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.

New Package Holiday Regulations in Force in the UK as of 1 July 2018

On 1st July 2018, the Package Travel and Linked Travel Arrangements Regulations 2018 (hereinafter referred to as the Package Regulations 2018) (SI 2018/634) entered into force to give effect to the Directive (EU) of the European Parliament and of the Council EU 2015/2302. This replaces the Package Travel, Package Holidays and Package Tours Regulations 1992.

The Package Regulations 2018 introduce several changes taking into account the transformation that the travel industry has gone through especially in the last decade. The main changes are:

  1. Redefining “package holiday” and extending the scope of the Regulations

Today, people do not usually purchase their holidays from travel shops but instead utilise internet (i.e. their mobile phones, laptop etc). It is also common to use an online travel agent where elements of holiday (i.e. flight, hotel) are bought separately although the consumer might get the impression that he/she is purchasing a package. Therefore, to offer extended protection for today’s consumers, a new definition of “package holiday” has been introduced. The new definition will capture thousands of more arrangements sold on a daily basis especially on the internet increasing consumer protection. For example, if elements of a holiday are offered or sold separately this will still be treated as a package holiday for the purposes of 2018 Regulation if a total price is charged to the consumer (Article 2, (5)(b)(ii)). Similarly, if a consumer purchases a product commonly known as “holiday gift box”, this will be treated as a package holiday even if the precise hotel, for example, or precise combination, is yet to be ascertained(Article 2, (5)(b)(iv)).

Also, consumers purchasing package holidays are increasingly interesting in renting cars for sightseeing purposes. Under 1992 Regulations, there was a package holiday if at least two travel services were included in the package- i.e. transport, accommodation and other tourist services. With 2018 Regulations, “car rental” is added to the list meaning that a contract that provides the consumer holiday accommodation and a rental car will be viewed as a package holiday within the scope of the Regulations.

2. Price Alterations

Article 10 indicates in which instances the price of the package holiday can be increased after the booking is made.

This is only possible if:

  • The contract expressly stipulates that such an increase may be made;
  • The prize increase is a direct consequence of changes in a) the price of the carriage of passengers resulting from the cost of fuel or other power sources; and b) the level of taxes or fees on the travel services included in the contract imposed by third parties not directly involved in the performance of the package.

The procedure as to how the price increase may be made is stipulated in the Regulation.

3. Cancellation of the Contract

Article 12(4) for the first time allows organisers to stipulate “reasonable standardised termination fees” when a booking is cancelled by the consumer. On the other hand, consumers have been afforded a new right to cancel without paying cancellation charges “… in the event of unavoidable and extraordinary circumstances occurring at the place of performance of the package, or which significantly affect the carriage of passengers to the destination.” (Article 12(7)). It is envisaged that this provision might prove problematic in practice especially if extraordinary events occur in the vicinity of the place of performance but there is no evidence that such events have caused disturbance at the location which the holiday maker was planning to go. For example, if a hurricane hits a nearby state (Alabama), would that justify the consumer to cancel a package holiday to Florida?

4. Liability of the Organiser

Under 1992 Regulations, the organiser is liable to compensate the consumers if something goes wrong during the holiday (i.e. problems arising during transportation or sub-standard accommodation is offered to the consumer) or if the consumer suffers illness or injury. This position is not altered under the 2018 Regulations but the liability of the organiser has been defined slightly differently. Under Article 15, the organiser is liable if there is “lack of conformity” with the package travel contract. It is submitted despite the use of new terminology, this will not create a significant change in the liability regime. This is because “lack of conformity” has been defined in Article 2(b) as “a failure to perform or improper performance of the travel services included in a package” which is precisely the wording used in 1992 Regulations.

From the perspective of transport law rules, 2018 Regulations offers the organisers the same protection that the previous Regulations provided.

Article 16(5) of 2018 Regulations provides that:

“In so far as the international conventions limit the extent of, or the conditions under which compensation is to be paid by a provider carrying out a travel service which is part of a package, the same limitations are to apply to the organiser.”

This means that if a passenger is injured whilst on board a ship involved in an international voyage, if the organiser is treated as a “contractual carrier” from the perspective of the relevant international regime, the Athens Convention on the Carriage of Passengers and their Luggage by Sea, the organiser will be able to rely on the limits afforded to carriers by that Convention. (It was stressed by HHJ Hallgarten QC in Lee v. Airtours Holidays Ltd & Another [2004] 1 Lloyd’s Rep 683, at [32] that a tour operator could be treated as “contracting carrier” under the Athens Convention as long as it assumes responsibility for the performance of the contract including the sea leg.) The position will be the same if the passenger is injured on a plane in an international voyage or on a train engaged in an international voyage.

5. Insolvency protection

The Regulation requires the organiser of a package holiday, who is established in the United Kingdom, to provide effective security in the event of organiser’s insolvency to cover the cost of refunding all payments made by or on behalf of travellers for any travel service not performed as a consequence of the insolvency (Article 19).

The Regulation 2018 also introduces a mutual recognition requirement. Accordingly, the UK must accept the insolvency protection arrangements entered into by organisers established in another EU Member State. Likewise, other Member States are required to accept the insolvency protection put in place by UK-based organisers.

One word of caution! Given that the Regulation is intended to implement an EU Directive, it is hard to predict what the position will be after BREXIT in March 2019 especially with regard to insolvency protection requirements. There is a serious risk that UK companies might be cut out of the European market unless they start a business in an EU county and offer insolvency protection as required by the Directive.

In the air with “The Aries”. Freight no set-off rule also applies to air carriage.

 

 

In Schenker Ltd v Negocios Europa Ltd [2017] EWHC B20 (QB), High Court, Mercantile Court, Mrs Justice Moulder held that the sea carriage rule in The Aries [1977] 1 Lloyds Rep 334 prohibiting set-off of against freight also applied to claims to freight in carriage by air. The rule had previously been applied to international carriage by road in R H & D International Ltd v IAS Animal Air Services Ltd [1984] 1 WLR 573 and to domestic carriage by road in United Carriers Ltd v Heritage Food Group [1996] 1 WLR 371.

 

There were also two authorities in Hong Kong Emery Airfreight Corporation v Equus Tricots Limited and RAF Forwarding (HK) Ltd v Wong Angela. Emery Airfreight Corporation which had applied it to carriage by air.

 

Mrs Justice Moulder concluded:

  1. It is not the part of the function of judges to alter a well established rule or to say that a different rule is part of our law for the sake of harmonisation. It is the position here that although English authorities have not expressly determined the point in relation to air freight, the approach in the road haulage cases extending the rule from shipping are, in my view, instructive and persuasive. I note the rationale which is advanced in relation to cash flow. However, I do not accept that this alone would justify the extension of the rule into a new area. The rule may well be said to be anomalous when contrasted with other contracts for the supply of goods and services.

 

  1. However, given the clear and uncontradicted expert evidence that this is the basis on which the freight market contracts and the fact that it extends to carriage by sea, international and domestic road haulage, it would, in my view, be anomalous to hold that the common law freight rule did not extend to carriage by air. I, therefore, concur with the conclusion reached in the Hong Kong authorities which, though not binding on me, found that there is no logical or sensible distinction between the three means of transport for the purpose of the common law rule.

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