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American Shipper

Not too hot, not too cold ?

Not too hot, not too cold à

      Eli Lilly, its in-house insurance company and reinsurers were sued when a shipment of temperature-sensitive insulin products was spoiled while being moved from a plant in Fegersheim, France to Indianapolis. (Eli Lilly and Co. v. Air Express International, U.S. District Court, S.D. Florida, No. 06-23048-CV. March 10.)

      Lilly said AEI-Danzas-DHL had breached a service agreement, and that there was a breach of air waybills by both DHL and Lufthansa Cargo. All the parties moved for summary judgment.

      Lufthansa was Lilly France's preferred carrier for shipments of pharmaceuticals from Fegersheim to the United States. They were moved under Lufthansa's Cool/td service under which the airline would, via DHL, provide Lilly France with LD9 'cooltainers' in which to ship its pharmaceuticals. These insulated containers keep cargo cool during transit, but will not protect cargo from exposure to freezing temperatures. The containers were to be stored at an ambient temperature of 12 to 28 degrees Celsius (54-82 degrees Fahrenheit) during transport.

      Lilly had placed temperature recording devices, called TempTales, inside and outside the LD9 containers in order to monitor the air temperature that the container and cargo would be exposed to in transit.

      In December 2004, Lilly France requested that DHL arrange a shipment to Indianapolis of eight LD9 containers of insulin and growth hormone. DHL's customer service representative contacted Lufthansa, which proposed routing shipments through Munich due to a lack of capacity out of Frankfurt, and Lilly approved it.

      The shipments were picked up at the Fegersheim plant by heated trucks hired by Lufthansa, weighed at the Strasbourg, France, airport and transported to the Munich airport. At Munich, the shipments were left outside in freezing temperatures prior to being loaded in the airplane and shipped to Chicago.

      After the shipments arrived in Indianapolis, the TempTales inside and outside the LD9 containers indicated that seven of the eight containers had been subjected to sub-freezing temperatures in violation of the Cool/td shipping protocols.

      Lilly France issued notices of claim to DHL for damage to the subject shipments within days, and DHL then issued notices of claim immediately to Lufthansa. A Lufthansa Cargo executive apologized for the shipment being spoiled saying 'the cool containers were left outside the terminal due to human error.'

      Lilly destroyed the insulin products from the seven containers where sub-freezing temperatures were recorded; some of the growth hormone was salvaged. A DHL representative asked Lilly's insurance company that the cargo not be destroyed, but Lilly contended that to properly test the insulin it would have to subject it to destructive testing. It let insurance underwriters and DHL representatives examine the spoiled shipment, but did not allow them to take the product away from its facility.

      Under the service agreement between DHL and Lilly damages were 'limited to two times the amount of the total fees payable to supplier.' Lilly made a claim to its in-house insurance company of more than $10.25 million, which included the transfer price of the damaged cargo, freight costs, and salvage expenses. In turn, it made a claim to the reinsurers, which paid $9 million on the claim.

      The court found DHL and Lufthansa were subject to liability as contracting and actual carriers, respectively, and both had received adequate notice of the damage within 14 days from Lilly's receipt of the shipments.

      It found the defendants were liable under the Montreal Convention because the cargo was delivered to the carrier in good condition, and received in damaged condition that resulted in a specified amount of damage. It noted an expert report said insulin products exposed to sub-freezing temperatures are not suitable for release for public use. The court said the defendants did not have any of the four defenses under the Montreal Convention ' showing inherent defect in the cargo, defective packaging, war or armed conflict, or act of a public authority.

      Lufthansa had suggested Lilly was negligent in approving the routing of the shipment in violation of its standard operating procedures, but the court rejected the argument, noting Lilly agreed to route the shipment through the Munich Airport at the suggestion of Lufthansa. Also the airline had moved similar cargo through Munich previously and only imposed an embargo on Cool/td shipments through Munich after this incident.

      Lufthansa also suggested it should be wholly or partially exonerated because of DHL's allegedly negligent designation of the cargo as 'consolidated' on the master air waybill. The court said while a carrier might reasonably assume from the 'consolidated' designation that the cargo was of low value, here the fact that the Cool/td service was used meant Lufthansa was aware of Lilly's shipping needs. Also, the air waybills contained instructions to keep the cargo 'REFRIGERATED AT +8 DEGREES CELSIUS' and to 'AVOID FREEZING.'

      The court said Lufthansa's liability was capped at 17 Special Drawing Rights (about $25.50) per kilo under the Montreal Convention, but the plaintiffs and defendants had starkly different takes on what DHL's potential liability should be. The companies agreed damages would be 'limited to two times the amount of the total fees payable to the supplier hereunder.'

      DHL argued the sensible interpretation of this provision was to limit liability to double the amount of fees for each particular shipment 'in this case about twice the 3,000-euro ($4,045) cost of the shipment.

      But the court agreed with Lilly and found 'the liability limitation clearly and unambiguously establishes that DHL's liability is limited to two times the total fees payable to DHL for the duration of the service agreement.' In this case that could be up to two times $250 million that Lilly paid DHL over the course of the five-year service agreement. The court said the amount of damages would be resolved at trial.

      David Y. Loh, a New York-based attorney with Cozen O'Connor, noted,    'the traditional measure of damages in a cargo case is the difference in fair market value of cargo in good condition at the port of destination, and the fair market value of the cargo in its damaged condition at the port of destination.'

      But in this case, 'Eli Lilly effectively owns a monopoly on the purchase and sale of insulin so there is no open market.' So the company presented an inter-company price list as its measure of damages.

      'Rather than rule that the proper measure of damages was replacement or manufacturing cost, the court surprisingly ruled that Eli Lilly was entitled to the transfer price between affiliated companies,' he wrote on the company's Web site. This makes it 'one of the few cargo decisions which effectively confirms that a shipper or consignee is entitled to certain level of profit in its pricing.'

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