Legal overview of China’s international air freight industry

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The Montreal Convention is an international air carriage convention introduced by the International Civil Aviation Organization in 1999, which took effect in China (and Macau) on 31 July 2005, automatically superceding its predecessor the Warsaw Convention. The Hong Kong SAR government also became a signatory on 15 December 2006. The convention governs only international carriage in which of the points of both departure and destination, with or without a break in carriage or a trans-shipment, are situated either within the territories of two party states, or within the territory of a single party state if there is an agreed stopping place within the territory of another state, even if that state is not a party state.

Under Article 142(2) of the PRC General Principles of Civil Law, any inconsistencies between international treaties to which China is a party and the Chinese civil law should be resolved in favour of the international treaties. The Montreal Convention is therefore the governing law relating to international air carriage of goods in China.

Chen Weidong Senior Partner Dacheng Law Offices
Chen Weidong
Senior Partner
Dacheng Law Offices

Application of the convention

In practice, the Montreal Convention has been applied only a handful of times by Chinese courts. One of these was in the case of Geologistics v. Societe Air France and others. Geologistics is a logistics service provider. In September 2005, it was commissioned by engine-maker General Electric to transport an aircraft engine from London to Shanghai. It hired Air France to transport the goods. The master air waybill listed the consignor as Geologistics and the consignee as a Shanghai-based logistics service provider named Donghuan. The house air waybill listed the consignor as General Electric and the consignee as China Eastern Airlines. The terms on the back of both air waybills stipulated that the Warsaw Convention applied.

A first instance court in Shanghai held that the party states involved in the performance of the contract under both the Warsaw and Montreal conventions were China and Britain, while Article 55 of the Montreal Convention provided that that treaty should be applied to the transaction (notwithstanding that the air waybills specified the Warsaw Convention as the operative treaty).

Pan Rui Lawyer Dacheng Law Offices
Pan Rui
Lawyer
Dacheng Law Offices

Liability of the carrier

On arrival at Pudong International Airport, the cargo was unloaded into a warehouse at the airport cargo terminal. The staff of Donghuan (the consignee stated in the master airway bill) and another party (a trucker, Puyun) then signed a notice of release which acknowledged: “the cargo is in good condition upon delivery”, after which the engine was carried by Puyun on an ordinary truck from the warehouse at the airport cargo terminal to a customs warehouse owned by Donghuan.

However, both General Electric’s terms and the air waybill stated that air-cushion suspension vehicles should have been used for any transportation of the engine by land. As a result, China Eastern Airlines, the consignee named in the house air waybill, rejected the cargo because it believed the aircraft engine was highly likely to have been damaged by being carried in an ordinary truck. As a result, General Electric arranged for the engine to be returned to Britain for testing, and demanded compensation from Geologistics for its transportation and testing costs. After making payment to General Electric, Geologistics sought to recover damages from Air France.

One of the main issues of the case was whether carriage from the warehouse at the airport cargo terminal to Donghuan’s customs warehouse was an activity for which the carrier could be held liable. Under Article 18(1) of the Montreal Convention, the carrier is liable for damage sustained in the event of, among other things, damage to cargo, provided that the event causing damage took place during the carriage by air. The meaning of “carriage by air” comprises the period during which the cargo is in the charge of the carrier and does not on its face extend to any carriage by land, sea or inland waterway performed outside an airport. However, if such carriage takes place in the performance of a contract for carriage by air, for the purpose of loading, delivery or trans-shipment, any damage is presumed to have been the result of an event which took place during the carriage by air.

In this case, the capacity in which Puyun was acting (i.e. was it in charge of the cargo on behalf of the consignee or of Air France?) should be the focus. Reports have suggested that the evidence presented by the parties on this issue, such as who paid for the transportation costs of Puyun, was inadequate. However, the court concluded that Puyun was acting as the agent of the cargo terminal, and that the cargo terminal was acting as the agent of Air France, and on this basis, the event leading to the damage to the cargo (i.e. carriage by land) undoubtedly took place during the period of the liability of the carrier.

In other cases we have handled, it was common for a consignee to commission its own forwarder to pick up cargo at the airport. In these cases, the carrier’s period of liability was usually restricted to the compound of the airport.

Extent of loss

Under the Montreal Convention, a claim involving carriage by air covers damage sustained in the event of the destruction of, or loss of, or damage to, cargo (Article 18), as well as damage occasioned by delay in carriage (Article 19). In the above case, General Electric had the aircraft engine returned and tested on the basis that damage had been caused due to improper carriage, resulting in significant transportation and testing costs.

However, after testing the aircraft engine was found to be undamaged. Air France therefore argued that transportation and testing costs were not classified as cargo damage under the Montreal Convention. The court held that the obvious neglect on the part of Air France or its agent was likely to cause damage to the cargo – the aircraft engine was returned and tested for the purpose of ascertaining whether it was damaged, and costs were incurred as a result. The cause-effect relationship was very clear, and it was obviously unreasonable for the consignor to bear the costs. As a result, the court ruled that Societe Air France was liable.

However, while the decision may be fair on its facts, its reasoning seems questionable. The Montreal Convention provides simply that compensation should be payable in the event of destruction or loss or damage. This is a fundamental concept that should not be broadly interpreted.

Chen Weidong is a senior partner and Pan Rui is a lawyer in the Shanghai office of Dacheng Law Offices

Dacheng Law Offices

Dacheng Law Offices LLP, Shanghai

3/F China Development Bank Tower

500 Pudong South Road, Shanghai

Postal code: 200120

Tel: +86 21 3872 2401

Fax: +86 21 5878 6866

E-mail:

weidong.chen@dachenglaw.com

rui.pan@dachenglaw.com

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