Newsletter - Clyde & Co

Aviation and aerospace

ContentsCanadian Supreme Court upholds exclusivity of Montreal Convention in context of language rights

Dangerous goods and the evolving regulatory environment to ensure the safety of their carriagePage 5

Regulation (EC) 261/2004 and ‘extraordinary circumstances’ – recent developmentsPage 9

Australian court dismisses passenger claim brought 22 years after the eventPage 12

The Cape Town Convention and repossession insurancePage 14

AVN67B/C: Observations from the lessor/lender perspectivePage 19

Pure mental harm arising from damage by aircraft – proposed changes to laws in AustraliaPage 26

NewsletterFebruary 2015

Canadian Supreme Court upholds exclusivity of Montreal Convention in context of language rightsOn 28 October 2014, the Supreme Court of Canada issued a 5-2 decision dismissing an action brought by passengers and avowed francophones Michel and Lynda Thibodeau for Air Canada’s failure to provide services in French as well as English on several international flights in violation of Canada’s Official Languages Act (the “OLA”). The decision addressed a tension between Canadian domestic law, which provides remedies for language rights violations, and the Montreal Convention (to which Canada is a state party), which does not. Ultimately, the majority concluded, correctly in our opinion, that Canada’s obligations under the Montreal Convention trumped the OLA with respect to international transportation governed by the Convention.

Canada’s Official Languages ActThe OLA is a Canadian federal statute aimed at ensuring “respect for English and French as the official languages of Canada” and the “equality of status and equal rights and privileges as to their use in all federal institutions….” OLA § 2(a). The statute seeks to “support the development of English and French linguistic minority communities and generally advance the status and use of the English and French languages within Canadian society” and to “set out the powers, duties and functions of federal institutions with respect to the official languages of Canada.” OLA §§ 2(b) and (c). The OLA fosters the recognition and use of both English and French in Canadian Society and establishes the Office of the Commissioner of Official Languages, who is empowered to conduct investigations, make recommendations and report. Under the statute, a person who has made a complaint to the Commissioner in relation to certain parts of the OLA may apply to Canadian Federal Court to “award such remedy as it considers appropriate and just under the circumstances.” OLA § 77(4). Air Canada is subject to the OLA by virtue of the Air Canada Public Participation Act, R.S.C. 1985, c. 35 (4th Supp._.), and the airline therefore must ensure, inter alia, that members of the public can obtain available services in either English or French “in Canada or elsewhere” where there is “significant demand” for services in that language. OLA § 22 (b).

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The Montreal ConventionCanada is a party to the Montreal Convention, adopted into Canadian law via the Carriage by Air Act. When the Convention governs, it limits the type of claims that can be brought against international air carriers. Specifically, the Convention permits claims for death or bodily injury, destruction, damage or loss of baggage and cargo, and for delay. Montreal Convention, Arts. 17 to 19. As to whether any other type of action for damages is permitted, the Convention provides:

In the carriage of passengers, baggage and cargo, any action for damages, however founded, whether under this Convention or in contract or in tort or otherwise, can only be brought subject to the conditions and such limits of liability as are set out in this Convention without prejudice to the question as to who are the persons who have the right to bring suit and what are their respective rights. In any such action, punitive, exemplary or any other non-compensatory damages shall not be recoverable.

Montreal Convention, Art. 29 (“Basis of Claims”)

The incidentsOver a four- month period in 2009, Air Canada failed to provide Michel and Lynda Thibodeau with services in French on three international flights between the United States and Toronto and on one occasion at the Toronto Pearson International Airport. More specifically, on a January 2009 flight from Toronto to Canada, Air Canada did not have a bilingual flight attendant to provide service in French to the Thibodeaus. On the return flight from Atlanta, the pilot’s announcements were made in English without translation into French. On a May 2009 flight from Charlotte, North Carolina to Toronto, Air Canada again failed to provide services in French (allegedly ordering a 7-Up in French from a flight attendant and instead receiving a Sprite) and, upon arrival at the Toronto airport, an announcement regarding baggage collection was made only in English.

The decisionThe Thibodeaus filed complaints regarding these incidents with the Canadian Commissioner of Official Languages, which conducted an investigation, upheld the complaints, and closed their file after Air Canada put in remedial measures with respect to its bilingual services. The Commissioner audited Air Canada with respect to its bilingual services and issued recommendations to which Air Canada responded.

In addition to their complaints to the Commissioner, the Thibodeaus filed an action in Canadian Federal Court under the OLA with respect to the breaches of their language rights, seeking institutional orders against Air Canada and damages – damages for the language rights violations, including punitive and exemplary damages. The Federal Court recognized the conflict between the OLA and the Montreal Convention but concluded that the power to award damages under the OLA prevailed over the Montreal Convention in face of the conflict and directed Air Canada to pay USD 6,000 in damages (USD 1,500 per incident) to the Thibodeaus for moral prejudice, pain and suffering and loss of enjoyment of their vacation. With respect to plaintiffs’ request for an institutional order, the Federal Court found that the issues were not isolated problems, and directed Air Canada to institute a monitoring process with respect to its language-rights obligations.

Air Canada appealed the Federal Court’s decision with respect to the damages award concerning the three incidents that occurred on board the Air Canada flights and with respect to the structural order. The Federal Court of Appeal set aside the damages award but agreed with the lower court that the Montreal Convention would bar plaintiffs’ claims for damages unless the OLA’s remedial powers trumped the Montreal Convention. However, unlike the lower court, the Federal Court of Appeal did not see a conflict between the Convention and the OLA because the OLA permits the court to issue remedies that are “appropriate and just”, and in determining whether a remedy is so must consider that damages are not permitted in circumstances where the Montreal Convention applies. The Federal Court of Appeal also overturned the structural order because of insufficient evidence and because the structural order was too vague to enforce.

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Aviation and aerospace newsletter February 2015

The Supreme Court of Canada granted leave to appeal (and gave appellant status to the Commissioner of Official Languages of Canada).

In its decision, the Supreme Court first considered whether the Montreal Convention excludes monetary damages under the OLA, agreeing with the lower courts that it does. The Court noted that at the heart of the appeal was the “exclusivity principle” of the Montreal Convention, i.e., the proposition that the only types of liability against air carriers arising from international transportation are those permitted by the Convention itself, excluding claims for liability under local law. In the Court’s view, the appellants were asking the Court to reject the exclusivity of the Montreal Convention to find that Air Canada could be subjected to liability under local law, the OLA, even when the underlying events occurred during the course of international air transportation.

In support of its conclusion that the Montreal Convention is the exclusive source of a passenger’s remedies with respect to events that occur on board international flights, the Court first discussed the text and purposes of the Montreal Convention. With respect to the text, the majority analyzed Article 29, the provision embodying the “exclusivity principle,” which states:

Article 29 – Basis of claims

In the carriage of passengers, baggage and cargo, any action for damages, however founded, whether under this Convention or in contract or tort or otherwise, can only be brought subject to the conditions and such limits of liability as are set out in this Convention without prejudice to the question as to who are the persons who have the right to bring suit and what are their respective rights. In any such action, punitive, exemplary or any other non-compensatory damages shall not be recoverable.

The majority concluded that the foregoing text clearly provides that, where the Convention applies, the only types of liability permitted against the air carrier are those set forth in the Convention, specifically in Articles 17 to 19: for an accident causing passenger death or bodily injury on board or during the course of

embarking or disembarking (Article 17); for destruction or loss of, or damage to, baggage while in charge of the carrier (Article 17); for destruction or loss of, or damage to, cargo during carriage (Article 18) and for damaged caused by delay (Article 19).

The majority then discussed the three main purposes of the Convention (i.e., uniformity of rules governing claims arising from international air transportation, limiting liability against air carriers, and balancing protection of the air carriers with the interests of those seeking recovery against the air carriers), and how the first two could only be achieved if the Montreal Convention provides the exclusive set of rules to matters covered by the Convention.

The majority also found overwhelming support in the “strong current of international jurisprudence” showing that, with respect to matters that fall within the scope of the Montreal Convention, carriers can only be subjected to the types of damages actions that are set forth in the Convention.

The majority rejected appellants’ argument that their language rights claims under the OLA fell outside the scope of the Montreal Convention because the claims were “quasi-constitutional” and/or “public law” claims that sought “public damages” as opposed to “private damages.” The majority found that the Thibodeaus’ action certainly was one “for damages” from events arising during an international flight – the Federal Court had awarded the Thibodeaus monetary damages for moral prejudice, pain and suffering and loss of enjoyment of their vacation. To permit such an action for damages under local law, the majority opined, would violate the text of Article 29 and undermine the goal of the Convention to achieve uniformity across jurisdictions. The majority emphasized that the factual circumstances giving rise to the claim (i.e., the time and place) determine whether the claim falls within the scope of the Convention – not the legal foundation for the claim. Claims based upon the alleged violation of “fundamental”, civil, statutory and/or constitutional rights, and those seeking “public damages” as opposed to “private damages” can be precluded by the Convention.

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The majority rejected the Thibodeaus’ argument that their claim was for “standardized damages” as opposed to “individual damages.” A line of cases from the Court of Justice of the European Union (“GJEU”) addressing passenger rights in the event of delay under a European Union regulation viewed standardized damages, i.e., identical damages for every passenger such as immediate assistance or care for all concerned, to fall outside the scope of the Convention. Even accepting the CJEU’s distinction between the type of damages, the majority found the issue irrelevant because the Thibodeaus could not be said to be pursuing such standardized damages on behalf of similarly-situated passengers but were in fact pursuing individual damages.

The majority also rejected appellants’ argument that their claims fell outside the temporal scope of the Convention (i.e., on board the aircraft or during embarking or disembarking) because the airline’s decisions to assign non-bilingual flight attendants to the flights were made long before embarkation. The Court found that the important consideration with respect to the exclusivity principles is the activity of the passenger when the event directly causing the alleged injury occurred. Here, the Thibodeaus’ were on board when the French language services were not provided to them.

Concluding that Thibodeaus’ claims fell within the substantive and temporal scope of the Montreal Convention, the Court then rejected the appellants’ arguments that they nevertheless are entitled to money damages because the OLA conflicts with, and should prevail over, the Montreal Convention. The majority concluded that, when properly interpreting the provisions (to avoid conflict wherever possible), there actually is no conflict between the OLA and the Montreal Convention, which have different goals. The remedial OLA does not require that damages be available in all settings and authorizes the court to issue “appropriate and just” remedies. A remedy, such as granting damages to the Thibodeaus under the OLA,

would not be “just” if it violated Canada’s obligation to honor its international obligations under the Montreal Convention, nor would it have been the Canadian Parliament’s intention to legislate in breach of Canada’s international obligations.

Lastly, the majority determined that the Federal Court of Appeal correctly set aside the structural order issued against Air Canada as being too imprecise and thus improperly inviting the need for endless court supervision.

ConclusionThe Canadian Supreme Court reached the correct decision in the Thibodeau case, recognizing Canada’s obligations under an international treaty that it has ratified, and which provides a uniform and fair system of liability with respect to events occurring during international air transportation. To subject airlines to claims and damages that are not contemplated by and set forth in the Convention would undermine the essential goals of the Convention. Although advocates may differ as to whether justice is done in an individual case, such arguments must be seen against the backdrop of the broader concerns addressed by the Convention – uniformity of rules in international air transportation and limited liability for air carriers balanced with the interests of those seeking recovery against the airlines. By adopting the Convention, Canada has accepted its system. Canada’s Supreme Court has ensured that the country is adhering to its international obligations by affirming the exclusivity of the Convention, as have the Supreme Courts of the US and the UK, but unfortunately not the CJEU.

For further information, please contact Nicholas Magali in our New York office

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Dangerous goods and the evolving regulatory environment to ensure the safety of their carriageWhen Flight MH370 disappeared while en route from Kuala Lumpur to Beijing on 8 March 2014, theories as to the cause of the disappearance ran rampant. Early speculation that gained widespread attention focused on a shipment of lithium batteries which the aircraft was carrying. While the cause of the loss of MH370 remains undetermined and there is no evidence to support that lithium batteries were in anyway responsible for the aircraft’s disappearance, it was perhaps a reminder that dangerous goods are frequently carried by air and require particular attention to be done so safely.

Dangerous goods‘Dangerous goods’ may be chemicals, mixtures of substances, manufactured products or other articles that pose risks to people, animals or the environment. Many common consumer products bring a risk of fire or explosion or they may adversely affect persons who come into contact with them.

The transport of dangerous goods encompasses a broad spectrum of interests, including manufacturers, packers, shippers, and sellers of dangerous goods, the carriers contracted to carry dangerous goods, consumers, and, certainly in the case of carriage by air, passengers.

The increase in the availability and use of dangerous goods (even within aircraft systems themselves), such as lithium batteries, has made the various involved parties much more aware of potential dangers - and possible exposure to liability should something go awry – which can lie anywhere along the chain of supply.

For instance, a lithium battery manufactured in Canada may be shipped by sea to China where it is installed in a mobile phone which is then flown on a cargo flight to Germany where it is stored in a warehouse before it is sold online, packaged and posted by rail, road, or ferry to a consumer in England who then travels on a passenger flight, with the phone on his person in the cabin or in his baggage in the cargo hold, on a holiday

to Florida. Dangerous goods have the potential to cause harm during each leg of their shipment and storage – and each mode of transport brings with it unique risks and concerns.

Moreover, the integration of, say, a lithium battery, as a component within another product (such as a mobile phone or tablet computer) can add to the problem of ensuring adherence to the current carriage standards because that use of a dangerous good is, to some extent, masked by the declaration or description of the overall product.

For these reasons, there are international and national regulations in place applicable to the various modes employed to transport dangerous goods. Unfortunately, along with the increased availability and use of dangerous goods there is a corresponding increase in parties finding themselves running afoul of regulators and opening themselves up to investigation – and potentially prosecution.

RegulationsShipment of seemingly innocent products such as nail polish, fragrances, aerosols, consumer electronics, and even children’s toys involves a web of international and national regulation and regulators.

To adopt a well-worn phrase, the international regulations are an ‘alphabet soup’ of comprehensive rules meant to supplement each other, yet in practice

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often contradicting and creating confusion. The United Nations Economic and Social Council’s Committee of Experts on the Transport of Dangerous Goods has published Model Regulations meant to harmonize these rules, but these often struggle to address the unique risks each different mode of transport presents.

The primary international regulations include the European Agreement concerning the International Carriage of Dangerous Goods by Road (ADR), the Regulations Concerning the International Carriage of Dangerous Goods by Rail (RID), the European Agreement concerning the International Carriage of Dangerous Goods by Inland Waterways (ADN), the International Maritime Dangerous Goods Code (IMDG), and the ICAO Technical Instructions for the Safe Transport of Dangerous Goods by Air (Technical Instructions) which are embodied in the IATA Dangerous Goods Regulations (DGRs).

Each of these regulatory schemes provides myriad requirements that must be met by all parties engaged in the handling, packaging, shipment, and carriage of dangerous goods.

Among the obligations are duties to properly label goods and packaging, ensure certain classes of dangerous goods are shipped in specific packaging designed to their nature (i.e. protective layering) and/or in a proper position (i.e. upright), ensure that carriers are provided with and maintain proper documentation, provision of detailed and specific training to employees based upon their individual functions, placement of placarding and other safety notices, provision of proper safety equipment, the adoption of measures to ensure the security of dangerous goods from theft or misuse, and many more.

Referring to the example above, the transport of the single lithium battery from manufacture to end consumer could fall under each of the major international regulations. These international rules are implemented and supplemented by national legislation which provides an additional layer of oversight likely to further muddy the waters of compliance.

The national legislation is also charged with enforcing compliance. National transportation and dangerous goods regulators and other enforcement authorities are afforded strict investigative and prosecutorial powers in respect of the carriage of dangerous goods

Shippers who use many different modes of transportation to ship dangerous goods must navigate a maze of often contradictory international and national legislation with the threat of investigation and prosecution in instances of noncompliance. Carriers accepting the dangerous goods for shipment face both similar regulatory burdens along with the added risk of there being an occurrence of the actual danger posed by the goods during transport – creating a threat to life and property.

The shipment of dangerous goods by air is of particular concern because of the inherent hazards these goods pose to aircraft in flight carrying flight personnel, other cargo, and potentially passengers.

Carriage by airConcern about the carriage of dangerous goods by air is not a recent development.

Perhaps the most tragic incident involving the carriage of dangerous goods by air was the loss of ValuJet Flight 592 shortly after take-off from Miami on 11 May 1996, killing all 110 persons on board. Following an investigation by the NTSB, it was determined that the Douglas DC-9-30 improperly carried undeclared dangerous goods as cargo, in this case oxygen generators. The generators were activated and this created a sudden large and quick-spreading fire in the cargo compartment; damaging the aircraft flying controls before the crew was able to react and land the aircraft. Following this incident, much stricter controls were put in place, including further amendments of the ICAO Technical Instructions and IATA DGRs.

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However, incidents involving the carriage of dangerous goods continue to occur. On 3 September 2010 a Boeing 747-400F operated by UPS Airlines crashed after take-off from Dubai while carrying a large shipment of lithium batteries. This incident prompted the FAA to issue an advisory to operators of that fact even though the investigation remains undetermined.

On 28 July 2011, a Boeing 747-400F operated by Asiana Airlines on a cargo flight reported a fire on the main deck soon after take-off from Incheon, Korea, crashing into the sea after it became impossible to operate the aircraft. The focus of the ongoing investigation is on dangerous goods being carried by the aircraft, including lithium batteries.

ICAO and IATA have responded quickly to these continuing incidents and concerns by further amending the Technical Instructions and DGRs, issuing guidelines and alerts, and working with national authorities to prevent such incidents from occurring. The focus of the regulators is on tightening controls in the handling of dangerous goods on the ground before they are loaded on aircraft.

In the UK we have seen an increased focus on the transport of dangerous goods by the Civil Aviation Authority (CAA). The CAA works with shippers and carriers to ensure that dangerous goods are handled in strict compliance with the regulations.

However, full compliance has proven difficult to achieve – and the CAA is not afraid to employ its investigative and prosecutorial powers. In the past year, the CAA Dangerous Goods Office completed 3 successful prosecutions for causing dangerous goods to be delivered for carriage in an aircraft. The convicted parties were indicative of the diverse reach of the regulations as they included a passenger, a shipper, and an aviation supply company.

Lithium batteriesRecently, much interest has surrounded the installation of lithium batteries in aircraft following the introduction of the Boeing 787 Dreamliner and the subsequent concerns about the operation of its lithium battery system. Incidents of fires believed to be related to this power source occurred soon after the 787’s first commercial flights in aircraft operated by Ethiopian Airlines, ANA, and Japan Airlines.

However, there has been less discussion about the carriage of lithium batteries aboard aircraft, either as cargo or as components of passenger belongings, although as the recent incidents referenced above indicate this is changing rapidly.

Lithium batteries are of two types: lithium metal batteries and lithium ion batteries. Both present potential hazards. Lithium batteries are used in many electronic devices like cameras, cell phones, hearing aids, laptop computers, medical equipment and power tools.

While most lithium batteries are safe, there have been notable instances of lithium batteries overheating and catching fire. Once ignited, an individual battery can cause any other nearby batteries to ignite as well. These fires are notoriously difficult to extinguish and can also produce dangerous fumes.

In addition, counterfeit and no-brand lithium batteries are of increasing concern. These batteries may not have been safety tested, and may be of poor design and manufacture with little in the way of safety components.

Recent reports of incidents involving lithium batteries include computer batteries heating up and causing fires, a charging battery exploding while plugged in, an airline passenger’s camera batteries beginning to smoke at the boarding gate, battery packs in checked baggage beginning to smoulder, and a passenger’s bag bursting into flames when handled by an airline agent.

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Because of these dangers and the obvious risk they pose to aircraft in flight, the carriage of lithium batteries by air has come under close scrutiny from ICAO and IATA. ICAO has formed a Working Group on Lithium Batteries under the aegis of its Dangerous Goods Panel (DGP).

A technical meeting of ICAO in February 2014 determined that “fires in flight involving certain types and quantities of lithium metal batteries have the potential to result in an uncontrolled fire leading to catastrophic failure of the airframe”. In response, in April 2014, the DGP proposed that the transport of lithium batteries be restricted to cargo aircraft only. This prohibition from transport on passenger aircraft applies only to lithium metal batteries being shipped on their own and does not apply to these batteries packed with or contained in equipment.

This prohibition and other comprehensive ICAO guidelines in respect of lithium batteries became effective on 1 January 2015.

Of particular note in the new guidelines are provisions which restrict the carriage of lithium batteries when carried by passengers as baggage. The guidelines require that only batteries which have successfully met UN-mandated testing may be carried. Most batteries will meet this requirement if manufactured, distributed, or sold by a major company; however some replacement batteries may not meet this requirement. The guidelines require that passengers be aware of this requirement. However, it is unclear how such a broad requirement on passengers likely to be unaware of the regulations may be enforced. For now, spare batteries are required to be placed in carry-on baggage and not in checked baggage.

These new guidelines have only recently gone into effect and further regulations are being developed by IATA. As this regulatory scheme develops shippers, carriers, and even passengers will have to be aware of the changes and comply swiftly in order to avoid potentially strict enforcement measures.

ConclusionAs the use of dangerous goods increases, so do the risks they pose in their transport. The current regulations are evolving to address the increased risks and regulators are employing the strict tools available to them in order to ensure full compliance. Navigating this complex regulatory environment will require knowledge, experience, and the flexibility to quickly respond and adapt.

For further information, please contact Paul Freeman or Dylan Jones in our London office

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Regulation (EC) 261/2004 and ‘extraordinary circumstances’ – recent developmentsAs regards Regulation 261/2004 jurisprudence, it is the Court of Justice of the European Union’s rulings that have traditionally been the source of controversy for the airline industry. However, more recently such frustration has centred on the English Court of Appeal and its analysis of the ‘extraordinary circumstances’ defence in the case of Huzar v Jet2.com [2014].

Huzar v Jet2.com

BackgroundMr Huzar was booked to travel with Jet2.com from Malaga to Manchester on 26 October 2011. During the aircraft’s inbound flight the crew identified a possible problem with the fuel shut-off valve. The aircraft and passengers were held in Malaga overnight whilst investigations continued, with the carrier eventually identifying a faulty length of wiring within the fuel valve circuit.

Mr Huzar, who suffered delay on arrival in Manchester of 27 hours as a result of this technical issue, sought compensation from Jet2.com under Regulation (EC) 261/2004 (the Regulation). In doing so he relied on the Court of Justice of the European Union’s (CJEU) ruling in the case of Sturgeon and Bock [2010], which held that compensation for flight delay is payable where there is a delay on arrival of three or more hours, notwithstanding the fact that the wording of the Regulation itself provides no such remedy.

Jet2.com sought to avoid paying compensation on the basis that the technical issue / flight delay was caused by ‘extraordinary circumstances’ which could not have been avoided even if all reasonable measures had been taken, this being a defence under Art.5(3) of the Regulation. It was Jet2.com’s position that the wire in the fuel value circuit was within its expected lifespan and that the defect could not have been prevented by prior maintenance or inspection.

Mr Huzar issued proceedings in the Manchester County Court. At first instance the Court held that the ‘extraordinary circumstances’ defence could indeed be invoked by Jet2.com, but on appeal the Manchester County Court (in its appellate function) found in favour of Mr Huzar. Jet2.com appealed the ruling to the Court of Appeal, who ultimately agreed with the Manchester County Court that Mr Huzar’s claim should succeed, but disagreed with its reasoning.

The Court of Appeal’s decisionThe Regulation itself contains no definition of ‘extraordinary circumstances’, with the relevant test having been developed by the CJEU in its Wallentin-Hermann v Alitalia [2009] ruling. In Wallentin the CJEU held that technical issues can only constitute ‘extraordinary circumstances’ where they “relate to an event which… is not inherent in the normal exercise of the activity of the air carrier concerned and is beyond the actual control of that air carrier on account of its nature and origin.”

The arguments put forward by the parties in the Court of Appeal action centred on the correct interpretation of that Wallentin test. In particular, the Court had to consider how the two limbs of the test interrelated (namely, the requirement that the issue (a) not be inherent in the normal exercise of the air carrier’s activities and (b) beyond its actual control), and which limb is dominant.

Jet2.com

Jet2.com

Jet2.com

Jet2.com

Jet2.com

Jet2.com

Jet2.com

Jet2.com

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The Court of Appeal held that the key consideration is whether the circumstances in question are extraordinary – that is, not inherent in the normal exercise of the air carrier’s activities – rather than the degree of actual control a carrier exercises over such circumstances. The Court of Appeal stated that:

“[d]ifficult technical problems arise as a matter of course in the ordinary operation of the carrier’s activity. Some may be foreseeable and some not but all are, in my view, properly described as inherent in the normal exercise of the carrier’s activity. They have their nature and origin in that activity; they are part of the wear and tear.”

The Court of Appeal’s judgment is contentious given the very limited weight was given to the question of control; this approach arguably being at odds with commentary from the CJEU in a number of its previous rulings, including the case of McDonagh v Ryanair [2013]. The judgment also has a marked impact on the proportionality of the Regulation and the associated costs for the airline industry. Whilst such suggestions are refuted by claimant interests, many argue that the additional cost of compensation payments to the industry will ultimately be borne by passengers through higher ticket prices.

Supreme Court appealOn 8 July 2014 Jet2.com applied for leave to appeal the matter to the Supreme Court. To the dismay of the airline industry, on 30 October 2014 the Supreme Court refused leave to appeal, noting that:-

a) The application “does not raise a point of law of general public importance”

b) The CJEU’s jurisprudence already provides sufficient answers to the points of EU law raised

The former point is controversial given that many commentators – not least the airline industry itself – would argue that the point of law is of significant public importance.

The same may be said of the latter point, particularly given that on 28 May 2014 a Court in Amsterdam referred 10 questions to the CJEU for preliminary ruling in the case of van der Lans v KLM, the bulk of which deal with issues similar to those addressed in Huzar. In that case, the CJEU is being asked to clarify (inter alia) what bearing the degree of control an air carrier has over an event should have on the question of whether that event is ‘inherent’ in the normal exercise of its activities and whether spontaneous technical issues not discoverable through routine maintenance can amount to ‘extraordinary circumstances’.

Current statusFollowing the Supreme Court’s decision refusing leave to appeal, the UK CAA wrote to air carriers outlining its practical interpretation of the Court of Appeal’s judgment in Huzar and setting out its expectations with regard to the handling of compensation claims going forward. It also notified carriers that it would begin proactively contacting approximately 11,000 consumers who had previously been assessed by the CAA as having no valid claim, or whose claims had not been addressed by carriers pending the outcome of Huzar.

Many litigated compensation claims under the Regulation had been stayed. Whilst some of those claims have since been settled, a number of air carriers have sought to have such technical delay and cancellation claims further stayed pending the CJEU’s ruling in van der Lans. The rationale for such applications is essentially that the legal issue at hand in those litigated cases, namely the application of the ‘extraordinary circumstances’ to technical issues, is the subject of a CJEU reference, the ruling in which will be binding on the English courts, and could well contradict the Court of Appeal’s analysis in Huzar.

An application for a stay is due to be heard in the Liverpool County Court on 25 February 2015 in the matter of Allen v Jet2.com, and it appears that a number of other County Court cases are now being stayed pending the outcome of the Allen application.

Jet2.com

Jet2.com

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Sandy Siewert v Condor Flugdienst

BackgroundOn 3 October 2011 the Siewert family travelled with Condor from Antalya (Turkey) to Frankfurt (Germany), suffering a 6.5 hour delay on arrival. The family sought flight delay compensation from Condor under the Regulation.

Condor rejected the claims on the basis of the “extraordinary circumstances” defence. The aircraft scheduled to operate the claimants’ flight was struck by mobile aircraft stairs at Stuttgart airport the previous night, causing structural damage to one of its wings. The aircraft had to be substituted, resulting in the delayed departure of the claimants’ flight.

The claimants issued proceedings against Condor, with the local German Court (Amstgericht Russelsheim) referring 4 questions to the CJEU for preliminary ruling. The key questions referred were whether adverse actions of third parties entrusted with the performance of tasks forming part of an air carrier’s operations, but acting under their own responsibility, constitute ‘extraordinary circumstances’, and if so, whether it matters who (airport, airline etc.) had entrusted the third parties with such tasks.

Ruling The CJEU delivered its ruling by Reasoned Order on 14 November 2014, less than three months following the referral of the questions by the local German court, indicating that the CJEU considered the existing law to be clear and the issues raised to be uncontroversial.

In its Order the CJEU referred to its ruling in Wallentin, noting that circumstances can only be ‘extraordinary’ within the meaning of Art.5(3) of the Regulation if they relate to an event which is not inherent in the normal operation of an air carrier’s activities and beyond its actual control on account of its nature or origin.

The CJEU noted that the use of mobile stairs and airbridges is vital to the embarkation and disembarkation of passengers, that air carriers are regularly confronted with situations resulting from the use of such equipment, and that a collision of

mobile stairs with an aircraft must therefore be considered inherent in the normal exercise of an air carrier’s activities. The CJEU further stated that there was nothing to indicate that the aircraft damage was caused by actions, such as sabotage and terrorism, falling outside the scope of normal services performed at an airport. It was therefore held that the collision in Stuttgart was not ‘extraordinary’ for the purposes of the Regulation.

CommentThis case represents a further eroding of the ‘extraordinary circumstances’ defence. It might be argued that upon an air carrier subcontracting services to a groundhandler, those activities no longer fall within the normal exercise of the air carrier’s activities, nor are they within that air carrier’s actual control. A contrary argument, namely that such activities ultimately remain the responsibility of the air carrier and within its control, might also sensibly be made.

However, the CJEU’s analysis in Siewert seems to have departed somewhat from a strict application of the Wallentin test of whether an event falls within an air carrier’s normal activities and actual control. Instead, the CJEU seems to be advocating a more general risk-based analysis, with consideration being given to, inter alia, the question of what activities might be expected to take place at an airport more generally.

If the application of such a risk-based approach is to become the norm, it is questionable where the line might be drawn insofar as ‘extraordinary circumstances’ are concerned. For instance, would damage caused by aircraft stairs operated by another air carrier’s groundhandler be ‘extraordinary’? Or if a bird scaring vehicle operated by the airport collides with an aircraft, causing flight cancellation or delay, would that be ‘extraordinary’, given that such operations are inherent in the operation of air services more generally, albeit not inherent in the operations of an air carrier itself?

For further information, please contact Tom van der Wijngaart in our London office

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Australian court dismisses passenger claim brought 22 years after the eventA superior court in Australia has recently reaffirmed that damages will not be awarded against an airline for pure psychological injury suffered by a passenger on board an international flight.

In Halime v Singapore Airlines Ltd [2014] NSWSC 1681, the Supreme Court of New South Wales dismissed a claim filed by the plaintiff, Mr Halime, against Singapore Airlines for damages for psychological injury allegedly suffered as a result of witnessing an engine explode while a passenger on board a Singapore Airlines flight from Athens to Sydney via Singapore on 28 May 1992. The proceedings had been commenced by Mr Halime on 28 May 2014, some 22 years after the flight in question.

It was alleged by Mr Halime that during the course of the flight, he witnessed one of the aircraft’s engines catch fire and explode, causing the flight to divert back to Athens. He contended that the incident was a breach of Singapore Airlines’s duty to ensure his safe passage and that as a result he had suffered “psychological trauma” and “severe trauma” for which he sought damages. It was not alleged that Mr Halime had suffered any physical injury in the incident.

Singapore Airlines filed a motion to dismiss the statement of claim on two grounds:

i) Mr Halime had no reasonable cause of action on the basis that his claim was governed by the Warsaw Convention as amended by the Hague Protocol (Convention) and damages for pure psychological injury are not recoverable under the Convention

ii) The proceedings were time barred given that the Convention requires that any claim be commenced within a period of two years from the date on which the carriage stopped

In upholding Singapore Airlines’s motion and dismissing Mr Halime’s statement of claim, Justice Adams of the Supreme Court of New South Wales made the following observations:

i) The Convention is given force of law in Australia by virtue of the Civil Aviation (Carrier’s Liability) Act 1959 (Cth) (Act) and covers the issue of injuries caused to passengers arising by carriage by air of the kind alleged by Mr Halime. Section 13 of the Act provides that the liability of a carrier under the Convention in respect of personal injury suffered by a passenger is in substitution for any civil liability of the carrier under any other law in respect of the injury. Accordingly, Mr Halime’s right to compensation was governed solely by the Convention

ii) Pursuant to Article 17 of the Convention, a passenger may recover damages from a carrier only in respect of injuries that fall within the scope of the expression ‘bodily injury’. There is leading judicial authority in Australia for the proposition that a pure psychological injury is not a ‘bodily injury’ within the meaning of Article 17

iii) It followed that Mr Halime was not entitled to sue Singapore Airlines for his alleged psychological injury suffered in the incident

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i) In any event, the Convention imposes a two year limitation period on the commencement of claims for injury by a passenger against a carrier. Mr Halime’s right to bring a claim against Singapore Airlines was therefore extinguished on 28 May 1994, being two years after the carriage was deemed to have stopped. The commencement of Mr Halime’s claim on 28 May 2014 fell well outside that period (exactly 20 years to the day). Further, no argument was available for Mr Halime to seek an extension of time to the prescribed limitation period as the Convention and the Act do not provide for such a process.

CommentsThe primary issues for determination in Halime (i.e. the recoverability of damages for pure psychological injury and the application of the two year limitation period for Convention claims) are ones that arise frequently in the context of aviation related claims and litigation. The Court’s endorsement in Halime of the now reasonably well-settled position in Australia is to be welcomed by airlines and their insurers.

Interestingly, the flight that was the subject of the claim in Halime was the same as that which gave rise to much earlier proceedings in Kotsambasis v Singapore Airlines in the mid 1990s and which ultimately came before the New South Wales Court of Appeal ([1997] NSWSC 303). That case similarly involved a claim for psychological injury, albeit by a different passenger. The Court of Appeal’s decision in Kotsambasis, in which the passenger’s claim for psychological injury was dismissed on the basis of no ‘bodily injury’, has stood as one of the seminal aviation law judgments in Australia for some years and was relied upon by the Court in Halime in similarly dismissing Mr Halime’s statement of claim. It was perhaps unexpected that this same in-flight incident would have to be revisited and considered by the Australian courts again so long after the event.

Singapore Airlines was represented by Clyde & Co’s Aviation Group in Sydney and Melbourne.

For further information, please contact Maurice Thompson and James Cooper in our Melbourne office, or Avryl Lattin in our Sydney office

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The Cape Town Convention and repossession insuranceRepossession insurance (also known as political risks insurance) is designed to protect lenders and lessors from the economic consequences of being unable to recover their financed/leased aircraft due to action or inaction of a foreign host government, where a right of recovery would otherwise be available. This insurance is provided by specialist political risk insurers.

This article seeks to address what we believe is an innovative question: How does this insurance coverage link to the obligations of the governments of Contracting States under the Cape Town Convention? To put it another way, if the government of a Cape Town Contracting State fails to comply with its obligations under the Convention/Aircraft Protocol, can this give rise to a claim by a lender/lessor against insurers under any repossession insurance that they have taken out?

Cape Town Convention/Aircraft Protocol – relevant provisions By way of background relevant to this discussion, there are certain particular obligations that a court, aircraft registry or administrative authority of a Cape Town Contracting State are required to comply with under the Convention and the Aircraft Protocol in the scenario of enforcement and repossession, namely:

Convention Article 8

default remedies of a lender/lessor

Convention Article 13

relief pending final determination (speedy interim relief)

Protocol Article IX

modification of default remedies provisions

Protocol Article X

modification of provisions regarding relief pending final determination

Protocol Article XIII

de-registration (use of IDERA)

Taking these in turn:

Article 8 — Remedies of chargee [which means lender/lessor]

1. In the event of default as provided in Article 11, the chargee may, to the extent that the chargor has at any time so agreed and subject to any declaration that may be made by a Contracting State under Article 54 [this relates to (a) disapplying any self-help rules and requiring a creditor to apply to and proceed through the courts, and (b) disapplying any right to grant a lease), exercise any one or more of the following remedies:

a) Take possession or control of any object charged to it

b) Sell or grant a lease of any such object

c) Collect or receive any income or profits arising from the management or use of any such object

2. The chargee may alternatively apply for a court order authorising or directing any of the acts referred to in the preceding paragraph [and this may be required by way of an Article 54 declaration].

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Article 13 — Relief pending final determination 1. Subject to any declaration that it may make under

Article 55 [which would be a declaration disapplying this provision], a Contracting State shall ensure that a creditor who adduces evidence of default by the debtor may, pending final determination of its claim and to the extent that the debtor has at any time so agreed, obtain from a court speedy relief in the form of such one or more of the following orders as the creditor requests:

a) Preservation of the object and its value

b) Possession, control or custody of the object

c) Immobilisation of the object

d) Lease or, except where covered by sub-paragraphs (a) to (c), management of the object and the income therefrom

2. In making any order under the preceding paragraph, the court may impose such terms as it considers necessary to protect the interested persons in the event that the creditor:

a) In implementing any order granting such relief, fails to perform any of its obligations to the debtor under this Convention or the Protocol

b) Fails to establish its claim, wholly or in part, on the final determination of that claim

Article IX — Modification of default remedies provisions1. In addition to the remedies specified in Chapter III

of the Convention, the creditor may, to the extent that the debtor has at any time so agreed and in the circumstances specified in that Chapter:

a) Procure the de-registration of the aircraft

b) Procure the export and physical transfer of the aircraft object from the territory in which it is situated

5. The registry authority in a Contracting State shall, subject to any applicable safety laws and regulations, honour a request for de-registration and export if:

(a) The request is properly submitted by the authorised party under a recorded irrevocable deregistration and export request authorisation

(b) The authorised party certifies to the registry authority, if required by that authority, that all registered interests ranking in priority to that of the creditor in whose favour the authorisation has been issued have been discharged or that the holders of such interests have consented to the de-registration and export

Article X — Modification of provisions regarding relief pending final determination1. This Article applies only where a Contracting State

has made a declaration under Article XXX(2) and to the extent stated in such declaration

2. For the purposes of Article 13(1) of the Convention, “speedy” in the context of obtaining relief means within such number of working days from the date of filing of the application for relief as is specified in a declaration made by the Contracting State in which the application is made

3. Article 13(1) of the Convention applies with the following being added immediately after sub-paragraph (d):

“(e) if at any time the debtor and the creditor specifically agree, sale and application of proceeds therefrom”,

and Article 43(2) applies with the insertion after the words “Article 13(1)(d)” of the words “and (e)”.

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6. With regard to the remedies in Article IX(1):

a) They shall be made available by the registry authority and other administrative authorities, as applicable, in a Contracting State no later than five working days after the creditor notifies such authorities that the relief specified in Article IX(1) is granted or, in the case of relief granted by a foreign court, recognised by a court of that Contracting State, and that the creditor is entitled to procure those remedies in accordance with the Convention; and

b) The applicable authorities shall expeditiously co-operate with and assist the creditor in the exercise of such remedies in conformity with the applicable aviation safety laws and regulations.

Article XIII — De-registration and export request authorisation1. This Article applies only where a Contracting State

has made a declaration pursuant to Article XXX(1)

2. Where the debtor has issued an irrevocable de-registration and export request authorisation substantially in the form annexed to this Protocol and has submitted such authorisation for recordation to the registry authority, that authorisation shall be so recorded

3. The person in whose favour the authorisation has been issued (the “authorised party”) or its certified designee shall be the sole person entitled to exercise the remedies specified in Article IX(1) and may do so only in accordance with the authorisation and applicable aviation safety laws and regulations. Such authorisation may not be revoked by the debtor without the consent in writing of the authorised party. The registry authority shall remove an authorisation from the registry at the request of the authorised party

4. The registry authority and other administrative authorities in Contracting States shall expeditiously co-operate with and assist the authorised party in the exercise of the remedies specified in Article IX

Enforcement/repossessionIn summary, therefore, the Cape Town regime envisages the following in terms of aircraft enforcement, taking the most likely scenario into consideration:

• Application to the court to immobilise (“arrest”) the aircraft under Article X (“speedy relief”) – unless this provision has been disapplied by way of an Article 55 declaration – the Aviation Working Group requires that, for an ASU qualifying declaration, Article X be implemented in its entirety

• The application for speedy relief to be granted within the period declared by a Contracting State under Article X(2) – the Aviation Working Group requires that for an ASU qualifying declaration the relevant period be not more than ten calendar days

• If Article 54 disapplies self-help (and in most cases even if self-help is available), application to the court for an order to take possession under Article 8(a) and sell under Article 8(b)

• De-registration and procurement of the export and physical transfer of the aircraft under Article IX – “registry authority and other administrative authorities” to co-operate in the use of an IDERA if permitted under Article XXX(1) – the Aviation Working Group requires this as an ASU qualifying declaration

• Under Article X, de-registration/export shall be done in five working days

It can be seen therefore that (if all required ASU qualifying declarations have been made) the court will be involved in the application to arrest the aircraft within a period up to ten calendar days, and in ordering repossession and sale of the aircraft; the registry authority will be involved in the process of de-registration, complying with an IDERA within five calendar days; and “other administrative authorities” will be involved in the export of the aircraft, also within five calendar days.

The question therefore arises: what if the court and/or the registry and/or other administrative authorities such as customs authorities fail to comply with their duties? Can a financier/lessor in such circumstances have recourse to its political risk repossession insurers?

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LSW147Turning to the specific terms of an example of a standard market policy LSW147 (Repossession of Leased Equipment), the relevant insured perils are set out as:

a) Confiscation, seizure, appropriation, expropriation, nationalisation, restraint, detention or requisition for title or use of the Insured Equipment by the Foreign Government

b) Refusal or failure of the Foreign Government to allow the Assured to exercise its rights to repossess the Insured Equipment

c) Refusal or failure of the Foreign Government to allow the Assured to remove the Insured Equipment from the Foreign Country following the Assured’s exercise of its rights to repossess the Insured Equipment

d) Refusal or failure of the Foreign Government to allow the Insured Equipment to be deregistered from the aviation register of the Foreign Country following he Assured’s exercise of its right to repossess the Insured Equipment

e) Refusal or failure of the Foreign government, following a compulsory sale or other compulsory disposal or divestiture of the Equipment in the Foreign Country, to allow the Assured to obtain the proceeds of sale, disposal or divestiture in United States dollars

in each case provided that the action by the Foreign Government is effective for a period not shorter than the applicable Waiting Period (which is a number of days as agreed with the underwriters and set out in the policy).

It seems that (b) to (d) have corresponding provisions in the Convention/Protocol, as described above. Put another way, if the Foreign Government did take steps to prevent a lender/lessor from taking advantage of its Convention/Protocol rights, then that could constitute a loss under the policy.

With regard to the Waiting Period, under LSW147 this commences upon the underwriters being notified by the Insured “of an event likely to give rise to a claim…” (other policies differ in their wording as to when the waiting period commences). An Insured Peril must therefore have occurred for such notification to be given (or it is “likely” that such Insured Peril will occur). Taking the starting point of an attempted arrest of the aircraft, given how important it is in these cases to obtain a quick order from the relevant courts to prevent the debtor from moving an aircraft out of the jurisdiction, it could reasonably be argued that the failure of the relevant courts to make an order within the relevant period as stipulated by the relevant country’s declaration on ratifying the Convention/Protocol (the recommended period being ten days) would effectively constitute a failure of the Foreign Government to allow the lender/lessor to exercise its rights under the Convention/Protocol and should therefore trigger the Waiting Period. This would not trigger payment under the policy, though – because of the “wait and see” rule it is necessary to wait until the end of the Waiting Period to determine if such failure of the relevant courts has a direct causal impact on the loss (provided that if the underwriters are satisfied that there is no reasonable prospect of the action by the Foreign Government being reversed or cancelled during the Waiting Period then the underwriters will pay the Agreed Value upon being so satisfied). Contrast the position in a jurisdiction which has not ratified the Convention/Protocol, which may not stipulate in its procedural rules how long the court may take in deciding to issue an arrest warrant for the aircraft: in such circumstances the Waiting Period would not commence until the court had actually refused to make the relevant order.

This is largely uncharted territory and an important issue in this will be the extent to which the actions of the foreign courts may be deemed to be actions of the Foreign Government. In a country where Montesquieu’s classic tripartite political system applies (or an appropriate variation thereof) the judiciary is supposed to be separate from the legislature/executive, and it is difficult to see in such a country how a court refusing to

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grant an application constitutes a refusal or failure by a Foreign Government. In our view it would be necessary to demonstrate that the court has been swayed by political influence or political considerations.

Different considerations apply to the actions of the relevant aircraft registry and “other aviation administrative authorities” (to use the phrase from the Convention), for example customs bodies – it should be more straightforward to argue that these are limbs of the Foreign Government (LSW 147 refers to “[a] governmental authority…[exercising] effective executive control…”). Perils (c) and (d) of LSW147 therefore appear to have the strongest direct link with the Convention/Protocol, in relation to de-registration and export under Article IX within five working days under Article X. One can envisage a scenario where de-registration/export is not achieved within five working days (which, incidentally, is a very ambitious timeframe) with this triggering the commencement of the Waiting Period and all parties having then to “wait and see” if the aircraft is de-registered and exported before the expiry of the Waiting Period. In theory no court action should be required in the area of de-registration/export (apart from of course any initial court order permitting the lessor to exercise its rights of repossession).

An exampleBy way of example of an application for speedy interim relief (“arrest”) in a country which has ratified the Cape Town Convention/Aircraft Protocol including Article X in its entirety and with the Article X(2) period being ten calendar days, in circumstances where a lessor has taken out repossession insurance under LSW147 terms that includes a Waiting Period of 60 calendar days commencing on the day that the lessor gives notice to the underwriters that an event has occurred that is likely to give rise to a claim:

Day 1 Lessee has failed to make a rental payment/grace period expires

Day 2 Lessor applies for speedy interim relief

Day 13 The court has not reached a determination

Lessor gives notification to the underwriters

Day 15 The aircraft leaves the jurisdiction

Day 20 The court grants interim relief – but too late as the aircraft is now inaccessible

Day 73 The aircraft has not returned; the waiting period expires; lessor claims the Agreed Value against underwriters arguing that the reason that the court delayed in reaching a decision was because the lessee is government controlled and the court was conferring with the country’s ministry of transport.

One can envisage many scenarios along these lines; as mentioned this is uncharted territory and it cannot be said with certainty that the above would apply, but this brief example should give a flavour of the sort of issues that may arise.

ConclusionThere is much commentary on the Cape Town Convention and the Aircraft Protocol in the aircraft finance world but we have seen little discussion of the linkage between the Convention/Protocol and aircraft insurance. We offer up this brief case study in anticipation that it may engender further consideration of this aspect of the Cape Town treaty.

For further information, please contact Mark Bisset in our London office

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AVN67B/C: Observations from the lessor/lender perspective:1. Breach of warranty or breach of exclusion?

2. Total loss – “sole loss payee”

3. Partial loss – consultation with the Contract Party?

4. Agreed Value

5. Contract Parties’ rights to claim the full Agreed Value

6. The duration of AVN67B coverage

7. Duty of disclosure of Contract Parties

IntroductionIn commercial aviation insurance, lessor/lender interests are usually insured by adding the relevant entities as “additional insureds” under the airline’s hull and liability policies by way of an endorsement. An endorsement is essentially a written document attached to an insurance policy that modifies the policy by changing the coverage under the policy. An additional insured is a party that is not automatically insured under the policies, but to whom the principal insured (ie, airline) wishes to extend coverage. Such coverage can be on the same terms as applicable to the airline, or on special terms, the most commonly used being AVN67B and, to a lesser extent, AVN67C.

AVN67B/C is a significant “standalone” endorsement and is widely used in the industry. AVN67B/C creates (almost) a ‘policy within a policy’ for the lessor/lender, who are added to the airline’s policy as additional insureds (or, using AVN67’s words, “Contract Parties”) with special protections, e.g. “breach of warranty”, as discussed below.

1. Breach of warranty or breach of exclusion?AVN67B/C contains a form of “breach of warranty” protection so that, if insurers are entitled to deny coverage to the airline as a result of the airline breaching a term of the policy or being guilty of material misrepresentation or non-disclosure, insurers cannot also deny coverage to the lessor/lender provided that the lessor/lender had nothing to do with the relevant breach or conduct.

The relevant clause states:

The cover afforded to each Contract Party by the Policy in accordance with this Endorsement shall not be invalidated by any act or omission (including misrepresentation and non disclosure) of any other person or party which results in a breach of any term, condition or warranty of the Policy PROVIDED THAT the Contract Party so protected has not caused, contributed to or knowingly condoned the said act or omission. (emphasis supplied)

(clause 3.2 in AVN67B/C and clause 5 in AVN67B/C (Hull War))

This is a major concession in favour of the lessor/lender because it will be a rare case when the proviso will apply, so insurers effectively waive their coverage defences (up to the value of the lessor/lender’s interest in the aircraft).

However, AVN67B/C also provides:

The Contract Party(ies) are covered by the Policy subject to all terms, conditions, limitations, warranties, exclusions and cancellation provisions thereof. (emphasis supplied)

Hence, the Contract Party receives the same coverage as that afforded to the principal insured airline i.e. it receives the benefit of the same insuring clauses but is also subject to all the exclusions from coverage.

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By way of example, in a straightforward hull all risks policy, if the “Situation” section of the policy excludes loss occurring in specified countries (apart from overflight and force majeure), then any loss occurring in those specified countries will not be covered. It is simply a matter that the specific peril is not insured, so there is no coverage for this type of loss. In this scenario, a Contract Party cannot recover: it can recover no more than the principal insured can recover (i.e. nothing).

In other words, one has to draw a distinction between, on the one hand, the extent of the cover which is provided by the policy (i.e. its insuring clauses and the exclusions thereto) and, on the other hand, acts or omissions by the principal insured airline which cause a breach of the terms of the policy. In the former case, a Contract Party is subject to all of the policy’s exclusions, and AVN67B/C does not afford to the Contract Party coverage any wider than that contained in the policy. In the latter case, if there is coverage, then the Contract Party is not prejudiced by any act or omission by the principal insured which may constitute a breach by the principal insured of the terms etc. of the policy.

This may seem unfair on the Contract Party, but it is one of the reasons for the purchase of comprehensive contingency insurance.

To illustrate the above within the context of a transaction document:

5.1 General Indemnity

5.1.1 The Borrower must, as an independent obligation, indemnify each Indemnitee for any Loss which that Indemnitee incurs or suffers:

(iii) In relation to an act or omission which invalidate or renders void any of the Insurances or results in applicability of an exclusion clause under any of the Insurances with the result that the Indemnitee is unable to claim for such Loss (or part thereof) under the Insurances…

i.e. an act or omission of the borrower airline resulting in the applicability of an exclusion would not invalidate or render void the insurances, but nevertheless would result in the insurances not responding.

2. Total loss – “sole loss payee”In respect of total loss of the aircraft, AVN67B/C provide that the insurance proceeds shall be paid “to, or to the order of the Contract Party(ies)”; there is no reference to “in accordance with the Contract(s)”. Thus, AVN67B/C provide that the Contract Party(ies) decide who shall receive the insurance proceeds.

Where there are multiple Contract Parties with different interests (e.g. senior lender, junior lender, intermediate lessor, owner trustee, airline sublessor, etc.), the Contract Party with the right to receive the agreed value in the event of a total loss often will require the words “as sole loss payee” to be inserted next to their name in order to (seek to) protect this right from other insureds that may have standing to claim under the hull insurance. For example:

Contract Party(ies):

1. MSN 1234 Lessor Limited (as lessor)

2. ABC Bank AG (as lender, security trustee and sole loss payee)

Alternatively, we have developed more detailed wording to achieve this purpose as follows:



2. ABC Bank AG (as lender and security trustee) (for the purposes of paragraph 1.1 of this Endorsement ABC Bank AG shall be sole loss payee for claims payable on the basis of a Total Loss...

Since this additional wording goes beyond defining the Contract Parties (and so goes beyond AVN67B/C) it is sometimes challenged by brokers on the basis that e.g. the Contract(s) will determine who is entitled to be paid the agreed value in the event of a total loss in this context. However, as mentioned, AVN67B/C does not refer to the Contract(s) but instead states that

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“settlement shall be made” (i.e. the agreed value will be paid) “to, or to the order of, the Contract Party(ies).”

In practice, insurers will require a deed of release signed by all insureds with standing to claim under the hull insurances, and this will include all Contract Parties insured under the hull insurance – not only the Contract Party specified as sole loss payee. Thus, in practice, the airline (as principal insured) and any Contract Party (excluding Contract Parties insured for legal liability only) that is not specified as “sole loss payee” could interfere with payment of the agreed value on a total loss.

To the extent that the principal insured airline or another Contract Party (e.g. an airline sublessor or another transaction party e.g. junior lender) sought to interfere in payment of the agreed value to the Contract Party entitled to receive it and/or refused to sign the aforementioned release, the Contract Party specified as sole loss payee could sue insurers for payment of the agreed value on the basis that (1) the policies provided that it is the sole loss payee for total loss, and (2) there is no legal or contractual requirement for them to sign a release. With this is mind, we consider that our more detailed wording above (“for the purposes of paragraph 1.1 of this Endorsement ABC Bank AG shall be sole loss payee for claims payable on the basis of a Total Loss”) is preferable to “sole loss payee”.

3. Partial loss – consultation with the Contract Party?In respect of partial loss (i.e. repair claims), AVN67B/C provide that insurance proceeds shall be paid to such party “as may be necessary to repair the Equipment unless otherwise agreed after consultation between the Insurers and the Insured and, where necessary under the terms of the Contract(s), the Contract Party(ies).”

As regards damage to aircraft, it is common for lease/loan agreements to restrict the airline’s access to proceeds of insurance in respect of a claim with a value that exceeds a certain threshold instead, for example, requiring such payments to be made directly to lessor or, with lessor’s prior consent, to a repairer against receipted invoices.

This is inconsistent with AVN67B/C, which presumes that repairs will be made and would require insurers to agree to the insurance proceeds being paid instead to the Contract Party lessor/lender. The requirement for consultation with the lessor/lender is in respect of such presumed payment to repairers, and is only a right to be consulted. Moreover, many lease/loan agreements do not contain an express right on the part of the lessor/lender to be consulted as contemplated by AVN67B/C (rather they simply dictate the position as between lessor and lessee), so insurers could take the view that they need not consider the lessor/lender’s requirements.

Again, in practice, insurers would not normally pay a hull claim without a release and discharge agreement signed by all insureds i.e. the principal insured airline and all Contract Parties in respect of the hull insurance.

The issue can be addressed by adding wording along the lines of the following:



2. ABC Bank AG (as lender and security trustee) (for the purposes of paragraph 1.1 of this Endorsement: (i) ABC Bank AG shall be sole loss payee for claims payable on the basis of a Total Loss; and (ii) in respect of any other claim, Insurers note that settlement shall not be made with the Insured or its affiliates otherwise than in reimbursement for repairs actually performed against appropriate receipted invoices, and provided that no Event of Default (as defined in the Contract(s)) has occurred)...

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This wording also seeks to address insolvency risk so that insurance proceeds for repairs are only paid in reimbursement for work done. The wording can be tailored to fit the provisions in the relevant lease/ loan agreement.

Again, since this additional wording is not part of AVN67B/C it may be resisted by brokers and/or open to challenge.

4. Agreed ValueLease/loan agreements will require that the hull insurance in respect of the aircraft be effected on an “agreed value” basis, i.e. on total loss the amount payable as insurance proceeds will be the pre-agreed value specified by the lessor/lender (a ‘valued’ policy), not the market value as at the date of loss (an ‘unvalued’ policy).

AVN67B/C does not refer to any agreed value, and it is essential that the agreed value is specified together with the details of the Equipment, for example:

Equipment (Specify details of any aircraft, engines or spares to be covered):

One (1) Airbus A320-200 aircraft with manufacturer’s serial number 1234 and registration mark G-ABCD with a hull agreed value of USD 33,000,000.

As well as specifying the agreed value of the Equipment, the hull insurance policies themselves should be underwritten on an agreed value basis. Thus, the certificate of insurance first should certify the hull insurance as being “on an agreed value basis” before going on to specify the agreed value of the particular item of Equipment.

5. Contract Parties’ rights to claim the full Agreed ValueWhere the Contract Party is the lessor and owner of the aircraft, clearly it will have an insurable interest in the aircraft and, in the event of a total loss, the lessor/owner will be entitled to recover the full agreed value pursuant to paragraph 1.1 of AVN67B/C (assuming that an agreed value was specified).

Where the Contract Party is a mortgagee the position is different. It is important to note that hull insurance is property insurance and, under English law, a mortgage transfers legal title to the aircraft to the mortgagee subject to the mortgagor’s equity of redemption (that the mortgage is released on repayment of the sums it secures). Absent a proprietary right in the insured aircraft a mortgagee/Contract Party may encounter difficulties if insurers take a coverage position on the basis of lack of insurable interest sufficient to establish a claim under a policy of first party property insurance.

Assuming the mortgagee has lent money to the principal insured airline (directly or indirectly) and the owner (mortgagor) has granted a security (mortgage) interest to the mortgagee, it has been held that (1) the mortgagee has an insurable interest in the property in question and (2) the insurance is an insurance of the mortgagee’s security (the aircraft), not of the debt.

Accordingly, at common law, if the security is lost, a mortgagee can recover the full agreed value. This is supported by paragraph 1.1 of AVN67B/C: “In respect of… a Total Loss… settlement shall be made to, or to the order of, the Contract Party(ies).”

However, section 14 of the Marine Insurance Act 1906 (set out below) provides that a mortgagee’s insurable interest is in respect of any sum due under the mortgage and a long line of English cases have held that, where insurance is taken out by those with a limited interest in the subject-matter insured, they are entitled to recover in full provided that any monies recovered in excess of such limited interest (i.e. the indebtedness) will have to be paid to the owner. In a mortgage situation, the mortgagee will hold the surplus over and above the outstanding indebtedness on trust for the mortgagor pursuant to an equitable concept often referred to as a “commercial trust”.

14 Quantum of interest.

1) Where the subject-matter insured is mortgaged, the mortgagor has an insurable interest in the full value thereof, and the mortgagee has an insurable interest in respect of any sum due or to become due under the mortgage…

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6. The duration of AVN67B coverageIn respect of AVN67B, it is undecided under English law when the insurance coverage provided under that endorsement terminates. This issue arises when the leasing of the aircraft has been terminated early by the lessor.

AVN67B provides that the Contract Parties are additional insureds on the airline’s policies:

…with respect to losses occurring during the period from the Effective Date until the expiry of the Insurance or until the expiry or agreed termination of the Contract(s) or until the obligations under the Contract(s) are terminated by any action of the Insured or the Contract Party(ies), whichever shall first occur… (emphasis supplied)

The Effective Date will be specified in the AVN67B endorsement and certificate of insurance; for example, as the date of delivery under the relevant operating lease. The coverage then continues until the earlier of policy expiry, expiry or agreed termination of the Contract(s) or the obligations under the Contract(s) are terminated by any action of the Insured or the Contract Party(ies).

It is the last of these three limbs that has proven to be problematic, i.e. the obligations under the lease agreement are terminated by any action of the lessee or the lessor (of course, operating leases will not normally allow the lessee to terminate the lease).

As to the relevant “action”, if, due to non-payment of rent and/or other events of default, the lessor terminates the leasing of the aircraft under the lease and demands return of the aircraft, the issue is whether that termination of (leasing under) the lease is a termination of “the obligations under the Contract(s)”.

Clearly it is important that the lessor/financier has certainty as to when its AVN67B coverage under the airline’s policy ceases in order that the lessor/financier can ensure its own insurances are in effect (usually under a separate possessed/contingency policy in the name of the lessor/financier).

Moreover, if the lessor terminates the leasing of the aircraft and the lessee then refuses to return the aircraft, the issue will be whether the failure to return occurred (see Note 1 below) after “the obligations under the Contract(s) [have been] terminated” and therefore after the expiry of the AVN67B coverage. AVN67B does not exclude loss resulting from “theft” or deprivation of possession by a co-insured (see Note 2 below); in principle such loss could be an insured physical loss of the aircraft suffered by a Contract Party (subject to review of policy terms).

As mentioned, the issue is undecided under English law and the two competing interpretations are as follows:

1) That the AVN67B coverage terminates following the lessor serving a notice of termination of the leasing of the aircraft; or

2) That the AVN67B coverage terminates once the aircraft has been returned to lessor, following lessor serving a notice of termination of the leasing of the aircraft.

Thus, in insurance coverage disputes involving AVN67B, a failure to return leased aircraft and a claim by the Contract Party for total loss by way of theft or dispossession/deprivation of possession, insurers may argue that (1) above is correct because lessor’s notice of termination of the leasing of the aircraft ended the relationship of lessor and lessee on which the granting of cover under AVN67B was premised. Moreover, that the effect of such a termination is to discharge all future obligations which remain executory (for both lessor and lessee) with accrued rights (based on earlier defaults) surviving such termination. Of course, the lessor will not be entitled to demand return of the aircraft until lessor has served a notice terminating the leasing of the aircraft, and such termination would not relieve the lessee from the obligation to return the aircraft. Insurers tend to view such claims as private contractual risk of lessor viz. the lessee and may not readily pay the indemnity to the Contract Party. On the other hand, the lessor/Contract Party

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will be bound to argue that cover continued until all of the parties’ respective obligations under the lease were discharged by performance or release; of these the obligations to return the aircraft and to insure the aircraft until such return are paramount and so it is logical and appropriate that the AVN67B cover continues until the aircraft is returned. Since leases will contain many obligations that survive early return of the aircraft (e.g. indemnities), it could be argued that the lessee’s obligations are never fully terminated, however this of course could not be what is intended by the words of AVN67B – the difficulty is determining which is the relevant obligation that, once terminated, has the effect of terminating the AVN67B cover.

AVN67C addressed this issue by providing that the Contract Parties are additional insureds on the airline’s policies:

…with respect to losses occurring during the period from the Effective Date until (i) the date and time at which the Insurance expires or, if earlier, (ii) the date and time at which the Insured has no further obligation to insure the Equipment under the Contract(s), as notified in writing by the Designated Contract Party to the Insurers (via the Appointed Broker, if any) (such notification to be given promptly and in any event within 30 days after such date) … (emphasis supplied)

However, AVN67C is not as widely used as AVN67B.

Note 1: A “losses occurring” policy will indemnify the insured for loss or damage occurring during the policy period, and the time when the Insured submits the claim is not relevant (subject to any prompt notification of claims conditions, etc.). In contrast, a “claims made” policy needs to be in force at the time the Insured finds out that there is possible claim. Airline aviation insurance policies underwritten out of London are on a “losses occurring” basis.

Note 2: Contrast this with the position under AVN67C which includes the following, new clause 3.3: Nevertheless, no Contract Party shall be entitled to claim a loss or alleged theft of the Equipment under the hull insurances by reason of the actual or alleged dispossession or refusal or failure to redeliver the Equipment by the Insured or any other Contract Party, but this shall not exclude any claim by a Contract Party by reason of loss of or damage to the Equipment (other than loss by such theft) during the period of this Endorsement.

7. Duty of disclosure of Contract PartiesWhether a Contract Party is under a separate duty of disclosure has not been tested in the courts. It is likely to be a complex question that will turn on the facts, policy wording and governing law of the particular case. We make the following observations as a matter of English law:

1) The starting point is that, absent an express waiver of the duty (there is none in AVN67B/C) there is nothing to displace the duty of disclosure implied by operation of law. On the other hand, it could be argued that AVN67B/C is exhaustive.

2) Paragraph 3.2 of AVN67B/C contemplates a Contract Party causing, contributing to or knowingly condoning an act or omission (including misrepresentation and non-disclosure) of any other person which invalidates cover under the policy, in which case that Contract Party will not benefit from the “breach of warranty” protection in that paragraph. But this refers to the Contract Party’s conduct in respect of an act or omission by another insured.

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3) It must be that the insurers will rely on the principal insured/the airline for disclosure of all material facts relating to the airline and its operation etc. of the aircraft. Therefore, if the Contract Party is under a duty of disclosure it is likely to be a limited duty. Any such duty may be limited to (A) matters that are exclusively within the knowledge of the Contract Party (i.e. not known by the principal insured) and which the Contract Party knows or ought to know will be material information for insurers; and (B) where the Contract Party knows that the principal insured/airline has failed to disclose material information to insurers. If disclosed to insurers, would the insurers nevertheless have agreed to underwrite the risk on the same terms or at all? If not, the insurer may be entitled to avoid the policy as against that Contract Party.

4) If a Contract Party is “automatically” added to a policy mid-term and/or “automatically” included at renewal as per the expiring policy (as often is the case) then there is an argument that insurers may have waived the duty of disclosure for that Contract Party for that policy. Conversely, it could be argued that a clear and equivocal waiver would be required to displace the principle that the duty applies to each insured on renewal of the policy.

5) In practice, given the uncertainty, our view is that if a Contract Party becomes aware of a fact or circumstance in respect of the aircraft that is material to the Contract Party, it is fairly likely also to be material to insurers and so the Contract Party should (A) require the principal insured/airline to confirm if they have informed their insurers and, if

not, to do so and (B) make independent disclosure to the brokers if the principal insured/airline fails to do so (such disclosure to be without prejudice to whether the Contract Party is under an obligation to do so).

The above is an extract from Aviation Insurance, Issues in Law and Practice from the Lessor/Lender Perspective (2014 Edition), published by the firm and made available to clients.

For more information, please contact Richard Sharman in our London office

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Pure mental harm arising from damage by aircraft – proposed changes to laws in AustraliaThe Victorian Government has recently endorsed a recommendation of the Victorian Competition and Efficiency Commission to amend existing state laws to limit the circumstances in which damages for mental injury caused by an aircraft to persons or property on the ground are recoverable, thereby significantly bringing those laws into line with the position at a national level in Australia.

In mid-2013, the Victorian Competition and Efficiency Commission (VCEC) was tasked with undertaking a wide ranging inquiry into aspects of the Wrongs Act 1958 (Wrongs Act), the primary source of tort laws in Victoria. The terms of reference for the inquiry included a review of the existing strict liability regime in Victoria governing damage caused by aircraft to a person or property on the ground.

Like many other countries, Australia has in place a legislative framework prescribing the circumstances in which third parties may claim compensation for damage caused by an aircraft on the ground (often referred to as ‘surface damage’). Such considerations were again brought to the forefront with the fatal crash of a light aircraft into residential property in a suburban area of Melbourne on 14 October 2014.

Historically, Australia’s laws on surface damage have comprised an inconsistent patchwork of statutory regimes at Commonwealth, state and territory levels. Steps were taken in recent years to remedy those inconsistencies and thereby offer more certainty to the market, principally via the enactment of Commonwealth legislation in the form of the Damage by Aircraft Act 1999 (DBA Act). The DBA Act had the stated objective of bringing about national uniformity and was designed to remove the uncertainties and inefficiencies that had previously undermined the strict liability regimes across Australia. In substance, the DBA Act imposes strict and unlimited liability on the owner or operator (as defined by the Act) of an aircraft if a person or property has suffered personal injury, loss of life, material loss, damage or destruction caused by an impact with either an aircraft in flight, part of an

aircraft while in flight, anything that dropped or fell from an aircraft in flight, or otherwise something that is a result of an impact of that kind.

In March 2013, important amendments were made to the DBA Act which were largely prompted by the High Court of Australia’s decision in ACQ Pty Limited v Cook; Aircare Moree Pty Limited v Cook [2009] HCA 28. Those changes consisted of:

a) Excluding liability for mental injury unless the claimant has suffered other personal injury or property damage

b) Recognising contributory negligence by allowing a reduction of damages where the claimant was partly responsible for the injury or loss

c) Allowing respondents a right to seek contribution from others who caused or contributed to the injury or loss

The wide scope of application of the DBA Act, coupled with the broad legislative powers of the Commonwealth, means that the vast majority of aircraft operations in Australia (including all international and interstate flights, as well as most intrastate flights operated by a corporate owner and/or operator) are covered by the DBA Act. This leaves only a relatively small set of operations, namely intrastate flights where the owner or operator is not a corporation and/or where the flight in question does not otherwise fall within one of the Commonwealth’s legislative powers, which in turn are governed by the corresponding state legislation. In the case of Victoria, that consists of section 31 of the Wrongs Act.

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Inconsistencies between the Commonwealth and Victorian regimesLike the DBA Act, the Victorian Wrongs Act adopts a strict liability approach to surface damage claims. There remain, however, significant inconsistencies between the operative provisions of the two pieces of legislation, including:

a) Unlike the DBA Act (post the 2013 amendments), the Wrongs Act does not limit liability for mental injury to those circumstances where it is accompanied by other personal injury, loss or damage

b) While both regimes now recognise the right to contribution and contributory negligence, the wording adopted in the respective provisions is not consistent

c) There are differences in the way in which each Act deals with the definition of ‘operator’

d) Under the DBA Act, claims are unlimited, whereas claims brought under the Wrongs Act are subject to a monetary cap as well as certain ‘significant injury’ thresholds

The need for greater consistency between the Commonwealth and Victorian provisions was an issue raised in a number of submissions made to the VCEC in the course of its inquiry. Concerns at a practical level included the unavailability of insurance cover for strict liability for pure mental injury, potential exposure to expensive litigation and a wider class of claimants in terms of pure mental injury claims, and uncertainty in assessing risk generally. Those concerns ultimately formed a significant part of the VCEC’s considerations in that context.

The VCEC’s recommendationsThe VCEC completed its inquiry in early 2014 and issued a final report in which it made various recommendations in respect of each item of its terms of reference. As regards the appropriateness of the existing regime in Victoria for damage caused by aircraft, the VCEC made the following key findings:

• It made a formal recommendation that section 31 of the Wrongs Act be amended to provide that damages for mental injury caused by an aircraft accident are only recoverable under the strict liability regime if the mental injury is accompanied by personal or property damage caused by the aircraft. Claims for pure mental injury would therefore be excluded. This amendment would, in effect, bring the Wrongs Act significantly into line with the DBA Act, thereby (in the VCEC’s view) creating greater commercial certainty to the risk assessment of potential mental injury claims

• It otherwise supported the continued application of strict liability for surface damage claims on the basis that its removal would otherwise lead to adverse efficiency and equity impacts, such as inconsistencies in the availability of compensation for victims under each regime

In September 2014, the Victorian Government issued its response to the VCEC’s recommendations, which included support for the proposed amendment to section 31 of the Wrongs Act limiting the recoverability of damages for mental injury. The Victorian Government’s full response is available on its website.

The proposed amendment to section 31 of the Wrongs Act will see that the Victorian regime is brought significantly into line with the national regime under the DBA Act on the issue of liability for

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mental injury claims arising from surface damage by aircraft. While the Victorian regime applies only to a comparatively small percentage of aircraft operations within Victoria, the Government’s foreshadowed legislative change is nonetheless a welcome one and will no doubt aid in bringing about certainty for those aircraft owners and operators (and their insurers) affected by it. It is important to note, however, that inconsistencies remain between the state and national regimes, both in terms of the wording adopted in the operative provisions and on other substantive issues (such as the monetary cap and significant injury threshold that forms part of the Victorian legislation). Those inconsistencies should continue to be taken into account when assessing liability risk and potential exposure for incidents of this nature.

Next stepsThe initial forecast from the Victorian Government was for legislation implementing the amendment to section 31 of the Wrongs Act (together with a number of the other recommendations made by the VCEC) to be brought before Parliament in early 2015. The change in government following the Victorian state election held in late November 2014 may delay that process, but the proposed amendments are still expected to gain sufficient support to0 pass through Parliament in due course.

For further information, please contact Maurice Thompson or James Cooper in our Melbourne office

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