Trucker’s material deviations from requirements of contract of carriage render limitation of liability provision unenforceable
January, 2007
By
Marilyn Raia
NipponKoa Insurance Co., Ltd. v. Watkins Motor Lines, Inc.
2006 AMC 2598 (S.D.N.Y. May 16, 2006)
Toshiba America Information Systems (TAIS) entered into a transportation agreement with Watkins Motor Lines pursuant to which Watkins supplied TAIS with nationwide trucking services. The agreement provided that Watkins assumed the liability of a common carrier under the Carmack Amendment to the Interstate Commerce Act, 49 U.S.C. §14706, for the shortage, loss, damage or delay of cargo (including mysterious disappearance caused by the Carrier's negligence) from receipt until delivery to the consignee. It also contained a limitation of liability provision for lost or damaged cargo, which provided: "The amount of Carrier's [Watkins's] liability shall be release value up to $25.00 per pound per article or $100,000.00 per shipment whichever is lesser for each bill of lading." Because of the high-end value of the cargo – laptop computers – the agreement included Minimum Security Guidelines, which required (1) that in the event freight must be stored at the carrier's premises for more than four hours, the cargo may be kept in a restricted and secured access area or, "as a last resort," in "trailers outside the building" and, in that event, with a "high security lock" in place, and (2) continuous closed circuit video monitoring of the cargo. The agreement provided that these security guidelines were "material" and that no deviation therefrom was permitted. In addition, the parties' agreement required Watkins to carry cargo liability insurance with specified limits naming TAIS as a loss payee.
In May 2004, TAIS tendered a shipment of laptops to Watkins in California for delivery to Synnex, TAIS's customer, in New Jersey. The May shipment was carried by Watkins to its terminal in New Jersey and then sent out for delivery later that day. The May shipment was never delivered to Synnex, and Watkins did not notify TAIS that the shipment was missing.
A second, similar loss occurred in September 2004. TAIS again tendered a consignment of laptops to Watkins in California for delivery to Synnex in New Jersey. The September shipment was transported to Watkins's New Jersey terminal and then reloaded into another trailer where it remained for more than a week. The September shipment was never delivered to Synnex, and again Watkins failed to notify TAIS that the shipment was missing.
It was undisputed that the shipments were kept outdoors in trailers, and there was no evidence that this was done after consideration of any other form of storage. High-security locks were not used on the trailers, and Watkins's closed circuit television system did not meet the requirements of the contract. In addition, Watkins failed to secure the insurance coverage required by the transportation agreement.
NipponKoa Insurance Co., TAIS's insurer, paid TAIS for the loss of the May and September shipments. NipponKoa then brought a subrogation action against Watkins in federal district court in New York. At trial Watkins admitted that it had breached its contractual obligations to TAIS and that the loss was the direct result of its breach. Watkins argued however that its liability was limited under the contract of carriage. The parties agreed that if the limitation of liability provision applied, the recoverable loss was $44,275. If the provision did not apply, the recoverable loss was (approximately) $180,000.
The trial court sitting without a jury concluded that the losses were the result of Watkins's "material deviations" under the contract of carriage and, therefore, under the material deviation doctrine, the contract's limitation of liability provision did not apply. The material deviation doctrine, which originated in admiralty law, provides that a fundamental deviation from a shipping contract may make a liability limitation unenforceable. Citing a decision from the 1st Circuit Court of Appeal, Hill Constr. Corp. v. Am. Airlines, Inc., 996 F.2d 1315 (1st Cir. 1993), in which the court refused to apply the material deviation doctrine to an air cargo loss noting that the carrier had made no special, separate promise to the shipper about special conditions of carriage designed to lessen the risk of loss, the NipponKoa court explained that a carrier must have made a "separate, risk-related promise (special to the particular shipment at issue)" to allow a shipper to avoid a liability limitation under the doctrine. However, when the carrier makes no such promise, liability limitation provisions of the contract apply. See also Praxair, Inc. v. Mayflower Transit, Inc., 919 F.Supp. 650 (S.D.N.Y. 1996) (shipper's allegations that motor truck carrier failed to provide special safety measures specifically requested and paid for by shipper presented a question of fact that, if decided in shipper's favor, may constitute a breach of the shipping contract, resulting in rescission of both the shipping contract and the limitation of liability provision).
TAIS sought and obtained several special provisions in the transportation agreement in order to enhance the security for the high-value laptop computers and protect the value of its property in the event of a loss. The court found that Watkins had violated the security guidelines and that those violations constituted material deviations insofar as it (1) did not store the shipments in a "secured access area," but instead in an outside trailer, not "as a last resort," (2) failed to use "high-security locks" on its trailers, and (3) failed to provide the specified closed circuit television coverage.
The court noted that the contractual provision requiring Watkins to carry cargo liability insurance naming TAIS as a loss payee was not a means to reduce the risk of loss of the cargo. Instead, the purpose of the provision was to protect the shipper [TAIS] against the economic consequences of a loss above the limitation of liability. Therefore, the court stated, it makes sense that the material deviation doctrine would apply to a complete failure to obtain the contractually-required insurance.
NipponKoa sought attorneys' fees based on a provision of the transportation agreement that required Watkins to defend, indemnify and hold TAIS harmless from any loss (including attorneys' fees) as a result of any claim arising out of or in connection with Watkins's handling of a shipment or Watkins's breach of the transportation agreement. The court denied NipponKoa's claim for attorneys' fees because the contract did not address the payment of such fees in an action between the parties or their assigns.
Finally, the court ruled that because its subject matter jurisdiction was based on a federal question (i.e., interpretation of the Carmack Amendment), the decision to award prejudgment interest and the rate used were within its discretion. The court awarded prejudgment interest based on New York law, which allows nine percent per annum, on a simple, rather than compounded, basis.