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Aircraft leasing and contractual estoppel: signing an acceptance certificate will likely preclude future disputes as to delivery condition

In Aquila WSA Aviation v Onur Air, Cockerill J gave summary judgment for the claimant on its claim for unpaid sums and damages arising from a lease of an aircraft engine. The lease was comprised of standard IATA Master Short Term Engine Lease Agreement terms (the Master Agreement) and various additional bespoke terms (the Lease Agreement).

The judgment will be of particular interest to those in the aviation industry, and those advising such clients. In addition, the case is a useful illustration of the application of the doctrine of contractual estoppel established in Peekay Intermark v ANZ and Springwell Navigation v JP Morgan.

Factual background

In September 2015, the defendant airline leased a jet engine from the claimant lessor, as temporary cover for an engine of the same type which was undergoing a shop visit. As contemplated by the terms of the agreement, Onur signed an acceptance certificate when it accepted delivery of the engine from the claimant. The leased engine was subsequently installed on one of Onur’s fleet.

On Christmas Day 2015, shortly after take off, and whilst the aircraft was carrying 186 passengers and ten crew, the engine experienced a major failure, causing the crew to have to perform an emergency landing. Fortunately, there was no loss of life or serious injury. Unsurprisingly, the engine was thereafter removed from the aircraft and has not been used since.

Contractual background

Clause 5 of the master agreement stated (all emphasis original):

“WITHOUT PREJUDICE TO 2.2.2, 2.3, 9 OR 12, THE ENGINE PACKAGE IS TO BE DELIVERED AND LEASED HEREUNDER ‘AS IS, WHERE IS‘.

SAVE AS EXPRESSLY STATED IN THIS AGREEMENT, PARTIES UNCONDITIONALLY AGREE AS FOLLOWS, IT BEING EMPHASISED THAT THE FOLLOWING IS FUNDAMENTAL TO THE TERMS OF THIS AGREEMENT:

(I) LESSOR MAKES NO WARRANTIES, GUARANTEES OR REPRESENTATIONS OF ANY KIND […] WITH REGARD TO THE ENGINE PACKAGE; AND

(II) LESSEE WAIVES ALL RIGHTS, REMEDIES AND DAMAGES […] WITH REGARD TO THE ENGINE PACKAGE, AND LESSOR IN THAT CAPACITY (AND, FOR THE AVOIDANCE OF DOUBT, ITS INSURERS) SHALL HAVE NO LIABILITY THEREFOR.

NOTHING IN 5(II) SHALL AFFECT THE LEGAL LIABILITY OF LESSOR, IF ANY, UNDER LAW ARISING FROM ITS WILLFUL [sic] MISCONDUCT OR GROSS NEGLIGENCE […].”

Under the Master Agreement, there was an option to use an acceptance certificate as a condition precedent to delivery. This option was taken and the Lease Agreement inserted a new clause 2.4.5 in the Master Agreement, which:

  • Recorded that the engine would be delivered to Onur “as is, where is” and substantially in compliance with four delivery conditions.
  • Stated that “[b]y signing the Acceptance Certificate, [Onur] confirms that [it] had the opportunity to fully inspect the Engine Package to its full satisfaction and to satisfy itself that the Engine Package is in accordance with the delivery conditions”.

The agreement prescribed the form of the acceptance certificate as follows (and, as noted above, Onur in fact signed a certificate in this form):

“[Onur] hereby confirms to [Aquila] that: (i) [Onur] has unconditionally accepted the Engine for all purposes hereof and of the [Lease]; (ii) [Onur] has inspected the Engine and the Engine satisfies the conditions set forth in the [Lease] and this Acceptance Certificate constitutes conclusive proof that the Engine satisfies such conditions; and (iii) [Onur] has no rights and/or claims against [Aquila] with respect to the delivery condition of the Engine.”

The claim and the defence

Aquila brought a claim seeking liquidated damages under the contract (on the basis that the engine was a total loss as defined therein), damages to be assessed for breach of the contractual redelivery conditions, debt claims for unpaid rent, and, under a general indemnity at clause 10 of the Master Agreement, its costs of proceedings.

After a jurisdictional battle was resolved in favour of the claimant, Onur filed a defence and counterclaim, relying on four grounds. Of those grounds, only two were pursued with any vigour at trial, it being conceded that the other two added little and were in effect alternative ways of putting the same case. The grounds pursued in substance were (paragraph 22):

  • In repudiatory breach of the lease, the engine was not delivered in accordance with the delivery conditions.
  • The defendant was entitled to rescind the lease and the acceptance certificate for misrepresentation.

The following analysis concentrates on the application of the doctrine of contractual estoppel to the first of these grounds (the second ground, on misrepresentation, is covered by Practical Law Dispute Resolution in its legal update).

Analysis: contractual estoppel

The doctrine of contractual estoppel is summarised by Moore-Bick LJ at paragraph 56 of Peekay:

  • There is no reason in principle why parties to a contract should not agree that a certain state of affairs should form the basis for the transaction, whether it be the case or not.
  • Where parties express an agreement of that kind in a contractual document neither can subsequently deny the existence of the facts and matters upon which they have agreed, at least so far as concerns those aspects of their relationship to which the agreement was directed.
  • In such circumstances, the contract itself gives rise to an estoppel (against the party who seeks to rely on a state of affairs different to that agreed).

The judge in the present case held, at paragraph 56, that, in the context of the present proceedings:

“This portion of the dispute is the kind of point of contractual construction which is eminently suited to disposal on a summary basis. It is about the words of the contract. There is no suggestion, so far as this point is concerned, of relevant factual matrix or the relevant evidence being different to what I have before me now.”

Whilst denying there was a breach of the delivery conditions, the claimant accepted that a breach should be assumed for the purposes of its application. However, the claimant submitted that even if that were so, the defendant could not rely on such fact, as it was contractually estopped from doing so by the effect, in particular, of clause 2.4.5 and the acceptance certificate.

Onur submitted that the claimant’s approach would denude the delivery conditions of any meaning, and that it was at least well arguable that the effect of clause 2.4.5 was limited only to Onur, confirming that it had had an opportunity to undertake the matters set out in that clause (see above).

The judge held, at paragraphs 55ff, that:

  • Onur’s approach was “exactly the sort of laboratory analysis of one part of a contract without reference to the whole which is frowned on by the authorities on construction of contracts”.
  • Construing clause 2.4.5 in the context of the contract as a whole, in particular the “staringly emphatic” clause 5, showed that the parties intended that Onur should, in taking the engine, be placed in a position of agreeing that it was in a certain defined condition, and could not, thereafter, complain about the condition of the engine.
  • Ultimately, the parties had “wittingly and willingly agreed to a risk allocation.” Onur had agreed that if it signed the acceptance certificate, it could not complain about the condition of the engine. It did sign that certificate, in full knowledge of the terms. It could not now resile from the position set out in the contract; and the parties’ knowledge that Onur had not in fact inspected the engine did not change matters.
  • Nothing material turned on the fact that the only mention of “conclusive proof” was in the certificate and not the contract itself.
  • The claimant’s construction did not denude the delivery conditions of meaning. The defendant was under no obligation to accept the engine unless it was in contractual condition. The deal was that, unless the defendant so confirmed, it would not get the engine. That was a “tough deal, but it [wa]s a perfectly sensible and clear one.” (See also Arnold v Britton at paragraphs 19 – 20.)

Conclusion

This case provides a useful illustration of the application of the doctrine of contractual estoppel, confirming that the Commercial Court will take a robust approach to holding commercial parties to the terms of their agreements, even in cases where the parties are aware that the factual position set out in the contract does not, in fact, obtain and where one party is on the end of a tough bargain. Further, it provides High Court authority on the meaning of the standard IATA Master Short Term Engine Lease Agreement terms.

39 Essex Chambers David Hopkins

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