Carol Aitken and Charlotte Winter
discuss a recent ruling in an aviation case has brought to light
the importance of wording in leasing contracts
The recent English High Court judgment in
ACG Acquisition XX LLC v Olympic Airlines (2012) EHWC 1070
(Comm) has attracted considerable attention from the leasing
community as it concerns the circumstances in which the defective
condition of an aircraft might entitle the operating lessee to
refuse to pay rent.
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While the court found in favour of ACG, the
judgment must be viewed against the particular wording of the
lease, and the availability of the principle of estoppel by
representation on these facts. The judgment reinforces the
importance of careful drafting of the lessor’s contractual
protections and the need for the lessee to satisfy itself with the
condition of the aircraft at delivery.
Background
In 2008, the lessor agreed to lease a Boeing
737-300 aircraft to Olympic Airlines under a five-year operating
lease, following redelivery of the aircraft from AirAsia. The
lessee signed an acceptance certificate (before the aircraft was
redelivered by AirAsia) and the aircraft entered into service.
Fifteen days later it was grounded when broken cables controlling
the spoilers on one wing were discovered. While undergoing repairs,
14 categories of defects were discovered and the Hellenic CAA
withdrew the aircraft’s certificate of airworthiness (CofA).
In September 2009 the lessor issued proceedings
against the lessee for payment of outstanding rent and maintenance
reserves and damages. The lessee, in turn, sought damages for
breach of the lease, in particular the provisions relating to the
delivery condition of the aircraft.
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By GlobalDataKey lease provisions
• Clause 4.2 obliged the lessor to deliver the
aircraft “as is, where is” and in the condition required in
schedule 2.
• Clause 7.9 specified the acceptance
certificate would be conclusive proof that, among other things, the
aircraft and the aircraft documents were satisfactory to the
lessee.
• Schedule 2 set out the aircraft’s specified
condition at delivery, including that the aircraft would be
airworthy.
The arguments
The lessor argued that:
• the aircraft was accepted by the lessee and
the condition of the aircraft conformed with the lease requirements
and was airworthy;
• if the aircraft was not airworthy, the lessee
was estopped by the terms of the acceptance certificate or by law
from asserting it was not delivered in accordance with the lease;
and
• the lessee’s non-payment was a repudiatory
breach of the lease.
The lessee claimed the aircraft was neither
delivered in the specified delivery condition nor airworthy, and
denied that it was estopped by the terms of the acceptance
certificate, the lessee argued that because the aircraft was not
delivered in the specified delivery condition and was not
airworthy, he had never been obliged to pay rent and could claim
damages for breach of the lease; there had been a total failure of
consideration; or the lease was frustrated by the suspension of the
aircraft’s CofA.
The decision
The court dismissed the lessee’s claims. It
accepted the aircraft was not airworthy on delivery, in breach of
the lease, but held:
• the confirmations given in the acceptance
certificate did amount to an estoppel of the lessee’s claims;
• the delivery of possession of the aircraft to
the lessee, combined with the estoppel, prevented the lessee’s
claim of a total failure of consideration; and
• the lease was not frustrated by the
withdrawal of the CofA.
The definition of
“airworthiness”
With no previous authority on the definition of
“airworthiness”, the court drew an analogy with seaworthiness
providing the following formulation: Would a prudent operator of an
aircraft have required that the defect should be made good before
permitting the aircraft to fly, had he known of it. If he would,
the aircraft was not airworthy.
It is therefore a question of fact and does not
depend on whether the defect was known. As references to
airworthiness in English law documentation should now be construed
in light of the above, parties need to exercise caution in
undertaking that any aircraft is airworthy.
The crucial arguments
The precise wording of the acceptance
certificate was a crucial factor in the determination there had
been an estoppel by representation. This principle prevents a party
who has made a representation of fact which has been relied upon,
and has induced the other party to act to his detriment, from later
acting inconsistently with that representation.
The lessee had had the right to inspect the
aircraft and to require acceptance flights prior to delivery, and
knew that the acceptance certificate would be signed before the
lessor accepted redelivery from AirAsia. The lessor, relying upon
the lessee’s representation in the acceptance certificate, accepted
redelivery from AirAsia and acted to its detriment in giving up its
right to refuse such redelivery.
The possibility of hidden defects which could
not be detected by the lessee in its pre-delivery inspection did
not make the estoppel inequitable because the lessee would have
appreciated before signing the acceptance certificate that hidden
defects might exist.
It is important to note that the conclusive
proof clause, as drafted, did not preclude the lessee’s damages
claim. In the absence of a direct reference to clause 4.2 of the
lease in clause 7.9, the court held that it operated as a waiver of
the lessee’s right to refuse to accept the aircraft, not its right
to claim damages for breach of the lease.
Some lessons
The case turned on the particular wording of
the lease and acceptance certificate, and the availability of
estoppel by representation on the facts.
Parties should take care using terminology like
“airworthiness” and “as is, where is” which, while commonly
accepted in aviation, might be interpreted differently by a court.
Caution should also be exercised when referring to the condition of
the aircraft at delivery, as it may cut across the “as is, where
is” wording, imposing a continuing obligation on a party.
Finally, lessees need to negotiate sufficient
opportunity to inspect the aircraft and records and perform an
acceptance flight, to satisfy themselves, as far as possible, with
the condition of the aircraft at delivery, as the risk of any
defects discovered after delivery may lie with them.
Carol Aitken is a senior associate
and aviation finance lawyer and Charlotte Winter, of counsel, is a
litigation and dispute resolution lawyer with Norton Rose
