Satisfying the "Fair Opportunity" Requirement under a COGSA Bill of Lading
by John M. Daley, Esq.
If you issue bills of lading for the carriage of goods to or from the United States by sea, or if you act as a receiving agent under such bills, you could end up with a serious problem if the bills upon which you rely do not provide the shipper a "fair opportunity" to avoid the $500 per package limitation of the Carriage of Goods by Sea Act ("COGSA").
COGSA, which is set forth at 46 U.S.C. § 1300 et seq., is the United States’ adaptation of the "Hague Rules," an international set of rules which was adopted in the Hague 1921. Both COGSA and the Hague Rules include what, on its face, appears to be an absolute limitation of liability for carriers of $500 per package or "customary freight unit."
As enacted in 46 U.S.C. § 1304(5), the limitation provides in pertinent part that "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 . . ."
Virtually all ocean bills of extend the $500 per package limitation of liability to persons who act as agents for the ocean carrier in performing functions owed under the bills through what is known as a "Himalaya" clause (named after a famous case involving the "SS Himalaya").
In most of the world, the $500 per package limitation will be effective regardless of what the bill of lading says about the limitation, since the courts in most countries recognize that the limitation has been adopted as part of an internationally recognized convention and is not a matter for private negotiation.
In the United States, however, the Courts have adopted a "fair opportunity" rule as a limitation upon the effectiveness of the $500 per package limitation. In particular, U.S. Courts have held that the $500 per package limitation cannot be enforced unless the shipper has been provided a "fair opportunity" to avoid the limit. See, e.g., General Electric Co. v. M/V Nedlloyd, 817 F.2d 1022, 1028-29 (2d Cir. 1987), cert. denied, 484 U.S. 1011 (1988); Cincinnati Milacron, Ltd. v. M/V American Legend, 784 F.2d 1161, 1163, reversed en banc on other grounds, 804 F.2d 837 (4th Cir. 1987); Brown & Root, Inc. v. M/V Peisander, 648 F.2d 415, 424 (5th Cir. 1981); Acwoo International Steel Corp. v. Toko Kaiun Kaish, Ltd., 840 F.2d 1284, 1289 (6th Cir. 1982); Nemeth v. General S.S. Corp., 694 F.2d 609, 611 (9th Cir. 1982); Insurance Co. of North America v. M/V Ocean Lynx, 901 F.2d 934, 939 (11th Cir. 1990).
The grafting of a "fair opportunity" requirement onto COGSA's $500 per package limitation has been heavily criticized. Professor Michael F. Sturley, of the University of Texas Law School, points out that COGSA contains no language "that even arguably requires the carrier to notify the shipper of the right to declare a higher value [or] to offer the shipper a choice of rates. . . ." Sturley, The Fair Opportunity Requirement under COGSA Section 4(5): A Case Study in the Misinterpretation of the Carriage of Goods by Sea Act (Part II), 19 J. Mar. L. & Com. 157, 158 (1988). Professor Sturley also points out that "The imposition of a fair opportunity requirement interferes with COGSA's primary purpose -- achieving international uniformity -- because other nations have not made the same mistake."
The grafting of a "fair opportunity" requirement onto COGSA has even been criticized by at least one sitting member of the Ninth Circuit Court of Appeal. In Carman Tool & Abrasives, Inc. v. Evergreen Lines, 871 F.2d 897, 900 (9th Cir. 1988), Judge Alex Kozinski cites approvingly to Professor Sturley’s article and describes the "fair opportunity" rule as a "judicial encrustation, designed to avoid what courts felt were harsh or unfair results."
Unfortunately, there is no movement afoot to eliminate the "fair opportunity" requirement. In fact, the United States Supreme Court has avoided several opportunities to address this issue, and Congress has done nothing to eliminate or change the rule.
Thus, unless and until the law is changed, carriers (including NVOCC's) must do what they can to ensure that they satisfy the "fair opportunity" requirement in the bills of lading they issue. Unfortunately, this requires an analysis of several different decisions from several different Circuit Courts of Appeal, since the Circuits do not agree on what satisfies the "fair opportunity" requirement.
For example, the Ninth Circuit Court of Appeals (whose decisions are binding in the States of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington, Guam and the Northern Mariana Islands) has held that the $500 per package limitation will not be enforced, at least in the absence of other evidence, unless the $500 limitation and the means of avoiding it are set forth in the bill of lading itself. See Nemeth v. General S.S. Corp., 694 F.2d 609 (9th Cir. 1982); Komatsu, Ltd. v. States S.S. Co., 674 F.2d 806, 810 (9th Cir. 1982); Pan Am World Airways v. California Stevedore & Ballast Co., 559 F.2d 1173, 1175-77 (9th Cir. 1977) (per curiam); Institute of London Underwriters v. Sea-Land Service, 881 F.2d 761, 766 (9th Cir. 1989).
The Fifth Circuit Court of Appeals has held that the "fair opportunity" requirement may be satisfied by including a choice of rates in the carrier’s tariff, along with a "clause paramount" in the bill of lading. Wuerttembergische v. M/V Stuttgart Express, 711 F.2d 621, 622 (1983); Brown & Root, supra, 648 F.2d at 419-25.
The Second Circuit Court of Appeals has held that the "fair opportunity" requirement may be satisfied by providing a "clause paramount" in the bill of lading along with sufficient space for declaring excess value of goods somewhere else on the bill of lading. Binladen BSB Landscaping v. MV "Nedlloyd Rotterdam," 759 F.2d 1006 (2d Cir. 1985). See also E.M.S. Industrie S.A. v. Polskie Towarzystwo Okretowe, 608 F. Supp. 1133, 1135 (E.D.N.Y. 1985); General Electric Co. v. M/V Nedlloyd, 817 F.2d 1022, 1029 (2d Cir. 1987).
Thus, for my clients, I recommend that the bill of lading they use (1) recite the $500 per package (or customary freight unit) liability limitation of COGSA, (2) specify that the shipper may avoid the limitation by declaring a value and paying a higher rate and/or by purchasing marine insurance, and (3) include a blank on the front side where the shipper may insert a higher declared value.
By making this recommendation, I am not suggesting that the absence of this information in the bill means that all is lost. On the contrary, the courts have held that the carrier may show that the shipper was provided a "fair opportunity" to avoid the $500 per package limitation through other other evidence, including evidence of a prior course of dealing between the parties. See, e.g., Carman Tool & Abrasives, Inc. v. Evergreen Lines, supra, 871 F.2d 897 at n. 10.
Unfortunately, developing the evidence necessary to establish that a "fair opportunity" was provided can be expensive. Moreover, if the opposing side can convince the court that there is a "question of fact" on the issue of whether it was provided a "fair opportunity," it can prevent you from obtaining summary judgment, which can make the litigation terribly expensive.
Accordingly, if you issue bills of lading for the carriage of goods to or from the United States by sea, you should retain counsel to ensure that your bill is drafted to comply with the "fair opportunity" requirement under even the most restrictive set of rules which might be applied.
If you act as a "receiving" or "delivery" agent for a foreign carrier which ships goods to the United States, you and your counsel should ask your foreign carriers to include appropriate "fair opportunity" provisions in the bill of lading, along with a properly drafted "Himalaya" clause which makes the $500 per package limitation applicable to you and to the services you provide.
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