A cargo consisting of steel irrigation pipes and galvanised and ungalvanised plumbing pipes was delivered to the defendant, Retla Steamship Co, to be carried from Yokohama, Japan, to Los Angeles, US. The defendant's tally clerks noted visible wetness or rust on their tally sheets. The notations were transferred to a mate's receipt, which was delivered to the shipper. The receipts were presented to the defendant in exchange for ocean bills of lading.

The purchaser of the cargo paid the shipper after receiving the bills of lading issued by the carrier, which provided that the goods were shipped on board 'in apparent good order and condition, unless otherwise mentioned in this bill of lading, to be transported subject to all of the terms of this bill of lading'.

The bills contained the following provision in capital letters and in larger type than the remainder of the bill (the Rust Clause):

The term 'Apparent Good Order and Condition' when used in this bill of lading with reference to iron, steel or metal products does not mean that the goods, when received, were free of visible rust or moisture. If the shipper so requests, a substitute bill of lading will be issued omitting the above definition and setting forth any notations as to rust or moisture which may appear on the mates' or tally clerks' receipts.

The purchaser incurred expenses to remove heavy rust from the irrigation pipes, and the plumbing pipes were depreciated because of rust. The rust giving rise to the loss existed at the time of the delivery of cargo to the carrier at Yokohama or had developed as a consequence of the rust and wetting present at that time. The purchaser paid without knowledge of the cargo's actual condition and did not inquire as to what the mate's receipt showed.

The plaintiff, Tokio Marine & Fire Insurance Co Ltd, brought a subrogated action against the carrier to recover damages. The District Court for the Central District of California entered judgment in favour of the carrier. It held, among other things, that the bills issued by the defendant made no representation as to the condition of the cargo with respect to rust or moisture, and that the Rust Clause was valid.

The plaintiff appealed, contending that the Rust Clause was invalid; that the carrier, in effect, represented the cargo to be in good order and condition, that the purchaser had a right to rely upon that representation, and that the bill was tantamount to a clean bill, estopping the defendant from denying that the cargo was damaged when placed on board.

Held: The judgment of the District Court is affirmed.

Where a carrier issues a bill of lading which makes no representation with respect to the order and condition of the cargo, the carrier is not, as a general rule, estopped from showing that any damage was of pre-shipment origin.

The bills of lading here, read fairly as a whole, show that the term 'good order and condition' was qualified by the clause defining that term with respect to iron, steel or metal products. The purchaser, an experienced importer of iron and steel products, could not reasonably rely upon this qualified statement as an affirmative representation that the pipe was free from rust or moisture when it was received by the carrier.

There is nothing in the COGSA which would render invalid the qualifying clause defining the term 'good order and condition' as applied to iron and steel products. The requirement of s 1303(3)(c) of the COGSA [based on art 3.3.c of the Hague Rules] that the carrier shall, on demand of the shipper, issue a bill of lading showing, among other things, the apparent order and condition of the goods is less stringent than the comparable provision in the Harter Act, under which the Supreme Court held that there was no liability where the carrier did not affirmatively represent good order and condition.

There is no evidence that the shipper here ever demanded bills of lading showing apparent order and condition. It is expressly stipulated that it did not demand substitute bills pursuant to the Rust Clause.

The damage suffered here was not within the exemptions provided in s 1304 COGSA [based on art 4 of the Hague Rules]. Specifically, heavy rust does not come within s 1304(2)(m) [based on art 4.2.m of the Hague Rules] which provides:

Neither the carrier nor the ship shall be responsible for loss or damage arising or resulting from ... (m) Wastage in bulk or weight or any other loss or damage arising from inherent defect, quality, or vice of the goods.

Section 1304(2)(m) has been restricted to light atmospheric rust, not the heavy flaky rust suffered here. The fact that this COGSA provision is not applicable, however, does not render invalid the qualifying clause relating to visible rust or moisture.

The plaintiff also relied on s 1303(8) of the COGSA [based on art 3.8 of the Hague Rules]:

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 Act, shall be null and void and of no effect. A benefit of insurance in favor of the carrier, or similar clause, shall be deemed to be a clause relieving the carrier from liability

Section 1303(8) does not render the Rust Clause invalid either, because no act or omission of the carrier caused or contributed to the rusting of the pipe. The cases relied upon by the plaintiff were distinguishable. They were concerned with situations where the carrier sought to relieve itself from liability for damage which developed during carriage. None involved pre-shipment damage.