Court looks to waybill, not contract

Court looks to waybill, not contract    A U.S. Court of Appeals has reversed a lower court ruling and held that the liability of a logistics company for an accident in which millions of dollars in pharmaceutical products were damaged, should be capped by the Montreal Convention for air cargo at about $26 per kilo. (Eli Lilly And Co. V. Air Express International d.b.a. DHL, Danzas, No. 09-12725, 11th Circuit, Aug. 23)
   In an appeal of the case also discussed here in May 2009, ('Not too hot, not too cold,' at www.AmericanShipper.com/links) the court found a limitation on liability in the convention is not pre-empted by a service agreement if the preemption is not incorporated in
the air waybill, according to a law firm involved in the case.
   In 2004 Eli Lilly directed DHL, pursuant to a long-term service agreement, to ship eight containers of insulin and growth hormone from Fegersheim, France, to Indianapolis with Lufthansa.
   But the court said due to an admitted human error by Lufthansa personnel, the containers were left outside in Munich in sub-freezing temperatures before being loaded on the planes.
   Lilly said that while it was able to salvage some of the growth hormone, the insulin had to be destroyed. It made a claim for $10.25 million, and its insurer, Elgo Insurance Co., along with reinsurers ultimately paid Lilly $9 million to satisfy the claim.
   Lilly, individually and for the benefit of Elgo and the reinsurers, filed the action against DHL in U.S. District Court for the Southern District of Florida.
   The law firm DeOrchis & Partners, which represented DHL in the case, explained in a recent issue of its company newsletter, Client Alert!, that the 1999 Montreal Convention, 'limits an international air carrier's liability for damage to cargo to protect it from catastrophic liability.'
   Like the Warsaw Convention of 1932 that it replaced, the Montreal Convention requires carriers to issue air waybills detailing the conditions of carriage.
   Normally the limit of liability for cargo and baggage is 17 'special drawing rights' (SDRs), an artificial currency created by the International Monetary Fund based on a basket of currencies worth about $26.
   Liability limits may be increased, 'only if the shipper makes a special declaration of value on the airway bill and pays any additional freight required,' or if the carrier voluntarily stipulates a higher limit in the waybill, DeOrchis explained.
   The trial court held that while Lufthansa's liability was limited to 17 SDRs per kilo under the waybills and the Montreal Convention, DHL's liability was governed by the terms of the service agreement.
   'Where the waybill is the only contract, there seldom is a problem with liability limits,' DeOrchis noted. 'But where large shippers enter into long-term service contracts with carriers covering many shipments, conflicts can develop between the two contracts.'
   Lilly and DHL had entered into a service agreement that covered five years beginning Jan. 1, 2003.
      A section of that agreement provided that DHL would indemnify Eli Lilly against third-party claims arising from breach of the service agreement.
   The agreement also contained a limitation of liability. It stated, in part, that damages either party was required to pay, for whatever reason, would be limited to two times the amount of the total fees payable to DHL under the service agreement.
   Lilly settled with Lufthansa and a judgment of more than $10.2 million was entered against DHL by the trial court.
   DeOrchis noted that this was far in excess of the limitation under the Warsaw Convention, though less than the limitation contained in the five-year service agreement.
   On appeal, DHL argued the district court erred in applying the terms of the service contract instead of the limitation that was contained in the air waybill.
   The 11th Circuit agreed with DHL that the service agreement took effect 11 months before the Montreal Convention went into force on Nov. 4, 2003.
   'If the parties intended for the service agreement to constitute a stipulation to waive limits on liability, this would not have been permitted by the Warsaw Convention which was then in effect,' DeOrchis noted.
   'The service agreement makes no mention of the Montreal Convention, the Warsaw Convention, the concept of declared value, or limits of liability imposed by law,' the 11th Circuit wrote. 'Nor does it contemplate that the service agreement would modify any subsequently executed air waybill contracts. In sum, there is no indication that the parties intended to opt out of the Montreal Convention liability regime ' '
   The 11th Circuit reversed and remanded the case back to the district court with instructions that DHL's liability should be capped at 17 SDRs per kilogram of the damaged cargo.
   Since the two shipments of the eight containers totaled 10,609 kilograms, it would appear DHL's liability would be less than $275,000.
   Another issue that DHL raised in the appeal had to do with the destruction of the insulin. DHL argued that because Lilly failed to produce documents showing the pharmaceuticals had been destroyed, they failed to present evidence sufficient to show that they were damaged in transit.
   DHL also argued that because Lilly denied it an opportunity to inspect and test the pharmaceuticals, they had committed a 'spoliation of evidence' ' withheld or hid evidence.
   But the court said Lilly produced records showing the insulin was subjected to sub-freezing temperatures and that the recording thermometers were tested and certified for accuracy before and after use.
   Also, the court noted federal regulations require pharmaceuticals subjected to sub-freezing temperatures must be tested for safety and purity prior to being salvaged, and Lilly presented expert testimony that sub-freezing temperatures would destroy the insulin.
   As a result, it said Lilly was entitled to summary judgment on the issue of whether the insulin products were damaged in transit. And it said the fact that Lilly destroyed drugs did not affect DHL's ability to make a claim or defense ' the exposure to the cold rendered the products worthless regardless of any tests that DHL may have conducted.