Beware! Reference to Tariff in Bill of Lading May Not Limit Liability
The standard practice for many motor carriers and railroads is to quote rates for service that are subject to limited liability. The shipper may request full liability coverage from the carrier (for a higher rate), but in practice, shippers often obtain insurance to cover the gap between the carrier’s limited liability and the value of the goods being shipped. This standard practice is at odds with the default federal statutory liability scheme for motor carriers and railroads (49 USC § 14706 and 49 USC § 11706, respectively, the “Carmack Amendment”), which imposes upon the carrier liability for the “actual loss or injury,” unless the shipper and carrier have limited the carrier’s liability. One means of doing so is to enter into a written agreement to limit liability. This clash between the statutory scheme and common practice has led to disparate outcomes in cargo liability cases. One recent decision, following an earlier Fourth Circuit decision, ABB Inc. v. CSX Transp., Inc., 721 F.3d 135 (4th Cir. 2013), may be alarming to carriers.
In Natural Polymer Int’l Corp. v. FedEx Freight, Inc., 4:16-CV-00359, 2017 WL 3537324 (E.D. Tex Aug 17, 2017), AZCO Corporation (“AZCO”), as the agent for its customer Natural Polymer International Corporation (“Polymer”), hired FedEx Freight, Inc. (“FedEx”) to carry six machines from New Jersey to Texas. The machines were destroyed in transit. AZCO provided the FedEx driver with its standard bill of lading, which stated that it is:
- subject to the classifications and lawfully filed tariffs in effect on the date of issue of this Bill of Lading
- all or any of said property that any service to be performed hereunder shall be subject to . . . the applicable motor carrier classification or tariff
- shipper hereby certifies that he is familiar with all the terms . . . set forth in the classifications or tariff
- those terms are “hereby agreed to by the shipper and accepted for himself and his assigns”
FedEx published on its website its “FedEx 100-M Rules Tariff,” which limited liability to $30,000. Despite these references to the tariff in the shipper-drafted bill of lading, and the certification that the shipper was familiar with the terms of the tariff, the Court held that “Polymer did not incorporate the Rules Tariff into the [bill of lading]” and thus FedEx’s limitation of liability did not apply.
In order for liability to be limited under the Carmack Amendment, the carrier bears the burden to persuade the Court that, among other things, the shipper agreed to limited liability. Hughes v. United Van Lines, 829 F.2d 1407 (7th Cir. 1987). FedEx argued that the fact that the shipper drafted the bill of lading should be interpreted against the shipper, citing the Eleventh Circuit decision in Siren, Inc. v. Estes Express Lines, 249 F.3d 1268 (11th Cir. 2001). The Court disagreed, stating that the “general contract principle that any ambiguity should be construed against the drafter has been preempted by the Carmack Amendment,” which “unambiguously imposes the risk of error on one particular party, the carrier, to the exclusion of the other party, the shipper.” (citing ABB, 721 F.3d at 141 and 49 U.S.C. § 14706(c)). Notwithstanding that reference to the preemption of contract construction principles, the Court then spent a significant amount of its analysis on Texas state law contract construction principles, ultimately concluding that the rule of construction governing the incorporation of another term had not been satisfied by FedEx.
In doing so, the Court also stated that “an antiquated reference to a sixty-seven page document did not ‘plainly refer’” to the limitation of liability and “the reference to a purported liability limitation is outdated and generic.” The Court determined that the reference was “antiquated” and “outdated” because “tariff” refers to documents that used to be filed with the Interstate Commerce Commission but are no longer required to be filed (the Interstate Commerce Commission was terminated in 1995 and replaced with the Surface Transportation Board and only certain tariffs not relevant here are required to be filed).
The Natural Polymer Court distinguished the Siren case, in which the shipper drafted bill of lading referenced “Class 85.” The Siren court determined that “Class 85” was understood throughout the trucking industry to limit liability, as compared to the more general incorporation of the tariff in the bill of lading at issue in Natural Polymer.
The fact that FedEx’s tariff was publically available on its website did not sway the Court. The Court determined that “[t]he Fifth Circuit has not found that a shipper agreed to limit liability on the basis of constructive knowledge alone. . . . Polymer has shown that it did not read the Rules Tariff and did not take any actions indicating that it knew about one or more levels of liability.”
The Court held that “[n]either Polymer, nor AZCO, had previously done business with FedEx Freight. The BOL was not the result of any negotiations; it was presented to FedEx for the first time when the shipment was loaded into the truck. Finally, there is no evidence that the rate was any different than it would be for a different liability level. Therefore, FedEx has not shown that the shipper had knowledge of or chose a limitation on liability. Without such knowledge, the Court finds that Polymer did not incorporate the Rules Tariff into the BOL.” (internal citation omitted).
A few additional facts are useful in interpreting the Court’s ruling:
- It is true that the reference to “lawfully filed tariffs” is outdated: it used to be contained in the uniform bill of lading but has since been replaced. However, while in most cases tariffs no longer need to be filed with the government, similar unfiled “tariffs” remain ubiquitous, and use of the term “tariff” is not at all antiquated: the term remains prevalent in the industry – FedEx even used the word “tariff” in the title of its document.
- The Court characterizes the shipper’s knowledge as “constructive,” but that phrase, as it is typically used, may not capture the facts of this case. It was not simply that the shipper should have known about the carrier’s tariff (even though many courts have found constructive notice to be sufficient). In this case, the shipper affirmatively declared in the bill of lading, without any obligation to do so, and in a bill of lading that it drafted, that the shipper was familiar with the carrier’s tariff. Specifically, the Court stated “Polymer did not incorporate the Rules Tariff into the [bill of lading].” It seems illogical that the Court would conclude that Polymer is not bound by those words. Presumably FedEx should have been able to rely on those statements as well, but the Court did not address that related issue.
- The Court’s statement that the Carmack Amendment “unambiguously imposes the risk of error on one particular party, the carrier, to the exclusion of the other party, the shipper” and thus preempts the “general contract principle that any ambiguity should be construed against the drafter” is not derived from any statement in the statute itself. That statute provides that a carrier and a shipper may limit liability by “written agreement” between the carrier and shipper. See 14706(c)(1)(A) (motor carriers); see also 11706(c)(3)(A) (rail carriers). Rather, it was judicially derived in ABB from the fact that the default liability scheme is full liability. While it may be argued that as a consequence of that default liability scheme, the carrier bears the burden of persuasion with respect to limited liability, it is not clear why the rules of contract construction and an admission by the shipper, as factors in the carrier’s ability to meet that burden of persuasion, are preempted by the statute.
- Limitation of liability is standard in the industry. The fact that the tariff would include a limitation of liability, or that the carriage would be subject to limited liability, would not likely be surprising to any sophisticated shipper.
- The Court relies frequently, and in pivotal places, on ABB. There were several similarities between the cases and a similar result was reached by a divided Fourth Circuit panel, which overturned the District Court that had granted summary judgment on the issue. ABB was not binding precedent, but in the four years since it was decided, it has been cited even outside of the Fourth Circuit in a few rulings that have favored the shipper.
FedEx could have taken actions to help ensure that its limitation of liability terms would be enforced. The Natural Polymer Court even explained what FedEx could have done to limit its liability, stating that: “Under certain circumstances, FedEx would be able to rely on the shipper’s generic reference. For instance, if FedEx and the shipper actively negotiated a contract or FedEx had knowledge that the shipper knew of FedEx’s tariff, then FedEx would be able to prove mutual assent. Similarly, if FedEx had many prior dealings with a shipper, it would be able to prove that the shipper had knowledge of and assented to its terms.” Both the Natural Polymer and ABB Court indicated that liability would have been limited if a more specific reference to limitation of liability was included.
The result in Natural Polymer, like ABB before it, reveals that the Court may have interpreted the Carmack Amendment without an appreciation for the customs and practices in the industry. Other courts have reached different conclusions, but the Natural Polymer decision demonstrates that ABB continues to echo. Every new case presents an opportunity to educate the court and create more favorable precedent, but in the meantime, carriers attempting to limit their liability would be wise to keep in mind that a court hearing a Carmack case is likely not familiar with industry norms.