Commercial Court considers meaning of ‘airworthiness’ for first time

2 May 2012

AVIATION AND COMMERCIAL LITIGATION GROUPS

ACG Acquisition XX LLC v Olympic Airlines S.A. (in special liquidation)
[2012] EWHC 1070 (Comm)

English High Court considers the meaning of ‘airworthiness’ for the first time. Airline estopped from recovering damages for delivery of an unairworthy aircraft.

In a significant judgment for the aviation industry (handed down on 30 April 2012) Teare J, sitting in the Commercial Court, found that:

  1. In the context of a lease of an aircraft intended for the safe carriage of passengers, whether an aircraft was airworthy depended upon whether it was fit or safe for the carriage of passengers by air as a matter of fact. Whether a particular defect renders an aircraft unfit or unsafe for flight will depend upon the function of the part in question and the severity of the defect and not upon whether the operator of the aircraft knows of the defect or not.
  2. Contrary to the terms of the lease, the Claimant (“ACG”) had delivered a Boeing 737-300 aircraft to the Defendant (“Olympic”) which was neither airworthy nor safe to fly and which “had not been properly maintained”.
  3. Olympic’s signature of a ‘Certificate of Acceptance’ immediately prior to delivery did not give rise to a ‘contractual estoppel’ which prevented it from arguing that the aircraft was not airworthy or was otherwise not in the required condition at delivery. On a proper construction of the lease the parties had agreed that the ‘Certificate of Acceptance’ would be conclusive proof of certain matters, but had not agreed that it would be conclusive proof of the condition of the aircraft at delivery. By agreeing to sign and by signing the ‘Certificate of Acceptance’ Olympic had not waived any right to damages for any breach by ACG of its obligation to deliver the aircraft in the required condition.
  4. A related company of ACG had nevertheless relied on Olympic’s statement in the ‘Certificate of Acceptance’ that the aircraft “complied in all respects with the condition required at delivery” so as to be “absolutely certain that Olympic considered that the aircraft complied with the required condition”. Olympic was therefore estopped from resiling from that statement. As such ACG was entitled to rent and Olympic was estopped from counterclaiming damages for breach of contract.

Background

ACG delivered the aircraft to Olympic in August 2008 pursuant to a 5-year dry lease. Immediately prior to delivery to Olympic a related company of ACG had leased the aircraft to AirAsia.

Clause 4.2 of the lease obliged ACG to deliver the aircraft to Olympic “as is, where is and in the condition required in Schedule 2”. Schedule 2 required the aircraft to be “airworthy … and be in a condition for safe operation” and “have undergone, immediately prior to delivery, the next scheduled, full zonal block C-Check” (being one of a series of heavy maintenance checks).

The next scheduled C-Check was carried out by AirAsia’s maintenance, repair and overhaul organization (“MRO”) in Singapore, ST Aerospace, between May and August 2009. AirAsia was required to carry out this C-Check as part of the redelivery conditions set out in its lease of the aircraft.

During the C-Check, representatives of ACG and Olympic inspected the aircraft for defects. ACG’s representatives drew up a list of 308 discrepancies (including corrosion on the spoiler and aileron cables and corrosion on the left horizontal stabilizer which Olympic’s representatives had identified and notified to ACG). ACG gave the list to AirAsia to allow it to inspect and, if necessary, rectify the discrepancies.

On 19 August 2008 Olympic and ACG each signed a ‘Certificate of Acceptance’ which the lease required Olympic to sign in a specified form. The ‘Certificate of Acceptance’ stated that Olympic confirmed to ACG that the aircraft “complied in all respects with the condition required at delivery under section 4.2 and Schedule 2 of the Agreement”. The lease provided that the ‘Certificate of Acceptance’ would be “conclusive proof” of certain specified matters (none of which was that the aircraft was airworthy and otherwise in the required condition at delivery). Shortly thereafter the related company of ACG accepted redelivery of the aircraft from AirAsia and ACG delivered it on to Olympic.

On 6 September 2008, only 2 weeks after the aircraft entered into commercial service with Olympic, engineers discovered that one of the flight spoiler cables on the aircraft was broken. Olympic’s MRO identified a series of additional defects to the flight controls and the Hellenic Civil Aviation Authority (the “HCAA”) suspended the aircraft’s airworthiness review certificate (the “ARC”), grounding the aircraft.

During September and October 2008, the aircraft underwent further inspections in Athens, including by Boeing. In January 2009 it was sent to a third party MRO in Chateauroux, France, to undergo work to enable its ARC to be restored. Repairs were carried out to address the defects identified and others which subsequently came to light. A sample check of 12 Airworthiness Directives (“ADs”) and Corrosion Prevention Control Program (“CPCP”) tasks was also carried out. The aircraft was found to be non-compliant with 4 ADs.

By 26 June 2009 the repair works were eventually completed at a cost of more than €1.25 million. The aircraft was returned to Athens on 23 July 2009 and Olympic sought the re-issue of the ARC.

In early August 2009 the HCAA, having considered the findings made in Chateauroux, required a further sample check of 8 other ADs. Of the first 5 ADs which were checked, 2 were recorded as “with findings”. For the HCAA this “put in doubt the reliability of the aircraft documents as a whole” and, on 17 August 2009, the HCAA refused to renew the aircraft’s ARC and required “detailed and full scale inspections” to be undertaken, including the recertification of all ADs and the checking of all CPCP tasks and all tasks undertaken on the previous C-Check.

Olympic informed ACG that this put the aircraft “beyond economic repair” and shortly afterwards it was placed in long-term storage.

In September 2009, ACG commenced legal proceedings against Olympic for unpaid rent and maintenance reserves for the period of the 5-year lease. Olympic counterclaimed for damages for ACG’s alleged breach of the lease in failing to deliver the aircraft in the required delivery condition, and also advanced a case based on total failure of consideration and frustration.

On 2 October 2009, Olympic went into liquidation. The aircraft nevertheless remained in Athens for well over a year. ACG subsequently transported the aircraft to Florida where, between July and September 2011, it underwent a C-Check as well as further work which allowed the Federal Aviation Authority to certify it as airworthy. ACG thereafter leased the aircraft to Aerosur in Bolivia.

The Decision

In a decision eagerly awaited by the aviation industry, Teare J held:

  1. The meaning of the word ‘airworthy’ depends upon its true construction in the context of the lease in which it is found, having regard to the factual background of which both parties are aware. The lease in this case is of an aircraft intended for the safe carriage of passengers. In that context the ordinary and natural meaning of airworthy is, in my judgment, fit or safe for the carriage of passengers by air. Whether a particular defect renders an aircraft unfit or unsafe for flight will depend upon the function of the part in question and the severity of the defect. It will not depend upon whether the operator of the aircraft knows of the defect or not”.
  2. The court thereby rejected ACG’s argument that an aircraft with a defect which, if known, would render the aircraft unfit or unsafe for flight could be “rendered fit or safe for flight on account of the operator of the aircraft being unaware of the defect.
  3. An appropriate test for airworthiness is: “Would a prudent operator of an aircraft have required that the defect should be made good before permitting the aircraft to fly, had he known of it. If he would the aircraft was not airworthy.
  4. The aircraft “had not been properly maintained” and a series of defects were present at delivery, including corrosion to the spoiler and aileron cables, to the horizontal stabilizers and to the cargo door cut-outs as well as an unacceptable amount of debris in the fuel tanks.
  5. Inspections carried out by ST Aerospace during the C-Check “must have been poor”.
  6. The aircraft documents incorrectly recorded that ST Aerospace had replaced 2 specific spoiler cables which were subsequently found corroded, although the precise manner in which the mistake was made which led to this was “difficult to identify”.
  7. Contrary to clause 4.2 of the lease the aircraft was not airworthy at delivery and otherwise did not comply with the required delivery conditions set out in schedule 2 to the lease.
  8. On a proper construction of the lease the parties had not agreed that the ‘Certificate of Acceptance’ – which Olympic was required to sign by the lease and which was in a form specified by the lease – would be conclusive proof that the aircraft was airworthy and otherwise in the required condition at delivery.
  9. There was, therefore, no ‘contractual estoppel’ and Olympic had not agreed to waive any right to damages for ACG’s breach of its obligation to deliver the aircraft in that condition.
  10. Olympic was nevertheless estopped from alleging that the aircraft did not comply with the condition required by clause 4.2 and schedule 2 of the lease as a result of its statement in the ‘Certificate of Acceptance’ that the aircraft “complied in all respects with the condition required at delivery under section 4.2 and Schedule 2 of the Agreement”. An affiliated ACG entity had relied on that statement so as to be “absolutely certain that Olympic considered that the aircraft complied with the required condition” and had thereby suffered detriment by giving up its right to refuse to accept redelivery of the aircraft from AirAsia, the previous lessee. It would accordingly be unconscionable to permit Olympic to resile from the statement.
  11. The HCAA’s withdrawal of the ARC in September 2008 and its refusal to renew it in August 2009 had not frustrated the lease.
  12. ACG was accordingly entitled to rent and maintenance reserves which fell due under the lease prior to its termination and to damages for lost rent after its termination. Olympic was not entitled to the damages for breach of contract which it sought by its counterclaim.

The court has not yet dealt with various ancillary matters, including costs and permission to appeal to the Court of Appeal.

Olympic was represented by Philip Shepherd QC and Edward Cumming of XXIV Old Buildings, instructed by John Evans and Francesca Liebling of Fulbright & Jaworski International LLP.