Legal Insights

Incorporation by Reference Doesn’t Always Work

Written by Alastar S. McGrath

Many shippers may be unaware that a carrier engaged to provide transportation services may have “standard rate rules” that limit liability for cargo loss unless the shipper asks and pays for full liability coverage. Importantly, even when both parties know about those terms and they are incorporated into the governing bills of lading by reference, they may not necessarily apply.

The Carmack Amendment provides that a carrier is liable to the “person entitled to recover” under the bill of lading “for the actual loss or injury to the property” caused by a carrier. 49 U.S.C. § 11706(a). The Carmack Amendment specifically provides a limited exception to full carrier liability, Section 11706(c). In order to properly limit liability under the Carmack Amendment, courts have required carriers to meet four requirements: 1) provide the shipper a copy of its rate schedule; 2) “obtain the shipper’s agreement as to (its) choice of liability; 3) give the shipper a reasonable opportunity to choose between two or more levels of liability; and 4) issue a receipt or bill of lading prior to moving the shipment.” Opp v. Wheaton Van Lines, Inc., 231 F.3d 1060, 1063 (7th Cir. 2000); see also One Beacon Ins. Co. v. Haas Indus., 634 F.3d 1092, 1099-1100 (9th Cir. 2011); Siemens Transformadores S.A. de C.V. v. Soo Line R. Co., No. 10 C 3750; 2012 WL 774937 (March 7, 2012 N.D. Ill.).

Carriers were once required to file their binding contract terms, or “tariffs,” publicly with the Interstate Commerce Commission, but in 1995 and with the Era of Deregulation this requirement was abolished to ease regulatory burdens on the transportation industry. ICC Termination Act of 1995, Pub. L. No. 104-88, 109 Stat. 803.

A June 7, 2013, 4th U.S. Circuit Court of Appeals case, ABB Inc. v. CSX Transportation, Inc., 2013 WL 2451088 (4th Cir. June 7, 2013), not only highlights the narrowness of this exception to the Carmack Amendment’s general rule imposing full liability on a carrier, but also stresses how an outdated bill of lading can get a shipper which did not intend to lessen a carrier’s liability into a tough situation.

In ABB, a rail carrier transported a $1.3 million electrical transformer from a plant in Missouri to a customer in Pennsylvania. The transformer was allegedly damaged in transit and the shipper filed a complaint alleging that the carrier was liable for more than $550,000, the full amount of damage. The bill of lading, which was a partially completed copy of the shipper’s standard bill of lading, did not include freight terms for the shipment or indicate the level of liability assumed by the carrier for lost or damaged cargo. However, the bill of lading did include the following language which made outdated references to the pre-1995 regulatory scheme:

“Shipper hereby certifies that he is familiar with all the terms and conditions of the said bill of lading, including those on the back thereof, set forth in the classification or tariff which governs the transportation of this shipment and the said terms and conditions are hereby agreed to by the shipper and accepted for himself and his assigns.”

The carrier’s price list contained a provision that the “[c]arriers’ maximum liability for lading loss or damage will not exceed $25,000 per shipment” and required the shipper to negotiate directly with the carrier to receive coverage for full liability. This price list was published on the carrier’s website and was available upon request from any of its sales representatives.

The carrier therefore raised the affirmative defense that any liability for loss to the cargo at issue was limited to a maximum of $25,000, arguing that the bill of lading prepared by the shipper incorporated by reference this liability limitation contained in its price list.

The U.S. District Court awarded summary judgment to the carrier on the limited liability issue and in so holding reasoned that the Carmack Amendment did not apply to the shipment because the shipper, rather than the carrier, drafted the bill of lading.

The shipper appealed.

A divided panel overruled the district court and held that the rail carrier was responsible for all damage caused during the shipment because the carrier did not sufficiently limit its liability pursuant to a written agreement. The court rejected the carrier’s argument that the shipper, as drafter of the bill of lading, was not entitled to the Carmack Amendment’s protection. Although the court scolded the shipper for including “outdated references to ‘tariffs’ and ‘classification’ that were
part of the pre-1995 regulatory scheme,” it noted that despite the shipper’s failures, the Carmack Amendment imposes “the burden of securing limited liability on the carrier … not the shipper.” (Note: Commodity classifications still are routinely used in the industry.)

The 4th Circuit also ruled that the shipper’s standardized language in its bill of landing, stating that it agreed to the terms and conditions in “the classification or tariff which governs the transportation of this shipment,” was not an adequate “written agreement” to meet the exception for avoiding full liability under the Carmack Amendment.

The dissent, however, did not distinguish the term “tariff” from the carrier’s “price list” as the majority did and instead reasoned that the bill of lading did limit the carrier’s liability in accordance with the Carmack Amendment because it “unambiguously incorporated [the carrier’s] effective tariff, which was [its price list].”

As both the majority and dissenting opinions in ABB highlight, don’t assume “incorporated by reference” wording in a bill of lading is sufficient to uphold your agreement on liability limitations. Especially in the age of computer word processing, is there any reason not to click on the language you want copied and paste it into your contract? ABB highlights that sloppy drafting by a shipper (or a carrier) could make a half a million-dollar difference, not to mention the costly price of litigating the dispute.