A Question of Principle: Settlement of Air cargo claims where claimant has not paid freight

by Peter Jones (Paterson, MacDougall)

Sandro Consoli of FIATA comments on the proper handling of airline claims.

FIATA has received requests from Forwarders in the South West Pacific area to comment on the practice of certain air carriers who deduct air freight due at destination from damage claims for which the carrier is responsible. The specific situation giving rise to the inquiry by the FIATA Ordinary member is as follows:

Cargo was booked with Air New Zealand, to travel from Auckland to Vancouver via Lax. On arrival In Vancouver, a carton of orange roughy fillets was missing (16kg x $18.00 = $288.00) and other products were covered in dirt and sand (4.76kg x $3.40 = $16.19). The freight amount for these items was $62.28 which brought the total amount claimed to $366.47.

Air New Zealand offered a settlement of $304.19 being the value of the cargo less the freight charges. To quote their response -

"The freight is deemed to be fully earned, whether or not cargo is lost or damaged, misdelivered or fails to arrive at the destination specified in the air waybill or shipment record".

(Ed. Note: Some air waybills contain the following clause:

"When no part of the consignment is delivered, a claim with respect to such consignment will be entertained even though transportation charges thereon are unpaid."

This clause does not directly address the issue of the amount of the settlement, but it does confirm that airlines are willing to settle claims without first insisting that the freight be paid.)

The opinion of the forwarder (as expressed by the FIATA Ordinary Member) is:

"We feel strongly that the moment the cargo is freighted, the value of the goods increases and in this instance the airline was responsible for the damage and should therefore be liable for the full costs. We intend taking the matter further as we feel that there might be a trend following, because we have received the same response from Qantas. We need to know whether we should advise our clients now of this development. We also intend taking this matter up with other freight forwarders, but would prefer to hear from you before we proceed."

In the opinion of Mr. Consoli this practice is contrary to the Warsaw Convention. In his view the air cargo rate is paid according to issued AWB or agreed rate and is not claimed if goods are damaged or lost. The maximum amount for claims is limited to SDR (special drawing rights) 17.-- per kg lost or damaged cargo, or 250 gold francs. Most countries have adopted the SDR, which can be converted into local currency using the current daily rate of exchange. If the amount claimed amount is within this limit, the carrier must pay the amount without further reduction. The carrier is not allowed to reduce the claimed amount, except it exceeds SDR 17.-- per kg. (Ed. Note: Mr. Consoli is clearly referring to claims governed by the Montreal Protocol No. 4. Neither the Warsaw Convention of the Montreal Protocol specifically refer to this issue.)

Mr. Consoli recommends that forwarders proceed as follows:

Do not accept the reduced amount the airline has offered. Every forwarder must insure its liability to its customer with an insurance company (TT-Club, Intercargo, etc.). The forwarder should, after receipt of the Damage Report issued by the carrier, submit the full claim to its insurer. The insurer will exercise rights of subrogation against the air carrier after payment of the claim. I question whether the airline would be willing to risk a court battle with the insurer. I also recommends to that the FIATA member advise its members and their insurers.

Commentary on airline claims practices by PK Liew

Dear Mr. Jones

I would like to add my comments to the air cargo claim situation referred to by Mr. Consoli.

a. Total Loss.

The clause "claim will be entertained when freight is unpaid" sounds generous but could only apply when "no part of the consignment" is delivered. Since there is nothing to take delivery, it would be silly to pay freight to the airline, right? The consignee would naturally proceed with his claim for loss with or without this clause.

However, when I was a claims adjuster many years ago, the airline for which I worked would demand for payment of the freight charges on receipt of the claim letter even though the shipment is completely missing because from it's standpoint the service had been performed, and the freight charges earned. At that time, the airline's waybill did not contain this clause.

b. Partial Loss or Damage

A consignee will have to pay the freight BEFORE he could survey and take delivery of the remaining partial or damaged cargo from the airline.

In either situation, the freight charge will be deemed earned by the airline so in (a), the airline will deduct freight from the compensation paid and in (b) they will pay your claim base on FOB invoice amount plus the pro-rated freight, but, remember, you have paid the freight to them in the first place.

Base on (b) situation for Mr. Consoli's example, the airline would collect the freight $62.28 first then survey, delivery and consider the claim for USD366.47. Eventually, when they settle the claim in full i.e. $366.47 --- the compensation is still $304.19 -- going round a big circle to arrive at the same amount.

I agree with Mr. Consoli's recommendation on taking up insurance. However, sorry to say, most shippers want to save on insurance premium and refuse to listen to us but quick to blame us when there are losses/damages

PK Liew

March 24, 2001