This case concerned a standard form bill of lading evidencing the carriage of a shipload of Moroccan oranges and lemons. The purchaser was Bacchus Associates (Bacchus), a New York wholesale fruit importer and distributor. Bacchus dealt with Galaxie Negoce SA (Galaxie), a Moroccan fruit supplier. Bacchus contracted with Galaxie to purchase the shipload of fruit and chartered a ship to transport it from Morocco to Massachusetts. The ship was the M/V Sky Reefer, a refrigerated cargo ship owned by MH Maritima SA (MH), a Panamanian company, and time-chartered to Nichiro Gyogyo Kaisha Ltd (Nichiro), a Japanese company. Stevedores hired by Galaxie loaded and stowed the cargo. When it received the cargo from Galaxie, Nichiro as carrier issued a form bill of lading to Galaxie as shipper and consignee. Once the ship set sail from Morocco, Galaxie tendered the bill of lading to Bacchus according to the terms of a letter of credit opened in Galaxie's favour.

Clause 3 of the bill of lading, entitled 'Governing Law and Arbitration', provided:

(1) The contract evidenced by or contained in this Bill of Lading shall be governed by the Japanese law.

(2) Any dispute arising from this Bill of Lading shall be referred to arbitration in Tokyo by the Tokyo Maritime Arbitration Commission (TOMAC) of The Japan Shipping Exchange, Inc., in accordance with the rules of TOMAC and any amendment thereto, and the award given by the arbitrators shall be final and binding on both parties.

When the vessel's hatches were opened for discharge in Massachusetts, Bacchus discovered that thousands of boxes of oranges had shifted in the cargo holds, resulting in over USD 1 million damage. Bacchus received USD 733,442.90 compensation from Vimar Seguros y Reaseguros (the petitioner), Bacchus' marine cargo insurer, who became subrogated to that extent to Bacchus' rights. The petitioner and Bacchus then brought suit against MH in personam and the M/V Sky Reefer in rem in the District Court for the District of Massachusetts under the bill of lading. The defendants (the respondents here) moved to stay the action and compel arbitration in Tokyo under cl 3 of the bill of lading and § 3 of the Federal Arbitration Act (FAA), which requires courts to stay proceedings and enforce arbitration agreements covered by the Act. The petitioner and Bacchus opposed the motion, arguing that the arbitration clause was unenforceable under the FAA both because it was a contract of adhesion, and because it violated the Carriage of Goods by Sea Act (COGSA) § 3(8), as the inconvenience and costs of proceeding in Japan would 'lesse[n] ... liability' as those terms are used in COGSA.

The District Court rejected the adhesion argument, observing that Congress defined the arbitration agreements enforceable under the FAA to include maritime bills of lading, and that the petitioner was a sophisticated party familiar with the negotiation of maritime shipping transactions. It also rejected the argument that requiring the parties to submit to arbitration would lessen the respondents' liability under COGSA § 3(8). The Court granted the motion to stay judicial proceedings and to compel arbitration, but retained jurisdiction pending arbitration. The First Circuit affirmed the order to arbitrate. Although it expressed doubt whether a foreign arbitration clause lessened liability under COGSA § 3(8), the Court of Appeals assumed that the clause was invalid under COGSA, and resolved the conflict between the statutes in favour of the FAA, which it considered to be the later enacted, and more specific statute. The Supreme Court granted certiorari.

Held (Justice Kennedy delivering the opinion of the Court): As foreign arbitration clauses in bills of lading are not invalid under COGSA in all circumstances, both the FAA and COGSA may be given full effect. The judgment of the Court of Appeals is affirmed, and the case is remanded for further proceedings consistent with this opinion.

The leading case for invalidation of a foreign forum selection clause is the opinion of the Court of Appeals for the Second Circuit in Indussa Corp v SS Ranborg 377 F 2d 200 (2d Cir 1967) (en banc). The Court of Appeals held that COGSA invalidated a clause designating a foreign judicial forum because it 'puts "a high hurdle" in the way of enforcing liability, and thus is an effective means for carriers to secure settlements lower than if cargo [owners] could sue in a convenient forum'. The Court observed that 'there could be no assurance that [the foreign court] would apply [COGSA] in the same way as would an American tribunal subject to the uniform control of the Supreme Court'. Following Indussa, US Courts of Appeals without exception have invalidated foreign forum selection clauses under § 3(8). As foreign arbitration clauses are but a subset of foreign forum selection clauses in general, the Indussa holding has been extended to foreign arbitration clauses as well.

Section 3(8) of COGSA provides as follows: 'Any clause, covenant, or agreement in a contract of carriage relieving the carrier or the ship from liability for loss or damage to or in connection with the goods, arising from negligence, fault, or failure in the duties and obligations provided in this section, or lessening such liability otherwise than as provided in this chapter, shall be null and void and of no effect.'

The liability that may not be lessened is 'liability for loss or damage ... arising from negligence, fault, or failure in the duties and obligations provided in this section'. The statute thus addresses the lessening of the specific liability imposed by the Act, without addressing the separate question of the means and costs of enforcing that liability. The difference is that between explicit statutory guarantees and the procedure for enforcing them, between applicable liability principles and the forum in which they are to be vindicated.

The liability imposed on carriers under COGSA § 3 is defined by explicit standards of conduct, and it is designed to correct specific abuses by carriers. In the 19th century it was a prevalent practice for common carriers to insert clauses in bills of lading exempting themselves from liability for damage or loss, limiting the period in which plaintiffs had to present their notice of claim or bring suit, and capping any damages awards per package. Thus, § 3, entitled 'Responsibilities and liabilities of carrier and ship', requires that the carrier 'exercise due diligence to ... [m]ake the ship seaworthy' and '[p]roperly man, equip, and supply the ship' before and at the beginning of the voyage: § 3(1); 'properly and carefully load, handle, stow, carry, keep, care for, and discharge the goods carried': § 3(2); and issue a bill of lading with specified contents: § 3(3). Section 3(6) allows the cargo owner to provide notice of loss or damage within three days and to bring suit within one year. These are the substantive obligations and particular procedures that § 3(8) prohibits a carrier from altering to its advantage in a bill of lading. Nothing in this section, however, suggests that the statute prevents the parties from agreeing to enforce these obligations in a particular forum. By its terms, it establishes certain duties and obligations, separate and apart from the mechanisms for their enforcement.

The petitioner’s contrary reading of § 3(8) is undermined by the Court’s construction of a similar statutory provision in Carnival Cruise Lines Inc v Shute 499 US 585, 111 S Ct 1522, 113 L Ed 2d 622 (1991), in which a number of Washington residents argued that a Florida forum selection clause contained in a cruise ticket should not be enforced because the expense and inconvenience of litigation in Florida would 'caus[e] plaintiffs unreasonable hardship in asserting their rights' and therefore 'lessen, weaken, or avoid the right of any claimant to a trial by court of competent jurisdiction on the question of liability for ... loss or injury, or the measure of damages therefor' in violation of the Limitation of Vessel Owner's Liability Act. This Court observed that the clause 'does not purport to limit petitioner’s liability for negligence' and enforced the agreement.

If the question whether a provision lessens liability were answered by reference to the costs and inconvenience to the cargo owner, there would be no principled basis for distinguishing national from foreign arbitration clauses. Even if it were reasonable to read § 3(8) to make a distinction based on travel time, airfare, and hotel bills, these factors are not susceptible of a simple and enforceable distinction between domestic and foreign forums. Requiring a Seattle cargo owner to arbitrate in New York is likely to impose more costs and burdens than a foreign arbitration clause requiring it to arbitrate in Vancouver. It would be unwieldy and unsupported by the terms or policy of the statute to require courts to proceed case by case to tally the costs and burdens to particular plaintiffs in light of their means, the size of their claims, and the relative burden on the carrier.

The Court's reading of 'lessening ... liability' to exclude increases in the transaction costs of litigation also finds support in the goals of the Brussels Convention for the Unification of Certain Rules Relating to Bills of Lading, 51 Stat 233 (1924) (the Hague Rules), on which COGSA is modelled. Sixty-six countries, including the United States and Japan, are now parties to the Convention, and it appears that none has interpreted its enactment of § 3(8) of the Hague Rules to prohibit foreign forum selection clauses. The English courts long ago rejected the reasoning later adopted by the Indussa Court: see Maharani Woollen Mills Co v Anchor Line [1927] 29 Lloyd's LLR 169 (CA) per Scrutton LJ: '[T]he liability of the carrier appears to me to remain exactly the same under the clause. The only difference is a question of procedure - where shall the law be enforced? - and I do not read any clause as to procedure as lessening liability.' Other countries that do not recognise foreign forum selection clauses rely on specific provisions to that effect in their domestic versions of the Hague Rules, see eg the Sea-Carriage of Goods Act 1924, § 9(2) (Australia); the Carriage of Goods by Sea Act, No 1 of 1986, § 3 (South Africa).

It would also be out of keeping with the objects of the Convention for the courts of this country to interpret COGSA to disparage the authority or competence of international forums for dispute resolution. The petitioner's skepticism over the ability of foreign arbitrators to apply COGSA or the Hague Rules, and its reliance on this aspect of Indussa, must give way to contemporary principles of international comity and commercial practice. If the United States is to be able to gain the benefits of international accords and have a role as a trusted partner in multilateral endeavours, its courts should be most cautious before interpreting its domestic legislation in such manner as to violate international agreements. That concern counsels against construing COGSA to nullify foreign arbitration clauses because of inconvenience to the plaintiff or insular distrust of the ability of foreign arbitrators to apply the law.

The petitioner's second argument against enforcement of the Japanese arbitration clause is that there is no guarantee that foreign arbitrators will apply COGSA. This objection raises a concern of substance. The central guarantee of § 3(8) is that the terms of a bill of landing may not relieve the carrier of the obligations or diminish the legal duties specified by the Act. The relevant question, therefore, is whether the substantive law to be applied will reduce the carrier’s obligations to the cargo owner below what COGSA guarantees. The petitioner argues that the arbitrators will follow the Japanese Hague Rules, which, petitioner contends, lessen respondents' liability in at least one significant respect. The Japanese version of the Hague Rules, it is said, provides the carrier with a defence based on the acts or omissions of the stevedores hired by the shipper, Galaxie. Whatever the merits of the petitioner’s comparative reading of COGSA and its Japanese counterpart, its claim is premature. At this interlocutory stage it is not established what law the arbitrators will apply to petitioner’s claims or that petitioner will receive diminished protection as a result. The arbitrators may conclude that COGSA applies of its own force or that Japanese law does not apply so that, under another clause of the bill of lading, COGSA controls. The respondents seek only to enforce the arbitration agreement. The District Court has retained jurisdiction over the case and will have the opportunity at the award enforcement stage to ensure that the legitimate interest in the enforcement of COGSA has been addressed. As the District Court has retained jurisdiction, mere speculation that the foreign arbitrators might apply Japanese law which, depending on the proper construction of COGSA, might reduce respondents’ legal obligations, does not in and of itself lessen liability under COGSA § 3(8).

Justice O’Connor, concurring in the judgment: agreed that the language of (COGSA) and the decision in Carnival Cruise Lines Inc v Shute precluded a holding that the increased cost of litigating in a distant forum, without more, can lessen liability within the meaning of COGSA § 3(8). Second, she agreed that, because the District Court has retained jurisdiction over this case while the arbitration proceeds, any claim of lessening of liability that might arise out of the arbitrators’ interpretation of the bill of lading’s choice of law clause, or out of their application of COGSA, is premature. However, she noted that foreign arbitration clauses of the kind presented here do not divest domestic courts of jurisdiction, unlike true foreign forum selection clauses such as that considered in Indussa. Accordingly, she would not, without qualification, reject the reasoning and the conclusion of the Indussa rule itself, but would prefer to disturb the existing line of authority only to the extent necessary to decide this case.

Justice Stevens, dissenting: Our interpretation of maritime law prior to the enactment of the Harter Act, and the federal courts’ consistent interpretation of COGSA, buttressed by scholarly recognition of the commercial interest in uniformity, demonstrate that the clauses in the Japanese carrier's bill of lading purporting to require arbitration in Tokyo pursuant to Japanese law both would have been held invalid under COGSA prior to today.

The foreign arbitration clause imposes potentially prohibitive costs on the shipper, who must travel - and bring its lawyers, witnesses, and exhibits - to a distant country in order to seek redress. The shipper will therefore be inclined either to settle the claim at a discount or to forgo bringing the claim at all. The foreign law clause leaves the shipper who does pursue his claim open to the application of unfamiliar and potentially disadvantageous legal standards, until it can obtain review (perhaps years later) in a domestic forum under the high standard applicable to vacation of arbitration awards. Accordingly, courts have always held that such clauses 'lessen' or 'relieve' the carrier’s liability, and even the Court of Appeals in this case assumed as much. Yet this Court today holds that carriers may insert foreign arbitration clauses into bills of lading, and it leaves in doubt the validity of choice of law clauses.

When one reads the statutory language in light of the policies behind COGSA's enactment, it is perfectly clear that a foreign forum selection or arbitration clause 'relieves' or 'lessens' the carrier's liability. The transaction costs associated with an arbitration in Japan will obviously exceed the potential recovery in a great many cargo disputes. As a practical matter, therefore, in such a case no matter how clear the carrier's formal legal liability may be, it would make no sense for the consignee or its subrogee to enforce that liability. Even if the value of the shipper's claim is large enough to justify litigation in Asia, contractual provisions that impose unnecessary and unreasonable costs on the consignee will inevitably lessen its net recovery. If, as under the Court's reasoning, such provisions do not affect the carrier's legal liability, it would appear to be permissible to require the consignee to pay the costs of the arbitration, or perhaps the travel expenses and fees of the expert witnesses, interpreters, and lawyers employed by both parties.

The Court’s reliance on its decision in Carnival Cruise Lines Inc v Shute is misplaced. That case held that a domestic forum selection clause in a passenger ticket was enforceable. As no carriage of goods was at issue, COGSA did not apply to the parties' dispute. Accordingly, the enforceability of the ticket's terms did not implicate the commercial interests in uniformity and negotiability that are served by the statutory regulation of bills of lading. Moreover, the Carnival Cruise holding is limited to the enforceability of domestic forum selection clauses.

Finally, the Court's implicit suggestion that the interpretation of the Harter Act (which preceded the Hague Rules), and the federal courts' consistent interpretation of COGSA since Indussa was decided in 1967, has somehow been unfaithful to US international commitments, is baffling. The concerns about invalidating freely negotiated forum selection clauses that this Court expressed in The Bremen v Zapata Off-Shore Co 407 US 1, 92 S Ct 1907, 32 L Ed 2d 513 (1972), have no bearing on the validity of the provisions in bills of lading that are commonly recognised as contracts of adhesion. International obligations do not require the US to enforce a contractual term that was not freely negotiated by the parties. Much less do they require the clear meaning of COGSA - itself the product of international negotiations - which forbids enforcement of clauses lessening the carrier’s liability to be ignored.

The majority points to several foreign statutes, passed by other signatories to the Hague Rules, that make foreign forum selection clauses unenforceable in the courts of those countries. The majority assumes (without citing any evidence) that these statutes were passed in order to depart from the Hague Rules, and that COGSA, the US enactment of the Hague Rules, should therefore be read to mean something different from these statutes. The opposite conclusion is at least as plausible: these foreign nations believed non-enforcement of foreign forum selection clauses was consistent with their international obligations, and they passed these statutes to make that explicit. If anything, then, these statutes demonstrate that several foreign countries agree that the United States courts' consistent interpretation of COGSA does not contravene mutual treaty obligations.