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Sompo Japan Insurance, Inc. v. Nippon Cargo Airlines Co.

April 11, 2008


Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 02 C 9311-Joan Humphrey Lefkow, Judge.

The opinion of the court was delivered by: Ripple, Circuit Judge


Before FLAUM, RIPPLE and WOOD, Circuit Judges.

Sompo Japan Insurance, Inc. ("Sompo"), as an insurer subrogated to the rights of Hitachi Data Systems Corporation ("HDS"), brought this action against Yusen Air and Sea Service Company ("Yusen"), Nippon Cargo Airlines ("NCA") and Pace Air Freight ("Pace"). It sought compensation for damage to computer equipment that the defendants transported from Japan to HDS's Indiana facility.*fn1 Sompo settled its claims with Yusen and Pace, but NCA proceeded to trial. After a bench trial, the district court entered judgment against NCA in the amount of $74,450.84 plus costs. NCA then timely filed this appeal, and Sompo timely filed a cross appeal that challenged the district court's denial of prejudgment interest. For the reasons set forth in this opinion, we affirm the judgment of the district court.*fn2


HDS purchased a number of computer parts from its manufacturer in Japan. HDS hired Yusen to arrange for their transportation from Tokyo to its facility in Indiana. Yusen contracted with NCA to transport the parts by air from Tokyo to Chicago's O'Hare Airport. HDS separately retained Pace to transport the goods from O'Hare to Indiana by truck.

On December 28, 2000, a portion of the shipment was damaged while the goods were in the process of being transferred from the loading dock to Pace's trucks at NCA's cargo facility at O'Hare. The undisputed value of the damaged cargo was at least $271,304. Sompo, a subrogated insurer, paid the insurance proceeds to HDS and commenced litigation against Pace, Yusen and NCA.

Before trial, however, Sompo settled its claims against Pace and Yusen for $100,000 and $8,500, respectively.

Sompo then moved for summary judgment against NCA, seeking recovery under the Warsaw Convention and Montreal Protocol No. 4. The Warsaw Convention establishes a ceiling on damages recoverable against an airline, limiting NCA's potential liability to 17 Special Drawing Rights ("SDRs")*fn3 per kilogram, or approximately $74,450.84. NCA cross-moved for summary judgment; it sought a setoff of the $108,500 Sompo had received in settlements against the limited damages allowable under the Warsaw Convention. Such a setoff, taken from the limited liability amount, would reduce any potential judgment against NCA to $0.

The district court initially granted Sompo's motion for summary judgment, denied NCA's motion for summary judgment and entered judgment against NCA for $76,923.03. After NCA moved to amend the judgment under Federal Rule of Civil Procedure 59(e), the district court vacated the judgment. It conducted a bench trial and returned a verdict in favor of Sompo. It held that NCA was entitled to a setoff of the settlement amounts under Illinois law, but the court nevertheless refused NCA's motion to apply the setoff against the limited liability amount established in the Warsaw Convention.

Rather, it applied the $108,500 setoff against Sompo's total proven damages, $271,304, reducing that amount to $167,114. The district court then entered judgment against NCA in the amount of $74,450.84 plus costs, the maximum amount allowable under the Warsaw Convention's liability cap at the time of the judgment.

NCA now seeks review of the district court's decision to apply the setoff against the total amount of proven damages rather than its limited liability amount. Sompo cross-appeals the court's denial of prejudgment interest.

A. The Warsaw Convention-History and Purpose

The Warsaw Convention*fn4 was the product of two international conferences that occurred between 1925 and 1929, while the airline industry was in its infancy. The Convention, largely a response to fears of airline carrier bankruptcy, had two primary goals: (1) to establish uniformity in the aviation industry regarding the procedural and substantive law applicable to claims arising out of international air travel; and (2) to limit air carriers' potential liability in the event of an accident.*fn5

The Warsaw Convention set out a scheme for limiting an air carrier's liability. It established a presumption of liability against the air carrier for accidents arising out of international air travel. Warsaw Convention, arts. 17-19. Potential plaintiffs received the benefit of presumptive liability against the carrier, but they also were subject to certain affirmative defenses and a strict damages ceiling. Id., arts. 20-22. The original Convention set the liability cap at $8,500 for personal injury and approximately $20 per kilogram for damage to goods, thus protecting the airlines from the risk of catastrophic damages. Id., art. 22.

As the fledgling airline industry matured, it became clear that the liability limitations of the Warsaw Convention were far too low. Largely at the insistence of the United States, the Warsaw Convention signatories reconvened in 1955 at the Hague to amend the Convention. See Paul Dempsey & Michael Milde, International Air Carrier Liability: The Montreal Convention of 1999, at 17 (2005). Among other alterations, the Hague Protocol increased the liability cap to approximately $16,500 for personal injuries. Id. at 20. The United States ultimately refused to ratify the Hague Protocol, in part because it saw the amended liability cap as still too low. Id. at 20-21.

Recognizing the harsh results of the unamended Warsaw Convention for potential plaintiffs, in 1965 the United States gave notice of its denunciation of the Convention. Id. at 29. Shortly before the denunciation was to take effect, however, a large number of private air carriers entered into an interim agreement, in which they voluntarily increased their personal injury liability limitation to $75,000. This voluntary action by the airlines became known as the Montreal Agreement.*fn6 Consequently, the United States' denunciation was withdrawn.

Efforts to modernize the Convention continued, and a number of different amendments, most notably the Montreal Protocols, were developed to address formally concerns about under-compensation for plaintiffs. In 1998, the United States ratified Montreal Protocol No. 4 ("MP4"),*fn7 which raised the liability cap for damage to cargo to 17 SDRs per kilogram. At the time of ratification, this equaled approximately $25 per kilogram. Id. at 28. The MP4 went into effect in the United States on March 4, 1999.

Prior to 2003, then, a complex interplay of conventions, treaties and domestic laws governed international air carrier liability. See Dempsey & Milde, supra, at 1-2. The Montreal Convention*fn8 (not to be confused with the MP4 or Montreal Agreement) was the product of a United Nations effort to reform the Warsaw Convention "so as to harmonize the hodgepodge of supplementary amendments and intercarrier agreements of which the Warsaw Convention system of liability consists." Erlich v. American Airlines, Inc., 360 F.3d 366, 371 n.4 (2d Cir. 2004). In May 1999, representatives of 121 nations gathered in Montreal, Canada to negotiate and adopt a new treaty that would replace the Warsaw Convention. Id. At the end of a three-week conference, the delegates approved the Montreal Convention, and fifty-two countries, including the United States, immediately signed the treaty. Id. The new treaty "unifies and replaces the system of liability that derives from the Warsaw Convention," id., explicitly recognizing "the importance of ensuring protection of the interests of consumers in international carriage by air and the need for equitable compensation based on the principle of restitution." Montreal Convention, pmbl. It establishes strict liability for personal injury claims up to 100,000 SDRs, and presumptive liability without limit above that amount. Montreal Convention, art. 21. This Convention seems to have reversed one of the premises of the original Warsaw Convention, which favored the airlines at the expense of consumers. Erlich, 360 F.3d at 371 n.4. Nevertheless, the Montreal Convention did not alter the original Warsaw Convention goal of maintaining limited and predictable damage amounts for airlines. The United States Senate ratified the treaty on July 31, 2003, and it entered into force on September 5, 2003.

In this case, the incident giving rise to Sompo's claim took place on December 28, 2000-after the ratification of MP4 but several years before the Montreal Convention became effective in the United States. Therefore, NCA's liability here is governed by the Warsaw Convention as amended by the MP4, not by the new Montreal Convention. Under Article 18 of the Warsaw Convention, NCA is presumptively liable for any damage sustained to goods while they are in the airline's custody. Under Article 22(2), ...

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