Ship managers can be litigation targets in the US

by Peter D. Clark of
Clark, Atcheson & Reisert

Ship management is an integral part of today’s shipping industry. Ships require constant maintenance, repair, technical support, crewing, shipyard supervision, financial management and chartering services to operate. While ship owners often retain navigational control over their ships, the trend over the past six decades is to hand over vessel commercial control to large ship management companies due to economic and liability concerns.

The recent Fortis v. Inviken case in the U.S. District Court of Northern Ohio (2008 AMC 2328) raises a multitude of interesting issues concerning the potential liability of ship managers when goods are damaged during ocean transit.

The principle issue concerned whether a ship manager that employed the crew would be liable for alleged crew negligence in monitoring rising bilge water levels and not taking timely action to prevent it from damaging steel cargo in the ship’s hold.

The relevant facts are as follows: Fortis, a cargo insurer, as subrogated underwriter of a cargo owner, sued the ship, her owner and the ship’s manager for saltwater rust damage to steel coils carried from Poland to Toledo, Ohio. The vessel was time chartered and sub-chartered for the voyage in question.

En route seawater entered a cargo hold crack causing severe rust damage to 99 coils. Fortis paid the cargo owner $375,000 to resolve its claim and then sued defendants for negligence and breach of bailment obligations. Fortis alleged the crew failed to exercise reasonable care by not sounding the bilges.

To maintain a claim for negligent operation and management under US maritime law, plaintiff must prove (1) a duty to safely transport the cargo; (2) breach of that duty; (3) causation; and (4) damages. Here the issues of causation and damages were not in dispute.

The ship manager claimed the crew was only contracted to operate the ship for the owner and had a list of specific duties to perform under its management agreement with the owner. Fortis argued that the ship manager had a duty to properly monitor the hold’s water level. The trial court held the ship manager liable for the full value of the 99 damaged coils in the amount of $375,000.

What makes the Fortis case unusual is its focus on the ship manager and the law of negligence rather than on the owner and the Carriage of Goods by Sea Act (COGSA). By way of background, the US Congress enacted COGSA in 1936 to level the playing field in international shipping by protecting shippers from ocean carriers’ superior bargaining position in transportation contracts. This was accomplished in part by establishing a minimum liability amount of $500 per package for cargo damage and a one year time bar provision for bringing suit against the carrier.

COGSA mandates that the "carrier" must properly load, stow, carry, care for and discharge the goods carried. The Act applies to every bill of lading evidencing a contract for ocean carriage of goods in foreign trade, to or from the United States. Cargo interest need only establish that the shipment was in good order when delivered to the carrier and damaged at outturn. Fault need not be proven.

COGSA also provides that the term "carrier" includes the owner or the charterer who enters into a contract of carriage with the shipper. Thus, a party must be deemed a "carrier" in order to receive the protection of the $500 package limitation and the one year suit time limit.

The majority of courts interpreting COGSA restrict "carrier" status to owners and charterers. However, a minority have found that the COGSA definition of ‘carrier" is open ended and non exclusive. Under this expansive approach ship managers can attain "carrier" status.

Prior to the trial in the Fortis case the ship manager made a motion for summary judgment claiming it could be a COGSA "carrier" without necessarily being an "owner" or "charterer." The action would be time barred under COGSA’s one year limitation period. The court dismissed the motion and held that the ship manager was neither a charterer, nor an owner and was therefore precluded from being considered a "carrier" under COGSA. As a consequence, the Fortis claim was not time barred.

The Fortis decision may have an impact on future cargo claims as it spotlights the potential vulnerability of ship managers for cargo damage liability. Under the majority view, if ship managers are not offered carrier status, they will not be entitled to COGSA defences. For example, in the Fortis case, if the ship manager was deemed a COGSA "carrier," its maximum exposure under the Act’s $500 package limit for 99 steel coils would be $49,500, rather than the full cargo value of $375,000. The case would also be time-barred under the one year time limit.

The ship manager does, however, have some defences to cargo claims. Under negligence principles, cargo interests must prove all four elements of a negligence cause of action, previously mentioned above. Because cargo interests are not present during the voyage, it may be extremely difficult to prove negligence.

Ship managers at times may be able to obtain COGSA protection by making use of carefully drafted Himalaya clauses in carrier bills of lading. Unfortunately, with sub-charter party contracts, this may not be an option.

Most ship managers will insist upon an indemnity clause in their management agreement with the ship owner, which will hold them harmless against all liabilities arising out of the performance of the management agreement. These indemnity clauses are subject to negotiations and could be eliminated if ship managers are continuously found liable in future cargo damage lawsuits.

It is ironic that ship owners who enjoy COGSA protection because they are deemed "carriers" under U.S. law may, nevertheless, lose that protection because of indemnity agreements in ship management contracts. This is not the scenario Congress had in mind in 1936 when it initially attempted to even the playing field in international shipping.

The Fortis case is now before the United States Court of Appeals for the Sixth Circuit, and a final opinion should be rendered early next year.

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