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A presentation given by Paul Briggs at the Law Society of Ireland on the legal issues of purchasing new and used aircraft.
Citation preview
Legal Issues - Purchase of new /
used Aircraft
Paul Briggs
6 November 2012
ADMIN: 1544 6107
© Bird & Bird LLP 2011
AgendaNew Aircraft - liability
• Excusable / Non-excusable delay - Liquidated Damages• Exclusion of Liability• Unfair Contract Terms Act• OEM warranty – interface commitmentUsed Aircraft
• LOI - Good faith?• Lex situs – transfer of title / creation on mortgage on purchase• as is – where is"
- Delivery Condition- Indemnities / Disclaimer- OEM / MRO Warranties
• Title Warranty- Liens- Searches
• Closing / cash and practical issues
© Bird & Bird LLP 2011
Who is Paul Briggs?Aircraft business since 1987•Beaumont & Son•Air 2000: both leasing companiesMcCann FitzGerald / GPA 1989 to 1991•Summers in Shannon!Hong Kong / China 1992 / 1995BAE 1995 / 2004•Hatfield – BAE Asset Management•Oasis Leasing•Airbus Asset Management•FSTATwobirds since 2004•Joint head of Aviation & Defence
© Bird & Bird LLP 2011
MY AIMReal Law! Yes indeed
•Real cases
•Real statutes
Law is FUN •messin' about with aeroplanes
•Train set
Business practice and $*$T happensWar stories from real deals
© Bird & Bird LLP 2011
Aircraft Security:General
Principles
Purchase of a new Aircraft from Manufacturer
Delay / Breach – Liquidated Damages
© Bird & Bird LLP 2011
Excusable DelayManufacturer not responsible for delays beyond its
"control and not occasioned/caused by its fault or negligence"
Acts of God, war, natural disasters, slowdown or interruption o f work, labour disputes, failure of sub-contractor or supplier to furnish materials etc – Excusable Delays
Termination on Excusable Delay Total Loss
• Buyer request a replacement Aircraft; or
• Agreement terminates without liability of Buyer
© Bird & Bird LLP 2011
Non-excusable Delay / LDs
Liquidated damages – Seller delayGenuine Pre-estimate of loss?Penalty clauses are unenforceable!Grace periodLiquidated damages usually cappedBuyer's right to terminateCommercial value of offered LDs?Buyer better off relying on law?Anticipatory BreachSpecific Performance
© Bird & Bird LLP 2011
Washington State / Boeing
VAA / CargoluxLate delivery: breach – damages / cancellationEasier to claim – no need to prove amount of lossBoeing aggressively defends LD claims and seeks to
negotiate downReally cap of Purchaser's rightsSole remedy?Careful not to remove cancellation [email protected]
© Bird & Bird LLP 2011
Buyer Default / PDPs
PDPs instalment of Purchase Price not "deposit"Seller right to keep on breachAppreciating market?Correct method of calculating contractual loss of Seller?
• Duty to mitigate• Sale to another customer / order book
Hadley v Baxendale (1854) party can only claim for losses arising from the other parties breach of contract is the losses are not too remote. There are two limbs to the test: • Losses which a reasonable man would have realised was a 'not
unlikely' consequence of the breach (direct losses generally fall under this limb);
• Losses which may have reasonably been in contemplation of the parties at the time they made the contract, as a probable result of the breach (consequential or special damages generally fall under this limb).
Recent example – enforceability of settlement
Exclusion of Liability
© Bird & Bird LLP 2011
Risk AllocationAirline Protection:
• Warsaw Convention 1929
• Montreal Convention 1999
• 1st tier: 100,000 SDRs (EUR 135,000)
• Excess: presumed fault of carrier – carrier would need to prove damage not due to its negligence / caused by negligence of another
Manufacturer limits liability to express warranties and excludes all other liability
Erosion of Airline limitsErosion of Manufacturer limits
© Bird & Bird LLP 2011
Contribution to 3rd Party DamageExcluded from exclusion to the extent of OEM's
relative % of the total fault or other legal responsibility of all persons causing such bodily injuries or damage
No standard practice – depends on negotiating position of parties
Boeing have offered above carve outEngine manufacturer: concept of joint tortfeasors
© Bird & Bird LLP 2011
WarrantiesManufacturer: Warranted Part – manufactured to
design of OEM or having OEM part number will be free from defects in:• Material• Workmanship• Design Expiry of performance guaranteesIP Warranty
• Patent• Copyright• SoftwareEngines and BFE usually separate from OEM [ATR
issues engine warranties]Vendor warranties / Interface commitment
© Bird & Bird LLP 2011
Exclusion of LiabilityManufacturer liability:
Contract – Sale of Goods Act 1979TortStrict liability
Unfair Contract Terms Act 1977Does UCTA apply• Consumer • Standard Terms
- Proper and meaningful negotiation?- All negotiated except exclusion clause?- International Supply Contract S.26
~ BAe V Amiri Flight ~ Trident Turboprop (Dublin) V First Flight [2009]~ Air Transworld V Bombardier [2012] High Court
If so to which provisionsReasonableness test
© Bird & Bird LLP 2011
Purchase of second hand aircraft from leasing companies/airlines
© Bird & Bird LLP 2011
Lex Situs – sales tax / VAT!
Structure – usually buyer risk [unless sale and lease back]
Number of jurisdictions have "friendly" sales tax regulations and "fly away" exemptions
Look through lessor?Greek ATR experienceUK Q400 experienceVAT – European Court of Justice: Re A Oy C-33/11International airspace
© Bird & Bird LLP 2011
Lex Situs – transfer of interest Basic rule: transfer of ownership interest (sale or
mortgage) aircraft should be in UK or jurisdiction where transfer will be recognised
EvidenceMortgage taking effect at time of purchase
• International airspace?
• Hamburg
• Toulouse
Proper law not just governing lawBlue Sky
• 3 X 747
• 1 aircraft location unknown – English law applied
• 1 aircraft in Netherlands
• International airspace?
© Bird & Bird LLP 2011
Documentation dealing with purchase (LOI/Purchase Agreement)
Letter of Intent
© Bird & Bird LLP 2011
Good Faith – VistaJet V Shaker
LOI contained a provision that where “despite the exercise of good faith and reasonable endeavours” the parties “fail to reach agreement ... before the Cut-Off Date ... [Vistajet/the Seller] shall ... refund the deposit to [Mr Shaker/the Buyer/the Purchaser]”
No agreement was reached, despite several extensions to the cut off date
The final amendment/extension to the LOI included the following acknowledgement: “notwithstanding the exercise of good faith and reasonable endeavours by all relevant parties"
Mr Shaker sued for the refund of the deposit
© Bird & Bird LLP 2011
Good Faith
Vistajet refused to repay on the basis that Mr Shaker had not carried out negotiations in good faith, nor had he used reasonable endeavours to complete the deal.
Mr Shaker submitted that:-
• such obligations were unenforceable (i.e. agreement to agree); and
• VJ estopped
© Bird & Bird LLP 2011
Good Faith
Judgment:
• Agreements to use reasonable endeavours to agree or to negotiate in good faith, such as the LOI between Shaker & Vistajet, are unenforceable if “...there are no objective criteria by which the court can decide whether a party has acted unreasonably..”
• Duty to negotiate in good faith is unworkable because”... it is inherently inconsistent with the position of a negotiating party...”
• Accepted Mr Shaker’s contractual estoppel argument
• Terms governing the cut-off date and the return of the deposit were legally binding and that Vistajet was obliged to return the money to Shaker
• No leave to appeal – because of estoppel (not good faith argument) [October 2012]
© Bird & Bird LLP 2011
LOI - enforceability
Majority of the LOI terms to be non-binding• Inspection
• Board approval
Buyer paying deposit will want comfort that the deposit can be returned in certain scenarios:• Failure to deliver Aircraft by [x];
• Non-compliance with the Delivery Condition;
• Event of Loss
Confidentiality and governing law provisions binding
Who holds cash – Jerry Starkes!
Purchase Agreement
© Bird & Bird LLP 2011
Purchase from lessor with lease attached
No physical DeliverySecurity InterestsCPsNovation
• New obligation between A and C
• Security
CashMaintenance Reserves – reconcilliationCommercial "arm wrestle"
© Bird & Bird LLP 2011
"as is- where is"
Different meanings – causes widespread confusion• Aircraft to meet delivery condition – then legally
accepted without warranty; or • It is what it is – buy it is you want it!Airworthy and serviceable?Definition of "Airworthiness from ACG – v – OlympicThe court could not identify any previous authority
for the meaning of the term “airworthiness” and looked to the world of shipping: "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."
Caveat – definition was provided obiter – courts need not be bound by the definition
© Bird & Bird LLP 2011
Operational IndemnitiesWide Buyer indemnity in favour of Seller covering
losses, costs, expenses, claims etc arising out of:• the sale, purchase, manufacture, ownership, possession,
inspection, use, control etc of the Aircraft following Delivery;
• Design, article or material in the Aircraft or the operation or use of the Aircraft constituting an infringement of patent, copyright, trademark, design
• Occurrence not claims basedExceptions:
• Wilful misconduct or recklessness of Seller [gross negligence];
• Ordinary or usual operating or overhead expenses;• Act, omission, event or circumstance before Delivery
© Bird & Bird LLP 2011
Indemnity
Buyer can request a "flip" indemnity covering losses, liabilities etc occurring before Delivery• More limited – subject to Disclaimer
• Novating lease – Seller limited warranties about lease and lessee
Tax• Buyer usually takes tax risks
• Different in sale and lease-back
• Stamp, transfer, sales, withholding, value added etc arising in connection with the sale of the Aircraft.
• Exceptions:
- Assessed on the overall income, profits or gains of Seller;
- Wilful misconduct or reckless of Seller;
© Bird & Bird LLP 2011
Tail Insurance
Run off liability insurance2 years or next major check / structural modificationCoverage for aircraft third party, passenger,
baggage, cargo etc.Name Seller as additional insuredSeparate policyNotice of cancellation (NOC)
© Bird & Bird LLP 2011
Assignment of Warranties
Residual OEM warranties / SLPAssignment / AgreementMRO warranties
• Paint
• Airframe Maintenance
• Engine and APU overhaul
© Bird & Bird LLP 2011
Cape Town / Liens
Contract of sale can be registered as a "Prospective International Interest"
Seller usually objects • How to remove if sale does not complete priority search immediately before DeliveryLiens Generally
• Eurocontrol• UK Fleet Lien• N Reg search• MRO - possessory• Airports – Jordan airport!• Fuel• Title insurance
© Bird & Bird LLP 2011
Closing
Bill of sale• possession of original• Escrow• Security Release• Solicitors UndertakingBack to BirthNY Banking HoursTechnical Acceptance / Delivery / Legal AcceptanceExecution processDeeds – consideration / settlement OpinionsFree circulation
© Bird & Bird LLP 2011
Interesting Topics not covered
OEM: fuel burn, city pairs, maintenance costs, training, support
PBH / total careExport Control
• Blue Sky (again!)Price, Options, Slide Rights, EscalationDocumentsCertification
• NAA• EASA / FAA• CAMORegistration
© Bird & Bird LLP 2011
About Bird & Bird
Key facts:
Awarded Global Law Firm of the Year 2009 by the International Council of Jurists
23 offices across Europe, the Middle East and Asia*
Over 1000 lawyers and legal practitioners including 229 partners
© Bird & Bird LLP 2011
Aviation & ADS at Bird & Bird
"You can really rely on their deep, specialised aviation knowledge."
Chambers & Partners 2010
●Bird & Bird is an international commercial firm focusing on chosen technology sectors: IP, communications, IT, aviation, aerospace, defence and security (ADS)
●Over the last year over 490 fee earners have worked on Aviation & ADS projects in 16 of our 21 offices
●Core strategic sector for Bird & Bird
"This team makes a notable impression on the market, particularly in the aviation sector and is praised for providing clients with speedy accurate and no-nonsense advice."
Chambers & Partners 2009
"The Bird & Bird team has 'a more concise approach and working mentality than larger firms – it is business-based, dynamic and to the point."
Chambers & Partners 2010
"The aircraft financing group at this firm offers a strong sector focus and lawyers with experience working inside the industry."
Chambers & Partners 2010
© Bird & Bird LLP 2011
Airlines
© Bird & Bird LLP 2011
Aircraft investors
© Bird & Bird LLP 2011
Emerging markets – Middle East
© Bird & Bird LLP 2011
Emerging markets – Far East
© Bird & Bird LLP 2011
Sharing your passion working your way for the longhaul across the whole
industry crossing the globe touching the metal to help
you ‘fly’ that’s Aviation with Bird
Bird
Thank you Paul Briggs
Partner
Direct tel: +44 (0)20 7905 6353
Bird & Bird is an international legal practice comprising Bird & Bird LLP and its affiliated businesses. www.twobirds.com