In ACG Acquisitions XX LLC v. Olympic Airlines (in Liquidation)¹, the airline defendant was estopped from alleging that the aircraft, a Boeing 737-300 aircraft was not in the condition required by the Lease because of representation contained in a signed certificate of acceptance. Mr Justice Teare, in his judgment, considered the meaning of airworthiness because it was a major debate between the parties. Neither party were able to refer to any authorities which considered the meaning of airworthiness². He stated, an appropriate test of airworthiness is:
“Would a prudent operator of an aircraft have required that the defect should be made good before permitting the aircraft to fly, had he known of it. If he would, the aircraft was not airworthy.”
He further commented that “in the context of a lease of an aircraft intended for the safe carriage of passengers it seems to [me] that the reasonable lessor and lessee would each expect the requirement in the lease that the aircraft be airworthy on delivery to relate to the actual condition of the aircraft and not the assumed condition.”
On findings of fact, the aircraft was not in an airworthy condition on delivery or in a condition for safe operation.
Teare J noted that there were no words of limitation to be found in the representation given by Olympic and on the contrary, the scope of the statement was that the aircraft complied “in all respects” with clause 4.2 and Schedule 2 was only limited by the defects set out in Annex 2 to the certificate.
Teare J, in his judgement, stated that “it is necessary to bear in mind that commercial men prefer certainty to doubt”. In referring to the requirement to have a certificate of acceptance signed prior to ACG signing a certificate of redelivery, he commented that:
“the reasonable man with knowledge of the background would be surprised if the statement in the certificate did not have consequences, and that Olympic having formally stated that the aircraft complied in all respects with the condition required at delivery was nevertheless free to allege to the contrary.”
Teare J was persuaded that it would be inequitable for Olympic to be permitted to allege, contrary to the representation, that the condition of the aircraft on delivery did not comply with the lease, notwithstanding that the effect of such an estoppel is to prevent Olympic from pursuing its claim for substantial damages for breach of ACG’s obligations to deliver the aircraft in the required condition.
On the facts here, the delivery to Olympic was timed to coincide with redelivery from Air Asia and the fact that ACG relied on Olympic representation to its detriment by giving up its right to refuse redelivery was sufficient, to make it inequitable for Olympic to go back on its representation.
ACG claim as summarised above was a claim in debt and damages and Olympic put forward 3 defences:
- No liability to pay rent: Teare J ordered that Olympic was estopped from contending that delivery had not taken place in accordance with the terms of the lease and Olympic had irrevocable and unconditionally accepted and leased the aircraft so that rent became due.
- Total Failure of consideration: Olympic was unable to establish a total failure of the performance for which it had bargained.
- Frustration: Olympic contended that the lease was frustrated by the withdrawal of the airworthiness certificate by the relevant Aviation Authorities and/or by their refusal to renew during the lease. This gave rise to consideration of the “hell or high water clause” or Absolute provisions (clause 5). The need to rely upon the doctrine of frustration only arises in the event that Olympic is unable to allege a breach of the lease by ACG and where the circumstances in which performance would be called for would render it a thing radically different from that which was undertaken by the contract. Teare J was not satisfied in context of a 5 year dry lease where only one year had elapsed that the lease was frustrated.³
ACG’s was entitled to judgement on its claim and Olympic’s counterclaim was dismissed. As Olympic’s is currently in liquidation, it remains to be seen if this decision will be appealed.
In general, the starting point for an aircraft lease is the signature and delivery by the lessee of a certificate of technical acceptance of the Aircraft. Statutory and implied conditions and warranties are excluded by contract. The accepted procedure is that the lessee must satisfy itself as to the technical condition prior to delivery. The judgment in the ACG case cautions against acceptance of an asset on the basis of a light touch inspection and accepting an asset as “airworthy” without full and thorough inspection and testing. It also suggests that reservations or exceptions to a certificate may be prudent in some circumstances. The impact of such decision will be felt not just at pre-delivery inspections and exceptions to certificates of acceptance but also to encourage lessors to action a greater level of diligence, auditing and inspection to ensure compliance by lessee with rigorous provisions relating to maintenance, operation and repair of aircraft during the lease term and enforce strict compliance with redelivery conditions.