Commercial Court judgment

A recent judgment of the Commercial Court in London has confirmed advice we routinely give clients, namely that aircraft leases will normally fall outside the provisions of the Unfair Contract Terms Act 1977 (UCTA) because they are deemed to be international supply contracts.

Relevant facts of case

The claimant, Trident Turboprop (Dublin) Ltd (Trident) which owns and leases commercial aircraft, leased two cargo aircraft to First Flight Couriers Ltd (FFCL), one of India’s leading express courier companies. The Aircraft Operating Lease Agreements for the two aircraft were entered into on identical terms (the Leases). Trident commenced proceedings1 on the basis that FFCL had failed to make two rental payments in breach of its obligations. FFCL, however, counterclaimed that Trident had made pre-contractual misrepresentations and that the aircraft were in fact defective. FFCL argued that Trident could not rely on the exclusion of liability clauses in the Leases. One of their arguments in support of this contention was that the relevant clauses in the Leases (clauses 19.1 and 19.2) were unenforceable under section 3 of the Misrepresentation Act 1967 as this requires an exclusion clause to be “reasonable” within the meaning of section 11 of the UCTA if the exclusion clause related to a misrepresentation.

No requirement to satisfy “reasonableness test”

The Court, however, held that the exclusion clauses in the Leases were valid and excluded Trident’s liability. The parties were therefore at liberty to exclude their right to argue that they were induced to enter into the contract by misrepresentation, unless those misrepresentations were fraudulent. Further, although the exclusion clause was within section 3 of the Misrepresentation Act, because it purported to limit or exclude liability for misrepresentation, the requirement that it satisfy the “reasonable” test under section 11 of UCTA did not apply because the Leases were international sale contracts and so excluded from the UCTA regime. Test of reasonableness (section 11, UCTA)

In brief, the UCTA regime provides that where two commercial parties are concluding a contract and one party is seeking to exclude liability, that exclusion of liability must satisfy the test of reasonableness (see section 11, UCTA), namely:

In relation to a contract term, the requirement of reasonableness … is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.

Section 11 will apply unless the contract meets one of the criteria in section 26 of UCTA. Section 26 effectively dis-applies UCTA from international supply contracts and therefore falls outside the ambit of UCTA, as was the situation in this case.

Leases as “international sale contracts” outside scope of UCTA

The Court considered that the Leases were international sale contracts because the parties’ places of business were in different territories and possession of the aircraft was being transferred from one to the other. This meant that section 26(3) of UCTA was satisfied. However, even if this had not been satisfied, the Court held further that section 26(4)(a) would have been satisfied if at the time of conclusion of the contract, the goods would be carried from the territory of one state to the territory of another. This in itself would be enough to constitute an international sale contract and therefore fall outside the ambit of UCTA.  

Commercial implications of judgment

One of the implications of this judgment therefore is that for parties entering English law aircraft leases which satisfy the requirements of an international sale contract, they should be aware that they have the contractual freedom to exclude liability for non-fraudulent misrepresentation which is very wide and that therefore what they agree in the contract will not be tempered by a test of reasonableness under UCTA.