What Is Cargo Legal Liability?
Cargo legal liability, in the most basic sense, is the responsibility that logistics providers (be it cargo carriers, freight forwarders, clearing agents, etc.) take over from shippers. It is an important aspect of the logistics industry and is a key consideration for cargo insurance providers. It essentially refers to the responsibilities by logistics stakeholders when cargo is damaged or lost while an air or ocean carrier is in charge. Cargo legal liability plays an important role in many industry sectors for various reasons. Sometimes , rules and regulations enforce liabilities to provide required clearance and secure transit. Sometimes, regulations only take effect when the shipper engages a service provider. And sometimes, commercial contracts between shippers and service providers impose additional responsibilities that are not defined by law. No matter the case, it is an important area every stakeholder should be informed about.
Regulations Applicable to Cargo Liability
In addition to national laws such as the United Kingdom’s Carriage of Goods by Sea Act 1971, international treaties also have a significant impact upon the legal liabilities of carriers and freight forwarders engaged in the movement of cargoes. These treaties, such as the CMR Convention and the Hague-Visby Rules, operate through the implementation of domestic legislation based upon their principles. There are a number of international treaties which can be applied to the carriage of goods. These are:
• The International Convention for the Unification of Certain Rules relating to the Carriage of Goods by Sea (The Hague Rules) 1924;
• The Protocol amending the International Convention for the Unification of Certain Rules relating to the Carriage of Goods by Sea (The Hague-Visby Rules) 1968;
• The United Nations Convention on Carriage of Goods by Sea 1978 (Hamburg Rules);
• The Protocol amending the United Nations Convention on Carriage of Goods by Sea 1978 (Hamburg Rules) 1996 (Rotterdam Rules);
• The Convention on International Bills of Lading 1986;
• The United Nations Convention on International Multimodal Transport 1980;
• The Convention on International Trade in Endangered Species of Wild Fauna and Flora 1973;
• The Convention on the Contract for the International Carriage of Goods by Road 1956 (CMR Convention);
• The Convention Concerning International Carriage by Rail (COTIF) 1980;
• The Convention Relating to the Carriage of Passengers and their Luggage by Sea 1974; and
• The United Nations Convention on International Liability for Damage caused by Space Objects 1972.
By way of example, we can consider the CMR Convention. The CMR Convention applies, as a default position, to the carriage of goods by road. These rules are overridden by the common law, obligations imposed under other conventions and, where appropriate, contractual obligations placed on the parties. The CMR Convention does not regulate liability for delay or provide for any exclusions of liability. The CMR Convention also contains Provisions regarding transport dangerous goods and the liability of the sender.
The Different Types of Cargo Legal Liability
Prior to examining the applicable cause of action or duty to be evaluated in a cargo claim analysis, one must first determine the cause of liability for the alleged damage. These are generally reduced to three types, or causes of action for recovery:
Contractual Liability, the typical cause of action is a contract created when the owner of the cargo enters into an agreement with the carrier for the payment of a freight charge. The carrier then becomes subject to the terms of the contract; its duties and liabilities depend on the terms of the contract and any relevant federal laws. The claimants burden is only to prove breach of contract occurred in order to be entitled to recover harm caused by the breach up to the contractual limit of liability unless otherwise covered by the Carmack Amendment.
The second cause of action, Tort liability, is a cause of action which arises out of the breach of a legal duty owed to another, which results in injury or damage to the other. In the cargo context, tort law addresses the subject of negligence and whether or not the defendant carrier was negligent in causing the damage for which recovery is sought. Federal law preempts state law tort based claims against carriers.
The third cause of action is Product Liability, which is a state law theory of recovery that is intended to compensate a consumer for damages resulting from a defective product or service that arises out of a duty imposed on the manufacturer.
Who Pays If Cargo Is Damaged?
The short answer to the question of who is liable for damaged cargo can be complicated. The question can involve a lengthy analysis that covers several laws, regulations, and contractual terms. The parties who might be held liable for a cargo loss can include the carrier, any freight forwarders, customs brokers, shippers, packers, weighers, and warehousemen. Determining liability among these parties largely turns on the facts of a particular shipment and the circumstances surrounding its loss.
Carriers: Carriers are transported goods over a route according to an agreement between the carrier and the shipper. Common carriers are companies that provide interstate transportation or intrastate transportation by a for-hire, motor vehicle or nonbulk freight, incidental to either interstate or foreign shipment, for compensation, signed receipt, and in commerce, resulting from the transmittal of bills of lading or other receipts for the goods by such companies. Noncommon carriers transport goods only over selected routes, or within a defined local area, or specific geographic areas for rates or fees higher than those charged by common carriers.
Freight Forwarders: Freight forwarders are also in the shipments business, but they do not assume responsibility for shipping per se. Instead, forwarders coordinate transportation and shipping services for a shipper to the destination specified by the shipper.
Shippers: Shippers are parties that have goods that need to be shipped and subsequently sold. A shipper contacts a freight forwarder or transportation company to have its goods loaded and delivered to a destination. In some cases, the shipper loads its own cargo onto a truck or other carrier.
In-house carriage refers to freight handlers that transport and deliver cargo for a shipper using their own vehicles. Because they control the transportation, they may be held directly liable for any loss or damage to the goods.
Legislation has been put in place to limit the liability of carriers and freight forwarders. For example, the Carmack Amendment, enacted in 1906, limits the exposure of a rail carrier when cargo is lost, destroyed, or damaged during transportation. A carrier is liable for exactly the amount of the loss or damage to goods, with some exceptions. Liability is limited to $100 per package or customary freight unit. The Package Limitation of Liability option incorporated into the Carmack Amendment is incorporated into freight forwarder bills of lading. The Hague-Visby Rules limit the shipowner’s liability to USD 500 per package of freight.
The Supreme Court of Massachusetts has also ruled that a party can be held liable for damages caused by an air carrier on whose bills of lading it had written its name, although it was not otherwise in the air cargo business.
Common Reasons Cargo Claims Occur
The vast majority of cargo claims will arise out of one of three sources or a combination of those three sources: (1) damage during transit, (2) theft, or (3) mishandling. Without question, the greatest number of cargo claims occur as a result of damage during the course of transportation. However, it is also important to note that any claim for cargo damage must be based upon some third party liability. Damages for purely economic loss (i.e., lost profits) without any alleged physical damage to cargo are not covered under most cargo insurance policies. In such cases, the damage, if any, must be linked to a specific physical loss or damage to cargo along with proof of the value of that cargo to recover for any economic loss.
In addition to damage during transit, theft of cargo is certainly a common source of cargo claims. Typical defense to cargo theft coverage disputes include claims that the theft is not covered because there was no forcible entry into covered property, that the theft was by an employee of the insured, or that there was insufficient security to prevent theft. Having adequate security measures in place at your facility may eliminate many of these defenses. Having an inventory control policy in place may also reduce the need to itemize each specific piece of equipment that was stolen.
Mishandling can also provide the basis for a substantial number of claims. Incidents of mishandling can certainly cause injuries, but may also result in bond forfeitures and consequential damages claims resulting from incomplete or defective work. Failure to deliver supplies in a timely manner might well result in claims for consequential damages caused by the delay in project construction. Some jurisdictions do recognize claims for such purported economic losses, and, therefore, the argument may be made that project delays resulting in economic losses are covered. However, most bonding agencies make very limited available coverage under their performance and payment bonds. With respect to surety bonds, coverage should be checked with the appropriate bonding agent.
Cargo Liability Insurance
Companies have the opportunity to purchase insurance products which protect them against cargo liability, either directly or indirectly. The obvious choice is marine cargo insurance, which protects those who own goods which are being transported by sea. Under a marine cargo policy, if the insured goods are lost, stolen or damaged while being transported by sea, the company can recover its loss falling within the policy limits. However, loss must be caused by an insured peril which is defined by the policy, such as fire, accident at sea, pirates and natural perils. Other exclusions include negligence on the part of the insured, if they fail to adhere to the contract of carriage which they have entered into. Alternatively, companies that supply goods to customers can purchase a specific endorsement known as the "sender’s interest in goods endorsement." This will protect the sender against their liability for actual loss of, or damage to the goods while they are being transported by sea.
There are many businesses which will not have any direct insurance of this nature. For example, if goods are lost or damaged in transit then there will be a direct loss suffered by the owner , who can make a claim under their marine insurance policy; the carrier, however, may have no such luxury. A cargo liability policy protects the recipient of the goods against a claim made by the sender for such loss or damage, by indemnifying the carrier for any amount payable under the contract with their own insurer. In many ways, a cargo liability policy goes above and beyond that of a marine cargo policy in that it also covers losses sustained on land. Liability policies are restricted to loss caused by negligence whereas, as discussed, marine policies cover a far wider scope of possible causes.
The insurance market has now developed so that policies are available to fit the needs of almost any company involved in carrying or collecting in goods. However, it is essential that anyone purchasing a policy is aware of what it does (and does not), cover. A policy will typically cover goods whilst being transported within the UK but can also be extended to include overseas transit. Such policies can easily be tailored to fit the needs of those merchants whose goods are travelling from port to port by both sea and land.
What To Do When Cargo Is Destroyed
Following the discovery of damage, companies should document the condition of the cargo as it sits and take photos. The closer to the time of receipt that a surveyor can be retained, the better, as a surveyor can perform further testing to determine the extent of damage, as well as its cause. Suspect cargo damage is always worth documenting as early as possible, and often even the briefest of documentation can bear fruit later, in the event that the error was never discovered by the consignee. If the cargo is lost and not able to be inspected, begin to prepare a list of items you believe may be missing, as soon as possible, to assist in any investigation or proof of claim. Few claims make their way into litigation, but when they do, litigation can resolve them much faster than any other process, and it usually does so before legal intervention is necessary. Most claims involve factual issues or coverage questions that can be worked through without an eight-foot stack of papers, i.e., you don’t need a call report with claims notes for every party, an IIR, bills of lading, requests for corrective action, and the latest three spreadsheets from IT, or an award-winning document production. Without the proper information, a settlement won’t be possible and a lawsuit is inevitable. Last, but not least, always remember: The best way to avoid litigation is to have the best possible policy . . . for free.
Problems Collecting Cargo Liability
A common challenge is a delay in the discovery of the loss, which is when the timer starts on any applicable contractual or statutory limitation of liability under an applicable contract or statute. Proving the nature and extent of the loss can be problematic because it requires a thorough investigation into all the circumstances surrounding the loss.
Another challenge is proving the proper amount of damage or loss of cargo. A client may be surprised to learn that the value of lost, damaged, or unreturned cargo is not always its current market value, as the market value is often rapidly changing, and is often capitalized upon by freight forwarders for their own profit, leaving an uneasy client with either no compensation at all to show for its lost cargo or with a small, unfair portion of that cargo’s true value. The true value of cargo is often its purchase price plus any improvement costs, including freight costs that were already hard fought in some prior negotiation, and other costs such as insurance premiums and applicable storage costs. A trust accounting system is always in the company’s best interest and makes it easy to correctly identify such costs before a cargo-related loss occurs.
Finally, determining the applicable statute of limitations can be complicated especially where the loss or damage occurred at sea in the course of waterborne transport, and is subject to the Carriage of Goods at Sea Act, or if it occurred on the public streets and is thus dispersed to various jurisdictions, which means various local limitation periods apply. There is also the distinct possibility that the more liberal General Bill of Lading conditions were crossed out at the start of the transport process, and replaced with the more limited policy conditions in terms of damages. For example, a client may only learn years later that it was initially charged with a General Bill of Lading insurance premium that covered the cargo at and above the insured loss amount, and by failing to investigate these premium line items and denials of payment for damages within weeks of the loss, is out of time under the applicable loss mitigation period and possibly some longer statutory time bar as well.
Current Trends In Cargo Legal Liability
As companies engage in wider international trade, new avenues of risk concerning cargo legal liability are emerging in today’s highly digitized, technologically-advanced world, providing more complexity as well as potential cost savings opportunities. Until very recently, it was extremely challenging to track shipments due to a lack of information, situations such as a truck not showing up for a shipment or incorrect cargo weights often going unchecked. As a result, if there was a problem with a shipment, it often took months for the damage to be identified and acknowledged, costing manufacturers and shippers money and time. New solutions are beginning to address these issues. Real-time sensors and e-documentation contain all the information regarding shipment location, temperature levels, and any other detailed updates, allowing all parties to see the information and address potential problems as they occur . While these can, of course, help when those problems do occur, they are also allowing companies to cut down claims-related costs. Through enhanced data collection, insurers are able to better analyze risk and identify claims trends to determine rates for covering the cargo. Through the online analysis of a single policyholder’s cargo portfolio, insurers can now use predictive analytics to identify risks for a cargo shipper. The rise of high-powered technologies such as AI and machine learning is also impacting the world of cargo legal liability. With blockchain development and the emergence of a digitized way to impact payments, smart contracts are allowing transactions to take place efficiently and quickly. In the event a claim does end up arising, faster resolution is expected as most parties have already fulfilled their obligations of a transaction on an automated system. While the advent of smart contracts is still in its infancy, they hold great promise for the world of supply chain logistics and cargo liability.