The trading of aircraft assets, be they whole aircraft, engines or other parts, between industry participants such as institutionalized leasing companies is as dynamic, legally complex and fraught with intense negotiation between interested parties as it has ever been.
Legal teams work (tirelessly!) to prepare tightly drafted documentation on behalf of their clients, attempting to prescribe recourse for every likely and unlikely eventuality which may arise during the course or following the completion of a sale and purchase transaction.
On occasion, however, despite the seemingly meticulously drafted documentation, unforeseeable events can occur and result in a potentially significant loss or cost accrual for one of the involved parties. In the unlikely event that the documentation does not provide for a remedy or guidance for correcting the issue, in the absence of goodwill between the transaction participants, the aggrieved party may be left with no choice but to initiate litigation.
This article briefly explores (i) some of the stakes in an aircraft sale and lease novation transaction, (ii) the mistake of a lessee making a lease payment to the prior lessor after closing, (iii) the concept of unjust enrichment as the likely (but not necessarily exclusive) source for a cause of action and (iv) the associated remedy of restitution.
The Stakes in a Leased Asset Sale Transaction
A purchase of an aircraft asset is normally concluded by the execution of a sale and purchase agreement between the selling and purchasing entities (the SPA). To illustrate the stakeholders in a common purchase and sale transaction and a mistake that could lead to unjust enrichment, an example is provided below.
To keep this example as straightforward as possible, we will assume that the selling entity under the SPA (the Seller or the Existing Lessor) is the full legal and beneficial owner of an aircraft asset and that it is also the lessor of that asset under a lease agreement (the Lease) between itself and a third-party airline (the Lessee).
The purchasing entity under the SPA (the Purchaser or the New Lessor) is not only purchasing the metal asset itself, it is also purchasing the economic benefits, including the stream of rental payments, under the Lease.
If the transaction is governed by English law and the sale of the asset is a straight metal sale (as opposed to an assignment of a beneficial interest under a trust or the sale of an aircraft-owning company), the document that will govern the transfer of the Lease will be a novation and amendment agreement (the Novation). The execution of the Novation by the Existing Lessor, the New Lessor and the Lessee will be a condition precedent to the sale of the asset under the SPA. The Novation would contain provisions pursuant to which the New Lessor promises to assume the role and the rights of the Existing Lessor under the Lease and the Lessee promises to perform all of its obligations under the Lease in favor of the New Lessor.
The Novation will ordinarily contain a provision called the Effective Time which will govern the time at which the operative provisions of the Novation become effective and a new lease agreement is constituted between the New Lessor and the Lessee. It will also typically contain carefully drafted provisions stating that all payments made by the Lessee under the Lease that are attributable to the period prior to the Effective Time shall be made by the Lessee to the Existing Lessor even if they fall due or are paid after the Effective Time1 and that all payments under the Lease that fall due and are attributable to the period after the Effective Time will be paid by the Lessee to the New Lessor.
These provisions will be the subject of deliberate and intense scrutiny by the legal teams of both the Existing Lessor and the New Lessor, each wanting to ensure that its client does not fall victim to a misinterpretation of the provisions of the Novation by the Lessee, an unintentional payment processing error, a careless mistake or negligence on the part of the Lessee, any of which could have significant implications for the economic benefits of the transaction for the Seller or Purchaser (or both), such as a significant variation in the purchase price of the asset in question.
How then, do payment-related mistakes still occur?
An example of a mistake in these circumstances occurred when an airline (the Lessee in the example) which was leasing an engine from an operating lessor (the Seller in the example) that was selling the engine to another operating lessor (the Purchaser in this example), mistakenly paid maintenance reserve amounts (MRs) to the Seller after the sale had concluded.
The engine was the subject of an SPA which provided that the total amount of the purchase price to be paid by the Purchaser to the Seller would be reduced by the total amount of MRs and security deposit held by the Seller at the time of the sale. Both the Seller and the Purchaser had been of the understanding that the engine was off-wing and in storage during the three months preceding closing, and therefore MRs did not accrue during those months.
At closing the total amount of the purchase price was reduced by an amount equal to the MRs for the engine held by the Seller on the closing date.
Later that month, the Lessee paid MRs to the Seller for three months preceding closing because it realized that it had made a mistake as to the engine which it had communicated to the Seller and the Purchaser as being off-wing. The engine that was the subject of the sale was in fact on-wing and MRs had accrued during those three months.
As the transaction had already closed, the Seller stood to benefit from a significant windfall amount that, but for the Lessee's mistake, would have been deducted from the purchase price on the closing date.
Crucially, there was nothing in either the SPA or the Novation that governed to whom MRs that were attributable to the period prior to the Effective Time should be paid. As the rent, MRs, and security deposit were built into the calculation of the final purchase price, it was considered satisfactory to include a generic provision in the Novation stating that all amounts payable by the Lessee under the Lease would be paid to the New Lessor irrespective of whether such amounts accrued or were attributable to the period prior to or after the Effective Time.
Not only was the Lessee mistaken in communicating that the engine was off-wing and therefore not accruing MRs, it paid the Seller after the Effective Time even though it had signed a Novation stating that all amounts payable under the Lease should be paid to the New Lessor.
Because the Seller in this case was a conscientious and reputable person, it paid the windfall over to the Purchaser even though it was not under a contractual obligation to do so. But what action could the Purchaser have taken here if, following closing, the Seller looked to retain its fortune?
The Cause of Action
The precise structure, scope and nature of the law of unjust enrichment has been and remains the subject of contested academic thinking and debate and its rise is partially attributable to what in essence was a very academic coup. There is a multitude of references to various legal academics throughout the relevant case law. However, all seem to agree that the decision that gave unjust enrichment unequivocal judicial approval as a distinct legal category in England is Lipkin Gorman (a Firm) v Karpnale Ltd2 where Lord Goff pointed out that:
it [the plaintiff's claim] is founded simply on the fact that . . . the third party cannot in conscience retain the money – or, as we say nowadays, for the third party to retain the money would result in his unjust enrichment at the expense of the owner of the money.
Unjust enrichment now sits firmly in the spectrum of the law of obligations alongside the laws of contract and torts.
There are four main requirements that must be proven by the plaintiff for a claim of unjust enrichment to stand a chance of success. These have been consistently expressed and referred to in case law since Lipkin Gorman including, for example, in Banque Financière de la Citè v Parc (Battersea) Ltd3 and more recently, Bank of Cyprus UK Limited v Menelaou.4 These requirements are that:
- the defendant has been enriched;
- his enrichment is at the claimant's expense;
- his enrichment at the claimant's expense is unjust; and
- there is no applicable bar or defense.
The third component of an enrichment needing to be unjust has proven to be the most difficult to discern. The concrete list of unjust factors differs from textbook to textbook and from decision to decision. Professor Burrows, for example, includes mistake, duress, ignorance, undue influence, exploitation, legal compulsion, necessity, failure of consideration, etc. in the range of viable factors.5 There is evidence to suggest that mistake of fact is one of the more commonly provable causative factors for demonstrating the injustice of a particular enrichment.6 Professor Birks has stated that where one person pays money to another while laboring under a causative mistake of fact or law, he or she may be entitled to restitution on the ground of mistake.7
Reverting to the example set out in the preceding part of this article, the onus would be on the Purchaser to prove that the Lessee had made a mistake of fact in paying the MRs to the Seller after the Effective Time (which resulted in the unjust enrichment) notwithstanding the fact that this was contrary to what it had signed up to do under the Novation. The standard of proof is quite a low one. In particular, it does not matter that the Lessee was negligent or careless in making the mistake; the Purchaser would still be entitled to restitution. The Purchaser's case would be supported by the fact that it had suffered a loss because, had the Lessee not miscommunicated the off-wing status of the engine, the purchase price which the Purchaser paid to the Seller at closing would have been reduced by the exact amount by which the Seller was enriched after the Effective Time.
The purpose of this article has been to demonstrate that although transacting parties go to great lengths to protect their pre- and post-closing positions attempting to account for all eventualities in the applicable transaction documentation, mistakes that fall outside the protective ambit of such documentation can still occur. However, in such cases, the law will attempt to step in to reverse the detriment imposed on the aggrieved party, be it through a claim for unjust enrichment, the remedy of restitution or another ground entirely.