Case No: A3/2012/1559

Neutral Citation Number: [2013] EWCA Civ 369

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

Date: 17/04/2013
Before :

LORD JUSTICE RIX

LORD JUSTICE TOMLINSON
and
LORD JUSTICE KITCHIN
---------------------
Between :

Olympic Airlines SA Appellant/

(in special liquidation) Defendant

- and -

ACG Acquisition XX LLC Respondent/

Claimant
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(Transcript of the Handed Down Judgment of
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Philip Shepherd QC and Edward Cumming (instructed by Fulbright & Jaworski International
LLP) for the Appellant
Michael McLaren QC and Harriet Jones-Fenleigh (instructed by Simmons & Simmons LLP) for the
Respondent

Hearing dates : 15 and 16 January 2013

---------------------
Judgmen
tLord 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:-

11. (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;

12. (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.

13. 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.

14. 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.

15. 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.

16. 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.

17. The upshot was that ACG’s claim succeeded, subject to quantification of the
damages to which it was entitled. Olympic’s counterclaim failed.
18. 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.

19. 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.

20. 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.

21. 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.

22. 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.”

23. 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.

24. 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.

25. On 26 May 2008 the C check began. For this purpose AirAsia used the services
of ST Aerospace in Singapore, an independent MRO provider.
26. 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.

27. 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.

28. AEC produced an Inspection Discrepancy List following an inspection of the

aircraft. Photographs were taken to illustrate the discrepancies noted.

29. 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.

30. 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.

31. 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.

32. 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.

33. 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.

34. 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.

35. It was a feature of the trial on which the judge commented that Mr Dimitriadis
did not give evidence.

36. 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

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.
 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.”

37. 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

38. 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.”

39. 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”

40. 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.

41. 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 19th 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.”

42. 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

43. 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.”

44. 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.

45. 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.

46. 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.”

47. 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.

48. 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.

49. 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.

50. 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.

51. 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.

52. 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.”

53. 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).

54. 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).

55. 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.

56. 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.

57. 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.

58. 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.

59. I would dismiss the appeal.

60. Lord Justice Kitchin :

61. I agree.

62. Lord Justice Rix :

63. I also agree.