The loss of flight MH17: how much compensation – and who pays?

A coffin bearing the remains of a victim from flight MH17 arrives in the Netherlands. In determining compensation, the onus is on the airline to prove it wasn’t at fault or negligent. EPA/Bas Czerwinski

On July 17, 2014, Malaysia Airlines flight 17 (MH17) – an international passenger flight from Amsterdam to Kuala Lumpur – crashed in eastern Ukraine. All 298 passengers and crew were killed. It appears likely that the aircraft was hit, through mistake or otherwise, by a Buk-M1 ground-to-air missile launched by pro-Russian separatists in that region.

In these circumstances, how much compensation is payable for the death of passengers on board the flight, and who pays? How can the circumstances in which MH17 was brought down be avoided in future?

And what of Malaysia Airlines? Before the crash, the airline was already in trouble following the loss of flight MH370. The airline has just been nationalised.

Liability for passenger death

Liability for the death of passengers on board an international flight is determined by reference to international aviation treaties. The 1929 Warsaw Convention was the first of these treaties. The most recent is the 1999 Montreal Convention.

Each air carrier liability treaty since 1929 has been more favourable to the passenger. The Montreal Convention “modernises and consolidates” Warsaw and related legal instruments. It is the most “passenger friendly” treaty in the Warsaw-Montreal regime.

Which treaty applies?

The treaty or treaties that apply to passengers on MH17 is determined by finding the same treaty in place at the point of departure and the passenger’s final destination. For MH17 that will generally be the Montreal Convention.

MH17 passengers may also be subject to different liability regimes. MH17 crashed while flying from Amsterdam to Kuala Lumpur. The Montreal Convention would apply to passengers on that ticketed one-way or return flight; both Malaysia and the Netherlands are parties to that convention.

However, while 236 of the 283 passengers on board MH17 were of either Dutch or Malaysian nationality, the remaining 47 passengers (including 27 of Australian nationality) were made up of nationalities from eight other nations.

For many passengers on MH17, and regardless of residence, their journey – their “ticketed” journey – may have been more extensive than the Amsterdam-Kuala Lumpur flight and other, less favourable liability regimes may apply. To determine liability, one looks for the same treaty in place at the beginning and end of a passenger’s total journey.

Liability for passenger death – potentially unlimited

Article 17 of the Montreal Convention provides that a carrier:

… is liable for damage sustained in case of death or bodily injury of a passenger upon condition only that the accident which caused the death or injury took place on board the aircraft or in the course of any of the operations of embarking or disembarking.

Death or injury must be caused by an “accident”. The most widely and generally accepted definition of an accident is set out in the decision in Air France v Saks, in which the US Supreme Court stated that liability under Article 17:

… arises only if a passenger’s injury [or death] is caused by an unexpected or unusual event or happening that is external to the passenger.

Under Article 21 of the Montreal Convention, for damages arising under Article 17 not exceeding 113,100 SDRs (or about US$173,000) per passenger, the carrier cannot exclude or limit its liability. An SDR or “special drawing right” is an IMF-created international reserve asset based on a basket of four international currencies. A passenger need not prove negligence.

However, a carrier’s liability – Malaysia Airlines’ liability – is potentially unlimited unless it can prove (and burden of proof is with the carrier) that damage “was not due to the negligence or other wrongful act or omission of the carrier or its servants or agents” or that such damage was solely due to the negligence or other wrongful act or omission of a third party.

And that’s a problem.

Negligence or wrongful act?

It may be difficult for Malaysia Airlines to prove that it was not negligent or that it did not commit a wrongful act. The issue is whether MH17 flew within restricted or controlled airspace, or whether it was reasonable, given the conflict below, for it to choose the flight path it did.

In terms of the latter – whether it was reasonable for Malaysia Airlines to choose the flight path it did – airlines clearly had adopted different approaches. Qantas, British Airways and other international carriers had stopped flights over the region; Malaysia Airlines (obviously), Air France-KLM, Lufthansa and others continued to fly this route.

After the downing of MH17, almost no airlines flew over the war zone (above), but it was a different story before the tragedy. FlightRadar24

In essence, was the region a safe place over which to fly? Or was Malaysia Airlines negligent in choosing to fly over a war zone and, thus, is it facing unlimited liability? As one aviation lawyer has stated:

It is a million-dollar question and … that will be the big fight.

It is also a matter that the UN aviation body, the International Civil Aviation Organisation (ICAO), has taken up. ICAO met on July 29 to review risks to civilian aircraft operating to, from and over conflict zones. In typical ICAO fashion, it established a taskforce and convened a “high-level safety conference” in February 2015 to look at ways in which potential risks to civil aviation arising from conflict zones can be mitigated.

As part of its deliberations, the conference may well have cause to consider Article 3 bis (a) of the Convention on International Civil Aviation (the Chicago Convention), to which Ukraine is a party. This provides that state parties to it:

… explicitly recognised that every State must refrain from resorting to the use of weapons against civil aircrafts in flight and that, in case of interception, the lives of persons on board and the safety of aircrafts must not be endangered.

How big could the bill be?

Malaysia Airlines was in financial difficulty well before the disappearance of MH370. The disappearance of that flight exacerbated an already bad position. The crash of MH17, needless to say, has not improved matters.

It is unsurprising then that, after considering some sort of rebranding, Malaysian Airline System Bhd will be delisted and taken private after Malaysia’s sovereign wealth fund Khazanah National Bhd offered to buy out minority shareholders for US$429 million – in other words, the airline will be rescued and nationalised.

But it won’t result in Malaysia Airlines avoiding higher premiums for “all-risk” insurance and, especially, for war insurance. It also appears to be the most expensive year for the industry since 2001 with annual losses passing US$2 billion.

And it won’t result in Malaysia Airlines avoiding compensation for passenger deaths. Some estimates put that compensation figure at US$1 billion.