Stephen Nemeth (Nemeth) contracted with a freight forwarder, Aeromar Van Lines (Aeromar), to handle the shipment of his household goods, personal effects, and work tools from Buenos Aires, Argentina, to Los Angeles, California. Nemeth wrapped his belongings into individual parcels. Aeromar packaged Nemeth's parcels into three large wooden shipping crates, sealed and delivered them to the Port of Buenos Aires. Aeromar loaded the crates aboard the M/S Villanger after an open inspection, as required by the Argentine customs and shipping regulations. The shipment was delivered to the Port of Los Angeles. Nemeth found that two of the three crates had been broken open, and several parcels were damaged or missing. Nemeth took possession of the goods and noted the damages on the delivery record.

Nemeth sued three defendants, Westfal-Larsen Line (the ocean carrier), General Steamship Corp Ltd (the agent of Westfal-Larsen Line) and the M/S Villanger, to recover damages for losses incurred. Nemeth sought USD 22,000 in damages. He claimed that he gave the defendants a list which detailed the contents of his shipment and notified them that the shipment's value was in excess of USD 20,000. Aeromar and Westfal-Larsen signed a bill of lading that listed Nemeth's goods as '3 (three) cases household goods'. A value declaration of USD 400 was typed on the face of the bill of lading. Nemeth claimed that the carrier only added this value declaration later, without his knowledge or consent.

The defendants moved for partial summary judgment contending that their liability, if any, was limited to USD 500 per package under the US Carriage of Goods by Sea Act, 46 USC § 1300 ff (COGSA). Section 4(5) of COGSA 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, ... unless the nature and value of such goods have been declared by the shipper before shipment and inserted in the bill of lading ...

The District Court for the Central District of California granted partial summary judgment limiting the defendants' liability to USD 500 per package. Nemeth appealed.

Held: The judgment of the District Court is reversed, and the case is remanded for further proceedings.

The Court of Appeals held that the partial summary judgment limiting the defendants' liability to USD 500 per package was erroneous. The District Court's ruling assumed that Nemeth had a fair opportunity to choose a higher or lower liability. However, there were genuine issues of material fact as to whether he had such an opportunity.

It is the law of the Ninth Circuit that a carrier may limit its liability under s 4(5) of COGSA only if the shipper is given a 'fair opportunity' to opt for a higher liability by paying a correspondingly greater charge (Komatsu Ltd v States Steamship Co 674 F 2d 806, 809 (9th Cir 1982) (CMI1734); Pan American World Airways Inc v California Stevedore & Ballast Co 559 F 2d 1173, 1176 (9th Cir 1977) (CMI1798)). The carrier bears the initial burden of proving fair opportunity (Komatsu 809). Normally, the carrier can discharge this initial burden by showing that the language of s 4(5) is contained in the bill of lading (ibid). The burden of disproving fair opportunity then shifts to the shipper. An express and legible recitation of s 4(5) is prima facie evidence that the shipper had notice of a choice of liabilities and rates, and was given a fair opportunity to choose a higher liability (Tessler Brothers (BC) Ltd v Italpacific Line 494 F 2d 438, 443 (9th Cir 1974)). An illegible recitation of section 4(5) does not impart such a notice, and does not qualify as prima facie evidence of fair opportunity.

The defendants did not discharge the initial burden of proving fair opportunity. Clause 7 of the bill of lading recited the language of s 4(5), but it was microscopic and blurry. It was illegible to the unaided eye, and could not be deciphered without resort to a magnifying glass or a pre-existing knowledge of s 4(5). Even if the defendants had met their initial burden, Nemeth's response was sufficient to create a genuine issue of material fact to overcome the summary judgment motion. Nemeth's list can be interpreted as evidence of an attempt to declare a higher valuation than the COGSA limit, or that Nemeth would have opted for a higher liability had he been given a fair opportunity to do so.

There were other considerations relevant to the inquiry on fair opportunity. The bill of lading contained no designated place for Nemeth to insert an excess value declaration (Pan American World Airways 1175). The USD 400 valuation was also purportedly typed on the bill of lading without Nemeth's knowledge or consent.

The District Court also erred when it did not give Nemeth the opportunity to prove unreasonable deviation. Prior to the enactment of COGSA, an unreasonable deviation from the contract of carriage deprived a carrier of the benefit of liability limitations (St Johns NF Shipping Corp v SA Companhia Geral Commercial do Rio de Janeiro 263 US 119, 124, 44 S Ct 30, 31, 65 L Ed 201 (1923); 2A Benedict on Admiralty § 128, pp 12-30 (7th edn, 1981). An unreasonable deviation was viewed as vitiating the contract of carriage and making the carrier responsible for the cargo as an insurer (Jones v The Flying Clipper 116 F Supp 386, 387 (SDNY 1953).

Since the passage of COGSA, US courts had been split over whether the 'unreasonable deviation' rule survived COGSA's enactment. The Second Circuit held that COGSA was not intended to change the existing law on this point, and that an unreasonable deviation from the contract of carriage deprives the carrier of the benefit of s 4(5)'s liability limitation (Du Pont de Nemours International SA v SS Mormacvega 493 F 2d 97, 100 n 9 (2d Cir 1974)). The Seventh Circuit held that Congress did intend s 4(5) to change the existing law on unreasonable deviation, and that the liability limitation applies regardless of whether there has been an unreasonable deviation (Atlantic Mutual Insurance Co v Poseidon Schiffahrt 313 F 2d 872, 875 (7th Cir 1963)).

The Second Circuit's position finds support from English law. The English Law Lords have unanimously held that their Carriage of Goods by Sea Act did not change the existing rule that an unreasonable deviation deprived the carrier of the protection of liability limitations (Stag Line Ltd v Foscolo Mango and Co Ltd (The Ixia) [1932] AC 328). The English Carriage of Goods by Sea Act was, like COGSA, based on the Hague Rules and contained the same provisions relating to deviation and carriers' exemptions. The Court of Appeals for the Ninth Circuit agreed with the Second Circuit and the English Law Lords.

A carrier will be deprived of the protection of liability limitations when it deviates unreasonably. The justification is that a deviation subjects the cargo to risks that the shipper did not anticipate. As held in Jones 389, '[a] shipper has the right to assume that the carrier will not deviate and thereby subject the cargo to other than the known risks inherent in a normal route or underdeck stowage'. Mere negligence in the stowage or handling of cargo may be considered an inherent risk of shipping but does not constitute a deviation (The Chester Valley 110 F 2d 592, 594 (5th Cir 1940)). A deviation is a 'serious departure from the contract of carriage' (ibid), which exposes the cargo to 'unanticipated and additional risks' (Jones 389).

Nothing in COGSA indicates that shippers should anticipate the additional risks associated with unreasonable deviations. A shipper is entitled to assume that its goods will not be subjected to such additional risks, in deciding whether to be bound by the liability limitation in s 4(5) or pay for higher liability. The rationale behind the unreasonable deviation rule is sound, and has not been undermined by the enactment of COGSA.

To hold that s 4(5)'s liability limitation is absolute, regardless of the carrier's actions, would permit a carrier to violate the terms of the bill of lading at will, knowing that its liability will be limited to USD 500 per package. Such an approach towards interpreting liability limitation would immunise the carrier even from the consequences of a fundamental breach of contract. Nothing in COGSA or its history warrants such a result (Jones 390).

The subsection which immediately precedes s 4(5) seems to assume that the unreasonable deviation rule survives. Section 4(4) provides that 'any reasonable deviation shall not be deemed to be an infringement or breach of this Act'. Section 4(4) implies that an unreasonable deviation by the carrier is a breach of COGSA, thereby depriving the carrier of COGSA's protection. Its language

is pregnant with the positive meaning that an unreasonable deviation is 'an infringement and breach of this act', it seems logical, as was held in the House of Lords in The Ixia, that when a departure from the contractual voyage is an unreasonable deviation, the carrier is not entitled to any of the exemptions or limitations provided by that Act (2A Benedict on Admiralty § 128, p 12-32 (7th edn, 1981).

The District Court correctly found that Nemeth's shipment consisted of three packages (Hartford Fire Ins Co v Pacific Far East Line Inc 491 F 2d 960, 964 (9th Cir 1974); American & Far Eastern Trading v Sea-Land Service 678 F 2d 830 (9th Cir 1982)). The bill of lading clearly reflected a shipment of three packages. The inner parcels were packaged in three wooden crates by Aeromar with Nemeth's express agreement.