Legal Lookout     April 2008

Can cargo owners who aren’t shippers of record sue carriers for lost/damaged freight?

by Steve Block

Don’t you just hate it when courts raise interesting and profound legal questions, but then proclaim they won’t rule on them because, well, they don’t have to reach the issue to make a final ruling in the case?  Here’s a prime example of such a frustration-provoking waive off, one that underscores a recurrent issue in all modes of transportation.

Professional Products, Inc. (PPI) purchased electronic equipment from Omneon Video for delivery to City University of New York.  Omneon engaged carrier Haas Industries to make the haul.  Haas issued a bill of lading naming Omneon as shipper and the University as consignee.  The freight arrived short to the tune of some 105 grand.

Omneon filed a cargo claim with Haas, and the carrier pointed to a limitation of liability clause in its bill of lading.  Omneon accepted $88.00 from the carrier, representing the limited liability amount.  Meanwhile, PPI filed a cargo insurance claim with its insurer OneBeacon, which paid the loss’ full value.  OneBeacon then sued Haas in subrogation in the Northern District of California.  Haas moved to dismiss based on the doctrine of accord and satisfaction.

The court did an excellent job of expressing its conundrum.  “On the one hand,” lamented Magistrate Judge Zimmerman, “judicial economy suggests the owner of the goods should be able to sue the carrier directly under the Carmack Amendment.  The alternative would be for the owner to sue the consignor or shipper who would then have to sue the carrier.”

Who has standing to sue is a common issue faced by those involved in cargo loss and damage claims.  The scenario in this case is typical.  Oftentimes, brokers and forwarders with business relationships to preserve with their customers pay damaged freight claims to shippers, but don’t situate themselves properly to have standing to collect from carriers.  Cargo insurers can get themselves into a mess of trouble by not making sure an uninsured entity upsets the liability picture.  Conversely, carriers don’t always have it straight as to what entity(ies) they can go after for general average, improperly packaged cargo that causes problems at sea, unpaid freight charges, and other matters.

Usually, the shipper of record reliably has standing, but a bill of lading doesn’t answer all questions about title, equitable interests, and assigned rights.  In an era of complex, multi-party business transactions, complicated by insurers and transportation facilitators who have their customers’ and own interests to protect, a cargo loss can aggrieve more than just a shipping document’s recipient.

Whether OneBeacon has standing to sue was unsettled, but the court found it immaterial and didn’t reach the issue.  Haas had effectively limited its liability, so the proper plaintiff’s identity didn’t matter.  While we’ll never know how this court would rule, the proper answer probably lies in the bill of lading, and the fact that PPI could have protected itself by shipping the freight in its own name after agreeing to acceptable terms with Haas.

Various players have mechanisms to avoid misunderstanding in the event of a loss.  First and foremost, everyone involved in the manufacture, sale, purchase, shipment, transportation administration and insurance of commodities should reach an agreement as to who bears the risk of loss through every point in the process.  This can be done in various contractual documentation, including the bill of lading.  Second, insurance coverage may be purchased or insisted upon, with each party at risk enjoying the benefit of coverage.  That way, standing isn’t so much of an issue, but it can be costly.

Perhaps most importantly, however, is that all affected participants should make sure they don’t make decisions – like accepting a settlement from a carrier or intermediary – without fully understanding the repercussions and obtaining the others’ consent.  This can be achieved by fluid communication and agreement by cargo interests from the moment a cargo loss becomes known.  A manufacturer/seller of a product that is damaged during transit after risk of loss has passed has nothing to lose.  Except perhaps someone else’s resentment, cessation of business dealings, or legal action.

Ref: OneBeacon Ins. Co. v. Haas Industries, Inc., 2008 WL 1847182 (N.D. Cal. 2008).