"As is where is" revisited – allocating risk through the acceptance certificate

Introduction – the facts

Onur Air, a Turkish airline, needed a temporary replacement engine for one of its aircraft. So, it arranged a lease from Aquila, an Irish lessor. After about three months the engine suffered a catastrophic failure; luckily the crew were able to land the aircraft safely, but a dispute then ensued between Onur and Aquila as to which was responsible for the resulting damage to the engine and whether Onur remained liable for paying the rent despite the engine being damaged. The sums in dispute were considerable, in excess of US$9 million, as the engine was apparently a total loss. At the time of the hearing it remained in possession of Onur.

The Lease and acceptance certificate

The parties had documented for the lease using IATA’s standard form Master Short Term Engine Lease Agreement with bespoke provisions documented in an engine specific lease agreement (the Lease). The terms of the Lease required Aquila to deliver the engine in "as is, where is" condition. In addition the engine was required to substantially comply with four delivery conditions which were:

• the engine was to be fresh from a "C" check;

• the engine was to be capable of certified full rated performance throughout the entire operating envelope;

• fresh from a hot and cold boroscope test; and

• free from any reduced interval repetitive inspection requirement and not "on watch".

On delivery of the engine, Onur signed an acceptance certificate stating that:

• it unconditionally accepted the engine;

• it had inspected the engine and the engine satisfied the conditions specified in the Lease;

• the acceptance certificate constituted conclusive proof that the engine satisfied the required conditions; and

• it had no rights or claims against Aquila with respect to the delivery condition of the engine.

Additionally, the Lease itself stated that when Onur signed the acceptance certificate, it would be confirming that it had had the opportunity to inspect the engine fully and satisfy itself that the engine was in accordance with the delivery condition on the delivery date. The Lease also passed the risk of loss of or damage to the engine to Onur and obliged Onur to maintain and insure the engine and to return it in good condition to Aquila at the end of the Lease.

The court case

Aquila’s claim was for the stipulated loss value for the engine specified in the lease and for unpaid rent (which continued to accrue under the terms of the lease until the stipulated loss value was paid).

Onur’s claim was that the engine suffered from a latent defect which had caused the failure. Aquila should have known about the defect as a result of an FAA Airworthiness Directive and a manufacturer’s service bulletin and rectified it to satisfy the delivery condition. That Airworthiness Directive required all potentially affected engines to be inspected and fixed the next time the relevant module was removed from the engine for servicing. Onur therefore argued that:

• Aquila was in breach of its obligation under the lease to deliver the engine in airworthy condition;

• Aquila had fraudulently or negligently misrepresented to Onur that the engine was airworthy and in compliance with the lease; and

• therefore it could rescind the lease and walk away as Aquila had not performed its side of the bargain.

At the summary judgement application hearing, the actual delivery condition of the engine, the cause of its failure and whether Aquila should have carried out the work required by the airworthiness directive were not considered; the issue was simply did Onur have to pay the sums due under the Lease as the Lease stated, or was Onur released from its obligation to pay as a result of Aquila’s alleged breach and misrepresentation.

The decision

The judge, Mrs Justice Cockerill, dismissed Onur’s defence as having no realistic chance of success1 on the following basis:

• Onur was bound by its statement in the acceptance certificate and the terms of the Lease, that it had inspected and accepted the engine and that the engine was in delivery condition;

• Onur could not go back on its statement and later allege the engine was not in the required condition (in legal terms, Onur was contractually estopped from using the condition of the engine as a defence);

• Onur had been under no obligation to accept the engine, but once it did, it could not change its mind; the contract clearly allocated the risk of the engine breaking down to Onur; and

• the claim that Aquila had somehow misrepresented the state of the engine to Onur fell away when the effect of the acceptance provisions in the Lease and acceptance certificate were considered.

Furthermore, on the facts, it was decided that Onur was aware at the time of acceptance that the airworthiness directive had not been dealt with.

Conclusions - acceptance certificates are conclusive proof

Although the facts and the arguments differed slightly from the Olympic case2, the case confirms that a well-drafted lease and acceptance certificate can be effective in allocating risk between a lessor and a lessee (or a seller and a buyer). This can be particularly important with complex equipment like aircraft or aircraft engines, which might suffer from defects which either party might find hard to identify on a standard pre-contract inspection. Parties can agree that a certain state of affairs is the case at the time of entering into the contract, even if it proves not to be the case at a later date (unless there is a law specifically preventing this agreement).