While we are hopeful that your business jet transaction is an unqualified success, experience suggests that there are several types of disputes that can arise pre- and/or post-closing. As forewarned is forearmed, we highlight the most common types of disputes and, at least at a high level, a brief discussion of the related legal issues.

  • Encumbrances. Aircraft purchase documents invariably require that the seller convey clear title. As a result, encumbrances identified or disclosed pre-closing must be cleared by payment or other action. Appropriate due diligence should reveal any substantial encumbrances (such as bank mortgages or leases); however, smaller encumbrances are not always identified pre-closing (fuel liens, airport fees, etc.), and some may be recorded against the aircraft after your transaction closes. Whether or not intentionally concealed, transaction documents should hold the seller responsible for settling the encumbrance and clearing the title. Of course, post-closing encumbrances can be a problem for the buyer, as the seller may be less than cooperative, especially if it is (or was) a single purpose entity, the only material asset of which was the aircraft. (For an additional discussion of liens and title, please see this Wiley Rein article: Clear Title -- Looking Beyond The FAA Registry When Buying A Corporate Aircraft.) On a practical level an unresolved encumbrance could cause operational complications (e.g., aircraft detainment, or an unpaid vendor refusing to providing services), or it could become an obstacle to a future sale of the aircraft.

Encumbrances are best dealt with through due diligence and good transactional drafting; however, post-closing surprises may require litigation, depending on their magnitude and your intended use of the asset.

  • Refusal to Close. Sometimes, a buyer or seller is simply unwilling or unable to bring the transaction to a close, possibly because that party has an internal conflict, has found a better deal, or has second thoughts. To avoid this awkward and troubling scenario, the transaction documents should require that closing occur within a specific time period, and if that time period is not met, a penalty is imposed. For the seller, this would most likely take the form of a forfeited deposit. For the buyer, the remedies might include (i) breach of contract, with buyer's damages potentially tied to the cost of a replacement aircraft, (ii) a negotiated amount for damages to cover the buyer's legal costs and potential loss, and/or (iii) specific performance (that is, forcing the sale). It is wise if the parties anticipate such scenarios before the contract is signed, so that the intended outcome of a "refusal to close" can be expressly documented in the sale agreement. (Note that while specific performance may sound like a good remedy, its viability hinges on state law, and specific performance may not be available unless the aircraft is truly unique.) Litigation (or the threat thereof), however, may be necessary, especially if you do not feel that you will be made whole under the specific terms of the sale agreement.
  • Failure to Meet Specifications. It could happen that the aircraft, when inspected, does not meet the contractual specifications (either manufacturer specifications in the case of a new aircraft or, in the case of a used aircraft, those specifications agreed upon by the parties), or that there is a good faith disagreement over whether it meets those specifications. Such requirements can include anything from the finishes on the lavatory fixtures to aircraft range and sound levels. This will almost always provoke a pre-closing dispute, as once the sale is complete -- that is, the aircraft has been accepted by the buyer -- the buyer will typically have accepted any such "faults." A dispute could also happen after acceptance of a green aircraft, but before acceptance of work by the completion center; in that case, a buyer might withhold an installment, the manufacturer might assert a default, grab the deposit, and sell to another buyer for more money and a windfall. Of course, good documentation will help the parties clearly define what is required; however, even the best sale agreement will not capture every specific detail. Absent documentation protecting your interest, such a dispute may require you to make concessions, agree to a price adjustment or changed specifications, or may lead a party to refuse to close, which is discussed above.
  • Scope of the Sale. Tricky disputes can also arise post-closing over the scope of what was included in the sale, as opposed to whether the aircraft meets agreed-upon specifications. For example, without specific language, it may be disputed whether spare parts, manuals, interior furnishings, etc., were conveyed with the sale. Similarly, there can be a dispute over whether "documentation" refers to all documentation that was first delivered with the aircraft, and the documentation that the owner happens to still possess. Again, accurate and complete transaction documents will help the parties too by defining exactly what was sold, but if not, the parties are left to squabble over what they intended, and what is "typical" in such a transaction.
  • Assignment of Service Contracts and Programs. It also happens that a third party, such as a maintenance provider, resists the assignment of a maintenance contract (or other service agreement) or demands a fee or that the assignee (purchaser) cure a default by the assignor (prior owner). These types of disputes should be avoided by thorough due diligence. Otherwise, they will be similar to a post-closing lien that may, or may not, need to be resolved through litigation, depending on the importance of the third-party-provider and other circumstances.
  • Bankruptcy. Once in a while, an aircraft manufacturer will voluntarily or involuntarily enter bankruptcy -- for example, Hawker Beechcraft (2012) and Eclipse Aviation (2008). Or a private owner of one or more aircraft contracts to sell enters bankruptcy, perhaps after taking the potential buyer's deposit. Either way, it is likely that the buyer will lose all or substantially all of any deposit unless specific measures have been put into place to protect that deposit from a bankruptcy -- measures that would almost invariably be unacceptable to a manufacturer. In the event of a bankruptcy, the most important objective is to preserve what rights you do have. For example, to the extent there will be distributions to creditors, you will want to preserve your pro rata portion of such distributions. Furthermore, with respect to a manufacturer bankruptcy, you may wish to band together with other similarly situated creditors and influence certain decisions by the bankruptcy estate. In sum, it is very difficult to proactively plan for bankruptcy other than to minimize your down payment; however, you must act quickly to secure legal advice once your seller files for protection from its creditors.
  • Lender Disputes. Unless the full purchase price is paid in cash, the transaction will depend on financing for the aircraft. Disputes with lenders arise first and foremost from non-payment, which is no surprise. Other disputes arise from failure to properly protect the lender's asset (the aircraft), such as failure to secure and maintain insurance, use of the aircraft in ways not contemplated by the lender that increase the risk (such as regulated use of the aircraft), sale or encumbrance of the aircraft without lender permission, or a change in ownership or control of a company that is set up to own the aircraft. Lender disputes often require sophisticated interpretation of the loan and related security agreements, and we recommend obtaining counsel during the negotiations of these documents and any post-closing disputes.
  • Assignment of Purchase. Purchasers often desire the right to assign their right to purchase the aircraft, perhaps mostly for the purpose of placing the aircraft in a special purpose entity to be created after the signing of the purchase and sale agreement. Many manufacturers, however, resist, or attempt to prohibit, such an assignment. If the seller resists the assignment, you will need legal counsel to assist you in negotiating and structuring the assignment. You may find yourself in litigation if a manufacturer claims a breach of the agreement because of an assignment it claims was not permitted, particularly if the manufacturer believes it can re-sell the aircraft at a higher price in a seller's market. Of course, the buyer may take the position that the manufacturer is interfering with its rights to the aircraft, and claims may need to be asserted to protect this valuable interest.
  • Tax Disputes. You could also end up in a dispute with the IRS or state taxing authority regarding the appropriate taxes resulting from the sale or your use of the aircraft. Careful planning is typically undertaken with respect to the location of closing (in certain tax-free locales) as well as the ownership vehicle and use of the aircraft. Competent tax advice is critical to avoiding unwelcome surprises. For more information on aircraft tax disputes, read: Aircraft Tax Audits - A Game of Tomes.

For any dispute that cannot be resolved through negotiations between the parties, more aggressive action may be required, such as arbitration and/or litigation. In addition to the cost and the likelihood of success, there are several important factors to consider when proceeding with more formal dispute resolution. They include the governing law, jurisdiction and venue, the location of the parties and witnesses, and the type of dispute resolution (arbitration, federal or state court).

The governing law will typically be determined by the purchase and sale agreement. The state law governing your transaction can have an impact on many different rights and obligations, including potential damages, specific performance, assignability, etc. While most manufacturers will require their home state to be the governing law of the deal, parties in a private sale may have more leeway to negotiate and you will want to consult with your transactional counsel on how to proceed. Generally speaking, however, the chosen governing law should have some relevance to the transaction, such as the property is based there, contracts are signed or performed there, the aircraft is delivered there, or one or both parties are incorporated or have a principal place of business there.

Jurisdiction (the specific courts or geographical area in which you agree to be subject to suit) and venue (specific courts with the jurisdiction which may hear the dispute) are also often documented in the purchase and sale agreement. Many factors come into play in selecting jurisdiction, such as, among other things, the makeup of the potential jury pool, location and proximity to one or both parties, and the speed at which litigation proceeds in the identified courts. The location of the parties may be particularly important if the parties reside in different countries or the aircraft is held in a sovereign nation with an inaccessible court system. Cross-border transactions make potential disputes more complex, and it is critical that you know your rights under the applicable law, and that you will be able to enforce those rights if necessary. Experienced counsel is necessary to ensure that you are properly advised when negotiating and agreeing to jurisdiction for any formal dispute resolution.

Last, the form of the dispute resolution is important and also often decided during negotiations of the deal. You may be forced to decide between arbitration and litigation. Many factors play into this decision as well. For example, discovery may be more limited in arbitration as opposed to the more expansive discovery rules of typical state or federal court litigation, which may be advantageous or disadvantageous. You may be able to maintain a certain level of privacy in arbitration, however, a public dispute might be beneficial in certain circumstances. While there is a perception that arbitration would be less costly overall, this is not always the case, especially given that you will have to pay the arbitrator's hourly or daily fees (unlike a state or federal judge).

As discussed above, disputes can arise both pre- and post-closing and can take many different forms. While most pre-closing disputes can often be resolved through negotiations, litigation is sometimes necessary to preserve and assert your rights. This is also the phase of the transaction in which you will set important ground rules for any post-closing disputes. Therefore, careful planning with experienced transactional and litigation counsel is necessary. For disputes arising post-closing, you will want to obtain accurate and complete advice regarding your rights and potential remedies and the risks and rewards associated with your decisions.

Wiley Rein attorneys have extensive experience in drafting and negotiating aircraft transactions as well as representing clients in litigation, arbitration and resolution of disputes arising from the sale or lease of aircraft, disputes with taxing authorities, and disputes with regulatory authorities. For more information regarding our dispute resolution experience, please click here.