Case Notes Riding the Circuits with Material Deviation

George W. Wright*

their bill of lading limitations of liability.5

Introduction

It is de rigueur for cargo owners to try circumventing carriers’ contractual limitations of liability with the so-called “material deviation” theory of fundamental contract breach. The material deviation theory purports to derive from maritime commerce and law. The doctrine of unreasonable geographical deviation has long been part of admiralty law and is codified in the U.S. Carriage of Goods By Sea Act of 1936 (“COGSA”).1 Before “held covered”2 clauses were common in marine cargo insurance policies, ocean carriers’ detours from their advertised routes often caused shippers to lose their insurance coverage. That dire consequence was thought to justify vessel interests bearing full liability to the cargo owner for a loss caused by, or occurring during, the carrier’s deviation.3

A maritime deviation means “any variation in the conduct of a ship in the carriage of goods whereby the risk incident to the shipment will be increased, such as carrying the cargo on the deck contrary to custom and without consent of the shipper, delay in carrying the goods, failure to deliver the goods at the port named on the bill of lading and carrying them farther to another port, or bringing them back to the port of original shipment and reshipping them.”4 When ocean carriers cause cargo loss or damage by such conduct, courts may void

Deviation-based theories have been applied by courts in some non-marine cases in which carriers agreed to special cargo handling procedures, received payment of separate consideration for such handling or agreed that the special handling is a material contract term. A majority of the United States Circuit Courts of Appeals and District Courts, however, have rejected material deviation and analogous doctrines. Its limited application largely consists of decisions from the United States District Court for the Southern District of New York. Summarized below are the significant precedents from the federal circuits.

A Survey of the Circuits First Circuit

In Hill Constr. Corp. v. American Airline,6 the First Circuit Court of Appeals enforced an air carrier’s limitation of liability after it lost freight for several months. The Court of Appeals held, “... the contract here does not condition the liability limitation upon the carrier’s satisfying its basic, general promise to transport the goods, for the parties normally intend a liability limitation to apply, not to disappear, when this type of general promise is breached (emphasis added).” The Court declined to extend the admiralty deviation doctrine, which applies to geographic departures from agreed routes, and distinguished the underlying facts from other cases involving “separate, risk-related promises (special to the particular shipment at issue)...”7

Second Circuit

Historically, the Second Circuit Court of Appeals has rejected “quasi-deviation” and other fundamental breach theories advanced by cargo owners to avoid carrier liability limitations in cases involving nongeographical ocean carrier deviations and certain inland carrier conduct in non-marine cases.8 In the seminal 1996 decision in Praxair v. Mayflower, however, a New York federal trial court held that the shipper’s payment of extra consideration to the carrier for special cargo handling, and the carrier’s failure to provide it, warranted applying material deviation to void the carrier’s limitation of liability.

In 2008, the Second Circuit held in Rexroth Hydraudyne v. Ocean World Lines, with respect to a railyard misdelivery of an ocean container:

This Court has consistently “reaffirm[ed] the rule that misdelivery of cargo is not a deviation that bars resort to the protections of COGSA [citations omitted] (further noting that, because the principle of quasi-deviation or unreasonable deviation is “arguably inconsistent with COGSA,” it is “not one to be extended . . .” In Nigerian Star, we adhered to this rule even though the misdelivery at issue was allegedly a product of corruption, or criminality . . . because the misdelivery in this case was the product of less culpable negligence, we cannot depart from established precedent (emphasis added).9

The Rexroth panel seemed to caution the trial courts not to extend deviationbased carrier liability theories, at least in cases lacking willful carrier misconduct. Eight of the thirteen relevant decisions from the District Courts in the Second Circuit have rejected “material deviation” in principle, or held proof of an actual conversion by the carrier is required to void its contractual limitation of liability.10 On the other hand, five New York federal court decisions have applied material deviation to void carrier limitations, or allowed the theory to withstand summary judgment under their facts.11

Third Circuit

In American Cynamid Co. v. New Penn Motor Exp., Inc., 12 the Third Circuit Court of Appeals rejected the material deviation theory raised by the shipper to void a bargained-for motor carrier limitation of liability on the ground the carrier failed to comply with the shipper’s instructions to prevent freezing of the goods. The Court held that only a carrier’s intentional destruction or conversion of the goods voids its contractual liability limitation: We distill the principle from Deiro and Rocky Ford that nothing short of intentional destruction or conduct in the nature of theft of the property will permit a shipper to circumvent the liability limitations in a released value provision. This is an understandable and desirable result, as a shipper can protect itself from loss by paying for a higher level of protection. Furthermore, when goods are lost or destroyed during transportation, there probably will be many circumstances in which a shipper will be able reasonably to characterize the carrier’s conduct as willful, and a rule of law allowing recovery in excess of the released value, if willfulness can be demonstrated, will lead to increased litigation. We think it better that there be certainty in these commercial settings, particularly since the shipper can protect itself by paying for a higher level of protection ... [M] ost courts have found ... that a liability limitation is unaffected by a breach of an essential term of the contract (emphasis added).13