated terms.

Taking the analysis one step further, the parties could also agree to a different method of allocating the burden of proof. If only a part of COGSA is incorporated, the courts would then apply the rules governing private carriage, inferring that the parties did not intend to be bound by the rules governing common carriage. On the other hand, where the charter incorporates by reference the entire COGSA, without relevant change or modification, then the parties' rights will be governed by the court cases allocating the burden of proof in common carriage.

Lastly, if the trier of fact believes that a party in control of the evidence on a particular point in dispute fails to produce that evidence, the likelihood of that party prevailing on the legal issue is greatly decreased, regardless of the precise wording on the charter.