Contractual estoppel: be careful what you sign

24 April 2018

Parties are taken to have read and understood contracts they enter into. Parties can agree that a certain state of affairs exists, even if it doesn't. What a party cannot do is then resile from that agreed contractual position when it benefits it to say that the state of affairs didn't, in fact, exist.



This was the position that the lessee of a defective airplane engine found itself in in Aquila WSA Aviation Opportunities II Ltd v Onur Air Tasimacilik AS.

Background

Onur Air Tasimacilik AS, (Onur), a commercial airline, entered into an agreement with Aquila WSA Aviation Opportunities II Ltd (Aquila), a lessor of aircraft engines, to lease an engine (the Lease).

Key contractual terms

A number of documents comprised the Lease, including the Master Agreement which provided, at clause 5, that:

  • the engine was to be delivered 'as is, where is'; and
  • the parties unconditionally agreed that:
    • the lessor made no warranties, guarantees or representations of any kind in relation to the engine; and
    • the lessee waived all rights, remedies and damages (including incidental and consequential) arising with regard to the engine and the lessor shall have no liability therefore.

The Lease documentation also provided that:

"by signing the Acceptance Certificate, [Onur] confirms that [it] had had the opportunity to fully inspect the [engine] to its full satisfaction and to satisfy itself that the [engine] is in accordance with the delivery conditions set out in this [Lease] on the date of delivery".

It was a condition precedent to the Lease that Onur sign the Acceptance Certificate which itself provided:

"[Onur] hereby confirms to [Aquila] that: (i) [Onur] has unconditionally accepted the Engine for all purposes hereof and of the [Lease]; (ii) [Onur] has inspected the Engine and the Engine satisfies the conditions set forth in the [Lease] and this Acceptance Certificate constitutes conclusive proof that the Engine satisfies such conditions; and (iii) [Onur] has no rights and/or claims against [Aquila] with respect to the delivery condition of the Engine."

The engine was delivered to Onur on 22 September 2015 and installed in a passenger aircraft. A major engine failure occurred on 25 December 2015 leading to an emergency landing. Onur alleged the failure was due to a latent defect in the engine's high pressure turbine module making it a 'ticking time bomb' at the time of delivery and that the defect would or ought to have been known to Aquila.

The claim

Aquila issued a claim for US$7 million alleging the engine was a total loss or in the alternative for damages on the basis it was a partial loss and for unpaid rent.

Onur defended and counterclaimed alleging, amongst other things, that:

  • Aquila was in repudiatory breach of the Lease as the engine was not received in accordance with the contractual delivery conditions; and
  • by presenting the engine for acceptance and delivery, and by proffering the Lease, Aquila had represented that the delivery conditions would be satisfied and that the engine would be useable and those representations were false and made recklessly and had induced Onur to enter into the Lease.

Aquila applied for summary judgment of its claim on the strength of the agreed contractual terms. It argued that Onur did not have a real prospect of successfully defending the claim.

The High Court's decision

The High Court agreed with Aquila and granted judgment in its favour. As a matter of contractual construction, clause 5 of the Master Agreement was clear and emphatic both in its terms (as is where is, unconditional, no representations of any kind) and in the way it was presented (in capitals, in bold italics and in part underlined). It could not be clearer that the starting point agreed between the parties was an 'as is where is' basis.

Reading the Lease documentation as a whole showed the parties did not intend to create self-standing obligations as to the delivery condition which undermined the 'as is where is' basis of the contract, but rather that Onur should, in taking the engine, be placed in a position of agreeing that the engine was in a certain defined condition and could not complain of that condition. Although this was a tough deal for Onur, the court found this to be entirely consistent with the thrust of the contract which reflected that Aquila was only the lessor, not a user, of engines; that Onur needed an engine; and the relative lack of availability of such engines.

The parties had wittingly and willingly agreed to a risk allocation, albeit the risk sat heavily on Onur. Onur agreed to provisions which meant that if it signed the Acceptance Certificate it could not complain about the condition of the engine afterwards. It signed the Acceptance Certificate in full knowledge that those were the terms it had agreed and was contractually estopped from resiling from the position set out in the Lease documentation. The fact that the parties knew that Onur had not inspected the engine could not have any impact upon the contractual scheme.

Onur's claim for innocent or negligent misrepresentation as to the delivery condition of the engine also failed. The court found there had been no representation as alleged and in any event, clause 5 (no-representation clause) and the Acceptance Certificate operated as a road block preventing Onur from establishing that it had been induced by any representation to enter into the Lease.

The court also held that no proper case on fraudulent misrepresentation had been pleaded. Had a fraudulent misrepresentation been made out, clause 5 and the Acceptance Certificate, in so far as they related to representations, would not have precluded a claim as a party cannot benefit from its own fraud. However, the effect of the remainder of clause 5 and the Acceptance Certificate on any such representations was again to prevent Onur saying it was induced by any such representations to enter the Lease.

Comment

There is no reason in principle why parties to a contract should not agree that a certain state of affairs forms the basis of their contractual dealings with one another, even if they know that not to be the case: parties can agree what they like but cannot subsequently deny the existence of the facts and matters upon which they had agreed.

A party entering into a risk heavy contract should exercise caution and ensure it knows what it is entering into or at least carries out all steps within its power to protect itself before it does so, especially if it contracts on terms similar to those in the above case. The court will not come to its rescue when it subsequently realises what a bad bargain it entered into.

For more on misrepresentation and limiting liability by way of non-reliance statements, entire agreement and express exclusion clauses, see The Basics: Negotiating a contract? Misrepresentation or just exaggeration?


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