July 2006 | Commentary | Fine Print

Proving Material Deviation

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William J. Augello, Esq. is an adjunct professor at the University of Arizona's College of Law and author of Transportation, Logistics and the Law.

One question shippers frequently ask is, "How do we avoid carriers' liability limits when they are negligent?"

Generally speaking, carriers' limitations apply if they are lawfully incorporated into a contract of carriage. If a shipper agrees to contract a low liability limit to obtain a lower rate, carrier negligence does not overcome that limit.

In a rare decision governing domestic truck shipments, however, a New York Federal District Court accepted a shipper's argument that a trucker's "material deviation" from its contract of carriage to ship a consignment of laptops caused a loss, and, therefore, the trucker's liability limitation did not apply.

The court awarded damages for the full invoice value of $179,957, in lieu of $44,275, which would have applied under the tariff limitation.

Carrier Failure

The material deviation in this case consisted of two elements:

1. The carrier's failure to provide the required security measures outlined in the "Minimum Security Guidelines" contract appendix.

2. The carrier's failure to name the shipper as "loss payee" on its cargo policy.

The contract's security guidelines required the carrier to place high-security locks on the freight in a "restricted and secured access area when stored at the carrier's premises for more than four hours."

It also specified that the carrier store product in trailers outside its office "only as a last resort." If the laptop shipment had to be stored outside, the carrier was to use high-security locks on the trailer door.

The load was stolen because the carrier did not provide the security measures the shipper requested. The New York court ruled that outside storage without prior consideration of other alternatives was not a "last resort," and therefore was a material deviation from the terms of the contract and likely contributed to the losses.

It also found that a bolt seal, which the carrier used, is not the equivalent of a high-security seal because it can be cut with a bolt cutter.

The contract's security guidelines also required the carrier's storage area to be under constant CCTV coverage capable of recording the identity of all individuals accessing the area.

But because the carrier did not provide TV coverage focusing on each unloading dock or on each trailer as it was unloaded, it did not provide "meaningful security," the court determined.

In addition, the carrier's failure to adhere to the requirement that "video cover all areas where assets are present" and that the system "allow continuous security monitoring to protect freight against theft," qualified as a material deviation contributing to the losses, the court found.

Lastly, the carrier failed to include the shipper as loss payee on the cargo policy, "without regard to any limitation of liability"—also a material deviation, the court ruled.

Paying More for Security

Though material deviation originated in admiralty law, it has been applied in surface transportation cases when shippers pay an additional charge for specialized safety measures—such as air-ride equipment or blanket-wrapping—to reduce the risk of cargo damage.

Because the contract in this case outlined several special security measures that were not adhered to, the court found the contract breaches met the standards for a material deviation. It also presumed the shipper paid additional charges for these security measures.

In addition, the court added prejudgment interest of nine percent on the amount awarded—on a simple, rather than compound basis—computed from the last date the carrier possessed the shipment.

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