Australia: ACG v Olympic - defective condition of a leased aircraft - Court of Appeal Judgment
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ACG v Olympic - Court of Appeal Judgment

Introduction

In May 2012 we reported on a High Court decision in the case of ACG Acquisition XXLLC v Olympic Airlines SA. The case attracted considerable attention from the aviation community as it concerned the circumstances in which the defective condition of a leased aircraft might entitle the airline to refuse to pay rent.

The High Court judgment was in favour of the Lessor but permission to appeal was granted and the Court of Appeal's judgment has now been delivered, again in favour of the Lessor, highlighting the risks for lessees in signing a definitive Certificate of Acceptance.

Background

Briefly, in 2008 ACG Acquisition XXLLC (Lessor) entered into an operating Lease with Olympic Airlines SA (Lessee) pursuant to which it agreed to Lease a Boeing 737-300 Aircraft for a five year period. The Lease contained an undertaking from the Lessor that on delivery, the aircraft would comply with detailed delivery conditions specified in the Lease (the Delivery Conditions). Upon delivery, the Lessee signed a Certificate of Acceptance and the aircraft went into service on 23 August 2011. However, just 15 days after it had entered into service, the aircraft was grounded when cables that controlled the spoilers on one wing were found to be broken. During the repair process, the Lessee discovered 14 categories of defects which were significant enough that the Hellenic Civil Aviation Authority withdrew the aircraft's Certificate of Airworthiness.

In September 2009 the Lessor issued proceedings against the Lessee for payment of outstanding rent and maintenance reserves and for damages. In response, the Lessee issued a claim against the Lessor seeking damages for breach of the Lease, in particular the provisions relating to the Delivery Condition of the aircraft.

Key Lease provisions

Clause 4.2 obliged the Lessor to deliver the aircraft "as is, where is" and in the condition required in Schedule 2 (which set out the Delivery Conditions).

Clause 7.9 specified the Certificate of Acceptance would be conclusive proof that, amongst other things, the aircraft and the aircraft documents were satisfactory to the Lessee.

The Certificate of Acceptance included a confirmation from the Lessee that the aircraft complied in all respects with the condition required at delivery under Section 4.2 and Schedule 2, except for specified discrepancies (which discrepancies were not material in this case).

High Court Judgment

At the hearing in the High Court, Mr Justice Teare found in favour of the Lessor. Although he accepted that the Lessor was in breach of the Lease as the aircraft was not in an airworthy condition on delivery, he held that by virtue of the confirmations given in the Certificate of Acceptance, that had been relied upon by the Lessor, the Lessee was stopped from making a claim for damages and from claiming that it was not obliged to pay rent or maintenance reserves.

The Judge did so on the basis that it would be inequitable for the Lessee to be permitted to allege, contrary to the clear and unequivocal representation in the Certificate of Acceptance, that the condition of the aircraft on delivery did not comply with the Delivery Conditions set out at Schedule 2 of the Lease as the Lessor had relied on this representation in accepting redelivery from the previous lessee, Air Asia. It had therefore acted to its detriment in giving up its right to refuse to accept redelivery of the aircraft from Air Asia on account of the aircraft's condition.

The Judge did not, however, agree with the Lessor's argument that the conclusive proof clause as drafted precluded a claim for damages for breach by the Lessor of its obligation to deliver the aircraft in Delivery Condition. In the absence of a direct reference to clause 4.2 and Schedule 2 of the Lease in the conclusive proof clause, the Court held that that clause operated only as a waiver of any right the Lessee might otherwise have to refuse to accept the aircraft, as opposed to the right to claim damages for breach of the Lease.

Court of Appeal Judgment

On appeal, the Court of Appeal reassessed the effect of the conclusive proof clause.

The Court of Appeal found that, by the conclusive proof clause together with the Certificate of Acceptance, the Lessee had conclusively agreed that the aircraft was in Delivery Condition.

The Court of Appeal did not agree with the Judge in the High Court that the wording of clause 7.9 was ambiguous when read in the context of the Lease and specifically when read together with the Certificate of Acceptance to which it gave conclusive effect. In construing this clause, the Court highlighted the fact that it is commonplace for parties to "strive to achieve finality in relation to allocation of risk and responsibility", particularly in circumstances where neither could be certain of an aircraft's condition at the point at which the lessee is called upon to accept delivery and the ongoing risk.

The Court of Appeal also appears to have been influenced by the recognition that the role of a lessor is largely financial - to raise finance on the strength of which an aircraft can be acquired and leased out, and that a lessor does not typically undertake maintenance of the aircraft other than during any hiatus of operational inactivity between one lease and another. By contrast, lessees operate and maintain aircraft and a lessee will generally have the opportunity to inspect the aircraft and, if it is not in Delivery Condition, either to reject it or to list material discrepancies and to accept the aircraft subject to their correction, as the Lessee did in this case.

Conclusion

Overall, the judgment emphasised that parties want to achieve commercial certainty when allocating risk and that the contract should be construed with that in mind.

The case remains one of contractual interpretation and so must be viewed against the particular wording of the Lease. It does, however, highlight the need for careful drafting. Just as importantly however, from a practical perspective it highlights the need for a lessee to satisfy itself, as far as possible, with the condition of the aircraft at delivery, understanding that it may bear the risk of any defects discovered thereafter.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.