Aircraft redelivery - what can possibly go wrong?

Aircraft redelivery has become an increasingly fertile breeding ground for disputes between lessors and lessees. The sums involved can be significant. Aircraft engines, airframe and component parts are complex marvels of engineering that require careful routine maintenance. Engine borescope examinations do not come cheap. Keeping technical records up to date can be onerous. Lessors and lessees should carefully consider issues around aircraft redelivery when negotiating a lease in order to avoid turbulence. Redelivery conditions in a lease should be drafted using precise wording. It is inadequate to use phrases such as 'reasonable wear and tear.' Ambiguity has no place in the drafting of this section of a lease. There should be extensive cross-referencing to schedules and appendices detailing the expected condition of the engines and aircraft component parts on the aircraft’s return. Although it is the lawyers who draft the (hopefully) watertight lease agreements and redelivery clauses, the level of input that is required from the technical experts cannot be underestimated.

Penalty provisions

Case law has focused on the legitimacy of penalty provisions within a lease and the damages to which a lessor is entitled in the event of a late aircraft redelivery.

Dealing firstly with penalty provisions, the rule of thumb is that if the contractual consequence of a breach is a penalty (rather than an entitlement to damages) then that part of the contract will be deemed unenforceable. The most recent authority on this point is Vivienne Westwood Ltd v. Conduit Street Development – a 2017 English decision. In that case, it was held that a landlord’s termination of a lease and the reinstatement of higher-than-agreed levels of rent amounted to a penalty and so was unenforceable, despite the tenant’s delay in paying two month’s rent.

Ferry flights

The recent case of Willis Leasing vs. Virgin Australia tells us what we already knew, namely that at the end of a lease a lessee cannot simply dump or abandon the aircraft in an unspecified location, in the expectation that a lessor will come along and ferry the aircraft back to a desired location. The lease will specify a precise redelivery location, and it will be the lessee’s responsibility to arrange flight crew to perform the ferry flight to that agreed location, at the lessee’s expense.

Late redelivery

As far as late aircraft redelivery is concerned, the leading authority appears to be Pindell and O’rs v. AirAsia Berhad – a 2010 decision which examined the types of damages that would foreseeably be recoverable following a party’s breach. The court took the view that any award of damages should put the non-defaulting party back in the position they would have been in, had the contract been performed as intended (subject of course to consideration of causation, remoteness and duty to mitigate). The relevant facts were that significant damage to a leased aircraft was detected by a lessee shortly before redelivery. There was a perceived risk that the damage could affect the lessor’s ability to onward deliver to aircraft to the new customer who, it transpires, decided to cancel the agreement and so the lessor suffered a loss. The court considered Hadley v. Baxendale in determining whether the losses claimed by the lessor were too remote. The court made no award of damages for the loss of the onward contract, as it was held that the loss was not an ‘ordinary consequence’ of the late redelivery. The cancellation could have arisen for a number of different reasons, not just because of the damage detected on the aircraft.

Key takeaways

• Plan ahead - anticipate some of the technical problems that might arise with the return of an aircraft and prepare accordingly. There is a lot of work to be done in returning an aircraft to the required standard.  The size of the task cannot be underestimated.
• Be familiar with and review redelivery conditions - consider not only the lease provisions for redelivery but also any schedules and appendices.
• Ensure clear and unambiguous drafting of original lease agreement - reducing the scope for later argument over the technical details of an aircraft’s return.
• Engage experts – if the lessor and lessee simply cannot agree that a return condition has been met, then the use of an independent third party with technical expertise may help the parties to reach agreement before litigation becomes necessary.
• Communicate – it is important that a lessor and lessee engage effectively both before and during the aircraft redelivery process.
• Consider all options – it may work out cheaper for a lessee to extend the aircraft lease as opposed to meeting the cost of redelivery conditions, or worse still litigating.

This alert is for information only and is not legal advice.