In 1991, Wahlco Inc (the shipper) shipped three containers with cargo by sea from Ponce, Puerto Rico, to Felixstowe, England. Pentol, an English corporation, was the receiver. Hapag-Lloyd AG (Hapag-Lloyd), a Carol Lines participating carrier, was the sea carrier. Luis A Ayala Colón Sucrs Inc (Ayacol) was Hapag-Lloyd's agent. Air Sea Forwarder's Inc was the shipper's agent. The shipper had procured a comprehensive insurance policy from Granite State Insurance Co (the plaintiff) to cover the cargo to be shipped by Hapag-Lloyd.

The three containers consisted of two 40-foot containers and one 20-foot container. These were filled with machinery and parts constituting one 'SO3 Flue Gas Conditioning Equipment'. The first container, a 40-foot flat rack, encompassed two sizeable control panels constituting one system skid assembly. The second 40-foot container included eight smaller crated parcels. The third 20-foot closed container held spare parts and other miscellaneous pieces of machinery. The containers were received in apparent visual good order and condition on its outer coverings and wrappings, and were placed onboard the vessel M/V Caraibe under a bill of lading.

The bill of lading did not specify the value of the cargo, or the specific contents of the cargo. According to the shipper's invoice, the cargo had a total value of USD 1,900,000. The shipper's insurance policy with the plaintiff covered the cargo during sea transport up to USD 300,000 or USD 3,000,000, depending on the freight method.

The only information presented in the bill of lading, beside the names and addresses of the involved parties, was a listing of the three container numbers, general description of each container, the freight cost methodology, and the total cost of shipment, all appearing in the box on the face of the bill of lading labelled 'ABOVE PARTICULARS AS DECLARED BY SHIPPER'. The containers were described as '2 x 40' FLAT CONTAINERS & 1 x 20' CONTAINER' with gross weight of '71,188 LBS' or '35,012 KGS'. The shipment was also stated as '2 SYSTEMS SKID ASSEMBLY, 6 PCS. HARDWARE AND PARTS, PROBES AND STABILIZERS'. The freight was marked prepaid for a total of USD 8,822.04.

The reverse side of the bill of lading explained various standard legal rights and responsibilities involving the shipment, including a clause paramount incorporating the US Carriage of Goods by Sea Act (COGSA) and related valuation and liability limitation requirements. Clause 12(3) of the bill of lading stated that '[t]he Merchant [or shipper] acknowledges that, except where the provisions of clause 7(3) apply, the valuer of the Goods is unknown to the Carrier'. Clause 7(3) of the bill declared that the only manner in which the carrier can know the value of the cargo, and becomes liable for the full value of it, is when the shipper states valuation information on the face of the bill of lading. Clause 7(3) stated:

The merchant [or shipper] agrees and acknowledges that the Carrier has no knowledge of the value of the Goods, and that higher compensation than that provided above [under the U.S.-Carriage of Goods By Sea Act of 1936 ("COGSA")] may not be claimed unless, with the consent of the Carrier, the value of the Goods declared by the Shipper prior to the commencement of Carriage is stated on this Bill of Lading and extra Freight paid. If required in that case, the amount of the declared value shall be substituted for the limits laid down above [in clause 7(2), namely COGSA's $500 per package or customary freight unit]. Any partial loss or damage shall be adjusted pro rata on the basis of such declared value.

According to Hapag-Lloyd and the bill of lading, the shipper could have increased the carrier's liability by declaring a value of the cargo above USD 500 per package or customary freight unit (CFU). By doing so, the shipper would have been required to pay a significantly higher freight in exchange for the increased carrier liability.

The containers arrived at Felixstowe and were delivered to Pentol. According to the plaintiff, the containers and cargo were noticeably damaged upon arrival. The plaintiff paid the shipper for the loss and became subrogated to its rights and claims. The plaintiff sued various defendants, including the vessel M/V Caraibe, the shipowner Hapag-Lloyd, and the insurer of Hapag-Lloyd, for USD 184,800 in damages.

The plaintiff moved for partial summary judgment to strike the defendant's affirmative defence of a USD 500 per package or CFU limitation on liability for cargo damage. Correspondingly, the defendants submitted a cross-motion for partial summary judgment, seeking limitation of liability of USD 500 per package or CFU by statute as set forth in the bill of lading.

The plaintiff asked the Court to consider whether the bill of lading lacked a clearly marked space for the shipper to declare the cargo's actual or market value. If a clearly marked space was not provided on the face of the bill of lading, the plaintiff argued that there would be no right to limitation, as the shipper was deprived of a fair opportunity to put the sea carrier on notice of the value of the shipment and, therefore, of the carrier's exposure to liability above the COGSA limitation level.

The issues before the Court were as follows: (1) whether liability can be limited; (2) if liability can be limited, what constitutes a 'package' or 'customary freight unit'; (3) whether the shipper was deprived of a fair opportunity to notify the carrier of the shipment's value and avoid COGSA's limitation of liability; (4) whether the bill of lading lacked a clearly marked space for the shipper to declare the cargo's value. The ultimate cause, time, and place of damage were not at issue in answering these legal issues.

Held: The defendants' motion is granted. The plaintiff's motion is denied.

COGSA

COGSA is a domestic codification of the Hague Rules. The Hague Rules were designed to provide 'uniformity to the law governing transportation of cargo by sea'. The effort of those Rules was to establish uniform ocean bills of lading to govern the rights and liabilities of carriers and shippers inter se in international trade. The language of COGSA was lifted almost bodily from the Hague Rules. One important aspect of the Hague Rules and COGSA is the 'standardisation of liability expectations'. The purpose of Hague Rules and COGSA is:

to allow international maritime actors to operate with greater efficiency and under a mantle of fairness. With an international legal standard for carrier liability, all parties involved in international shipping - ideally no matter where on the face of the planet - may rely on the principles and practicalities with which they have become familiar in previous dealings.

COGSA established a framework within which carriers and shippers worldwide can operate with a high degree of certainty as to the responsibility of the parties. Important terms and the parties' rights and duties are settled by COGSA. Bills of lading typically contain a clause paramount expressly incorporating COGSA. While uniformity has been provided to the legal landscape of sea carrier insurance and cargo liability, the federal courts of the United States have not harmoniously interpreted the limitation of liability provisions of COGSA. This detracts from the original and laudable purpose of COGSA. Yet, more and more jurisdictions are converging on a common interpretation of COGSA law.

COGSA should be interpreted in light of the statute's overall international purpose of clarity and uniformity. Diminishing the plain meaning of COGSA provisions regarding bills of lading hampers the public policy and the legislative purpose behind COGSA's enactment. The Court cited academic commentary stating that:

[A]n American court should therefore strive to construe COGSA consistently with other nations' interpretations of their domestic enactments of the Hague Rules. … [O]ther nations have not made the mistake [of even adding a fair opportunity requirement]. It … interferes with COGSA's more specific goals. It is unclear, unpredictable, and difficult to apply in commerce. It fosters expensive litigation … . The courts that imposed the requirement were wrong to do so, and future courts should avoid the error.

COGSA is silent as to whether bills of lading that invoke the provisions of the sea carriage statute must contain on their face an explicit space for value declaration in order for the COGSA limitation of liability to apply. The Court referred to Carman Tool Abrasives Inc v Evergreen Lines 871 F 2d 897, 899 (9th Cir 1989) to the effect that '[t]he requirement is not found in COGSA; it is judicial encrustation, designed to avoid what courts felt were harsh or unfair results'. The relevant text of COGSA (46 USC § 1304(5)) provides:

Neither the carrier nor the ship shall in any event be or become liable for any loss or damage to or in connection with the transportation of goods in an amount exceeding $500 per package lawful money of the United States, or in the case of goods not shipped in packages, per customary freight unit, or the equivalent of that sum in other currency, unless the nature and value of such goods have been declared by the shipper before shipment and inserted into the bill of lading.

After considering the divergent views of the various circuits of the United States Courts of Appeals, the Court held that a COGSA clause paramount on the reverse side of a bill of lading gave the shipper sufficient notice that the COGSA liability limitation applies unless a higher value of the freight is declared on the face of the bill. Also, the face of the bill need not have space reserved specifically for a cargo value declaration. Standard bills of lading provide shippers with a large space to fill in details. As such, when proper notice of the COGSA liability limitation has been given, the shipper is given a fair opportunity to declare a cargo value higher than the COGSA limitation and to put the sea carrier on notice of its possible increased liability. The carrier is not obliged to ask the shipper questions about cargo value or concealed contents of containers.

Fair opportunity for shippers to declare a higher value can only reasonably mean that shippers are put on notice of the COGSA limitation in the language found in bills of lading and are allowed at their discretion to put carriers on notice of their cargo's excess value.

In the real world, the vast majority of United States shippers are very familiar with COGSA and its liability limitation. If a shipper acts negligently or recklessly in arranging cargo transport with a carrier, the consequences should rest on the shipper, not the carrier. The carrier should be liable only for the amount agreed on with the shipper, be that the COGSA-limited amount or a greater sum.

COGSA packages

The Court then turned to consider how a COGSA package and CFU could be defined.

When COGSA was adopted, few could have foreseen the change in shipping units like containers. COGSA speaks of two types of shipping units for limiting liability: USD 500 per package, or USD 500 per CFU for goods not shipped in packages. This gives rise to two issues of interpretation: defining packaged goods, and determining the CFU for unpackaged goods.

The Court found the test stated in Binladen BSB Landscaping v M/V 'Nedlloyd Rotterdam' 759 F 2d 1006, 1011-17 (2d Cir 1985) (CMI1621) to be 'coherent, thoughtful, and thorough' as well as 'compelling'. That decision developed four principles that may be used to classify cargo into COGSA packages. First, 'looking to the bill of lading as a primary source of understanding the nature of the shipment'. Second, 'determining if an item or items have been prepared for transport, ie, packaged'. Third, 'establishing that a large-scale container should not be defined as a package if the bill of lading describes the container's subunits or if the parties expressly agree that the container is not a COGSA package'. Fourth, 'recognizing that if the bill of lading does not describe the containerized cargo in terms of individual packages, the freight should be considered "goods not shipped in packages" and prospectively as COGSA packages'.

Hayes-Leger Associates Inc v M/V Oriental Knight 765 F 2d 1076 (11th Cir 1985) extracted the following two-part test from the above-mentioned principles:

(1) [W]hen a bill of lading discloses the number of COGSA packages in a container, the liability limitation of section 4(5) applies to those packages; but (2) when a bill of lading lists the number of containers as the number of packages, and fails to disclose the number of COGSA packages within each container, the liability limitation of section 4(5) applies to the containers themselves.

The Court adopted the test of the Second Circuit and its interpretation by the Eleventh Circuit because it was logical and reasonable. It focuses on the bill of lading as the primary interpretational factor. The principles support the virtue of certainty, the goal of national and international uniformity of sea cargo law, and comports well with the various international agreements including the 1968 Brussels Protocol (ie the Visby Amendments) to the Hague Rules (the Hague-Visby Rules). Adherence to these international precepts provides uniformity and its consequential advantages.

CFUs

The Court then turned to consider how a CFU might be defined.

Federal circuit courts use two distinct methods to determine a CFU: the 'cargo-classification practice and the bill-of-lading method'. Method (1): The cargo-type practice divines the CFU by determining the customary unit for figuring the freight rate in international commerce for particular types of goods. Method (2): The bill-of-lading procedure ascertains the CFU by examining the methodology behind the calculation of shipping rates for the cargo at issue, relying on the terms of the particular bill of lading and tariff governing the transaction in question.

The Court indicated a preference for method (2) and held that the agreement between the parties, the bill of lading, ought to be the starting point for determining the CFU. This rule provides certainty, fairness, and 'security' in the shipping business. However, if the bill of lading and the published tariff do not allow the Court to decipher the CFU used to the determine the freight cost, only then should the Court go beyond the bill of lading to the general industry custom to seek an answer. The Court noted that this preference for method (2) is 'harmoniously consistent with the positions … taken with regard to the fair opportunity doctrine of COGSA liability limitation and the determination of what constitutes a COGSA package'.

Joining a plurality of circuits of the United States Court of Appeals, the Court observed that the bill of lading, as prima facie evidence of the agreement between the parties, is the 'primary guidance' as to how legal issues may be resolved.

Evidence of Fair Opportunity

The Court then turned to evaluate the evidence.

On the evidence, the Court found that the defendant could limit its liability. The shipper had a fair opportunity to declare a value higher than the COGSA limitation. First, the bill of lading expressly invoked the COGSA liability limitation and expressly stated that the shipper could avoid the limitation by declaring a higher value and paying an ad valorem tariff. There was ample space in the bill of lading for the shipper to declare a higher value of the cargo if the shipper so desired.

Second, Hapag-Lloyd had a published ad valorem tariff that itself evidenced the shipper's ability to declare a higher value, pay a higher freight, and enjoy insurance-like liability on the part of Hapag-Lloyd.

Third, the shipper had obtained third-party cargo insurance cover from the plaintiff. The insurance policy stated that the shipper could use the carrier's least expensive freight rate for its cargo. The policy specifically anticipated that the shipper would have the option of choosing freight rates without adversely affecting insurance coverage.

Fourth, the plaintiff's insurance policy approved of liability-limiting freight rates. Fair opportunity was provided to the shipper and indirectly to the insurer, even though 'no explicit duty is owed [to] the insurer under … COGSA'.

Evidence concerning COGSA packages and CFUs

The Court then turned to determine the potential liability of the defendant carrier.

On the facts, the Court found that the contents of, or the subcontainers within, the three containers were not clearly described or listed in the bill of lading. The shipper did not declare a higher value or even a number of COGSA packages other than to list the dimension of the three containers in the 'packages' column of what the three, together, contained. The bill of lading provided no information that would allow the carrier to discern the number of COGSA packages or to estimate a value for the unspecified cargo.

For the two 40-foot containers, the Court held that each container would be a COGSA package, and that each container would be the CFU for this instant case only. Both containers had the same freight rate. Since the weights and items in the two containers were different, the same freight rate of USD 3,400 for each container clearly indicated that the containers themselves (and not any other CFU) were the basis of the freight rate. Thus, the two containers were each a COGSA package. However, the Court adopted the prospective ruling approach used by an earlier Court of Appeals decision and held that the containers were considered to be the CFUs for determining the freight rate. The Court observed that if the same facts appeared in a subsequent case, it would treat each container as a COGSA package instead.

According to the bill of lading, the third container (ie the 20-foot container) had its contents shipped at a freight rate of USD 149 per 'cubic meter' (also known as 'CBM'). Thus, 'cubic meters' were the CFUs; the third container itself was not a COGSA package or a single CFU. The third container's cargo included 4.99 'cubic meters' of materials. Liability limitation for the third container was thus 4.99 CFUs.