Planely obvious? Perhaps not... Careful inspection required in aircraft engine leasing

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Summary: The recent case of Aquila WSA Aviation Opportunities II Ltd v Onur Air Tasimacilik AS [2018] EWHC 519 (Comm) has followed Olympic Airlines SA v ACG Acquisition XX LLC [2013] EWCA Civ 369 in relation to the leasing of an aircraft engine. The Aquila judgment shows the inclination of the Courts to uphold what parties have contractually agreed, and their reluctance to meddle with the agreed risk allocation – even where the outcome may appear unfair.

Background

The Commercial Court awarded the claimant lessor company, Aquila WSA Aviation Opportunities II Ltd (Aquila), summary judgement against the defendant lessee airline, Onur Air Tasimacilik AS (Onur), for sums due under the lease of an aircraft engine. It was held that Onur could not complain of the condition of the engine as it had signed an acceptance certificate.

This decision was reached notwithstanding the fact that the engine was described by Onur as a “ticking time bomb” when it was delivered under the lease. Indeed, three months after delivery, a major engine failure occurred and the aircraft on which the engine was installed was forced to make an emergency landing.

Key contractual points

The main contractual points were as follows:

  1. An acceptance certificate was a condition precedent to delivery and was executed by Onur and delivered to Aquila. This acceptance certificate confirmed that (i) Onur had unconditionally accepted the engine; (ii) Onur had inspected the engine and the acceptance certificate was conclusive proof that the engine satisfied the conditions in the lease; and (iii) Onur had no rights or claims against Aquila relating to the engine’s delivery condition.
  2. The lease documentation included clauses to the effect of the following:
  • The engine is to be delivered and leased as is, where is. The Lessor makes no warranties, guarantees or representations of any kind relating to the engine. The Lessee waives all rights, remedies and damages relating to the engine.
  • By signing the acceptance certificate, Onur confirms that it had the opportunity to fully inspect the engine to its full satisfaction and to satisfy itself that the engine was in accordance with the delivery conditions (as set out in the lease).

Arguments advanced

Onur argued that (i) the condition of the engine on delivery amounted to a breach of contract by Aquila; (ii) Onur was entitled to rescind the lease and/or the acceptance certificate for misrepresentation by Aquila; and (iii) the condition of the engine at delivery and/or its subsequent failure led to a total failure of consideration.

The Court’s ruling

On the breach of contract argument, the Court ruled that the lease provisions were clear, and that the “as is, where is” clause was “staringly emphatic”. Mrs Justice Cockerill emphasised the importance of viewing the contract as a whole and upholding the agreed risk allocation, despite it being a “tough contract” for Onur.

The Court gave short shrift to Onur’s misrepresentation argument, with Mrs Justice Cockerill describing this argument as “completely unconvincing”. No obligations beyond those in the delivery conditions were found to have been established by Onur. In any event, Mrs Justice Cockerill described the contractual background as a “road block preventing Onur from establishing inducement”.

Finally, the Court held that the total failure of consideration argument could not stand. This was in light of its earlier ruling that Onur was precluded from claiming that the engine did not meet the delivery conditions.

Lessons to learn

This case is a reminder that the Courts are reluctant to depart from what parties have contractually agreed. Where contractual documentation is heavily based on a supplier’s standard terms and conditions, it would be prudent for lessees to carefully review this, especially those clauses which relate to the condition of the engine or aircraft. In any event, lessees should always thoroughly inspect the engine or aircraft to ensure they are fully satisfied before executing and delivering the acceptance certificate. Lessees may not always be able to exert much influence over the contractual documentation; but inspection and acceptance are always within lessees’ control.

BCLP’s global aviation practice has over 200 years of combined experience transacting aviation related business in global financial centres, and we are recognised by clients and directories as market leading lawyers in the aviation sector. We have significant expertise gained from working for aircraft lessors, airlines, airports, banks and other financial institutions, arrangers, suppliers and manufacturers across the full spectrum of aircraft financing techniques including secured lending, export credit, credits, insurance-based products, finance and leveraged leasing, securitisation and operating leasing.

Engine leasing and financing is a distinct specialism within the aviation sector, with analysis of jurisdictional risks and the protections required to be put in place as a result of such analysis needing to be carefully considered to ensure engine lessors (and their financiers) can repossess their asset. With aircraft engines not being able to be registered in the majority of jurisdictions, local legal advice is key. BCLP’s global aviation team has substantial experience in leasing and financing engines in a number of jurisdictions; Ireland, United Kingdom, France, United States of America, Hungary, Indonesia, Saudi Arabia, UAE, Russia, France, Japan, Israel and Vietnam to name a few, all of which required protections specific to that jurisdiction to be put in place. Please do not hesitate to contact us should you require further information in respect of our expertise in the engine leasing and financing sector or in the aviation sector more generally.

 

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