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22 May 2013
Following the Commercial Court decision in ACG Acquisition XX LLC v Olympic Airlines SA(1) (for further details please see "High Court rules on delivery process for commercial operating lease"), the Court of Appeal (Civil Division) recently issued a decision(2) that is of considerable importance to aircraft lessors, lenders and airlines.
The Court of Appeal held that the clear and unambiguous language contained in an aircraft operating lease agreement between ACG and Olympic relating to a Boeing B737-300 aircraft and the related acceptance certificate was enforceable to preclude Olympic not only from ceasing to pay rent, but also from claiming damages for improper delivery condition.
The certificate of acceptance that Olympic signed and submitted to ACG at delivery included a confirmation by Olympic that the aircraft complied in all respects with the conditions required at delivery, including the condition required by Schedule 2 of the lease agreement, subject only to discrepancies noted in an annex. The lease agreement further provided that Olympic's delivery of the acceptance certificate would constitute conclusive proof that Olympic:
Among other things, Schedule 2 of the lease agreement obliged ACG to deliver the aircraft in a condition for safe operation. The Commercial Court had found as matters of fact, and the Court of Appeal did not dispute, that unbeknown to either ACG or Olympic, the aircraft was not in a condition for safe operation or in the other conditions required by Schedule 2, and that the aircraft was not even airworthy.
The Commercial Court in passing defined 'airworthy' by reference to maritime law and held that an aircraft would not be airworthy if a prudent operator of the aircraft would have required that defects be made good before permitting the aircraft to fly, had the operator known of the defects. In other words, even an unknown defect could render an aircraft unairworthy. Although the Court of Appeal did not itself articulate a definition of 'airworthy', it nevertheless rejected that definition and held that the maritime definition of 'seaworthy' is not persuasive precedent in determining whether an aircraft is airworthy. Principally, the Court of Appeal said that in the charter of a ship, the owner of the ship is responsible for its maintenance and crewing and navigation, whereas in an aircraft operating lease, the lessor is in the role of a finance party – it neither operates nor is responsible for the maintenance of the aircraft. The Court of Appeal also pointed out that the complexity of modern passenger aircraft is such that a contractual mechanism to measure compliance with a required delivery condition is necessary to avoid years of uncertainty and to allocate the risk of defects of which neither lessor nor lessee is aware. The Court of Appeal found that the lease agreement was sufficient to allocate this risk to Olympic. The Court of Appeal acknowledged that short of complete disassembly of an aircraft, it is impossible to inspect an aircraft fully and eliminate all risk of undiscovered defects upon delivery, and that "the parties know that neither of them can be absolutely certain of an aircraft's condition at the point at which the lessee is called upon to accept delivery and the on-going risk" (Paragraph 43 of the decision). The lease agreement provided Olympic with ample opportunity to inspect the aircraft and its technical records and to have discovered, and required the rectification of, discrepancies before delivery; Olympic availed itself of that opportunity.
The Commercial Court held that the language in the lease documents was sufficient to preclude Olympic from revoking its acceptance of the aircraft or ceasing to pay rent, but that under the terms of the lease agreement, it could nevertheless seek to recover damages for the deficient delivery condition of the aircraft. However, Olympic was estopped under the facts of the case from doing so, because ACG had relied in good faith – to its detriment – in accepting redelivery of the aircraft from the previous operator based on Olympic's confirmations of acceptance and satisfactory condition set out in the acceptance certificate and the lease agreement. The Court of Appeal rejected this reasoning, holding that the language of the lease agreement and the acceptance certificate alone was sufficient to preclude Olympic from seeking damages based on the delivery condition of the aircraft.
At Paragraph 47 of the decision, the judge said:
"In my judgment, the natural meaning of the relevant provisions is clear. There is no ambiguity about paragraph 2(e) of the Certificate of Acceptance - the lessee confirms that the aircraft at delivery complied in all respects with the condition required under clause 4.2 and Schedule 2, except for the items listed on Annex 2. Clause 7.9 provides that delivery by lessee to lessor of a certificate in that form will be conclusive proof that the aircraft and the aircraft documents are satisfactory to the lessee. For my part, I have no difficulty with what is meant by the aircraft being 'satisfactory' to the lessee. The contract provides only one yardstick by which the lessee's satisfaction with the aircraft is to be measured, and that is compliance with the condition required by Schedule 2, as spelled out by clause 4.2(a). When the lessee confirmed that the condition of the aircraft at delivery complied in all respects with that required under Schedule 2, the lessee was confirming that the aircraft was satisfactory to it in the only sense in which it was entitled, or expected, to express its satisfaction."
The decision sends a clear message that aircraft leases and their related certificates of acceptance should be construed in accordance with their plain, unambiguous terms, and that the risk allocation set forth in those documents between lessee and lessor should be given effect.
For further information on this topic please contact John Pearson at Vedder Price's London office by telephone (+44 20 3440 4680), fax (+44 20 3440 4681) or email (firstname.lastname@example.org). Alternatively, contact John Karesh at Vedder Price's New York office by telephone (+1 212 407 7700), fax (+1 212 407 7799) or email (email@example.com).
(1)  EHWC 1070 (Comm).
(2) ACG Acquisition XX LLC v Olympic Airlines SA (in special liq)  EWCA Civ 369.
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