New Life in an Old Method: A Concise Railroad Law Primer

by Christopher Minelli September 12 2006, 16:22

The reality of the modern world is that fuel prices are enormous compared with averages from as little as ten years ago, and it is improbable that they will decline anytime in the near future.  [1]  One consequence of current fuel prices is the higher cost of freight and passenger transportation around the country.  Carriers must adjust their rates according to a confusing maelstrom of fluctuating fuel costs, federal security requirements pertaining to the war on terrorism, and the instability of steady customers in the lukewarm economy.  [2]  A solution may be as simple as looking to a transportation method that is over a century old and is conveniently located in nearly all major American markets – the railroad system.  Railroad freight and passenger services, and the laws that accompany them, are probably unfamiliar to many practicing attorneys because of the multitude of other transportation options that sellers have preferred over the last half century.

The railroad’s decline from the late 1950s to just recently has highlighted the benefits of other methods of transportation when fuel costs are relatively inexpensive.  To the producer of the 1960s interstate trucking was cheap, reasonably reliable, and was not dependant on railroad time tables.  [3]  Also, an increase in the volume of air transportation at the same time provided sellers with a means of delivering goods to buyers in only a fraction of the time that was once required by rail.  In addition, passenger rail service suffered as the interstate highway system made personal travel from the comfort of one’s own automobile more attractive than trains constrained by set routes.  [4]

The rising price of fuel and the accompanying increase in freight rates by trucking companies and fares by the airlines have put the spotlight back on railroads as a possible solution to the current shipping dilemma.  [5]  Rail transportation is more fuel efficient than interstate trucking, and is capable of carrying a wider variety of materials than aircraft.  Although the rail system has declined in recent decades, there are thousands of miles of track still in use and many thousands more that have been abandoned by regular revenue service.  [6]  In short, it is probable that rails will play a far more important role in national transportation than they have in the recent past.  In fact, high technology giants have chosen rail service over interstate trucking to move their merchandise from major ports on the west coast across the country because of its cost-effectiveness.  [7]  Because coal and timber shipments are now taking a backseat to DVD players and stereo equipment in railroad freight cars, a short practice primer on contracts for the carriage of goods (“COG”) via railroads is pertinent.

COGs are essentially service contracts and thus are not covered by the Uniform Commercial Code.  [8]  They are rooted deep within the common law of contracts, and their law does not materially differ from state to state.  The most striking difference between railroad COGs and their road, air, and maritime counterparts lie in the way that courts have analyzed their terms in light of public policy.  [9]  Railroads have been determined to be vital to the public interest by both Congress and the courts, and as such are under heavy federal regulation based on theories of public policy [10] and Congress’s express power to regulate interstate commerce.  [11]  Courts, although cognizant of the time-honored freedom of contract, are aware of the public interest within the railroads and will construe COGs narrowly in a manner that will not injure that public interest.  [12]  However, if the construction of a given COG will not materially injure public interest, then the express terms of the contract will be upheld.  [13]

The leading case in this area is Taylor v. Florida East Coast Ry. Co.  [14]  A landowner in Florida contracted with a local railroad to build a spur line off their main track, complete with depot for passenger and freight access, to serve a hotel that the landowner was constructing.  The contract was honored; the line and depot were built and trains served the area for thirteen years.  The original landowner died and passed a fee simple in the property to his heirs.  The railroad immediately ceased operations and tore up the track.  [15]  The heirs sued for specific performance, and although the court found that the contract had been substantially performed and there was no remedy available to the heirs at law, equity could enforce the contract and require the railroad to again take up operations.  [16]  The court’s reasoning for this was that, due to the public nature of railroad service, the railroad’s freedom of contract could be curtailed in the public interest.  [17]  Note that the construction of railroad COGs in one manner or another essentially strikes to the remedy offered by the court.  Thus, when drafting railroad COGs an important theme to consider from rough outline to completed document is what detriment (if any) the contract may inflict on railroad operations and how to minimize those detriments through preliminary negotiations and minimizing express terms.

COGs rarely stand by themselves in business transactions between corporate buyers and sellers.  Instead, they are only a small cog in the wheels of the overall purchase agreement between a buyer and seller or a series of buyers, sellers, and intermediaries.  [18]  The typical sales transaction will include an independent agreement for shipping the purchased items.  These can be one of two varieties: a “shipment contract” in which the seller’s liability for the goods terminates after the sales transaction is completed (essentially at the front doors of the factory or warehouse), and a “destination contract” in which the seller has a duty to deliver the goods to the seller as a part of the overall purchase agreement.  [19]

Railroad COGs can be drafted easily from standard forms, keeping in mind a few specifics to the rail industry that may want to be considered more closely:

1. Fuel Price Cap

It defeats the purpose of using railroads to transport freight if the price of fuel is the same if not more expensive than in alternate methods of transportation.  The party carrying the burden of delivery would be better served with a quicker method of transportation if there was not a substantial discount on fuel prices offered by the railroad in proportion to the efficiency of the method.  At any rate, it pays to make sure that the COG specifies an exact, express fuel price within its material terms.

2. Independent Contracts of Inspection and Associated Clauses

It has been customary in admiralty practice for years to provide for an independent third party to inspect cargo right before it is shipped to the buyer (in some cases immediately before the doors to the cargo container are sealed) to objectively document that condition of the cargo.  This is vital to insurance and negligence litigation to prove when (and where) damage occurred if the cargo does not arrive to the buyer in the condition she was expecting it to be in.  Thus, it is well worth the added cost to have documentation of the condition of the goods prior to departure.

3. Express Duty of Care Terms for Railroad Operation

The duty of care a seller (or in the case of a shipment contract, the third party railroad) owes the freight and buyer can of course be expressly modified by the terms of the contract.  However, the common law default rule courts will imply into a COG depends largely on whether or not the railroad was operating in the capacity of a common carrier or a private carrier.  Common carriers are those railroads that operate in an “open to the public” fashion – accepting freight from anyone for a fee, and as such have a higher duty of care towards the freight they are carrying.

The drafter of a railroad COG should keep in mind the interests of the party she is representing, and negotiate the duty of care owed the cargo accordingly.  History tends to repeat itself, and transportation law is no exception.  If fuel prices stay steady or increase even further, it is likely that the railroads will provide new wine in old bottles for the transportation industry.  Thus, it is pertinent to any attorney that represents buyers, sellers, shippers, or even remotely affected third parties to find a basic understanding of how railroad contracting operates.  It might not be the too distant future when a business person in Chicago, needing to send goods to a buyer across the country, ignores the telephone number to FedEx and instead calls the Central Pacific Railroad Office.

[1]  Phil Tinari, Dire ProphesyWALL ST. J., Sept. 15, 2004, at A1.

[2]  The Economic Impact of Higher Oil PricesCBC NEWS ONLINE, Mar. 17, 2005, available at http://www.cbc.ca/news/background/oil/economicimpact.html.

[3]  See generally Transportation, 28 ENCYCLOPEDIA BRITANNICA  788-792 (15th ed. 1989).

[4]  See generally Transportation in the U.S., ENCYCLOPEDIA BRITANNICA (2006),available at http://www.history.com/encyclopedia.do?articleId=224413.

[5]  Id.

[6]  See generally Transportation, supra note 3.

[7]  John Schmeltzer, Fuel Price Hikes Bear Down on Railroads, but Profits Up, CHICAGO TRIBUNE, Mar. 26, 2005, at C1.

[8]  U.C.C. § 2-102 (2001)

[9]  See Taylor v. Florida East Coast Ry. Co., 45 So. 574 (Fla. 1907).

[10]  See Interstate Commerce Commission v. Oregon-Washington R. & Nav. Co., 288 U.S. 14 (1933).

[11]  U.S. Const., art. I, § 8.

[12]  On the philosophy of freedom of contract, see JEFFREY FERRIELL & MICHAEL NAVIN, UNDERSTANDING CONTRACTS 7-8 (2004).

[13]  See Taylor, 45 So. 574.

[14]  See id.

[15]  See id. at 648-51.

[16]  See id. at 647.

[17]  Id.

[18]  THOMAS J. SCHOENBAUM, ADMIRALTY AND MARITIME LAW 489 (West 2004).

[19]  Id. at 490.

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