Service Contract Held Inapplicable In Favor Of Bill Of Lading: Entire Yacht Is A “Package” Under COGSA And Liability Limited To $500

Until the Rotterdam Rules take hold, we will continue to examine COGSA cases worthy of note.  A case involving the dropping of a $4,000,000 yacht due to a collapsed crane is noteworthy in our book, especially when the ocean carrier attempts to limit its liability to $500, and the case turns on whether the terms and conditions contained in a service contract or the bill of lading control the outcome.  Such was the scenario in St. Paul Travelers Ins. Co. v. M/V Madame Butterfly, 2010 U.S. Dist. LEXIS 32204 (Mar. 30, 2010).

While offloading a 72-foot 2006 Sunseeker Predator yacht valued at $4,179,938 at Port Hueneme, California, a mobile crane toppled over, apparently causing the yacht to become a total loss.  St. Paul Travelers Insurance Company, seeking to recover that loss, sued the ocean carrier, crane lessor, and stevedores involved in the incident. The ocean carrier had previously entered into a service agreement with the freight forwarder that served as Sunseeker’s agent.  The key issue in the case was whether the terms of that service agreement or the terms of the bill of lading governed the damaged shipment.  If the service contract was held to govern, liability would have been limited in accordance with the Hague-Visby rules under English law. If the bill of lading was held to govern, COGSA would apply and liability would have been limited to $500 per package.

The court recited the law as follows: “Where the parties’ relationship is governed by a separate contract, that contract acts as the contract of carriage and bills of lading are mere receipts.”  However, in this specific case, the service contract was held to be inapplicable because (i) the contract required that the forwarder to place the service contract number on bill of ladings covered by the contract and the bill of lading in question bore no such number and (ii) the contract contained no rate for the shipment of the yacht at issue, even though a specific rate was for the shipment was filed with the FMC.  The court rightly noted that even though the forwarder’s representative that negotiated the freight rate had a subjective belief that the service contract controlled with regard to the shipment, testimony to that effect could not overcome the plain meaning of the contract.

After deciding that the bill of lading controlled, the court took up the question of whether the customary freight unit for purposes of the $500 package limitation was the yacht itself, or the weight of the yacht measured in metric tons.  Were the defendant to prevail on this argument, liability would be limited to $500 in total; were the plaintiff to prevail, liability would have been calculated at $346,680 for the 693-metric-ton yacht.  The bill of lading itself read that “[e]ach unpackaged vehicle or other piece of unpackaged cargo on which freight is calculated constitutes one customary freight unit.”  Although this bill of lading language was decisive, the court additionally noted that several prior cases had held that a yacht in a cradle is considered a single package under COGSA.

The moral of the story is that if you ship pursuant to a service contract, don’t presume that it is effective to cover every shipment.  There may be pre-conditions that must be fulfilled for it to take effect, such as in this case, where the fact that the service contract number was absent from the face of the bill of lading led the court to the conclusion that the shipment was outside the contract’s scope.  It takes time and manpower to monitor parties’ adherence to agreements of this sort, but unless such steps are taken, it is possible to lose the benefit of one’s bargain.

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