Incoming air cargo agreement could buffet airline insurers

The recent announcement by the International Federation of Freight Forwarders (FIATA) and the International Air Transport Association (IATA) of a new air cargo agreement and subsequent signing of a co-operation agreement is intended to herald a new era in the relationship between freight forwarders and airlines.

Date published

26/11/2016

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The new relationship will see the end of the IATA airline-controlled Cargo Agency Programme and Conference in favour of the establishment of a new shared cargo programme called the IATA FIATA Air Cargo Programme (IFACP).

The new programme means forwarders and airlines are intended to sit as equals in acknowledgment of a shift from forwarders’ traditional cargo-selling agent role to their evolving principal-to-principal relationship with airlines, while together they define and establish new operating procedures in the cargo business. Roll-out of the new programme will commence next year in Canada with the expectation the IFACP will be fully operational in 2018.

With more than 80% of transactions now performed by forwarders acting as principals, the move to principal relationships is anticipated to “diminish liability issues and reduce the risk of legal challenge going forward”, while reducing airline forwarder conflict said to be caused by ambiguous roles and terms.

Under the old agency relationship, the role of the forwarder has often been subject to legal scrutiny, particularly when issues arise as to the capacity in which a forwarder was acting in relation to a particular element or task associated with carriage. This IATA agent “dual capacity” has always been legally perplexing and, over time, has become more difficult to manage particularly from a legal liability perspective.

Clarifying liability

Another stated objective of the IFACP is to clarify the realm of legal liability between carriers and forwarders. Issues have often arisen, particularly concerning when the carriage by air commences or whether notices of complaint to the airline may be delivered to the forwarder in its capacity as agent of the carrier.

Whether these issues will be definitively resolved under the new programme will continue to depend heavily on the manner in which air waybill documentation is recorded, the true facts and circumstances associated with each contract of carriage and claim, the actual role performed by the forwarder and, not insignificantly, on what a shipper understood or was told about the carriage and its logistics.

Under IFACP, forwarders acting as principals and their consignments will be governed by the same rules of contract formation as “true shipper” consignments. For example, the carriage by air and an air carrier’s convention liability for loss, damage or delay to cargo is not intended to commence until cargo is received by the airline or its ground handling agent.

In addition to legal issues, which will remain dependent on the particulars and logistics of carriage, the newly recognised role of the forwarder as principal brings with it the reality of forwarders’ increased customer bargaining power vis-à-vis airlines, particularly with regard to cargo legal liability, claims, and payments.

With FIATA forwarders currently comprising a significant (if not the most important) segment of commercially valuable customer for airlines, traditional approaches to cargo liability and even convention applicability may well be at risk as airlines are, as a commercial imperative, forced by forwarders to approach claims from a commercial or customer relations standpoint rather than from a pure legal one.

With forwarders increasingly controlling shipper-consignee relationships and airlines’ increasing distance from originating shippers or ultimate consignees, forwarders are increasingly settling claims directly with their shipping customers without prior reference to airlines or to convention principles of legal liability, then exerting pressure on airlines to reimburse them irrespective of valid legal defences to liability or limitation of liability.

To complicate matters, the new relationship makes it increasingly difficult for carriers to verify claims and damages directly with a forwarder’s client unless the forwarder provides that information.

Forwarders increasingly threaten to (and do) shift business from carrier to carrier unless carriers pay full claimed amounts without reference to applicable law or limitation. It is not difficult to anticipate that commercial imperative and preservation of key customer relationships will likely override airline legal considerations in handling cargo claims.

Difficult decisions

Decisions must be made as to whether and how airlines will deal with (read pay) and account for payments in the absence of any legal liability and in excess of limits of liability with the knowledge that such ex gratia payments will directly affect carrier revenue and profit, as well as recoverability from underwriters if the cargo policy is applicable to a particular claim.

Air waybill deductibles aside, it is a well-settled principle of insurance enshrined in the policy that underwriters are obligated only to indemnify amounts that their insureds are legally liable to pay.

In addition to the fundamental question of whether the convention and its liability limits will remain relevant considerations in cargo claims, airlines will need to consider the effect of ex gratia payments on indemnities to which they may otherwise be entitled from other responsible parties.

Historically, IATA-based ground handling agreements or road carriage contracts allow service providers to limit liability in accordance with applicable convention limits. Voluntary payments may therefore impinge on issues related to contribution and indemnity.

This article was first published by Insurance Day on 22 November 2016.

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