Aquila v Onur – The case of the lease of an aircraft engine

A number of years ago we wrote about the case of ACG v Olympic which concerned the circumstances in which the defective condition of a leased aircraft might entitle the airline to refuse to pay rent. 

Recently, similar issues arose in the case of Aquila WSA Aviation Opportunities II Limited (Aquila) v Onur Air Tasimacilikas (Onur) in respect of the lease of an aircraft engine. 

In this case the English Commercial court granted summary judgment in favour of Aquila, the lessor of an aircraft engine, which had claimed sums in excess of US$12 million from the airline, notwithstanding that it had leased a faulty engine which failed mid-flight and was described as a “ticking time bomb” by the airline. 

The judge found that in view of the terms of the lease:

“The parties have wittingly and willingly agreed to risk allocation. That risk allocation sits somewhat heavily on the airline”.

Onur, a Turkish airline, needed a temporary replacement engine. It arranged a lease from Aquila, an Irish lessor. After approximately three months of operation the engine suffered a catastrophic failure although the aircraft landed safely. A dispute then arose between the lessor and lessee as to which party was responsible for the resulting damage to the engine and whether the airline remained liable for paying the rent. The engine was a total loss.

The lease consisted of a Master Short Term Engine Lease Agreement with bespoke provisions documented in a separate Engine Specific Lease Agreement. 

Specifically, the lease required the lessor to deliver the engine in an “as is where is condition” and the engine was additionally required to 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 rate performance throughout the entire operating envelope.
• It was to be fresh from a hot and cold borescope test.
• It was to be free from any reduced interval repetitive inspection requirement and not “on watch”. 

Significantly, the Acceptance Certificate signed by Onur stated that

• It had unconditionally accepted the engine for all purposes.
• It had inspected the engine and the engine satisfied the conditions set forth in the lease and this Acceptance Certificate constitutes conclusive proof that the engine satisfies such conditions.
• Onur had no rights and/or claims against the lessor with respect to the delivery condition of the engine.

The lease documentation also contained the following terms

• The engine is to be delivered “as is where is”.
• Aquila makes no warranties, guarantees or representations of any kind with regard to the engine.

Finally, the lease documentation also stated that Onur’s signing of the Acceptance Certificate was a condition precedent to delivery of the engine and commencement of the term of the lease.

The application before the court was for summary judgment in favour of Aquila 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 position was that the engine suffered from a latent defect which had caused the failure and that the lessor should have known about the defect as the result of an FAA airworthiness directive and a manufacturer’s service bulletin. Onur argued that the lessor was in breach of its obligation under the lease to deliver the engine in an airworthy condition.

Further, Onur asserted that Aquila had fraudulently or negligently misrepresented to Onur that the engine was airworthy and in compliance with the lease and therefore Onur could rescind the lease. 

The judge, Mrs. Justice Cockrell, dismissed Onur’s defence as having no realistic chance of success. In particular, the judge held that 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 was contractually estopped from using the condition of the engine as a defence.

The judge found that the airline had been under no obligation to accept the engine but once it did, the contract clearly allocated the risk of an engine failure to Onur and the claim that Aquila had somehow “misrepresented” the state of the engine could not succeed in light of the clear terms of the acceptance provisions in the lease and Acceptance Certificate.

It is obvious that the aviation industry relies heavily on documents in relation to a whole range of technical and legal issues; contractual estoppel is therefore of immense importance as demonstrated yet again by this case. 

It is a well-established principle of English law as emphasised by this decision that:

“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. Such contractual estoppel precludes a party from relying on misrepresentations as to the state of affairs”. 

The judge described the provisions of the lease as emphatic and as:

“ … a tough contract which makes Onur responsible for insurance, maintenance and so forth as well as explicitly placing the engine at Onur’s risk during the currency of the lease”.

The judge found that Onur had agreed to provisions which on their face mean that if it signed the Acceptance Certificate it could not then complain about the condition of the engine. Onur signed the Acceptance Certificate in the full knowledge that those were the terms it had agreed. It cannot resile from the position as set out in the lease and the Acceptance Certificate. The judge did not consider that the fact that the parties knew that Onur had not in fact inspected the engine had any impact.

Although the facts and the arguments differed slightly from the Olympic case, this case once again confirms that a well drafted lease and Acceptance Certificate can be effective in allocating risk between a lessor and a lessee. This is of immense importance with complex equipment such as aircraft and/or engines which might well suffer from defects which a party would find hard to identify on a standard pre-contract inspection.

Under English law parties can agree that a certain state of affairs exists even if it does not. Parties are taken to have read and understood the contracts they enter into. 

What Onur could not do, having signed an Acceptance Certificate on those terms, was then resile from the agreed contractual position.