Third Party Liability Exposure for Keepers of Private Railway Cargo Wagons Under COTIF 1999

28.04.2006

What is COTIF 1999?

COTIF (Convention relative aux transports internationaux ferroviaires - Convention concerning International Carriage by Rail) is an international treaty joined by 42 countries (all European countries but without the succession countries of the Soviet Union - with the exception of Lithuania, Latvia, and the Ukraine - as well as four countries in the Middle East and three countries in North Africa). The currently valid version of COTIF dates from 1980 (COTIF 1980). COTIF 1980 contains inter alia internationally binding regulations concerning the railway freight law (CIM) as well as the carriage of private cargo wagons (RIP) in cross-border traffic. Already in 1999, the general meeting of the COTIF member countries adopted extensive changes to COTIF (COTIF 1999) in Vilnius. COTIF 1999 can only take effect after at least 27 member countries ratify it. Turkey in early April 2006 has been the 27th member country to deposit ratification documents with the OTIF in Bern, the international organisation for the administration of COTIF. COTIF 1999 will therefore now take effect on 1st of July 2006.

To which extent will COTIF 1999 take effect on 1st of July 2006?

COTIF 1999 on 1st of July 2006 will take effect with legal force only in the 27 member countries which have already ratified it. Railways from the states which have not yet finalized the ratification process (among many others for example also France, Italy, Belgium and Sweden) will be able to apply COTIF 1999 on a contractual basis until the ratification processes are finalized. It is generally expected that this possibility will be made use of.

What changes does COTIF 1999 bring for private cargo wagons?

The new concept of the "keeper"

In the context of the international railway law, COTIF 1999 follows the path of the liberalization of the railway sector initiated by the EU Commission. This also includes the position that the use of private cargo wagons in international traffic is no longer tied to the condition that the wagons are incorporated in the wagon fleet of a railway undertaking. RIP and the obligation contained therein to conclude a "registration contract" with a railway undertaking have been dropped. Also, the term "private cargo wagon" or "P-wagon" disappears from the international railway law. In view of the responsibility for the wagon, COTIF 1999 takes up the term "keeper" in the future - similar to the field of road traffic - which is used for the first time in the international railway law. Incidentally, railway undertakings are also "keepers" with regard to their own fleet of wagons. The present legal distinction between private cargo wagons and cargo wagons owned by railway undertakings is eliminated by COTIF 1999.

"Contract of Use", CUV and GCU

With the new COTIF Appendix D, the uniform rules CUV (contrats d'utilisation de véhicules), the use of rail cargo wagons receives an entirely new legal basis. The legal relation between the wagon keeper responsible for the wagon and the community of railway undertakings using the wagon - provided for by the present law for private cargo wagons under the registration contracts - is superseded by the new type of contract, the "contract of use", which is independent of the individual freight contract (just as the present registration contract); however, the keeper must conclude a contract of use not only with one but theoretically with every railway undertaking who places the cargo wagon in its train and thus "uses" it. This legal position applies in the future to the railway undertakings? own fleets of wagons as well, who up to now have stipulated the reciprocal use of their cargo wagons in the contractual framework of the RIV.

What is a contract of use needed for anyway?

The member countries of COTIF have thought it necessary to particularly settle issues of liability for damage on the wagon that is being used as well as damage caused by this wagon in a direct legal relation between the wagon keeper and the railway undertaking that uses the wagon, independent of the underlying freight contracts.

However, the rather minor and at the same time predominantly optional scope of regulation in CUV led to the fear that presently dependable basic conditions for the international use of rail cargo wagons would be replaced by an obscure multitude of bilateral contracts of use which would have been counterproductive for the pursued objective of liberalizing rail cargo traffic.

Therefore, the international associations of private wagon keepers (UIP) and the railway undertakings (UIC and ERFA) have, after several years of negotiations, developed a multilateral contractual framework aimed at maintaining the dependability of the basic conditions for the international use of rail cargo wagons by creating a uniform contractual minimum standard. This "General Contract of Use" (GCU) in the meantime has been agreed upon. The associations UIP, UIC, and ERFA in a joint declaration in early May 2006 will recommend to their respective members, as well as to keepers and railway undertakings who are not members of any association, to join the GCU.

What does the "General Contract of Use" (GCU) deal with?

The GCU supplements CUV, particularly with detailed regulations concerning the assessment and handling of damage on rail cargo wagons that are being used as well as the associated obligations regarding conduct and information duties of the railway undertakings and wagon keepers involved. With regard to liability, GCU follows the principles of CUV.

When will the GCU take effect?

Since the GCU makes reference to COTIF 1999 and its appendix CUV, it can come into force earliest together with COTIF 1999. As mentioned above, this will already be the case on 1st July 2006.

How does the GCU work in practice?

Cargo wagon keepers and railway undertakings can join the contract by stating this (so-called "opting in") to the GCU Bureau which will be established in Brussels at the latest on 1st of January 2007. Until the GCU Bureau has been finally set up, UIC will be the caretaker to whom the opting in declarations can be directed. After having joined the GCU a contract of use with the GCU terms applies "automatically" each time a cargo wagon, the keeper of which is a GCU member, is actually used by a railway undertaking who has joined GCU as well. Thus, it is unnecessary amongst GCU members to negotiate the terms of each individual use of a cargo wagon.

Does COTIF 1999 change the wagon keeper's statutory third party liability?

Clearly not. COTIF 1999 and CUV do not provide for additional legal liability on the part of the wagon keeper compared to the present legal position. The wagon keepers' liability vis-à-vis third parties still arises from the respective applicable national tort law which regularly implies negligence. Consequently, the wagon keeper is, in particular, not affected by liability regardless of fault, which is the case in most European countries for the train operators and the infrastructure managers.

What is the difference between the wagon keeper's contractual liability under CUV and GCU and the wagon keeper's liability based on the present registration contracts?

Keeper liability under CUV and GCU

The concept of CUV and GCU is simple: The keeper is liable for damage caused by the wagon only in case of his own negligence. Therefore, the wagon keeper's contractual liability based on GCU does not exceed the scope of his statutory third party liability.

Wagon keeper liability under the registration contracts and UIC leaflet 433

The basic function of the liability regulation in the registration contracts, concluded on the basis of the international standards of UIC leaflet 433, has grown historically and is complicated:

First of all, the railway undertakings registering private wagons have demanded from the wagon keepers of private cargo wagons the contractual takeover of a liability regardless of fault for all damage caused by the wagon. The wagon keeper could only exonerate himself - which is in most cases not possible - by proving negligence on the part of the railway undertaking. This liability regulation that still forms the basis of all registration contracts has been eased since 1962 by the so-called "indemnity agreement:" Accordingly, the railway undertakings who were joined together in UIC exempted the wagon keepers from the contractually assumed liability regardless of fault by paying a "indemnity fee" in so far as there was no gross negligence or deliberate act on part of the wagon keeper, or the damage was caused by typical properties of nuclear matter, or lack of proper cleaning, or decontamination of the wagon.

The exemption provided by the "indemnity agreement" applies also to claims from third parties which, at first glance, lends the agreement an insurance-like nature. Since the wagon keeper is only liable to third parties due to negligence, and in case of an accident the third parties regularly can take action much more easily against the operating railway undertaking on the basis of its legal liability regardless of fault, this exemption is less about covering third party risk but rather concerns a waiver of recourse by the railway undertaking vis-à-vis the wagon keeper that is declared beforehand in case he can only be accused of "simple" negligence.

Ever since the beginning of liberalization of the European railway system more than a decade ago, the "indemnity agreement" has lost importance as new railway undertakings, who have been entering the market, have appeared as competitors to the state-owned railways that are joined together in UIC, and who have not taken part in this model of claims funding.

What will happen to the present registration contracts and the "indemnity agreement" once COTIF 1999 and the GCU take effect?

Until COTIF 1999 comes into force, RIP (valid until then) requires the conclusion of a registration contract for the use of a private cargo wagon in international traffic. Registration contracts that are not terminated on COTIF 1999 taking effect will neither through this nor through the wagon keeper joining GCU be affected in their validity. As long as they continue to exist they have the character of bilateral agreements which are legally possible even under the rule of the GCU and will constitute a deviation from the GCU only between the parties of the registration contract.

However, during GCU negotiations UIC and ERFA have made it clear that in the future neither the "indemnity agreement" nor other models of group funding of claims or liability pooling with the participation of railway undertakings will be continued or newly installed. Against this background, with the remaining registration contracts expiring, the "indemnity agreement" will be history in the foreseeable future.

How does the discontinuation of the "indemnity agreement affect the risk exposure of the third party liability insurer of a wagon keeper?"

In answering this question one has to make the following distinctions:

If there was already a third party liability policy for covering a wagon keeper's statutory third party liability in place - like the compulsory coverage for wagon keepers that is obligatory in Germany - it only needs to be assessed whether and to which extend the discontinuation of the UIC railway undertakings' general waiver of recourse as part of the liability agreement actually increases the risk of recourse to the third party liability insurer of the wagon keeper.

Is the keeper's third party liability exposure, like in France for example, for operating railway cargo wagons generally not included in the regular third party liability coverage (provided this exists at all) - since up to now SNCF has offered its wagon keepers, in addition to the "indemnity agreement," a separate insurance cover in the form of group insurance policies (which will no longer be continued) that goes beyond the indemnity agreement's scope of application - the risk under the wagon keeper's statutory third party liability therefore, for the first time and on the whole, has to be assessed by the third party liability insurer.

How is the third party liability exposure of the keeper of railway cargo wagons keeper to be judged in general?

As already explained, COTIF 1999 does not change anything concerning the statutory third party liability of a cargo wagon's keeper which, as a rule, is plain liability due to negligence. The keeper's liability under GCU is plain liability due to negligence as well.

When is negligence on the part of the wagon keeper considered?

Negligence on the part of the wagon keeper regarding damage caused by operating the cargo wagon is only considered, if the keeper bears the responsibility for the wagon's operational safety and he can influence this operational safety by his own conduct (or could be held responsible for a lack of operational safety due to improper conduct and the damage caused by this).

For the assessment of the typical third party liability exposure of a wagon keeper, only his capacity as keeper is to be taken into account. At the same time, if the wagon keeper is also a train operator, infrastructure manager, workshop, or shipper, the responsibilities due to the different capacities and the risk in case of their violation are to be assessed separately and not as part of the third party liability exposure of the wagon keeper.

No responsibility on part of the keeper for the direct operational risk of the wagon

Since the cargo wagon does not have its own driving mechanism, the keeper has nothing to do with the direct operational risk of the wagon. The operational risk of the cargo wagon that is placed in a train is primarily an issue for the railway undertaking whose task it is to inspect the operational safety when assembling the train and ensuring safety during rail transport. This primary risk bearing and responsibility for the train operator takes into account the regularly granted liability regardless of fault by the railway undertaking vis-à-vis third parties. In so far as an inadequate condition of the track infrastructure causes damage, additionally the infrastructure manager also bears the responsibility for the operational risk, who stands, under CUV and GCU, from the wagon keeper's point of view in terms of liability on the side of the train operator.

The keeper's obligation to organize and monitor the wagon's maintenance

The keepers fundamental obligation regarding the wagon's operational safety is to organize and monitor the wagon's maintenance, especially to arrange for the recurring examinations stipulated by law. However, the cargo wagon needs a public permit prior to its first use as well as for future changes. In the future, this will also apply to maintenance plans drawn up by the keeper. Maintenance measures and repairs on the wagon are to be carried out only by workshops that are authorized to do the respective work (to date the by the railway undertakings, in the future by state authorised notified bodies).

Maintenance carried out by authorized workshops within the framework of the regulation in force for the wagon will regularly rule out negligence on part of the keeper, even if a mistake on part of the workshop causes the damage. There is just as little negligence on part of the keeper, if a railway undertaking during assembling or operating the train neither eliminates a recognizable damage with own means nor asks for the keeper to do so, and thereby a damage is caused - because inspecting the operational safety of the rail transport is, today as well as in the future, the railway undertaking's primary obligation, and is in fact not feasible for the keeper to take care of by himself.

The internationally standardized regulation situation in the railway sector that has been in place for decades - today as well as in the future within the EU and the remaining COTIF area being replaced by state supervision based on standardized specifications - in connection with the inspection carried out by the railway undertaking prior to each wagon's operation adds to the risk of negligence on part of the keeper being rather minor.

Can conclusions be derived from the actual claims settled under the "indemnity agreement" with regard to third party liability exposure of the wagon keeper under CUV and GCU?

Neither in a qualitative nor in a quantitative sense. The reason for this is based on the fundamentally different liabilities under UIC leaflet 433 on one hand, and CUV and GCU on the other hand:

The claim issues settled under the "indemnity agreement" were exclusively cases of contractually assumed liability regardless of fault on part of the wagon keeper in which an assessment of negligence proportions did not matter. The trend by UIC railway undertakings to assign the settlement of claims, when in doubt, to the "indemnity agreement" has been criticized by wagon keepers for decades who have joined in the financing through the lump sum indemnity fees. Based on this, the scope of the claim issues settled under the "indemnity agreement" is certainly much more voluminous than the potential scope of claims the wagon keeper could be held responsible for due to his own negligence under CUV and GCU, thus the lump sum indemnity fee paid for financing these claims cannot be taken as a benchmark for a premium calculation.

By Stefan Lohmeyer, General Counsel, VTG Aktiengesellschaft