DMC Category Rating: Developed

The case note was contributed by Isabel L. Baumgarten of Healy & Baillie LLP in New York. Healy & Baillie are the International Contributors to the website for the United States of America

Facts
Pfizer hired CSX to transport a shipment of pharmaceuticals from Puerto Rico to Tennessee in the United States of America. Pfizer packed 2,156 cartons of the drugs onto 44 pallets, or skids and loaded the skids into a sealed container. CSX received the sealed container in Puerto Rico and delivered the sealed container to the port of Jacksonville, Florida. At Jacksonville, the container was picked up by Wall Street, a trucking company hired by CSX to transport the container from Jacksonville to its final destination, Memphis, Tennessee.

During the inland portion of transit the cargo was stolen. Police were able to recover the cargo days later but Pfizer, nonetheless, destroyed the cargo citing quality control concerns. Pfizer’s insurer, American Home Assurance Company ("AHA") paid Pfizer US$1,381,632.48 for the loss.

AHA, as the subrogee of Pfizer, filed a complaint against CSX and Wall Street alleging that both parties should be jointly and severally liable for breaching CSX and Pfizer’s service agreement. More specifically, AHA alleged that CSX and Wall Street violated the practices and procedures contained in the service agreement which prohibited cargo from being left unattended in an unsecured facility during land carriage.

As an affirmative defense, CSX asserted that the service agreement contained a limitation of liability which capped CSX’s and Wall Street’s damages. CSX argued that the service agreement incorporated by reference CSX’s bill of lading which contained a limitation of liability provision. The limitation of liability provision provided that in cases where the U.S. Carriage of Goods by Sea Act (1936) does not apply – which was the case here - "the US$1,000 limitation shall apply to each shipping or customary freight unit or piece provided . . .." AHA disagreed and both parties filed cross-motions for summary judgment to determine the applicability and scope of the limitation of liability provision.

Judgment
In determining the parties’ summary judgment motions, the Court considered three distinct issues with respect to the limitation of liability: (1) Was the bill of lading incorporated by reference in the service agreement between CSX and Pfizer? (2) If so, what cargo unit (i.e., pallet, skid, carton, container) constituted a "shipping or customary freight unit or piece" for purposes of the US$1,000 liability limitation? and (3) did CSX’s liability limitation extend to Wall Street as CSX’s ground carrier?

With respect to the first issue, the Court found that CSX’s bill of lading was incorporated by reference into CSX and Pfizer’s service agreement, referring to several points in the service agreement where the bill of lading was specifically mentioned. In addition to relying on the plain reading of the service agreement for finding an incorporation by reference, the court also found support for finding incorporation of the bill of lading, given the parties’ course of dealing and Pfizer’s decision to insure independently. On this latter point, the Court reasoned that if Pfizer had truly objected to the US$1,000 liability limitation contained in the bill of lading, it would either have renegotiated a different limitation or declared the value of the cargo to CSX to secure full value coverage.  Instead, Pfizer purchased separate cargo insurance from AHA.  Accordingly, the Court viewed Pfizer's decision to insure independently as a "tacit acceptance of the bill of lading's liability limitation and recognition that the terms of the bill were in fact included in the Service Agreement."      

In considering the second issue, the Court had difficulty conclusively determining what constituted a "shipping or customary freight unit or piece" for the purposes of the US$1,000 liability limitation. Finding that the case law was not sufficiently clear and the language of the provision imprecise, the court decided that the US$1,000 limitation applied to either the sealed container or to the 44 pallets or skids but not to the 2,156 cartons packed on the skids. As such, for purposes of summary judgment, the Court held that liability was limited to either US$1,000 or US$44,000 (subject to further findings).

Finally, with respect to the last issue, the Court held that the limitation of liability provision did extend to Wall Street, CSX’s inland haulage contractor carrier, because CSX’s bill of lading also contained a Himalaya clause which extended the defenses and limitations of the bill of lading to any person performing cargo carriage services under the bill of lading, including both inland and ocean portions.

Accordingly, the Court granted CSX’s summary judgment motion.

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