A Salty Flavor to Your (Formerly) Land-Based Contracts: Norfolk Southern v. Kirby Two Years Later

by Christopher Minelli October 10 2006, 16:21

In 2004 the Supreme Court of the United States handed down a decision that changed the jurisdictional requirements of adjudicating a contract in admiralty.  [1]  This was a major development in an area of the law that is remarkably resistant to change because of the nature of shipping evolves little compared to other technology.  These changes should have had a larger effect in legal circles, because now certain “mixed contracts” that fell in the grey area between admiralty and non-admiralty law were considered to be within admiralty jurisdiction entirely.  [2]  Now certain contracts for the carriage of goods that arrange for transportation over both land and water in a single contract can be adjudicated in certain instances that were impossible before.  [3]  Currently, a shipping container undergoing some catastrophic event in Nevada could be litigated in admiralty as long as the majority of its journey was made on navigable waterways or the high seas.  This counter-intuitive principle deserves a closer look by business attorneys working in the transportation field because now more than ever it is possible that they will brush up against an ancient (and somewhat mystifying) area of law that most lawyers working away from the coastline would never before had encountered.  It is a useful exercise for any lawyer in the field to examine exactly how the jurisdictional requirements for maritime contracts changed, what decisions have been made since, and exactly what it means to their legal practice.

Of the entirety of American jurisprudence, few areas are as separated from other subjects as admiralty law.  [4]  Most specializations are related to the basic subjects of contracts, torts, property, and the criminal law by advancing their concepts a step further or by focusing in on a tiny area in far greater detail.  Admiralty law is wholly separate, and although its precedent speaks to all of the common law in one way or another, the processes or even the underlying principles are different and maritime in flavor.  [5]  This is because admiralty developed along separate lines in common law England than did its land-based cousins.  [6]  A consequence of the separation is that admiralty lawyers frequently only specialize in admiralty claims (or in some cases, transportation claims), and attorneys in conventional fields are somewhat unaware and mystified by the separateness of maritime law.

I. Traditional Admiralty Jurisdiction

For any claim to be litigated under the unique rules of admiralty law, the jurisdictional threshold requirement must be met.  [7]  Furthermore, the policies of admiralty law should be examined to understand why admiralty is necessary in the modern United States.  At English common law, admiralty fell between the cracks of the competing law and equity courts.  Jurisdiction was determined geographically.  If the contract was made at sea, it was a maritime contract and was appropriate for admiralty jurisdiction.  [8]  If the tort occurred at sea, then the resulting claim was also appropriate for admiralty.  [9]  Rules developed to determine how to determine geographical locations.  The most important was that “sea” meant any water affected by the tides.  If you were subject to a contractual breach or a tort on a body of water affected in this manner, then you were eligible for the admiralty courts.  [10]

These concepts were transferred to the United States during the colonial period and shortly thereafter, but it soon became apparent to federal courts [11] that the English rules were not well-suited for American marine activities.  [12]  Many American waterways were fully navigable by ships that were not affected by the tides, such as rivers and large lakes.  The amount of river traffic increased in the United States as the population started moving west in the early nineteenth century, and the Courts were hard pressed to find a reasonable solution of updating the elements of admiralty jurisdiction.  [13]  Specifically it was apparent that admiralty law should be in the province of the federal government only; not only because of express constitutional authority, but because the interstate nature of shipping meant a uniform law was preferable to a smattering of irreconcilable state decisions.  [14]

The federal courts soon developed an American test for admiralty jurisdiction bringing all such claims into federal court.  [15]  Justice Joseph Story was at the forefront of these decisions and is known for his lengthy, scholarly decisions that slowly extended jurisdiction to what it is today.  [16]  American admiralty tort jurisdiction required that the cause of action occur (1) on navigable waters (2) during traditional maritime activity (3) in a manner that could potentially disrupt maritime commerce.  [17]  Each element over time evolved their own specific nuances, but Story’s contribution to admiralty contract jurisdiction has remained static until only recently.  [18]  A contract is maritime if its nature is substantially related to maritime matters.  [19]  This differs from the English law because American judges look for a contract’s subject matter, not where it was made geographically.  [20] 

Because admiralty law is exclusively litigated in front of a single judge or a panel of judges (where does one find jurors on the high seas?) the law changed slowly.  Maritime contract law didn’t fundamentally change.  The case law from the nineteenth century to modern times only added examples to what is and what is not maritime subject matter.

II. Norfolk Southern v. Kirby

As is the case with many landmark cases, Norfolk Southern Ry. Co. v. Kirby  [21] involved a very interest fact pattern.  “This,” wrote Justice O’Connor, “is a maritime case about a train wreck.”  [22]  The General Motors Company ordered $1.5 million worth of machinery from the James N. Kirby Company of Australia to be sent to an automotive plant in Huntsville, Alabama.  [23]  The machines were loaded into ten shipping containers.  [24]  Kirby hired a freight forwarding company, which arranges for overseas transport but doesn’t ship items themselves, which gave Kirby a bill of lading.  [25]  The bill of lading is a contract that also serves as proof that the forwarding company received the items.  [26]  Under federal law, the forwarding company and the actual carrier were limited to only $500 of liability per container.  [27]  Furthermore, the bill of lading contained a standard “Himalaya Clause,” which extended the limited liability to “servants, agents, or other independent contractors” working under or for the two organizations.  [28]
Because the shipping containers were capable of being easily loaded on board the ship and subsequently offloaded to a waiting Norfolk Southern freight train at its debarking port in Savannah, Georgia, the contract was a “through bill of lading” providing for carriage from factory to factory as opposed to breaking the trip into sea- and land-borne legs as was common in the era before containerization.  [29]  The sea voyage from Australia to Georgia was without incident, but the Norfolk Southern train derailed on its way inland to Huntsville rendering most of the equipment damaged or destroyed.  [30]

The theory forwarded by Norfolk Southern was that it was an “agent” of the forwarding company, thus the through bill of lading’s Himalaya Clause extended the $500 limitation on liability to them.  [31]  The District Court agreed [32], but the decision was reversed by the Eleventh Circuit.  [33]  Through the appeals process, the parties relied in state law contract principles in their arguments.  [34]  Once the case reached the Supreme Court, Kirby raised the issue of federal admiralty principles being the controlling law instead of the common law contracts principles of Alabama.  [35]  The Court used this minor threshold issue as an opportunity to expand admiralty jurisdiction within the contract realm.  [36]

Federal admiralty law controls the interpretation of maritime contracts where there is no overriding local interest that would require application of local laws.  [37]  This is so that the law remains uniform throughout the United States.  [38]  First, the Court determined that there was no material interest in applying local law in the case, and then they raised more than a few eyebrows by holding the bill of lading as a maritime contract even though the cargo was lost on a land leg of the journey.  [39]  This expansion was focused on the bill of lading being primarily maritime, as the majority of the trip was on water.  The Court noted that the purpose of applying admiralty principles to maritime contracts is to protect those contracts, and in the modern era “the shore is now an artificial place to draw the line.”  [40]  They pointed to containerization methods and modern machinery in ports to quickly offload such containers for the expansive understanding of maritime contracting.  [41]

The Court was also careful to state a limitation on itself – a maritime contract necessarily involves the majority of the trip to be over water: “(it) is useful in a conceptual inquiry only in a limited sense: if a bill’s sea components are insubstantial, then the bill is not a maritime contract (emphasis retained).”  [42]  By meeting the threshold jurisdictional question, the Court was able to go on to reverse the Eleventh Circuit, holding that Norfolk Southern was in fact covered by the limitation in the bill of lading’s Himalaya Clause and remanding the case.  [43]

III. Case Law Applying the New Rule

In theory, Kirby should have sent shockwaves throughout American jurisprudence resulting in a flood of cases on the dockets of admiralty courts around the country.  Two years later, this effect has yet to be seen.  There are a few possibilities for why this is so: admiralty might not be particularly appealing to attorneys litigating cases best heard in front of a jury, the dispute settles quickly because the depth of admiralty case law clears any grey area in the facts that litigants could use to their advantage in civil court, or (and most probably) the majority of attorneys are afraid of the mysteries of admiralty due to inexperience in the field. 

Some courts have heard maritime contract cases in the post-Kirby world.  The majority of them followKirby, but some have distinguished its facts and held contrary.  The Supreme Court has yet to speak on any of these opposing decisions. 

As recently as last month in Atkins Machinery, Inc. v. Powell Company, Inc.  [44], the U.S. District Court for the District of South Carolina applied a similar Himalaya clause to the one found in Kirby to a freight carrier who negligently damaged a textile machine on its way to Thailand.  [45]  It is fairly clear that without the expand rule established in Kirby, the defendant’s motion to dismiss would not have been granted.  Both parties acknowledged that the damaged occurred at a port within the United States as the freight carrier was loading the machine’s shipping containers on the company’s vessel.  [46]  The voyage had not even seen navigable waters at that stage, and without Kirby’s rule the bill of lading would not have been considered a maritime contract for purposes of the Himalaya Clause.  [47]  Similar results from similar fact patterns were found in Polimeros Technolgia, S.A. v. Maersk Sealand[48] (a shipper’s motion for summary judgment was granted upholding a Himalaya Clause after several thousand dollars’ worth of equipment was stolen from a Guatemalan port) and Monarch Gems v. Malca-Amit, USA, LLP [49] (Himalaya Clause extended to carrier when a shipment of diamonds disappeared in route).

Other courts have distinguished the case, choosing not to hold certain bills of lading as maritime and denying litigants the benefit of admiralty jurisdiction.  In Folksamerica Reinsurance Company v. Clean Water of New York [50], the Second Circuit criticized the lack of detail in Kirby’s test.  The case involved an injured harbor worker that sued Folksamerica for insurance coverage.  [51]  Folksamerica claimed his policy did not cover the worker because the worker’s employer was a mere subcontractor to the policyholder.  [52]  The Court went to great length describing their own jurisdictional test, stated flatly that the Kirby Court did not apply a threshold test appropriate to the type of insurance (even though marine insurance) contract in the case, and refused to apply it.  [53]  Marine insurance is a grey area within the Kirby framework, but a plethora of other cases have held that contracts for marine insurance are in fact maritime contracts.  [54]  A liability extension clause in these logically ought to work in the same manner as a Himalaya Clause, thus allowing for limited liability a la Kirby.  Other cases distinguished the Carriage of Goods by Sea Act applications from the Hamburg Rules applications [55], contracts that did not expressly state liability was extended “beyond the (port of debarkation) [56],” and where there is clear evidence that the parties to the bill of lading never intended for the Himalaya Clause to extend to the specific agent that caused the damage.  [57]

IV. Application to Land Based Practice

Any motorist driving down an interstate highway sees the modern result of shipping every time they spot a flatbed trailer hauling one or more shipping containers.  These shipping containers revolutionized the business of shipping and allowed cargo to be loaded at a factory, taken by rail to a port, loaded onto a ship, offloaded at the debarkation port, loaded onto a truck, and then delivered to the buyer without requiring any machine or dock worker to touch the actual goods themselves.  [58]  The efficiency in this system is immense (in terms of both time and money) from the “break bulk” shipping methods of yesteryear that required hundreds of hired hands to offload cargo at a port one crate at a time.  [59]  The difference in data is staggering: in the modern world it takes a container-ready port crane to offload a ship in several hours versus offloading a break bulk ship in the 1950s, which could take weeks.  [60]

The decision in Kirby is a fresh breath of air into a (sometimes) musty area of the law.  Many of the principles still litigated in admiralty courts across the country were developed in pre-Revolutionary times, and a select few can trace their roots back as far as ancient Mesopotamia.  [61].  Applying these can be difficult at best to an attorney litigating a uniquely twenty-first century problem like that of damaged shipment hundreds of miles inland.  Problems such as those were non-issues as little as fifty years ago, when the process of unloading a ship took weeks and it logically followed that two separate bills of lading would be necessary to (1) get the shipment to the debarkation port and (2) get the shipment from the port to wherever it was going via road or rail.  Nowadays, goods do not move from their containers from the factory to the buyer.  Efficiency has been applied to the business of shipping, and the Supreme Court has rightly applied it to the law of shipping as well.
Because of this, the possibility of admiralty causes of actions in any jurisdiction in the United States is a reality.  Assuming the container’s bill of lading involved a “substantial” sea leg of its overall journey, any Himalaya Clause could be raised as a pre-trial defense to negligence, theft, and logically business and economic torts.  It is not a stretch to believe most attorneys engaged in the practice of business or transportation law would come across a possible admiralty claim sometime during their practice – and in the post-Kirby world, those instances will be far more common.

Footnotes:

[1]  See Norfolk Southern Ry. Co. v. Kirby, 543 U.S. 16 (2004).

[2]  Id. at 29.

[3]  See Thomas J. Schoenbaum, ADMIRALTY AND MARITIME LAW § 1-10 (Hornbook ed., Thomson-West 2004).

[4]  Id. at § 3-1.

[5]  Id.

[6]  See 1 BENEDICT ON ADMIRALTY §§ 41, 42 (Matthew Bender, 2006).

[7]  See Schoenbaum, supra note 2, § 1-2.

[8]  See DeLovio v. Boit, 7 Fed.Cas. 418, 444 (C.C.D. Mass. 1815).

[9]  See In Re The Plymouth, 70 U.S. 20 (1825)

[10]  See The Propeller Genesee Chief v. Fitzhugh, 53 U.S. 443 (1851) (English rule discussed throughout).

[11]  Since the founding of the country, federal courts have been charged with litigating admiralty suits, with the stated policy of insuring admiralty law is uniform throughout the country.  See Act of Sept. 24, 1789, ch. 20, § 9, 1 Stat. 73.  See also THE FEDERALIST Nos. 7 and 11 (Hamilton).

[12]  See DeLovio, 7 Fed.Cas. 418.

[13]  See id.

[14]  See id.    See also U.S. Const. art. I sec. 7.  Joseph Story is known for his scholarship promoting a uniform commercial law (including admiralty) across the country.  Ironically, his goal did not come to pass (although Congress’s authority to do so is without question) but the American Law Institute used many of his theories when drafting the Uniform Commercial Code, which was eventually adopted in various forms all over the United States.

[15]  See Schoenbaum, supra note 2, § 1-2.

[16]  See DeLovio, 7 Fed.Cas. 418.

[17]  See Schoenbaum, supra note 2, § 1-5.  See also Omaha Indemnity Co. v. Whaleneck Harbor Marina, Inc., 610 F.Supp. 154 (E.D.N.Y. 1985).

[18]  Norfolk Southern Ry. Co., 543 U.S. 16.

[19]  Id. at 23-24.  See also North Pacific Steamship Co. v. Hall Bros., 249 U.S. 119, 125 (1919).

[20]  See Schoenbaum, supra note 2, § 1-10.

[21]  543 U.S. 16 (2004).

[22]  Id. at 18.

[23]  Id. at 21.

[24]  Id.

[25]  Id. at 20.

[26]  See Schoenbaum, supra note 2, § 8-11.

[27]  See 46 U.S.C. § 1292(b) (Carriage of Goods by Sea Act).

[28]  See Schoenbaum, supra note 2, § 8-8.  The Himalaya Clause was named after the good ship Himalaya, from a British case: Adler v. Dickson (The Himalaya) [1955] 1 Q.B. 158.

[29]  Norfolk Southern Ry. Co., at 24.

[30]  Id. at 18.

[31]  Id. at 21.

[32]  Id. at 22.

[33]  See Norfolk Southern Ry. Co. v. Kirby, 300 F.3d 1300, 1308-1309 (11th Cir. 2002).

[34]  Norfolk Southern Ry. Co., at 25.

[35]  Id. at 22.

[36]  Id.

[37]  Id. at 27-28.

[38]  Supra, note 11.

[39]  Norfolk Southern Ry. Co., at 28-30.

[40]  Id.

[41]  Id.

[42]  Id. at 27.

[43]  Id. at 35.

[44]  2006 U.S. Dist. LEXIS 63624 (D.S.C. Sept. 5, 2006).

[45]  Id.

[46]  Id.

[47]  Id.

[48]  2006 A.M.C. 356 (S.D. Tex. 2005).

[49]  2005 U.S. Dist. LEXIS 9971 (N.D. Ill. May 4, 2005).

[50]  413 F.3d 307 (2d Cir. N.Y. 2005).

[51]  See id. at 309.

[52]  See id. at 310.

[53]  See id. at 320-322.

[54]  Subject to a few narrow exceptions including “preliminary contracts” to procure marine insurance in the future.  See Schoembaum, supra note 2, at § 17-2.

[55]  Ferrostaal, Inc. v. M/V Sea Phoenix, 447 F.3d 212 (3rd Cir. 2006).

[56]  Oparaji v. N.E. Automarine Terminal, USA, Inc., 2006 U.S. Dist. LEXIS 45508 (D.N.J. June 19, 2006).

[57]  Atkins Machine Co. v. C.H. Powell, Co., 2006 U.S. Dist. LEXIS 63624 (D.S.C. Sept. 5, 2006)

[58]  See generally Marc Levinson, THE BOX: HOW THE SHIPPING CONTAINER MADE THE WORLD SMALLER AND THE WORLD ECONOMY BIGGER(Princeton University Press, 2004).

[59]  Id.

[60]  Id. at 3.

[61]  See 1 BENEDICT ON ADMIRALTY § 2 (Matthew Bender, 2006).

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