Peskova v. Travel Service AS | Ireland

ACG Acquisition XXLLC v. Olympic Airlines SA

Introduction
Facts
High Court
Court of Appeal
Conclusion

Introduction

In a standard commercial aircraft lease, the lessee is required to assume responsibility for inspection of the aircraft and for issuing a Certificate of Acceptance to the lessor acknowledging its airworthiness. An important provision in a commercial aircraft lease is the 'hell or high water' clause which imposes an unconditional obligation on the lessee, once it has issued the Certificate of Acceptance, to pay the rent. The English High Court in ACG Acquisition XXLLC v. Olympic Airlines SA considered the exact meaning of the term 'airworthiness' and the precise contractual effect of issue of a Certificate of Acceptance. On appeal, the Court of Appeal, in reconsidering the issues, addressed the pivotal question as to "whether a claim for damages for defective delivery survives execution by the parties of the Certificate of Acceptance".

Facts

In 2008, ACG Acquisition (ACG) leased a Boeing 737-300 to Olympic Airlines SA (Olympic). By the terms of the lease, ACG undertook that, on delivery, the aircraft would be compliant with the delivery conditions as specified in the lease. Upon delivery, Olympic produced to AEG a Certificate of Acceptance and the aircraft duly went into service on 23 August 2011. However, 15 days later, defects appeared in the spoilers of one of the wings necessitating repairs. During the repair operation, 14 further categories of defects were identified prompting the Hellenic Civil Aviation Authority to withdraw the aircraft's Certificate of Airworthiness. In September 2009, AEG issued proceedings against Olympic claiming for outstanding rent and maintenance reserves and for damages. Olympic set up a counterclaim against AEG, claiming damages for breach of the Lease including the provision governing the Delivery Condition of the aircraft.

High Court

Significantly, in his decision, Teare J considered the meaning of the word "airworthy” and concluded that it depended on “its true construction in the context of the lease in which it is found, having regard to the factual background of which both parties are aware. The lease in this case is of an aircraft intended for the safe carriage of passengers. In that context the ordinary and natural meaning of airworthy is […] fit or safe for the carriage of passengers by air. Whether a particular defect renders an aircraft unfit or unsafe for flight will depend upon the function of the part in question and the severity of the defect. It will not depend upon whether the operator of the aircraft knows of the defect or not".

The court proceeded to identify the provisions in the lease having relevance to the fact scenario facing it:

Clause 4.2, which obliged the Lessor to deliver the aircraft 'as is, where is' and in the condition required in Schedule 2 (which sets out the Delivery Conditions).
Clause 7.9, which specified the Certificate of Acceptance would be conclusive proof that, that among other things, the aircraft and the aircraft documents were satisfactory to the Lessee.

Another relevant factor in the instant case was that, in the Certificate of Acceptance, Olympic had confirmed that the aircraft complied in all respects with the condition required at delivery under Clause 4.2 and Schedule 3.

The Court ruled in favour of AEG, making three significant findings:

Olympic had, by issue of the Certificate of Acceptance, made an equitable representation to the effect that the aircraft was in the condition as required by the lease.
Although Olympic was precluded from maintaining its stated claim for damages and from denying that it was required to pay the rent and maintenance reserves, it could, despite having issued a Certificate of Acceptance, bring a claim for damages for alleged breach of Delivery Condition.
A lessee may, in certain circumstances where an aircraft requires to be grounded, circumvent the Certificate of Acceptance by pleading "a total failure of consideration".

Court of Appeal

The Court of Appeal dismissed the appeal, holding as follows:

In light of the conclusive proof clause and the issue of the Certificate of Acceptance, Olympic had conclusively agreed that the aircraft was in Delivery Condition. (By contrast with the approach taken by the High Court, the court reached this aspect of its judgment on the basis of the contractual terms agreed by the parties rather than on equitable considerations of reliance, detriment and unconscionability).
The complexity of modern passenger aircraft is such that in the absence of some contractual mechanism whereby compliance with the contractually required delivery condition can be conclusively determined, parties to leases could face years of uncertainty as to the allocation of responsibility for defects which neither of them was aware on delivery. The court further observed that in an aircraft leasing transaction, the lessor's role is essentially financial; lessees, by contrast, by nature of their business, are operators of the aircraft and so necessarily responsible for ongoing maintenance.
The trial judge erred when he expressed the view that the contractual documentation did not preclude a claim for damages for breach by the lessor of its obligation to deliver the aircraft in the condition required by clause 4.2 and Schedule 2 of the lease.

Conclusion

The decision exhibits an admirable and nuanced understanding of the realities and complexities of aircraft leasing, particularly taking cognisance of the problem posed where the aircraft it is intended to lease is already on lease to another lessee and the lessor is desirous of arranging for the direct delivery of the aircraft to the new lessee. It has now been judicially affirmed that the combination of a Certificate of Acceptance and a correctly drafted lease agreement is conclusive evidence of acknowledgement by the lessee of the airworthy condition of the aircraft. Providing further reassurance to the lessor is the finding that the issue of the Certificate of Acceptance precludes the right of the lessee to bring a claim for breach of Delivery Condition. From the perspective of the lessee, the decision highlights the importance of not only carrying out a thorough inspection of the aircraft in advance of issue of the Certificate of Acceptance, but also, where the lessee is unable to satisfy itself that the aircraft is free from defects, of inserting appropriate words of limitation into the Certificate of Acceptance.