ACG Acquisition XX LLC v Olympic Airlines

In an aircraft lease, “airworthy” means fit or safe for the carriage of passengers by air. The assessment concerns the aircraft’s actual condition, assuming that the operator knows of the relevant defect. A hidden defect which would have required rectification before flight therefore prevents airworthiness.

A certificate of acceptance may waive the lessee’s right to refuse delivery without waiving a separate claim for damages for breach of the lessor’s delivery obligations. However, a clear representation in the certificate may create an estoppel where it was intended to be relied upon, was relied upon to the representor’s detriment, and it would be inequitable to resile from it.

Frustration is unlikely where a dry lease allocates operational risks to the lessee through wide absolute-obligation provisions.

ACG leased a Boeing 737-300 aircraft to Olympic Airlines for five years. After delivery, defects were discovered in flight-control cables and elsewhere. The aircraft’s airworthiness certificate was suspended, extensive inspections and repairs followed, and Olympic later entered liquidation.

ACG claimed unpaid rent, maintenance reserves and damages for Olympic’s repudiatory breach. Olympic counterclaimed damages for alleged breach of the obligation to deliver the aircraft in the required condition. Olympic also relied on total failure of consideration and frustration.

The principal issues were the meaning of airworthiness, the effect of the contractual conclusive-evidence clause and certificate of acceptance, whether Olympic was estopped from alleging defective delivery, and whether the lease was frustrated.

1. Airworthiness. The lease required delivery of an aircraft that was airworthy and in a condition for safe operation. “Airworthy” meant fit or safe for the carriage of passengers by air. The question was whether a prudent operator, knowing of the defect, would have required it to be remedied before permitting the aircraft to fly. The test concerned the aircraft’s actual condition, not the operator’s knowledge of the defect or the existence of an airworthiness certificate (paras [111]-[121]).
2. The aircraft was in breach of the delivery condition because of corrosion affecting flight-control cables, worn pulleys, corrosion affecting the stabiliser and cargo-door cut-outs, unrecorded structural damage, and unacceptable fuel-tank contamination. It also failed fully to satisfy the relevant C-check and corrosion-programme requirements (paras [121]-[126]).
3. Certificate of acceptance. Clause 7.9 made delivery of the certificate conclusive proof that Olympic had inspected the aircraft, found it satisfactory and irrevocably accepted it for lease. Properly construed, it waived Olympic’s right to refuse acceptance under clause 3.4. It did not clearly waive Olympic’s separate right to damages for breach of ACG’s obligation to deliver the aircraft in the required condition (paras [127]-[136]).
4. Nevertheless, the certificate contained a clear and unequivocal representation that the aircraft complied in all respects with the delivery condition. ACG reasonably relied on that representation when accepting redelivery from AirAsia and thereby gave up the opportunity to require AirAsia to remedy defects. Olympic was therefore estopped from alleging non-compliance with the delivery condition. The counterclaim was consequently barred (paras [137]-[163]).
5. Frustration. The dry lease allocated to Olympic the risks of operating the aircraft, including withdrawal or non-restoration of its airworthiness certificate. The wide wording of clause 5.14 was not limited to temporary or readily remediable unairworthiness. The supervening events did not make performance radically different, and frustration would reverse the agreed allocation of risk. The lease was not frustrated (paras [173]-[185]).
6. ACG was entitled to judgment on its claim. Olympic’s counterclaim was dismissed. The parties were directed to agree the quantum of ACG’s claim (para [212]).