Aviation Bulletin, May 2012

Introduction

While it may be self-evident, in these difficult economic times participants in the aviation sector, from airlines to owners, leasing companies to financiers and airport operators are all faced with continuing challenges of contract performance, and implementation. There have been a number of recent judicial decisions relevant to the aviation sector on contract interpretation and this paper briefly looks at a number of such cases and their impact and importance to this sector.

Transaction Performance and Implementation

Contract negotiations at any time are challenging. There is pressure on all commercial participants and their representative counsel to cut the best deal but not risk or jeopardise the commercial relationship and bargain, and at the same time have due regard to the competing agendas and timetables for completion and delivery of the participants. In this context it is not unusual for pressure to be brought to bear on counterparties to vary absolute obligations to obligations to be complied with on basis of best or reasonable efforts or endeavours and to reduce or negate absolute restrictions to lesser requirement of a consent provision.

The focus and commercial pressure to be seen to get the deal done at transaction entry stage often can lead to imperfectly drafted contracts where the implications of such concessions and compromises are not fully assessed or understood by principals. This can lead to issues upon implementation and enforcement of such agreements and recourse to rights and remedies.

(a) The meaning of "Airworthiness" and its consequences for aircraft leases In ACG Acquisitions XX LLC v. Olympic Airlines (in Liquidation)1 the airline defendant was estopped from alleging that the aircraft, a Boeing 737-300 aircraft was not in the condition required by the Lease because of representation contained in a signed certificate of acceptable.

Briefly the facts were that prior to delivery to Olympic the aircraft was leased by ACG to Air Asia. As is usual the timing of redelivery was synchronised to minimise time the aircraft was AOG prior to delivery to Olympic. This had an impact on redelivery conditions and timing. Following delivery to Olympic certain defects were discovered including the concerns about the condition of flight control cables and corrosion. This resulted in the aircraft being taken out of service and put into a maintenance repair facility for repair. Subsequently the defendant airline filed for bankruptcy.

ACG claimed the payment of rent and maintenance reserves in the sum of approximately US$4.6 million plus damages, alternatively for conversion in amount of approximately US$6.9 million, less what it received from subsequent lessee, plus the cost of deregistering and exporting the aircraft in order to mitigate its loss.

Olympic counterclaimed damages for breach of contract by ACG in failing to deliver the aircraft in the contracted condition, seeking approximately €6.8 million in respect of cost of hiring substitute aircraft and costs related to attempting to make the aircraft airworthy. Mr Justice Teare in his judgment considered the meaning of airworthiness because it was a major debate between the parties. Neither party were able to refer to any authorities which considered the meaning of airworthiness.2 He stated, an appropriate test of airworthiness is: "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."

He further commented that "in the context of a lease of an aircraft intended for the safe carriage of passengers it seems to [me] that the reasonable lessor and lessee would each expect the requirement in the lease that the aircraft be airworthy on delivery to relate to the actual condition of the aircraft and not the assumed condition." On findings of fact, the aircraft was not in an airworthy condition on delivery or in a condition for safe operation.

ACG contended that Olympic was precluded from alleging that ACG delivered the aircraft in breach of the Lease (Schedule2) based on the signed Certificate of Acceptance on 2 main grounds:

Pursuant to Clause 7.9 of the Lease the statement in the Certificate of Acceptance that the aircraft complies with the delivery condition is agreed to be conclusive proof of that statement. Alternatively, ACG argued that that statement gave rise to an estoppel in accordance with the ordinary principles of English law. The effect of ACG's arguments is that provisions of the lease preclude a claim by Olympic for damages for breach by ACG of its obligation to deliver the aircraft in the condition required by the lease.

Teare J stated that the effect of wording in Clause 7.9 was to waive any right the lessee might otherwise have had under the lease to refuse to accept the aircraft (Clause 3.4). However it did not purport to waive any right the lessee might have to claim damages of the lessor's obligation to deliver the aircraft in the requisite condition. Those rights were separate and distinct.

Notwithstanding this Teare J went on to consider the terms of the Certificate of Acceptance and noted that it contained a clear and unequivocal representation that the aircraft and the aircraft documents "complied in all respects with the condition required at delivery under Section 4.2 and Schedule 2 of the Agreement, except for the items, if any, listed on the attached Annex 2 (the "Discrepancies")". This representation was significant.

He concluded that,

"The fact that the representation is question is not, on the true construction of clause 7.9, to be treated as conclusive proof of the truth of the representation does not preclude the representation from giving rise to an estoppel. The effect of clause 7.9 is that the delivery of the certificate of acceptance operates as conclusive proof of the matters listed in that clause. That is a contractual right which arises independently of the principles of estoppel."

Arguments put forward by Olympic was that the representation contained in the certificate of acceptance was given and understood as "... simply confirming that the aircraft was in the requisite condition in so far as the inspections had allowed it to form any meaningful view and in so far as they were reasonable capable of revealing any defects or discrepancies".

Teare J noted that there were no words of limitation to be found in the representation given by Olympic and on the contrary, the scope of the statement was that the aircraft complied "in all respects" with clause 4.2 and Schedule 2 was only limited by the defects set out in Annex 2 to the certificate.

Teare J in his judgement stated that "it is necessary to bear in mind that commercial men prefer certainty to doubt". In referring to the requirement to have a certificate of acceptance signed prior to ACG signing a certificate of redelivery, he commented that

"the reasonable man with knowledge of the background would be surprised if the statement in the certificate did not have consequences, and that Olympic having formally stated that the aircraft complied in all respects with the condition required at delivery was nevertheless free to allege to the contrary."

Teare J was persuaded that it would be inequitable for Olympic to be permitted to allege, contrary to the representation, that the condition of the aircraft on delivery did not comply with the lease, notwithstanding that the effect of such an estoppel is to prevent Olympic from pursuing its claim for substantial damages for breach of ACG's obligations to deliver the aircraft in the required condition.

On the facts here the delivery to Olympic was timed to coincide with redelivery from Air Asia and the fact that ACG relied on Olympic representation to its detriment by giving up its right to refuse redelivery was sufficient, to make it inequitable for Olympic to go back on its representation.

ACG claim as summarised above was a claim in debt and damages and Olympic put...