News

Re: U.S. MARITIME LAW DEVELOPMENTS-5TH CIRCUIT COURT OF APPEALS RULES THAT A VESSEL’S MANAGER CAN BE LIABLE IN TORT FOR CARGO DAMAGE OUTSIDE THE UNITED STATES CARRIAGE OF GOODS BY SEA ACT (“COGSA”)

24 July 2003 No.484
We would like to draw your attention to the U.S. Court of Appeals for the Fifth Circuit's 13th May 2003 decision in Steel Coils, Inc. v. M/V LAKE MARION, et al,No.02-30006(5th Cir. 2003).In this important unanimous decision, Judge Higginbotham, writing for the Court, affirmed the local Federal District Court's earlier decision, holding that cargo interests can successfully maintain a tort action outside of COGSA against a vessel's Manager who is not a COGSA carrier. The decision had burdensome financial and legal consequences for the vessel's Manager as it was not able to avail itself of the U.S. COGSA US$500 package limitation.

This cargo case, on appeal from the United States District Court for the Eastern District of Louisiana, concerned the alleged seawater wetting of steel coils and plates loaded in Riga, Latvia, for discharge at New Orleans, Louisiana, and Houston, Texas. Steel Coils, Inc. ("Steel") sued the M/V "LAKE MARION" in rem, and the vessel's Owners, Lake Marion, Inc. ("Lake Marion"), its Managers, Bay Ocean Management ("Bay Ocean"), and its Time Charterers, Western Bulk Carriers K/S Oslo ("Western Bulk"), in personam, all pursuant to COGSA, and alleged a separate negligence claim against Bay Ocean.

The local District Court held that the coil cargo for New Orleans, and the coil and plate cargoes for Houston, were damaged by seawater ingress through the vessel's hatch covers during the ocean voyage, and in addition, coils for New Orleans stowed in Hold No. 1 were damaged by water that leaked from "...a crack in the plating that separated the No. 1 hold from the port wing ballast tank." Accordingly, all defendants were found jointly and severally liable to Steel for US$262,000 (the COGSA package limitation for the 524 damaged coils and plates), and Bay Ocean for an additional US$243,358.94 (the difference between the COGSA package limitation and the amount of proved damages). In addition, the District Court ruled that Western Bulk was entitled to indemnity from Lake Marion for any amount it had to pay Steel based on the terms and conditions of the Inter-Club New York Produce Exchange Agreement incorporated in the Lake Marion/Western Bulk Charter Party (the District Court's decision is reported at 2002 AMC 1680).

The 5th Circuit discussed cargo interests' burden of proof under COGSA, and agreed that it had been met by Steel, i.e., that the coils and plate were loaded onboard the vessel in apparent good condition, and discharged in a damaged condition due to seawater ingress through the vessel's hatch covers, and for some coils carried in Hold No. 1, by wetting due to a crack in the hold's plating. Although some of the Bills of Lading contained preloading exceptions for atmospheric rust and/or physical damage, the Court decided that the damage complained of was not preloading in nature and related to those Bills of Lading exceptions, but instead, the damage was caused during the ocean voyage. Specifically, the Court found no evidence that the cargo was exposed to seawater prior to loading onboard the M/V "LAKE MARION" at the Latvian ports.

While the defendants attempted to escape liability by arguing that they exercised "due diligence" to make the vessel seaworthy, the 5th Circuit further found that they did not exercise the requisite due diligence to make the vessel seaworthy at the commencement of the voyage. Instead, the Court of Appeals agreed with the District Court that the hatch covers were not well maintained, they had not been "tested for watertightness before embarkation," and the holds had not been washed with fresh water prior to loading the steel products at Latvian ports, although the vessel had previously carried a rock salt cargo on its penultimate voyage, and its holds were washed with seawater prior to loading. Importantly, the Appeals Court, in dismissing vessel interests' argument that a voyage charterer (Itochu), and not the defendants, was contractually obligated to test the hatch covers, reaffirmed that it is "...the COGSA carrier's nondelegable duty to ensure that the vessel is reasonably fit to carry steel cargo."

The 5th Circuit further addressed vessel interests' contention that "...they had no contractual duty to rinse out the holds with fresh water" prior to the loading of steel coils at Latvian ports. The Court stated that "...we remind that the vessel interests need not be contractually bound to perform a task for its omission to be a lack of due diligence." The evidence showed that even though silver nitrate tests performed at Riga and Ventspils in the vessel's holds after they were washed with seawater yielded positive reactions, the crew did not wash or rinse the holds with fresh water, and/or take the "...necessary precautions to protect the cargo even after they knew salt was in the holds."
Vessel interests also maintained that they were not responsible for the damage to the coils as a result of COGSA's peril of the sea defense. While the vessel encountered Force 11/12 winds during the ocean voyage, the District Court rejected this defense because such conditions were foreseeable in a winter crossing of the North Atlantic, and importantly, there was no apparent damage to the vessel caused by the heavy weather. The only damage or problems were "...preexisting damage as a result of prolonged neglect." The 5th Circuit provided a detailed discussion of the peril of the sea defense, and affirmed the District Court's conclusion that vessel interests could not avail themselves of the heavy weather defense as the vessel faced Force 11/12 winds for only a short period of time, i.e., about two (2) hours, and there was no apparent damage to the vessel. As a result, vessel interests could not escape liability for the damage caused to the steel products by way of seawater ingress through the hatch covers during the periods of heavy weather.

Vessel interests further maintained that they should not be responsible, pursuant to COGSA's latent defects exception, for the water damage to 123 coils carried in Hold No. 1 caused by a crack in that hold. The 5th Circuit affirmed the District Court's finding that the crack was not a latent defect not discoverable by due diligence, and instead, found that it was old damage that could have been detected by proper inspection. Steel's expert, Captain Sparks, had "hypothesized that the crack was caused by gradual deterioration, and not by a defect in the metal," a hypothesis the Court found credible. Consequently, vessel interests were not able to avail themselves of the COGSA exception.

In what is arguably the most important aspect of this decision, the 5th Circuit analyzed Steel's negligence claim against the vessel's Manager, Bay Ocean, for failing to maintain and test the vessel's hatch covers, failing to repair the crack in Hold No. 1, and for washing the holds with seawater. Bay Ocean maintained that Steel's only remedy against Bay Ocean was pursuant to COGSA. In upholding the District Court's ruling that Bay Ocean was liable to Steel "...in tort for its negligence separate from the COGSA claim...for the entire amount requested by Steel Coils because Bay Ocean was not entitled to claim the $500-per-package limitation on liability found in COGSA," the 5th Circuit held that Bay Ocean was not a COGSA carrier, nor protected by the provisions of a "Himalaya Clause," and thus could not avail itself of COGSA's protections, in particular its US$500 package limitation. It is worthwhile to note that the 5th Circuit suggested that a "Himalaya Clause" in the contract of carriage could have arguably extended an ocean "...carrier's rights under COGSA to agents of the carrier...." In other words, had the contract of carriage incorporated a "Himalaya Clause" that protected/included the vessel's Managers, then Bay Ocean would have had a viable argument that it, too, should have been entitled to the benefits of the US$500 COGSA package limitation.

Importantly, Bay Ocean was also held not to be protected/bound by the provisions of Lake Marion/Western Bulk Charter Party, as its only presence in that contract was deemed to be simply as Lake Marion's "signing agent." Significantly, Bay Ocean was not explicitly named in the ocean contract of carriage, i.e., the voyage Charter Party entered into between Western Bulk and Itochu International ("Itochu"), nor was it included in or protected by a "Himalaya Clause" in either the Charter Party or the Bills of Lading. Accordingly, the Court held that Western Bulk did not enter into the voyage Charter Party with Itochu on Bay Ocean's behalf, but merely for itself and Lake Marion. Although it was Lake Marion's agent, Bay Ocean was found not to be a carrier, nor covered by a "Himalaya Clause," and thus it did not qualify for the US$500 COGSA package limitation.

In view of the 5th Circuit's decision, and in order to avoid similar problems in the future, we recommend that the Owners and Charterers of vessels that trade to the United States perform the following:

    1.Prior to the loading of water sensitive cargoes, a vessel, and in particular, its hatch covers, should be carefully checked for watertight integrity. If any defects are found, they should be repaired, and a record/report be made of both the inspection, and repairs performed (if needed).

    2.Vessel interests should ensure that a vessel's holds are properly cleaned prior to loading a cargo. Should a vessel's holds be cleaned with seawater, as is commonly done, they should be thoroughly rinsed with fresh water prior to loading, particularly if the cargo to be carried is susceptible to damage by chlorides. It may be prudent to test the vessel's holds with silver nitrate, and if positive reactions are obtained, those areas testing positive should be cleaned again with fresh water until the chlorides or other contaminants are removed. Any previous cargo residues should also be satisfactorily cleaned/removed. A record/report of hold cleaning operations should be made.

    3.Should a vessel encounter heavy weather during the ocean voyage, the vessel's Master should keep detailed records that include the Beaufort Scale Force strength/velocity of the winds and seas, any damage whatsoever sustained to the vessel, the vessel's movements during the heavy weather, any cross-seas, and wave heights. Weather charts the vessel obtained by fax and/or any other channels should also be kept. Such records may assist vessel interests in sustaining a peril of the sea / heavy weather defense for cargo damage.

    4.While a vessel's Manager could become a COGSA carrier by directly entering into the contract of carriage with a Shipper, or by ratifying a contract of carriage, i.e., agreeing that a Bill of Lading may be issued on its behalf, and thus avail itself of COGSA's protections/limitations, this may not be commercially practical as the contract of carriage is typically entered into between the vessel's Owner and/or Time Charterer and cargo interests. On the other hand, the 5th Circuit appears to indicate that a vessel's Manager could avail itself of COGSA's protections/limitations by being included in a "Himalaya Clause" found in the contract of carriage. We therefore strongly recommend that a Charter Party entered into between a vessel's Owner and a Charterer, as well as the Bill of Lading issued for the cargo, contain a "Himalaya Clause" that extends to the vessel's Managers, Operators, agents, employees, officers, crew, independent contractors, etc., the benefits, rights, limitations, etc., of the contract of carriage, and COGSA, including its package/freight limitation unit limit. We therefore set forth below recommended "Himalaya Clause" language to be used in the Charter Party and Bill ofLading:

     A.Himalaya Clause for the Charter Party
    "This Charter Party is subject to the following clause which is to be included in all Bills of Lading and Waybills issued hereunder:

    Benefit to Third Parties: It is hereby expressly agreed that the vessel, any and all agents, servants, representatives, and employees of the Carrier or Shipowner, and every independent contractor who performs any part of the services provided by the Carrier or Shipowner pursuant to this contract, including, but not limited to, the vessel's managers, operators, charterers, Master, officers and crew, and all participating (including inland) carriers, stevedores, terminal operators, warehousemen, shore side employees, draymen, watchmen, crane and other machinery operators or repairmen, and all other subcontractors whatsoever, shall have the same rights, privileges, protections, benefits, limitations of liability, including the package and freight limitation unit limits, immunities, liberties, powers, defenses and exemptions from liability provided for the Carrier, or to which the Carrier is entitled, by this contract, by U.S. COGSA, the Hague Rules or the Hague-Visby Rules, as applicable, or by any other statute or regulation, the foregoing contract provisions being made by the Carrier and Shipowner for the benefit of all persons and parties performing services in respect of loading, handling, stowing, carrying, keeping, caring for, discharging, delivering, and transporting the Goods, maintenance of the ship or otherwise."

     B.Himalaya Clause for the Bill of Lading
    "Benefit to Third Parties: It is hereby expressly agreed that the vessel, any and all agents, servants, representatives, and employees of the Carrier or Shipowner, and every independent contractor who performs any part of the services provided by the Carrier or Shipowner pursuant to this contract, including, but not limited to, the vessel's managers, operators, charterers, Master, officers and crew, and all participating (including inland) carriers, stevedores, terminal operators, warehousemen, shore side employees, draymen, watchmen, crane and other machinery operators or repairmen, and all other subcontractors whatsoever, shall have the same rights, privileges, protections, benefits, limitations of liability, including the package and freight limitation unit limits, immunities, liberties, powers, defenses and exemptions from liability provided for the Carrier, or to which the Carrier is entitled, by this contract, by U.S. COGSA, the Hague Rules or the Hague-Visby Rules, as applicable, or by any other statute or regulation, the foregoing contract provisions being made by the Carrier and Shipowner for the benefit of all persons and parties performing services in respect of loading, handling, stowing, carrying, keeping, caring for, discharging, delivering, and transporting the Goods, maintenance of the ship or otherwise."

    Should the Association's Members have any questions concerning the above recommended "Himalaya Clause" language, please contact the Association.



    5.In the event that a vessel's Time Charterer sub-charters a vessel, we recommend that the head Charter Party entered into between the vessel's Owners and Time Charterer contain an additional clause that provides (a) that any sub-charter party entered into between the vessel's Time Charterer and the voyage Charterer contain the "Himalaya Clause" language appearing in the head Charter Party; and (b) that any Bill of Lading issued for the cargo also contain the needed "Himalaya Clause".

    6.In addition to including the appropriate "Himalaya Clause" language in both the governing Charter Party and the Bill of Lading, we further recommend that the Bill of Lading issued for the cargo specifically incorporate the terms and conditions of the governing Charter Party, including its arbitration clause, by reciting the date of the Charter Party and the names of the parties to the Charter Party. In this way, should a Charterer or its agents issue a Bill of Lading that does not contain the needed Himalaya Clause language, the Himalaya Clause found in the governing Charter Party would nevertheless be a term of the contract of carriage by virtue of the Charter Party's incorporation into the Bill of Lading.

    7.The Charter Party should also contain a clause holding the Charterer responsible/liable for any losses, claims, damages, etc., sustained by the vessel's Owners, Managers, Operators, etc., for the Charterers' failure to include the required "Himalaya Clause" language in the governing Charter Party and the Bill of Lading issued for the cargo, and for failing to properly incorporate the terms and conditions of the Charter Party, including its arbitration clause, in the Bill of Lading.



    Should the Association's Members need a copy of the 5th Circuit's decision, and/or have any questions concerning the above listed recommendations, please contact the Association for assistance.

    Acknowledgment:

    The Association would like to thank Mr. Charles L. Whited, Jr., Attorney of Murphy, Rogers & Sloss, New Orleans, Louisiana, USA, for his contribution to this Circular.