On 9 October 1975, the M/V Mimi sailed from Miami, Florida, United States of America, with cargo onboard, bound for ports of call in Venezuela and Guyana. The vessel was owned by International Properties Management SA (the shipowner) and time chartered to two joint ventures, All-Caribbean Inc and High Watch Shipping Co Ltd (the charterer).

A crew member was injured during loading operations. He was sent to his cabin to rest after receiving treatment. Subsequently, he attacked the officers of the vessel with a knife, killing some and incapacitating others. He awakened the remaining crew and forced them at knife-point to lower a lifeboat. He also managed to shut down the vessel's engines and opened the engine room valves. On 11 October 1975, the vessel sank with its cargo and its dead or incapacitated officers.

The shipowner petitioned the District Court for the Eastern District of Virginia for exoneration from or limitation of liability under 46 USC ss 181-189. Seeking recovery, the cargo interests filed claims against the shipowner. Separately, some cargo interests claimed against the charterers; the charterers claimed against the shipowner for loss of charter hire and unused fuel, and for an indemnity; the shipowner claimed against the charterer for an indemnity; and some crew members filed claims but these were settled prior to the District Court's judgment.

Following a trial on liability issues, the District Court exonerated the shipowner from liability in respect of all of the cargo interests' claims. All other claims, except for the charterer's claim for unearned or unused charter hire, were dismissed. The District Court reasoned that as the shipowner was faultless in respect of the crew member's act, it was entitled to exoneration from liability under the applicable provisions of the Carriage of Goods by Sea Act (COGSA), 46 USC ss 1300-1315. Despite the shipowner's argument to the contrary, the District Court found COGSA to be applicable on two alternative grounds. First, COGSA applied by its terms even though no contract existed (the first ground). No authority was cited for the first ground. Second, the shipowner was estopped by its conduct in the litigation to deny COGSA's applicability (the second ground). The District Court identified three factors to justify the second ground: (1) the issue was first raised by the shipowner 'during final oral argument', and 'without prior notice to the claimants'; (2) the shipowner 'had submitted to the COGSA provisions in the final pretrial order'; (3) the shipowner had similarly submitted to COGSA 'in its brief opposing the motion of [the cargo interests] to increase bond'. Nevertheless, the District Court held that under COGSA's terms and on the facts found, the shipowner was entitled to exoneration.

The cargo interests appealed against the exoneration of the shipowner, but conceded that the first ground was unsupported by authority.

Thus, the issue before the Court of Appeals for the Fourth Circuit was whether the shipowner was liable to cargo interests for cargo loss caused by the deliberate scuttling of the vessel by the crew member.

The shipowner argued that: (1) the cargo interests failed to prove that COGSA applied to the claims made; (2) these claims were entirely predicated upon COGSA being applicable; (3) the cargo interests' right of recovery (if any) was defeated. As to the second ground, the shipowner contended that its position throughout the pretrial and trial proceedings was consistent with a legitimate reliance upon two alternative positions: that COGSA was not applicable; but that if it were, the shipowner was entitled to exoneration. Given that the cargo interests bore the burden of proof, the shipowner was justified in raising deficiencies in proof for the first time at the close of all the evidence, and was not obliged to alert its adversary to possible deficiency at any earlier time.

Held: Judgment vacated; case remanded for further proceedings.

If COGSA applies, the shipowner is not entitled under its terms to exoneration on the facts found and undisputed in the District Court. The District Court's conclusion on this issue is wrong.

The issue of whether COGSA is applicable must be remanded for determination by the District Court on a re-opened record. There is no basis in law for the first ground. As to the second ground, the District Court did not properly exercise its discretion in holding that the shipowner was estopped. The court found, among other things, that estoppel to deny COGSA's applicability cannot be based simply on the shipowner's act of bringing the limitation proceeding, nor on the prayer for 'exoneration from liability' as well as limitation.

Liability for cargo loss is imposed under COGSA only on those charterers and shipowners who meet the definition of 'carrier' contained in 46 USC s 1301.a, that is, those 'who [enter] into a contract of carriage with the shipper'. Cargo claimants who prosecute a claim for cargo loss under COGSA must prove the existence of such a contract of carriage: Associated Metals & Minerals Corp v SS Portoria 484 F 2d 460, 462 (5th Cir 1973); Yeramex International v SS Tendo 595 F 2d 943 (4th Cir 1979). A contract of carriage with a shipowner may either be direct between the parties, or by virtue of a charterer's authority to bind a shipowner by signing bills of lading 'for the master': Yeramex.

COGSA is the United States' codification of the Hague Rules. COGSA provides the substantive framework for determining liability for damage to cargo carried in international trade to or from ports of the United States. For COGSA to apply to a particular loss, two requirements must be satisfied. First, damage must have occurred after loading was commenced and before unloading was completed: 46 USC ss 1300, 1311. The Harter Act, 46 USC ss 190–196, enacted before COGSA and to some extent superseded by the latter, still governs domestic traffic and losses occurring outside the COGSA time frame. Second, the charterer or owner sought to be charged with the loss was a 'carrier' as defined in 46 USC s 1301.a.

COGSA regulates the terms of ocean carriage by dealing with the terms of the ocean bill of lading. COGSA forces incorporation of its terms by reference into any covered contract of carriage - 46 USC s 1300 (enacting clause) - so that the contracting parties' rights and obligations in respect of carriage derive from those terms. The existence of a 'contract of carriage', typically the ocean bill of lading, between cargo claimant as 'shipper' and charterer or owner as 'carrier' is an essential element in any COGSA claim.

COGSA provides two distinct substantive frameworks within which liability for a particular loss may be established. These build upon the two fundamental pre-statutory obligations of public carriers of goods by sea that the courts had established as 'overriding' in respect of all common law or contractual exceptions to the original strict liability of carriers as insurers or warrantors of safe arrival and of seaworthiness. These are: the duty to use due care with respect to the cargo, and the duty to use due diligence to furnish a seaworthy vessel.

COGSA codifies the substantive scope of these two obligations in two sets of paired sections, each of which defines the general duty and sets out its limits or qualifications. These are ss 3.1, 3.2, 4.1, and 4.2. Sections 3.1 and 4.1 (46 USC s 1303.1 and 46 USC s 1304.1 respectively) together impose (in mirror image statement of duty and immunity) an obligation to exercise due diligence to provide a seaworthy ship 'at the beginning of the voyage'.

46 USC s 1303.1 reads:

The carrier shall be bound, before and at the beginning of the voyage, to exercise due diligence to

(a) Make the ship seaworthy;

(b) Properly man, equip, and supply the ship;

(c) Make the holds, refrigerating and cooling chambers, and all other parts of the ship in which goods are carried, fit and safe for this reception, carriage, and preservation.

46 USC s 1304.1 reads:

Neither the carrier nor the ship shall be liable for loss or damage arising or resulting from unseaworthiness unless caused by want of due diligence on the part of the carrier to make the ship seaworthy, and to secure that the ship is properly manned, equipped, and supplied, and to make the holds, refrigerating and cool chambers, and all other parts of the ship in which goods are carried fit and safe for their reception, carriage, and preservation in accordance with the provisions of paragraph (1) of section 1303 of this title. Whenever loss or damage has resulted from unseaworthiness, the burden of proving the exercise of due diligence shall be on the carrier or other persons claiming exemption under this section.

Sections 3.2 and 4.2 (46 USC s 1303.2 and 46 USC s 1304.2 respectively) together define the 'due care' obligation by providing in s 3.2 a general duty to 'properly and carefully load, handle, stow, carry, keep, care for, and discharge the goods carried', then indicating in s 4.2 16 specific causes, ss 4.2.a–4.2.p, and one catch-all, s 4.2.q, of loss or damage to cargo that serve to limit the scope of the duty as generally defined in s 3.2.

46 USC s 1303.2 reads:

The carrier shall properly and carefully load, handle, stow, carry, keep, care for, and discharge the goods carried.

46 USC §§ 1304.2.a, 1304.2.c, 1304.2.d, and 1304.2.q reads:

(2) Neither the carrier nor the ship shall be responsible for loss or damage arising or resulting from

(a) Act, neglect, or default of the master, mariner, pilot, or the servants of the carrier in the navigation or in the management of the ship; ...

(c) Perils, dangers, and accidents of the sea or other navigable waters;

(d) Act of God; ...

(q) Any other cause arising without the actual fault and privity of the carrier and without the fault or neglect of the agents or servants of the carrier, but the burden of proof shall be on the person claiming the benefit of this exception to show that neither the actual fault or privity of the carrier nor the fault or neglect of the agents or servants of the carrier contributed to the loss or damage.

The practical effect of these four sections is to give a cargo claimant two substantive theories upon which that claimant may be able to establish a carrier's liability for a particular loss: the 'due care to prevent loss or damage' theory, and the unseaworthiness theory. Each is clearly a fault theory, as the key duty-defining language 'due diligence', 'carefully', 'fault or neglect' makes plain. This imposes critical proof problems for any shipper. COGSA accommodates to these by a proof scheme that is of supreme importance in its application to particular disputes.

The primary stage of this proof scheme, partly integral to COGSA, and partly the result of judicial gloss, is decisive here and must be summarised. As at common law and under the predecessor Harter Act, a claimant makes out a prima facie case of liability for loss or damage to the goods by the traditional means given to bailors: proof that the claimant delivered the goods to the carrier and that they were not returned, or that the claimant delivered them in good condition and they were damaged upon return: Mamiye Bros v Barber Steamship Lines Inc 241 F Supp 99, 109 (SD NY 1965), affirmed, 360 F 2d 774 (2d Cir 1966). On this state of proof standing alone, the unseaworthiness theory has not been directly put in play, and it is possible to take the view that the bailor's prima facie case goes only to the 'due care to prevent loss or damage' theory or that it goes as well to the unseaworthiness theory, with corresponding proof burdens placed upon the carrier to avoid the prima facie case of liability. Compare Maxine Footwear Co v Canadian Government Merchant Marine Ltd [1959] AC 589, 602-03 (PC); Toronto Elevators Ltd v Colonial Steamships Ltd [1950] Can Exch 371, 375; Firestone Synthetic Fibers Co v M/S Black Heron 324 F 2d 835, 836-37 (2d Cir 1963); Isbrandtsen Co v Federal Insurance Co 113 F Supp 357 (SD NY 1952), affirmed, 205 F 2d 679 (2d Cir 1953). Under either view, faced with a bailor's prima facie case, whether or not accompanied by direct evidence of unseaworthiness causing or contributing to loss, a carrier must at least establish one of the exculpating causes of s 4.2 to avoid the fault that is otherwise imputed to the carrier in respect of the obligation imposed by s 3.2. If the carrier cannot do this, any proof related to the unseaworthiness theory is irrelevant to the determination of liability.

Liability in this case was established at this stage of the proof scheme, and so there is no need to explore the further ramifications of that scheme which have become exceedingly complicated, and are by no means clearly worked out, once the carrier has successfully established an exculpating cause under s 4.2.

There is also no need to address a contention by the cargo interests that it was entitled to the so-called 'Pennsylvania presumption'. This rule, which originated in The Pennsylvania 86 US (19 Wall) 125, 22 L Ed 148 (1874), would wrench the COGSA proof scheme. Upon proof by the cargo interests of any condition of unseaworthiness constituting a breach of statutory duty, it would fix upon the carrier a burden of persuasion that the condition could not reasonably have contributed to the loss. No view is expressed as to whether that presumption has survived the COGSA codification.

Turning to the proof in this case, the cargo interests' prima facie case of delivery and failure to return was shown except for the issue of whether COGSA was applicable. The cause of loss was undisputed: the vessel was wilfully scuttled by a member of its crew.

The cargo interests adduced evidence to show that the shipowner had breached its obligation under s 3.1 to provide a seaworthy ship and that these breaches proximately caused the loss. This evidence related to failures 'properly [to] man' the ship, 46 USC s 1303.1.b, by pointing to carelessness in employing the berserk crew member and in providing a crew adequate to have restrained him or otherwise prevented the scuttling.

The shipowner countered with evidence designed to establish its s 4.1 'immunity' under the unseaworthiness theory by showing its 'due diligence' in crewing the ship in the many respects challenged by the cargo interests, and the lack of proximate causation between any of its acts or omissions respecting its 'proper manning' obligation and the loss.

The decision turns on whether the shipowner successfully overcame by proof the prima facie breach of s 3.2. This could only have been done by proof that established the cause of loss as one of those specifically excepted in ss 4.2.a-4.2.p, or as '[a]ny other cause arising without the actual fault . . . of the carrier and without the fault or neglect of the agents or servants of the carrier', under s 4.2.q (the q clause). However, the shipowner was constrained by indisputable evidence that the direct cause was the wilful act of its crew member.

The above was the proof laid before the District Court and upon which it concluded that the shipowner was entitled to exoneration. From the District Court's judgment it appears that although the parties argued and the Court was advertent to the possible application of both theories of recovery, the District Court's legal conclusion of exoneration was related only to the unseaworthiness theory.

In response to the prima facie breach of s 3.2, the shipowner expressly relied upon both s 4.2.a (errors in management) and s 4.2.q. The District Court rightly rejected the 'errors in management' exception and the shipowner has abandoned that exception on appeal. However, the District Court wrongly applied the q clause, stating that:

The exception provided in s 1304(2)(q) appears to provide the same burden given in 46 U.S.C. s 1304(1), namely, that [the shipowner] prove that its fault, if any, did not contribute to or proximately cause the loss complained of. Thus, the one question before this Court is whether [the shipowner] has successfully proven that the cargo loss sustained from the sinking of the [vessel] was not proximately caused by its negligence, if any.

The District Court then exonerated the shipowner because it found no proximate causal connection between the alleged breaches of the seaworthiness obligation and the loss.

The District Court wrongly equated the defensive proof requirements of ss 4.1 and 4.2, which address two distinctly different theories of recovery, and consequently have different substantive content. This led the District Court to completely disregard the q clause requirement that the carrier prove not only that the identified cause of loss arose 'without the actual fault and privity of the carrier' but also 'without the fault or neglect [of] the agents or servants of the carrier'. These dual requirements are plainly stated conjunctively in the q clause.

Thus, the District Court failed to spot the following decisive question of law (apparently one of first impression under COGSA): whether under the q clause a crew member's wilful act of scuttling a ship is an excepted cause of cargo loss that exculpates the carrier or employer from liability. According to the plain language of COGSA, it is not.

Only one narrow interpretive problem might be thought left open by the quoted language. Applied to this case, it is whether the crew member, whose fault clearly caused the loss, was at the time of the scuttling an agent or servant of the shipowner. That he was at the time employed by the shipowner is undisputed. He was therefore a 'servant' of the shipowner unless there is to be read into COGSA a 'scope of employment' qualification outside whose reach his causative act fell.

On appeal, the shipowner argued that such a 'scope of employment' qualification should be read into the q clause: Leesh River Tea Co v British India Steam Navigation Co [1967] 2 QB 250 (CA). Because the question is novel and because of the general policy favouring uniformity of interpretation of the various national counterparts to the Hague Rules (Robert C Herd & Co v Krawill Machinery Corp 359 US 297, 301 (1959) (CMI1735), Leesh River must be carefully considered.

Under the Leesh River rule, the crew member's act was within the scope of employment. It is therefore unnecessary to either adopt or reject the Leesh River rule as one of general application to decide that the crew member's act was that of a servant under the q clause, even though criticism of Leesh River is persuasive.

In Leesh River a carrier was sued for damage to cargo caused by seawater entering the hold of its ship. Stevedores employed by the carrier to transfer cargo had removed and stolen a brass plate from the hull, leaving a hole through which the water entered after the voyage resumed. Applying the English counterpart to pertinent provisions of COGSA, the Court in Leesh River held that the carrier was exculpated from liability under the q clause. It reached this result by applying the land-based bailment rule of Morris v C W Martin & Sons Ltd [1966] 1 QB 716 (CA). Within that rule, the Leesh River carrier would have been liable had the stevedores stolen the goods, but they did not steal them, rather they damaged the ship. Since their employment pertained only to the handling of goods, their act of damaging the ship lay outside the scope of their employment per the Morris rule as interpreted in Leesh River and read into the q clause.

The very terms 'agent and servant' imply at the minimum a temporal coincidence of general employment with causative act, and any rational interpretation of the q clause must start with that interpretation. Leesh River reads in only a modest further qualification: that the causative act shall have occurred at a place and time, and in respect of an object related to the general duties of the employment. It does not read in any further qualification related to the servant’s culpability or state of mind, a qualification of the q clause that the shipowner here has contended for. That this last is so is shown by considering the land-based bailment rule of the Morris case from which the Leesh River rule was derived.

Morris resolved an anomaly in English law regarding the liability of English bailees for misconduct of their servants. Prior to Morris a bailee was liable for theft by a third party if it occurred through the negligence of the bailee's employee, Abraham v Bullock (1902) 86 LTR (NS) 796 (CA), but not if the employee himself was the thief, Cheshire v Bailey [1905] 1 KB 237 (CA). Morris simply shifted focus from the degree and kind of servant culpability to the relationship between act and employment duties. A fur was left with a furrier for cleaning. Since the furrier did no cleaning, the fur was sent with the bailor's permission to a person who did, and an employee of that person stole the fur. The Court held the bailee liable, and an important distinction emerged: had the thief been a maintenance employee of the cleaner, no liability of the bailee would have resulted; but because the thief was an employee specifically assigned to clean the fur, liability resulted. See also Lloyd v Grace, Smith & Co [1912] AC 716 (HL). Were this rule to be applied to the instant case, the crew member's act would similarly have fallen within any scope of employment requirement implied as a condition in the q clause. Consequently, even assuming the Leesh River rule as a qualification of the statute's literal language, under the q clause the cause of loss here was not shown to be one arising 'without the fault of a servant' of the shipowner.

This construction of the q clause is reinforced by two other considerations. First, the result dictated by this construction conforms to the general policy that must underlie COGSA's careful allocation of burden(s) of proof in respect of loss of goods at sea. In the proof scheme earlier analysed appears a frequently used procedural device to force a preferred substantive result where proof is in equipoise or unavailable, or where only very specific exceptions to generally assumed liability are to be recognised. Where such a device is used it ordinarily reflects an intention that in the case where both parties are without direct fault but one must suffer the loss, it is ordinarily fairer that the loss shall fall upon the party in the better position to have controlled, and to produce evidence of, the operative facts. The device used is the evidentiary presumption (prima facie case, res ipsa loquitur) that casts the burden, hence the loss, on that disfavoured party. That such a policy may well also cast the loss upon the disfavoured party in some situations not precisely contemplated nor adequately described in a statute is itself likely to be an intended consequence. As between the carrier and the shipper of goods by sea, the carrier is obviously the party more likely to be in control both of events and of evidence of events. Thus, the result dictated by this construction of the q clause is likely to conform to congressional policy in enacting COGSA.

Finally, this construction is suggested by treating the crew member's act as barratry: National Union Fire Insurance Co v Republic of China 254 F 2d 177, 182-84 (4th Cir 1958). Before cargo damage law was codified, barratry was one of the exceptions to liability traditionally listed by the carrier in bills of lading. Many of these exceptions were carried into the specific exceptions in COGSA s 4.2, but not barratry. Thus, barratry, the most obvious conceivable example of 'fault' of a vessel's crew, was not intended to be an exculpating cause of loss under COGSA.