HIGHLIGHTS:

  • There is a natural discord between an "as is where is" disclaimer and an "airworthiness" requirement in an aircraft purchase agreement.
  • Rules of construction will determine which party bears the risk of loss.

Courts continue to analyze the term "airworthy" and its implications. Recently, a District Court in the Western District of Tennessee weighed in on the scope of the term "airworthy" and its sometimes complicated relationship to an "as is where is" clause. The decision is now on appeal with the Sixth Circuit. (See Holland & Knight alert, "District Court Evaluates Express Warranty of 'Airworthiness,'" Nov. 5, 2014.)

In McMahan Jets, LLC v. Roadlink Transportation, Inc., __ F. Supp. 3d __, 2014 WL 7335322 (W.D. Tenn. Dec. 18, 2014), an aircraft buyer filed an action for, inter alia, a breach of contract arising out of the sale of a Cessna Citation corporate jet. While the aircraft was in service in the 1990s, the interior passenger space was reconfigured, replacing two chairs with a couch situated atop the aircraft's forward carry-through spar (a major structural component) on the floor of the passenger compartment. As part of the reconfiguration, holes were bored into the forward carry-through spar to accommodate the speaker system for the passenger compartment. Prior to the sale at issue, the aircraft had undergone several inspections that deemed the aircraft "airworthy."

The agreement provided that the aircraft would be delivered "as is where is" subject to a pre-purchase identification of "airworthy discrepancies." Under a "pre-purchase inspection" provision, the seller would do one of the following:

  • pay to have the airworthy discrepancies repaired at the seller's expense
  • reduce the purchase price to the purchaser's satisfaction
  • decline to pay the costs and terminate the agreement

In a separate provision, the agreement stated that the seller would deliver the aircraft "in airworthy condition prior to delivery and acceptance of the aircraft."

During the closing process, the purchaser conducted a "cursory" pre-purchase inspection and relied on the prior airworthiness determinations. Following delivery, the purchaser operated the aircraft for 22 months until an inspection revealed the holes in the aircraft's forward carry-through spar and the manufacturer determined that the aircraft was not airworthy. The purchaser's breach of contract claim asserted that the seller materially breached the agreement by failing to deliver the aircraft in airworthy condition and falsely represented that the aircraft was airworthy, structurally sound, safe and not unreasonably dangerous.

Tension Between Airworthiness Requirement and Disclaimers

The court recognized the potential for ambiguity based on the tension between the agreement's disclaimers and its airworthy condition requirement. The disclaimers signal to a purchaser that the seller makes no promises about the condition of the goods. The airworthy condition requirement does just the opposite and guarantees "a relatively high standard of quality." The issue is whether the delivery of the aircraft in "airworthy condition" was a condition precedent to the purchaser's acceptance of the aircraft. The court determined that the conditional language evidencing a condition precedent was present only in the pre-purchase inspection clause, whereas the requirement that the aircraft be delivered in airworthy condition appeared in a different section unaccompanied by conditional language and unrelated to any of the disclaimers.

At the same time, the court disagreed with the seller's assertion that on its face the term "airworthy condition" as used in the delivery condition meant satisfaction of any of the "airworthy discrepancies" noted during the buyer's pre-purchase inspection. The court explained it as follows:

The use of "airworthy" in the [pre-purchase inspection provision] merely signals that pre-purchase inspection is directed to uncovering and identifying the type of discrepancy that specifically goes to the plane's airworthy condition. If [the purchaser] had failed to notice that the aircraft had no wings, for example, it would be absurd to conclude that the aircraft still ought [to] be considered "airworthy" under the [a]greement despite lacking any capacity to fly.

The court cited prior cases that have analyzed the term "airworthiness" and stated that such precedent led the court to conclude that an agreement requiring "airworthiness" without explanation relies on the word's generally accepted meaning, not an agreement-specific one. The court concluded that there was no dispute as to whether the aircraft met objective criteria for airworthiness or that it could be safely operated as a result of the holes drilled in the carry-through spar.

Next the court considered "whether the airworthy condition requirement ought to be enforced at the expense of the disclaimers." The court found that the language in the "as is" clause and the separate airworthiness clause "strongly suggest" that the parties intended the pre-purchase inspection process to define the scope of the seller's delivery obligations. It pointed out that even the sentence actually containing the phrase "in airworthy condition" actually referenced the pre-purchase inspection: "Seller shall deliver Aircraft from the Pre-Purchase Inspection with all systems functioning normally ... and in Airworthy Condition." As a result, the court held that, based on numerous cross references, the pre-purchase inspection requirements were intended to "dovetail" with the disclaimers:

The effect of the interlocking provisions is to place the burden on [the purchaser] to identify airworthiness problems before accepting the aircraft ... It cannot be the case that this deliberate arrangement is to be overturned by the single use of the phrase "in airworthy condition."

Parties to Purchase Agreements Must Be Aware of Rules of Construction

Courts appear to routinely assign an objective definition to the term "airworthy." But this decision highlights that the term "airworthy" must be assessed in connection with the contract as a whole. The interplay between the term "airworthy" and an "as is where is" clause, which at face value are polar opposites, is a subjective inquiry dependent on the construct of the particular contract at issue. As recognized by the court, "the cardinal rule for interpretation of contracts is to ascertain the intention of the parties, and to give effect to that intention, consistent with legal principles." In this particular instance, the court determined that the purchaser waived the right to maintain a claim for breach of contract for airworthiness discrepancies following delivery:

To hold [the seller] to the words 'in airworthy condition' would fundamentally alter the allocation of risk established by the jointly operating pre-purchase inspection provisions and disclaimers. If the parties had intended [the seller] unconditionally to guarantee the aircraft's airworthy condition, there would have been no reason to contract for pre-purchase airworthiness inspection in such detail – or at all, for that matter, as [the purchaser] would have had no reason to worry about being forced to accept an unairworthy aircraft.

It is important to note that this decision, which appears to have arisen out of a case of first impression for this particular District Court, does not signal that an "as is where is" clause in some way supersedes or negates an "airworthiness" requirement. Indeed, as the court recognized, the central issue is whether "the grossly negligent seller" or "the nearly equally careless buyer" should bear the burden of an aircraft that was not airworthy at the time of the sale. Given that a court's inquiry will apply rules of construction to determine the parties' intent, both buyer and seller should beware.