On 8 December 1967, the Santa Ana, owned and operated by Grace Lines Inc (Grace) arrived in San Francisco with cargo including coffee, lumber, quebracho, and corned beef insured by Home Insurance Co (Home), Atlantic Mutual Insurance Co (Atlantic Mutual), Royal Globe Insurance Co (Royal Globe), and Commercial Insurance Co of Newark (Commercial). The Santa Ana proceeded under pilotage for an inspection in drydock in the Oakland Estuary to a drydock operated by Todd Shipyards Corp (Todd). When entering the dry dock, the port side of the Santa Ana rammed into an unseen recessed wall of the dry dock, ripping a hole in the ship below the water line. Besides damaging the ship, the allision damaged the drydock and the cargo. The Santa Ana was ultimately drydocked and repaired by Todd.

Four lawsuits arose from this accident. (1) Grace, the owner of the steamship, sued Todd, the operator of the drydock, for the damages to the vessel and resultant damages. Todd filed a counterclaim against Grace for the damages to the drydock and for the money Todd had spent in repairing the ripped hull. Todd also filed a third-party complaint for the dock damage against S & M Towboat, which employed the pilot and the tugboats. (2) Two cargo insurers, Home and Atlantic Mutual, joined in suit against Grace, the Santa Ana itself, Todd and S & M Towboat for damage to the coffee and lumber. (3) Commercial brought a separate suit against the same defendants for damage to the quebracho. (4) Royal Globe likewise brought a separate suit against the same defendants for damage to the corned beef.

The suits were consolidated and tried in the District Court. The Court held that Todd was negligent and hence liable to Grace in the net amount of USD 17,265.03; that Todd, though negligent, was entitled to immunity against the cargo insurers; and that neither Grace nor S & M Towboat were negligent or liable to any party.

In the two appeals (by Todd and the cargo insurers) and the two cross-appeals (by Grace and Todd), the following questions were raised:

(1) Did the trial Court err in finding Todd negligent?

(2) Did the trial Court err in finding that there was no negligence on the part of the Santa Ana, Grace or S & M Towboat?

(3) Did the trial Court err in refusing to grant pre-judgment interest to Grace?

(4) Did the trial Court err in holding that Todd is entitled to the same exemptions and immunities from and limitations of liability which Grace has against the cargo interests (these exemptions, immunities and limitations primarily being those that the US Carriage of Goods by Sea Act (COGSA) provides specifically for carriers)?

Held: Affirmed in part, and reversed in part and remanded for further proceedings.

The first three questions were answered in the negative, and the decision of the District Court was affirmed in respect of these. The fourth question should be answered in the affirmative; the District Court erred in holding that Todd was entitled to immunity from liability to the cargo insurers

The bills of lading constituting the contract of carriage between Grace and the cargo interests contained a Himalaya clause:

The Carrier shall be discharged from all liability in respect of loss, damage and every claim whatsoever with respect to the goods unless suit is brought within one year after delivery of the goods or the date when the goods should have been delivered ... . It is expressly agreed between the parties (the Carrier and the cargo owners) hereto that the master, officers, crew members, contractors, stevedores, longshoremen, agents, representatives, employees or others used, engaged or employed by the carrier in the performance of such work or services (undertaken in this contract), shall each be the beneficiaries of and shall be entitled to the same, but no further exemptions and immunities from and limitations of liability which the carrier has under this bill of lading, whether printed, written, stamped thereon or incorporated by reference ... . Without limitation or restriction of the exemptions and immunities from and limitations of liability provided for (above), the persons and companies mentioned therein shall be entitled to the same, but no further, benefits which the carrier has under the US Carriage of Goods by Sea Act, including but not limited to sections 3.6, 4.1, 4.2.a, 4.2.q and 4.5 of said Act.

As Todd was a contractor engaged in the performance of work undertaken in the bills of lading, the following of COGSA’s protections are purportedly extended to Todd contractually:

• The one-year period of limitations for instituting suit and the notice-of-damage requirement (Hague Rules, art 3.6);
• The immunity from liability for unseaworthiness of the vessel unless caused by want of due diligence (Hague Rules, art 4.1);
• The immunity from liability for negligent acts in the navigation or management of the ship (Hague Rules, art 4.2.a);
• The immunity from liability for damage caused by fire, unless caused by the actual fault or privity of the carrier (Hague Rules, art 4.2.b);
• The immunity from liability for damage arising from any cause without actual fault or privity (Hague Rules, art 4.2.q); and
• The limited liability of USD 500 per package or freight unit unless the nature and value of the goods have been declared by the shipper before shipment and inserted in the bill of lading (Hague Rules, art 4.5).

The exemptions, immunities, and limitations which are pertinent to this case are the complete exemption from liability (Hague Rules, art 4.2.a), the USD 500 limitation on liability (Hague Rules, art 4.5), and the one-year period of limitations for instituting suit (Hague Rules ,art 3.6).

In Tessler Brothers (BC) Ltd v Italpacific Line 494 F 2d 438 (9th Cir 1974), this Court squarely faced the issue of whether a Himalaya clause was valid which purported clearly and expressly to extend to a non-carrier to USD 500 limitation on liability which COGSA § 4.5 provides for carriers. That clause was held valid, and Tessler Brothers is binding authority as regards the inclusion in bills of lading of limitations on amount of non-carrier’s liability.

The Harter Act and COGSA are by far the most important bodies of law for dealing with the question of who bears the loss when cargo is damaged in ocean commerce. The net position of the Harter Act was this: the carrier could not contract out of the duty to use care to put its vessel in seaworthy condition or to use care with respect to cargo, but once it had fulfilled these duties, it could not be held liable for the negligence of those who navigated and managed the vessel. It will be noted that negligent management of the vessel, from which the statute exonerates the carrier, could simultaneously constitute lack of care with respect to cargo, for which the statute holds the carrier liable.

The compromise of the Harter Act was so well received that it was embodied in main outline by a worldwide conference of maritime nations proposing the Hague Rules as a universal guide to treatment of the shipper-carrier relation. In 1936, in order to update the Harter Act to conform more closely with the world conference proposals, Congress passed COGSA. The Harter Act was thus largely supplanted by COGSA.

It will be noted that COGSA's provisions regulate the lability of carriers, but not non-carriers. Since the Act, in balance, is more protective than the common law, it is not surprising that non-carriers have nonetheless sought to place themselves under COGSA's shelter. This has been attempted by arguing in the courts that COGSA should be construed to protect parties other than carriers, despite the Act's language to the contrary; and since this argument has failed, the extension of COGSA has been attempted contractually, by providing in bills of lading that certain non-carriers would be subject to COGSA's protections.

In Robert C Herd & Co v Krawill Machinery Corp 359 US 297, 79 S Ct 766, 3 L Ed 2d 820 (1959) (CMI1735), the Supreme Court considered whether the provisions of COGSA should apply to a stevedore, either by virtue of the Act itself or by contractual extension in the bills of lading. The Supreme Court held that nothing in the language, history, or environment of the Act showed a congressional intent to regulate by statute the liability of stevedores or other agents of the carrier. The Supreme Court further noted that the bills of lading in that case did not expressly extend the provisions of COGSA to the stevedore. In language of significance here, the Supreme Court stated as follows:

This Court has several times held that an agent's only shield from liability 'for conduct harmful to the plaintiff ... is a constitutional rule of law that exonerates him.' ... Any such rule of law, being in derogation of the common law, must be strictly construed, for 'no statute is to be construed as altering the common law, farther than its words import. It is not to be construed as making any innovation upon the common law which it does not fairly express.' ... Similarly, contracts purporting to grant immunity from, or limitation of, liability must be strictly construed and limited to intended beneficiaries, for they are not to be applied to alter familiar rules visiting liability upon a tortfeasor for the consequences of his negligence, unless the clarity of the language used expresses such to be the understanding of the contracting parties.

The above quotation from the Herd opinion is relevant here. It suggests that the sole reason the Supreme Court refused to allow the contractual extension of COGSA's protections to stevedores was that the bill of lading in that case was not clear and express in its intent to make this extension; the Herd opinion might be interpreted to mean that a bill of lading, if it clearly and expressly extends a COGSA exemption, immunity or limitation to a non-carrier who is an agent of the carrier, is a valid derogation of the common law, and will be given effect. Thus the Court of Appeals for the Ninth Circuit in Tessler Brothers, held on the basis of Herd that a bill of lading, if clear and express, was effective to extend the USD 500 limitation on the amount of liability, as provided in COGSA § 4.5, to stevedores.

Here, the concern, however, is not with the contractual extension of the Act’s limitation on amount of liability, but rather with an extension to non-carriers of the complete exemption from negligence in navigation and management as provided in COGSA § 4.2.a. The bills of lading in this case expressly extend COGSA § 4.2.a to the master, officers, crew members, contractors, stevedores, longshoremen, agents, representatives, employees or others used, engaged or employed by the carrier in the performance of such work or services undertaken in the bills of lading. Although drydock operators were not expressly listed as persons covered, Todd would seem to be a 'contractor', as the District Court held.

Less clear is whether Todd's services were part of the work or services undertaken in the bills of lading. The District Court held that they were. The primary work undertaken in the bills of lading is the transporting of cargo. But implicit in the undertaking is the agreement to take reasonable steps to ensure the safety of the cargo in transport. Thus it is customary for cargo vessels to drydock in transit for routine inspections and repairs. The work performed by the drydock operator, although directly affecting the ship only, aids the carrier in safely transporting the cargo. Therefore, Todd was a contractor employed by Grace in performing the work undertaken in the bills of lading, and hence was clearly intended by the parties thereto to be entitled to the immunities of COGSA § 4.2.a.

There is a general rule of contract law that when there is a gross disparity of bargaining power between two parties to a contract such that one party has no choice but to adhere to unfavourable and unfair terms, those terms will not be enforced against them unless they consent to be bound. The cargo insurers contend that the bills of lading are contracts of adhesion (see Cabot Corp v S S Mormacscan 441 F 2d 476, 478 (2d Cir 1971), and that since they gave no 'understanding consent', they are not bound.

The cases refusing to enforce contracts because they were contracts of adhesion have generally involved special circumstances, such as a grossly unfair bargain foisted by a non-competitive industry upon the ordinary consumer on a 'take-it-or-leave-it' basis, with the terms often buried in fine print unlikely to be understood or even read by the consumer. There is no binding authority for likewise refusing to enforce bills of lading. The shipper or insurer of cargo, while not equal in bargaining power to the carrier, is not in the position of the ordinary person facing an enormous, impersonal industry. The cargo insurers would have been aware of the Himalaya clauses. As a group they could have mustered the bargaining power necessary to alter the terms in the bills of lading. Therefore, although the bills of lading might be sufficiently adhesive to warrant a strict construction against the carrier and his agents, the Court will not interfere with the freedom of contract to the extent of refusing entirely to give effect to the Himalaya clause.

COGSA § 6 provides that a carrier and a shipper may enter into any agreement in any terms as to the liability of the carrier’s agents for negligence in respect to cargo, but may do so only if no bill of lading has been or shall be issued and the shipments are not ordinary commercial shipments made in the ordinary course of trade. Since in this case there is a bill of lading and the shipment is in ordinary commerce, § 6 does not apply.

COGSA § 4.2.a immunises carriers from liability for negligence in navigation or management. It has not, however, altered the common law rule as regards agents or servants. One must therefore inquire whether Todd was an 'agent' or 'servant' of the carrier. Todd is a 'contractor', but that of course does not necessarily make Todd an 'agent'. From the facts of this case it is apparent that Todd was the carrier's agent within the meaning of the above definition. There was an agreement between the two that Todd should act on the carrier's behalf in maintaining the vessel in a seaworthy condition. Upon taking control of the vessel, Todd assuredly had a fiduciary duty to exercise skill and care in its work. This work, of course, would be subject to the ultimate control of the carrier as owner of the vessel.

As an 'agent', Todd could not contractually be exculpated from its negligence, unless case law has modified the old common law rule, which it has not. A contract, no matter how clear and express, which purports wholly to immunise a non-carrier from liability for its negligence, is repugnant to traditional law and to sound policy. There is a distinction between a limitation on liability and an exemption from liability which is crucial. A limitation, unlike an exemption, does not induce negligence.

Assuming that COGSA § 4.2.a could validly be extended to Todd, does the language of that provision apply to Todd's conduct? There is an alternate ground for holding that Todd is not immunised from liability - even if § 4.2.a could validly be extended to protect non-carriers, its protection does not cover the sort of negligence of which Todd was culpable, because a reading of the many cases giving content to the words 'navigation' and 'management' makes it evident that Todd was doing something else. Todd's negligent maintenance of the drydock was not 'in navigation or management' of the vessel, and § 4.2.a has no relevance to this case.

In relation to the time limitation in COGSA § 3.6, COGSA indicates the Congressional determination that one year is a reasonable time limit for instituting a suit against a carrier, and there are no factors necessitating more time for a suit against the carrier's agents. Since the extension of § 3.6 to agents of the carriers is clear and express, and since it creates a reasonable limitation on the common law liability of agents, and since there is no binding authority for holding such clauses void, this portion of the bills of lading is upheld.