30 December 2020
With up to half of the 'cold chain' breakages occurring at the airport, Air Pharma handling disputes risk heating up faster than vials of vaccine on the tarmac in the hot sun. We explore whether the IATA Standard Ground Handling Agreement (SGHA) is fit for purpose to deal with some complex logistics contract liability arguments now and in future.
25% of all vaccines will spoil prior to delivery
Ground Handling International
Introduction
Are the key liability provisions of the SGHA able to adequately protect ground handlers in light of planned large scale vaccine distribution or should it be revised to provide better clarity and protection given the changing face of ground operations brought by global travel disruption and operational challenges arising from the COVID-19 pandemic?
The Airline Industry Economic Performance report published by IATA on 24 November 2020 provides that COVID-19 has decimated air connectivity with full recovery for passenger air travel to take several years. The IATA report also provides that air cargo has supported global supply chains in 2020 and it is projected that vaccines and testing will continue to support global travel at 50% of 2019 levels in 2021.
Recent announcements by Moderna and Pfizer that their experimental vaccines are effective in preventing COVID-19 have raised hopes that the end of the pandemic is in sight. The UK Medicines & Healthcare Products Regulatory Agency is the first of the worldwide regulators expected to approve the use of the vaccine. Developing a vaccine is only half the challenge. Distributing the vaccine worldwide at the volumes projected across the world is a logistical challenge and pharmaceutical companies such as Pfizer have been working closely with the industry to address the safe transportation of its vaccines. Although transportation of time and temperature sensitive cargo such as vaccines, pharmaceutical, life science and medical products (Air Pharma) is not new to the ground handling industry, handling large scale Air Pharma will undoubtedly bring its own set of distinctive operational challenges especially in a COVID-19 environment.
50% of all temperature excursions will take place in airports or with airlines"
IATA
The IATA's eponymous SGHA providing the contractual framework for ground handling services has stood the test of time despite earlier crises that have engulfed the industry with 9/11 and SARs being key examples. However, given the unique challenges faced by the ground handling industry with diminishing passenger travel on one hand and the projected demand to distribute COVID-19 vaccines, whether the contractual framework remains fit for purpose and adequately protects ground handlers will need to be carefully considered.
The complex vaccine cold chain landscape
The cargo supply chain is complex. Cargo is handled along the chain by multiple parties with varying responsibilities, including consignors, freight forwarders, carriers (both actual and contracting airlines), ground handling agents, terminal operators, haulage companies, consolidators and consignees. It frequently involves several modes of multimodal transport using road, rail and air, with several different flights used and storage arrangements before it reaches its final destination. Air cargo is highly diverse in its physical characteristics and value.
The transportation of Air Pharma cargo adds even more complexity to the supply chain. Vaccines are sensitive biological products and have specific handling and storage requirements. Once vaccines are exposed to inappropriate temperatures, the vaccine potency cannot be regained and will not provide protection against the target disease. To ensure the quality of vaccine, vaccines must be transported and stored from its point of manufacture to end patients using a cold chain that meets specific temperature requirements. Preserving the COVID-19 vaccine cold chain is challenging due to three primary factors: the scale of vaccines required, timing of vaccines required and the varying temperatures requirements (from ultra-low and frozen) by manufacturers to transport and store the vaccines.
Given the scale of the COVID-19 pandemic, all countries are impacted and it is clear that as and when vaccines are finally approved for distribution by various regulators, urgent worldwide delivery of all available vaccine doses will be required to support early immunisation efforts. Various first world governments have already reportedly signed deals to secure early doses of successful vaccines with various pharmaceutical companies, which are likely to be accompanied with onerous delivery obligations in the sales contract. Accommodating demand with severely reduced air cargo capacity (from acute loss of belly hold cargo capacity) will be hugely challenging.
Cold calling
Vaccines must be handled and transported at controlled temperatures without delay to ensure integrity and quality of the product. Regulations such as the US Code of Federal Regulations Title 21 as well as pharmaceutical distribution rules and regulations in other jurisdictions impose strict temperature control requirements. Currently, most vaccines including the flu vaccine are stored and transported at normal refrigerated temperatures of between 2 degrees to 8 degrees Celsius with a number of other vaccines transported frozen at minus 20 degrees Celsius. Each leading COVID-19 vaccine under development have different temperature requirements. The Pfizer vaccine requires transportation and storage in temperatures below minus 70 degrees Celsius, with the vaccine not being able to be removed from a temperature of minus 70 degrees Celsius more than four times. To give some context, that's colder than the average temperature in the Antartic. The storage and handling of ultra-cold vaccines will require more specialised equipment and skills beyond existing cold chain infrastructure which makes it more difficult and expensive to transport safely. By contrast, the vaccine developed by Moderna needs to be shipped at minus 20 degrees Celsius (with storage between 2 degrees to 8 degrees Celsius) and can be distributed using existing cold-chain shipping and storage infrastructure. AstraZeneca’s vaccine candidate reportedly allows for storage and shipping at minus 20 degrees Celsius while Novavax's vaccine requires shipping and storage at 2 to 8 degrees Celsius.
Dangerous Goods
Many shipments of time and temperature sensitive products already contain, or have attached, small battery-powered tracking devices or data loggers to ensure that the contents have maintained within the required temperature range. These items are governed by IATA's Dangerous Goods Regulations (DGR) for air transport. To ship ultra-cold vaccines, dry ice may be required to keep the cold chain effective (there is discussion by Pfizer that its vaccines will be shipped in specially designed temperature controlled thermal shippers with dry ice used as a refrigerant), this will create further logistical challenges. Dry ice is frozen carbon dioxide and also regulated by IATA DGR even when used as a refrigerant for non-dangerous goods. The packing requirements must meet the applicable requirements of the IATA DGR (including the documentary requirements) and there are special requirements for accepting and handling of each shipment. Shippers must also ensure that they follow the requirements in the IATA DGR to ensure that the total weight of dry ice being offered in the consignment does not exceed the limit for the particular aircraft type.
Air Pharma and the SGHA contractual framework
Given the precise nature and complexity of Air Pharma therefore, it is reasonable to question whether the SGHA contains enough to provide a proper contractual framework for parties to assume the requisite risks. For example, there has always been a lot of debate around the viability of Article 8 and the SGHA's liability provisions. Some parties love it, some hate it. Most agree that it could be clearer. A common theme raised by industry, both carriers and handlers alike, when discussing the current version of Article 8 is that the standard form document should not be negotiated and amended on the basis that it is a standard form agreement borne out of careful industry negotiations.
Such comments were made pre the COVID-19 pandemic and divorced from the fact that ground handling industry and airline carriers alike are collectively affected by operational challenges brought on by pain points such as furloughed or retrenchment of workforce, the obligation to provide services in a way which safeguards the safety and well-being of employees and passengers while preserving much needed cash flow.
As a starting point, a key function of contracts is to allocate risk between parties. Standard form contracts across various industries are intended to provide a convenient starting point for the negotiation of desired allocation of risk. The underlying principle of Article 8.1 is that airlines are responsible for damage to their aircraft (or other property) or any other liability in respect of passengers, employees, baggage or cargo unless these have arisen "from an act or omission of the ground handler done with intent to cause damage or reckless knowledge that such damage would probably result". To withdraw the indemnity and therefore pass on the contractual responsibility to ground handling agents, there must be actual proof of this conduct. What remains problematic is the actual standard applicable (whether this should be interpreted as subjective actual intention or objective intention based on a reasonable person) to determine intention.
Subject to the individual requirements of each COVID-19 vaccine developed, the COVID-19 cold chain will require specialised capabilities to handle, store, transport and deliver the future COVID-19 vaccines. Building temperature controlled facilities and sourcing additional infrastructure is expensive and requires time. In times of an economic downturn, this may not be a viable option for most businesses including handling companies. The reality is that some businesses will be adapting existing infrastructure to assist with the distribution of COVID-19 vaccines and shipments of vaccines handled by airports, airlines and ground handlers who are not IATA CEIV Pharma certified, equipped to handle AirPharma with different temperature requirements or sufficiently trained to handle Air Pharma.
Narrow margin of error
While there are still many unknowns in terms of the temperature sensitivities of the vaccines (whether to be handled as cold or ultra-cold) and the manufacturing and distribution locations, handling and getting the vaccines to the right destination and within optimal conditions is not straightforward.
According to IATA's latest CEIV Pharma Guide, 25% of vaccines reach their destination degraded due to incorrect shipping conditions and 20% of temperature-sensitive Air Pharma are damaged during transportation due to a broken cold chain. Losses associated with temperature excursions are estimated at USD34.1 billion. More worryingly, IATA also indicated that 30% of the scrapped pharmaceutical can be attributed to logistics issues alone. Given the current COVID-19, safe and rapid transportation of COVID-19 vaccines is essential and the loss of spoilt vaccines due to cold chain issues is problematic and costly. There may not always be a secondary market for the COVID-19 vaccine or for Air Pharma more generally. That means a consignee might not be able to mitigate its loss by selling any remaining stock that has not perished. The consignee may therefore seek to recover all of these losses from the ground handler. The questions are therefore how easy it will be to trigger liability against a ground handler for much bigger amounts and what protection will SGHA Article 8 afford the ground handlers in relation to its handling of Air Pharma?
CEIV Pharma certified ground handlers may be more prepared to handle COVID-19 vaccines. According to the recent Sunrays Air Cargo Readiness Survey released in September 2020 (commissioned by Pharma.Aero), handlers and airports feel less prepared than freight forwarders and airlines overall. In the case of ground handlers who are not accustomed to handling temperature-sensitive Air Pharma and may not have the cool chain infrastructure such as temperature controlled cool dollies to mitigate the risk of temperature deviations and contamination, especially in local stations who traditionally may have focused on passenger handling, the potential for errors and risk exposure is high.
If the ground handler's conduct is to be assessed objectively, any evidence showing that spoilage of a batch of Air Pharma was caused by the company's handling measures or other actions and omissions of the employee of the agent which a reasonable handling agent would not have had in place, the loss potentially recoverable from ground handling agents is high due to the value of the vaccines. For example, if standard operating procedures for handling of Air Pharma cargo is not updated or followed, or if there was congestion at the airport and COVID-19 shipments were temporarily stored in containers which did not maintain the vaccines in allowable temperature ranges.
Risk in bulk
The projected high volumes and the urgency in which the high value, time and temperature sensitive vaccines are to be transported only exacerbate the risk of things going wrong.
According to IATA, over 50% of all temperature excursions occur while products are in the hands of airports and airlines, with airlines and cargo handlers being considered as high risk parties.
IATA
Without the specific equipment, storage facilities, cool chain ground equipment and containers, appropriate handling processes and adequately trained staff, the risk of damage and spoilage of the vaccines are extremely high with consequential liability potentially falling on ground handlers. Furthermore, with so many parties involved in the vaccine cold chain, temperature excursions, unexpected delays, possible customs clearance approval issues, lack of adequate infrastructure by any one party and skills to handle the vaccine further adds to the risk of spoilage and liability exposure to ground handlers.
COVID-19 vaccines are high value commodities and the risk of theft is extremely high and should be mitigated. Ground handling companies must therefore ensure that they put in place robust operational standards to ensure that processes are in place to keep the shipments of COVID-19 vaccine secure.
Chilling exposure
It is also important to bear in mind that even if the actions of the ground handlers have not caused the loss, undoubtedly in the case of high value vaccines (as has been the case with high value commodities), consignees or shippers (or their insurers) who have suffered loss will be actively seeking to identify different parties against whom a claim can be brought in order to maximise recovery. It is therefore far more prudent for ground handlers to ensure that their contractual framework is in good shape. A carefully drafted contract which takes into consideration various operational risks and potential liability across the supply chain (for example, ensuring that both upstream and downstream liability is appropriately aligned to reduce exposure) will assist at to reduce potential recovery claims against handlers at the outset. With so much riding on it, contractual clarity is essential.
Furthermore, Article 8.6 overrides the ground handler's protection for direct loss of damage to the carrier's cargo by the handler's negligent act or omission, subject to the limits of liability for cargo under the Montreal Convention 1999 applying to the handlers as well. The use of the word direct loss is misleading. Cargo is either lost or it isn't. 'Direct' implies that it concerns the damages related to that loss and the definition of 'Direct Loss' in the SGHA means 'a loss arising naturally or directly from an occurrence and which excludes remote, indirect, consequential, or special losses or damages, such as loss of revenue or loss of profit'. Whilst ground handlers can derive some comfort from this language, it should be noted that national courts do not have a universal definition for the meaning of 'consequential loss'. Under English law at least indirect and consequential loss are indistinguishable and far more losses fall into the 'direct' camp than people realise. Loss of profit has been held to be direct or indirect depending on the circumstances.
Nevertheless, as indicated above, if 25% of vaccines reach their destination degraded due to incorrect shipping conditions, then this type of issue, if viewed under the transportation of COVID-19 vaccines, could potentially lead to a new category of cargo claim under SGHA. Here, the degraded batch of vaccine would still be transported and delivered to the consignee, but with a lower quality and efficacy due to temperature excursion during delivery. There is a possibility that consignees may initiate a claim for the loss of value for the degraded vaccine which is directly caused by the failure of the cargo handlers to keep the temperature-sensitive vaccines in the cold chain facility. This could lead to liability under Article 8.6, particularly when the shipment concerned is equipped with temperature logger which records the point in time where the shipment is exposed to an inappropriate temperature.
Self-administered protection
Whilst ground handlers insure themselves against liabilities arising out of their handling work, if insurance responds to a claim then the compensation paid or costs incurred in defending the claim may have a detrimental impact on their loss record and the premiums they pay for their insurance. COVID-19 vaccines are high value commodities and the risk of theft is extremely high. Ground handlers' insurers will also be concerned with any successful recovery particularly considerable commercial pressure to preserve cash flow and improve loss ratios.
Our preference would be to identify and define the types of loss likely to occur and then either limit or exclude them. It avoids having to determine them in a dispute. Of course, it is difficult to predict all types of losses that might arise. But handling operations are mature enough for the industry to identify the major pain points and apportion responsibility accordingly. Air Pharma handling for a pandemic will likely throw up new logistical challenges above and beyond what has occurred to date.
However, in what we fervently hope is the aftermath of COVID-19, it would be a good time to address liability and other unanswered questions, gaps and shortfalls in the SGHA's drafting and implementation. More importantly, we should take the opportunity to ensure that it is fit for purpose in time for the next pandemic or global crisis on the horizon.
For further information, please contact
Peter Coles, Partner, Clyde & Co
peter.coles@clydeco.com
