Two Year Limitation Period Not Applicable to Contribution and Indemnity Claims under Montreal Convention

In a decision that could have far-reaching implications for the air freight industry, the Ninth Circuit Court of Appeals recently held in Chubb Insurance Company of Europe, S.A. v. Menlo Worldwide Forwarding, Inc., ___ F. 3d, 2011 WL 451953 (9th Cir., Feb. 10, 2011) that the two year limitation period contained in Article 35 of the Montreal Convention does not apply to suits seeking indemnity and contribution, thus permitting those actions to be commenced after the expiration of the two year limitation period under the Montreal Convention.

The facts in Chubb are fairly straightforward: in November 2004, an engineering company in New Zealand shipped a turbine engine from New Zealand to the United States, utilizing a freight forwarder which, in turn, contracted with Qantas to perform the actual carriage of the engine to its destination in Los Angeles. When the engine arrived in a damaged condition in Los Angeles on November 19, 2004, the owner of the engine filed a claim with its insurer, the plaintiff Chubb, which eventually settled the case and commenced a subrogation against the freight forwarder’s successor, UPS. Chubb argued that UPS was liable for the damage to the engine under the Montreal Convention and the parties eventually reached a settlement under which UPS paid Chubb $80,000. On September 18, 2007, nearly ten months after the two year limitation period under Article 35 of the Montreal Convention had expired, UPS filed a third-party Complaint against Qantas seeking indemnification and contribution for all or part of the $80,000 settlement it had paid to Chubb. Following established precedent in cases from both New York and California, the District Court in California dismissed the lawsuit on the grounds that it was time-barred under Article 35 of the Montreal Convention since UPS’ claims against Qantas had not been brought within two years of the date of the damaged engine’s arrival in Los Angeles. This principle of law is well established in four Federal and State Court cases in both New York and California. However, the Ninth Circuit found those cases to be “unpersuasive” and instead was guided by an Ontario Supreme Court case ruling that Article 29 of the Warsaw Convention (the predecessor to Article 35 of the Montreal Convention) did not apply to suits brought by one carrier against another.

Article 35 of the Montreal Convention provides that “The right to damages shall be extinguished if an action is not brought within a period of two years reckoned from the date of arrival at the destination . . .” The Ninth Circuit ruled that Article 35 extinguishes only a single right, the “right to damages”. The Court agreed that Chubb’s action against UPS asserted such a right to damages, but went on to hold that UPS’ third party claim against Qantas did not constitute a “right to damages” since UPS was not seeking compensation for the damage sustained to the engine; rather, UPS, as the contracting carrier with the shipper, was seeking indemnification and contribution from Qantas, the actual carrier of the goods, for such compensation as UPS has paid to the shipper’s insurance company. The Court concluded that while the Montreal Convention does not create a cause of action for indemnification or contribution among carriers, it does not preclude such actions as may be available under local law. Article 37, entitled Right of recourse against third-parties, provides nothing in the Montreal Convention shall prejudice the question whether a person liable for damage in accordance with its provisions has a right of recourse against any other person. The Court interpreted the right of recourse under Article 37 as referring to local law causes of action for indemnification, contribution, apportionment and set-off. Accordingly, the Ninth Circuit concluded that because an action between carriers for indemnification or contribution is premised on the right of recourse, rather than the right of damages, Article 35’s two year time bar did not apply and, instead, the timing of such an action of recourse was governed by local law.

The Court further went on to note that Article 35 only mandates that the right of damages shall be extinguished if an action is not brought within the period of two years. The Court noted, somewhat sophistically, that Article 35 did not require that “all actions” related to a particular event must be brought within two years. Accordingly, it found that “the plain language of the Montreal Convention makes clear that actions for indemnification and contribution are not subject to Article 35’s two- year statute of limitations.”

Simply put, the Chubb decision is a poorly reasoned decision which will have a grossly unfair impact on the airline industry. In short, it is a bonanza for air freight forwarders and their insurers. No longer can an airline be certain that it will not be subject to a claim for damages once the two year limitation period under Article 35 of the Montreal Convention has expired. A carrier must now be aware that there is a distinct possibility that litigation may be commenced against them many years after the transportation of the consignment has concluded. For example, a right of contribution or indemnity generally does not arise until a wrongdoer has paid the judgment against it. Depending on the local law, the wrongdoer may have as long as six years to file an action against the actual carrier who performed the transportation of the goods. Accordingly, the Chubb decision, at least for cases in the Ninth Circuit Court of Appeals, which comprises California and some of the western states of the United States, will now require an airline to maintain its cargo files for many years after the expiration of two years from the date the transportation stopped.

Particularly troublesome is that the Ninth Circuit disregarded four well-decided and well-reasoned decisions, going back more than a quarter of a century, which concluded that the limitation period in the Warsaw Convention, the predecessor to the Montreal Convention, applied as well to third-party actions for indemnity and contribution. The Court instead relied upon a discredited Ontario Supreme Court of Appeals decision which simply held that the Warsaw limitation period did not apply to suits brought by one carrier against the other.

The only possible step left to appeal this judgment further would be for the filing of a petition for writ of certiorari before the United States Supreme Court. Such a petition for writ of certiorari would have to be filed within ninety days from the Court’s decision of February 10, 2011. It does not seem likely, given the amount of money involved, that a certiorari petition will be filed in this case. Assuming that no further review is sought, carriers must be alert in keeping their cargo files open for at least six and possibly ten years following the date of a cargo loss, even if the carrier is not aware of any claim which has been asserted.