Virtually all used aircraft sales are documented as “as is, where is” transactions, where the seller expressly disclaims any warranties as to the condition of the aircraft. As an alternative to relying on seller warranties, the buyer is invited to conduct a pre-purchase inspection and determine for itself the condition of the aircraft. Typically, a buyer will want the pre-buy inspection to address, among other things, whether the aircraft conforms to the description provided by the seller in the course of marketing the aircraft, whether the aircraft has any damage history or whether the aircraft is subject to additional maintenance or inspection requirements. Above all else, a buyer will need the pre-buy to address whether the aircraft is “airworthy” – meaning that the aircraft conforms to its FAA-approved type design and is in condition for safe operation. To be “airworthy” an aircraft must, among a host of other requirements, conform to its FAA-approved type certificate data sheet, all instructions for continued airworthiness provided by each applicable OEM and all FAA-issued airworthiness directives. If the pre-buy identifies airworthiness discrepancies that the seller won’t or can’t fix, the documents usually allow the buyer to walk away from the transaction without penalty. In general, sellers find these sorts of arrangements acceptable, but want to be sure that, once the sale closes, their buyers can’t renegotiate the purchase price or unwind the sale – all sales must be final. Sellers want to be sure that once the closing takes place, the buyer owns not only the aircraft but also any issues associated with it.
Sometimes, however, a buyer only discovers problems with the aircraft after the closing takes place. There is a higher risk of this happening with more “experienced” aircraft, as logs and records for such aircraft may have passed through many owners and maintenance facilities, and such aircraft may have FAA airworthiness files which are hundreds of pages long. Because of the ubiquitous “as is, where is” disclaimers, a buyer who identifies an issue post-closing often finds that it has little or no recourse against its seller. But, as a recent Federal district court opinion from Texas, Luig v. North Bay Enterprises, Inc. (Civil Action No. 7:13-cv-00094-O, October 27, 2014) indicates, the buyer’s cause may not be hopeless, at least in cases where the contract of sale was not carefully drafted.
The Luig case involved a 1964 vintage Bell helicopter that was sold by the seller, Perry J. Luig, to the buyer, North Bay Enterprises, Inc. for $110,000. Relevant to the dispute were two provisions from the contract of sale. The first, captioned “Pre-purchase Inspection” provided, in an informal way, that:
Purchaser will have Bill Clark perform the pre-purchase inspection at Seller's location. The Aircraft will be delivered with Fresh Annual Inspection with all systems in an airworthy condition and a current Certificate of Airworthiness. Seller will also take care of discrepancies list by Bill Clark on Attachment "A". Purchaser will notify Seller of its acceptance of the Aircraft by signature of the Aircraft Acceptance, "Attachment C".
The second provision was captioned “Acceptance of Condition of Aircraft” and provided that “At the time of delivery Purchaser agrees to accept the Aircraft in an “as is where is” condition. (NO WARRANTY).”
North Bay conducted its pre-purchase inspection, which identified several discrepancies. Luig made the requested repairs and delivered the helicopter to North Bay. North Bay then paid the purchase price and accepted the helicopter.
After the closing, North Bay became disenchanted with its antique helicopter. North Bay was unable to confirm from the maintenance log whether a circa-1980 FAA airworthiness directive had been complied with. Also, the airworthiness certificate for the helicopter described it as a Bell model 47-G-3B1 helicopter -- identified on the relevant FAA type certificate as a helicopter equipped with a turbocharged Lycoming engine. However, sometime during the long history of the helicopter, the turbocharged Lycoming engine had been replaced with a normally aspirated Lycoming engine with a different model designation. This meant the helicopter failed to conform to its FAA type certificate and was by definition not airworthy. This also meant that the helicopter’s airworthiness certificate was invalid. Having belatedly determined that it had purchased a helicopter fit for static display only, North Bay apparently approached Luig for a purchase price adjustment. Luig was not receptive, and brought an action for declaratory judgment against North Bay in a Texas state court. North Bay removed the action to the U.S. District Court for the Northern District of Texas, asserted a counterclaim for breach of contract, and moved for summary judgment.
Specifically, Luig sought a declaration that the parties had intended to waive all warranties and other objections to the condition of the helicopter by virtue of the “as is” disclaimer. Luig also disputed that the helicopter was not airworthy. The District Court was not persuaded on either issue. It concluded that the “as is” disclaimer only disclaimed implied warranties, not express warranties. It then concluded that the language of the contract providing that the helicopter would be delivered “with all systems in an airworthy condition and a current Certificate of Airworthiness” was an express warranty by Luig, and thus not disclaimed by the “as is” disclaimer. The District Court further concluded that Luig had failed to demonstrate that there was a genuine issue of fact as to the non-airworthiness of the helicopter when it was delivered. It did not help Luig that his expert testified in a deposition that “[I]f I had to do it again, I would say it was unairworthy … With what I know today.”
One of the takeaways from this decision is that a seller should be mindful of the dangers of agreeing to language that could be construed as an express warranty as to the condition of its aircraft – unless that’s really what it intends. Luig clearly had not intended to provide an express, undisclaimed warranty to North Bay. He may have understood the provision that the helicopter would be delivered “with all systems in an airworthy condition and a current Certificate of Airworthiness” to be more in the nature of a condition to North Bay’s obligation to purchase, rather than as an express seller warranty. Unfortunately for Luig, that understanding was not clearly reflected in the agreement, and the agreement’s terse “as is” disclaimer did not clearly disclaim what the District Court took to be an express warranty. Ambiguity generally does not work well for sellers in this context.
North Bay benefitted not only from the buyer-friendly language in the purchase agreement, but also from the unambiguous nature of the airworthiness discrepancies. So unambiguous, in fact, that the seller’s expert appeared to concede that the helicopter was not airworthy. In practice, however, it is often not so clear that a particular maintenance or condition item has attained the level of an airworthiness discrepancy. The lesson for buyers is – make sure your pre-buy is comprehensive. It will lower the buyer’s risk of having to litigate the issue, likely from a position of weakness, later in time.