SNR Denton - Victory for Aircraft Lessors in ACG v. Olympic

The recent ACG v. Olympic Airlines [2012] EWHC 1070 case reinforces the near-universal deal in aircraft leases. Alexander Hewitt considers two aspects of the case that are particularly useful to lessors.

It is fundamental to an aircraft lease that:

• the lessee takes the aircraft as is, where is;
• the lessor gives no assurance about the aircraft?s condition; and
• once the lessee accepts delivery of the aircraft, it cannot later reject it, but must pay all amounts expressed to be due from it ?come hell or high water?.

The ACG lease was unusual in that ACG promised Olympic the aircraft would be delivered airworthy and fit for immediate commercial service. After delivery, the aircraft turned out to have been neither. At a trial of the resulting dispute, the judge:

• ruled the pre-delivery acceptance certificate Olympic had signed stopped it from raising pre-delivery defects in the aircraft (discovered post-delivery) against ACG?s claim for sums due under the lease; and
• commented on the drafting of the lease?s conclusive evidence clause.

Acceptance Certificate and Conclusive Evidence Clause

At trial, ACG?s main arguments were:

• when Olympic signed a pre-delivery acceptance certificate, which ACG relied on in accepting re-delivery of the aircraft under a previous lease, this created an estoppel by representation preventing Olympic from relying on the pre-existing defects in the aircraft that emerged after delivery; and
• once Olympic took delivery, a conclusive evidence clause in the lease created a contractual estoppel preventing Olympic from relying on those defects.

ACG won on the acceptance certificate/estoppel by representation argument. It lost on conclusive evidence/contractual estoppel ? but only because the judge ruled the conclusive evidence clause was unclear.

Regarding estoppel by representation, ACG convinced the judge:

• ACG had relied on Olympic?s clear and unequivocal statement in the acceptance certificate that the aircraft was in the condition the lease required; and
• in reliance on that statement, ACG had given up rights to require the previous lessee to put the aircraft in that condition before re-delivery.

Finance Leases and Sale and Leaseback Transactions

In a cross-border finance lease or sale and leaseback transaction, it is unlikely the lessor will agree to any express term or representation regarding the aircraft?s condition. So the need to argue the acceptance certificate creates an estoppel should not arise ? except in any domestic aircraft lease to which the Unfair Contract Terms Act applies.

However, should a lessor need to rely on the acceptance certificate to prevent the lessee from claiming the aircraft was defective at delivery, it would need to show it:

• relied on the lessee?s representation in the certificate that the aircraft was in the condition the lease required ? which should usually be possible; and
• acted to its detriment in relying on that statement.

As to detriment, the lessor should usually be able to show its detriment was giving up its right:

• in a finance lease, not to accept the aircraft from the manufacturer; and
• in a sale and leaseback, not to accept the aircraft from the lessee.

Contractual Estoppel

Contractual estoppel is a recent development. Broadly, it allows parties to agree certain things are to be treated as true under their contract. In JP Morgan v. Springwell [2010] EWCA Civ 1221, the Court of Appeal ruled a contract can validly provide that something shall be treated as true between its parties even if they know it is false ? unless some rule of public policy provides otherwise.

It will be very rare that a rule of public policy will prevent sophisticated parties to a cross-border aircraft lease from agreeing that, once it has accepted the aircraft, the lessee cannot later claim the aircraft was defective. In part, this will be because:

• even after pre-delivery inspections by experts, neither party will be certain the aircraft is in any given condition; and
• overall the lease will indicate the parties have freely decided for good commercial reasons that, once it has accepted the aircraft, the lessee takes all risks of the aircraft not being in any particular condition.

In ACG, the judge accepted the parties could have agreed an enforceable contractual estoppel on these issues. The only reason they failed to do so was that the conclusive evidence clause was too general.

For a fuller note on drafting aircraft leases and managing deliveries after ACG, please click here.

For more information, please contact Alexander Hewitt or your usual SNR Denton contact.

Law stated as at 28 June 2012

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