Opposition — Franklin Mint Corporation v. Trans World Airlines, Inc.

No. 82-1465 epee

reme Court. WS.

ED

MAY 20 1982

IN THE

| ALEXANODSR L STEVAS,

Supreme Court of the United States

OCTOBER TERM, 1982

FRANKLIN MINT CORPORATION, FRANKLIN

MINT LIMITED, and MCGREGOR, SWIRE

AIR SERVICES LIMITED,

Petitioners,

Vv.

TRANS WORLD AIRLINES, INC.,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

RESPONDENT'S BRIEF

JOHN N. ROMANS

ROBERT S. LIPTON

101 Park Avenue

New York, New York 10178

(212) 696-6000

Counsel for Respondent,

Trans World Airlines, Inc.

CURTIS, MALLET-PREVOST,

CoLtT & MOSLE

Scott J. MCKAY WOLAS

MICHAEL L. M. QUINTTUS

Of Counsel

May 20, 1983

TABLE OF CONTENTS

PRELIMINARY STATEMENT ......ccccccccccccccsscccccssceeseseves

PRIOR PROCEEDINGS BEFORE THIS COURT ..........+.

gE OEE ES CL ON ODEO

Point I—Both Franklin Mint’s and TWA'’s Peti-

tions for Certiorari Should Be

Oa be ed EO

Point II—In the Event That Both Petitions Are

Granted, TWA Should Be Treated As

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a esapibdicmeueainenianaieia

SEITINODG, viunicitincctesnpstetovenioonsbisuccvenseivenntenmupinentinpensitatt

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A-l

TABLE OF AUTHORITIES

Cases: PAGE

In re Air Crash Disaster at Warsaw, Poland on March

14, 1980, 535 F. Supp. 833 (E.D.N.Y. 1982), aff'd on

other grounds, No. 82-7616 (2d Cir. April 8, 1983) 4n.4

In re Aircrash at Kimpo International Airport, Korea

on November 18, 1980, No. MDL-482 (C.D. Cal. Feb.

15, 1983), interlocutory review denied, No. 83-8051

EE IE OED DP . csinisbsecdedense vecesceesoocesecocccevezee 3

Benjamins v. British European Airways, 572 F.2d 913

(2d Cir. 1978), cert. denied, 439 U.S. 1114 (1979) 5

Block v. Compagnie Nationale Air France, 386 F.2d

323 (Sth Cir. 1967), cert. denied, 392 U.S. 905 (1968) 5

Boehringer Mannheim Diagnostics, Inc. v. Pan Ameri-

can World Airways, Inc., 531 F. Supp. 344 (S.D. Tex.

1981), appeal docketed, No. 81-2519 (Sth Cir. Feb. 2,

ania cas cccasnenenteestonccocccose 4n.4,4

Deere & Co. v. Deutsche Lufthansa AG, No. 81 C 4726

IE ENED. cdsctctsccsocecsssscisescocsevcserqcascees 3

Franklin Mint Corp. v. Trans World Airlines, Inc., 525

F. Supp. 1288 (S.D.N.Y. 1981) cccccccscsseseeeseeeeees 4n4

Maschinenfabrik Kern, A.G. v. Northwest Airlines,

Inc., No. 81 C 656 (N.D. Ill. April 5, 1983) ........... 3, 4, A-1

Reed v. Wiser, 555 F.2d 1079 (2d Cir.), cert. denied,

IIIT TT sss csneanscuseodescascossioovscoenceosneoscsers 5

Other Materials:

Convention for the Unification of Certain Rules Relat-

ing to International Transportation by Air, opened for

signature October 12, 1929, 49 Stat. 3000, T.S. No.

876, 137 L.N.T.S. 11, reprinted in 49 U.S.C. §1502

SE ET BEE a ae a Ee EER passim

; J. Gold, SDRs, Gold, and Currencies, IMF Pamphlet

a Series No. 26 (Washington, D.C. 1979) ....cccceseseoees 3 n.3

Letter from Chief Deputy Clerk, Fifth Circuit, to

counsel after oral argument on the merits (March 4,

SS BOSSES AS a EEE RS a AL ee 4

PRELIMINARY STATEMENT

Respondent, Trans World Airlines, Inc. (“TWA”),’ submits

this brief in response to the petition for certiorari filed by Franklin

Mint Corporation, Franklin Mint Limited, and McGregor, Swire

Air Services Limited (collectively “Franklin Mint”) on March 1,

1983. This brief is filed pursuant to the Court's request, by letter

dated April 20, 1983, that TWA respond to Franklin Mint’s

petition for certiorari on or before May 20, 1983.

PRIOR PROCEEDINGS BEFORE THIS COURT

This action was initially brought before the Court by TWA’s

petition for a writ of certiorari, dated January 15, 1983 (No. 82-

1186), seeking review of the same judgment and opinion of the

United States Court of Appeals for the Second Circuit which

underlies Franklin Mint’s petition. In its petition, TWA submit-

ted that the Second Circuit abrogated the Warsaw Convention by

nullifying its limitation of liability provisions even though the

treaty is capable of enforcement. By so holding, the Second

Circuit acted beyond its constitutional power and impermissibly

infringed upon the powers reserved to coordinate branches of the

Federal Government (TWA’s petition at 9-14).

Rather than responding to TWA’s petition for certiorari,

Franklin Mint timely filed its own petition for certiorari on

March 1, 1983 (No. 82-1465), seeking review of the Second

Circuit's decision. Thereafter, by a letter dated March 7, 1983,

the Court requested Franklin Mint to file a response to TWA’s

petition. That response was filed on April 5, 1983.

In addition to the parties’ petitions for certiorari and Franklin

Mint’s response to TWA's petition, three non-parties have filed

amicus curiae briefs. On January 20, 1983, the International

Air Transport Association and 43 of its member airlines filed an

amicus curiae brief in support of TWA's petition for certiorari,

which in the alternative requested leave to intervene in No. 82-

1186. On February 7, 1985, the Air Transport Association of

1. Pursuant to Rule 28.1 of this Court, respondent states that TWA

is a wholly owned subsidiary of Trans World Corporation.

gh OF

i el oe

2

America (“ATA”) filed an amicus brief in support of TWA’s

petition for certiorari in No. 82-1186. Finally, on April 7, 1983,

the United States filed an arm’ us brief in both No. 82-1186 and

No. 82-1465, urging the Court to grant both parties’ petitions for

certiorari, largely for the constitutional reasons set forth in

TWA’s petition.

ARGUMENT

POINT I

BOTH FRANKLIN MINT’S AND TWA’S PETITIONS FOR

CERTIORARI SHOULD BE GRANTED

Franklin Mint offers two reasons why this Court should grant

certiorari: (i) “[t}his case concerns an important question of

federal law which should be settled by this Court” (Franklin

Mint's petition at 5); and (ii) “[t]he federal courts are in disar-

ray over the interpretation of Article 22” of the Warsaw Conven-

tion (Franklin Mint’s petition at 7). TWA agrees with both of

those contentions, as we!l as with Franklin Mint’s assessment that

these factors are of sufficient importance to merit consideration

by this Court.

As demonstrated by the briefs previously filed by the parties, as

well as by those of the amici curiae, the limitation of liability

provisions of the Warsaw Convention, as interpreted by federal

law, are the basis upon which both international shippers of air

cargo and international air carriers make far-reaching economic

decisions. Those decisions affect not only the aviation industry

but also the numerous industries in which the shippers are

engaged. Since the Second Circuit's decision raises major diffi-

culties for both international air carriers and shippers alike, and

since it leaves many questions unresolved, that decision, even

disregarding its significant constitutional infirmities, should be

reviewed by this Court.’

3

Franklin Mint also accurately states that the federal courts are

in disarray over the interpretation of Article 22.’ Of the three

federal courts which have decided the identical issue raised by

these petitions subsequent to the Second Circuit's decision, not

one has followed it. See Deere & Co. v. Deutsche Lufthansa AG,

No. 81 C 4726 (N.D. Ill. Dec. 30, 1982) (reprinted at A-61 of

the appendix to TWA's petition in No. 82-1186) (last official

price of gold applied because a treaty capable of enforcement

must be enforced); /n re Aircrash at Kimpo International Air-

port, Korea on November 18, 1980, No. MDL-482 (C.D. Cal.

Feb. 15, 1983) (reprinted at A29 of the appendix to Franklin

Mint’s petition in No. 82-1465) (Article 22 completely unen-

forceable effective April 1, 1978), interlocutory review denied,

No. 83-8051 (9th Cir. May 13, 1983); and Maschinenfabrik

(footnote continued from previous page)

United States both in its immediate application to the Warsaw Conven-

tion and in its broader implications for the treaty obligations of this

country generally” (United States’ brief at 2). Indeed, the Department

of State has already reported that “several foreign governments have

expressed their view that the court of appeals’ decision will seriously

affect United States relations in international aviation” (id. at 2-3).

Yet a further example of the difficulties engendered by the Second

Circuit's decision is the virtual certainty that “travelers, shippers and

the nation’s flag carriers would have to cope with a maze of widely

differing legal systems and philosophies of recompense, if the Conven-

tion ceases to be a viable treaty” (ATA’s brief at 50).

3. Franklin Mint’s petition is not, however, entirely accurate. For

example, Franklin Mint incorrectly states that “[w]ith the elimination

by ory a of an official price of gold, the only price for gold in the

nited States is that set on the open market” (Franklin Mint’s petition

at 3). In fact, the last official price of gold “is retained for some

chavs under the [International Monetary] Fund's Articles, and...

as normative effects on some of the Fund's activities” (J. Gold, SDRs,

oo — urrencies, IMF Pamphlet Series No. 26, at 40 (Washington,

i. )).

Moreover, the last official price of gold continues to serve a number of

functions in the United States. The price of $42.22 per troy ounce of

me is currently used to govern the issuance of gold certificates by the

nited States reasury (id: see also United States’ brief at 13); to

express the value of the gold reserves of the United States (United

States’ brief at 13); and to determine the amount of the United States’

subscription oy gm to several major international financial institu-

tions (id. at 13-14).

4

Kern, A.G. v. Northwest Airlines, Inc., No. 81 C 656 (N.D. Ill.

April 5, 1983) (reprinted at A-1) (last official price of gold

applied).

As the court observed in Northwest:

To conclude as the Second Circuit did in Franklin Mint

that the action of Congress in eliminating an official price

of gold should operate to eliminate all limitations of liabil-

ity found in the Warsaw Convention reads too much into

an unrelated act of Congress. That act was intended to

deal with various monetary matters and only incidentally

affected the provisions of the Warsaw treaty. There is no

reason to believe that Congress intended to declare Article

22 obsolete.

Rather, this Court believes it should enforce .. . the last

official price of gold in the United States as the basis for

conversion and liability limitation (id. at A-13).‘

Moreover, the need for Supreme Court resolution of the War-

saw limitation question is underscored by the Fifth Circuit's

recent statement in Boehringer, supra note 4, that

it will withhold the disposition of the above cause pending

the Supreme Court's ruling on the petition for certiorari

and subsequent disposition on the merits if certiorari is

granted, in Franklin Mint v. TWA... (letter from Chief

Deputy Clerk, Fifth Circuit, to counsel after oral argu-

ment on the merits (March 4, 1983)).

Undoubtedly, the guidance which the Fifth Circuit seeks from

this Court will be equally beneficial to other circuit and district

courts, as well as to the public. Supreme Court guidance is

4. Three federal courts decided the identical issue prior to the Sec-

ond Circuit's decision. Franklin Mint Corp. v. Trans World Airlines,

Inc., 525 F. Supp. 1288 (S.D.N.Y. 1981), applied the last official price

of gold. ee Sypeead unaware of the Franklin Mint decision rendered

several weeks earlier, Boehringer Mannheim Diagnostics, Inc. v. Pan

American World Airways, Inc., 53\ F. Supp. 344 (S.D. Tex. 1981),

appeal docketed, No. 81-2519 (Sth Cir. Feb. 2, 1982), applied the free

market price of gold. Finally, after analyzing both of the “an

decisions, Jn re Air Crash Disaster at Warsaw, Poland on March 14,

1980, 535 F. Supp. 833 (E.D.N.Y. 1982), aff'd on other grounds, No.

82-7616 (2d Cir. April 8, 1983), applied the last official price of gold.

A ats

5

particularly important in this case because uniformity of interpre-

tation is a primary purpose of the treaty. Block v. Compagnie

Nationale Air France, 386 F.2d 323, 337-38 (Sth Cir. 1967),

cert. denied, 392 U.S. 905 (1968); Reed v. Wiser, 555 F.2d 1079,

1090 (2d Cir.), cert. denied, 434 U.S. 922 (1977); Benjamins v.

British European Airways, 572 F.2d 913, 919 (2d Cir. 1978),

cert. denied, 439 U.S. 1114 (1979); United States’ brief at 3.

For this reason alone certiorari should be granted.

In sum, for the reasons set forth in TWA’s petition for certio-

rari (No. 82-1186), among which are substantial constitutional

questions, its petition should be granted. Nevertheless, Franklin

Mint’s petition should also be granted since the issues raised by

that petition are clearly of sufficient weight to require review by

this Court. Indeed, as the United States observed in its amicus

brief, which also suggests that both petitions should be granted,

resolution of the questions presented by the Franklin Mint peti-

tion “entails consideration of the issues raised by TWA” ( United

States’ brief at 17).

POINT II

IN THE EVENT THAT BOTH PETITIONS ARE GRANTED, TWA

SHOULD BE TREATED AS THE PETITIONER

Since it is clear that the granting of either or both petitions will

ultimately bring the same substantive issues before the Court, it is

respeci/wily submitted that if both petitions are granted, TWA

should be deemed the petitioner for purposes of the briefs on the

merits. Notwithstanding the substantial nonconstitutional issues

raised by both the parties and the amici curiae, the primary

reason for this Court's review of the Second Circuit's decision is

to consider the substantia! constitutional question of whether the

Second Circuit exceeded its power by nullifying a treaty to which

the United States is a party. Since TWA will argue the affirma-

tive on this constitutional issue, it is respectfully submitted that

TWA should be deemed the petitioner if both petitions are

granted.

6

CONCLUSION

Both TWA’s petition and Franklin Mint’s petition for certio-

rari should be granted. In addition, in the event that both peti-

tions are granted, TWA should be deemed the petitioner for the

proceedings on the merits.

Respectfully submitted,

JOHN N. ROMANS

ROBERT S. LIPTON

101 Park Avenue

New York, New York 10178

(212) 696-6000

Counsel for Respondent,

Trans World Airlines, Inc.

CURTIS, MALLET-PREVOST,

COLT & MOSLE

Scott J. MCKAY WOLAS

MICHAEL L. M. QUINTTUS

Of Counsel

May 20, 1983

APPENDIX

A-]

IN THE

United States District Court

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

No. 81 C 656

> —

MASCHINENFABRIK KERN, A.G.,

Plaintiff,

f

NORTHWEST AIRLINES, INC. and

J. E. BERNARD & Co., INC.,

Defendants.

-

M! MORANDUM OPINION AND ORDER

The plaintiff Maschinenfabrik Kern, A.G. (“Kern”) filed this

action against defendants Northwest Airlines, Inc. (“North-

west”) and J. E. Bernard & Co. (“Bernard”) in the United States

District Court for the Northern District of Iliinois. Kern seeks

contract damages in the amount of $74,171.00 for injury to its

duplicating machines during air shipment from the United States

to Switzerland. The fact and extent of damage on delivery is

undisputed. Bernard and Northwest, however, disclaim any lia-

bility for the damage. Northwest's disclaimer is made under the

notice provision of the Warsaw Convention. 49 U.S.C. § 1502,

Art. 26.’ In the event it is found liable, Northwest also seeks a

limitation of liability under Article 22 of the Convention. Ber-

nard and Northwest cross claim against each other seeking

1. The Warsaw Convention, formally known as the “Convention for

the Unification of Certain Rules Relating to International Transporta-

tion by Air,” is a multilateral Convention for the unification of certain

rules relating to international transportation by air, concluded at War-

saw, on October 12, 1929. 49 Stat. 3000, T.S. No. 876, 137 L.N.TS.

11. Both the United States and Switzerland are parties. Adherence of

the United States was proclaimed on October 29, 1934.

A-2

indemnification and Bernard has filed a third party complaint

against Cheshire, Co. (“Cheshire”). Subject matter jurisdiction

is predicated on 28 U.S.C. § 1332(a)(2)* and 28 U.S.C. § 1337.’

Venue ‘a this district is proper.

Presently before ‘he Court is Northwest's motion for summary

judgment. For the reasons given below, Northwest's motion is

denied. Summary judgment is granted in favor of Kern on the

issue of liability as against Northwest. The Court finds that the

only proper way to limit liability in accordance with the policy of

the Warsaw convention is at $9.07 per pound of damaged goods,

by reference to the last official price of gold. Nonetheless, North-

west’s motion for partial summary judgment on the issue of liabil-

ity limitation is denied. Kern’s charge that Northwest's conduct

is wilful and an exception to the liability limitation is inappropri-

ately decided by summary disposition. Whether Bernard or

Cheshire are liable to Kern, or whether any of the parties must

indemnify one another, remains to be resolved.

FACTS

Kern is a business entity organized under the laws of Switzer-

land and is a citizen of a foreign state. Northwest, a Minnesota

corporation with its principal place of business in Minnesota, is a

common carrier by air. Bernard, a New York corporation, with

its principal place of business in Illinois, is a forwarder of freight

over land. Cheshire, a subsidiary of Xerox Corporation, has its

principal place of business in Mundelein, Illinois.‘

2. 28 U.S.C. § 1332(a)(2) provides that “the district courts shall

have original jurisdiction of all civil actions where the matter in contro-

versy exceeds .. . $10,000.00. .. end is between .. . citizens of a staic,

and foreign states or subjects thereof.”

3. 28 U.S.C. § 1337 provides that “the district courts shall have

original jurisdiction of any civil action . . . arising under any Act of

Congress regulating commerce or protecting trade.” The instant action

arises under the Federal Aviation Act of 1958, 49 U.S.C. § 1301 et seq.

4. Service of process could not be executed upon Cheshire. On

June 20, 1982, a summons was personally served on the Xerox corpora-

tion. Thus far Xerox has not answered or otherwise pled, although its

attorney filed an appearance on July 20, 1982.

| de + a ee

A-3

The damaged duplicating machines, valued at $74,171.00, are

Kern's property. Kern had loaned them to Cheshire to test their

suitability for possible introduction into the United States mar-

ket. Pursuant to the agreement between Kern and Cheshire,

Cheshire was responsible for arranging to ship the machines back

to Kern in Switzerland.

On or about January 29, 1979, Bernard received Kern’s dupli-

cating machines from Cheshire for shipping to Kern in Switzer-

land. On or about February 9, 1979, Bernard transferred the

machines to Northwest, the carrier engaged to airship the

machines to Kern. Northwest, however, was only one carrier ina

chain of air carriers involved in the shipment of the machines.

When the duplicating machines left O'Hare Airport in Chicago,

Illinois, they travelled first via Northwest (the origin carrier),

then on British Airways and finally un Swiss Air (the destination

carrier). Neither Swiss Air nor British Air are named parties in

this suit.

When the machines arrived in Switzerland, agents of Swiss Air

noted damage to them and prepared a “cargo damage report.” A

cargo damage report is a preprinted form designed to document

any damage or loss sustained by goods during transportation. In

addition to providing a place for general information, e.g., the

airway bill number and last point of loading, a place is provided in

which to indicate damage observed. In the instant case, the

cargo damage repor! indicates that the duplicating machines

were “broken,” that the container in which the machines were

crated also was “broken” and that the crates had no inner packing

material. The report further recites that the damage was discov-

ered during “an inbound check and customs clearance,” although

it does not indicate the country in which the machines were

located when the damage was discovered.

On February 9, 1981, Kern sued Northwest and Bernard

claiming damages in the amount of $74,171.00 plus costs. Since

the machines’ aggregate value is $74,171.00, the damage claimed

is equivalent to total destruction of the machines.’ In count I of

5. Actually the amount claimed is less salvage value.

A-4

its two-count complaint, Kern alleges that Northwest failed to

deliver the duplicating machines in the same good condition as

the machines allegedly were in when received by Northwest from

Bernard. Alternatively, count II alleges that Bernard failed to

deliver the duplicating machines to Northwest in the same good

condition as the machines allegedly were in when received by

Bernard from Cheshire.

Apparently, none of the defendants dispute the nature and

extent of the damage to the duplicating machines. Northwest,

however, denies all liability and raises two affirmative defenses.

First, Northwest claims that it is not liable for any damage to the

duplicating machines because Kern did not notify Northwest of

such damage within the seven day time period for notification

required under Article 26 of the Warsaw Convention. Sec nd,

Northwest says that even if Northwest is liable for injury to the

machines, its liability is limited under Article 22 of the Warsaw

Convention to $9.07 per pound. That ceiling on liability would

greatly diminish any recovery by Kern from Northwest.

Northwest and Bernard cross claim against each other.

Northwest says that although Bernard delivered the machines to

Northwest with an unremarkable airway bill, the airway bill

prepared by Bernard falsely portrayed the condition of the

machines. Rather Northwest admits that a panel of one machine

was loose, that its legs had broken through the skids and that the

machines were wrapped only in plastic and set on wooden skids.

Northwest claims it told Bernard of the poor packaging and

refused to accept the machines for shipment. Allegedly at Ber-

nard’s persistence, Northwest reexamined the packaging,

recanted and shipped the machines. Northwest says that it

marked the airwuy bill with an “exception” to indicate that the

machines were defectively packed on receipt from Bernard.

Bernard also disclaims liability to Kern. Additionally, its

crossclaim against Northwest states that it delivered the

machines to Northwest in good order, as proved by the “clean”

airway bill which accompanied the machines to Northwest's ter-

minal. It is Bernard's position that the exception noted on the

A-5

airway bill was added by Northwest to reflect an after-delivery

injury to the machines. Bernard also filed a third party com-

plaint against Cheshire. That complaint alleges that if the

machines were delivered by Bernard to Northwest in damaged

condition, the cause was some action or inaction by Cheshire in

packing because Cheshire prepared the machines for shipment.

Discussion

I. Notice Provision of Warsaw Convention: Article 26

Northwest's motion for summary judgment is based on Kern's

alleged failure to notify Northwest of the damage to the duplicat-

ing machines within the time specified by the Warsaw Conven-

tion. Article 26 of the Convention requires that notice of damage

to goods must be made in writing to the carrier within seven days

of the date of receipt of goods. Written notice is given either by

writing upon a document of transportation or by a separate writ-

ten notice. 49 U.S.C. § 1502, Art. 26. Article 26(4) further

provides that failure to comply with the written notice require-

ment shall prevent any action against the carrier for damage to

goods transported by the carrier, absent fraud by the carrier.

Since Northwest claims that it first received written notice of the

damage several weeks later, Northwest says that Article 26(4)

precludes any recovery by Kern from Northwest.

To the contrary, Kern argues that the Warsaw Convention only

requires written jotice to any one carrier among successive carri-

ers so long as the transportation performed is considered a single

transportation. 49 U.S.C. § 1502, Art. 1(3). Under this view, it

is irrelevant that Northwest may not have received notice within

seven days because Swiss Air, a successive carrier on a single trip,

had timely notice. Kern submits that notice to Swiss Air is

demonstrated by the cargo damage report prepared by Swiss

Air's agent. That report was written before delivery of the

machines to Kern, well within the seven day notice period.

A-6

The Court first must decide whether Article 26 should be con-

strued to require notice to all successive carriers, including the

origin carrier, or whether notice to any successive carrier will

suffice. Article 26(2) requires that

[in] case of damage, the person entitled to delivery must

complain to the carrier forthwith after the discovery of

damage, and at the latest, within... 7 days from the date

of receipt in the case of goods.

Thus, Article 26(2) does not specify whether the proper carrier to

receive notice of damage is the “origin” carrier (Northwest), the

“destination” carrier, (Swiss Air) or each carrier in the chain; it

only requires that notice be given to “the” carrier.

Article 26 may be interpreted in two ways. The construction

favored by Northwest is strict, satisfied only by giving written

notice toeach carrier. Conversely, Kern urges a liberal construc-

tion, satisfied by giving notice to any of the successive carriers

involved in a single transportation of goods.

In deciding this issue, the Court is guided by the rules of treaty

construction set out by the Fifth Circuit.

In construing [a] treaty, as other contracts, we give con-

sideration to the intent of the parties so as to carry out

their manifest purpose. ... We proceed under the admo-

nition that where a treaty admits of two constructions, one

restrictive of and the other favorable to the rights claimed

under it, the latter is preferred.

Board of County Commissioners v. Aerolineas Peruansa, 307

F.2d 802, 806-07 (Sth Cir. 1962). Clearly the more liberal

construction is the one advanced by Kern. Modern air transpor-

tation often results in the use of many carriers for a single jour-

ney. Some of the carriers are unknown to the owner of goods

shipped. It is reasonable, therefore, to conclude that written

notice of damage to one carrier involved in the air transportation

of the goods satisfies the written notice requirement under Article

26 of the Warsaw Convention.

A-7

Article 1(3) of the Convention supports the conclusion that

notice to any one carrier is sufficient. Article 1(3) provides that

transportation to be performed by several successive carriers shall

be deemed to be one undivided transportation, if the parties

regard it as a single operation. It is reasonable to conclude that

the participants viewed the transportation of the duplicating

machines from Illinois to Switzerland as a single operation. No

separate contracts were entered into between Cheshire and Ber-

nard. Bernard and Northwest, and Northwest and the successive

air carriers. There is no evidence that there was any long break

in the machines’ journey, beyond the time required to off-load the

machines from one carrier and onto the next. Thus, for the

purposes of the Convention, the transportation of the machines

from Illinois to Switzerland is a single transportation. If the

journey is a unitary one, notice to Swiss Air within seven days

should satisfy Article 26.

Furthermore, Article 30(3) provides that successive carriers

shall be jointly and severally liable for damage sustained to goods

during transportation. Thus, under Article 30(3) all air carriers

who participate in a single shipment are potentially liable for

damage sustained to the goods transported, irrespective of which

carrier actually caused the damage. Arguably, the drafters of

the Convention determined that it would be inequitable to compel

the injured party to identify the precise carrier in a chain which

caused the damage. This is especially true since the carriers, and

not the owner of the goods, usually have exclusive control over the

facts of damage. See Daiton v. Delta Airlines, Inc., $70 F.2d

1244 (Sth Cir. 1978). Consequently, the injured party may sue

all of the carriers involved with a single transportation of goods.

The burden is on each carrier to absolve itself from liability.

The rationale underlying Article 30(3) is equally applicable to

an interpretation of Article 26. Given the relatively short time

period within which written notice must be given, it would be

unfair, if not impossible, to force the damaged party to discover

the “culprit” as a predicate to giving notice under Article 26.

~ susie

A-8

The Court concludes that an equitable interpretation of Article

26, especially in light of Article 30(3) and Article 1(3), is that

timely written notice to one carrier in the chain of a unitary

transportation of damaged goods is sufficient. In effect, it is

notice to all.

There is no merit to Northwest's argument that because Kern

did not make Swiss Air a party to the instant action, the principles

of Article 30(3) are inapplicable to Article 26. In Northwest's

view, only “parties to a suit” are within the protection of Article

26. The purpose of the notice requirement under Article 26,

however, is to give those involved in the transportation of goods an

opportunity to determine the cause of damage. See Dalton v.

Delta Airlines, Inc., supra; Hughes-Gibb & Co. v. Flying Tiger,

504 F. Supp. 1239 (N.D. Ill. 1981). Kern's decision as to

whom to sue is not determinative for the purpose of Article 26

notice.

There is still another reason why Northwest cannot disclaim

notice of damage as a way of avoiding liability to Kern. North-

west had actual notice of at least possible damage to the duplicat-

ing machines even before the machines began their air trip to

Switzerland. Northwest marked the airway bill it received from

Bernard to indicate that the machines were poorly packaged.

The agent decided to ship the machines, allegedly because if

damaged, they likely would not be damaged further in shipment.

Its agent also admits that a panel of one machine was loose and its

legs protruding through the plastic. Thus, the purpose of Article

26, to give the carrier an opportunity to determine the cause of

damage, is not thwarted. While Northwest may not have conclu-

sively known that the machines were damaged when they left

O'Hare, it certainly was on notice of a problem with the shipment

and knew where to begin looking for the source of the damage.

For the reasons stated above, the Court denies Northwest's

motion for summary judgment. Furthermore, the Court grants

summary judgment in favor of Kern on the issue of Northwest's

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liability. The fact of damage is undisputed and there no longer is

any genuine issue as to whether Kern made a proper notice of

damage under Article 26. Fed. R. Civ. P. 56(a).

II. Limitation of Liability: Article 22

Northwest also seeks partial summary judgment as to the

amount of damages that it can be required to pay to Kern. Arti-

cle 22 of the Warsaw Convention limits a carrier’s liability for

damaged goods to 250 French gold francs per kilogram. That

sum was to be converted “into any national currency in round

figures.” 49 U.S.C. § 1502, Art. 22(4). As of 1973, the conver-

sion rate was approximately $9.07 per pound of goods. As the

two duplicating machines weighed a total of 5,000 pounds,

Northwest seeks a finding that the maximum amount for which it

can be held is $45,850.00. a

Kern opposes Northwest's suggestion for limiting liability by

arguing that Article 22 is obsolete because the “gold standard”

underlying the international monetary exchange system is

defunct. Kern seeks to limit liability in reference to the current

free market price of gold.

In order to understand either party's position, a brief review of

the international monetary exchange system pursuant to the War-

saw Convention follows. At the time that Article 22 was

enacted, the conversion from francs to dollars was contemplated

in reference to gold and not to some national currency like the

pound or the dollar. This was done in order to avoid fluctuations

in the value of a particular national currency which might result

from unilateral action by the government whose currency was

selected as the peg in the liability clause. See, e.g., Boehringer

Mannheim Diagnostics, Inc. v. Pan American World Airways,

Inc., 531 F. Supp. 347, 350 (D.C. Tex. 1981), and the authorities

cited therein. In 1934, the United States established an official

price of $35.00 an ounce for gold. Gold Reserve Act of 1934, ch.

6, § 12, 48 Stat. 342 (1934); Presidential Proclamation No.

2072, 48 Stat. 1730 (1934). Although that official price varied

some, the policies of the International Monetary Fund (“IMF”)

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kept the price of gold relatively stable for the next 40 years.

IMF's relevant monetary policy was centered on a system of

international currency exchange based on assigned par values of

each nation’s currency. The par values were tied to the dollar

value of gold at $35.00 per ounce. Boehringer Mannheim vy. Pan

American, supra, at 350 n.16. Adding to the stability of the

price of gold was the ban prohibiting American citizens from

dealing in gold. Gold Reserve Act of 1934, ch. 6, §§ 3, 6, 48 Stat.

340 (1930) (repealed by Par Value Modification Act of 1973,

Pub. L. No. 93-110, 87 Stat. 353 (1973)).

Events in the late 1960's and early 1970's led to the 1971

decision by the United States to stop converting its dollar into

gold reserves. See S. Rep. No. 678, 92d Cong. 2d Sess. 4,

reprinted in [1972] U.S. Cong. & Ad. News 2209, 2212. Thus,

the U.S. dollar value for gold became hypothetical. At the same

time, the use of the price of gold as the anchor of the IMF system

of international currency exchange became doubtful. Boehr-

inger Mannheim v. Pan American, supra, at 350 n.29. There

followed in 1971 and 1973 two devaluations of the United States

dollar, Par Value Modification Act of 1972, Pub. L. No. 92-268,

§ 2, 86 Stat. 116 (1972); Par Value Modification Act of 1973,

Pub. L. No. 93-110, § 1, 87 Stat. 353 (1973), and consequent

increases in the “official” price of gold to $38.00 and $42.22 an

ounce, respectively. Then, in 1973, th: United States ratified an

amendment to an IMF agreement to abolish the concept of an

official price of gold. Act of Oct. 19, 1976, Pub. L. No. 94-564,

90 Stat. 2660 (1976). Finally, on April 1, 1978 the official price

of gold was rescinded simultaneously with the effective date of the

IMF amendments. See 22 U.S.C. § 286a note (Supp. II 1978).

Subsequent to the 1973 devaluation of the dollar, the Civil

Aeronautics Board (“CAB”) directed the airlines to set tariffs for

limiting liability to reflect the new “official” price of gold of

$42.22 an ounce. Order 74-1-16, Dkt. 26274, adopted Jan. 3,

1974, 39 Fed. Reg. 1526 (1974). See 14 C.F.R. § 221.38(j)

(1981) (requiring limitations to be set out in carrier tariffs).

Liability was set to $20.00 per kilogram of damaged goods, or

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$9.07 per pound. However, after the United States abandoned

its “official” price of gold in 1978, the CAB did not revise the

limiting tariffs. Although the CAB expressed concern that there

was no longer any legal basis for using the $9.07 limitation, see

Bureau of Consumer Protection, Civil Aeronautics Board, Mem-

orandum on Warsaw Convention Liability Limits, at 4, its Bureau

of Compliance and Consumer Protection suggested that the CAB

‘ should continue to engage in the “legal fiction” that an official

gold price exists in order to satisfy the liability limiting goals of

the Warsaw Convention. /d. at 6. The result of the CAB’s

decision not to revamp its tariff of liability is that at a time when

the free market price of gold has risen to more than $400.00 an

ounce, airlines may calculate their liability limitation based on an

artificial, non-existent gold price of $42.22 an ounce.

Against that background, this Court must decide whether

Northwest's liability should be cut off at $9.07 per pound of

damaged merchandise, the fictional standard; whether another

limiting standard should be used, such as the current free market

price of gold; or whether Northwest's liability to Kern should be

unlimited. In Franklin Mint Corp. v. Trans World Airlines, 690

F.2d 303 (2d Cir. 1982), the Second Circuit was faced with

virtually the identical issues as are presented here. The Second

Circuit first held that Article 22 is indeed unenforceable by courts

of the United States. However, the Franklin Mint court also

declined to adopt any of the proffered alternatives for determin-

ing liability, and has held that prospectively there will be no

liability limit.

The parties had suggested four possible standards to be used to

limit liability: (1) the last official price of gold in the U.S.; (2)

the free market price of gold; (3) the Special Drawing Right

(“SDR”), a unit of account established by the IMF;* or (4) the

6. Franklin Mint, supra at 310, provides a description of the SDR

based, in part, on Ward, “SDR in re Liability Conventions:

Some Clarifications,” 13 J. Mar. L. Com 3 (1981): ‘The SDR was

created by the IMF in 1969 to ce gold and foreign cu in the

international money reserve mar MF banks oor beac SDRs for

other convertible currencies as though they were lines of credit against

which reserves are borrowed for use in central banks. Methods of

A-12

exchange value of the current French franc. Among the reasons

given by the Franklin Mint court for rejecting the various alter-

natives were: a lack of international agreement on the proper unit

of conversion; congressional! repeal of the last official price of gold

($42.22); SDR’s are created by the IMF without basis in the

Warsaw Convention; the French franc is subject to unilateral

change; and the highly volatile condition of the free market price

of gold. /d. at 310-11. Cf. Boehringer Mannheim Diagnostics,

Inc. v. Pan American World Airways, Inc., supra, (after 1978, the

only proper basis for determining a carrier's liability limitation is

with reference to the free market price of gold).

In declining to select any proposed alternative the Second Cir-

cuit concluded that it lacked the authority to set policy as toa new

unit of conversion in an international matter:

Treaty advice and consent and proposal is the province of

the executive and ratification is the exclusive province of

the United States Senate. While federal co: (s are neces-

sarily called upon to interpret treaties, they must observe

the line between treaty interpretation on the one hand and

negotiation, proposal and advice and consent and ratifica-

tion on the other... . However, selection of a unit of

conversion and the level of value of a limitation on liability

is plainly a matter to be negotiated by the parties, as the

history of the Convention demonstrates.

690 F.2d at 311 (citations omitted).

Although the Second Circuit held that Article 22 is unenforce-

able, its ruling is prospective. This was because Franklin Mint

overruled prevailing precedent in the United States, a decision

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not foreshadowed. See Chevron Oil Co. v. Huson, 404 U.S. 97

(1971). As tocases arising before the issuance of the mandate in

Franklin Mint, the last official price of gold would be used to

calculate damage liability. 690 F.2d at 312. Although the opin-

ion does not expressly so state, its effect is that liability for dam-

age to goods by air carriers on international flights will be

unlimited.

This Court also has no authority to select an alternative basis

for limiting liability, absent congressional direction. However,

Northwest's liability should not be unlimited, since the clear

intention of the Warsaw Convention in Article 22 was to limit the

liability of air carriers on international runs. To conclude as the

Second Circuit did in Franklin Mint that the action of Congress

in eliminating an official price of gold should operate to eliminate

all limitations of liability found in the Warsaw Convention reads

too much into an unrelated act of Congress. That act was

intended to deal with various monetary matters and only inciden-

tally affected the provisions of the Warsaw treaty. There is no

reason to believe that Congress intended to declare Article 22

obsolete.

Rather, this Court believes it should enforce the position taken

by the CAB, the governmental agency most intimately concerned

with the transactions at hand, and recognize the last official price

of gold in the United States as the basis for conversion and

liability limitation. That price, resulting in a liability limitation

of $9.07 per pound of damaged goods, also was relied upon in

In re Air Crash Disaster at Warsaw Poland on March 14, 1980,

535 F. Supp. 833 (E.D.N.Y. 1982) and by the lower court in

Franklin Mint Corp. v. Trans World Airlines, 525 F. Supp. 1288

(S.D.N.Y 1981), rev'd 690 F.2d 303 (2d Cir. 1982). Any

change from this base should be determined by the executive and

the legislature. Air carriers, at least in this country, have relied

upon the last official price of gold and have filed tariffs based on

that rate. Thus, the public had notice of the liability limitations.

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Parties, such as the commercial entities in this case, may protect

themselves through insurance. They are not made victims of

hardships or injustice by the maintenance of the CAB rule.

Kern raises a second argument for unlimited liability premised

on Article 25. Article 25 provides:

(1) The carrier shall not be entitled to avail himself of

the provisions of this convention which exclude or limit his

liability, if the damage is caused by his wilful misconduct

or by such default on his part as_ . . is considered to be

equivalent to wilful misconduct.

(2) ...or if the damage is caused by any agent of the

carrier acting within the scope of his employment.

Kern asserts that Northwest's actions in accepting the duplicat-

ing machines with full knowledge of their inferior packaging

constitutes wilful conduct sufficient to invoke Article 25. To the

contrary, Northwest argues that its decision to ship the machines,

arguably damaged and unquestionably poorly packaged, was not

wilful misconduct. In its view, to accept Kern’s argument would

be to suspend liability limitation whenever a carrier made an

exception on an airway bill and subsequent damage was claimed.

For purposes of Article 25 of the Warsaw Convention, wilful

misconduct occurs where an act or omission is taken with knowl-

edge that the act probably will result in injury or damage or with

reckless disregard of the probable consequences. See, e.g., Ber-

ner v. British Commonwealth Pacific Airlines, Ltd., 346 F.2d

$32, 536-37 (2d Cir. 1965); Grey v. American Airlines, Inc., 227

F.2d 282, 285 (2d Cir. 1955), cert. denied, 350 U.S. 989 (1956);

Excelled Sheepskin and Leather Coat Corp. v. ATC Services, 16

Avi. 17, 609 (N.Y.S. Ct. 1981). Wilfulness is largely a subjec-

tive matter. The questions of fact which must be resolved makes

summary disposition inappropriate. Jd. Thus, whether North-

west’s liability to Kern is limited to $9.07 per pound (or

$45,850.00) or whether Northwest is liable for $74,171.00 must

be determined at trial.

Several other matters remain. First; the Court must deter-

mine whether and to what extent Bernard or Cheshire are liable

A-15

for damage to Kern's duplicating machines. Bernard and

Cheshire are land transporters not air carriers. They are not

bound by the provisions of the Warsaw Convention. Second,

Xerox Corporation, which was served with summons in place of

its subsidiary Cheshire, has neither answered nor otherwise pled

to Bernard’s third party complaint. Accordingly, if service of

process was valid, Bernard is given seven days in which to move

for a default, or else the third party complaint will be dismissed

for want of prosecution.

In accordance with this Opinion, IT Is HEREBY ORDERED

that:

(1) Summary judgment is granted for Kern and against

Northwest Airlines on the issue of whether Kern gave timely

notice of damage to its goods pursuant to Article 26 of the War-

saw Convention.

(2) Pursuant to Article 22, Northwest's liability is limited to

$9.07 per pound or $45,850.00. However, judgment will not be

entered in that amount pending resolution of whether North-

west’s decision to ship the duplicating machines as packaged

constituted wilful misconduct sufficient to incur unlimited liabil-

ity pursuant to Article 25.

(3) Bernard is given until April 12, 1983 to move for a default

against Cheshire, and must support its motion with an affidavit

showing service of process on Xerox to be good service, or the

third party complaint brought by Bernard against Cheshire will

be dismissed for want of prosecution.

A status hearing is set for April 25, 1983 at 9:45 a.m.

Entered:

WILLIAM T. HART

United States District Judge

Dated: April 5, 1983.