On 19 November 1973, Shulman Transport Enterprises Inc (Shulman) received a press for shipment from New York to San Juan. The press weighed over 1,000 pounds and was shipped in open view, unboxed, uncrated, and without shipping skids. The press was heavily damaged during shipment due to the negligence of Shulman or its employees. Hanover Insurance Co (Hanover) paid USD 8,221.62 to its insured (the consignee) for the damage to the press and expended USD 125 in survey fees. Hanover brought a subrogation action against Shulman.

The Carriage of Goods by Sea Act, 46 USC § 1300 ff (COGSA) governed the shipment. Section 4(5) states:

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 ...

COGSA provides that the carrier may not, by contractual arrangement, relieve itself from liability. Section 3(8) states:

Any clause, covenant, or agreement in a contract of carriage relieving the carrier or the ship from liability for loss or damage to or in connection with the goods, arising from negligence, fault, or failure in the duties and obligations provided in this section, or lessening such liability otherwise than as provided in this chapter, shall be null and void and of no effect.

A clause in Shulman's short form bill of lading purportedly limited Shulman's liability to USD 50 per shipment. Shulman contended that the limitation clause was a valid declaration of the actual value. It was not an invalid attempt to exempt itself from liability. Shulman also argued that this limitation provision did not violate COGSA.

Shulman submitted evidence that included the short form bill of lading and Shulman's 'Rules and Regulations FMC-F-No 1', which was filed with the Federal Maritime Commission (FMC). The rules and regulations state:

All shipments are governed by the following terms, conditions, and provisions which are hereby made a part of the Carrier's Bill of Lading through incorporation therein or by reference to this item.

(a) In consideration of the rate charged for carriage, being dependent on the value of the goods and being based upon an agreed valuation of not more than fifty (USD 50.00) dollars per shipment, unless a greater value is declared at the time of shipment and an additional charge thereof paid, the shipper or owner of the goods agrees that Carrier shall not be liable in any event for more than the value so declared, nor unless a greater value is declared, for more than USD 50.00 or more than the actual value if same is less than USD 50.00 ...

Shulman argued that the tariff schedule had the force and effect of a statute and gave Hanover constructive notice of its contents as a matter of public record. By filing the rules and regulations with the FMC as part of its tariff schedule, the limitation provision had the approval of the FMC.

The District Court for the District of Puerto Rico held that Shulman was liable for the actual damages suffered by Hanover and entered summary judgment of USD 8,346.62. Shulman appealed.

Held: The judgment of the District Court is affirmed.

The Court of Appeals held that the clause in the bill of lading limiting liability must fail, in light of the legislative history, prior court interpretations and COGSA policy considerations.

Under the common law, a carrier was absolutely liable for damage to cargo, unless the damage was caused by an act of God, an act of a public enemy, inherent vice or the shipper's fault, and the carrier was not negligent. Carriers inserted various 'exceptions' in their bills of lading to reduce their exposure to this liability but such agreements were not, in reality, consensual, and the courts of the day held some of them to be void as against public policy.

Congress passed the Harter Act, 46 USC §§ 190 ff, for domestic shipping in 1893 to address these exemptions. The Harter Act was a Congressional compromise between the shippers who wanted the carriers to be responsible for all negligence and the carriers who wanted full exemption from negligence claims:

The carriers were relieved of their judicially imposed insurers' liability. In return they were required to forego the possibility of avoiding by contract certain specified obligations. Finally, if those obligations were in fact performed (a proviso eliminated in COGSA), recovery against the carrier for damages to cargo due to faulty navigation was altogether disallowed (United States v Atlantic Mutual Insurance Co 343 US 236, 245, 72 S Ct 666, 671, 96 L Ed 907 (1952) (dissenting opinion)).

The success of the Harter Act provided a basis for the Hague Rules of 1921, as modified by the Brussels Convention of 1924. COGSA was, in effect, implementing legislation passed in connection with the International Convention for the Unification of Certain Rules Relating to Bills of Lading (the Hague Rules), 25 August 1924, 51 Stat 233 (1937), TS No 931, the ratification of which, with reservations and an understanding, was deposited at Brussels on 29 June 1937. The full text of the reservations and understanding are reprinted at 51 Stat 261-62 (1937).

The language of COGSA largely mirrors the Hague Rules. COGSA was 'lifted almost bodily from the Hague Rules … . The effort of those Rules was to establish uniform ocean bills of lading to govern the rights and liabilities of carriers and shippers inter se in international trade' (Robert C Herd & Co Inc v Krawill Machinery Corp 359 US 297, 301, 79 S Ct 766, 769, 3 L Ed 2d 820 (1959) (CMI1735)). However, COGSA contained a few deviations (see 51 Stat 269-74 (1937)). One deviation pertains to package limitation. Under art 4.5 of the Hague Rules, a carrier's liability was limited to GBP 100 'per package or unit' (corresponding to USD 500 lawful money of the United States). Under COGSA, the USD 500 limit applies 'per package … or in the case of goods not shipped in package, per customary freight unit …' (46 USC § 1304(5)).

The change was made because the expression 'per package or unit' in art 4.5 was ambiguous. It was not clear 'whether both terms were applicable to goods shipped in packages or whether the term "unit" was to be applied only to goods not shipped in packages' (Hearings before a Subcommittee of the Committee on Foreign Relations, United States Senate, 70th Cong, 1st Sess 29 (22 December 1927)). Judge Charles M Hough, an American delegate to the conference, questioned whether such a change resulted in clarification: 'It seems to me that one who cannot understand the expression "per package or unit" does not wish to understand it, if he has the slightest acquaintance with transportation language and custom. I can only submit that the words used in the bill … mean exactly the same thing as "per package or unit"' (ibid 32).

The Courts have characterised the purposes of the Hague Rules and COGSA in various ways. One purpose was to 'carry over into the international sphere the uniformity achieved for American voyages in the Harter Act by mitigating the common-law insurer's liability of carriers, in exchange for a prohibition of a clause in the contract of carriage lessening the carriers' liability' (Scarburgh v Compania Sud-American de Vapores 174 F 2d 423, 424 (2d Cir 1949).

A second purpose was 'to effectuate a standard and uniform set of provisions for ocean bills of lading' (Encyclopaedia Britannica Inc v SS Hong Kong Producer 422 F 2d 7, 11, 14 (2d Cir 1969) (CMI1649).) This purpose was described in Tessler Brothers (BC) Ltd v Italpacific Line 494 F 2d 438 (9th Cir 1974) as 'to counteract the persistent efforts of carriers, who are the drafters of ocean bills of lading, to insert all embracing exceptions to liability' (444) and 'to obviate the necessity for a shipper to make a detailed study of the fine print clauses of a carrier's regular bill of lading on each occasion before shipping a package' (445).

These various purposes of COGSA were explicitly considered by Congress. The House Committee Report accompanying COGSA defined the purpose as 'to define by law the rights and liabilities of water carriers and shippers in foreign commerce. It fixes an irreducible minimum of immunity of the carrier from liability' (HR Rep No 2218, 74th Cong, 2d Sess 1 (23 March 1936) (H Rep)). The Committee Report lists the most outstanding benefits of the legislation as including 'simplifications and uniformity of bills of lading, … increased valuation, … and denial to the carrier of power to exempt itself from various classes of liability by riders and exempting clauses in bills of lading at present so numerous and so technical as to create confusion and to occasion untold litigation' (ibid 6-7).

The Committee noted that:

The uniformity and simplification of bills of lading will be of immense value to shippers who will be relieved of the necessity of closely examining all bills of lading to determine the exceptions contained therein to ascertain their rights and responsibilities; to underwriters who insure the cargo and are met with the same difficulties; and to bankers who extend credit upon the bills of lading. There are in existence hundreds of different forms of bills of lading with varying exceptions which will be eliminated by this legislation. This lack of uniformity creates an undesirable condition in business which will largely be corrected by this bill (ibid).

Congress considered package limitation to be an important provision for both the Hague Rules and COGSA. In the Senate hearings, it was stated that:

Another beneficial and noteworthy provision of the Hague Rules is the stipulation which makes the carrier liable for loss or damage up to 100 per package, or unit, unless a greater value shall have been declared by the shipper and inserted in the bill of lading. This is important when we recall that present limits are usually USD 100 or USD 250; in fact, one instance is recorded of a limit of 10 francs (Hearings before the Senate Committee on Commerce on S 1152, 74th Cong, 1st Sess 47 (1935). See Hartford Fire Insurance Company v Pacific Far East Line Inc 491 F 2d 960, 962 n 3 (9th Cir 1974), cert denied, 419 US 873, 95 S Ct 134, 42 L Ed 2d 112 (1974); Jones v The Flying Clipper 116 F Supp 386, 388 n 10 (SDNY 1953)).

The Committee Report accompanying the House Bill also stated: 'Valuation clauses in bills of lading frequently restrict the recovery to an agreed valuation as low as USD 100. This bill increases that limit to USD 500 per package or customary freight unit.' (H Rep 8).

Courts faced with interpreting the statutory provisions of COGSA have consistently determined that the USD 500 limitation of liability provision of s 4(5) serves as a minimum level of valuation. As stated by the Second Circuit: '[T]he purpose of s 4(5) was to set a reasonable figure below which the carrier should not be permitted to limit his liability …' (Leather's Best Inc v SS Mormaclynx 451 F 2d 800, 815 (2d Cir 1971)).

Section 4(5) was aimed directly at the type of limitation inserted in the bill of lading by Shulman. The USD 500 limit represents a binding allocation of risks between the carrier and shipper, which cannot be reduced by contractual agreement. Nevertheless, COGSA permits the limit of liability under s 4(5) to be increased: 'COGSA allows a freedom of contracting out of its terms, but only in the direction of increasing the shipowner's liabilities, never in the direction of diminishing them' (Grant Gilmore and Charles L Black, The Law of Admiralty (1957) 125. See also Encyclopedia Britannica 12).

Section 4(5) is buttressed by s 3(8), precluding various clauses in bills of lading which would limit a carrier's liability. The courts have used s 3(8) to invalidate various clauses in bills of lading which had the effect of relieving a carrier from liability. In United States v Atlantic Mutual Insurance Co, the court invalidated a 'both-to-blame' clause in a collision involving cargo damage where both ships were at fault; the clause required a portion of the recovery to be paid to the carrying vessel if the recovery was made against a non-carrying ship. In Encyclopaedia Britannica, the court invalidated a clause which gave the carrier an option to carry goods above deck - exempting it from COGSA - but did not disclose how the option would be exercised. In Pan-Am Trade & Credit Corp v The Campfire, the court invalidated a 'pro-rata' clause, which limited recovery to the same percentage of the valuation as the percentage of the damage was to the actual damage. In Otis McAllister & Co v Skibs 260 F 2d 181 (9th Cir 1958), the court invalidated an 'invoice valuation' clause, which limited recovery to the invoice value rather than the value the goods would have had on arrival. The Second Circuit stated the rationale behind such decisions:

The shipowners stress the consensual nature of the clause, arguing that a bill of lading is but a contract. But that is so at most in name only; the clause, as we are told, is now in practically all bills of lading issued by steamship companies doing business to and from the United States. Obviously the individual shipper has no opportunity to repudiate the document agreed upon by the trade, even if he has actually examined it and all of its twenty-eight lengthy paragraphs, of which this clause is No 9. This lack of equality of bargaining power has long been recognised in our law; and stipulations for unreasonable exemption of the carrier have not been allowed to stand (United States v Farr Sugar Corp 191 F 2d 370, 374 (2d Cir 1951), aff'd sub nom, United States v Atlantic Mutual Insurance Co).

If the clause here limiting Shulman's liability to USD 50 per shipment were to stand, similar clauses would soon find their way into other carriers' bills of lading.

COGSA obviates the necessity for a shipper to make a detailed study of fine print clauses of carrier's regular bill of lading on each occasion before shipping a package. While there may not be actual disparity of bargaining power between large shippers and large carriers, '[t]he bill of lading is usually a boilerplate form drafted by the carrier, and presented for acceptance as a matter of routine business practice to a relatively low-level shipper employee' (Pan American World Airways Inc v California Stevedore & Ballast Co 559 F 2d 1173, 1177 (9th Cir 1977) (CMI1798)). There is little opportunity to negotiate away this type of clause, especially since such a clause would not be expected under the uniform rules of COGSA. The presence of such a clause would have the effect of destroying the uniformity of bills of lading upon which their free negotiability depends, in contravention of an express purpose of COGSA.

The Court of Appeals held that there was no question about Shulman's liability; the only issue was the correct measure of damages. The question in this case was whether a shipping carrier could limit its liability below the USD 500 limit per package, or customary freight unit, by relying on the limitation clause.

The press was not a 'package' as defined by COGSA. It was shipped in open view, unboxed, was not wrapped or crated, and did not have any type of shipping skids. The statutory alternative ie 'in case of goods not shipped in packages, per customary freight unit' was equally inapplicable. The maximum liability for goods not shipped in packages was USD 500 per customary shipping unit.

The clause limiting liability to USD 50 was invalid under COGSA. The amount to which Shulman has attempted to limit its liability, USD 50 per shipment, was so low as to offend public policy. Shulman's USD 50 per shipment limit would apply to any shipment from a carton of nails to a shipload of computers. The potential liability of Shulman is so small as to almost completely exempt it from liability. In David Crystal Inc v Cunard Steam-Ship Co 339 F 2d 295, 299 (2d Cir 1964), the Court determined that a USD 20 per package limitation, 'when contrasted with COGSA's USD 500 figure, is such an arbitrarily small sum that it should be void as contrary to public policy'.

The filing of carrier's rules and regulations with the FMC as part of carrier's tariff schedule did not render the clause valid. The FMC was without authority to approve the carrier's rules and regulations, which violated COGSA.