England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Teare J
2009 Folios 1249 and 1252

		Royal Courts of Justice Strand, London, WC2A 2LL
		17/04/2013

Lord Justice Tomlinson :

1. This appeal is about aircraft leasing. Specifically, it concerns a "dry" lease of a 17 year old Boeing 737 entered into between the Appellant, "Olympic", as lessee, and the Respondent, "ACG", as lessor on 30 May 2008. The lease was to be for five years and the scheduled delivery date was 30 June 2008.
2. Olympic was at the time the well-known Greek flag carrier. It ceased trading on 2 October 2009, transferred its business and assets to other entities, and entered a creditors' special liquidation.
3. ACG is an aircraft lessor. Its business is asset finance. It does not itself either operate or maintain aircraft. In this it is typical of aircraft lessors.
4. Before being leased to Olympic the aircraft was leased through a subsidiary of ACG to AirAsia, a low-cost airline or budget carrier. Neither the parties nor the judge drew any relevant distinction between ACG and its subsidiary.
5. On 19 August 2008 Olympic accepted delivery of the aircraft from ACG. Acceptance of delivery was evidenced by lessor and lessee completing and signing a "Certificate of Acceptance" in a form prescribed by Exhibit A to the lease, Exhibit A being a proforma Certificate of Acceptance. Certificate of Acceptance is a term defined in the contract as meaning "a certificate in the form attached as Exhibit A to be completed and executed by Lessor and Lessee at the time of Delivery."
6. On the same day, 19 August 2008, having secured acceptance of delivery by Olympic, ACG accepted redelivery of the aircraft from AirAsia. By an amendment dated 12 May 2008 the redelivery conditions specified in the lease to AirAsia had been amended to mirror the delivery condition that was in due course to be agreed with Olympic.
7. The Certificate of Acceptance included the following, under the rubric "Lessee's Confirmation" –

"The Lease Property complied in all respects with the condition required at delivery under Section 4.2 and Schedule 2 of the Agreement, except for the items, if any, listed on the attached Annex 2 (the "Discrepancies"). Lessor and Lessee agree that the Discrepancies, if any, shall be corrected as set forth on the attached Annex 2."

8. The judge below, Teare J, sitting in the Commercial Court, found that, unbeknown to either Olympic or ACG, the aircraft was not in fact on delivery in the condition required by Schedule 2 of the lease. Indeed it was not in an airworthy condition or in a condition for safe operation. Between 23 August 2008 and 6 September 2008, the height of the summer season, the aircraft operated as part of Olympic's commercial passenger fleet. It flew 112 flights in that time. A pre-flight inspection at Athens on 6 September discovered a defect in one of the spoiler cables on the aircraft's left wing. The aircraft was grounded for repair and inspection work, during which further defects, both to spoiler cables and to other parts of the aircraft, were discovered. On 11 September 2008 the Greek Civil Aviation Authority suspended the aircraft's airworthiness certificate. For reasons which for the purposes of this appeal it is unnecessary to explore, Olympic did not before ceasing trading satisfactorily complete the work required in order to return the aircraft to service.
9. On 29 March 2010 ACG sent notice of termination of the lease, but for reasons which are again not presently material, the aircraft was not redelivered to ACG until 24 November 2010. The full history of what transpired between September 2008 and November 2010 can be found set out in the judgment of Teare J, [2012] EWHC 1070 (Comm).
10. Those events gave rise to substantial claims on both sides:-

(i) ACG claims the payment of rent and maintenance reserves in the sum of about US$4.6 million for the period from delivery until November 2010, together with damages for the loss of rent in the sum of US$6.9 million from 24 November 2010 until the end of the intended term of the lease, giving credit for what it had earned in mitigation;

(ii) Olympic counterclaims damages for breach of contract by ACG in failing to deliver the aircraft in the contractual condition, namely €6.8 million in respect of the costs of hiring substitute aircraft and of attempting to make the aircraft airworthy.

11. The essential question which the judge had to decide is whether a claim for damages for defective delivery survives execution by the parties of the Certificate of Acceptance.
12. It was the contention of ACG that the contractual terms rendered the Certificate of Acceptance conclusive proof that the aircraft complied in all respects with the condition required at delivery.
13. The judge rejected this contention, but accepted ACG's alternative contention that statements made by Olympic in the Certificate of Acceptance gave rise to an estoppel by representation on which ACG had reasonably relied to its detriment in accepting redelivery from AirAsia which precluded Olympic from contending that the aircraft was not on delivery in the contractually required condition.
14. A further argument was in play before the judge, although it had not been pleaded, to the effect that the lease by clause 2.1(d) constituted the Certificate of Acceptance an independent binding agreement, enforceable against Olympic in accordance with its terms. By that contract Olympic agreed that the aircraft was on delivery in the contractually required condition. The judge did not consider this argument in his judgment, indeed he had no need to do so. The argument was resurrected on the appeal by Mr Michael McLaren QC for ACG. Mr Philip Shepherd QC for Olympic contended that had this argument been pleaded Olympic would have countered it with an argument to the effect that this independent contract was procured by misrepresentation by ACG as to the condition of the aircraft.
15. The upshot was that ACG's claim succeeded, subject to quantification of the damages to which it was entitled. Olympic's counterclaim failed.
16. Olympic appeals, essentially on the ground that the judge was wrong to find that a contractual machinery which was ineffective to give rise to a contractual estoppel was nonetheless effective to give rise to an estoppel by representation. ACG seeks to uphold the judge's judgment. The principal thrust of ACG's case before us was, however, that the judge should have decided the case in its favour on the basis of either its primary case, that the Certificate of Acceptance was agreed to be conclusive proof of delivery of the aircraft in the contractually required condition, or the allied albeit unpleaded analysis that the Certificate of Acceptance was an independent contract bringing about the same result.
17. The judge heard a 13-day trial with many contested issues of fact and of expert evidence. His careful factual findings are unchallenged. I need only put a little more flesh on the bare bones which I have already set out before turning to examine the contractual provisions on the true construction of which this appeal turns. In what follows I have borrowed heavily from the judge's judgment.
18. A pre-leasing survey of the aircraft was carried out in April 2008 in Kuching, Malaysia, by Olympic Airlines Services (OAS), the maintenance repair and overhaul (MRO) provider used by Olympic to service its aircraft. The purpose of this survey was to enable Olympic to decide whether or not to lease the aircraft. Following that inspection, Olympic was well aware that this 17-year old aircraft needed maintenance work.
19. Prior to redelivering the aircraft AirAsia was due to carry out a maintenance check known as a C check. A C check is a maintenance check designed for each type of aircraft by reference to the type of operations the aircraft will be performing and environmental considerations. The nature and intensity of the C check varies according to the stage in the operational and maintenance cycle which the aircraft has reached. The rationale for carrying out a C check prior to redelivery is to attempt to harmonise the condition of the aircraft on redelivery with the condition which will be acceptable for onward delivery to the next lessee. The new operator will thus be able to put the aircraft into operation immediately.
20. OAS recommended that before deciding to incorporate the aircraft into Olympic's fleet "during the next C check it must be inspected in detail … and any findings must be repaired. Additional openings may be required other than those provided for by the C check."
21. Following the inspection of the aircraft at Kuching, e-mails were exchanged on 15 and 16 April 2008 between Mr Ryan of ACG and Mr Dimitriadis of Olympic in which it was agreed that any "discrepancies" or "findings" could be addressed during the C check.
22. As I have already noted, on 12 May 2008 the lease between ACG and AirAsia was amended so that the required redelivery condition was brought into line with the delivery condition intended to be agreed between ACG and Olympic.
23. On 26 May 2008 the C check began. For this purpose AirAsia used the services of ST Aerospace in Singapore, an independent MRO provider.
24. On 30 May 2008 ACG and Olympic signed the five-year lease of the aircraft. The lease provided that the aircraft and aircraft documents would be available for inspection by Olympic. They were made available for such inspection and Olympic inspected them. Thus in June 2008 the aircraft documents, in particular the maintenance records, were inspected in Kuala Lumpur. The aircraft was inspected in Singapore.
25. ACG employed the services of Aircraft Engineering & Consulting Limited (AEC) to assist it with regard to the redelivery of the aircraft from AirAsia and the delivery of the aircraft to Olympic in Singapore.
26. AEC produced an Inspection Discrepancy List following an inspection of the aircraft. Photographs were taken to illustrate the discrepancies noted.
27. AEC had dealings with Mr Ioannis Kolydas, one of the inspectors from OAS. None of the OAS inspectors who went to Singapore gave evidence at the trial. Mr Kolydas produced a list of his findings dated 16 June 2008. He wanted them to be added to the AEC Discrepancy List, and they were. They included at item 140 "LH wing just outboard of engine spoiler cables have rust" and at item 154 "RH wing spoiler cables at pylon area have rust." Item 292 also referred to "Aileron and spoiler cables running wing rear spar and wheel well have rust at some points." These items concerning rust on the spoiler and Aileron cables mirrored what had been noted in April 2008 in Kuching during the pre-lease inspection. The full list of Olympic's discrepancies provided to AEC set out defects affecting the horizontal stabilisers, the wings (including the spoilers), the fuselage, the landing gear, the engines, the cabin and the cockpit.
28. The full discrepancy list prepared by AEC, including Olympic's findings, was provided to AirAsia and to ST Aerospace, in order that the listed items could be rectified. There were 308 items, the majority of which were illustrated by photographs. The work done, or not done, by ST Aerospace was a major issue at the trial. The judge received neither oral nor written evidence from any employee of either AirAsia or ST Aerospace. The work took longer than had been anticipated causing disappointment to both ACG and Olympic.
29. In late July 2008 the same inspection team from OAS which had conducted the pre-delivery inspection in June returned to Singapore to take delivery of the aircraft. That involved checking to ensure that all necessary maintenance work had been carried out. Mr Kolydas listed some 27 "findings" as a result of his inspection. His list was passed on to AirAsia by AEC. From 24 July 2008 the inspection team was joined by Mr Dimitriadis of Olympic. On 6 August 2008 Mr Dimitriadis provided Mr Ryan of ACG with a list of outstanding "findings". Again, this list was passed on to AirAsia by AEC with instructions in relation to each item.
30. On 13 August 2008 AirAsia and ST Aerospace agreed with each other that the C check and "Redelivery Package" had been completed although it appears that work continued until 18 August 2008.
31. On 19 August 2008 at 8.00 am Mr Dimitriadis and Mr Ryan signed the Certificate of Acceptance. Pursuant to that Certificate, Olympic not only irrevocably and unconditionally accepted the aircraft but also confirmed that the aircraft complied in all respects with the condition required at delivery under the lease save for such items as were set out in an Annex of Discrepancies. After having signed the Certificate of Acceptance, Mr Ryan met with the AirAsia representative and signed the AirAsia Return Acceptance Receipt.
32. Also on 19 August 2008 the Greek Civil Aviation Authority, the HCAA, issued a certificate of airworthiness. It appears that the HCAA had three inspectors in Singapore for this purpose. The aircraft was flown to Greece on 19 August 2008.
33. It was a feature of the trial on which the judge commented that Mr Dimitriadis did not give evidence.
34. I need say little more about events after the aircraft's grounding over and above what I have set out at paragraph 8 above. Mr McLaren summarised them thus in his skeleton argument for the purpose of the appeal:

"(1) Olympic never returned the Aircraft to commercial service. OAS carried out some repair work on the Aircraft. In addition, Olympic requested Boeing to send a team to advise on a course of action. Boeing made clear that it was not its role, but Olympic's as the Aircraft's operator, to determine whether or not the Aircraft was airworthy, but suggested that Olympic could carry out a review of the Aircraft's Airworthiness Directives ("ADs")^[1]

(2) Olympic prepared a work package of the checks that it considered necessary to restore the Aircraft's ARC. OAS was unable to perform that work due to its existing commitments and it was therefore necessary to identify another MRO. On 8 January 2009 the Aircraft flew under a special permit to Europe Aviation ("EA"), a maintenance facility in France. EA eventually commenced work on the Aircraft, but Olympic and ACG20 both had serious concerns about the slow pace and poor quality of its work. By 26 June 2009 the work at EA was complete. EA issued a Certificate of Release to Service on 29 June 2009, a test flight took place on 2 July 2009 and the Aircraft was returned to Athens on 23 July 2009.

(3) Olympic then submitted an application to the HCAA to reissue the ARC. The HCAA required Olympic to carry out a further sample check of 8 ADs which had been certified as carried out by ST Aero. On 10 August 2009 Olympic reported that it had checked 5 ADs and that 2 were not in compliance. ACG20 submitted at trial, and the Judge found, that in fact both ADs had been in compliance when ACG20 delivered the Aircraft to Olympic: one AD had been "undone" by EA, and the findings in respect of the other did not justify the conclusion that an AD had not been complied with.

(4) On 17 August 2009 the HCAA informed Olympic that it would only consider reissuing the ARC if all of the ADs and corrosion prevention and control tasks applicable to the Aircraft, and all of the tasks carried out in the C Check, were re-checked, which would have been very costly. By that stage, Olympic was about to go into liquidation. On 23 September 2009 the Aircraft was placed in long term storage and on 2 October 2009 Olympic ceased trading and went into creditors' special liquidation.

(5) On 6 August 2009 ACG20 sent a Notice of Default to Olympic regarding unpaid rent and maintenance reserves. On 23 September 2009 ACG20 issued proceedings, and Olympic issued separate proceedings the following day. On 29 March 2010 ACG20 served termination and redelivery notices in respect of the Aircraft. Olympic assured the Court at a hearing on 19 April 2010 that it would redeliver the Aircraft. It failed to do so and therefore on 6 August 2010 the Court ordered Olympic to do so. In breach of that order, Olympic did not redeliver the Aircraft to ACG20 until 24 November 2010. ACG20 flew the Aircraft back to the United States.

(6) Having recovered the Aircraft, on 22 July 2011 ACG20 signed a letter of intent with AeroSur of Bolivia. AeroSur took delivery of the Aircraft in September 2011, the US Federal Aviation Authority and the Bolivian Aviation Authority certified it as airworthy, and the Aircraft has since been operated without incident."

35. The judge concluded that the inspections at ST Aerospace had been rushed and were not as thorough as they ought to have been. The aircraft had not been properly maintained. The principal defect affecting the aircraft on delivery in August 2008 was corrosion. There was corrosion in the flight cables, which caused the failure of a spoiler cable on 6 September 2008, in way of the cargo door cut outs and in way of the horizontal stabilisers. Not only were certain of the flight control cables corroded, but the related pulleys were worn. Schedule 2 paragraph 1(c) of the lease required the aircraft to be on delivery in a condition for safe operation. It was not. A prudent operator of an aircraft, had he known of the corroded flight cables, would have required them to be replaced before permitting the aircraft to fly because that was what the manufacturer recommended. The same was true of the extent of the wear to the pulleys which was outside recommended limits, and the corrosion in way of the LH stabiliser, an important flight control. There were other less significant defects, but it is unnecessary to detail them further. It is sufficient to say that the aircraft was not on delivery in the contractually required condition and that the shortcomings were serious in nature.

The contractual terms

36. Relevant terms of the contract include:

"1. DEFINITIONS and INTERPRETATION

1.1 Definitions

…

Certificate of Acceptance a certificate in the form attached as Exhibit A to be completed and executed by Lessor and Lessee at the time of Delivery.

…

Operative Documents this Agreement, the Certificate of Acceptance, the Deregistration Power of Attorney and the Notice and Acknowledgement.

…

2. REPRESENTATIONS and WARRANTIES

2. 1 Lessee's Representations and Warranties

Lessee represents and warrants to Lessor as follows:

…

(d) Legal validity: Each of the Operative Documents to which Lessee is a party constitutes Lessee's legal, valid and binding agreement, enforceable against Lessee in accordance with its terms.

…

2.4 Lessor's Representations and Warranties

Lessor represents and warrants to Lessee that:

…

(c) Enforceability: Each of the Operative Documents constitutes Lessor's legal, valid and binding agreement, enforceable against Lessor in accordance with its terms.

…

3. CONDITIONS PRECEDENT

…

3.4 Lessee's Conditions Precedent

Lessee's obligation to accept the Leased Property on lease from Lessor under this Agreement is subject to the satisfaction by Lessor of the following conditions precedent:

…

(c) Delivery Condition: the Aircraft shall be in the condition set forth on Schedule 1, Part 1 and in the condition required in Schedule 2, except for any items set forth on Annex 2 to the Certificate of Acceptance and any other items agreed in writing by Lessor and Lessee, as referenced in Section 4.2 below.

...

4. COMMENCEMENT

…

4.2 Delivery

(a) Delivery Condition: Lessor shall deliver the Leased Property "as is, where is" and in the condition required in Schedule 2, except for any items set forth on Annex 2 to the Certificate of Acceptance and any other items agreed in writing by Lessor and Lessee.

(b) Delivery Inspection: At least fifteen (15) days before the Scheduled Delivery Date, Lessor shall make the Leased Property available for Lessee to conduct a ground inspection of the Aircraft and an inspection of the Aircraft Documents to its satisfaction (collectively, the "Delivery Inspection"). The Delivery Inspection of the Aircraft shall include the following:

…

(d) Acceptance Flight: Before the Delivery Date, Lessor shall cause an acceptance flight of the Aircraft to be performed of up to three hours at Lessor's cost (with up to two representatives of Lessee on-board as observers), and such further acceptance flights as may be necessary in the event that the first or subsequent flights do not confirm that the Aircraft complies with the delivery conditions set forth in Schedule 2.

…

(f) Correction of Discrepancies: The obligation of Lessee to lease the Leased Property from Lessor is subject to Lessor delivering the Leased Property to Lessee in compliance with the conditions set forth on Schedule 2. If Lessor corrects all material discrepancies from the conditions set forth on Schedule 2 before Delivery, or if Lessor and Lessee agree that Lessor will correct or pay for their correction as set forth on Annex 2 to the Certificate of Acceptance, then Lessee shall accept the Leased Property. If, on the Scheduled Delivery Date, the Aircraft is not, in all material respects, in the condition set forth in Schedule 2 and either Lessor does not correct all material discrepancies or Lessor and Lessee do not agree upon the correction of such material discrepancies within 45 days after the Scheduled Delivery Date, then Lessee may by notice to Lessor terminate this agreement, in which event neither Lessor nor Lessee shall have any further obligations under this Agreement except as set forth in Section 7.4. If Lessee fails to give any such termination notice within 45 days following the Scheduled Delivery Date, Lessee shall be deemed to have accepted the Leased Property for all purposes of this Agreement.

...

4.5 Acceptance and Risk

(a) The Leased Property will be delivered to, and will be accepted by, Lessee at the Delivery Location on the Delivery Date immediately following satisfaction of the conditions precedent specified in Sections 3.1, 3.2 and 3.4 (or their waiver or deferral by the party entitled to grant such waiver or deferral).

(b) Immediately following satisfaction of the conditions precedent specified in Sections 3.1, 3.2 and 3.4 (or their waiver or deferral by the party entitled to grant such waiver or deferral), Lessee and Lessor shall forthwith complete Annex 1 to the Certificate of Acceptance specifying the maintenance status of the Airframe, Engines, APU and Landing Gear, and Lessor and Lessee shall sign and deliver to each other the Certificate of Acceptance. Delivery of the signed Certificate of Acceptance to Lessor shall constitute deemed delivery of the Aircraft to Lessee.

…

7. LESSOR'S COVENANTS and DISCLAIMERS

…

7.6 Exclusion

THE AIRCRAFT IS ACCEPTED BY LESSEE "AS IS, WHERE IS" AND LESSEE AGREES AND ACKNOWLEDGES THAT, SAVE AS IS EXPRESSLY STATED IN THIS AGREEMENT, LESSOR WILL HAVE NO LIABILITY IN RELATION TO, AND LESSOR HAS NOT AND WILL NOT BE DEEMED TO HAVE MADE OR GIVEN, ANY CONDITIONS, WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, WITH RESPECT TO THE AIRCRAFT , INCLUDING:

(a) THE DESCRIPTION, AIRWORTHINESS, MERCHANTABILITY, FITNESS FOR ANY USE OR PURPOSE, VALUE, CONDITION, OR DESIGN, OF THE AIRCRAFT OR ANY PART; OR

(b) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN TORT, WHETHER OR NOT ARISING FROM LESSOR'S NEGLIGENCE, ACTUAL OR IMPUTED (BUT EXCLUDING ANY SUCH OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN TORT WHICH ARISES FROM LESSOR'S GROSS NEGLIGENCE OR WILFUL MISCONDUCT); OR

(c) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY FOR LOSS OF OR DAMAGE TO THE AIRCRAFT FOR ANY LIABILITY OF LESSEE TO ANY THIRD PARTY, OR FOR ANY OTHER DIRECT, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES.

7.7 Lessee's Waiver

LESSEE HEREBY WAIVES, AS BETWEEN ITSELF AND LESSOR, ALL ITS RIGHTS IN RESPECT OF ANY CONDITION, WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, ON THE PART OF LESSOR AND ALL CLAIMS AGAINST LESSOR HOWSOEVER AND WHENEVER ARISING AT ANY TIME IN RESPECT OF OR OUT OF THE OPERATION OR PERFORMANCE OF THE AIRCRAFT OR THIS AGREEMENT EXCEPT AS IS OTHERWISE EXPRESSLY STATED IN THIS AGREEMENT.

7.8 Lessee's Confirmation

LESSEE CONFIRMS THAT IT IS FULLY AWARE OF THE PROVISIONS OF SECTIONS 7.6 AND 7.7 AND ACKNOWLEDGES THAT RENT, MAINTENANCE RESERVES AND ALL OTHER AMOUNTS PAYABLE BY LESSEE UNDER THIS AGREEMENT HAVE BEEN CALCULATED NOTWITHSTANDING ITS PROVISIONS.

7.9 Conclusive Proof

DELIVERY BY LESSEE TO LESSOR OF THE CERTIFICATE OF ACCEPTANCE WILL BE CONCLUSIVE PROOF AS BETWEEN LESSOR AND LESSEE THAT LESSEE HAS EXAMINED AND INVESTIGATED THE AIRCRAFT, THAT THE AIRCRAFT AND THE AIRCRAFT DOCUMENTS ARE SATISFACTORY TO LESSEE AND THAT LESSEE HAS IRREVOCABLY AND UNCONDITIONALLY ACCEPTED THE AIRCRAFT FOR LEASE HEREUNDER WITHOUT ANY RESERVATIONS WHATSOEVER (EXCEPT FOR ANY DISCREPANCIES WHICH MAY BE NOTED IN THE CERTIFICATE OF ACCEPTANCE).

…

12. RETURN OF AIRCRAFT

…

12.5 Acknowledgement

Provided Lessee has complied with its obligations under this Agreement, following redelivery of the Aircraft by Lessee to Lessor at the Redelivery Location, Lessor will deliver to Lessee an acknowledgement in the form of a redelivery acceptance certificate confirming that Lessor is satisfied that the Aircraft is in the condition required by this Agreement and has been redelivered to Lessor in accordance with this Agreement."

37. As indicated in clause 3.4(c) of the lease, Schedule 2 describes the aircraft's required delivery condition. It begins:

"[O]n the Delivery Date the Aircraft, subject to ordinary wear and tear to an extent consistent with similar aircraft engaged in commercial airline operations, will be in the condition set out below"

and, as adumbrated above, it requires the aircraft to be in a condition for safe operation. It is a detailed document, but it is unnecessary to reproduce it further here.

38. The Certificate of Acceptance is a crucial document to some of the terms of which I have already referred. So far as material it reads:

"Certificate of Acceptance

This Certificate of Acceptance is delivered on the date set forth in paragraph 1 below by OLYMPIC AIRLINES SA ("Lessee") to ACG ACQUISITION XX LLC ("Lessor") pursuant to Lease Agreement 25071, dated May 30, 2008, between Lessor and Lessee (the "Agreement"). Capitalized terms used but not defined in this Certificate of Acceptance shall have the meaning given to such terms in the Agreement.

1. Details of Acceptance.

Lessee hereby confirms to Lessor that at 8:00 am G.M.T. on this 19^th day of August 2008, at Singapore, Lessee irrevocably and unconditionally accepts and leases from Lessor, in accordance with the provisions of the Agreement, the Airframe, as more particularly defined in the Lease Agreement, in addition to the following:

…

2. Lessee's Confirmation.

Lessee confirms to Lessor that as at the time indicated above, being the time of Delivery:

(a) Lessee's representations and warranties contained in Sections 2.1 and 2.2 of the Agreement are hereby repeated;

(b) the Aircraft is insured as required by the Agreement;

(c) Lessee confirms that there have been affixed to the Aircraft and Engine 724945 the fireproof notices required by the Agreement;

(d) the current status of the Airframe, Engine 724945 and APU and Landing Gear are in the condition set forth on Annex 1 attached hereto; and

(e) the Lease Property complied in all respects with the condition required at delivery under Section 4.2 and Schedule 2 of the Agreement, except for the items, if any, listed on the attached Annex 2 (the "Discrepancies"). Lessor and Lessee agree that the Discrepancies, if any, shall be corrected as set forth on the attached Annex 2.

3. Lessor's Confirmation.

Lessor confirms to Lessee that, as at the time indicated above, being the time of Delivery, Lessor's representations and warranties contained in Section 2.4 of the Agreement are hereby repeated."

39. The Discrepancies listed in Annex 2 to the Certificate of Acceptance are of no relevance to the dispute. It is worth noting that both the lessee's and the lessor's representations and warranties contained in Sections 2.1 and 2.4 of the lease include their respective warranty that each of the Operative Documents to which they are a party constitutes their legal, valid and binding agreement, enforceable against them in accordance with its terms.

Discussion

40. In Pindell v AirAsia [2011] 2 All ER (Comm) 396 I drew attention to the danger of attempting to draw parallels between an aircraft operating (dry) lease and some other more commonly litigated superficially similar instruments such as time charters of ships, where the legal incidents are, for obvious reasons, hallowed by far longer usage. At paragraph 78 of my judgment I pointed out that not only are ships very different in their nature from passenger aircraft, but that an operating lease is significantly different in character from a time charterparty. As I there pointed out:

"Under a time charter the owner retains possession of the ship and is responsible for its maintenance and for its crewing and navigation. The charterer has a right to give instructions as to the vessel's employment, making therefore essentially commercial decisions as to the commitments which can be achieved during the period for which the vessel is at its disposal. Under an operating lease the position is very different. The lessee takes possession of the aircraft and becomes responsible for its maintenance and insurance. After delivery the aircraft, engines and every part are at the sole risk of the lessee, who therefore bears the risk of loss, theft, damage, destruction and unexpected mechanical problems."

41. ACG is typical of aircraft lessors in not being an operator of aircraft. A lessor's role is essentially financial – to raise finance on the strength of which aircraft can be acquired and leased out. A lessor does not typically undertake maintenance of its aircraft. If it does, it is only, in Mr McLaren's phrase, in a hiatus of operational inactivity between one lease and another. Lessees are by contrast, by the nature of their business, operators of aircraft and so necessarily responsible for on-going maintenance.
42. It is also worth noting that the complexity of a modern passenger aircraft is such that, in the absence of some contractual mechanism whereby compliance with the contractually required delivery condition can be conclusively determined, parties to leases such as this could face years of uncertainty as to the allocation of responsibility for defects of which neither of them were aware on delivery. Although I do not regard it as a conclusive point, the material before the Court demonstrated that it is commonplace for parties in this market to contract upon a basis which, at first sight, appears to be intended to provide a structure whereby a lessee elects whether or not to accept an aircraft on lease and with it the risk of non-compliance with required delivery condition becoming apparent later. The question, of course, is whether the present contract achieves that objective.
43. It should not, however, be thought that the achievement of such an objective is unlikely to have been the parties' intention. Both parties to this litigation acknowledged that short of complete disassembly, which is impractical, it is impossible to inspect an aircraft fully and therefore correspondingly impossible to eliminate the risk of undiscovered defects upon delivery. I have already referred to the maintenance cycle. It is structured in such a way that relatively light checks such as was the C check which this aircraft underwent before delivery are interspersed with heavier and more intensive checks at different stages of the cycle. A heavier 4C check would have been required in the medium term and the heaviest of all checks, a D check, before the end of the lease term. The maintenance cycle is designed such that aircraft can tolerate the risks associated with potential unknown damage, pending its discovery. Developing defects may be for all intents and purposes unknowable at a given stage in the maintenance cycle. I do not, of course, suggest that the principal defects here fell into that category. The point is the more general one – that the parties know that neither can be absolutely certain of an aircraft's condition at the point at which the lessee is called upon to accept delivery and the on-going risk. That commercial parties should in such a situation strive to achieve finality in relation to the allocation of risk and responsibility is a commonplace. The judge cited the observation of Lord Browne-Wilkinson in Westdeutsche Landesbank v Islington LBC [1996] 2 AC 669 to the effect that "certainty and speed are the essential requirements for the orderly conduct of business affairs."
44. Although the judge does not expressly so find, it seems likely that Olympic knew before contracting that the aircraft would be redelivered by AirAsia at the same time as being delivered to Olympic. Such arrangements are in any event common in this market. Olympic would thus have appreciated that the work required to put the aircraft into deliverable condition would be likely to be carried out by the previous lessee's MRO provider. It would be in the interests of both lessor and lessee that the relevant work should in fact have been properly performed by the previous lessee's MRO and thus at the previous lessee's expense. It would also be known that ACG would have no contractual relationship with its previous lessee's MRO provider.
45. Finally, leaving on one side Olympic's opportunities to inspect the aircraft prior to concluding the lease, the lease itself contains extensive provision of facilities for inspection by the lessee of the aircraft and its associated documents before it was required to elect whether to accept delivery. Clause 4.2(b), which I have reproduced in part above, gives to the lessee an entitlement to observe various specific technical inspections and tests. I have also set out clause 4.2(d) which deals with acceptance flights. By paragraph 1(f) of Schedule 2 the lessee was entitled to inspect the aircraft throughout the C check and to require the rectification of any defects. There is also the procedure provided by clause 4.2(f) of which Olympic availed itself pursuant to which the lessee is entitled to note discrepancies on Annex 2 to the Certificate of Acceptance and to require their correction failing which the lease may be terminated.
46. All of these considerations, in my judgment, militate in favour of a construction of clause 7.9 of the lease and of the Certificate of Acceptance whereby finality is achieved not just as to the commencement of the lease term, thereby generating in the lessee an obligation to pay rent, but also as to the compliance of the aircraft with the required delivery condition.
47. In my judgment, the natural meaning of the relevant provisions is clear. There is no ambiguity about paragraph 2(e) of the Certificate of Acceptance – the lessee confirms that the aircraft at delivery complied in all respects with the condition required under clause 4.2 and Schedule 2, except for the items listed on Annex 2. Clause 7.9 provides that delivery by lessee to lessor of a certificate in that form will be conclusive proof that the aircraft and the aircraft documents are satisfactory to the lessee. For my part, I have no difficulty with what is meant by the aircraft being "satisfactory" to the lessee. The contract provides only one yardstick by which the lessee's satisfaction with the aircraft is to be measured, and that is compliance with the condition required by Schedule 2, as spelled out by clause 4.2(a). When the lessee confirmed that the condition of the aircraft at delivery complied in all respects with that required under Schedule 2, the lessee was confirming that the aircraft was satisfactory to it in the only sense in which it was entitled, or expected, to express its satisfaction.
48. Why then did the judge not give to these words their clear meaning and effect? The judge was in my view distracted by a number of features of clause 7.9 and of the Certificate of Acceptance, none of which either singly or in combination deprived the Certificate of Acceptance of the quality ascribed to it by the clause, and in one distinct respect the judge I think fell into error. Thus the judge noted that the wording of the Certificate of Acceptance does not exactly reflect that of clause 7.9. The Certificate of Acceptance says nothing about the lessee having examined and investigated the aircraft. That is, of course, so, but in my judgment it is implicit in the Certificate of Acceptance, read with the lease, that the lessee has indeed examined and investigated the aircraft or that it is content to confirm the aircraft's condition without such an examination. The judge also noted that the Certificate of Acceptance says nothing about the aircraft and aircraft documents being "satisfactory" to the lessee, but this is, I think, of no significance where there is no yardstick for "satisfaction" other than compliance with Schedule 2. By the same token the judge noted that clause 7.9 says nothing in terms about the lessor's obligation to deliver the aircraft in the condition required by Schedule 2. He did, however, recognise that the clause refers to the lessee's acceptance of the leased property, which he regarded as a reference to clause 3.4, which in turn refers to the condition precedent that the condition of the aircraft on delivery shall be as required by Schedule 2. The judge also in this context acknowledged that "whether the aircraft is "satisfactory" to the lessee will no doubt be judged by the lessee by reference to the delivery condition in Schedule 2." The reference to Schedule 2 in clause 7.9 was therefore at best indirect. The judge thought that that was an insufficiently clear reference to have the effect of precluding a claim for damages for breach by the lessor of its obligation to deliver the aircraft in the condition required by clause 4.2 and Schedule 2 of the lease. I disagree. Clause 7.9 must be read in the light of the rest of the contract of which it forms a part. Specifically, it must be read together with the Certificate of Acceptance to which it gives conclusive effect. Clause 7.9 refers to clause 4.2 and to Schedule 2 by clear implication. That the reference is not express does not, I think, mean that the reference is insufficiently clear nor does it prevent the words being given their natural meaning. Their natural meaning is that the aircraft has been examined and investigated, that it has been found in the condition required for delivery, and that it has accordingly been accepted on (or for) lease.
49. The judge might, I think, have reached this conclusion had he not at paragraph 134 of his judgment fallen into what is I think a plain error. At paragraph 134 he said this:

"The ambit of the contractual estoppel created by clause 7.9 must depend upon the true construction of clause 7.9. The first matter of which delivery of the certificate of acceptance is said to be conclusive proof is that the lessee has examined and investigated the aircraft. In the context of the lease I consider that that is to be construed as a reference to the delivery inspection referred to in clause 4.2(b) of the lease. The second matter of which delivery of the certificate of acceptance is said to be conclusive proof is that the aircraft and aircraft documents are satisfactory to the lessee. I consider that, in the context of the lease, this is to be construed as a reference to the opportunity afforded by the delivery inspection in clause 4.2(b) to the lessee to conduct an inspection of the aircraft and aircraft documents to its satisfaction. The third matter of which delivery of the certificate of acceptance is said to be conclusive proof is that the lessee has irrevocably and unconditionally accepted the aircraft for lease. I consider that, in the context of this lease, this is to be construed as a reference to the requirement in clause 3.4 of the lease that the lessee shall accept the leased property on lease."

50. I do not agree with the judge that the reference to the aircraft and the aircraft documents being satisfactory is a reference to the opportunity afforded by the delivery inspection in clause 4.2(b) to the lessee to conduct an inspection of the aircraft and the aircraft documents to its satisfaction. In the first place, reference to the inspection comes I think in the first limb of the clause, that which speaks of the examination and investigation of the aircraft. The subject matter of the second limb of clause 7.9 is not the inspection, but the aircraft itself and its documents. Secondly, whilst I agree with the judge that the first limb of clause 7.9 refers to clause 4.2(b) of the lease, in my view he was wrong not to regard the second limb of clause 7.9 as referring to clause 4.2(a) of the lease. The judge may I think have been thrown off the scent by the circumstance that clauses 4.2(a) and 4.2(b) are arguably placed in the wrong order. Clause 7.9 deals more logically with (1) inspection, (2) compliance of condition with that required on delivery and consequently (3) acceptance of the aircraft for lease. Third, there would be little point in the lessee confirming that it was satisfied with the inspection if it was not also confirming that the aircraft was in the required condition. In short, I have little doubt that the second limb of clause 7.9 should be regarded as referring to clause 4.2(a) just as the first limb refers to clause 4.2(b).
51. By clause 1.2 the headings in the Agreement are to be ignored in construing the Agreement. But the text of clause 7.9 speaks of conclusive proof. Clause 7.9 and the associated Certificate of Acceptance is a very elaborate mechanism if all it achieves is conclusive proof that the lessee has accepted delivery and thus the obligation to begin to pay rent, but has not accepted that the aircraft was in fact in the condition required to trigger an obligation to accept delivery. This is the more so given that, by clause 4.2(f), the lessee is afforded the opportunity to list material discrepancies and to accept the aircraft for lease subject to their correction with the option to terminate which I have already described. The meaning ascribed to clause 7.9 by the judge is, I think, that which is of least use to the parties in achieving that certainty which commercial parties usually seek in their dealings. It would expose the parties to the potential for endless dispute. For completeness, however, I should mention that I am also unattracted, as evidently was the judge, by Mr Shepherd's submission that clause 7.9 provides that the Certificate of Acceptance should constitute conclusive proof that the aircraft and its documents are satisfactory to the lessee on the basis of its limited inspections and insofar as it has been able to form a view of the condition of the aircraft. This is a most unlikely and uncommercial construction of a provision which provides for conclusive proof since it is, essentially, wholly inconclusive of anything of any value to either party. In any event the submission, in my judgment, simply fails to appreciate that the second limb of clause 7.9 is the counterpart of clause 4.2(a).
52. Mr Shepherd contends that the construction of clause 7.9 which I prefer deprives clause 4.2(a) of all content, but with respect that is to miss the point. The lessor's obligation to present the aircraft for delivery in the contractually required condition is in no way diluted. Clause 7.9 merely provides a contractually agreed mechanism whereby it can be determined whether the condition of the aircraft on delivery is to be treated as compliant with Schedule 2. There is no obligation on the lessee to accept delivery unless the aircraft is in the condition required by Schedule 2 – see the condition precedent in clause 3.4(c). The combined effect of clause 7.9 and the Certificate of Acceptance is that the lessor is conclusively agreed to have satisfied both its positive obligation to deliver the aircraft in a condition compliant with Schedule 2 and the condition precedent providing that the lessee is not required to accept the aircraft unless it is in the condition required by clause 4.2(a) and Schedule 2.
53. We were much pressed by Mr Shepherd with the judgment of Hamblen J, [2010] EWHC 923 (Comm), given on the application of ACG for summary judgment on both its claim and Olympic's counterclaim, alternatively for security for the costs of Olympic's counterclaim. This was an interlocutory judgment given without the benefit of hearing evidence as to the commercial background and the judge decided nothing more than that Olympic had at least a real prospect of success in making out its case that the conclusive effect of the acceptance of the aircraft is limited to the right of rejection and does not extend to the right to claim damages, still less to claim for a total failure of consideration. Insofar as the judge in the course of reaching that conclusion expressed views concerning the proper construction of the contractual provisions which differ from my own, I respectfully disagree.
54. I therefore conclude that the judge below, Teare J, came to the right conclusion but for the wrong reason. I agree with Mr Shepherd that if clause 7.9 does not provide that delivery of the Certificate of Acceptance is conclusive proof of compliance of the aircraft and of the aircraft documents with the contractual requirements, it is not possible to regard the Certificate of Acceptance as nonetheless giving rise to an estoppel by representation to the same effect. It is in the circumstances unnecessary to examine further the elements in that estoppel which the judge found established.
55. It is also strictly unnecessary to examine further Mr McLaren's alternative argument to the effect that clause 2.1(d) renders the Certificate of Acceptance an independent binding contract precluding the lessee from contending that the aircraft's condition on delivery was other than contractual. I can, however, see no answer to the point. Nor am I impressed by Mr Shepherd's argument that the point could have been met, had it been appreciated by Olympic that it was live, by an allegation that such a contract had been procured by misrepresentation by ACG. The Certificate of Acceptance contains no representation by the lessor as to the condition of the aircraft. By contrast, it does contain a representation by the lessee that the condition of the aircraft is contractually compliant. Mr Shepherd submits that ACG, by tendering the aircraft for delivery and asking Olympic to sign the Certificate of Acceptance, represented that it had satisfied the condition precedent. This submission flies in the face of the contents of the Certificate of Acceptance. In the lease itself it is nowhere suggested that by tendering the aircraft for delivery the lessor makes such a representation. I can see no room for this implied representation, the argument in support of which fails, I think, to have regard to the overall shape and nature of the transaction. It is possibly informed by an imprecise analogy with a time charter of a ship. Typically in a time charter the owner gives various warranties and undertakings as to the conditions and capability of the vessel on its delivery to the charterer, but it is not conventional for a charterer to be invited to decide whether he wishes to accept the condition of the vessel as compliant. He is merely informed that the vessel is delivered into his service at a certain time, and that the vessel is on delivery seaworthy and with the capability warranted in the charterparty. The dry lease is, as I have already pointed out, of a completely different nature, as is the aircraft to which it relates. All that is said in the contract is that the aircraft must be tendered for delivery in the condition described in Schedule 2. A contractual machinery is provided whereby the parties may determine conclusively whether or not it is in that condition. The lessor tenders the aircraft for the maintenance of which, as is well known, he has had no direct responsibility, together with third party documents and certificates which bear on the aircraft's condition. At the very most, as it seems to me, the only representation which can be implied is a representation by the lessor that, so far as he is aware, the aircraft is in the contractual delivery condition. However, since ACG has no need of its argument founded upon clause 2.1(d) of the lease, I need say no more about the apparent unavailability of any argument in misrepresentation concerning the condition of the aircraft.
56. I would dismiss the appeal.

Lord Justice Kitchin :

57. I agree.

Lord Justice Rix :

58. I also agree.

Note 1   ADs are issued by the national aviation authority of the country in which an aircraft was designed when a problem is encountered that may compromise an aircraft’s safety. They usually specify additional maintenance or design actions that are necessary to ensure the airworthiness of the Aircraft.     [Back]