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Accepting the unacceptable: a plane warning for aircraft engine leasing

Accepting the unacceptable: a plane warning for aircraft engine leasing

  • United Kingdom
  • Diversified industrials - Aerospace, defence and security

22-03-2018

In the recently reported case of Aquila WSA Aviation Opportunities II Limited –v- Onur Air Tasimacilik AS, the Judge granted summary judgment in favour of the lessor of an aircraft engine who claimed sums in excess of $12 million from the lessee, notwithstanding that it had leased a faulty aircraft engine which failed mid-flight, said to be a “ticking time bomb”. The Judge found that:

“[t]he parties have wittingly and willingly agreed to risk allocation. That risk allocation sits somewhat heavily on [the lessee]”

Background

In September 2015 Aquila WSA Aviation Opportunities II Limited (“Aquila”) agreed to lease to Onur Air Tasimacilik AS (“Onur”) an aircraft engine (the “Engine”)(the “Lease”).  Critically, at the time of entering into the Lease, Onur signed a comprehensive acceptance certificate in respect of the Engine (the “Certificate”).

In December 2015, following installation of the Engine into an aircraft, a major failure with the Engine occurred whilst the aircraft was in-flight, forcing the crew to perform an emergency landing (fortunately none of the 186 passengers and 10 crew members suffered serious injury). Onur maintained that there was a latent defect with the Engine that would or ought to have been known to Aquila, which rendered the Engine a “ticking time bomb”.

Key contractual terms

Importantly, the Certificate signed by Onur stated that Onur:

"(i) has unconditionally accepted the Engine for all purposes hereof and of the [Lease]; (ii) has inspected the Engine and the Engine satisfies the conditions set forth in the [Lease] and this Acceptance Certificate constitutes conclusive proof that the Engine satisfies such conditions; and (iii) [Onur] has no rights and/or claims against [Aquila] with respect to the delivery condition of the Engine" (the “Certificate”).

The Lease documentation also contained the following material terms:

  • “The [Engine] is to be delivered and leased hereunder 'as is, where is’”
  • "[b]y signing the [Certificate], [Onur] confirms that [it] had the opportunity to fully inspect the [Engine] to its full satisfaction and to satisfy itself that the [Engine] is in accordance with the delivery conditions set out in this [Lease] on the date of delivery.”
  • “Aquila makes no warranties, guarantees or representations of any kind […] with regard to the Engine.”

The Lease documentation also stated that Onur’s signing of the Certificate was a condition precedent to delivery of the Engine and commencement of the term of the Lease.

The Court’s decision

In response to Aquila’s claim for losses arising under the Lease, Onur argued (as both a defence and counterclaim) that: (i) the state of the Engine on delivery amounted to a breach of contract and warranty; (ii) Aquila committed reckless misrepresentations as to the condition of the Engine which induced Onur to enter into the Lease; and (ii) there had been a total failure of consideration due to the condition of the Engine.

Aquila applied for summary judgment on the strength of the agreed contractual terms.  At the hearing, the Judge found that Onur’s defences and counterclaims had no real prospects of success and accordingly summary judgment was granted in favour of Aquila in respect of its claim for sums exceeding $12 million from Onur.  In reaching this decision the Judge found that:

1.     even if it was successfully argued that, factually speaking, the state of the Engine breached the delivery conditions at the time of delivery, Onur was contractually estopped from relying on this breach.  The Judge stated:

            “[Onur] has agreed to provisions which on their face mean that if Onur signs the [Certificate] it cannot complain of the condition of the Engine. […] I do not consider that the fact the parties knew that Onur had not in fact inspected the Engine can have any impact on the effect of the contractual scheme”;

2.     there was no misrepresentation on the part of Aquila.  The terms of the Lease documentation and Certificate “operated as a road block preventing Onur from establishing inducement [to enter into the Lease]” and given the contractual backdrop, the Judge found it “completely unconvincing” that there was a representation, much less that it was intended to be relied upon; and

3.     there was no total failure of consideration.  The Judge considered that this argument hinged on whether Onur could establish that the Engine supplied failed to meet the contractual delivery conditions.  Onur was precluded from asserting this, in light of the Judge’s findings on contractual estoppel.

Conclusion

Whilst every case turns on its facts, this judgment is a reminder that the Courts will uphold contractual terms agreed by the parties, even if those terms appear to be unfair on the question of the allocation of risk and loss in a commercial relationship.  In that context, customers in dealing with suppliers of equipment or machinery (whether purchased or leased) are well advised to:

1.     exercise caution in dealing on a supplier’s standard terms and conditions, particularly in respect of issues around product quality and the ability to claim losses; and

2.     as a matter of good practice, always inspect and ensure they are satisfied that the condition of the goods supplied meets the contractual standard (before confirming acceptance of the goods).

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