Source: https://www.theenergylawblog.com/2017/08/articles/insurance/fifth-circuit-addresses-a-complicated-cargo-dispute-resulting-in-a-victory-for-vessel-operating-common-carriers/
Timestamp: 2019-04-21 08:46:26+00:00

Document:
In GIC Services, L.L.C. v. Freightplus USA, Inc., No. 15-3097 (5th Cir. Aug. 8, 2017), the United States Fifth Circuit Court of Appeals held that an ocean carrier stiffed by an intermediary in a freight transaction may recover unpaid freight from the original NVOCC who arranged the cargo transportation unless the evidence clearly shows the carrier intended to release that party from liability. The court further held that the carrier may protect its interest in unpaid freight against the cargo in rem, and weighed in on several other issues pertinent to the maritime field. The key points of the lengthy opinion are highlighted below.
GIC Services involved a contract for the transport of a tugboat from Houston, Texas to Nigeria. The plaintiff, GIC, contracted with Freightplus USA, Inc. (Freightplus), a freight shipping company, to arrange for transport of the tug REBEL on its ocean voyage. Because Freightplus did not have the means to transport the REBEL, Freightplus contracted with Yacht Path International, Inc. (Yacht Path), a broker specializing in transportation of large watercraft, who completed the chain by contracting with Industrial Maritime Carriers, L.L.C. (IMC) as the “vessel-operating common carrier.” GIC agreed to pay Freightplus $111,000, Freightplus agreed to pay Yacht Path $85,000, and Yacht Path agreed to pay IMC $70,000. When all was said and done, GIC paid Freightplus, Freightplus paid Yacht Path, but Yacht Path stiffed IMC. The complications did not, however, end there.
In the course of negotiating these arrangements, a miscommunication arose as to the port at which the REBEL was to be discharged. Yacht Path was of the opinion that the vessel was headed to Lagos, Nigeria while IMC believed the REBEL would be discharged at Warri, Nigeria. Various documents exchanged between the parties designated conflicting ports of discharge. While the REBEL was in transit, communications between IMC and Yacht Path brought to light the confusion over the vessel’s intended destination. Despite efforts to remedy the situation, IMC was ultimately unable to discharge the REBEL at Lagos. IMC proceeded on to Warri and discharged the REBEL there. GIC sought to obtain the vessel’s release, but failed when it became clear that IMC had not been paid its freight. Predictably, litigation ensued.
GIC sued Freightplus, and Freightplus in turn brought a third-party claim against IMC who counter-claimed against Freightplus and the REBEL in rem. Following a bench trial, the district court concluded that Freightplus was liable to GIC for $1,860,985 in damages incurred as a result of the REBEL’s discharge in Warri. Of the same token, the district court determined that IMC was 30% at fault for GIC’s damages and therefore required GIC to pay 30% of the judgment and 30% of Freightplus’s attorneys’ fees. Finally, the district court permitted IMC to recover $70,309.12 from Freightplus, the amount of IMC’s unpaid freight.
On appeal, the Fifth Circuit considered numerous challenges to the district court’s ruling, only the most salient of which are discussed here, including: (1) whether IMC, the ocean carrier, had a duty to indemnify Freightplus, the freight forwarder, for a portion of damages; (2) whether Freightplus was entitled to recover attorney’s fees from IMC; (3) whether Freightplus was required to reimburse IMC for its unpaid freight; and (4) whether IMC was entitled to exercise a lien against the REBEL in rem for its unpaid freight.
On the issue of IMC’s duty to indemnify Freightplus for damages arising out of its negligence, the court began by noting that maritime tort indemnification is available in a very limited set of circumstances. Hardy Gulf Oil Corp., 949 F.2d 826, 833 (5th Cir. 1992). One of these is when the parties stand in a “special relationship.” Cities Serv. Co. v. Lee-Vac, Ltd., 761 F.2d 238, 240 (5th Cir. 1985) (citing Fed. Marine Terminals, Inc. v. Burnside Shipping Co., 394 U.S. 404 (1969)); see also LCI Shipholdings, Inc. v. Muller Weingarten AG, 153 F. App’x 929, 931 (5th Cir. 2005). When such a relationship exists, an entity will owe indemnity when its negligence causes a loss to its counterpart. The purported “special relationship” at play was that between a “non-vessel operating common carrier” (NVOCC) and “vessel-operating common carrier” (VOCC). Freightplus and IMC disagreed over whether Freightplus was operating as an NVOCC.
As a preliminary matter, the Fifth Circuit joined the Third and Eleventh circuits in endorsing the NVOCC/VOCC relationship as a “special relationship” for purposes of maritime tort indemnity. The court proceeded to conduct a statutory analysis of NVOCC status under the Shipping Act of 1984, 46 U.S.C. § 40102(16), to ultimately conclude that Freightplus shared the characteristics typically associated with an NVOCC: (1) it issued a bill of lading, which listed it as the “carrier” (the role an NVOCC plays vis-à-vis the ultimate shipper) and (2) it was paid exclusively by the shipper. Accordingly, the court found that Freightplus and IMC stood in the special NVOCC/VOCC relationship and IMC was therefore liable to indemnify Freightplus for damages arising out of its negligence.
In light of the allocation of 30% fault to IMC and IMC’s duty to reimburse Freightplus for that share of damages, Freightplus claimed that IMC further owed it 30% of its attorneys’ fees incurred in defending the action. Freightplus argued that because its action against IMC was brought under a theory of indemnity (based on the “special relationship”), rather than contribution, it should be entitled to recover its attorneys’ fees. The Fifth Circuit rejected the indemnity/contribution distinction as material in and of itself, focusing instead on “whether the justifications articulated in Odd Bergs and Sea-Land for allowing recovery of attorneys’ fees in the typical indemnity context, and not in the contribution context, are present.” GIC Services at 23.
In Odd Bergs, and further developed in Sea-Land, the Fifth Circuit held that ‘where the party seeking attorneys’ fees is defending against charges of its own wrongdoing, ‘incurring expenses [on attorneys’ fees] . . . would be necessary even if there were no other tortfeasors,’ and so they are ‘not recoverable in contribution from the other negligent parties.’” Applying this rationale, because Freightplus was found partially liable for failing to ensure an accurate bill of lading, the Fifth Circuit reasoned Freightplus would have been required to incur defense costs in defending the action on the basis of its own conduct—regardless of any concurrent fault of IMC. Accordingly, Freightplus was not entitled to indemnity for any portion of its attorneys’ fees.
As noted above, in the chain of monetary transactions between the contractual parties, GIC, the original shipper, paid Freightplus, who in turn paid Yacht Plus. Yacht Plus, however, failed to remit payment to IMC, the ocean carrier, resulting in unpaid freight and the refusal to release the REBEL at Lagos. The question arose, therefore, whether Freightplus, who had upheld its end of the bargain in remitting payment to an intermediary, could nevertheless remain on the hook for the unpaid freight to the ocean carrier (who went unpaid because of the act of an intermediary). Relying on Strachan Shipping Co. v. Dresser Indus., Inc., 701 F.2d 483 (5th Cir. 1983), the Fifth Circuit held that Freightplus could be held liable.
In Strachan, The Fifth Circuit ruled that the relevant inquiry under such circumstances is “whether the carrier intended to release [the shipper] from its obligations and look solely to the forwarder for payment.” GIC Services, at 25. Such a determination is based upon “the course of dealings of the particular parties, and must be judged from the totality of the circumstances.” Id. at 25. Although Freightplus was not operating as a primary shipper, the court found no reason for Strachan’s framework not to apply in deciding whether an ocean carrier has released an entity from liability merely because the entity in question was an intermediary, rather than the primary shipper.
Applying this approach, the Fifth Circuit eschewed a number of technical arguments advanced by Freightplus relating to its practice of extending credit to Yacht Path and the fact that a particular bill of lading was marked freight “prepaid.” According to the Fifth Circuit, “there is no economically rational motive for the carrier to release entities from liability, [because] the more parties that are liable the greater the assurance for the carrier that he will be paid.” Id. at 27 (internal quotation marks omitted). Thus, the court will be “loathe to find release absent a clear indication of the carrier’s intent” to release the intermediary from liability for unpaid freight. Id. Finding no such indication in the record, the court found that Freightplus remained liable to IMC for unpaid freight based on Yacht Plus’ non-payment.
Finally, the Fifth Circuit reversed the district court’s conclusion that IMC could not recover its freight charges from GIC by bringing an action in rem against the REBEL to enforce a maritime lien. The district court had resorted to principles of equity to conclude that such would present an opportunity for double recovery for the carrier. Rejecting the district court’s conclusion, the Fifth Circuit emphasized: “Under United States law, it has been settled for over a century that we presume a maritime lien exists in favor of a shipowner on cargo for charges incurred during the course of its carriage.” Id. at 28 (citing Arochem Corp. v. Wilomi, Inc., 962 F.2d 496, 499 (5th Cir. 1992); see The Bird of Paradise, 72 U.S. 545, 554 (1866)); see also 2 Benedict on Admiralty § 44 (Matthew/Bender 2013) (“[M]aritime law permits an action in rem against the cargo itself . . . .”). Under this well-established principle, reasoned the court, IMC obtained a maritime lien against the REBEL in rem.
The court also rejected an argument by GIC that such a lien requires privity of contract and would not apply in a scenario like the present one involving third parties. According to the Fifth Circuit, this concept is only relevant in circumstances involving a purported lien against cargo owned by a charterer in the chartering context. Because the common carrier scenario at issue did not involve a charter, the default lien principle applied, and IMC was entitled to recover its unpaid freight against the REBEL in rem.
The Fifth Circuit reinforced two important rules of law that may come into play for shippers, freight forwarders, and ocean carriers in their normal course of dealings: (1) in order to release an intermediary or original shipper from freight liability, there must be a clear indication of intent from the carrier to release such a party, even where a third party is really to blame for non-payment and (2) an ocean carrier has a maritime lien on cargo in rem for unpaid freight where the cargo was the subject of a freight agreement.
In essence, the Fifth Circuit’s decision is a victory for vessel operators who carry cargo at the direction of an intermediary. It confirms that the carrier can recover unpaid freight from the NVOCC or the cargo itself, not merely from the intermediary who failed to pass the freight payment along to the carrier. This decision protects carriers from insolvency in the marketplace (an all-too-common problem over the past decade), while exposing NVOCCs to the risk of extra-contractual liability for the actions of its intermediaries.
 This portion of the opinion was later vacated by the district court but the issue was still raised on appeal.
 It should be noted that the court’s use of “indemnify” does not signal full tort indemnity. Rather, under the pure comparative fault system applicable under general maritime law, IMC was liable to Freightplus for its 30% share of allocated fault, the subject of detailed discussion in the opinion but beyond the scope of this article.
 See GIC Services, at 23 (citing Odd Bergs Tankrederi A/S v. S/T Gulfspray, 650 F.2d 652, 653–55 (5th Cir. 1981)); see also Sea-Land Service, Inc. v. Crescent Towing & Salvage Co., 42 F.3d 960 (5th Cir. 1995).

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