Contracts to acquire, lease or finance aircraft are extremely complex and they seem to get longer each year. As a result of this, a client must often rely on their legal advisor’s opinion that a contract is fair and appropriate. When dealing with domestic and international clients, I am often called upon to explain a particular contract clause, or to give my opinion on the contract overall.
This article is one in a series of three that will examine some of the most important contract clauses that a business executive should understand when entering into an aircraft transaction.
Choice of Venue.
A complex contract will usually have provisions that describe the process for resolving a dispute or a breach of the contract, including selection of the courts that will be employed to litigate the dispute. The vast majority of disputes are resolved without court involvement, but often knowing the court that will solve it actually helps the parties reach a compromise. The choice of venue clause is the agreement between the parties to select a court to handle disputes. Choice of venue is not the same as choice of law, which is discussed below. Choice of venue is an agreement between the parties selecting the courts of a specific country and region. It is usually enforceable (meaning that you will be forced to litigate there) if the venue chosen has some connection to the dispute. It might be the home of one party, or the place where the aircraft is based, or where the closing took place.
Choice of venue, when properly tied to consent to jurisdiction, will mean that the person or entity signing the contract will be required to respond to litigation in the location designated, and may have a judgment rendered against it in that location. That judgment can then be used to seize assets as necessary to satisfy the damages awarded.
Consent to Jurisdiction.
Laws vary globally, but generally a court will not be able to render a decision against a person or entity unless the person or entity is subject to the jurisdiction of that court. Jurisdiction is determined by the local law and generally relates to the physical presence of the party in a geographic area, and/or the party’s use of that geographic area for business. Jurisdiction can be established by contract as well. So, in order to secure a choice of venue, a contract will also require the parties to consent to the jurisdiction of the courts in that venue.
Choice of Law.
Choice of law is an agreement between the parties to use the laws, regulations and prior court decisions (precedent) to resolve a contract dispute. In most cases, the choice of law will match the choice of venue, but that will not always be the case. For example, a U.K. court could be the designated venue for a dispute, but that court could be required to apply New York law. This might be because the laws of the chosen nation or state are stronger on a particular topic.
When buying an aircraft from a prior owner (and not from a manufacturer) the contracts usually state that the buyer takes the aircraft “as is, where is” which simply means that the buyer assumes all responsibility for any defects or deficiencies after the closing. In other words, there is no warranty after closing. This clause often creates confusion when buyers incorrectly perceive that it means that they cannot inspect the aircraft. The opposite is usually true. The buyer is given extensive rights to inspect the aircraft, and the contract will also describe the seller’s obligations to fix problems, and the buyer’s rights to walk away. But once the transaction closes, the buyer assumes all risk and responsibility because the buyer takes the aircraft “as is, where is.”
The English Rule – Cost of Disputes.
The so-called English rule requires the loser in any legal dispute to pay the legal costs of the winner. In U.S.-law contracts, this rule must be stated in the contract itself in order for the winning party to have such a right. The cost of litigation can be very high, and often a party will choose to default on a contract, guessing that the other party will not be able to afford litigation, or will not want to spend the money to litigate. Commercial litigation in the U.S. can be so costly that we rarely recommend litigation if the amount in dispute is less than $200,000. However, this advice changes if the English rule is in effect. If a party has a very strong case against the party in default, then the ability to recover costs of litigation may prevent the cost of litigation from discouraging the harmed party from litigating. More importantly, the party that is considering defaulting is much less likely to do so if it knows that it will be responsible both for its default and the cost of the other side’s litigation.
Limitation of Liability.
This clause is exactly what it says it is. It limits one party’s liability to another. The limitation can be a dollar amount but most often it is a limit on the type of liability. Under the laws of most U.S. states, there are different types of damages available for contract breach. The terminology varies, but the most fundamental damage is “direct damage.” That will mean the economic harm arising solely as a result of the breach. So if a buyer defaults on a $4 million purchase contract, and the seller ends up selling the aircraft for $3.5 million, direct damages will be about $500,000. Other forms of liability (often called consequential, indirect, punitive or exemplary) involve secondary harm. For example, if as a result of the buyer’s default (failure to pay), the seller defaults on its obligations to a third party under a separate contract, and that secondary default cost seller $2 million, that amount would be consequential or indirect damages. The vast majority of U.S. contracts disclaim (or prevent) damages other than direct damages.
The “Integration” Clause.
It is rarely called an “integration clause” in the contract, but it is a statement in the contract that the contract overrules and terminates any other written statement on the same topic. This is an important clause because it means that nothing that was told to a party verbally or in writing prior to the contract has any legal force if it is not reflected in the contract. This can prove very frustrating. For example, if the seller of an aircraft states to a buyer, even in writing (in an email, for example), that the aircraft has never been damaged, but that statement is not repeated in the purchase agreement, the integration clause will prevent the buyer from claiming a breach for discovered damage. We often recommend that buyers look through any advertising or prior correspondence and identify any representations that they wish to have put into the purchase agreement.
Contracts are complex, and it is always important to have legal counsel who is familiar with both the type of contract, as well as the governing law of that contract. But the more a business executive knows about contracts, the better able he or she is to assess the risks of entering into that contract.