The Sun Oil Co and Sun International Ltd (jointly Sun) chartered the tanker Carisle to transport Zarzatine crude oil from Tunisia to Pennsylvania. The Carisle loaded the oil on 13 October 1980. The measurements showed 540,401 barrels on board. When it arrived at Pennsylvania on 31 October 1980, measurements showed 537,566 barrels on board. Sun filed a complaint in admiralty against the Carisle in rem, and against Ore Sea Transport SA and Tradax Gestion SA in personam, seeking damages for the missing 2,835 barrels of oil.

This case was one of four similar cases filed by Sun in 1980 and 1981 in the District Court. In each case, one of the defendants raised the affirmative defence that by custom and practice the carrier has a 0.5% trade allowance, which was an implied term in the charterparty. Therefore, they argued, unexplained losses of less than 0.5% do not give rise to any claim against the carrier. Thus, the carrier was only obligated to deliver 99.5% of the oil loaded. The District Court held that a custom as alleged was proved, and was an implied term in the contracts.

Sun appealed, arguing, among other things, that the Carriage of Goods by Sea Act (COGSA), 46 USC ss 1300 ff, precluded the implication of the alleged custom into the contract.

Held (by majority): Appeal allowed. The District Court judgment is reversed and remanded.

COGSA 'was lifted almost bodily from the Hague Rules of 1921, as amended by the Brussels Convention of 1924': Robert C Herd & Co v Krawill Machinery Corp, 359 US 297, 301, 79 S Ct 766, 769, 3 L Ed 2d 820 (1959) (CMI1735). The Hague Rules were themselves based in part on the Harter Act of 1893, 46 USC ss 190-196, now largely superseded by COGSA, which was passed in 1936.

Under the general law of maritime carriage, the carrier was strictly liable for cargo loss, subject to certain exceptions, such as acts of God. In the 19th century, the carriers used their superior bargaining power to insert clauses into bills of lading which exempted them from liability for loss of or damage to the cargo even if caused by their own negligence. The Harter Act of 1893 sought a compromise between the opposing interests. The Harter Act imposed an obligation of due diligence on the carrier to make the vessel seaworthy and provided that if it did so, the carrier was absolved of liability for 'faults or errors' in navigation or management of the vessel. At the same time, it made unenforceable contract provisions which relieved carriers from liability for negligence in loading, storage, or delivery of goods or for failure to exercise due diligence to make the vessel seaworthy.

Nonetheless, because of gaps in the Harter Act, momentum grew for an international agreement on uniform rules governing bills of lading which would be more favourable to shippers. The Hague Rules, which emerged from a 1921 multinational Conference, reflected an agreement . The Hague Rules were refined and put in legislative form by the International Conference on Maritime Law in a series of meetings held in Brussels between 1921 and 1924. The United States took a leading role in this process, and the Hague Rules are based in large part on the Harter Act. COGSA, which is in most pertinent respects the Hague Rules, was passed as law in 1936.

COGSA applies to foreign commerce and may, by agreement of the parties through a stipulation in the bill of lading, apply to domestic voyages as well. Absent such a stipulation, the Harter Act applies to shipments by water from one port of the United States to another. The Harter Act also applies even in foreign trade, while the goods are in the custody of the carrier, but before loading and after unloading. The charterparty specifically states that it shall have effect 'subject to the provisions of COGSA', and that COGSA 'shall be incorporated herein'. Even if it did not so specify, COGSA would still apply.

Section 3 of COGSA sets forth the basic obligations of the carrier, including due diligence to make the ship seaworthy and fit for the cargo to be carried, and exercise proper care for the goods. Section 4 sets out the rights and immunities of the carrier.

Under COGSA, the owner of the cargo makes a prima facie case of cargo loss by proving delivery of the cargo to the vessel in good condition and short delivery by the vessel. The burden then shifts to the carrier to show either due diligence or due care under s 4(2)q, or that the loss or part thereof was due to one of the causes enumerated in ss 4(2)(a)-(p), which specify causes of cargo damage or loss for which the carrier is not responsible.

The specific provisions on which Sun relies for its claim of inconsistency between COGSA and the customary trade allowance enforced in this case are ss 3(2), 4(2)(m), 4(2)(q) and 3(8) of COGSA. Section 3(2) provides: 'The carrier shall properly and carefully load, handle, stow carry, keep, care for, and discharge the goods carried.' Under s 4(2)(m), the carrier is not liable for loss resulting from 'wastage in bulk or weight or any other loss or damage arising from inherent defect, quality or vice of the goods'. Section 4(2)(q) is a catch-all provision which exempts the carrier from liability for damage or loss 'arising without the actual fault and privity of the carrier and without the fault or neglect of the agents or servants of the carrier'. Under this subsection, 'the burden of proof shall be on the person claiming the benefit of this exception'. Thus, if the carrier wants to escape liability under COGSA without reference to a cause specified in ss 4(2)(a)-(p), it must prove that its negligence did not contribute to the loss. The final relevant provision is s 3(8) of COGSA which provides:

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.

Sun argues that because COGSA establishes the carrier’s liabilities and responsibilities with respect to the carriage of cargo and also establishes the burden of proof concerning claims for cargo loss or damage, the District Court’s decision to apply a customary trade allowance contravenes both the letter and the spirit of the statute.

The District Court held that recognition of a trade allowance is not inconsistent with COGSA because the trade allowance has to be construed as a term of the contract of carriage. The issue to be decided is whether COGSA precludes implying a trade allowance into the contract.

The practical effect of enforcing a customary trade allowance can be illustrated by comparing the course of litigation with or without the trade allowance. In both instances the shipper would first produce evidence of the amount of the short delivery. The carrier would then have the burden of rebutting the prima facie case by providing evidence that it exercised due diligence to avoid and prevent the loss (s 4(1)), and that it was free from negligence in the preparation of the ship and the care and stowage of the cargo (s 4(2)(q)), or that the loss resulted from an 'excepted cause', such as the inherent vice of the cargo (s 4(2)(m)). In this case, Sun showed by expert testimony that the expected loss due to the inherent vice of the cargo for this particular voyage would be 704 barrels. If this was established, the carrier would under COGSA (in the absence of trade custom) would be liable for the loss exceeding 704 barrels, which would amount to 2,131 barrels at USD 38.01 per barrel, or USD 80,999.31 plus interest.

On the other hand, if the trade allowance is enforced, and the carrier offered no evidence as to cause of loss, existence of a statutory exception or exercise of due diligence, relying instead on the 0.5% allowance which amounts to 2,702 barrels. Therefore the carrier would be liable for 133 barrels at USD 38.01, or USD 5,055.31 plus interest.

It is clear that the effect of enforcing the trade custom alters the statutorily prescribed method of litigating claims. The District Court placed on the shipper the burden of proving that some specific cause such as the carrier’s negligence was responsible for the loss, rather than following COGSA's scheme which places the risk of unexplained losses on the carrier. As the Second Circuit noted, '[t]he burden of proof which COGSA has placed on the carrier is a major weapon in the shipper’s arsenal': Encyclopaedia Britannica Inc v SS Hong Kong Producer 422 F 2d 7 (2d Cir 1969) (CMI1649).

The District Court stated that 'this matter is one of contract, within the power of both carriers and charterers to negotiate'. However, s 3(8) of COGSA renders void clauses which relieve the vessel of liability for negligence. As stated by Gilmore and Black, 'COGSA allows freedom of contracting out on its terms, but only in the direction of increasing the shipowner’s liabilities and never in the direction of diminishing them'. This rule is supported by an array of authority in the United States.

COGSA was designed to achieve a fair balancing of the interests of the carrier, on the one hand, and the shipper, on the other. If clauses which relieve the carrier from liability for loss or damage to goods arising from negligence, fault, or failure in fulfilling obligations specified in COGSA cannot be enforced, it follows that clauses, whether originating in trade custom or otherwise, cannot be implied if they would have the same effect.

Some customs may be implied into the bill of lading, but this can only occur if the matter is not governed directly by COGSA, or is left open by the statutory language. However, no custom can properly be implied into the contract that conflicts with COGSA's provisions or purposes. A custom that lessens, or might lessen, the carrier’s liability under COGSA cannot be implied. The enforcement of the customary trade allowance of 0.5% does present such a conflict. COGSA takes into account the apparently undisputed fact that for some types of cargo it will not be possible for the carrier to deliver all the cargo it received for carriage. COGSA provides that in such circumstances the carrier can be relieved of its obligation, but only after the carrier has borne the burden of showing that the shortage in that instance resulted from inherent vice. The inherent vice of most oil on most voyages is considerably less than 0.5%. Thus, enforcing a 0.5% trade allowance both undermines the inherent vice provision and shifts the burden of proof to the shipper, thereby limiting the carrier’s liability beyond that recognised by COGSA.

Hunter Cir J, dissenting: COGSA does not apply to the 0.5% trade allowance because it is not a 'loss' allowance, but an 'allowance for imprecision of measurement'. For this reason, the allowance does not run afoul of COGSA's substantive prohibition against disclaimers of carriers' liability for lost or damaged cargo resulting from negligence or other fault. Nor does it offend COGSA's allocations of burdens of proof between shippers and carriers. The only other issue in this case - whether the allowance is a custom of the industry implied into charterparties for crude oil - depends upon findings of fact by the District Court which were not clearly erroneous. The judgment of the District Court should be affirmed.