Cargo Damage

Billions of tons of cargo move in and out of ports and across the ocean in every year. No transportation system is perfect and accidents do happen in shipping business, people make mistakes and every so often problems arise with the transportation of cargo. During voyage cargo may be damaged by sea water ingress, cargo may be damaged or lost due to negligence or mishandling, ship’s crane may break. Maritime law has been developed to facilitate the prompt resolution of cargo claims and disputes. Maritime law presumes that the affected parties (defendants and plaintiffs) are familiar with their rights and duties and the various steps of handling cargo and charter claims.

In United States, shipments are governed by the Carriage of Goods at Sea Act (COGSA). According to Carriage of Goods at Sea Act (COGSA), in case of a cargo damage claim, shipper (charterer) must give notice:

  • If cargo damage is apparent, before the cargo is removed from the custody of the carrier
  • if the damage is not readily apparent, within three (3) days

If shipper (charterer) does not give notice for damaged cargo, the removal of the goods from the custody of the carrier will be deemed to be strong evidence that the goods were delivered in good order. This does not mean that the shipper (charterer) can’t still bring a complaint for damage to goods not discovered within three (3) days, but it does mean that the shipper will have more of a burden to establish that the damage was incurred while the goods were in the custody of the carrier and not after delivery to the receiver. This rule intended to put a burden on the shipper (charterer) to inspect the goods upon receipt and rule has the effect of reducing disputed claims.

According to Carriage of Goods at Sea Act (COGSA), cargo claims must be brought within one (1) year after date of delivery or the date that delivery was supposed to have been made. Cargo claim can be initiated like any other maritime case:

  • Complaint on the carrier
  • Arresting the ship involved in the carriage
  • Attaching the property of the carrier through a maritime attachment process

If cargo shipment was made under a contract that includes an arbitration provision, shipper (charterer) can also serve its notice of arbitration. Even if a contract includes an arbitration provision, shipper (charterer) may still use the process of maritime arrest or maritime attachment to obtain security for the claim.

Generally, shipper (charterer) bring the action against the ship itself (in rem), if the ship can be found in an acceptable jurisdiction. Shipper (charterer) can also bring action against the shipowner or carrier (in personam). In most cases, shipper (charterer) bring action against the entity that issued the bill of lading (B/L). If shipper (charterer) shipped the cargo through a non-ship operating common carrier (NVOCC), then non-ship operating common carrier (NVOCC) will be the most likely defendant. Later on, non-ship operating common carrier (NVOCC) is likely to file a third-party complaint against shipowner or ship operator. Shipowner or ship operator can be required to file an answer directly to the original complaint (plaintiff). Shipper (charterer)’s direct suit against the shipowner or ship operator could be subject to being dismissed because shipper (charterer) would not have any direct contractual link to the shipowner or ship operator.

In a cargo claim case, burden of proof goes back and forth between shipper and carrier:

Firstly, shipper (charter) has the burden to prove that cargo was delivered to the carrier in good order (apparent good condition as written on clean bill of lading) and later that cargo was received in a damaged condition.

Secondly, carrier can defeat liability by showing that damage was caused by one of causes for which the carrier is exempted from liability:

  1. Carrier is not liable for losses due to unseaworthiness of the ship not caused by any lack of due diligence by shipowner or ship operator to make the ship seaworthy. In order to take advantage of this defense, shipowner or ship operator must show that ship was seaworthy when it departed on the voyage. Ship was in good repair, with proper equipment, sufficient supplies, and properly manned with a competent crew. Carrier has the burden of showing that he exercised due diligence.
  2. Carrier is also not liable for damages that arise from matters beyond the carrier’s reasonable control, for example:
  • Actions, failures to act, neglect or other errors by the master, pilot, crew or other employees of the carrier in the navigation or management of the ship (errors in navigation)
  • Fire (unless caused by the actual fault or involvement of the carrier)
  • Perils, dangers and accidents of sea or other navigable waters
  • Acts of God (unavoidable natural causes)
  • Act of war;
  • Act of public enemies
  • Arrest or restraint of princes (governmental actions), rulers, or people, or seizure under legal process
  • Quarantine restrictions
  • Acts or omissions of the shipper, consignee
  • Strikes or lockouts (except crew members)
  • Riots and civil commotions
  • Saving or attempting to save life or property at sea
  • Problems inherent in the cargo itself
  • Insufficient packing of the goods
  • Improper or insufficient marking of the goods
  • Latent defects in the goods not discoverable by due diligence
  • Any other cause arising without the actual fault and privity of the carrier

Usually, cargo receiver will have an inspector who checks the cargo or packages for signs of damage on receipt. If cargo damage is observed, shipper (charter) appoint an independent inspector to examine the cargo. Independent Inspector (cargo surveyor) take pictures and videos to show cargo damage and to build the evidence supporting a cargo claim against the carrier. Independent Inspector attaches pictures and videos to a cover of the damage report.

When there is an evidence of cargo damage, shipper (charterer) contact the carrier and suggest a joint survey. Joint Survey is a survey which is conducted simultaneously by representatives of both shipper (charterer) and carrier. Traditionally, joint survey may be a little more cumbersome to organize. During course of a joint survey, both surveyors examine and take pictures of the claimed cargo damage.

If surveyors of both sides agree with regard to damage, it means that shipper (charterer) and carrier do not have to litigate whether the damage did or did not occur. Hence, joint survey makes resolution of cargo claim much more efficient. In many damaged cargo cases, use of a joint survey can eliminate the need for any lawsuit or arbitration.

According to Carriage of Goods at Sea Act (COGSA), carrier’s liability is limited to $500 per package or customary freight unit, unless shipper declares a higher value. When shipper declares a higher value, carrier charge an additional amount of freight to cover the cost of cargo insurance. When carrier does not give the shipper fair opportunity to declare a higher cargo value, then $500 limitation will not apply.

Customary Freight Unit is what the parties (shipper, carrier) say it is. Customary Freight Unit term is not defined in Carriage of Goods at Sea Act (COGSA). That is why, for the purpose of measuring damages courts consider units that are used in the Bill of Lading (B/L). When Bill of Lading (B/L) refers to containers, boxes, vehicles, cartons or other terms, then those terms will define the Customary Freight Unit. Both shippers and carriers should be very careful to how they count the goods being shipped, because the units used for counting will also be the units used to measure damages in the event that the goods are lost, destroyed or damaged.

Shipper (charterer) cannot sue carrier’s subcontractors for cargo damage in order to avoid the carrier’s limitation of liability. Most bills of lading provisions include a clause commonly called a Himalaya Clause. Himalaya Clause extend the defenses, waivers, exculpatory terms and limitations of liability applicable to the carrier to the carrier’s subcontractors. Himalaya Clause has since been widely upheld in most maritime courts. Meaning of Himalaya Clause is now well-established in maritime courts and tribunals. Furthermore, carrier is responsible for cargo damage caused by subcontractors. Subject to the various Carriage of Goods at Sea Act (COGSA) defenses, carrier is liable to shipper (charterer) for damages incurred while goods are in the custody of the carrier or carrier’s subcontractors.

Most bills of lading (B/L) will include a clause giving the carrier some flexibility to account for unexpected delays. On the other hand, if cargo is delayed due to mis-delivery or other faults by the carrier, shipper may have a recovery for damages that can be proven by the shipper. Mere inconvenience and disappointment is typically not enough to sustain a claim for damages, but lost business, delay damages and other harm incurred by the shipper as a result of late delivery may be subject to being passed on to the carrier, as long as the contract between shipper (charterer) and the carrier does not waive such claims.

Contract of Affreightment (CoA) is service agreement under which the shipper (charterer) agrees to ship a certain minimum amount of cargo and carrier agrees to provide a specific rate or other terms of service. Usually, Contract of Affreightment (CoA) terms does not alter the terms of the carrier’s bills of lading. Besides, Contract of Affreightment (CoA) might include terms that may provide a higher standard of care to apply to the carrier. Contract of Affreightment (CoA) may set out a dispute resolution process to resolve cargo claims.

Charter disputes are most commonly resolved by arbitration. Generally, arbitration clauses are inserted in standardized charter-party forms. In the absence of an arbitration clause in the charter-party, parties (shipper and carrier) are free to litigate disputes in an appropriate court with jurisdiction.