Forwarder’s right to limit under Montreal Convention

When does the Montreal Convention 1999 cover loss or damage to a cargo under a multimodal contract when that occurs outside the airport? That was one of the questions  before the District Court of the Hong Kong Special Administrative Region in In Mozard v Dachser [2018] HKDC 574. A Hong Kong garment exporter engaged the defendant freight forwarder to carry 20 cartons of garments by air from Hong Kong to Lyon, France. The goods reached the buyer but the exporter did not receive payment of the price and argued that the carrier had been in breach of its contract in allowing delivery to be taken without production of the airwaybill which named a bank as the consignee. The exporter had signed the carrier’s shipper’s instructions which expressly incorporated ‘HAFFA’s Standard Conditions’ and received and AWB which was expressly subject to the rules relating to liability under the Montreal Convention. The forwarder accepted that is was liable, but argued that it could limit liability as per the limitations under either the Montreal Convention or the HAFFA standard conditions.

The first issue was whether the loss or damage was covered by the Montreal Convention. The alleged misdelivery had not occurred during actual air flight and it was for the defendant to prove that it occurred within an airport. This was not the case as the only evidence before the court was that the forwarder did not have a warehouse inside Lyon airport. Nor did the Montreal Convention apply to the loss by virtue of the contractual provision in clause 2/2.1 of the AWB: “Carriage is subject to the rules relating to liability established by the Warsaw Convention or the Montreal Convention unless such carriage is not “international carriage” as defined by the applicable Conventions.” The word ‘carriage’ bore the same meaning as in the Convention and therefore the Montreal Convention only applied in relation to loss or damage within the limits set by the Convention.

 

The forwarder’s liability was dealt with under the HAFFA conditions and the relevant liability and limitation provisions were to be found in cl.21. Cl. 21.1 a general exception from liability for damage to or loss or non-delivery of or misdelivery of the goods unless it was proved that this occurred while the goods where in the carrier’s actual custody and under its control and was due to the wilful neglect or default of the forwarder or its servants. In the event of liability being established Cl. 21.5 provided a limitation of HK$200 per shipping package or unit or HK$10.00 per kilogram, whichever is the least. The clause covered loss which was not covered by other clauses in cl.21 as well as causes of loss which were unknown or not capable of being defined or characterised. On the evidence there was no explanation of how the loss here had arisen. There was nothing in the contract or on the face of the AWB to show that the AWB had to be presented for delivery of the goods to be obtained. The AWB was marked ‘Not Negotiable’. Nor was a term to this effect to be implied as the AWB is not a document of title. There was no legal or factual basis to find that the loss here was a fundamental breach or deviation and its specific cause was unknown and fell within cl.21.5 which covered situations where explanation is lacking.

The court then found that the limitation clause satisfied the reasonableness test in  Hong Kong’s Control of Exemption Clauses Ordinance which is modelled on the UK Unfair Contract Terms Act 1977. First, the parties’ bargaining power were equal and the exporter could have engaged other freight forwarders and, indeed had done so: the reason why it engaged the defendant was simply due to their usual agent switching to work for the defendant. Second, clause 21.5 was inherently relevant to the rates charged by the forwarder as the exporter had the option under clause 21.7 to contract out of the clause 21.5 limits by paying additional charges. Third, the exporter could have effected insurance on the cargo and was in fact in a better position to do so as there was no evidence that the forwarder knew of the cargo’s value and it would be cheaper for the exporter to effect indemnity insurance than for the forwarder to effect liability insurance

 

IS THE COMMERCIAL PARADOX OF THE MONTREAL CONVENTION 1999 IN THE CARRIAGE OF GOODS BY AIR FINALLY RESOLVED?

In Underwriters at Lloyds Subscribing to Cover Note B0753PC1308275000 v Expeditors Korea Ltd 882 F 3d 1033 (11th Cir, 2018) the US Court of Appeals for the 11th Circuit examined the scope of application of the Montreal Convention 1999 (MC) over the combined air and land carriage of cargo. This is the first US decision to look carefully into Art 18(3)MC. This provision has caused quite a stir in the air cargo world as it was clumsily re-drafted in the MC by deleting the airport requirement of the Warsaw Convention System (WCS).  

Under the WCS, the carrier is liable for the Loss, Damage or Destruction(LDD) of goods that occurs during carriage by air, which is defined as the “period during which the … goods are in charge of the carrier, whether in an aerodrome or on board an aircraft or, in the case of a landing outside an aerodrome, in any place whatsoever”. This provision created a clear rule in that it applied the WCS on an airport-to-airport basis, with the prevailing view interpreting the term “airport” to cover the airside area (airport limitation). English courts, being in the minority, adopted a wider meaning to include both airside and landside areas of an airport (RollsRoyce plc v Heavylift-Volga DNEPR Ltd [2000] 1 Lloyd’s Rep. 653).

This clear rule was disturbed in the MC which deleted the phrase“whether in an aerodrome or on board the aircraft or,in the case of a landing outside an aerodrome, in any place whatsoever”. As such, carriage by air is defined as “the period during which the cargo is in the charge of the carrier”.Inevitably, this change opens up the possibility of applying the MC to LDDs that take place outside airports.

This change of wording should not have caused such turmoil as the MC(same as the WCS) expressly prohibits its application to land carriage: “[t]he period of the carriage by air does not extend to any carriage by land, by sea or by inland waterway performed outside an airport” (carriage by land restriction).  Only the following two exceptions are permitted: 1. The MC applies in cases of unlocalised LDDs provided an AWB covers both the air and land segments and the land segment takes place for the delivery, loading or transshipment of the goods (presumption of loss) ; and 2.The MC applies to land carriage if the carrier substitutes air carriage by road carriage without the consent of the consignor (unlikely scenario as courts, including the Expeditors one, have ruled that the standard AWB provides such authority). 

The following two reasons lie behind the continued controversy over the multimodal application of the MC:

  1. A strong minority of US courts have applied the air law conventions to land US carriage which follows international air carriage and is covered by the same AWB. With the Carmack Amendment not applicable in such cases, US courts have justified this application on reasons of commercial certainty (one contract-one law). They either do so by misapplying the “presumption of loss” or applying (without much analysis) the MC or WCS to the land carriage by means of contractual incorporation;  
  2. The MC does not provide for a clear-cut solution when an LDD occurs in a warehouse of the carrier (or its agents)outside the airport. Under the WCS, this LDD is not subject to its provisions as the warehouse is situated outside the airport. However, the “airport limitation”has been deleted in the MC and the “carriage by land restriction” is not applicable as the LDD occurs while the goods are stored in a warehouse rather than moved by land.

Resolving these two issues was the focal point of the recent decision of the US Court of Appeals for the 11th Circuit in Expeditors (the Court also dealt with the term “package or packages concerned” as used in the AWB but this discussion is outside the scope of this note). The facts were no more extraordinary than the average air cargo case.The defendants, Expeditors, arranged for the carriage of a silicon coating machine from Incheon, South Korea to Orlando, US. The machine belonged to TriQuint and the claimants are TriQuint’s subrogated insurers. Exercising their route liberty under the AWB, the defendants flew the machine in 10 crates from Incheon to Miami, Florida. When the crates arrived in Miami, they were transported by land by several of the defendant’s agents as follows:

  1. from the airside area of Miami airport to a warehouse situated in the airport’s vicinity but outside its physical boundary(off-airport warehouse);
  2. from the airport warehouse to a warehouse in Miami, further away from the airport (Miami warehouse);
  3. from the Miami warehouse to an Orlando warehouse (first Orlando warehouse) ;
  4. from the first Orlando warehouse to a second Orlando warehouse (second Orlando warehouse); and  
  5. from the second Orlando warehouse to the consignee’s delivery agent (with the last segment to the consignee performed by its delivery agent);

The damage to one of the crates, containing the robotic arm of the machine, took place either in the Miami warehouse (segment No. 2) or during the land carriage from Miami to the first Orlando warehouse(segment No.3).

The US District Court for the Southern District of Florida, in a short and unsophisticated judgment, applied the MC to the damage in question. The decision was based on the misapplication of the“presumption of loss” provision of the MC; a rather concerning trend among US courts. For the District Court the land carriage in question is part of the MC as it is performed by the air carrier (or its agents) in order to deliver the crates to the consignee and an AWB covers both the air and land segments. Following this logic, the MC applies every time an air carrier undertakes land carriage “outside an airport…if such carriage takes place in the performance of a contract for carriage by air”. Damage is presumed to have happened during this period, unless the claimant proves that it occurred outside the scope of the AWB, namely by a road carrier that is not acting for the air carrier. Such solution has the potential to apply the MC on a door-to-door basis and it is not surprising that has strong supporters in the industry. Yet, it is a blatant disregard of the text of the“presumption of loss” provision and the philosophy of the MC as a unimodal Convention. Furthermore, the District Court failed to discuss the possibility that the damage took place in the Miami warehouse, assuming that the MC applies therein.

The Courts of Appeals for the 11thCircuit, following close examination of the MC, was right to dismiss the finding of the District Court.

To deal with the land carriage from Miami to Orlando, Circuit Judge Jill Pryor focused on the “carriage by land restriction” rather than the “presumption of loss”. She examined whether this segment qualifies as carriage by land under the MC and answered in the affirmative. The damage occurred during the “multi-hour journey” from Miami to Orlando which is “part and parcel of the last step of the cargo’s journey,which was plainly carriage by land”. As she emphatically stated “if an intercity, multi-hour journey over land does not qualify as carriage by land,the term essentially would be meaningless”. As such, the presumption that the loss occurred in the air carriage is rebutted and the MC is not applicable. Still,the Court accepted that the MC can apply outside the strict boundaries of an airport.But, it rightly cautioned against its extensive application either by misapplying the “presumption of loss” provision or using the (controversial) argument of contractual incorporation.

What proved more difficult is dealing with the damage in the Miami warehouse. What would have been a straightforward answer under the WCS has been complicated by the new wording of what constitutes carriage by air in the MC.Under a literal interpretation the MC is applicable to this damage as the crates were in storage in the carrier’s charge and were not carried by land. This is what the Austrian Supreme Court in its decision of 19 January 2011 and the German Federal Court of Justice in its decision of 24 February 2011, when coming across similar cases, decided. Although this interpretation was rejected by the US Court of Appeals, it is based on the text of the MC. Its main deficiency is operational in that it creates, what I described elsewhere, as a commercial paradox: the application of the MC is suspended while the goods are carried by land and reestablished upon them reaching the warehouse. It respects the text of the MC but is certainly not elegant.

Circuit Judge Jill Pryor did not agree that the MC creates such a paradox. She rejected the approach of the Austrian and German courts as they do not reflect the modern realities of air cargo transportation which may require storage between two (lengthy) land carriages. Suspending the application of the MC does not make operational sense and the better (operational) solution would be to incorporate the period of storage into the carriage by land. In what was a policy-driven opinion, the Court filled the obvious textual gap of the MC by treating warehousing as a secondary operation, since the law applicable to it depends on the nature of the carriage segments before and after it. While the continental European Courts have it given it autonomy, the Court of Appeals wants to see it absorbed by one of the two modes of transport. Convenient as a solution this is, the Court offered no reasonable explanation about the reasons that led to the textual gap of the MC. It is surprising that neither the cargo insurers nor the carrier advocated for such solution which raises questions whether it reflects the modern realities of air transportation.

Furthermore, the Court categorically declined to import in the MC the“airport delimitation” of the WCS. There is little doubt that this is the right decision as the new wording of the MC demonstrates an intention to move away from it. Instead, the Court endorsed the dissenting opinion in Victoria Sales Corp. v. Emery Freight Inc 917 F.2d 705 (2d Cir. 1990) which advocated for a functional interpretation of the term airport under the WCS. Although not accepted in the US at the time, it found fertile ground in England following the Heavylift-Volga DNEPR case. For the US Court of Appeals these two cases “are especially persuasive” in identifying the scope of the term “carriage by air” in the MC.

This judicial statement sheds light on the law applicable to LDDs of goods while carried from the airside area of the airport to the off-airport warehouse or while stored inside the off-airport warehouse (segment No. 1). Most probably, the MC will apply to such LDDs as the goods are within the functional area of the airport. Especially with respect to the short road carriage, the Court seems to suggest that it would be absorbed by the air carriage as it is a land segment of minimum importance.

What remains a difficult decision is the law applicable to the land movement between the off-airport warehouse and the one in Miami. Such a situation tests the limits of application of the Expeditors decision which refused to adopt a bright line test. One cannot argue that this segment is closely linked to the last segment between Miami and Orlando, but it is also distanced from the prior air segment. It could be characterised as preparatory to the last land segment in which case it makes more sense to exclude the application of the MC over it.

The US Court of Appeals in Expeditors has issued a rare decision on carriage of goods by air and road which refocuses the relevant discussion in the US, long diverted from the text and philosophy of the air law conventions. Subject to the disagreement about the application of the MC to goods that are in stored by the air carrier during transit, the decision is welcoming news for the air cargo industry. Still, the refusal of the Court of Appeals to establish a bright line test is to be regretted. It would have given to the air cargo industry the certainty missing from the text of the MC. This could have been easily achieved by using the functional limit of an airport as the overarching limit of application of the MC. The Court endorsed it but did not elevate it to the level of principle as it refused to establish a clear cut-off point of application. It is to be hoped that other Circuits will now follow and maybe develop its ratio decidendi.

Suspect a company has financial difficulties? Careful what you say.

A libel case on Maricom is a first, but Flymenow v Quick Air Jet [2016] EWHC 3197 (QB), decided today by Warby J, is a salutary warning. Efficient German operation Quick Air Jet regularly chartered aircraft to English air ambulance operators Flymenow. Flymenow were slow in paying, spinning out the process for a long time and doing their best not to pay their suppliers before they themselves got paid. Exasperated, Quick Air Jet emailed others in their branch of the industry, saying:

“To Whom It May Concern. WARNING: Company you should not deal with! Pecuniary difficulties! … We consider that it is our duty to warn you against doing business with the following company as they are not able to pay outstanding amounts dated from July 2013. … FlyMeNow Limited is obviously incapable to pay their outstanding amounts in total. In this particular case for two ambulance flights they booked with our airline company in July and August 2013.”

The result was a writ for libel. The action succeeded on the basis that there was an unsubstantiated allegation of insolvency, and that there was no sufficient interest to raise any defence of qualified privilege. The only crumb of comfort for Quick Air Jet was Warby J’s holding that Flymenow, by paying slowly, had brought all this on themselves, and the consequent decision to award an effectively nominal £10 damages. Nevertheless, the moral is obvious for (for example) disponent owners with suspicions about time charterers: be very very careful what you say, and limit it to allegations of won’t pay rather than can’t pay.

New Book on Air Cargo Insurance published by Professor M Clarke and Dr G Leloudas

The most recent addition in the list of publications of IISTL members is the book entitled “Air Cargo Insurance” by Associate Professor George Leloudas and Professor Malcolm Clarke.

This exciting new book is the only one on the market that deals exclusively with air cargo insurance, and will therefore, be a vital addition to the collection of any practitioner, professional or academic working in the field. The book analyses the model policies and standard terms and conditions of air cargo insurance used in the London markets. The authors also provide readers with an invaluable perspective on cases in other jurisdictions, and the book discusses freight forwarders’ relations with airlines and addresses the possibility of recovery from third parties.

Clarke & Leloudas - Air Cargo Insurance

An airline manager’s lot is not a happy one

Under EC Regulation 261/2004 Easyjet has gone down for 400€ in Scotland over a 6-hour delay due to air traffic control problems. Although the Sheriff was satisfied that the problems amounted to “extraordinary circumstances” he was not satisfied that Easyjet had taken all reasonable steps to avoid their effects. In particular he thought that they might have had more spare aircraft available, and was unimpressed with the fact that all the spares which Easyjet might have deployed mysteriously suffered from “unexpected flight safety shortcomings”.

See DUNBAR v EASYJET AIRLINE CO LTD [2015] ScotSC 70 (04 November 2015), available on BAILII.