When an ocean carrier issues a through bill of lading for transport terminating inland in the United States, the terms of the bill of lading govern the liabilities of all parties to the transaction. This includes the rail or motor carriers performing the inland transportation.

The case of Sompo Japan Insurance Company of America versus Norfolk Southern Railway brought before U.S. Court of Appeals for the Second Circuit brings this point to bear. In determining whether an Exoneration Clause contained in a bill of lading was enforceable, the court considered the authority of a common carrier intermediary (the NVOCC) to bind the cargo owners to the terms of the bill of lading issued by the ocean carrier contracted to transport the goods.

In this case, an auto parts producer hired an intermediary (Nippon Express) to organize the transportation of auto parts from Japan to the U.S. The intermediary issued a through bill of lading to the producers and engaged an ocean carrier (Yang Ming) to provide ocean transport and arrange inland transport. The carrier then issued its bill of lading to the NVOCC (Non Vessel Owned Common Carrier) and outsourced inland transport to the defendant Norfolk Southern Railway.

The cargo was successfully shipped trans-ocean to the U.S. and loaded onto a Norfolk Southern train. Subsequently, a derailment occurred in Texas and the cargo was destroyed. The insurance company reimbursed the shipper for the cargo loss and proceeded to sue the railroad for damages.

The bill of lading of the carrier contained an Exoneration Clause, which restricted the liability for cargo damage to the Carrier (on whose behalf the bill was issued, and its agents) and specifically excluded Underlying Carriers (the railroad) from liability. The parties concurred that the railroad companies (now defendants) were Underlying Carriers based on the intent of the bill of lading.

In its decision, the Second Court rejected the plaintiffs’ argument that the Exoneration Clause was ambiguous. The Court concluded that reasonable interpretation of the clause was that the provisions of the bill of lading made the ocean carrier the Carrier and companies relied on to assist with transportation could be liable to the owners of the cargo and entities subrogated to the owners’ interests.

The appellate court referred to the general principle that in a case of potential ambiguity, the rendering that achieves reasonable and effective meaning to all terms of a contract is better than one that leaves a segment meaningless.

In addition, the Second Circuit deliberated on the enforcement of the Exoneration Clause and established that it did not violate public policy by absolving a common carrier or its agents of all liability due to their negligence. Rather, the clause assigned the ocean carrier sole responsibility for all losses caused by it or any other party. The clause did not remove the liability of the railroad companies to the ocean carrier for damage caused by their negligence.

The appeals court rejected the plaintiffs’ argument that the intermediary was not authorized to agree to the clause in the bill of lading. The court referred to a U.S. Supreme court precedent establishing that an intermediary may arrange enforceable, reliable agreements with the carriers it engages in regards to liability limits for negligence causing damage.

This decision exemplifies the fact that, when an ocean carrier issues a through bill of lading for transportation to an U.S. inland point, the terms and conditions of that bill of lading will control the liabilities of all parties to the transaction including the inland carriers.

Shippers should keep in mind that when they contract with an ocean carrier or intermediary, an Exoneration Clause in the bill of lading will preclude claims directly against underlying carriers.