In December 1983, steel coils were shipped from Bilbao, Spain, to New Orleans, Louisiana, on the vessel M/V Sava under the cover of 36 bills of lading. Upon discharge in February 1984, the coils showed various degrees of rusting. Coutinho, Caro & Co Inc (the plaintiff), a steel importer, sued the vessel and its owners and operators (the defendants) for the damaged coils after the plaintiff's buyers complained. The plaintiff collected the coils and subsequently sold them 'at salvage or subject to depreciation allowances'.

The parties agreed that the United States Carriage of Goods by Sea Act (COGSA) governed the case. The District Court for the Eastern District of Louisiana (the district court) found the following at first instance:

First, the defendants were 'a carrier' of the coils. They received the coils in good condition but delivered the coils in damaged condition.

Second, the bills of lading contained numerous exceptions noting rust and packaging damage but these were found to be unpersuasive because of testimony from witnesses. The master testified that the exterior rust he saw on the coil did not concern him. He observed no waterline marks or indication that water might have penetrated through waster sheets and into the coils. However, the coils showed various degrees of rusting upon discharge. A clearly defined waterline on the coils from one cargo hold and standing water in another cargo hold indicated the presence of seawater in both cargo holds. Further, during the voyage, inclement weather frustrated ventilation of the steel coils. The vessel lacked a forced ventilation system to control the dewpoint in the cargo holds. These factors suggested flooding of the cargo holds during the voyage and carriage of the cargo in a moisture-saturated environment.

Third, the defendants failed to prove that they exercised due diligence or any other statutory exception under COGSA that caused the harm. The district court rejected the defendants' exculpatory assertions that condensation caused the rust and constituted a peril, danger, or accident of the sea, and that insufficiency of packing caused the damage.

Fourth, the bills of lading had incorporated COGSA by the following provision known as 'Clause B':

ADDITIONAL CLAUSES

(To be added if required in the contemplated trade).

B. U.S. Trade. Period of Responsibility.

In case the Contract evidenced by this Bill of Lading is subject to the U.S. Carriage of Goods by Sea Act, then the provisions stated in said Act shall govern before loading and after discharge and throughout the entire time the goods are in the Carrier's custody.

Fifth, Clause B provided the shipper with adequate notice of 46 USC § 1304(5) and met the common law requirement set by federal courts in the United States that the carrier provide fair opportunity for the shipper to change the limitation of liability. The bills of lading contained no declarations of value.

Sixth, given that it was undisputed that each coil was a 'package' for the purposes of 46 USC § 1304(5), the defendants' liability was limited to USD 500 per coil under 46 USC § 1304(5), which provides:

Neither the carrier nor the ship shall in any event be or become liable for any loss or damage to or in connection with the transportation of goods in an amount exceeding $ 500 per package lawful money of the United States, or in case of goods not shipped in packages, per customary freight unit, or the equivalent of that sum in other currency, unless the nature and value of such goods have been declared by the shipper before shipment and inserted in the bill of lading. This declaration, if embodied in the bill of lading, shall be prima facie evidence, but shall not be conclusive on the carrier.

Seventh, damages of USD 195,937.94 were accordingly awarded to the plaintiff.

The parties appealed to the Court of Appeals for the Fifth Circuit (the Court of Appeals).

In the plaintiff's appeal, the plaintiff raised the issue of 'whether the district court erred in holding that a carrier presents prima facie evidence that it afforded the shipper a fair opportunity to avoid the [USD] 500 per package limitation by merely adducing a bill of lading that refers to COGSA' (the limitation of liability issue). The plaintiff argued that Clause B did not incorporate COGSA into the contract of carriage; second, Clause B did not notify the shipper of a potential limitation or how to avoid it; third, even if COGSA was incorporated, a mere incorporation of COGSA generally would not provide adequate notice to the shipper of the terms of 46 USC § 1304(5).

In the defendants' cross-appeal, the defendants contended that the district court erred in finding that the coils were in good pre-shipment condition, but did not challenge the district court's finding that the coils were delivered to the carrier free of rust (the liability issue). The defendants argued that the coils were not in 'good' condition because of other physical irregularities, such as manufacturing defects discovered during subsequent testing and mechanical damage observed during loading. The plaintiff admitted that some coils had broken bands and that some had indents or cuts, but argued that only evidence of rust was relevant in determining the pre-shipment condition of the coils because the plaintiff's claim for damages was based on rusted coils.

Held: The judgment as to limitation of liability is reverse. The judgment as to liability is affirmed. The case is remanded for determination of damages.

As to the limitation of liability issue, the Court of Appeals disagreed with the district court's conclusion that Clause B incorporated COGSA into the bills of lading and provided constructive notice to the shipper of 46 USC § 1304(5)'s statement of fair opportunity.

Clause B did not state that the bill of lading was subject to COGSA's provisions or that COGSA was incorporated into the bill of lading. Clause B merely provided that if COGSA applied, the period of applicability would include the entire time that the carrier had custody of the goods, including before loading and after discharge.

Instead, COGSA controlled the bill of lading because of COGSA's compulsory terms and the nature of the voyage. COGSA applies by its own force 'to all contracts for carriage of goods by sea to or from ports of the United States in foreign trade': see 46 USC § 1312.

Clause B did not even provide constructive notice to the shipper of the content of COGSA's limitation of liability provision. Clause B contained no indication that a choice of shipping rates existed or that the shipper knew that a particular rate was tied to a limited value. Had there been such an indication, the burden of proof would then have shifted to the shipper to demonstrate that a fair opportunity did not in fact exist.

As to the liability issue (ie the issue on the condition of the coils), the Court of Appeals agreed with the plaintiff. Only evidence of rust was relevant in determining the pre-shipment condition of the coils. Thus the coils were in 'good' condition when the carrier received them. The defendants' argument suggested that their real concern was that the plaintiff would seek to prove actual damages by showing the cargo's reduction in value from 'prime' material. This argument was premature and should be directed to the district court instead. The case should be remanded for a determination of damages.