No Sympathy for Spoiled Melons – Service Contract Terms Upheld

Types : Alerts

Sometimes you just can’t win.  In Sol Group Marketing Co. v. American President Lines, Ltd. before the Southern District of New York, a shipper named Sol brought suit for fraud and misrepresentation against APL on the grounds that the Service Contract between the parties was accompanied by a weekly schedule of sailings for the coming year and which APL failed to maintain.  The shipper argued in its complaint that, in entering into the Service Contract, it relied upon the shipping schedule providing weekly service from Central America.  When APL failed to provide cargo space every week, Sol was confronted with containers of melons that could not be loaded and subsequently suffered deterioration.  Sol also had to use other carriers at much higher freight rates to meet its commitment with suppliers in the United States.

However, the federal judge showed little sympathy for Sol’s situation and held that they could have protected themselves by being more careful with the provisions in the Service Contract.

Although a prior E-mail exchange between the parties indicated that APL had the ability and capacity to ship Sol’ melons on a weekly basis, the resulting Service Contract did not contain such terms.  Moreover, the District Court noted that there was a merger clause in the Service Contract which prohibited any party from referring to a document outside of the Service Contract, i.e., parol evidence.  Hence, Sol could not rely upon the weekly schedule that was previously given by APL, and was specifically on that the carrier did not guarantee weekly service under the terms of the actual Service Contract.

Sol sought to get around the parol evidence rule by arguing that APL had “peculiar” knowledge of the relevant facts and the shipper would not had been able to discover the truth about the sailing schedules through the exercise of due diligence.   The Court disagreed that the peculiar knowledge exception applied under New York law, pointing out that where the plaintiff has a low cost alternative to the problem, such as “insisting that the written contract terms reflect any oral undertaking on a deal-breaking issue,” the parol evidence rule should continue to apply.  Succinctly stated, “a party will not be heard to complain that he has been defrauded when it is his own evident lack of due care which is responsible for his predicament.”

The District Court also dismissed plaintiff’s declaratory judgment claim that the liquidated damage clause in the Service Contract was unenforceable because it was a contract of adhesion and therefore unconscionable.  Typically, contracts of adhesion are “standard-form contracts, offered by large, economically powerful corporations to unrepresented, uneducated, and needy individuals on a take-it-or-leave-it basis, with no opportunity to change the contract’s term.”  Since Sol had negotiated and modified parts of the Service Contract, and was a sophisticated company familiar with shipping, it could hardly complain that the Service Contract was a contract of adhesion.

Lastly, Sol complained that the $350 per container “liquidated damages” penalty, under the Service Contract against either party for either failing to provide the minimum volume, or failing to provide service to handle the minimal volume, was unconscionable because it did not come anywhere near the $1 million in damages that was suffered by the shipper.  Defendant pointed out that the Shipping Act of 1984, as amended by the Ocean Shipping Reform Act of 1998, sanctions the use of liquidated damages clauses in shipping service agreements in order to put the parties on notice of the risks involved from the outset of their relationship.  Moreover, since the $350 penalty was applicable to either party for breach of the service agreement, it could hardly be perceived as doing more injustice to the shipper than the carrier.

As such, the District Court granted APL’s motion to dismiss Sol’s fraud in the inducement claim and partially dismiss Sol’s declaratory judgment claim.