A tale of two circuits

IMAGINE leaving a $500,000 down-payment on a new home with your local bank, only to learn the next day that a bank employee has stolen the money. Then imagine that the bank claims that it only owes you $100 under the small print of a deposit contract that you signed.

Few would expect a court to enforce such an outrageous agreement but, every day in the US, courts enforce exactly such small- print agreements - even when it is $500,000 of cargo that is deposited with an ocean or land-based carrier and it is their employee who did the stealing. In many cases, it can only be described as highway robbery. Whether or not a carrier has to pay for it depends, in a large part, on where in the US the lawsuit against the carrier is filed.

According to the National Cargo Security Council (NCSC), a private US group, cargo theft is a $12 billion a year industry, yet the criminal penalties are considerably less than those for selling drugs. One truckload of computer microprocessors can be worth millions of dollars. The high value-to-volume ratio of hi-tech goods has encouraged criminals previously involved in drug dealing to move into this area of activity, where they run less risk of detection and suffer less severe penalties if caught. The biggest problem areas are Los Angeles, Miami and New York, where the highest incidence of the crime occurs. A large portion of these thefts have been found to have an inside source.

A number of new options are being tried to prevent cargo theft, including GPS tracking, electronic and tamper-resistant seals and anti-theft devices that can disarm a truck’s ignition. As a result, cargo theft is imposing costs on US consumers, with higher insurance premiums and deductibles for shippers, which translates into higher shelf prices. A wide range of groups, from the NCSC to the International Chamber of Commerce, have called for stiffer penalties for cargo thieves in the US.

But when it comes to recovering from the thieves’ employer, the carrier, the results are anomalous at best. Consider, for example, that in one of the US’s busiest maritime appeals courts, the Second Circuit Court of Appeals, which covers the east coast port of New York, a carrier is fully liable if its employee erroneously stows cargo on deck without notifying the shippers, but not liable if the same employee criminally misdelivers or even simply steals the cargo.

On the west coast, however, the position is now the opposite. By virtue of a 1999 Ninth Circuit decision, intentional acts by an ocean carrier or its employees are not subject to contractual limitation. In Vision Air Flight Service Inc v M/V National Pride, a case which involved reckless stevedoring conduct rather than cargo theft, the court set forth a simple principle that would apply to either eventuality,

“The intentional destruction of cargo is not a risk any shipper bargains to undertake or should expect to bear. The essence of the contract of carriage is that the carrier will transport the shipper’s goods from one place to another. Yet this contract is rendered pointless by the carrier’s intentional destruction of the goods enroute. It is hard to conceive of a more fundamental breach going more to the essence of the contract, or one that more thoroughly frustrates the essential expectations of the parties. Having breached the contract of carriage so fundamentally, the carrier cannot be allowed to invoke the liability limitation it incorporates. (See Nemeth, 1983 AMC at 890, 694 F 2d at 613). Thus, we conclude that a carrier’s intentional destruction of the very goods it contracts to transport constitutes an unreasonable deviation which renders inapplicable COGSA’s limitation of liability provision.”

The Vision Air viewpoint, it is worth noting, is also the viewpoint in the leading US treatise on maritime law. Thomas J Schoenbaum, Admiralty and Maritime Law, states:

“A workable criterion for fundamental breach would be to reserve the doctrine for willful breaches of duty that subject the cargo to substantially increased risk of loss or damage.”

While it is true that cargo owners normally take out insurance, the Vision Air court did not consider that to be the critical issue,

“The availability of insurance does not necessarily affect the question of who should bear the costs of certain losses. The argument for imposing unlimited liability on the carrier for certain fundamental breaches as presented in Nemeth is incentive-based. If a carrier is not immunised by a liability limitation, it will have more incentive to exercise care, or at least to not breach the contract of carriage in certain fundamental ways. If a certain cost is not borne by the carrier, it is irrelevant whether that cost is borne by the shipper or the shipper’s insurance carrier. Either way, it is a cost to maritime commerce that COGSA seeks to avoid, and the carrier’s incentive to avoid a fundamental breach will be reduced.”

Nor is the position in the Second Circuit uniform. One judge in the Southern District of New York, where decisions are appealed to the Second Circuit, has referred to the Second Circuit’s position as ‘an unjust paradox.’ Another judge in the same circuit has held that an intentional misrepresentation by a carrier’s employee in issuing a clean bill of lading that goods have been received and loaded on board, when they were not, voided any limit of liability. (See Mitsui Marine Fire & Ins Co v Direct Container Line, Inc). Yet a third judge in the Southern District of New York has held that conduct evidencing ‘affirmative wrongdoing or a reckless indifference’ voids any limitation of a carrier under New York law - the state where the Second Circuit sits.

Whether the Ninth Circuit decision or the Second Circuit’s decisions are based upon more sound legal principles is of same debate. Allowing for a limitation of liability in the face of intentional damage or theft of cargo would seem to run in the face of US Supreme Court precedent. As far back as 1927, the US Supreme Court held that willful misconduct by an ocean carrier voided any package limitation. In the case involving The Wildomino, the court held that where a carrier intentionally started a voyage short on fuel - thus necessitating a course deviation - that voided any package limit.

Outside of maritime law it is well established in the US that ‘when a bailee commits the intentional act of conversion, courts will not enforce limitation of liability provisions on the grounds of public policy.’ However, citing an older Ninth Circuit case, numerous courts have held that to break the limitation the conversion must be shown to be done for the carrier’s own gain, not that of its employees. (See Glickfeld v Howard Van Lines). Under this requirement, the president of the carrier’s company would have to be the thief.

The Vision Air decision would appear to cast the continued viability of Glickfield into doubt, and yet it continues elsewhere to be followed. However, under New York law, applicable to warehousemen, a presumption that the goods were stolen for the warehouse owner’s benefit arises from the mere mysterious disappearance of the goods. Without such a presumption, proof of that would seem to often be an insuperable burden.

Outside of US maritime law, at least one of the present US Supreme Court Justices, Justice Stephen G Breyer, has written broadly with respect to a broadening of the material deviation doctrine as against carriers generally for the intentional, and perhaps even the negligent, breach of a separate safety-related contractual promise. In Hill Construction Corp v American Airlines, Justice Breyer explained that a limit of liability should be avoided when,

“…the carrier made [and breached] a special, separate promise to the shipper about special conditions of carriage designed to lessen the risk of harm to the shipper’s particular cargo.”

Judge John G Koeltl in the Southern District of New York, when reviewing all of the cases up to 1996, has found Judge Breyer’s theory of the law to be consistent with the law nationwide in most modes of transport:

“On review, and when organised in accordance with Justice Breyer’s observations in Hill, the case law establishes that in cases of shipment by air, rail, and truck where the shipper paid an additional charge to ensure specialised safety measures to reduce the risk of damage to its cargo, the carrier’s failure to perform those very measures which resulted in damage to the cargo has been found to be a sufficient basis upon which the liability limitation provision in the shipping agreement may be rescinded. The parties have not cited, and the court has not found any contrary authority in this circuit, and the decisions of the Courts of Appeals for the First and Ninth Circuits are persuasive on the proposition. Indeed, at oral argument, counsel for the defendant said that essentially there would be no consequences for simply failing to supply to provisions that the plaintiff had paid for. This would be contrary to the reasoning of the decisions which I have already mentioned.”

Indeed, an expansion of US maritime law to void limitations of liability in the case of ‘willful misconduct’ would be a step toward international uniformity. After all, the Warsaw Convention and its amendments void limits of liability for willful misconduct, which was recently held to include airline employee conduct. Similarly, the Hague-Visby rules provide for no limitation where:

“… the damage resulted from an act or omission of the carrier done with intent to cause damage … recklessly and with knowledge that damage would probably result.”

Therefore, a court in the Second Circuit has voided the per-package limitations where the Hague-Visby Rules applied.

When it comes to US maritime law, it can be said that there is currently a tale of two circuits, and completely different justice, depending on which one of America’s coasts the employee’s intentional acts or theft of cargo occurs.