Reproduced with the Permission of Miles L. Kavaller

Under California law a covenant of good faith and fair dealing is implied in every contract. This means that neither party to a contract may injure the other party’s right to enjoy the contract’s benefits. The violation of this covenant exposes the guilty party to liability for the payment of actual damages as well as extra-contractual damages which can include attorney’s fees and punitive damages.

Why then did the California Court of Appeal reverse a trial court’s judgment against Fed Ex for $78,000 in compensatory damages representing fees paid to the shipper’s attorneys in pursuing a legitimate claim and $600,000 in punitive damages after Fed Ex was found by a jury to have unreasonably denied the shipper’s cargo claim?

Answer: Federal law. See, Power Standards Lab, Inc. v. Federal Exp. Corp. 26 Cal.Rptr.3d 202 (Cal.App. 1 Dist.,2005).

Here are the basic facts: The shipper, Power Standards Lab (“PSL”), an Emeryville, California manufacturer of high tech electronic products tendered a prototype to Fed Ex for intrastate transit to San Diego. The Fed Ex air waybill stated:

Shippers and carriers who wish to resolve disputes through arbitration or mediation must agree to do so by written contract. The written contract term can be included in a bill of lading or a transportation contract. A typical provision in a bill of lading or transportation agreement is as follows:

“Limitations On Our Liability And Liabilities Not Assumed Our liability in connection with this shipment is limited to the lesser of your actual damages or $100, unless you declare a higher value, pay an additional charge, and document your actual loss in a timely manner. You may pay an additional charge for each additional $100 of declared value. The declared value does not constitute, nor do we provide, cargo liability insurance. In any event, we will not be liable for any damage, whether direct, incidental, special, or consequential in excess of the declared value of a shipment, whether or not Federal Express had knowledge that such damages might be incurred including but not limited to loss of income or profits.

The air bill also set forth the procedures for “Filing A Claim,” which stated:

“For us to process your claim, you must make the original shipping cartons and packing available for inspection.”

PSL purchased $20,000 of additional “declared value” coverage from Fed Ex. The prototype sustained serious transit damage and PSL had it repaired for $17,450 after its President was told by Fed Ex that, despite the provision on the air waybill, no Fed Ex post-shipment inspection was necessary. Fed Ex then denied the claim because there had been no post-shipment inspection. During the following four months PSL sought payment but was told that “the only way Fed Ex pays claims like this is if you sue us.” PSL did and incurred attorney’s fees of $78,000. Six weeks before trial Fed Ex sent PSL a check for $18,409.45 representing the $17,450 in repair costs and $959.45 in freight charges.

Although the trial court entered judgment on the jury verdict in favor of PSL, it was reversed by the California Court of Appeal which reluctantly explained as follows:

“The ADA [Airline Deregulation Act] enacted by Congress in 1978 largely deregulated air transport service within the United States. Congress determined that the quality and efficiency of air carrier service would be better promoted by relying on competitive market forces instead of the existing system of pervasive federal regulation. A major congressional concern was that carriers should not be burdened with conflicting state laws and policies that would have adverse economic consequences on the goal of increasing competition among carriers. (See 49 U.S.C. § 40101, subd. (a)(6); H.R. Conf. Rep. No. 95-1779, 95th Cong., 2d Sess., 1, 53 (1978) U.S.Code Cong. & Admin.News 1978, 3737, 3773; American Airlines, Inc. v. Wolens (1995) 513 U.S. 219, 222, 228, 230, 115 S.Ct. 817, 130 L.Ed.2d 715; Morales v. Trans World Airlines, Inc. (1992) 504 U.S. 374, 378-379, 112 S.Ct. 2031, 119 L.Ed.2d 157.) To avoid state frustration of its purposes, Congress included a provision preempting conflicting state law. In its current version, the provision reads in pertinent part: “[A] State … may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of an air carrier….” (49 U.S.C. § 41713, subd. (b)(1).)”

This is known as the doctrine of federal preemption which is based on the Supremacy Clause in the United States Constitution and holds that federal law can, in this situation, in effect “trump” state law.

Of course, the ADA applies to air carriers. While Fed Ex is an air carrier, not all of its cargo is transported by air. Did Fed Ex transport this shipment from Emeryville to San Diego by air? Probably not!  Should the ADA have applied here?

Air carriers and interstate motor carriers (which are also subject to the preemptive federal statute known as the Carmack Amendment to the ICC Termination Act of 1995, 49 U.S.C. §14706(a)) are not subject to the payment of these extra-contractual damages no matter how unconscionable their conduct. The California Court of Appeal thus observed as follows:

“Confronting a situation almost identical to that endured by PSL, one federal appellate court stated: ‘Ordinarily, common law principles of equity leaven the law, softening its rigors so that the law’s aim of administering justice fairly is not lost. But on occasion, and this is one, the equities urge a course that the law may not take.’ (Cleveland v. Beltman North American Co., Inc., supra, 30 F.3d 373, 374.) We find ourselves similarly hamstrung. Although the supremacy of federal law requires that Federal Express prevail, we cannot refrain from expressing our dismay at this result.”

 Is it time for a change?