The shipper, Escambia Treating Co (Escambia), was to ship approximately 4,350 telephone poles from Brunswick, Georgia, to San Juan, Puerto Rico. Escambia chartered the barge Herwood from Hercules Inc (Hercules). In turn, Hercules entered into a towage contract with Detco Towing Co (Detco) for the towage of the Herwood by the tug Tracy D. Acting for Escambia, Stevens Shipping Co Inc (Stevens) loaded the poles onto the barge. After setting sail, the barge showed a noticeable list to port and eventually capsized, losing its cargo of telephone poles, and sustaining substantial damage to the hull.

Two claims arose from the situation. First, the claim by Hercules against Stevens, Detco, the Tracy D, and Escambia, for physical damage to the barge. Second, the claim of Aetna Casualty & Surety Co (Aetna - Escambia’s subrogated cargo underwriter) for loss of the cargo.

This appeal arose from the claim by Hercules against Escambia for the hull damage caused by improper loading of the cargo under the charterparty. Escambia cross-claimed from Detco, the Tracy D and Stevens, seeking indemnity and asserting that if Escambia were held liable on Hercules' claim, legal responsibility lay on the impleaded cross-defendants.

After dismissing Hercules' claim against Detco for failure to bring suit within the contractual one-year period, the District Court dismissed Escambia's cross-claim for indemnity on the ground that it was also thereby time-barred. The District Court also dismissed Aetna's claim for cargo damage as being time barred.

Held: The judgment is reversed and remanded.

The District Court granted Detco’s motion to dismiss Aetna's petition of intervention. The basis for this decision was the one-year limitation provided by COGSA which was incorporated by para 9 into the charterparty. In opposing the dismissal of its petition to intervene, Aetna urged that the agreement between Escambia and Hercules was one of towage, to which COGSA did not apply. As to the Hercules-Escambia charterparty, Aetna contended that para 9, referring to all the 'rights and immunities', was an incorporation only of § 4 of COGSA, 46 USC § 1304, titled 'Rights and Immunities of Ships and Carrier', whereas the one-year limitation provision was found under § 3 of COGSA. From this, Aetna deduced that the charterparty did not contain a sufficiently expressed statement that the parties intended to incorporate the one-year limitation. As to the towage agreement, Aetna argued that the incorporation of COGSA was an invalid and indirect method of circumventing the Bisso doctrine, which is based on public policy and generally invalidates contracts releasing towers from all liability for their negligence: see Bisso v Inland Waterways Corp 1955 AMC 899. In its filed memorandum, Aetna first raised the issue that it was a third-party beneficiary to the Hercules-Detco towage contract. Escambia, in its cross-claim against Detco, also indicated that it was a third-party beneficiary to this towage contract. In replying to Aetna's opposition to the dismissal of its intervention, Detco urged that, if the charterparty did not create a one-year limitation by incorporation of COGSA, the one-year provision in the towage agreement provided a defence to Detco only, since Escambia and its subrogee, Aetna, were barred as third-party beneficiaries.

The District Court accepted Detco’s argument that Aetna, as the subrogee of Escambia, was a third-party beneficiary of the Detco-Hercules towage agreement and thus bound by para 12 of the towage contract fixing a one-year limitation for claims. The Court also rejected Aetna's position that the requirement in the towage contract that all claims be brought within one year of expected delivery was exculpatory and therefore invalid under Bisso. Approximately one month after denying Aetna's motion to reconsider the dismissal of its petition for intervention, the District Court granted summary judgment in favour of Detco on the original complaint by Hercules and also on Escambia's cross-claim for indemnity. Both motions were granted on the basis of the one-year limitation period in the towage agreement, with Hercules being a direct party, and Escambia a third-party beneficiary. Both Aetna and Escambia appealed.

In its appeal, Escambia argued that its claim against Detco was one for indemnity, and not for damages, and was misconstrued by the lower Court. Since Escambia had not been found liable to Hercules for damage to the barge, its claim for indemnity had not yet accrued, and therefore could not be barred by the one-year limitation in the towage agreement. Escambia also attacked the District Court's finding that Escambia was bound as a third-party beneficiary to the Hercules-Detco towage agreement. Aetna contended that its action for the cargo loss rested not on the contract to tow, but on the negligent performance of the 'implied obligation to tow the barge properly and safely', and perhaps also on breach of the implied warranty of workmanlike performance. Aetna reasoned that the contractual one-year limitation for claims in the towage agreement, of which Escambia had no prior knowledge, did not control a tort approach, and therefore a third-party beneficiary analysis was inappropriate. Instead, Aetna argued that a claim for negligent towage was governed by the maritime doctrine of laches.

In response to these arguments, Detco reasserted its defence based on the language of para 9 of the charterparty, which extended COGSA benefits to both the barge and the tow. As to the towage agreement, Detco argued that Escambia and Aetna, claiming to be third-party beneficiaries, must be subject to the defences of the contract. Lastly, to rebut Escambia's argument that its claim was one for indemnity, Detco relied on this Court's opinion in Grace Lines Inc v Central Gulf Steamship Corp 416 F 2d 977 (5th Cir 1969). In that case, it was held that where the suit of the cargo claimant against the shipowner was barred, the indemnity action was also barred.

The Court of Appeals, over-ruling its decision in Grace Lines, held that a cause of action for indemnity arises separately from, and after, liability has been established. The statute of limitations does not commence to run until the liability arises. Where the relationship between the party seeking indemnity and the one from whom indemnity was sought is not governed by an agreement subject to COGSA, courts decline to apply Grace Lines: see ITT Rayonier Inc v Southeastern Maritime Co 620 F 2d 512 (5th Cir 1980) (CMI1724). This Court’s opinion in ITT Rayonier illustrates the general approach used by courts to avoid the harsh Grace Lines precedent, by distinguishing the cases on the facts and by reading Grace Lines narrowly. The general rule of indemnity provides that a cause of action does not arise until there is a determination of initial liability. Therefore, the Court of Appeals reversed the District Court’s judgment dismissing Escambia’s claim for indemnification against Hercules.

Having ruled that Escambia's claim for indemnity was not time-barred, the Court of Appeals remanded the case back to the District Court to determine the factual issues concerning the intent of the charterparty, directing the District Court to determine whether the arrangement was one for transportation, with Escambia looking entirely to a turn-key performance by Hercules without regard to the towage that Hercules would have to obtain. If the District Court decided that the dominant purpose of this contractual arrangement was one of transportation, the parties were free to incorporate COGSA provisions.

In the event that the District Court were to conclude the whole arrangement between Escambia and Hercules was not intended as a transportation contract, but that a separate towage contract was contemplated, it should then hold that the attempted incorporation of COGSA was ineffective because of Bisso. The incorporation of COGSA does indeed affect the rights of the parties. COGSA not only limits the time in which suit may be brought, but also alters the substantive rights and duties of the parties. The general standard of negligence applied to the tow is markedly reduced by COGSA which 'excuses a multitude of sins, including faults in navigation, etc'.

Under a private contract of carriage, Escambia could, and indeed did, release the tug from liability. Paragraph 9 of the charterparty makes it clear that the owner and the tug are entitled to the benefits of COGSA. Aetna's argument that the parties did not mean to incorporate all of COGSA under para 9 did not persuade the Court. The section of COGSA restricting liability for negligence is § 1304 was specifically incorporated through the use of the words 'rights and immunities'. The contention that the one-year limitation provision in § 1303 was also not included was frivolous. By the express agreement between Escambia and Hercules, it is clear that Escambia was aware of, and consented to, the incorporation of COGSA into the charterparty. If the District Court determines that the contract was one for transportation, it is clear that Escambia released Detco from all COGSA liability.