In this article we explain why a recent case in the aviation sector highlights the importance of a careful acceptance process when taking delivery of procured goods and the practical and legal effect of accepting goods “as is, where is”.
Acceptance certificates for deliveries should only be signed once the party signing has satisfied itself that the goods have been delivered in accordance with the terms of the contract under which they were supplied and in the expected physical condition. If the goods are delivered in a condition different from that agreed to in the contract, it is imperative that the receiver adapts the acceptance certificate to reflect the actual physical condition of the equipment. The receiver may not rely on any representations with respect to the condition of the goods in the contract, once the acceptance certificate has been signed.
A recent case involving Olympic Airlines (and the lease of a Boeing 737-300 to that airline) demonstrates that acceptance certificates have the desired commercial and legal effect, from the perspective of the supplier, of passing any risks of defects in the condition of the equipment discovered after acceptance onto the party signing the acceptance.
Facts of the case
Olympic Airlines agreed to lease a Boeing 737-300 from ACG Acquisition XX LLC (AGC) for five years. On delivery, Olympic Airlines signed and delivered to ACG a certificate of acceptance confirming that the aircraft had been irrevocably and unconditionally accepted.
However, the aircraft delivered had broken cables controlling the spoilers on one of the wings. Olympic Airlines had noticed this damage during the pre-leasing technical inspection but the findings of the engineers were not subsequently recorded in the discrepancies report that was attached to the final technical inspection certificate. On repairing this damage after delivery, other defects in the aircraft were discovered resulting in the Greek Civil Aviation Authority withdrawing the aircraft's certificate of airworthiness.
Olympic Airlines refused to pay and ACG sued them for the unpaid rent pursuant to the lease agreement. Olympic Airlines counterclaimed for breach of contract (by ACG) claiming that ACG had failed to deliver the aircraft to Olympic Airlines in the condition that had been required by the lease. Olympic Airlines argued that they should not be required to pay rent (and instead should be entitled to substantial damages) given that ACG had delivered to them an aircraft that was not "airworthy".
On the 21st April 2010, the Commercial Court dismissed ACG's application for summary judgment and held that Olympic Airlines had established an arguable case. However at trial, on the 30th April 2012, the Commercial Court rejected Olympic Airlines' claims and held them liable for the unpaid rent and maintenance reserves under the lease. In addition, they were ordered to pay damages to cover the remainder of the term of the lease.
The key legal issues
Olympic Airlines argued that the Boeing 737-300 was not delivered in an "airworthy" condition as required by the lease. However, ACG counter-argued that Olympic Airlines had signed the certificate of acceptance and had accepted the technical condition of the aircraft. As Olympic Airlines had failed to thoroughly inspect the aircraft at completion to see if previous defects identified had been repaired and to check that there were no other defects present, Olympic Airlines was not entitled to claim that the aircraft had not been delivered in an airworthy state.
The delivery clause in the lease included an "as is, where is" clause, meaning that the aircraft was delivered in whatever condition and at whatever location it was at the time of acceptance, effectively passing the risk of any defects on to the lessee. Olympic Airlines was therefore required to validate the condition of the aircraft to ensure it was of satisfactory condition and serviceable prior to delivery.
The "hell or high water" clause in the lease provided that the lessee's obligations under the lease were absolute and unconditional. The wording of the clause effectively meant that:
The lease also included a "conclusive proof" clause detailing the effect of the lessee signing the acceptance certificate. Signing a certificate of acceptance would be conclusive proof that the lessee has examined the aircraft and irrevocably accepted it for lease.
Olympic Airlines also claimed that there was a total failure of consideration. This occurs when there has been a complete failure of the performance by one party, for which the other party had given consideration. The failure of consideration here has to be total as consideration is 'whole and indivisible' and the courts will not divide or apportion it unless the parties have done so.
The reasoning and decision
Olympic Airlines irrevocably and unconditionally accepted and leased the aircraft from ACG pursuant to the certificate of acceptance so that rent became due. Olympic Airlines did not seek to discharge the lease at any time.
The court confirmed that although the aircraft had not been in an airworthy condition for safe operation at the time of its delivery to Olympic Airlines and, accordingly, ACG was in breach of the lease obligation to deliver an airworthy aircraft, Olympic Airlines were nonetheless bound by their signed representation in the certificate of acceptance, stating that the aircraft was in a satisfactory deliverable condition.
The court applied the principle of estoppel; Olympic Airlines were prevented (estopped) from asserting that the aircraft did not comply with the delivery conditions in the lease because they had signed the certificate of acceptance. ACG had relied on the signing of the certificate of acceptance by Olympic Airlines to release the previous lessee, AirAsia, as they assumed the redelivery conditions of the previous lease had been met.
In future negotiations on this subject matter, the parties may try to negotiate carve-outs in acceptance certificates to explicitly address the issue of partial failure of consideration if a defect in the aircraft is discovered at a later date, particularly in transactions involving older aircraft where a defect may be difficult to detect during the technical inspection process.
This case also acts as a useful reminder of the importance of picking up any apparent inconsistencies in the language of contracts in terms of stipulating both that equipment is delivered "as is", whilst also stating elsewhere in the same contract that it is "serviceable" or fit for purpose.
Effective project management is also vital throughout the technical inspection process, and during financial close, to ensure that the physical reality of the deal at the time of the close still matches the drafting in the final contract documents to be signed.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.