A recent case suggests the courts are increasingly likely to find cross-border aircraft leases are outside the Unfair Contract Terms Act 1977 (UCTA). If a lease is outside UCTA its exclusion clauses may be valid even if they are “unreasonable”. Alexander Hewitt considers the case and summarises some key principles for drafting exclusion clauses.

Why do lessors seek to exclude liability for the leased aircraft and engines?

Aircraft lessors include exclusion clauses in their leases:  

  • to reduce their potential liability for defects in leased equipment. This is because the lessor will rarely have designed, made or selected the leased equipment for the lessee (naturally, manufacturers who lease their own aircraft also seek to limit their liabilities); and  
  • to bolster the lease’s “hell or high water” terms. Under these terms, a lessee must pay rent in full and on time, and litigate later if it alleges the aircraft is defective.  

How might UCTA apply to an aircraft lease?

One might expect English law to allow parties to an aircraft lease to be relatively free to exclude liabilities as they see fit. UCTA may regulate the lessor’s exclusion clauses, however, if the lease is on the lessor’s “written standard terms of business”.

If the lessor has drafted the lease, there is some risk a court will find it is on the lessor’s written standard terms of business – even if the parties change the lessor’s draft during negotiations.

International supply contracts are outside UCTA

Even if a lease is on the lessor’s written standard terms of business, it will be outside UCTA if it is an “international supply contract” (an ISC). Unfortunately, the definition of an ISC in UCTA is detailed and not entirely clear. Until recently the courts have criticised the definition, but felt they had to apply its literal wording – even if that produced odd results.

But in Trident Turboprop (Dublin) v. First Flight Couriers [2009] EWCA 290, the Court of Appeal adopted a more commercial interpretation of the definition of an ISC. This may mean most cross-border aircraft leases will fall outside UCTA.

In Trident:

  • the lessor was based in the UK;  
  • the lessee was based in India;  
  • the lessee intended to use the aircraft in its courier business in India;  
  • the parties negotiated and executed the leases in the UK;  
  • delivery of each aircraft was to be in the UK.  

These facts satisfied two of the three essential elements of an ISC. These were that the contract:  

  • provided for possession of goods to pass from one party to another; and  
  • had been made by parties in different states.  

However, as:  

  • the parties made their offer and acceptance of the leases’ terms in one state; and  
  • the leases did not provide for the aircraft to be delivered to a state in which neither offer nor acceptance had taken place, the Court of Appeal had to consider section 26(4)(a) UCTA to see if the leases passed the third and final test for an ISC.

Under section 26(4)(a), the leases would pass this final test if:  

“the [aircraft were] at the time of the conclusion of the [leases], in the course of carriage, or [would] be carried, from the territory of one state to the territory of another”.  

The court decided a lease would come within this formula in (with bold emphasis added):  

“any case in which the parties contemplate at the time of entering into the contract that the goods … will be transported across national boundaries, not necessarily in order to fulfil the terms of the contract, but in order to achieve its commercial object [so that] … if a person who carries on business abroad hires equipment from a supplier in this country in circumstances where both know that the intention is for it to be used abroad, the lease is one pursuant to which the goods will be carried from the territory of one state to the territory of another within the meaning of section 26(4)(a) and can sensibly be described as an [ISC]”.

On this basis, the court held that the leases in the Trident case were ISCs and therefore excluded from UCTA.

Implications for lessors and key drafting points

The fact that the Court of Appeal has applied a “sensible” and “commercial” construction of section 26(4)(a) is good news for lessors. However, the courts still have a common law power to interpret exclusion clauses so that they do not protect a lessor.  

This is a complex area, but certain drafting practices can increase the chances a court will uphold a lessor’s exclusion clause. These include:  

  • making the exclusion prominent and easy to find;  
  • ensuring the exclusion is clear, coherent and makes commercial sense. Anything one cannot decode without a cold towel on one’s head may be a gift to the lessee;  
  • reducing ambiguity. The courts are likely to resolve ambiguities in an exclusion against the person who drafted the lease;  
  • putting any exclusion you consider suspect into a separate clause. If a court strikes this clause out this may help leave the other exclusions intact;  
  • clearly and specifically covering all relevant causes of action, categories of loss and remedies; and  
  • using the correct technical terms when seeking to exclude set-off, abatement, counterclaim and analogous remedies. This may make your “hell or high water” language more flame- and waterproof. The courts have held, for example, that saying payment must be made “without deduction” does not prevent the paying party from exercising set-off.