In ACG Acquisition XX LLC v Olympic Airlines SA, the English High Court examined the effect of signature of a Certificate of Acceptance and a hell and high water clause in deciding not to grant summary judgment to the lessor for unpaid rent. As these are key elements of operating leases, the decision is significant for both lessors and lessees.
In 2008, ACG Acquisition XX LLC (ACG) entered into an operating lease with Olympic Airlines SA (Olympic) for the lease of a Boeing 737 aircraft. The lease was for a period of five years. As part of the delivery conditions, ACG undertook that the aircraft would be airworthy and in a condition suitable for immediate operation in commercial service. On delivery of the aircraft, Olympic signed a Certificate of Acceptance, which, under the lease, was formally deemed to constitute delivery.
Shortly after putting the aircraft into use, it was grounded due to a technical defect. On further investigation, Olympic discovered 14 separate categories of technical defects, and the aircraft was taken out of service. Following this, the aircraft's certificate of airworthiness was withdrawn by the Greek Aviation Authority.
Olympic stopped paying rent and claimed that it was under no obligation to do so, as there had been a total failure of consideration from ACG.
ACG issued proceedings for recovery of rent and damages. Olympic counterclaimed, alleging that ACG had breached the lease agreement and claimed damages. ACG argued that Olympic was precluded from maintaining a claim against ACG in respect of the condition of the aircraft as it had signed the Certificate of Acceptance.
ACG's application for summary judgment was dismissed by the Court on the ground that Olympic had established an arguable case. ACG's failure to ensure that the aircraft complied with the delivery conditions was such as to place them in breach of contract. Olympic were entitled to claim damages notwithstanding the "as is, where is" provision in the lease and the signature of the Certificate of Acceptance.
The "hell and high water" clause, which provided that Olympic's obligation to pay rent was absolute and unconditional irrespective of any right of set-off or defect in the airworthiness of the aircraft, was not upheld by the Court. The Court took the view that Olympic had a real prospect of defeating ACG's claim for rent. Even if it did not, there should be a stay of execution on any judgment in ACG's favour.
Elements of the Decision
"As is, where is"
Although the lease provided that the aircraft was accepted by the lessee "as is, where is", this was "save as is expressly stated in this agreement". ACG were expressly obliged to deliver the aircraft in an airworthy condition and fit for commercial operation. That obligation remained notwithstanding the "as is, where is" clause and signature of the Certificate of Acceptance.
Certificate of Acceptance
The lease provided as follows:-
Delivery by Lessee to Lessor of the Certificate of Acceptance will be conclusive proof as between Lessor and Lessee that Lessee has examined and investigated the aircraft, that the aircraft documents are satisfactory to Lessee and that Lessee has irrevocably and unconditionally accepted the aircraft for lease hereunder without any reservations whatsoever (except for any discrepancies which may be noted in the Certificate of Acceptance)."
The Certificate of Acceptance itself included the following confirmation from Olympic:-
"The lease property complied in all respects with the condition required at Delivery under s.4.2 and Sch 2 of the agreement except for the items, if any, listed on the attached Annex 2".
ACG contended that the very terms of the Certificate of Acceptance meant that Olympic had confirmed at the time of delivery that the aircraft complied with the delivery conditions set out in the lease and that it had been accepted for all purposes. Olympic were, therefore, precluded from contending that ACG was in breach of its obligations.
Olympic responded by pointing out that the lease did not provide that the Certificate would constitute conclusive proof that that aircraft complied with the delivery conditions as it could have done. Consequently, there was nothing preventing Olympic from alleging that ACG was in breach of its obligation to deliver the aircraft in the required condition or from claiming a total failure of consideration. All the Certificate did was prevent them from rejecting the aircraft and mark the commencement of the lease term. The Court accepted Olympic's reasoning.
The facts of this case were extreme and the decision needs to be viewed accordingly. The condition of the aircraft was appalling. Olympic claimed that it would cost more to repair than it was worth and this was not challenged by ACG. The Court would also appear to have been influenced by the fact that the aircraft documentation on which Olympic had relied gave a misleading picture of the aircraft's condition, showing work as performed which had not been done or not been done adequately. Whether the US Courts, which have consistently upheld "hell and high water" clauses, would have reached the same decision is an interesting question. Nevertheless, the decision is one which lessors need to heed in reviewing their lease documentation. For lessees, it re-emphasises the risks of signing a Certificate of Acceptance if they have any reservations about the condition of the aircraft they are taking (which it would appear Olympic probably did).
The full hearing of the case is due to take place in March 2011 and the judgment in that should hopefully further clarify the position.