Shipping contractsi Shipbuilding
The US shipbuilding and repairing industry is comprised of establishments that are primarily engaged in operating shipyards, which are fixed facilities with dry docks and fabrication equipment. Shipyard activities include ship construction, repair, conversion and alteration, as well as the production of prefabricated ship and barge sections and other specialised services. The industry also includes manufacturing and other facilities outside the shipyard, which provide parts or services for shipbuilding activities within a shipyard, including routine maintenance and repair services from floating dry docks not connected with a shipyard.
In 2018, there were 124 shipyards in the United States, spread across 26 states that are classified as active shipbuilders. In addition, there are more than 200 shipyards engaged in ship repairs or capable of building ships but not actively engaged in shipbuilding. The majority of shipyards are located in the coastal states, but there also are active shipyards on major inland waterways, such as the Great Lakes, the Mississippi River and the Ohio River. Employment in shipbuilding and repairing is concentrated in a relatively small number of coastal states, of which the top five account for 63 per cent of all private employment in the shipbuilding and repairing industry. The federal government, including the US Navy, US Army and USCG, is an important source of demand for US shipbuilders. Although just 8 per cent of the ocean-going vessels delivered in 2020 (18 of 205) were delivered to US government agencies, 15 of the 17 large deep-draft vessels delivered went to the US government: eight to the US Navy and seven to the USCG.
There are no statutory formalities or requirements (beyond standard contractual requirements) with which parties must comply when entering into shipbuilding contracts for commercial vessels.
What may surprise some observers not familiar with the US legal system is that a contract to build a ship is not considered a 'maritime contract' and, therefore, is not within admiralty jurisdiction and not governed by general maritime law. Shipbuilding contracts are subject to state law and commonly contain choice of law and forum clauses. It is common for dispute resolution clauses to contain a referral to the classification society, such as the American Bureau of Shipping (ABS), for a determination of technical disputes. Even foreign choice-of-law clauses will be enforced if there are sufficient contacts present. For instance, in Hartford Fire Insurance Co v. Orient Overseas Containers Lines (UK) Ltd (decided on 27 October 2000), it was held that '[a]bsent fraud or violation of public policy, a court is to apply the law selected in the contract as long as the state selected has sufficient contacts with the transaction'.
Performance and quality standards are often subject to classification society rules or International Maritime Organization (IMO) standards. The flag state authority is the USCG, which has delegated a significant portion of its monitoring of newbuilds to the ABS or similar classification societies.
A ship repair contract, in contrast to a newbuild contract, is a maritime contract governed by general maritime law. There is warranty of workmanlike performance that is implied in common law. Depending on the governing law, common clauses such as warranty, indemnity and additional insured provisions could have dramatically different results. Common law remedies for breach of contract and the availability of liquidated or consequential damages may also vary by state.
Commercial shipyard disputes often arise out of claims by subcontractors, which may be subject to the provisions of the Uniform Commercial Code or state lien law. In addition, a security interest can be created in favour of third-party creditors of either the buyer or the builder over both a vessel under construction and related equipment.
Shipyard workers are covered by the Longshore and Harbor Worker's Compensation Act (LHWCA), which provides a federal worker's compensation scheme for injured workers. Indemnity provisions in shipyard contracts are often affected by the LHWCA, which precludes certain indemnity schemes. Contracts to build or repair vessels in the United States should account for that possibility.
Owners of US-flag vessels who purchase equipment for, and repair, a vessel outside the United States are subject to declaration, entry and payment of ad valorem duty, an imposition of 50 per cent duty on all repairs conducted in foreign yards. When the US vessel returns home, it must file a vessel repair declaration with Customs and Border Protection (CBP), even if the vessel underwent no foreign repairs.
If a vessel incurred foreign repair-related expenses, the entry generally must show all foreign voyage expenditures for equipment, parts of equipment, repair parts, materials and labour. US-flagged vessels are exempt for the repairs if they were made in countries with which the United States has a free trade agreement or were done by the regular crew members of the vessel.
Prior to CBP making a determination of duty, an application for relief of duties can be filed with CBP within 90 days of the vessel's arrival in the United States – applications for relief are very detailed and need to include items such as itemised bills, receipts, invoices, photocopies of relevant parts of vessel logs, certification or permits.
In addition to issuing a determination of duty, CBP may issue penalties for failure to report, enter or pay duty and for a false declaration.
Depending on CBP's determination of duty, a protest may be filed under 19 USC 1514(a)(2). A protest is the basic means of challenging a Customs Service decision. The protest must be filed within 180 days of issuance of the duty.
A protest is typically decided at the port level; however, an importer could also request that Customs Headquarters review the protest. A denied protest may be challenged in the United States Court of International Trade (CIT). To begin a case in the CIT, a summons is filed with the Clerk of the Court within 180 days of the date Customs denied the protest or two years from the non-protestable decision being challenged.
Importers are reluctant to bring a claim in the CIT because of the perceived expense of litigation, a general reluctance on the part of some importers to be seen suing the US government and the incorrect notion that Customs will always prevail.ii Contracts of carriage
The movement of goods over the water is complex and involves various interlinked systems, particularly in multimodal carriage. Often there are overlapping contracts in place between shippers, ocean carriers, freight forwarders and non-vessel owning common carriers (NVOCCs).
Contracts of carriage are generally frequently governed by the COGSA and its precursor, the Harter Act. Enacted in 1936, COGSA is the US enactment of the International Convention for the Unification of Certain Rules of Law relating to Bills of Lading 1924 (the Hague Rules). The United States has not adopted the Protocol to amend the International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading 1968 (the Hague-Visby Rules) or the UN Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea 2009 (the Rotterdam Rules).
Contracts of carriage for common carriage are generally evidenced by bills of lading or contracts of affreightment. Contracts of private carriage are generally reflected in charter parties. Bills of lading can serve as the contract of carriage and as documents of title. The interpretation of the clauses in a bill of lading is the focal point of many cargo damage suits. Many carriers and NVOCCs will maintain a copy of their tariff with the standard terms of their bills of lading on file with the Federal Maritime Commission.
Charter parties are maritime contracts governed by US general maritime law, although courts typically enforce a clause choosing other law to govern, subject to choice-of-law rules. Disputes under charter parties are usually resolved in arbitration pursuant to an arbitration clause. Courts have fashioned some principles of general maritime law applicable to charter parties. The US Supreme Court has interpreted a safe berth clause in a voyage charter. In Citgo Asphalt Refining Co v. Frescati Shipping Co (decided 30 March 2020), the Supreme Court held that an unqualified safe berth clause constitutes a warranty that imposes on the charterer an absolute duty for safety of the berth it selects. Parties remain free to contract around the warranty, such as by a clause expressly limiting the charterer's obligation to an exercise of due diligence to nominate a berth or port that is safe.
A charter party includes an owner's implied warranty of seaworthiness at the commencement of every voyage, unless express contract language limits or extends this warranty. Breach of a charter party can give rise to a maritime lien.
By its terms, the COGSA applies to 'all contracts for carriage of goods by sea to or from ports of the United States in foreign trade'. The 'contract of carriage' covers 'only . . . contracts of carriage covered by a bill of lading or any similar document of title'. Section 1305 of the COGSA specifically excludes charter parties, unless bills of lading are issued under the charter party. The definition of 'goods' excludes live animals and certain deck cargo. Further, the definition of 'carriage of goods' covers only 'the period from the time when the goods are loaded on the ship to the time when they are discharged from the ship'.
The COGSA applies to most international ocean shipments to or from the United States during the tackle-to-tackle period. It may be extended by contract to cover the entire period that the goods are in the carrier's possession. Via a Himalaya clause in the contract of carriage, the COGSA defences and limits may be further extended to the agents and contractors of the carrier, such as stevedores, or connecting carriers. The extension of the COGSA by contract is generally motivated by the desire to benefit from the Act's US$500 per package or customary freight unit limitation of liability.
The Harter Act frequently comes into play on inland shipments (i.e., tug and barge movements) for domestic US shipments. The Harter Act generally applies to domestic carriage (in the absence of a contrary agreement), shipments under charter parties, most deck cargo and damages outside the tackle-to-tackle period. The Harter Act does not contain any specific language regulating the extent to which a carrier may limit its liability. Although the Harter Act has no package limitation, common practice made the US$100 agreed valuation clause the effective equivalent and some carriers have used even lower amounts.
Under the Harter Act, a carrier is never exempted from liability for cargo loss unless it exercised due diligence to make the ship seaworthy at the beginning of the voyage. If unseaworthiness and a lack of due diligence are found, the carrier cannot invoke the Harter Act exoneration clause even if there is no causal connection between the unseaworthiness and the loss or damage. The Harter Act makes unlawful any provisions in a bill of lading or shipping document that relieves the manager, agent, master or owner of any vessel transferring property between ports of the United States and foreign ports from liability for loss or damage arising from negligence, fault or failure in proper loading, stowage, custody, care or proper delivery.
Both shippers and consignees may be bound by the terms of a bill of lading. Accordingly, indemnity claims by a carrier for vessel or property damage arising out of a contract of carriage could involve claims against both the shipper and the consignee. As explained below, the consignee may also be bound by a forum selection or choice of law clause in a bill of lading that it may never have seen.
Since the 1972 United States Supreme Court decision in Bremen v. Zapata, contractual choice of law and forum selection clauses in maritime contracts have been held to be presumptively valid. Subsequently, the US Supreme Court in Vimar Seguros y Reaseguros, SA v. M/V Sky Reefer declined to nullify foreign arbitration clauses in contracts for carriage of cargo as a lessening of the carrier's liability under the COGSA. Cargo claims often involve litigation over which law to apply, as some parties try to avoid the COGSA US$500 package limitation in favour of a more advantageous limitation scheme.
An interesting phenomenon is the extension of the COGSA, its defences and limits to inland portions of the carriage of goods under a 'through bill of lading'. A through bill of lading is issued for the 'door-to-door' transportation of goods whereas a 'port-to-port' bill of lading covers transportation from loading to unloading. In 2004, in Norfolk Southern Railway Co v. Kirby, the US Supreme Court held that a through bill of lading was a maritime contract and therefore the COGSA limits could apply to a rail company that was not a party to the bill of lading. The Kirby decision was reinforced by the Supreme Court's decision in 2010 in Kawasaki Kisen Kaisha Ltd v. Regal-Beloit Corp, which extended the reach of a forum selection clause to a rail company under a through bill of lading.iii Cargo claims
Given the sheer volume of goods that move in and out of US ports, cargo damage and loss claims are bound to occur. Small claims typically do not generate lawsuits. Rather, marine surveyors inspect the damage, exchange customary documents, and insurance adjusters negotiate settlements.
For large matters or more difficult claims, suits are often filed in federal district courts under admiralty jurisdiction. A cargo claim also gives rise to an in rem claim against the vessel. As such, cargo suits are often started with a vessel arrest or the furnishing of a letter of undertaking or a surety bond by the ocean carrier's insurer. Damage claims filed in state courts arising out of ocean carriage are far less frequent than federal suits.
The COGSA provides carriers with strong statutory defences, such as errors in navigation, perils of the sea or insufficiency of the packaging, and a time bar that requires a lawsuit to be commenced within one year. The COGSA also requires the ocean carrier to exercise due diligence at the beginning of the voyage to make the vessel seaworthy, and the carrier must properly load, stow and care for cargo.
The COGSA sets up a complex system of shifting burdens of proof and accompanying presumptions of liability. The COGSA 'ping pong ball' burden of proof follows a well-established path. The shipper must establish a prima facie case that the cargo was loaded in good order and upon discharge it was lost or in damaged condition.
- A shipper's prima facie case creates a presumption of liability, which may be rebutted by the carrier.
- The carrier is required to establish that (1) it exercised due diligence to prevent the cargo loss or damage, or (2) the cargo loss or damage falls within one of the enumerated COGSA defences.
- If the carrier successfully rebuts the shipper's prima facie case, the burden returns to the shipper to establish that the carrier's negligence was at least a concurrent cause of the loss.
- If the shipper establishes that the carrier's negligence is at least a concurrent cause of the loss then the burden shifts once again to the carrier, which must establish what portion of the loss was caused by other factors.
If the carrier is unable to prove the appropriate apportionment of fault, then it becomes fully liable for the full extent of the shipper's loss.
The application of the COGSA package limitation is often hotly contested. Depending on the facts of a case, cargo claimants may assert that there was an improper geographical deviation or improper deck stowage, so as to deprive the carrier of the right to limit. Oddly enough, although the COGSA itself does not do so, a well-defined body of case law outlines what a COGSA package is. For non-containerised cargo, a package may be prepared for shipment by being fully or partially boxed or wrapped, regardless of the size of the cargo. For containerised cargo, the wording on the bill of lading often determines whether the container or its contents are the 'packages'.
The measure of the shipper's recovery when cargo is damaged is normally the difference between the fair market value of the goods at the port of destination in the same condition as they were in when shipped and their value damaged. Incidental damages, such as survey costs, are recoverable. Damages for delay are more problematic to establish and will often be determined if the contract of carriage is on a 'time is of the essence' basis. Consequential damages are potentially recoverable but are often excluded as a matter of contract.iv Limitation of liabilityBackground
In 1851, the United States Congress enacted the US Limitation of Liability Act (the Act). Limitation of liability for shipowners was common in the admiralty law of most nations well before 1851. In 1734, a limitation of liability scheme was enacted under British law. Prior to 1851, US shipowners were uneasy facing potentially unlimited personal liability, which also put them at a competitive disadvantage with respect to shipowners in countries that offered a limitation of liability scheme. The US shipowners pressed Congress to remedy this perceived disparity. As a result, Congress passed the 1851 Act. Whereas many countries have since amended their limitation of liability schemes, the US Limitation Liability Act of 1851 remains essentially unchanged.Purpose and benefits
In general, limitation liability schemes seek to limit the exposure of the shipowner to its interest in the vessel and any pending freight. This was the heart of the Act and remains so today.4 When a vessel sinks or suffers extreme damage, there may be little or nothing in the limitation fund to pay personal injury and death claimants. In 1935, Congress amended the Act to ensure that in cases of personal injury or death, the shipowner would have to establish a fund in the amount of US$420 per gross tonne solely to pay personal injury or death claims.
Not all participants with an interest in a voyage are permitted to take advantage of the Act; it is reserved solely for the owner or demise charterer. 'Owner' is defined by the Act to include a demise charterer that 'mans, supplies, and navigates the vessel'. Time and voyage charterers do not fall within this definition.
The limitation fund is to be equal to the value of the vessel at the conclusion of the voyage or casualty, plus any pending freight. The owner stipulates this amount in court. The claimants can demand that security be deposited with the court in the same amount. Claimants to the fund can also challenge the sufficiency of the limitation fund and seek to have it increased. A vessel owner may limit only for tort claims, including property damage, personal injury and death. Under the 'personal contract doctrine', a vessel owner cannot limit liability for contractual agreements entered into prior to the casualty.Venue, concursus and injunction
The owner files its limitation proceeding in the district court. If the vessel owner has not yet been sued, it must file its action in the judicial district where the vessel lies. If the owner has been sued, it must file its limitation action in the judicial district where the first suit was lodged. If the vessel remains at sea outside any judicial district and the owner has not been sued, the owner can file its limitation action in any judicial district of the United States.
When a vessel owner files its own limitation of liability proceeding, the federal court will then issue an injunction staying any suits that have been filed in any other court. It will also order those suits, as well as all future suits, to be brought solely in the limitation proceeding commenced by the shipowner. It will order all claimants to file their claim in the shipowner's limitation of liability proceeding within four to six weeks. Claimants that fail to file by that date are subject to being defaulted by the court. This is an excellent tool for the shipowner not only to pick its forum but to force the many claimants that arise out of a major casualty to file their claims in the shipowner's action. Thus, time and expense are saved by not having to litigate multiple claims in various jurisdictions and venues. Shipowners must be mindful that they have six months from written notice of a claim to file their limitation of liability proceeding.5 If a shipowner does not file within six months and a suit is filed against it, it still has the right to assert limitation of liability under the Act as an affirmative defence. However, it does not have the right to the injunction and marshalling of claims into its own proceeding.Claimants' stipulation and the shipowner's privity and knowledge
If all the claimants agree and stipulate that they will not seek to enforce a judgment in excess of the federal court's limitation value set forth in the initial order, the court will allow the case to go back to state court for trial. If a judgment is obtained in excess of the limitation value, the parties then return to federal court to resolve the issues surrounding the limitation value and the right of the owner to limit in the first place. The theory behind the Act and all limitation liability schemes is to limit the owner's liability for the negligence of his or her crew, owing to the fact that the ship is at sea and the owner lacks control over the vessel's operation. If, however, the court finds that the negligent act or omission causing the casualty was within the privity and knowledge of the shoreside management, the vessel owner will be denied its right to limit liability. Although Congress has chosen not to amend or repeal the Act, the federal courts are often keen to find privity and knowledge, especially in cases of severe personal injury or death juxtaposed with a limitation value that is extremely low.
Should the limitation proceeding proceed to trial in the federal court, three results may be obtained:
- the vessel owner is totally exonerated;
- the owner is found liable, but damages are limited to the post-casualty value and pending freight; or
- the owners are found liable, the court finds the cause of the casualty within its privity and knowledge, and the owner must pay the full damages awarded by the court.
For the foreseeable future, it does not appear that the US Congress will alter or amend the Act. The Limitation of Liability Act is available to shipowners of any nationality. It remains a useful tool not only for limiting liability but for fixing venue, marshalling claims in one convenient form, and maintaining control of what can be an expensive and complicated litigation.