UK: Airport Service Providers Beware – The Changing Ground Handling Regime

One of the most widely used standard contracts in the airline industry is IATA’s SGHA which sets out the rights and liabilities, of airlines and airport service providers (ramp handlers, terminal services, maintenance, fuellers etc) in a standard form. Similar contracts are used by caterers.

The means of regulating the liability position between airlines and ground handling companies is the infamous Article 8. Traditionally, airlines have picked up the tab for any damage to their aircraft (or other property) or any liability in respect of passengers, employees, baggage or cargo unless these have arisen from an act or omission of the handler done with intent to cause damage or recklessly and with the knowledge that such damage would probably result. This language has a familiar ring since the words were taken from Article XIII of the Hague Protocol replacing Article 25 of the Warsaw Convention which governs air carrier liability to passengers and cargo owners.

Observers have often asked why should an airline pick up the tab for acts or omissions of its ground handling agents. One of the arguments has been that they are in a better position to protect themselves against such risks commercially and are able to purchase insurance to guard against such risks. Some commentators have argued that such a system is not only disadvantageous to airlines, it is also economically inefficient since it insulates airport service providers from responsibility for their errors and encourages a culture of carelessness.

Ground handling arrangements have, however, been evolving to the extent that it is no longer correct to argue that there is an imbalance in addressing the management of liability exposures of airlines and airport service providers.

In 1996 a significant change to Article 8 took effect, when it was agreed (Article 8.5) that notwithstanding an airline’s agreement to indemnify a ground handler in respect of damage to property (except in cases of intentional or reckless misconduct), the ground handler would indemnify the carrier with regard to damaging its aircraft where such damage was caused by its negligent operation of ground support equipment. The indemnity was limited to claims above US$3,000 but below US$1.5 million. It was somewhat ironic that, as airlines were beginning to move away from limited liability (Inter-Carrier Agreement etc), airport service providers were introducing it. However, there were good grounds for this change. There was little justification for the exclusion of an airline’s right to bring a claim for hull damage against airports and service providers, because airlines do not benefit from a limit to such a loss; and because it is unfair for airlines to bear the financial brunt of such damage when their insurance programmes also contain large hull deductibles.

In 2004, the scope of Article 8.5 was extended further to include a requirement that airport service providers agree to indemnify airlines in respect of hull damage caused by their negligent acts or omissions, irrespective of whether such acts or omissions involved the use of ground support equipment. Therefore, if, for example, there is negligence in the handling of cargo and aircraft damage is sustained, the ground handler would have to indemnify the airline for the resulting damage (up to US$1.5 million).

Proposed changes to IATA’s SGHA, which may take effect in 2008, increase further the potential liability exposure of airport service providers. It is intended that notwithstanding the obligation for airlines to indemnify airport service providers for destruction, loss and damage to cargo (except in cases of intentional or reckless misconduct), airport service providers will have to indemnify airlines against direct loss of or damage to cargo caused by the negligent acts or omissions of airport service providers in the provision of services and/or in the supply of goods but that their liability will be limited to 17 SDRs per kilo or to the actual compensation paid out by the airline, whichever is less. A rider to that proposal is that it in any event the total amount of the claim will not exceed US$1 million and that losses below US$500 will not be indemnified.

Arguably, there is some justification to this proposal in that airlines and their insurers have incurred a significant financial burden in resolving cargo claims, in many cases where such claims have arisen solely as a result of acts or omissions of airport service providers. The international air carrier liability regime, however, has entitled airlines to limit their liability to approximately US$20 per kilo except in cases of intentional or reckless misconduct, and first MAP 4 and now the Montreal Convention 1999, which is now in force in many countries, imposes an unbreakable limit of 17 SDRs per kilo for both carriers and their servants or agents. On the other hand, more efficient airport service providers with sound quality assurance practices in place may be willing to accept such arrangements in order to compete more effectively against less customer orientated airport service providers.

Parties to a ground handling arrangement can, of course, agree to be bound by whatever terms they are content with. It is interesting that most arrangements in Asia with which we are familiar are still governed by the 1998 Edition of the SGHA and there does not appear to be much appetite to change this. The position in Europe and the United States is different however and bilateral agreements may force changes elsewhere.