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THE CONTRACTUAL ALLOCATION OF
RISK
ROYAL AERONAUTICAL SOCIETY
26 JANUARY 2016
Christopher Smith, Associate
T: +44 (0)20 7264 8805
Introduction
Purpose of the provisions and drafting considerations
Drafting goals
The evolution of the standard agreement
Current Drafting Practices
Current practices
The limitations of current templates and common areas of dispute
Contractual interpretation
Areas for particular attention
An Alternative Approach
Purpose of the Provisions – Drafting Goals
Gro
und
Handlin
g A
gent
1. Commercial certainty
2. Allocation of Risk
The Evolution of the Standard Agreement
IATA SGHA – Liability intrinsically linked to the carriage by air
conventions and developments thereof.
1983
1998
2004
2008
1993
MC
•Intended to serve Carrier-to-
Carrier handling;
•Liability - Basic Proposition
still holds true today.
•Liability Standard (Article
8.1)– airline responsible for and
will hold harmless the GHA in
respect of claims, liabilities,
legal costs and expenses in
respect of passengers,
baggage, cargo, arising from
acts or omissions (including
negligence) unless done with
intent to cause damage or
recklessly and with
knowledge........
• Recognised that ground
handling is being increasingly
outsourced.
• Airline’s believe GHA should
be responsible for aircraft
damage up to deductible.
• Evolution of Liability
Standard (Article 8.5) – basic
proposition remains
unchanged, but GHAs now
liable for aircraft damage
caused by its negligent
operation of ground support
equipment, compensation not
to exceed deductible or
US$1.5m
• Reference to operation of
ground support equipment is
omitted. Simply, damage
caused by their negligent act or
omission.
• Remains as per 2004,
however, airlines'
indemnity [from GHA ] is
limited to MC99 limits
(cargo)
The Evolution of the Standard Agreement
Traditionally airlines absorbed or took responsibility for many
losses.
Airlines were traditionally in a better position to protect themselves
from these risk – insure/better quality standards and expertise.
Fewer airlines self-handling; insurance more expensive; changes in
liability regime to passengers and cargo interests.
Little justification for excluding an airline’s rights to claim against
GHAs. Unfair for airlines to bear the financial consequences when
insurance programs excluded cover for part of the damage
(deductible).
GHAs and MROs are now of a size where they can purchase
affordable insurance.
Liability is linked to international carriage by air conventions.
Standard Agreement in 2016
Intolerable clear that the SGHA is predicated on the notion that
airlines will channel the majority of the risk to Insurers. Indeed, the
standard for many agreement is to channel the majority of the risk
to Insurers.
GHAs only exposed to claims for hull damage and arising from its
own negligence, commensurate to the airlines deductible (subject to
a US$1.5m ceiling).
MROs, Distributors, Caterers etc – not uncommon to limit liability to
the value of the contract.
Current Drafting Practices
Parties can agree to contract on any terms – commercial realities,
particularly for ground handling may prove difficult depending on
local arrangements.
The SGHA is a template and can be amended.
Default position appears to reflect historic contractual position (i.e.
weighted against airlines).
Limitations of Templates and Common Areas of Dispute
“8.1 Except as stated in Sub-Article 8.5, the Carrier shall not make any claim against
the Handling Company and shall indemnify it (subject as hereinafter provided) against
any legal liability for claims or suits, including costs and expenses incidental thereto, in
respect of:
(a) delay, injury or death of persons carried or to be carried by the Carrier;
(b) injury or death of any employee of the Carrier;
(c) damage to or delay or loss of baggage, cargo or mail carried or to be carried by
the Carrier, and
(d) damage to or loss of property owned or operated by, or on behalf of, the Carrier
and any consequential loss or damage;
arising from an act or omission of the Handling Company in the performance of this
Agreement unless done with intent to cause damage, death, delay, injury or loss or
recklessly and with the knowledge that damage, death, delay, injury or loss would
probably result.
......................”
Effect of Gross
Negligence?
Limitations of Templates and Common Areas of Dispute
“8.1 Except as stated in Sub-Article 8.5, the Carrier shall not make any claim against
the Handling Company and shall indemnify it (subject as hereinafter provided) against
any legal liability for claims or suits, including costs and expenses incidental thereto, in
respect of:
(a) delay, injury or death of persons carried or to be carried by the Carrier;
(b) injury or death of any employee of the Carrier;
(c) damage to or delay or loss of baggage, cargo or mail carried or to be carried by
the Carrier, and
(d) damage to or loss of property owned or operated by, or on behalf of, the Carrier
and any consequential loss or damage;
arising from an act or omission of the Handling Company in the performance of this
Agreement unless done with intent to cause damage, death, delay, injury or loss or
recklessly and with the knowledge that damage, death, delay, injury or loss would
probably result.
......................”
Limitations of Templates and Common Areas of Dispute
“8.5 Notwithstanding Sub-Article 8.1(d), the Handling Company shall indemnify the
Carrier against any physical loss of or damage to the Carrier’s Aircraft caused by the
Handling Company’s negligent act or omission PROVIDED ALWAYS THAT the
Handling Company’s liability shall be limited to any such loss of or damage to the
Carrier’s Aircraft in an amount not exceeding the level of deductible under the
Carrier’s Hull All Risk Policy which shall not, in any event, exceed USD 1,500,000
except that loss or damage in respect of any incident below USD 3,000 shall not be
indemnified.
....................”
“Annex B - Paragraph 4. Limit of Liability
4.1 The limit of liability referred to in Sub-Article 8.5 of the Main Agreement shall be as
follows:
Aircraft Type Limit (per incident)
___A321__________________ _____USD 750,000_________
_________________________ _________________________”
Limitations of Templates and Common Areas of Dispute
"The Airport Authority shall not have any liability to the Airline or be obliged to
indemnify it in respect of:
a) indirect loss;
b) consequential losses;
c) loss of profits;
d) loss of revenue;
e) loss of goodwill;
f) loss of opportunity;
g) loss of business;
h) increased costs or expenses;
i) wasted expenditure; or
j) any other injury, loss, damage, claim, cost or expense
caused (or to the extent caused) by any act, omission, neglect or default of ours or
our employees, servants, agents or Affiliates even if such loss was reasonably
foreseeable or we had been advised of the possibility of you incurring the loss.
….. the Airline agrees to hold at all times passenger, baggage, cargo and third party
liability insurance in respect of any aircraft used or operated at the Airport …….."
Limitations of Templates and Common Areas of Dispute
Airline MRO
Limited to value
of the contract
Standard Agreement in 2016
Is this approach still fit for purpose?
Airlines are already obliged to insure against such risks. Avoids duplication of
insurance.
Gives commercial certainty that allows parties to assess exposures.
Relevance in a soft [insurance] market.
Commercial realities of negotiating on more favourable terms?
Consider the effect on a ‘just’ safety culture.
An Alternative Approach?
Knock for Knock?
- Typically found in Oil and Gas.
- A mutual hold harmless regime and indemnity provision – A agrees to
indemnify and hold harmless B for any damage to A’s property, plant,
equipment or personnel. In return, B agrees to indemnify and hold
harmless A for any damage to B’s property etc. howsoever caused.
- Unlikely to work due to imbalance in value of equipment.
Negligence based test - effective back to back and/or circular indemnities.
Lawyers for international commerce
hfw.com
