ACG V Olympic Airlines: The meaning of “airworthiness” and the “as-is, where-is” principle

18 February 2013

Katy Proud

The process for delivering an aircraft within a standard commercial operating lease generally has two key components. The lessee is responsible for inspecting the aircraft and, upon completion, issues an acceptance certificate confirming acceptance of the condition of the aircraft. The second is a ‘hell or high water’ clause, providing that once acceptance of the aircraft has taken place, the lessee must pay the rent unconditionally. Delivery is normally on an “as-is, where-is basis”, which requires the lessee to verify the aircraft is in a satisfactory condition before delivery and so passes the risk of any defects to the lessee.

ACG Acquisition XX LLC v Olympic Airlines (In Liquidation) [April 2012] clarified this process and the application of the “as-is, where-is” principle.

Facts

ACG Acquisition XX LLC (ACG) leased a Boeing 737-300 aircraft to Olympic Airlines (Olympic) for a 5 year period. The lease contained an “as is, where is” clause under which ACG undertook that on delivery, the aircraft would be in an airworthy condition, suitable for immediate operation in commercial service and would comply with various other detailed requirements.

Upon delivery to Olympic in Singapore, the acceptance certificate was executed, under which the airline represented that (a) it “irrevocably…leases from the Lessor the aircraft” and (b) the aircraft “complied in all respects…at delivery”.

The lease agreement stated that execution of the acceptance certificate was conclusive proof that Olympic had irrevocably accepted the aircraft for lease, but that it was not conclusive proof of condition at the time of delivery.

The aircraft was put into commercial service following delivery; however, shortly after, the aircraft was grounded when broken cables controlling the spoilers on one of the wings were found. Various other serious defects were discovered and the aircraft’s Certificate of Airworthiness was suspended. Olympic were unwilling to pay for the required repairs as they would cost more than the aircraft itself. 

ACG issued proceedings against Olympic claiming outstanding rent and maintenance reserves due under the lease. Subsequently, Olympic issued its own claim against ACG seeking damages for breach of the lease, in particular, in relation to provisions relating to the delivery condition.

ACG argued that however serious its breach of the lease in failing to deliver the aircraft in an airworthy condition, Olympic were, in any case, barred from making a claim, either for total failure of consideration or in damages for breach of contract, because Olympic signed the acceptance certificate.

The court found in favour of ACG and Olympics’ counterclaim was dismissed. Olympic have recently been granted permission by the Court of Appeal to appeal to the Supreme Court.

Meaning of airworthiness

There was a dispute between the parties as to the meaning of ‘airworthiness’ and whether the aircraft could be considered airworthy for the purposes of the required delivery condition.  ACG maintained that an aircraft was airworthy if the aircraft had been properly maintained, notwithstanding that there was an existing defect, which had the operator known of, would have prevented it from flying. Olympic argued that an aircraft was only airworthy it if was actually safe to fly.

The principal defect found was that of corrosion of the flight cables, causing failure of a spoiler cable. As such, the aircraft was not in an airworthy condition on delivery or in a condition for safe operation, which was in breach of the lease.

The court went on to discuss the meaning of ‘airworthiness’ and applied the following test: Would a prudent operator of an aircraft have required that the defect be made good before permitting the aircraft to fly, had he known of the defect? If he would, the aircraft cannot be deemed airworthy.

Whether a particular defect renders an aircraft unsafe for flight depends on the part in question and the severity of the defect, not whether the operator is aware of the defect.

Estoppel Claim

The court held that the clause in the lease, which provided that the certificate of acceptance was proof that Olympic had investigated and examined the aircraft, was to waive any right they might have had to refuse to accept the aircraft. It did not purport to waive any rights Olympic may have had to claim damages for breach of ACG’s obligation to deliver the aircraft in the required condition. The court made the distinction between the two rights and ruled that the clause did not prevent ACG from relying on ordinary principles of estoppel.

Before signing the lease, the parties had agreed that Olympic would carry out a detailed inspection of the aircraft and that any findings would be rectified at ACG’s cost prior to delivery. The court found that once the acceptance certificate had been signed, it would be unjust for Olympic to be permitted to allege the condition of the aircraft did not comply with the requirements under the lease.

The court distinguished the case of Lowe v Lombank [1960] 1WLR 1969, which dealt with the acceptance of a car under a hire purchase contract which was not fit for purpose, on the grounds that the representation as to condition and the nature of the parties differed, and there was no reliance by the hire purchase company on the representation of the hire. However, the court’s discussion on this point does leave open the possibility that an unsophisticated lessee could attempt a rather weak argument that it did not intend any statement as to condition to be relied upon. 
 
The court also ruled that the lease was not frustrated as claimed by Olympic, by the suspension of the Certificate of Airworthiness.

Impact

The key points to take away from this case are that: (a) lessees should ensure that they fully inspect the aircraft at delivery as they will be held liable for any undetected defect found at a later stage; and (b) lessors should ensure there is clear wording in the acceptance certificate, to the effect of ‘once executed this certificate represents conclusive proof that the aircraft is delivered in the requisite delivery condition’ instead of purely proof of acceptance of the lease. This makes it harder for an airline to bring a claim for failure to satisfy delivery condition. The lessor should also consider whether the lessee’s representation in the acceptance certificate should also refer to all circumstances in which the lessee waives all rights it might otherwise have to claim anything to the contrary.

As ACG Acquisition XX LLC v Olympic Airlines is a relatively recent case, there are limited cases which support or distinguish it. However, the case does provide a reliable basis for the way in which the courts may interpret “airworthiness” and the nature of the effect of signing an acceptance certificate. It should be noted that, as the meaning of airworthiness did not directly affect the outcome of the case, the comments are obiter dictum and therefore future courts are not bound by the test.

Other articles related to the Aviation Bulletin for February 2013:

> The passenger as master of the journey: connecting flights under the 1999 Montreal Convention

> Islamic Aircraft Financing

> Regulation 261 in practice after ECJ Grand Chamber's decision on Sturgeon