A Norfolk South Railway freight train
A Norfolk South Railway freight train ()

Railroads that damage cargo relayed to them from an overseas ocean liner are largely immune from direct liability to the shipper under standard intermodal transport contracts, the U.S. Court of Appeals for the Second Circuit has held.

The court’s decision stemmed from a lengthy effort by two Japanese insurers to hold railroad companies responsible for damages following a 2006 derailment in Texas.

In a unanimous and lengthy opinion, the court said contracts between the railroads and the ocean carriers dictate their respective liability because there is no American law requiring the railroad companies to assume at least some responsibility. The United States is unique in that it has no such law, according to an attorney for the insurers.

Sompo Japan v. Norfolk South Railway, 13-3416-cv, and Nopponkoa Insurance v. Norfolk South Railway, 13-3501-cv, involves tractors, auto parts, copy machines and other cargo that originated in Asia and was destined for recipients in Georgia and other parts of the United States.

The cargo was shipped across the Pacific by Yang Ming, an ocean carrier, and loaded onto a train that later derailed near Dallas. Much of the cargo was destroyed, leaving a question of who was responsible to the original shipper or the insurer.

After the derailment, two insurance companies, Sompo and Nipponkoa, the subrogees of the cargo owners and shippers, sued the railroad under the so-called “Carmack Amendment,” which imposes carrier liability for goods lost or damaged in interstate shipment.

But after the U.S. Supreme Court, in Kawasaki Kisen Kaisha Ltd. v. Regal-Beloit Corp., 561 U.S. 89 (2010), held that the Carmack Amendment does not apply to shipments originating overseas, the insurers were left only with “bills of lading” contracts designating the ocean carrier as the only entity directly responsible for the cargo’s damage. The question was whether those contracts established the sole chain of liability.

Then-Southern District Judge Denny Chin (See Profile) held that two railroads, the Norfolk Southern Railway and the Kansas City Southern Railway, bore no liability for the damaged goods because they were not parties to the contract between the shipper and the insured sellers in Asia. Chin now sits on the Second Circuit.

On Wednesday, the Second Circuit affirmed in a 63-page opinion by Circuit Judge Gerard Lynch (See Profile) and joined by judges Dennis Jacobs (See Profile) and Robert Sack (See Profile).

The court stressed that the exoneration clause in the contract does not let the railroads off the hook for negligence. Rather, it said that while the railroads cannot be directly sued by the insurers, they are potentially liable to Yang Ming, the ocean carrier.

Lynch said the exoneration clause “designates Yang Ming, and only Yang Ming, as the entity responsible for loss of or damage to a shipment” whether it or another entity caused the damage.

“It thereby concentrates all liability to the cargo owner in the issuing carrier, essentially requiring the cargo owner to sue the issuing carrier, and no one else, for damage to or loss of the cargo,” Lynch wrote.

Lynch said that clause shields the railroads and any other underlying carrier “from being held liable for the damages they cause by their negligence to any entity other than Yang Ming.”

But he stressed that the railroads are not relieved of liability for their negligence and remain liable to Yang Ming.

The appeal was argued May 9 by Paul Keenan of Keenan Cohen & Howard in Jenkintown, Pa. for the railroads. David Maloof, senior partner at Maloof Browne & Eagen in Rye, argued for the insurance carriers.

Maloof, who has written about intermodal cargo transit for the New York Law Journal (NYLJ, Aug. 28, 2013 and Jan. 7, 2009), said the ruling sanctions an outmoded practice in which railroads routinely obtain contractual exonerations shielding them from direct actions for liability.

“The ocean shipping laws have not been updated since 1936, and that’s too long,” Maloof said. “So it is a very odd situation that is not replicated, I believe, anywhere else in the world.”

Maloof said old laws, combined with a conservative Supreme Court has “essentially put ‘freedom of contract’ ahead of what I would say is a common sense outcome of economic justice” for shippers.

“Railroads can damage cargo, say they are sorry and pay nothing—or not say they are sorry and pay nothing,” he said.

Christopher Merrick of the Keenan firm, said the Second Circuit ruling largely follows a similar holding in a Sixth Circuit case. He said the railroads are not necessarily immune, and their liability is logically determined by the terms of their contracts.

“The overarching point is that a downstream rail carrier’s liability is governed by the terms of its contract, which is great because a lot of times the rail carrier doesn’t even know who the overseas shipper of the freight is,” Merrick said. “They should not have unlimited liability for freight they don’t know anything about.”

Merrick said the ruling simply enforces the various contracts, “and everybody gets the benefit of the bargain as they expected. Everybody is liable to the party they contracted with.”