LEGAL LOOKOUT OCTOBER 2008
By Steve Block
Offset: Carmack doesn’t preclude shippers from deducting lost cargo value from outstanding freight charges.
“The interstate shipment of goods is a complicated business,” begins a well-written decision from the U.S. Court of Appeals for the Seventh Circuit. Complex notions of business and law are bound to collide, giving rise to confusion, dispute and lawsuits.
Shipper Circuit City engaged transportation broker C.H. Robinson to arrange transit of a cargo of DVD players from California to Illinois. C.H. Robinson arranged the three-leg shipment, booking (1) motor carriage by trucker Patriot from Circuit City’s Walnut, California facility to the Union Pacific Railroad’s Los Angeles depo; (2) rail carriage by the U.P. to Dupo, Illinois; and (3) drayage by trucker REI Transport from Dupo to Marion, Illinois. Patriot issued a through bill of lading (covering the entire transit) which affirmed the cargo’s quantity.
The first leg went fine, but a U.P. employee noticed Circuit City’s container seal was missing and reported an “unknown loss” of DVD players. The U.P. resealed the container, but mistakenly noted on the delivery receipt that the original seal was intact. REI took the freight and delivered it to Circuit City, where a shortage of $85,429.98 in DVD players was found missing.
C.H. Robinson, probably for business reasons, paid Circuit City the value of its claim in exchange for an assignment of rights against the carriers. Exercising its rights under a clause in its contract with REI, the broker withheld $81,232,64 in due and owing freight charges as offset against the lost cargo’s value. REI sued C.H. Robinson in the U.S. District Court for the Southern District of Illinois, where the court found that the Carmack Amendment preempted REI’s breach of contract claim against C.H. Robinson, and that C.H. Robinson had satisfied Carmack’s requirements for a prima facie case of cargo loss. The trial court even awarded C.H. Robinson some four grand representing the lost cargo’s value and the offset freight charges.
On appeal to the Seventh Circuit, REI successfully argued that Carmack preemption doesn’t apply here. Carmack provides shippers of freight in interstate transit their sole rights and remedies against motor carriers. In doing so, state and common law theories of recovery – such as negligence, intentional torts, breach of contract, and others – are “preempted,” meaning aggrieved shippers are foreclosed from basing their cargo claims on them. This provides industry players a uniform and level playing field regarding their positions in lost/damaged freight disputes. Interstate surface transit (including both rail and trucking transit) inherently involves travel through more than one state, and having inconsistent state law govern cargo lawsuits would produce uncertainty and ambiguity as to players’ rights and obligations. This basically is the same concept maritime law embraces with federal admiralty jurisdiction and its uniform body of law applicable to international and interstate water carriage.
But, as the Seventh Circuit concluded, that federal-law preemption applies only to shipper claims against carriers for lost/damaged cargo, and not to carrier claims against shippers for unpaid freight charges. The latter are business issues that don’t require national uniformity, and aren’t encompassed by Carmack’s statutory mandate.
But just because REI’s breach-of –contract claim for unpaid freight charges isn’t preempted doesn’t mean it’s valid. To prevail on a Carmack claim, a shipper must first establish a prima facie case by presenting evidence of (1) tender of freight to the surface carrier in good order and condition; (2) arrival in damaged condition (or, as here, a shortage); and (3) damages. REI conceded elements “2” and “3,” but did dispute whether C.H. Robinson had proved delivery to REI of the full alleged quantity.
The court concluded that C.H. Robinson had indeed demonstrated “1” as well, as Patriot’s “pick sheet” itemized the shipment’s contents, and testimony from Circuit City left no reason to suspect that its general loading procedures weren’t followed. Not analyzed in the decision is whether REI could have confirmed the cargo count when it received the freight, or why it should be bound by the count in Patriot’s through bill of lading. The court did point out that once a shipper has demonstrated a prima facie case, the carrier may defend by proving one of Carmack’s enunciated defenses and its freedom from negligence in causing the loss. Apparently, REI didn’t even attempt to do so in the trial court proceedings.
REI did point to a contract clause which would limit its liability to damage occurring while cargo was in its “custody and control.” However, that takes us back to Carmack, which spells out all whys and wherefores of carrier liability, and therefore prohibits such restrictive contract clauses. Notably, parties to a transportation contract may partially or wholly waive Carmack (assuming they specifically do so), which might have saved REI in this instance.
The final word is that, yes, shippers may deduct outstanding freight charges from the value of lost/damaged cargo in interstate transportation. Entitlement to that deducted lost value, unless otherwise agreed to, is governed by Carmack.
Ref: REI Transport, Inc. v. C.H. Robinson Worldwide, Inc., 519 F.3d 693 (7th Cir. 2008).