2 Case Law: Spain, Australia, Hungary, Korea

Joseph Gold
Published Date:
December 1989
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Spain is a contracting party to the Warsaw Convention and the Hague Protocol. The Territorial Court of Madrid (Audiencia Territorial de Madrid) delivered a decision on April 30, 1984 on the carrier’s limitation of liability.1 Article 11 of the Hague Protocol provides that, in the case of judicial proceedings, conversion into a national currency shall be made according to the gold value of currencies at the date of judgment. The court confirmed that conversion remains possible notwithstanding the demonetization of gold in the international monetary system. The court noted that in view of this development in the legal status of gold, it has become customary for air carriers to use the U.S. dollar in standard clauses that limit liability for loss of, or damage to, baggage in domestic and international transportation by air. The rate of compensation in such cases has been US$20 per kilogram of the weight of lost baggage. It can be assumed that the carrier would pay Spanish pesetas at the rate of exchange between that currency and the U.S. dollar at the date of judgment.

The issue in the Madrid case was not the rate of exchange between the two currencies, but the propriety of a limitation of US$20 per kilogram as a basis for translation into pesetas of the limit of 250 Poincare francs per kilogram. The court held that this translation was not capricious. This conclusion, the court said, was supported by the fact that the Montreal Protocols negotiated in September 1975 adopted a limit of SDR 17 per kilogram. The court noted that in October 19812 SDR 1 was equivalent to US$1.1446. Seventeen times this dollar amount was equivalent to US$19.4582. The court held this standard to be so close to US$20 per kilogram, which had been the basis for the amount that had been awarded to the claimant, that the award must be maintained.

The decision does not substitute a standard of US$20 per kilogram for the 250 Poincaré francs in the Warsaw Convention and the Hague Protocol, but confirms that such a standard is a reasonable way of calculating the equivalent of the prescribed number of Poincare francs in U.S. dollars, because of the rate between the SDR and the dollar at the date considered relevant. The court seems to have interpreted the provision in the Hague Protocol on conversion into national currencies to have justified the limit expressed as US$20 per kilogram as a limit that accorded with the Warsaw Convention and the Hague Protocol. It would have been possible to decide, however, that the reference to judicial proceedings meant only that courts are authorized to translate 250 Poincaré francs per kilogram into the currency of the forum.

The technique adopted by the court emphasizes the role of the SDR in the present international monetary system, but though the decision comes close to substituting the SDR for the Poincare franc in applying the Warsaw Convention and the Hague Protocol, it may not go quite so far. The decision can be considered a pragmatic one. It finds that the standard according to which the carrier had limited its liability was defensible, particularly in view of the endorsement of the SDR solution by the proposed Montreal Protocols. The decision, therefore, seems to have been justified by the court by reference to the circumstances of October 1981. If this was indeed the ratio decidendi, it would not necessarily provide a solution in other cases. If, however, the ratio decidendi was that as a matter of law the SDR solution represents the proper interpretation of the two treaties in current conditions, the U.S. dollar equivalent of SDR 17 per kilogram would be the amount to which liability is limited by the treaties, whatever the rate might be between the SDR and the U.S. dollar at the relevant date.

The decision of the Madrid court has some resemblance to the decision of the United States Supreme Court in the Franklin Mint case, even though in that case the limit on liability in the contracts of carriage was expressed in the court’s own currency and not in a foreign currency as in the Madrid case. Another dissimilarity is that the Supreme Court emphasized the relevance of the Federal Aviation Act of 19583 because it conferred on a governmental agency, the Civil Aeronautics Board (CAB), the function of translating the Poincare franc into U.S. dollars for the purpose of the Warsaw Convention. In 1974 and later, the CAB informed international air carriers doing business in the United States that the minimum limit on liability for lost cargo would be US$9.07 per pound avoirdupois. The CAB required carriers to file their tariffs with the agency, showing the limit on liability for lost or damaged cargo, and the agency could reject tariffs not meeting the requirements of the statute or of the CAB’s rules. The Madrid court seems not to have emphasized, as did the Supreme Court, that the Warsaw Convention did not prescribe the way in which the limits on liability were to be converted into national currency and that the Convention left this operation to national authorities.


Fitzpatrick v. Pan American World Airways Inc.4 was decided by the Court of Petty Sessions in Sydney on July 8, 1983. The issue in the case was the limitation of the carrier’s liability under the Warsaw Convention and the Hague Protocol in relation to a claim by the plaintiff for missing baggage on a flight from Sydney to North America and back. In describing the setting of the problem of applying the Poincare franc, the magistrate referred to April 1, 1978 as the date when Australia and other countries “went off the gold standard,” by which he meant the date when the Second Amendment took effect.

He said that authors had suggested five formulas for applying the Poincaré franc in present conditions. His reactions to the formulas were these:

(1) The French franc solution. The Poincaré franc should be treated as if it were the current French franc. It was clear that the parties to the Warsaw Convention did not have this intention, as was evidenced by the fact that the Hague Protocol deleted the word “French” before the word “franc” in the Warsaw Convention.

(2) The status quo solution. The Poincare franc should be applied on the basis of the last official price of gold before April 1, 1978. This fixed figure would become increasingly inappropriate as time passed.

(3) The Franklin Mint solution. The magistrate’s reference was to the decision in this case of the United States Circuit Court of Appeals for the Second Circuit,5 which held that it was not possible to give effect to Article 22 of the Warsaw Convention in present conditions. The magistrate did not accept this solution, as is apparent from his own choice of a solution.

(4) The SDR solution, which had been urged by the defendant as the correct solution. The magistrate described the SDR as “a notional unit of currency on the international market,” which had been approved by the Fund in 1969 “to replace gold and foreign exchange as an international reserve asset.”6 He noted that the SDR had been approved by the negotiators of the Montreal Protocols also, but the protocols had not been ratified by Australia, the United States, or most of the parties to the Warsaw Convention, so that the protocols were “in limbo” for the time being.

The magistrate stated that one had to take into account the fact that when the SDR was created and until March 31, 1978, currencies still had a gold value. The creation of the SDR by the Fund’s Articles did not connote an intention that it should be the unit of account under the Warsaw Convention.

In the United Kingdom, legislation had been adopted that authorized statutory orders to prescribe the equivalent of the Poincare franc in sterling. Similar legislation did not exist in Australia. Italian and Dutch decisions had been cited in which the SDR solution had been applied, but there were no Australian decisions that were helpful.

Article 22 of the Hague Protocol, of course, did not mention the SDR.

This court cannot be used, in my view, to in any way ratify the Montreal protocol, and until they are ratified or legislation is brought into force in Australia, I feel that it is not proper to consider the suggested Special Drawing Rights solution.

(5) The magistrate was satisfied that, as the law stood, the solution had to be based on the market price of gold. It would be as near as one could get to a formula that complied with the requirements of the Warsaw Convention and the Hague Protocol. The price would be the one ruling on the day before the proceeding first came on for hearing. The amount to which liability was limited according to this decision was far in excess of the amount claimed.

Polatex Trading Co. Pty. Limited v. Scandinavian Airlines System and Singapore Airlines Limited was decided by the District Court of New South Wales on December 11, 1984.7 Polatex imported carpets from the Islamic Republic of Iran. The carpets involved in this proceeding were delivered on June 16, 1980 to the Teheran office of Scandinavian Airlines System (SAS) and consigned to Sydney. The bales were conveyed to Copenhagen and then on another SAS flight to Singapore. From there, the bales were carried to Sydney by Singapore Airlines Ltd. (SAL). When the bales were opened, it was found that six carpets were damaged, but there was no evidence to explain when in the course of the three legs of the flight, or how, the damage was done. The six carpets were ultimately sold at public auction at a loss for Polatex, which then sued SAS and SAL. The defenses raised a number of issues of fact and law, all but one of which need not be considered here. The defense that will be considered is that in the event of liability, the limit imposed by the Warsaw Convention had to be observed. The court held that SAS and SAL were jointly and severally liable to Polatex.

The court decided that the defendants’ liability was limited by Article 22 of the Warsaw Convention, but the court regarded application of that provision to be the most difficult of the many issues that arose in the case. The court noted that, so far as it was aware, no currency in the world was tied to the value of gold.

A few decisions delivered in the 1970s by courts outside Australia on the application of Article 22 had been cited, together with the Franklin Mint case and Fitzpatrick v. Pan American World Airways Inc., which is discussed above. The court stated that it would advert only to the decision of the United States Supreme Court, “which is, it is hardly necessary to say, a decision of great status.”8 The court, however, recorded its agreement with the magistrate’s opinion in Fitzpatrick v. Pan American World Airways Inc., the only Australian decision, although neither that decision nor any of the foreign decisions was binding on the court.

The essence of the Franklin Mint decision, the court went on, was that the Congress of the United States had delegated to the Executive Branch the authority to translate the liability limit of Article 22 of the Warsaw Convention into U.S. dollars. The Civil Aviation Board (CAB) of the United States was the United States statutory authority charged with supervising compliance with the liability limits under the Convention. The CAB had promulgated an order declaring US$9.07 per pound avoirdupois to be an acceptable basis for translating the liability limits into U.S. dollars. This figure was in force in 1978 and remained in effect. The Supreme Court held that courts in the United States were bound to respect the CAB’s authority unless it was exercised in a manner inconsistent with United States law or international law. The Supreme Court concluded that the CAB’s action did not infringe domestic or international law.

The New South Wales court decided, however, that it would not reach a conclusion comparable to the Supreme Court’s decision in the Franklin Mint case:

I am not so bold as to suggest any disagreement with the decision of such a Court as the United States Supreme Court but I really fail to see that that decision in any way provides any guidance for Courts in Australia. The simple fact is that there has been no corresponding delegation by the Parliament and no executive endeavour to inform carriers (or the judicial system) how to calculate a conversion into $A. Whilst one understands that gold has been and is a volatile commodity whereof the value of carriers’ liability becomes reflective and whilst there may be good arguments from the standpoint of the carrier to maintain some certain and constant value, I do not see why Article 22 is to be so read that there should be incorporated into Australian domestic law the result of the Franklin Mint decision. I think, as the Article says, the conversion is to be made in an ambulatory way, i.e., at the date of the judgment.9

The last sentence of this passage makes the interesting point that an amount of domestic currency fixed in advance, as was done by the CAB, was not consistent with the Warsaw Convention. Under the Convention, the amount was to be determined at the date of judgment. In view of the fluctuation of exchange rates, the amount could not be known, and could not be fixed, at an earlier date.

In accordance with this view, the court based its decision on the current price of gold. This procedure yielded a price more than eight times the official price in Australian currency that had prevailed in 1978. The consequence was that, as in Fitzpatrick v. Pan American World Airways Inc., the liability limit under Article 22 far exceeded the claim by Polatex, and the limit had no practical effect.

The court accepted the market price of gold with only a subdued reference to considerations unfavorable to this solution. No reference was made to the SDR solution. The court’s approval of Fitzpatrick v. Pan American World Airways Inc. must be understood to mean that the court was aware of the SDR solution and did not approve of it. All the cases and academic articles cited by counsel and mentioned by the court seem to have been taken from the briefs in the Franklin Mint case.

On September 22, 1988, the Supreme Court of New South Wales, Commercial Division, decided S.S. Pharmaceutical Co. Ltd. & Another v. Qantas Airways Ltd.10 in a case in which goods were carried by the defendant from Melbourne for delivery to the first plaintiff in Tokyo. The goods arrived in a condition that made them unsaleable. The plaintiff claimed the value of the goods, and the defendant relied on Article 22 of the Warsaw Convention to limit its liability. In answer, the plaintiff argued that, in accordance with Article 25 of the Convention, the defendant’s conduct made the limitation provision inapplicable. Article 25 of the Convention, as amended by the Hague Protocol, provides that:

The limits of liability specified in Article 22 shall not apply if it is proved that the damage resulted from an act or omission of the carrier, his servants or agents, done with intent to cause damage or recklessly and with knowledge that damage would probably result; provided that, in the case of such act or omission of a servant or agent, it is also proved that he was acting within the scope of his employment.

Australia has given the Warsaw Convention, as amended by the Hague Protocol, the force of law in relation to any carriage by air to which the Convention (as amended) applies. The parties agreed that the Convention and the Protocol applied to the carriage of the goods in this case.

The court made a thorough examination of Article 22 and the efforts to apply the provision in other countries, and noted that interpretation of it had not been previously considered by any superior court in Australia. The court stated that the dispute demonstrated the necessity for the Australian Parliament to clarify the rights of Australian air travelers and consignors and consignees of cargo, as well as carriers.

The history of Article 22, the court said, had been fully explored in the Franklin Mint case, but the importance of the provision in the task of interpretation made it necessary to rehearse the history to some extent. History showed that the Poincaré franc had been chosen as the unit of account because gold was deemed to have a stable value in the world market, although the value of currencies as satellites around gold had changed from time to time in relation to gold. Now, however, countries, including Australia, allowed gold to find its own value in the market, with the result that there had been violent swings in price. The court then outlined the history of the evolution of the SDR and the Fund’s method of valuing it. Recalling that the method had been based successively on gold, a basket of 5 currencies, and then a basket of 16 currencies, the court concluded that: “It may therefore be pointed out that SDRs also do not have the stability gold used to enjoy.”11

This comparison overlooks the fact that the method of valuation of the SDR is established by official action, and in this sense is comparable to the former official action to determine the value of currencies in relation to gold. The comparison also overlooks the fact that the method of valuation is changed at infrequent intervals, and then to reflect developments in international monetary conditions and relationships.

Additional Montreal Protocol No. 4, the court stated, would replace the Poincare franc with the SDR. The limit on liability would be absolute. The requirement of the absence of willful misconduct provided for by Article 25 would disappear.

The Protocol, the court continued, had not been ratified by many countries. The United States and Australia were among those countries that had refrained. In 1982, the then Australian Minister for Transport had rejected in Parliament acceptance of Montreal Protocol No. 4 because it had not yet come into effect.

The court said it was ironic that gold as a standard of measurement intended to achieve international uniformity had produced such judicial diversity. The court quoted the following passage from Pamphlet No. 44 in the Fund’s Pamphlet Series to show the chaotic results of judicial efforts to interpret the Warsaw Convention in present conditions:

The varied approaches by courts that reject the market price of gold illustrate the difficulties of reaching uniform judicial solutions under multilateral treaties. The U.S. Supreme Court has found that, notwithstanding the disappearance of an official price for gold, there was no gap in the treaty with which the court was dealing and the court could apply the gold unit, in effect on the basis of American law, because a regulatory agency was authorized by law to choose the method of translation. A Netherlands court has found that there was now a gap in the treaty, but that Netherlands law had filled the gap. An Austrian court has rejected the analysis of a gap and has applied the unit of account by analogy to a German statute, which was not part of Austrian law, and an Austrian statute, which did not apply to the treaty in question.12

Four solutions, the court noted, had received some judicial support: the SDR solution, the last official price of gold, the current price of the French franc, and the market price of gold. A further solution would be to hold that Article 22 was unenforceable in present conditions. Neither party, however, had contended for unenforceability. The plaintiff had argued in favor of the market price of gold; the defendant had supported the last official price of gold, or, failing the choice of that interpretation, the SDR solution.

Notwithstanding the approach of the parties, in the view of the court the proposition that the limitation provision had become unenforceable would most closely meet the intention of the framers of the Convention. That view had been adopted by the Second Circuit Court of Appeals of the United States in the Franklin Mint case, but the Supreme Court had reversed that decision. The history of the Convention showed that the limitation provision was predicated on the assumption of a stable and internationally uniform gold price. The doctrine of rebus sic stantibus would allow the signatories to avoid application of the terms of a treaty when there had been a significant change of circumstances in the period between the drafting and an attempted application of the terms.

The court held that however intellectually satisfying the doctrine might be, it could not be applied:

With international conventions even more than national legislation, it is important to sustain the purpose of enactment. Here it was the self-evident intention of the nations which signed the Warsaw Convention that there should be available to air carriers some means of limiting their liability. Furthermore, the limitation provision was to operate on an international basis. In those circumstances, it would be going a long way indeed to hold that the wish of so many nations, solemnly expressed in the form of an international convention should be set at nought because of changed circumstances. If any means can be found to sustain the provision, it is the duty of a Court to search for it.13

The court recalled also the reasons given by the Supreme Court in the Franklin Mint case. The Supreme Court had held that the Warsaw Convention contained a provision on withdrawal: a signatory was required to give other signatories six months notice of an intention to withdraw. The Executive Branch of the United States had not done so and, on the contrary, had insisted in its brief as amicus curiae that Article 22 was still enforceable. When the contracting parties to a treaty insist that it is still enforceable, a private person cannot successfully invoke the doctrine of rebus sic stantibus because of a fundamental change of circumstances.14 The Australian Parliament had made it clear, when passing the Civil Aviation (Carriers’ Liability) Amendment Act in 1982, that it wished the Convention and the limitation liability under it to remain in force.

Nevertheless, the court cited with approval the view of Justice Stevens in the Franklin Mint case, who dissented from the result reached by the majority although not from its view on the doctrine of rebus sic stantibus. He concluded that if the limitation in the Convention was unworkable, the remedy was amendment by the contracting parties. Ratification of Montreal Protocol No. 4 was required for this purpose. The court said that this statement had particular relevance to Australia.

The court described the SDR solution as the next most satisfying solution and one that would most closely sustain the intention of the framers of the Warsaw Convention. The solution had been incorporated in Montreal Protocol No. 4. That instrument had been signed by a number of countries, and a number of other countries had adopted the solution by legislation or other appropriate official action as the basis for translating the liability limits into currencies. In some countries, the courts had taken the initiative to apply the SDR solution.

Notwithstanding the highest respect with which the court viewed the decisions of the courts referred to, the SDR solution could not be adopted by a court in the particular circumstances of Australia. The court explained this attitude in the following passage:

What the framers of the Convention self-evidently desired was to identify a stable internationally accepted means of conversion. In international financing, SDRs have replaced gold in this regard although without the same degree of reliability. Nonetheless, as has been pointed out (Shawcross & Beaumont Air Law, 4th ed VII [120]):

The SDR solution accords with the objectives of the Warsaw Convention as seen by the Court (the U.S. Supreme Court in Franklin Mint); (1) to set some limit on a carrier’s liability; (2) to set a stable, predictable, and internationally uniform limit; and (3) to link the Convention to a constant value that would keep step with the average value of cargo carried and so remain equitable for carriers and transport users alike.

Sir Joseph Gold took the same view (infra p 79)15 when he remarked that:

[i]t is undeniable that the SDR is the only choice for a unit of account […] that can achieve uniform results.

For this reason, all other things being equal, I would take the view that, notwithstanding the difficulties of, in effect, rewriting the Convention, a court should adopt SDRs as the standard. However, even if I were able to overcome the self-evident difficulties of substituting for the words of the Convention other words altogether, it seems to me that this route is foreclosed to me by the speech of the Minister for Transport in 1982. It cannot be for a Judge, sitting at first instance, to usurp the role which the Minister has self-evidently reserved to Parliament to consider on another day. The mere fact that the Government and the Parliament have failed to attend to the matter can be no justification for a Court interposing its views and interpretation. It is for this reason that I ventured to say at the outset that it is urgent and important that the matter be considered by the Parliament.16

The court’s reference to the statement of the Minister for Transport is the one he delivered in Parliament on the occasion of the second reading of the bill that became the Civil Aviation (Carriers’ Liability) Amendment Act, 1982. He had expressed concern about the gold unit in the Warsaw Convention, and pointed out that the Montreal Protocols were designed to rectify the situation by expressing the limits of liability in SDRs. He went on to say:

However, these protocols have yet to come into force and the Government is currently examining possible interim arrangements regarding limits on airline liability for international carriage until such time as the protocols take effect.17

The next possibility was the last official price of gold. The Supreme Court of the United States in the Franklin Mint case had been able to adopt this solution because there existed statutory authority for the Civil Aeronautics Board (CAB) of the United States to translate the Poincaré franc into U.S. currency, and the CAB had exercised this authority. Each time the official price of gold in U.S. dollars had been changed by Act of Congress, the CAB had directed carriers to increase the amounts of their liability limits in dollars. The CAB continued without change the order based on the last official price of gold in dollars notwithstanding the repeal by Congress of the Par Value Modification Act, with effect on April 1, 1978 (the date when the Second Amendment of the Fund’s Articles, which abrogated the par value system, became effective). Indeed, the CAB restated its position in an order published on August 14, 1978.18

The Supreme Court’s solution was not feasible in Australia, however, because of Australian legislative provisions. The New South Wales court traced the complex history of the official price of gold in Australia as established by successive enactments.19 The statute under which the last official price had been established was suspended on January 30, 1976 and regulations on gold transactions were repealed. The Treasurer had explained at the time that the effect was to widen the market for sales of gold by Australian producers and to entitle them to sell gold to any person in Australia or elsewhere at such prices as were negotiated.

To base the decision on the Minister’s statement that the Government was considering what action to take on the application of the liability limits might suggest that the way was open for the New South Wales court to apply the last official price of gold as the solution, notwithstanding the absence of legislation of the kind that enabled the Supreme Court to decide as it did in the Franklin Mint case. The legal impediment, however, seems to have been the legislative measure that suspended the statute under which an official price had been imposed for gold transactions by Australians. But the court had other objections to the last official price: it would not satisfy the intention of the framers of the Convention; it would not pay sufficient regard to the changed circumstances; the last official Australian price, fixed on September 25, 1974, had been fixed “with scant regard to other countries’ prices;” and it no longer had “any relevance to today’s values in the financial market place.”20

The court added yet another objection. The Supreme Court in the Franklin Mint case held that the last official price in dollars represented a reasonably stable figure when translated into other “Western”—which probably meant “major”—currencies. In addition, the Supreme Court regarded the last official price as a reasonable interim approximation to the limits enforced by other signatories to the Warsaw Convention. The New South Wales court, however, relied on the criticism in Pamphlet No. 44 to reject the Supreme Court’s conclusion that the CAB’s limit satisfied the purposes of stability, predictability, and international uniformity. For the court, the only advantage the last official price of gold had over the market price was that such wide swings in the market price as had occurred over the last decade would be avoided.

The solution of equating the Poincaré franc with the current legal tender franc of France was rejected with the same vigor. The history of Article 22 of the Warsaw Convention showed that the proposal of the French franc as the unit of account had been rejected and a gold franc substituted for this purpose. An even more weighty objection was that the Hague Protocol had deleted the word “French” from the reference to the Poincaré franc in the Convention. An American decision21 that had endorsed the French franc solution must be considered wrong after the Franklin Mint case, and the French decision that had followed the same course had been overruled.22

The last solution to be considered was inevitably the market price of gold. The argument for it was that it was the only price now in existence. Some courts had accepted this solution, and there was some academic support for it. The principal objection was that this solution destroyed stability, the fundamental purpose of the Convention.

As the Seoul Court of Appeal pointed out in Kim v Korean Air Co Ltd. (Nov. 30, 1987), the free market price fluctuates, based on political and economic considerations. It does not properly reflect increases in prices and wages so as to constitute the proper basis for compensation.23

Justice O’Connor in the Franklin Mint case had objected to the solution of the market price of gold because the airlines would have to become speculators in gold or, alternatively, protect themselves against the price of gold in order to ensure that their liability in the event of an aerial disaster remained within tolerable limits. But, said the New South Wales court, there was another difficulty. If airlines were not self-insurers, how was an insurer to calculate the premium to be payable in respect of a particular year when taking into account the fact that the consequences of a disaster in that year might be measured according to the price of gold ruling some years later? The viability of some carriers and perhaps a number of insurance companies might be imperiled if nothing was done to ameliorate the prevailing situation.

The new Italian law has adopted the SDR solution, which provides an approximate predictability with respect to liability, but makes the limitation of liability dependent on the contracting of adequate insurance by the carrier. A consequence of this condition is that the uninsured carrier, which at least in theory might be less likely to sustain the consequences of a catastrophic accident, would not be able to rely on the limitation of liability. This objection would be overcome if insurance were made mandatory.

The New South Wales court reached the following conclusion:

In the circumstances, with regret for what I regard as a wholly unsatisfactory result, both in practical and intellectual terms, I conclude that effect can be given to the intentions of the framers of the Convention only by holding that the market price of gold should be the appropriate conversion mechanism. I should, nonetheless, highlight how inappropriate this result is. It must be wholly unacceptable in this regard that the verdict awarded to a person in respect of the death of a relative in an air crash should be susceptible to huge variation depending upon the market price of gold on the particular day that judgment is pronounced. That was never the intention of the framers of the Convention.

In the relatively short period I have taken to write this judgment, the price of gold has fallen substantially and thus, for no good reason, the plaintiffs may recover substantially less than would have been the case had I been able to give judgment at the conclusion of the argument.24

The court held that the clause “recklessly and with knowledge that damage would probably result” in Article 25 of the Warsaw Convention must be interpreted to mean that a subjective test of knowledge had to be applied. In other words, the carrier must have actual knowledge of the risk of damage. The court held, according to this test, that the defendant had been reckless. Therefore, under Article 25 the defendant was not protected by the limits in Article 22. It can be argued, therefore, that the conclusion reached on the interpretation of Article 22 was obiter. Judgment was given for the plaintiffs in the sum of $A 144,193.83, of which $A 32,355.83 represented interest. On the date of the judgment, the limit under Article 22, based on the market price of gold, would have been $A 133,139.80.


Konsumex Foreign Trade Company v. Malev Hungarian Airlines25 was decided by the Supreme Court of Hungary on March 27, 1981 in an action for the loss of certain leather coats carried as cargo from India. The plaintiff had claimed 42,070.33 Hungarian forint as the equivalent of 9,360 Indian rupees. The defendant admitted liability, but pleaded that under the Warsaw Convention liability was limited to 500 forint per kilogram as the equivalent of 250 Poincaré francs, or a total of 18,200 forint in respect of 36.4 kilograms, the weight of the missing cargo.

The court of first instance consulted the Ministry of Finance on the value of the Poincare franc in forint. The Ministry advised that the Poincare franc was not quoted officially in Hungary, and that after the quotation of gold parities for currencies had been suspended, determination of the value of the Poincare franc in forint was subject to certain basic and practical difficulties.

The court of first instance gave judgment for 23,732 forint (36.4 kilograms x 32.60 forint per U.S. dollar x 20 U.S. dollars). In this equation, the court took US$20 to be the equivalent of 250 Poincare francs per kilogram. The amount of US$20 was based on the practice of the International Air Transport Association (IATA). The defendant appealed, objecting to the calculation. The plaintiff asked that the judgment be confirmed, although it doubted that US$20 per kilogram was the maximum prescribed by the Warsaw Convention.

In the appellate proceedings, the Supreme Court sought the advice of the National Bank of Hungary on the translation of the Poincare franc into forint. The Bank replied that it did not quote the value of the gold franc, and neither did the leading financial countries of Europe. Gold had been eliminated from the international financial system. The price of gold fluctuated in the market, as did the price of all other marketed goods. Consequently, gold value was no longer suitable for establishing the limits on liability under international conventions. It seemed advisable to adjust the provisions of conventions to the new conditions. (Neither the Ministry of Finance nor the National Bank seems to have taken a position on how the court should make the calculation in prevailing conditions.)

In the appellate proceedings, the Supreme Court required the defendant to present evidence of the practices of airlines in major European socialist and nonsocialist countries. The practices to be covered related to the questions whether the airlines stipulated contractually or in any other way in their terms and conditions of business the maximum limit of compensation for each kilogram of goods lost or destroyed, how much compensation was afforded, and the currency of compensation. The defendant complied by supplying a communication by IATA with respect to the IATA Interline Cargo Claims Procedures Agreement (Recommended Practice 1665). The communication set forth the practices of airlines in Czechoslovakia, Denmark, Finland, the Federal Republic of Germany, Norway, Switzerland, and the United Kingdom. The IATA Agreement specified that if the amount of compensation was not declared in the airway bill, the maximum compensation was US$20 per kilogram.

The court held that the rise and fluctuation of the market price of gold made it unsuitable as a basis for determining the extent of compensation under the Warsaw Convention, because the fundamental objective of fixing the amount of compensation would cease to be achieved. The court was satisfied by the information put in evidence that the major airlines of the world, whether or not they were members of IATA, stipulate that their conditions or contracts of affreightment limited liability to about US$20 per kilogram.

The law of Hungary provides that international conventions on international transportation may take precedence over internal legal rules. Hungary, though not a member of IATA, cooperates with it and has accepted the recommended practice of the IATA Agreement referred to above, but the court recognized that this instrument was not an international convention entered into with other countries.

However, the objectives of the authors of legal rules [of relevant Hungarian law] include the intention that the internal [i.e., domestic] carriers should be invested with the same rights and liabilities as the foreign carriers of similar character. Since, on the other hand, the extent of compensation of $20/kg. can be regarded at present as a prevailing practice all over the world in air transportation, this fact, as some sort of silent agreement, cannot therefore be left out of consideration from the point of view of the defendant, i.e. the Hungarian air carrier.26

This approach can be considered an addition to the list of solutions that have been adopted at one time or another for applying a gold unit of account in current conditions. An interesting feature of this solution is that the Supreme Court recognized that it was substituting another monetary unit for the Poincare franc. The motive for this approach was the unacceptability of the solution based on the market price of gold.

Disregard of the Poincare franc, the court continued, did not mean that all other provisions of the Warsaw Convention were ineffective. One such provision was that in a judicial proceeding the translation of the Poincare franc into the national currency must be made at the gold value when judgment is rendered. The U.S. dollar had to be translated into forint at the exchange rate prevailing on that date. The Supreme Court confirmed the solution applied by the lower court but corrected it so that the appropriate exchange rate was selected.

Dr. Benedek Patassy, the President of the Supreme Court that decided the case, has published an article on the problem of applying gold units of account.27 The article is of particular importance because of the insight it provides into the reasoning on which the decision of the Supreme Court relies. The President notes that while some airlines have determined that the limit on liability they are willing to undertake is above or below the equivalent of US$20 per kilogram, for most airlines the limit is around the equivalent of that amount. Some airlines (Denmark, Norway, and Finland) have established a limit of SDR 17. He notes also that SDR 16 corresponded approximately to US$20, and that US$20 was approximately the value of the Poincaré franc before [August 15] 1971.

Thus, indemnification practice has given up adjusting to gold, but retained the 1971 measure in the form of the dollar or other convertible currencies. The disadvantages suffered by the clients of the carriers because of the inflation of currencies is far less significant than the setbacks the carriers would suffer if they had to follow the gold equivalent.28

Similar practices are followed under treaties regulating other forms of international transportation.

The President then considers how the computations made on the basis of gold for the purposes of the various treaties can be given legal effect. He arrives at a legal rationale by isolating three basic principles that govern the responsibilities of carriers under the treaties:

(a) The responsibility of carriers is specified in relation to the value of cargo without any obligations for additional costs suffered by claimants or profits they lose;

(b) The responsibility under (a) above is subject to a fixed maximum, which is defined by reference to gold and to the weight of lost or damaged cargo; and

(c) When the maximum compensation is paid, it is computed in gold but paid at the daily exchange rate for the domestic currency.

The first two principles determine the substantive responsibilities of carriers, but the third principle is merely a method of computation, though based on gold as a traditionally stable measure of value until recently. As the third principle is only a method of calculation, another method can be substituted for it without affecting the first two principles, provided some realistic rate is applied. Rigid adherence to the third principle would be incompatible with the first two principles and, in particular, would cancel principle (b) because of the changed position of gold.

The exact definition of the amount of compensation was not easy. The US$20 figure, which reflected the price of US$35 per ounce, was at the lower end of the realistic range, not only because the price of gold has shot up but also because inflation has affected the U.S. dollar. Nevertheless, the acceptance and application of the US$20 figure was justified, as it was not in the interest of Hungary to compel its carriers to pay higher compensation than carriers in the rest of the world. The efforts of Hungarian carriers to function under the same conditions as other carriers, with equal rights and obligations, are expressed in provisions of Hungary’s Civil Code and in ministerial comments on those provisions.

There was no hope that the former role of gold would be reestablished. The obvious consequence was that the international rules should be modified. As a first step, a new unit of account should be substituted for gold. If a convertible currency or gold were chosen, the agreement should include a clause dealing with the effect of inflation on maximum liability. Perhaps agreement might be reached on uniform charges for the transportation of cargo and on periodic adaptations of charges that would be related to adaptations of the maximum amount of liability. Pending new international agreement, courts must find a working solution.

The President concludes his article with the argument that it would not be satisfactory for each country to adopt legal measures to define the limit on liability in its own currency as temporary assistance for its courts. Not all currencies are convertible, and it was doubtful that the exchange rates chosen for fixing amounts in inconvertible currency would be acceptable to other countries. The U.S. dollar and the Swiss franc could be used temporarily as generally recognized means of payment, “thereby acknowledging the strictly speaking not quite legal practice used by the carriers.”29 It seems that the President proposes this solution—which of course was applied by the Supreme Court—even if not all countries take steps to give effect to it. If this is the President’s intention, it is not clear to what extent his reasoning is affected by his reference to the “not quite legal practice used by the carriers.”

The decision of the Supreme Court and the President’s article make it clear that the solution applied in the case and advanced in the article is ultimately a version of the former official price of gold in U.S. dollars. The solution can be considered only one version, because the date as of which this price was chosen is the date that preceded the declaration by the President of the United States on August 15, 1971 that the United States would no longer convert official holdings of dollars into gold or other assets. Yet, the official price of gold was not abrogated by international law until the Second Amendment became effective on April 1, 1978. Furthermore, before that date the U.S. dollar had been devalued twice and stood at US$42.22 per ounce of gold.

The outstanding legal novelty of the case is not so much the decision as the President’s legal reasoning as set forth in his article. The analysis of the three principles and the view of the third principle is probably unique in the treatment of the problem. The analysis has been inspired by considerations of public policy. After stating his recommended solution, the President concludes his article with the following assertion:

A significant argument in favor of this is that it would not be economically justifiable to force either more favorable or less favorable conditions upon Hungarian carriers and their clients than those of other European carriers and their clients; that is, we should adopt the existing accepted practice for economic reasons.30

It is worth noting that the President does not recommend the SDR solution as an interim measure or adoption of the SDR as the unit of account in amended treaties.


The Korean case referred to in S.S. Pharmaceutical Co. Ltd. & Another v. Qantas Airways Ltd. is Kim Tong-hun et al. v. Korean Airline Co. Ltd.,31 decided by the Tenth Civil Court of the Seoul High Court on December 21, 1987. The proceedings arose out of the attack on the defendant’s airplane by a Soviet air force fighter plane over Sakhalin Island, Soviet territory, on September 1, 1983. The plaintiffs were the husband and two sons of a passenger, who died in the disaster. Korea is a signatory to the Warsaw Convention and the Hague Protocol. Total damages were calculated by the court at an amount somewhat in excess of 146 million won. Liability was limited under the Warsaw Convention as amended by the Hague Protocol to 250,000 Poincaré francs.

The court stated that the gold franc was obsolete as a standard of value in view of developments in the international monetary system. Consequently, the gold franc was deficient as a rational and unified way for translating the franc into currencies. These translations had been made on the basis of the exchange rate for the current French franc, the (former) established price of gold, or the market price of gold. The market price rises and falls over a wide range, depending upon the time and place and political and economic factors. It is not an appropriate method for calculating stable exchange rates among currencies. International agreement had not been reached on substituting the national French franc, divorced from the gold standard, as a standard of value.

The method based on the official price of gold had the merit of being a stable and established value and, therefore, was more suitable than the other methods. Korea, however, had not recognized the official price. In any event, the Second Amendment of the Fund’s Articles had abrogated the system of official gold prices. Therefore, the official gold price also probably could not be relied on to provide an effective solution.

Currently, the academic and business communities generally are tending to use a conversion method based upon the IMF’s special drawing rights. . . . At the time it was created, the SDR was computed on the basis of a stable gold price and it was most appropriate as a substitute for the French franc as a stabilizing function. The value varied little, and the exchange rate was announced to all countries through the International Monetary Fund.32

For these reasons, as demonstrated by the Montreal Protocol, the SDR was recognized as the most reasonable method to give effect to the intent of the Warsaw Convention and the Hague Protocol to stabilize and unify limits of liability. The SDR solution would limit liability to US$16,366. The Warsaw Convention prohibits any agreements by which recoveries would be reduced below the limits of the Convention, but agreements between passenger and carrier to exceed the limits in the Hague Protocol are valid. In certain circumstances, which existed in the present case, special agreements did raise the limit of liability to US$75,000. In this case, the plaintiffs were entitled to the equivalent of US$58,000. At the appropriate date, the exchange rate was 852.02 won per U.S. dollar, so that the plaintiffs were entitled to a total of approximately 49.4 millon won.

Note by Antonio Marin Lopez, Revista Espanota de Derecho Internacional (Madrid), Vol. 38, No. 1 (1986), pp. 353–55. The discussion of the case is based on this Note.

The relevance of this date is not apparent from the Note cited in footnote 1 above. The date may have been the date at which a lower court delivered the decision affirmed by the Territorial Court of Madrid.

49 U.S.C. §1301.


690 F.2d 303 (1982).

This was not the intention. See Article XXIV, Section 1(a) of the First Amendment:

“In all its decisions with respect to the allocation and cancellation of special drawing rights the Fund shall seek to meet the long-term global need, as and when it arises, to supplement existing reserve assets in such manner as will promote the attainment of its purposes and will avoid economic stagnation and deflation as well as excess demand and inflation in the world.”

The provision is unchanged in the present Articles, in which it appears as Article XVIII, Section 1(a). On the meaning of the clause “to supplement existing reserve assets,” see Gold, Pamphlet No. 14.

No. 23603/81; Jonathan Barrett, “Case Law and Comments: Australian Court Refuses to Follow Franklin Mint,” Air Law (Deventer, Netherlands), Vol. 10, No. 6 (1985), p. 292.

Opinion, p. 18.

Ibid., p. 19.

[1989] 1 Lloyd’s Rep. 319.

Ibid., p. 324.

Gold, Pamphlet No. 44, pp. 103–104.

[1989] 1 Lloyd’s Rep., at p. 325.

Gold, Pamphlet No. 44. pp. 72–73.

The page reference is to Pamphlet No. 44.

[1989] 1 Lloyd’s Rep., at p. 326.

Ibid., p. 324.

The court was evidently skeptical about this technique: “It is not for me to comment on the approach to the question by the majority of the Supreme Court.” (Ibid., p. 327.) But, in both a footnote and in A subsequent statement in the opinion, the court pointed out that the opinion of the majority had been “trenchantly criticized” by Justice Stevens as well as by commentators (ibid.).

The court makes the strange statement that in 1974 the IMF absolved members from the obligation to declare a par value in terms of gold. ([1989] 1 Lloyd’s Rep., at p. 327.) It is not clear what action of the Fund the court had in mind. Perhaps it was the Fund’s Decision No. 4232–(74/67) of June 13, 1974 on Guidelines for the Management of Floating Exchange Rates (see Selected Decisions, Eighth Issue, pp. 21–30). That decision did not dispense with par values in accordance with the requirements of the Articles. It recognized a situation of fact, namely, that members were allowing their currencies to float notwithstanding the obligation to make par values effective, and called on members to collaborate in those circumstances by observing certain principles designed to minimize disorder.

[1989] 1 Lloyd’s Rep., at p. 327.

Kinney Shoe Corp. v. Alitalia Airlines, 15 Av. Cas. (CCH) 18, 509 (S.D.N.Y. 1980).

ociété Egyptair v. Chamie, Recueil Dalloz Sirey, 1987, Jurisprudence, p. 526.

[1989] 1 Lloyd’s Rep., at p. 328.

Ibid., pp. 328–29.

International Air Transport Associa tion, Air Carrier Liability Reports, No. 566 (Geneva, May 1983), pp. 11–17.

Ibid., p. 16.

“Az arany áremelkedésének hatása a nemzetközi fuvarozók kártérítési felelösségére” (Effect of the gold price increase on the indemnification responsibilities of the international transportation industry), Közlekedàsi Közlöny (Journal of transportation), Vol. 23, pp. 444–47.

Ibid., p. 446 (translation).

Ibid., p. 447 (translation).

Ibid. (translation).

Case 87NA1017; original judgment: Seoul District Civil Court, February 3, 1987, Decision 85Kahap4258.


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