Assurances in Aircraft Leases: Latest High Court Decision

Factual Background

In September 2015 Aquila Aviation and Onur Air entered into a short term lease agreement, by which Aquila agreed to lease one aircraft engine to Onur for a period of 10 months.

Three months after delivery, a major engine failure occurred whilst the aircraft was taking off with 196 passengers and crew on board. There was no loss of life or serious injury but the engine was removed from the aircraft and not used again.

Contractual Background

The master lease agreement stated that the engine was to be delivered "as is, where is" and that Aquila "makes no warranties, guarantees or representations of any kind" with regard to the engine. The agreement also made it clear that the risk of loss or damage to the engine during the lease term rests with Onur. Even in the event of a total loss of the engine, Onur would continue to be liable for the rent, until it paid to the Lessor the stipulated amount of $7,000,000.

The specific lease agreement added that: "by signing the Acceptance Certificate, [Onur] confirmed that it has the opportunity to fully inspect the Engine Package to its full satisfaction and to satisfy itself that the Engine Package is in accordance with the Delivery Conditions set out in this [Lease] on the date of delivery."

Onur duly executed the Acceptance Certificate, in which it confirmed that it had inspected and unconditionally accepted the engine, and that the Certificate constituted conclusive proof that the engine satisfied the delivery conditions under the lease.

The Proceedings

Aquila later brought a claim against Onur for the stipulated amount, unpaid rent, damages and costs.

Onur responded with four key points:

1. Repudiatory Breach: The engine did not comply with the contractual delivery conditions, meaning Aquila was in repudiatory breach of the lease.
2. Misrepresentation: Onur was entitled to rescind the Lease and Acceptance Certificate because, by presenting the engine for delivery, Aquila had falsely and recklessly misrepresented that the delivery conditions would be fulfilled and the engine would be useable throughout the term, and thus induced Onur to enter the contract.
3. Breach of Warranties: the 'representations' made by Onur also constituted warranties/ collateral warranties which Aquila had breached.
4. Consideration: the condition of the engine at delivery and/ or the later total failure of the engine meant that there had been a total lack of consideration.

Aquila responded that Onur's arguments had no real prospect of success, and applied for summary judgment.

The Judgment

Mrs Justice Cockerill noted that the lease stated clearly and emphatically that "the starting point between the parties was an 'as is where is' basis". On a reading of their contractual agreement as a whole, the parties had clearly not "intended to create self-standing obligations as to the delivery condition which undermined the 'as is where is' basis of the contract".

Cockerill J. also refused to accept Onur's submission that the Acceptance Certificate should be seen as referring only to the timing of delivery. She held that the intended purpose of the Acceptance Certificate was that "the lessee shall not take delivery and start the contract running without having given the confirmation (in effect) that no claims as to delivery condition exist". The effect is that "the parties have wittingly and willingly agreed to a risk allocation". Therefore, even if Onur could show that the engine was in fact in breach of the delivery conditions at the time of Delivery, it was contractually estopped from relying on such breach. The judge followed Olympic Airlines SA v ACG Acquisition XX LLC[2]  on this point, holding that the factual differences were not sufficient to distinguish this previous decision.

The judge was also unconvinced by Onur's arguments relating to misrepresentation: "In circumstances where the contractual backdrop is what it is, I find it completely unconvincing for it to be said that there was a representation, much less that it was intended to be relied on." Furthermore, "the contractual scheme operates as a road block preventing Onur from establishing inducement".

In response to the point regarding lack of consideration, the judge held that "an assertion of total failure of consideration hinges on Onur being able to say that the Engine did not meet the Delivery Conditions. However, as I have found above, Onur is precluded from making that assertion." This argument, therefore, also had no real prospect of success.

Cockerill J accordingly held that Aquila was entitled to summary judgment.  Each of Onur's arguments failed.

Conclusion

This High Court decision reaffirms both (i) the parties' ability to draft a lease and acceptance certificate which effectively allocate risk between them, and (ii) the courts' willingness to uphold such contractual arrangements. This allows parties to agree that a certain state of affairs is the case even if, factually speaking, it later proves not to have been.  

Lessors can take comfort from this further confirmation that the allocation of risk in 'as is where is' will be upheld by the courts.

Lessees should again be reminded of the importance of undertaking sufficient inspections of relevant goods and equipment (such as engines) before accepting delivery, and in particular before signing an acceptance certificate which is stated to be 'conclusive proof' of their condition.