Steve Block, Foster Pepper PLLC, USA

Maritime law’s doctrine of material deviation – one that goes way back – is defined per Nineteenth Century U.S. Supreme Court case law as a “voluntary departure without necessity, or any reasonable cause, from the regular and usual course of the ship insured.” A vessel operator’s unreasonable deviation may deprive it of its ability to enforce contractual provisions regarding limitation of liability for lost/destroyed/damaged/delayed cargo.

The doctrine originally prohibited only departures from accepted, agreed-to, or customary sailing routes, the thought being that if a carrier, usually for its own economic reasons, exposes its shippers to greater risks or the inconvenience of delayed delivery, then it shouldn’t be able to escape liability when something goes wrong during the altered voyage. The concept was extended for similar reasons to include deviations from other contracted or reasonably expected procedures, namely unauthorized stowage of cargo on deck. Admiralty courts have bought into the notion that shippers may reasonably expect their cargo to be stowed below deck unless a bill of lading expressly provides otherwise.

The primary caveat is that a deviation be unreasonable, i.e., as the Second Circuit put it, where “in the absence of significant countervailing factors, the deviation substantially increases the exposure of cargo to foreseeable dangers that would have been avoided had no deviation occurred.” If a new route or stowage plan was justified by circumstances, and/or if the deviation didn’t make any difference as to cargo safety, then the doctrine generally doesn’t apply. Modern technology renders the reasonability element a double-edged sword: it’s often harder for a carrier to argue unforeseeable weather or equipment failure reasonably required an altered route; and it’s harder for shippers to argue on-deck storage in modern containers exposed their cargo to greater danger.

While concepts governing cargo liability in surface transportation track closely those in the ocean shipping world, courts have refused to nix a motor carrier’s limitation of liability provision based on altered routes and other deviations from contracted terms. Shippers have unsuccessfully urged adoption of the material deviation doctrine on a number of occasions, often with compelling arguments as to how circumstances on land and sea are adequately similar to justify parallel law. But that may have changed, at least if one court’s analysis takes hold.

Shipper Ingram Micro and carrier ECM Transport executed a service agreement in 2007 that set forth general shipping terms and contemplated new rate agreements being issued and incorporated into the service agreement on a periodic basis as addenda. It limited ECM’s liability to $250,000, but provided that “reach of security, willful misconduct, and/or employee theft [would] be subject to the full replacement of the product.” Each addendum contained a merger agreement providing that the new package supersedes previous agreements. The last issued addendum contained a “Released Value” clause stating that ECM’s liability would be limited to $100,000.

When Ingram Micro’s load of computer parts, worth some 561 grand, disappeared en route from Pennsylvania to Illinois, cargo insurer Royal & Sun Alliance paid its shipper and sued ECM in subrogation in the U.S. District Court for the Southern District of New York. A gate to ECM’s yard had been left open, and the unattended trailer was stolen.

On cross motions for summary judgment, the parties focused on limitation of liability. ECM argued that the last addendum encompassed more than just revised pricing terms, i.e., the merger clause rendered it an entirely new agreement with a lower limitation of liability amount. Because the service agreement referred to it as “an attachment,” the court rejected that argument, but nonetheless found that newer terms addressing the same subject matter as older ones generally supersede them. That might activate the lower limitation of liability amount.

None of that ultimately made any difference, as the court applied the material deviation doctrine to nix ECM’s limitation of liability altogether. While the court didn’t get into why it departed from judicial trends here, it’s pretty apparent that the specific security terms Ingram Micro bargained and paid for were on its mind. The “breach of security” clause wasn’t superseded by any addendum, and as ECM apparently failed to follow its own security protocols by leaving the gate open, a breach was readily apparent. Thus, the addendum’s released value clause doesn’t apply, and the insurer gets its full money back.

Application of the deviation doctrine here may really just have been the court’s way of enforcing contract terms the law doesn’t really contemplate allowing. Moreover, this case isn’t published, at least not yet. Still, it may be a significant first step in surface carriage law’s adoption of a heretofore uniquely maritime legal concept.

Ref: Royal & Sun Alliance Insurance, PLC v. ECM Transport, Inc., 2015 WL 5098119 (S.D.N.Y. 2015)