Yacht Transport and the Carriage of Goods by Sea Act

Sep 16, 2021

Yacht Transport and the Carriage of Goods by Sea Act

Congratulations! You’ve just purchased a beautiful new yacht. The deal has only just gone through, and already you can feel the ocean spray bouncing off your face and the sun warming your shoulders. Before making plans to set sail, though, you first need to find a carrier to transport the yacht from Genoa, Italy to the Everglades. Anxious to see the ship arrive, you ask around and settle on one of the first carriers willing to ship the vessel for a reasonable fee. You sign on the dotted line without paying much attention to the fine print, and begin your long, excruciating wait. One month later, as the carrier pulls into the harbor and begins to unload your yacht, however, the vessel slips from its sling and comes crashing down. After the yacht is salvaged and inspected, you discover the vessel is a complete loss. You turn to the carrier and stevedore for just compensation but find that the most you’ll be able to recover is no more than $500. 

This nightmare has in fact been a reality for many yacht owners. “Dropped yacht” cases, as they have come to be known, are painful examples of what can happen when your shipment is governed by the Carriage of Goods by Sea Act (also known as “COGSA”) and special precautions are not taken. No port has all of the boats, and inevitably you’ll want to ship your boat somewhere new. The exposure that can come from doing something like this is significant and not understanding your liability can end up costing you. 

Generally, so long as a shipper can show that their goods arrived in a worse state than when they were delivered to the carrier, the shipper has a strong case for showing that the carrier is at fault and should be held fully liable. Under COGSA, however, a carrier is entitled to seventeen (17) different statutory defenses if cargo is lost or its contents are destroyed while in the carrier’s care, custody, and control. Even if the incident falls outside this list of defenses, the carrier may still be able to limit its liability to just $500 per package of the lost or destroyed cargo. Thankfully, there are limitations to this rule and possible ways in which shippers can protect themselves from significant loss. This article will first introduce the role of COGSA in maritime trade. Next, it will detail the necessary preconditions for a carrier to limit liability under COGSA, followed by information on two specific elements of COGSA most relevant to the shipping of yachts. Lastly, this article includes information on practical steps that both parties can take to mitigate losses.

Carriage of Goods by Sea Act (COGSA)

Introduced in the 1930’s, COGSA is a law designed to govern the rights and responsibilities between the owners of the cargo being shipped (aka “shippers”) and the persons or entities that transport the cargo for a fee (aka “carriers”). This important piece of maritime legislation applies to contracts for the carriage of goods by sea between foreign and U.S. ports for which bills of lading (“BL’s”) are issued. However, due to its favorable terms and provisions, carriers often incorporate COGSA into their domestic shipping contracts. This domestic application of COGSA has resulted in a deep well of U.S. caselaw that helps define many of the more ambiguous concepts for which neither COGSA nor Congress have provided much guidance. 

Preconditions to Limitation on Liability

One of the most well-known and controversial provisions of COGSA is its $500 limitation on carrier liability. Under COGSA §4(5), if cargo is lost or its contents destroyed, the carrier may be entitled to limit their liability to $500 per package, or per customary freight unit (“CFU”) depending on the nature of the cargo. Courts in the U.S., however, have developed two preconditions before a carrier can limit liability in this way. First, the carrier must give the shipper “adequate notice” of the $500 limitation by expressly adopting the terms of COGSA into their BL. Second, the carrier must give the shipper a “fair opportunity” to avoid the per-package limitation by declaring a higher excess value. 

Adequate Notice

First, carriers can satisfy the “adequate notice” requirement if their BL expressly adopts COGSA via the Clause Paramount. This requirement is intended to put the shipper on notice that COGSA is governing the BL and warn them of the limitations associated with COGSA. While there is some division in how different jurisdictions address this precondition, the actual notice required differs only slightly. In the Second, Fourth, Fifth, and Eleventh Circuits, for example, carriers are only required to include a Clause Paramount incorporating COGSA by reference in their BL. This can be satisfied simply by providing: “This bill of lading shall have effect subject to the provisions of the Carriage of Goods by Sea Act, approve April 16, 1936.” In comparison, the Ninth Circuit—which has legal jurisdiction over the entire West Coast of the United States—has held that the required language does not need to appear on the front page of the BL and that the language may even be presented as fine print. Despite the images of microscopic print and hidden legalese that this description likely conjures in one’s mind, many U.S. courts have been diligent in ensuring that “illegible recitations” of the incorporation fail to meet the standard for adequate notice that is owed to shippers. 

Fair Opportunity

The second precondition is the “fair opportunity” requirement. A carrier may take advantage of COGSA’s per-package liability limit only if it provides the shipper with a “fair opportunity” to opt for a higher liability by paying a correspondingly greater charge. What does this mean exactly? A split of authority has developed between the circuit courts whether a “fair opportunity” requires the carrier to provide the shipper with a specific opportunity to declare a higher value, such as providing the shipper with a blank space in the BL to declare a higher value, or merely referencing COGSA’s limitations via the Clause Paramount. The majority of U.S. courts have taken the latter view and held that a shipper has constructive notice of COGSA’s limitation if the BL expressly incorporates COGSA via the Clause Paramount, irrespective of whether it contained a blank space for the shipper to insert a higher valuation. However, the Nineth Circuit Court of Appeals, which has legal jurisdiction over the entire West Coast of the United States, has adopted a stricter interpretation of the statute and now wants carriers to provide a space in their BL’s that allows the shipper to insert a higher value. Consequently, West Coast carriers that fail to provide shippers with an opportunity to declare a higher value risk losing their rights to the $500 per-package limitation.

The Significance of Whether Your Yacht is a “Package”

Once it is determined that COGSA has been effectively incorporated into a BL, the degree of limitation on liability that a carrier is afforded can vary based on whether the court believes the cargo constitutes a “package.” Since its inception, U.S. courts have struggled to agree on a clear and concise definition for what constitutes a “package” under COGSA. The relevance of this issue is intertwined with the limitation on liability detailed in §4(5) of COGSA which provides that a carrier will not be liable for any loss exceeding $500 per package or, for goods not shipped in packages, per customary freight unit. Especially for cases involving dropped or damaged yachts, the answer to this question can have a significant impact on the outcome—as the CFU would likely be calculated per metric ton. Despite there not being any universally excepted definition of what constitutes a package under COGSA, U.S. courts have charted a map of various factors that one can reference. In yacht cases specifically, the answer can almost always be found in the language of the BL. 

Most often, the BL sets forth a specific definition of what the carrier considers to be a “package” for the purposes of their transit. Courts have largely held that, when COGSA’s sole force is through incorporation by reference and required by statute, the incorporated terms of COGSA are given no more power or priority than common contract terms; meaning that parties to a BL can include additional terms or definitions of their own. So long as these terms are not directly inconsistent with those of COGSA, the additional contract terms will be given force regardless of the federal jurisdiction. As a result, U.S. courts have largely found language in the BL that explicitly includes yachts or defines cargo shipped on a “cradle” as being a “package,” consistent with COGSA and thus given force in that contract. 

If the court finds reason to believe that the yacht is only “partially packaged,” or where there are legitimate challenges as to whether the contractual definition of a package in a BL applies to a yacht, the court will often look to other factors within the BL to help inform their ruling. In these cases, courts consider a combination of things, including the number of package units listed on the BL, the information provided under “Description of Goods,” any ambiguities in the provided definition of “package,” whether a definition is provided for CFU’s, any contract terms that provide for an explicit categorization of yachts, and even whether the freight was paid by the shipper in one lump sum or many. Although most courts have accepted the idea that a yacht constitutes a single package, each of those determinations is grounded in facts derived from the BL, many of which may be negotiated between the parties before signing. Nevertheless, it is vital that all parties involved in the documentation process be mindful of the words included in both the BL instructions and the BL itself, as the content of these documents can have a deep impact on the future determination of carrier liability.

Liability for On-Deck Cargo

Unlike standard cargo that can be boxed, crated, or bagged, the shipping of a yacht comes with unique considerations and challenges. While it is universally agreed that COGSA can be incorporated into a carriage contract even where it may not otherwise govern, this reach requires a more explicit showing when dealing with on-deck cargo. By its own terms, COGSA does not apply to cargo carried on the deck of a vessel. When a bill of lading simply incorporates COGSA by reference with no further explanation, courts will not read this as extending to the on-deck cargo of a carrier’s vessel. This concept stems from a time when cargo shipped above deck was exposed to the elements and at a greater risk of damage and loss overboard. Today, the question of whether COGSA can be extended to goods stored above deck has largely become obsolete since standard shipping containers stacked high above the deck are now deemed an extension of a vessel’s internal hold. Nevertheless, the issue still has great significance for goods such as yachts, which are shipped in a cradle and exposed to greater risk. 

To overcome COGSA’s explicit rebuff of limited carrier liability for on-deck cargo, parties may instead contractually extend COGSA’s reach by including language in the BL to make COGSA applicable at times when it would not otherwise apply through force of its own. Put simply, parties can add a contractual term to the BL using express language that extends COGSA to cargo above deck, which courts will enforce. Because COGSA applies only to goods stowed between decks or in the hold, a bill of lading for a yacht that contains a “Clause Paramount” incorporating by reference “all of the provisions of COGSA,” is not sufficient to extend COGSA to on-deck cargo stowage of the yacht. The bill of lading MUST include a separate clause applying COGSA specifically to those goods carried above deck.

Preventative Measures – Marine Insurance

As a practical matter, most shippers carry their own cargo insurance. A typical cargo insurance policy will reimburse a shipper for lost or damaged cargo while being transported. However, cargo insurance policies have their own language, notice requirements, and subjectivities, which can lead the shipper into believing the cargo is insured, when in fact it is not. Yacht owners in particular should be cautious in choosing a reliable insurer. Many insurance companies are hesitant to insure yachts being shipped due to the increased hazards and substantial values at risk.

To prevent a conflict down the road, shippers should take a careful read through the terms and conditions of their cargo policy. Shippers should pay particular attention to the policy’s deductible, its geographical limits, and the basis of evaluation for the goods (actual cash value vs. replacement cost). The abnormal size and shipping requirements associated with transporting a yacht make it critical that shippers understand any limitations their policy might have towards goods being shipped “on-deck.” Often, cargo policies will exclude or drastically limit the amounts available for goods shipped on the deck of a barge or ship. That said, a well-crafted cargo insurance policy can prevent a lot of headaches down the road, but shippers must make sure the language clearly covers the risks at hand and hidden stipulations. 

The shipment of goods by sea, while providing a convenient method of transporting cargo, can establish a complex legal analysis when cargo is lost or damaged during transit. Shippers and carriers both should put great care and consideration towards the information included on the BL. Carriers must know the requirements of adequate notice and fair opportunity if they wish to limit their liability under COGSA. They should also be deliberate and explicit in extending COGSA’s reach to on-deck cargo if they intend on limiting their liability for yachts and other cargo stored above deck. Shippers should be aware of the significance of the information they include on the BL regarding the yacht and how it’s described. Regardless of whether a blank space is provided, shippers can always declare a higher value for what’s being shipped to ensure greater liability on the part of the carrier. Lastly, to limit this exposure further, shippers should take out a cargo insurance policy that adequately covers the value of what is being shipped and pay close attention to any language that may limit the scope of the policy and lead to surprise down the road. 

About the author

Samuel Maier

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