Post by lairezippert on May 24, 2010 0:46:59 GMT 4
United Kingdom: Has the "Hell or High Water" Clause Lost its Appeal?
30 April 2010
Article by Zohar Zik
Zohar Zik considers the decision of ACG Acquisition XX LLC v Olympic Airlines SA, where the court refused to grant summary judgment on a claim for unpaid rent in respect of a leased aircraft where it was arguable that ACG Acquisition XX LLC ("ACG"), the lessor, had breached the lease agreement and failed to provide Olympic Airlines SA ("Olympic"), the lessee, an aircraft in an airworthy condition. He also examines the continuing effectiveness of "Hell or High Water"* clauses in light of this decision.
ACG applied for summary judgment in respect of its claim for payment of rent due under the lease of its Boeing 737 aircraft to Olympic and in respect of Olympic's counterclaim for damages for the alleged breach of the lease by ACG. The lease was for a period of five years and required that Olympic pay a monthly rent to ACG.
It was a term of the agreement that ACG should deliver the aircraft in an "airworthy" condition and ACG was obliged to perform a number of tasks including inspections and a C-check. A key provision stated that a signed certificate of delivery was conclusive proof of acceptance of the aircraft.
ACG delivered the aircraft to Olympic who, in turn, signed the certificate of delivery and put the aircraft into use. However, due to the discovery of various defects, the aircraft was taken out of service 14 days later and subsequently had its certificate of airworthiness withdrawn by the Greek Aviation Authority. Olympic stopped paying rent and withheld the maintenance reserves payment for accrued utilisation. ACG issued proceedings for recovery of rent and damages. Olympic counterclaimed, alleging that ACG had breached the lease agreement and claiming damages. ACG argued that Olympic was precluded from maintaining a claim against ACG as Olympic had signed the certificate of delivery which prevented it from relying on any breach.
The court refused the summary judgment application and rejected ACG's argument. It was held that Olympic's acceptance of the aircraft was only a conclusive proof that it had accepted and investigated the aircraft and that it had ascertained that the necessary documents were satisfactory. The lease agreement did not exclude ACG's liability to comply with its positive obligation under schedule 2 to provide an airworthy aircraft, as fully as it could have. Accordingly, Olympic was entitled to maintain its claim.
Further, ACG's failure to provide an aircraft in an airworthy condition was fundamental and Olympic had a good arguable case that there had been a total failure of consideration which, if substantiated, would mean that ACG's right to receive rent would not have arisen. In addition, the court took the view that the underlying purpose of the lease was to give Olympic use of a useable aircraft, not mere possession of it, and, accordingly, if Olympic were obliged to pay rent, its claim in damages would increase correlatively.
Commentary
The judge's finding that "...the lease agreement did not exclude [ACG's] liability to provide an aircraft in compliance with its obligations to ensure it was airworthy, as it could have" is interesting. Typically, lease agreements would provide for delivery of the aircraft in an "as is, where is" condition to the exclusion of, among others, any warranties, representations and implied terms as to the leased aircraft being fit for purpose. Lessors go to great lengths to ensure that the lessees bear sole responsibility for all matters pertaining to the airworthiness of the aircraft. In this case, however, there appears to have been a conflict between the standard "as is, where is" clause and the delivery conditions, which imposed a positive obligation on ACG to provide an airworthy aircraft. It was this dichotomy that enabled the judge to rule in favour of Olympic.
The fact that the parties ended up litigating this point suggests that this perceived conflict was not result of a commercial compromise during lease negotiations but rather of a drafting oversight or simply an over reliance on template documentation.
If this was indeed the case, then it would be yet another example of the importance of undertaking a thorough review of all the provisions of the lease, including those which are routinely canvassed as 'boilerplate', to ensure that the final document (schedules included) truly represent the commercial agreement between the parties. This could save both parties time and money, whilst helping them sustain their commercial relationship over time.
In the short term, at least, this decision could mean a big headache for lessors. They may not able re-price their leases to compensate for this additional, unexpected exposure to lessee's default - yet, their repayment obligations under their own financing arrangement will continue despite lessee having stopped paying its rent, whatever the reason for such non-payment might be. Lessees, on the other hand, can rejoice for having finally been successful in challenging the hitherto impregnable "Hell or High Water" provision.
However, this 'victory' could be short lived in practice (and may even cost lessees dearly) for various reasons. Firstly, lessors will seek to reinforce the wording of their standard documentation to minimise the risk of this line of argument ever succeeding again. Secondly, lessors are likely to increase their future rates to compensate for an exposure for which they have not provisioned. Thirdly, the unique circumstances of this case are such that it may be possible to distinguish the decision on its own facts.
A leave to appeal was denied by the court but ACG may still make an application to the Court of Appeal.
* A "Hell or High Water" or "Net Lease" clauses require lessees to pay rent regardless of what happens.
see: Barlow, Lyde & Gilbert
30 April 2010
Article by Zohar Zik
Zohar Zik considers the decision of ACG Acquisition XX LLC v Olympic Airlines SA, where the court refused to grant summary judgment on a claim for unpaid rent in respect of a leased aircraft where it was arguable that ACG Acquisition XX LLC ("ACG"), the lessor, had breached the lease agreement and failed to provide Olympic Airlines SA ("Olympic"), the lessee, an aircraft in an airworthy condition. He also examines the continuing effectiveness of "Hell or High Water"* clauses in light of this decision.
ACG applied for summary judgment in respect of its claim for payment of rent due under the lease of its Boeing 737 aircraft to Olympic and in respect of Olympic's counterclaim for damages for the alleged breach of the lease by ACG. The lease was for a period of five years and required that Olympic pay a monthly rent to ACG.
It was a term of the agreement that ACG should deliver the aircraft in an "airworthy" condition and ACG was obliged to perform a number of tasks including inspections and a C-check. A key provision stated that a signed certificate of delivery was conclusive proof of acceptance of the aircraft.
ACG delivered the aircraft to Olympic who, in turn, signed the certificate of delivery and put the aircraft into use. However, due to the discovery of various defects, the aircraft was taken out of service 14 days later and subsequently had its certificate of airworthiness withdrawn by the Greek Aviation Authority. Olympic stopped paying rent and withheld the maintenance reserves payment for accrued utilisation. ACG issued proceedings for recovery of rent and damages. Olympic counterclaimed, alleging that ACG had breached the lease agreement and claiming damages. ACG argued that Olympic was precluded from maintaining a claim against ACG as Olympic had signed the certificate of delivery which prevented it from relying on any breach.
The court refused the summary judgment application and rejected ACG's argument. It was held that Olympic's acceptance of the aircraft was only a conclusive proof that it had accepted and investigated the aircraft and that it had ascertained that the necessary documents were satisfactory. The lease agreement did not exclude ACG's liability to comply with its positive obligation under schedule 2 to provide an airworthy aircraft, as fully as it could have. Accordingly, Olympic was entitled to maintain its claim.
Further, ACG's failure to provide an aircraft in an airworthy condition was fundamental and Olympic had a good arguable case that there had been a total failure of consideration which, if substantiated, would mean that ACG's right to receive rent would not have arisen. In addition, the court took the view that the underlying purpose of the lease was to give Olympic use of a useable aircraft, not mere possession of it, and, accordingly, if Olympic were obliged to pay rent, its claim in damages would increase correlatively.
Commentary
The judge's finding that "...the lease agreement did not exclude [ACG's] liability to provide an aircraft in compliance with its obligations to ensure it was airworthy, as it could have" is interesting. Typically, lease agreements would provide for delivery of the aircraft in an "as is, where is" condition to the exclusion of, among others, any warranties, representations and implied terms as to the leased aircraft being fit for purpose. Lessors go to great lengths to ensure that the lessees bear sole responsibility for all matters pertaining to the airworthiness of the aircraft. In this case, however, there appears to have been a conflict between the standard "as is, where is" clause and the delivery conditions, which imposed a positive obligation on ACG to provide an airworthy aircraft. It was this dichotomy that enabled the judge to rule in favour of Olympic.
The fact that the parties ended up litigating this point suggests that this perceived conflict was not result of a commercial compromise during lease negotiations but rather of a drafting oversight or simply an over reliance on template documentation.
If this was indeed the case, then it would be yet another example of the importance of undertaking a thorough review of all the provisions of the lease, including those which are routinely canvassed as 'boilerplate', to ensure that the final document (schedules included) truly represent the commercial agreement between the parties. This could save both parties time and money, whilst helping them sustain their commercial relationship over time.
In the short term, at least, this decision could mean a big headache for lessors. They may not able re-price their leases to compensate for this additional, unexpected exposure to lessee's default - yet, their repayment obligations under their own financing arrangement will continue despite lessee having stopped paying its rent, whatever the reason for such non-payment might be. Lessees, on the other hand, can rejoice for having finally been successful in challenging the hitherto impregnable "Hell or High Water" provision.
However, this 'victory' could be short lived in practice (and may even cost lessees dearly) for various reasons. Firstly, lessors will seek to reinforce the wording of their standard documentation to minimise the risk of this line of argument ever succeeding again. Secondly, lessors are likely to increase their future rates to compensate for an exposure for which they have not provisioned. Thirdly, the unique circumstances of this case are such that it may be possible to distinguish the decision on its own facts.
A leave to appeal was denied by the court but ACG may still make an application to the Court of Appeal.
* A "Hell or High Water" or "Net Lease" clauses require lessees to pay rent regardless of what happens.
see: Barlow, Lyde & Gilbert