LIMITATION OF LIABILITY PROVISIONS 

IVAN HOFFMAN, B.A., J.D.


        Since publishers (and others) are routinely called upon to ship books and other materials  (or more often, unfortunately, receive shipments of returning books—read “Many Unhappy Returns”), a case from the First Circuit Court of Appeals can be of great value to all shippers, not just publishers, as well as carriers.

        In Rational Software Corporation vs. Sterling Corporation, Rational engaged the services of Sterling to ship computer equipment from one place to another within Massachusetts.  The parties had had many dealings previously.  For the purposes of the litigation, the parties agreed that the computer equipment was worth $250,000.00 and that the said equipment had been damaged by Sterling in transit. The trial court awarded Rational $924.00 in damages based on the limitation of liability provisions which limited the liability of Sterling to 60 cents per pound unless Sterling declared a higher value.  The sole issue on appeal, as stated by the Court, was

… whether the carrier's limitation of liability provision, well known to Rational, the shipper, by a prior course of dealings, is effective, when, in the instance of damaged goods, the bill of lading is not given to the shipper until after the damage occurred.
        Preliminarily, the reader should read with care the article called “Apples and Oranges: An Analysis and Comparison of Distribution Agreements” on my site.   Among the many, many provisions that should be negotiated by the publisher before signing any such agreement are the provisions regarding risk of loss.  These provisions cover which party is responsible for damage or loss of the goods being shipped or stored.

        These were the facts as described by the Court:

Between 1997 and 2001, Rational engaged Sterling to move items between its various Massachusetts facilities over 200 times. For each move, Sterling issued Rational a bill of lading. The bill contained a section for a Rational representative to sign acknowledging that the goods were delivered as previously agreed. The bill also included a liability-limiting section. This section appeared in bold print and read: "Unless A Different Value Is Declared, The Shipper Hereby Releases The Property To A Value Of $.60 Per Pound Per Article." Immediately after this provision, there was a space for Rational to declare a higher value.

In addition to the bill of lading, the sixty cent per pound limitation was stated in Sterling's Commodity Rate Tariff, which was filed with the Massachusetts Department of Telecommunications and Energy. The tariff stated that, if a shipper wanted to declare a different value for its goods, it had to enter the value on the bill of lading. The tariff was referenced in every bill of lading that Sterling issued to Rational.

Besides written notification, Sterling orally advised its customers of the liability limitation. Sterling told its customers that if they wanted additional insurance for their property they could either declare a higher value for the goods and pay Sterling a commensurately higher price or purchase additional coverage from another insurer.

        The trial court also found that Rational never declared a higher value in any of its shipments with Sterling.

        In the shipment in question, Sterling’s employees did not deliver a bill of lading at the time they picked up the equipment, which bill of lading was not delivered until the move was completed.  The Court stated:

The bill was identical to the bills used in the preceding 200 moves but stated that the computer had suffered as yet undetermined damage because of the accident. Horn [Rational’s employee] signed the bill in the delivery acknowledgment section and (as usual) left the liability-limiting section blank.
 …
Horn testified that he had not declared a higher value for the computer because he did not know its value, and, in any event, thought that Rational had its own insurance for the computer.
        Note: as indicated above, readers should read “Apples and Oranges: An Analysis and Comparison of Distribution Agreements” as well as “Advertising Injury Provisions in Liability Insurance Policies”, since many parties may believe that they are covered for some forms of loss only to find out, after the fact, that they are not.

The Decision

        The Court stated:

Because the move in which the damages occurred took place within Massachusetts, the dispute is governed by Massachusetts law, specifically Mass. Gen. Laws ch. 106, § 7-309(2). The Uniform Commercial Code establishes the requirements for a carrier who wishes to limit its liability for goods damaged during a move. The statute provides:
Damages may be limited by a provision that the carrier's liability shall not exceed a value stated in the document if the carrier's rates are dependent upon value and the [shipper] by the carrier's tariff is afforded an opportunity to declare a higher value or a value as lawfully provided in the tariff, or where no tariff is filed he is otherwise advised of such opportunity.
Mass. Gen. Laws ch. 106, § 7-309(2). The "document" referenced in § 7-309(2) is a "document of title," which includes "a bill of lading." See Mass. Gen. Laws ch. 106, § 7-102(e); Mass. Gen. Laws ch. 106, § 1-201(15).
        Note: although the Court was called upon to interpret the Massachusetts version of the Uniform Commercial Code (“UCC”), the UCC has been adopted in most states although the provisions may vary from one state to the next.   Which state’s law applies depends upon the facts of the given situation and you should consult with an attorney in your state with experience in these matters.

        The Court went on:

Rational concedes that Sterling had in place all of the mechanisms required by § 7-309(2) to limit its liability: Sterling's rates were dependent on value, Sterling used a bill of lading containing a liability limitation, and Sterling filed a tariff containing a liability-limiting provision. But Rational contends that Sterling did not effectively implement these mechanisms because Sterling did not issue the bill of lading until after the accident. Rational also argues that the tariff's liability-limiting provision should not apply because Sterling regularly varied from the tariff requirements in its dealings with Rational. Sterling counters by reiterating the argument on which it prevailed below: that regardless of when the bill of lading was delivered and whether it adhered to the terms of its tariff, Rational knew from the parties' prior course of dealings that Sterling's liability was limited to sixty cents per pound. [emphasis added]
        The Court, looking to the law of other jurisdictions since there was no ruling on this issue within Massachusetts, stated:
A prior course of dealing between the parties is "admissible to show the practice of the parties of limiting liability" in a transaction for the shipment of goods…. [citations omitted]“A course of dealing is a sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.” [citations omitted]

The evidence in this case supports the district court’s conclusion that the parties, through their prior course of dealing, understood and agreed that Sterling’s liability would be limited to sixty cents per pound unless Rational declared a higher value. Prior to the February 2001 move, Rational had engaged Sterling for over 200 jobs. For each move, Rational received a bill of lading which prominently displayed the liability limitation and referenced Sterling’s tariff (which, as set forth above, contained the liability limitation). Moreover, Deignan, Sterling’s employee in charge of the Rational account, had orally informed Horn, the responsible Rational employee, of the limits on Sterling’s liability well before the move. Horn confirmed that he had been so informed and that he knew of his obligation to declare a higher value should Rational wish to avoid application of the liability-limiting provision. In view of these facts, the court did not err in enforcing the provision.

Conclusion

        As I indicated in the article “Advertising Injury Provisions in Liability Insurance Policies” mentioned above, often parties believe that there are such things as “one size fits all” insurance policies.  That is a mistaken belief.  Goods in transit (and being stored) should be covered by appropriate insurance but often a party may not have such insurance in the mistaken belief that another party is responsible for the security of the goods.  All parties should examine their respective business models including all their agreements as well as statutory and case law and consult with appropriate and experienced attorneys and insurance brokers about what kind of insurance is necessary.

Copyright © 2005 Ivan Hoffman.  All Rights Reserved.

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This article is not legal advice and is not intended as legal advice.  This article is intended to provide only general, non-specific legal information.  This article is not intended to cover all the issues related to the topic discussed.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This article is based on United States law.  You should consult with an attorney familiar with the issues and the laws of your country.  This article does not create any attorney client relationship and is not a solicitation.

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