Lessee Beware: English Commercial Court upholds tough terms of aircraft engine lease
English Court rules that "tough contract" terms in an aircraft engine lease must be upheld in relation to a condition precedent.

 

In the recent case of Aquila WSA Aviation Opportunities II Ltd v Onur Air Tasimacilik AS [2018] EWHC 519, the English Commercial Court ruled in favour of the Plaintiff, an Irish lessor of an aircraft engine, despite the fact that the engine it had leased to the Defendant had failed during use and was not fit for purpose. 

The Court notably upheld the terms of the lease previously agreed between the parties and emphasised the importance of an acceptance certificate as a condition precedent to the engine's delivery. 

Background to the dispute

On 11 September 2015, the Defendant, Onur Air Tasimacilik AS ("Onur"), entered into a 10 month lease with the Plaintiff, Aquila WSA Aviation Opportunities II Ltd (''Aquila'') in respect of an aircraft engine. It was intended by the parties that the lease would provide short term cover for one of Onur's other aircraft engines while it underwent repair work. 

However, on 22 December 2015 a major engine failure occurred and the relevant aircraft experienced a "surge event", following take off. This resulted in an emergency landing of the aircraft with 186 passengers and 10 crew members on board.

Following the incident, Aquila issued summary proceedings against Onur for in excess of US$90m which it argued was due under the contract to lease the aircraft engine. 

The terms of the lease stated that the engine was to be delivered by Aquila and leased "as is, where is" and should comply with agreed delivery conditions. In addition, the terms also stipulated that once Onur signed the acceptance certificate and accepted delivery of the engine, it would be confirmed that Onur had inspected the engine and agreed to its condition on delivery.

In defending the action, Onur argued, amongst other things, that Aquila had breached the correct construction of the delivery conditions which provided that the aircraft engine had to be airworthy. It claimed that the cause of the engine's failure was a "latent defect" and as a consequence the engine was a "ticking time bomb" on delivery. Onur argued that Aquila had misrepresented the condition of the engine and therefore it could rescind the lease. 

The Court's ruling 

The Court ruled that while the engine was not fit for purpose, the acceptance certificate was a condition precedent and the Court upheld what the parties had contractually agreed. 

The Court emphasised the importance of the acceptance certificate as a condition precedent to delivery which confirmed;

  1. unconditional acceptance of the engine by Onur;
  2. that Onur had inspected the engine and was satisfied with the state of the engine and the conditions of the lease; and
  3. by signing the acceptance certificate, Onur waived its rights to make a claim against Aquila in relation to the engine’s delivery condition.

In delivering judgment, the Court followed the decision of Olympic Airlines SA v ACG Acquisition XX LLC [2013] EWCA Civ 369 where the Court did not accept the lessee's argument that a leased aircraft was not in the required condition due to pre-agreed contractual terms.

The Court ruled that despite it being a "tough contract", Onur should have carefully inspected the engine to ensure satisfaction prior to executing the acceptance certificate and it could not now argue a breach of contract by Aquila.

Commentary 

The Irish High Court recently confirmed, in the context of an insurance dispute, that once a condition precedent has been agreed between parties, failure to comply with it is a ground for declinature of the contract1. The Aquila decision is likely to be persuasive before the Irish Courts as courts are reluctant to depart from what commercial parties have contractually agreed. 

Therefore, parties should exercise caution when entering contracts and lessees in particular should carefully inspect aircraft or engines to ensure they are entirely satisfied with their condition before executing an acceptance certificate.

This case is an important reminder of the necessity of a well-drafted lease and acceptance certificate as a means of allocating risk between the lessor and lessee where aircraft or aircraft engines are involved.  

1 Kelly Builders (Rosemount) Limited v HCC Underwriting Agency Limited [2016] IEHC 72

 

Contributed by Sarah Twohig

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