In a recent insurance coverage action, Sompo Japan Insurance Company of America v. Norfolk Southern Railway Company, et al., the U.S. Court of Appeals for the Second Circuit considered the enforceability of an exoneration clause within a bill of lading, and the authority of a common carrier intermediary to bind cargo owners to the terms of a bill of lading issued by an ocean carrier.

In Sompo, a cargo auto parts was shipped from Japan to the United States. The manufacturers of the auto parts hired an intermediary, non-vessel owning common carrier ("NVOCC") to arrange for the transportation of the cargo. The intermediary issued a through bill of lading to the manufacturers, and hired an ocean carrier to provide ocean transport as well as arrange for inland transportation. The ocean carrier subsequently issued its own bills of lading to the intermediary, and subcontracted responsibility for the inland leg of the shipment to the defendant railroad companies.

The ocean carrier bills of lading contained an "Exoneration Clause," which limited liability for damage to the cargo to the "Carrier," and specifically excluded "Underlying Carriers" from liability. The same bill of lading also defined the term "Carrier" as "the party on whose behalf this bill is issued, as well as the time charterer and any substituted or Underlying Carrier[,]" and further defined the term "Underlying Carrier" as "any water, rail, motor, air or other carrier utilized by the Carrier for any parts of the transportation [of] the shipment covered by this Bill." The parties agreed that the defendant railroad companies were "Underlying Carriers" within the meaning of the ocean carrier bill of lading.

In deciding the case, the Second Circuit rejected the plaintiff insurance companies' argument that the clause was ambiguous. In doing so, the appellate court noted that the only reasonable interpretation of the Exoneration Clause was that the ocean carrier was the "Carrier" under the the bill of lading, and any company relied upon by the "Carrier" to facilitate the transportation could be liable to the cargo owners and those subrogated to the cargo owners' interests. In so holding, the appellate court cited the general principle that, in a situation of potential ambiguity, an interpretation that gives reasonable and effective meaning to all terms of a contract is preferable to one that leaves a portion meaningless.

The Second Circuit also considered the enforceability of the Exoneration Clause and found that the clause did not violate public policy by exonerating a common carrier or its agents from all liability for damages caused by their negligence. Rather, the clause functioned as an ordering mechanism by designating that the ocean carrier, and only the ocean carrier, was responsible to the cargo owner for losses caused by it or any other entity involved in the shipment. The clause did not relieve the railroad companies from being held liable to the ocean carrier for damage caused by their negligence.

Finally, the appellate court rejected the plaintiffs' argument that the intermediary carrier was not authorized to agree to the Exoneration Clause in the ocean carrier's bill of lading. In doing so, the court noted U.S. Supreme Court precedent establishing that, with regard to liability limitations for negligence resulting in damage, an intermediary may negotiate reliable and enforceable agreements with the carriers it engages. This is founded in both practical considerations - such as the notion that a contrary rule would frustrate carriers who may not know whether they are dealing with an intermediary or cargo owner, and thus wouldn't know whether their contractual liability limitations are enforceable - and the equitable consideration that cargo owners retain the ability to sue intermediary carriers for any gap in liability limitations between through bills of lading issued by the intermediary and subsequent carriers.

In the end, the Sompo decision adheres to longstanding principles of construction and does not relieve underlying carriers from the consequences of their negligence. However, shippers must be mindful that, when contracting with an ocean carrier or intermediary, they will not be able to assert direct claims against underlying carriers if the contracts of carriage contain an Exoneration Clause.