A Lesson for Sellers of Aircraft: Make Sure Your 'as is' Disclaimers Work the Way You Intended

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.

Environmental Groups File Notice of Intent to Sue EPA Again Over Endangerment Finding for Aircraft Emissions

As discussed previously in this blog, in 2012, the United States District Court for the District of Columbia required the Environmental Protection Agency (EPA) to review and respond to an administrative petition filed by several environmental groups, including the Center for Biological Diversity and Friends of the Earth, regarding their request that the agency issue an endangerment finding for greenhouse gas (GHG) emissions from aircraft. (Ctr. for Biological Diversity et al. v. EPA et al., No. 1:10-cv-00985). Section 231 (a)(2)(A) of the Clean Air Act, 42 U.S.C. § 7401 et seq., requires EPA to determine whether GHG emissions from aircraft endanger public health and the environment, and thus should be regulated. EPA reviewed the petition and responded that the agency would need 22 months to complete the rulemaking process.

On August 5, 2014, the Center for Biological Diversity and Friends of the Earth filed a notice of intent to sue EPA for unreasonable delay because, after two years, the agency has failed to begin the rulemaking process to determine if an endangerment finding is necessary. According to the groups, the aviation sector is one of the fastest-growing sources of carbon dioxide pollution, contributing 3% of the U.S. GHG emissions in 2006 and emissions were growing by 5% annually by 2008.

As this case progresses, please check back to this blog for future posts.

Environmental Groups Petition EPA to Reconsider Position on Lead Aviation Gasoline

Last week, environmental groups Friends of the Earth, Physicians for Social Responsibility, and Oregon Watch filed an administrative petition asking the United States Environmental Protection Agency (EPA) to regulate lead emissions from aircraft. Friends of the Earth filed an earlier petition with the agency in 2006, but this petition was denied in 2012. The environmental groups then sued EPA (Friends of the Earth v. EPA, D.D.C., No. 12-363). As posted earlier, the U.S. District Court for the District of Columbia held that EPA has no mandatory duty under the Clean Air Act to find that lead emissions from general aviation gasoline cause or contribute to air pollution and endanger human health and the environment.

The environmental groups now ask EPA to reconsider its denial of the 2006 petition and issue an endangerment finding under the Clean Air Act. According to the petition, lead is a “dangerous neurotoxin” that causes a variety of health problems, especially in children. The petition also cites EPA’s own estimates that 16 million people reside and three million children attend school in close proximity to the approximately 20,000 airports where leaded aviation gasoline may be used.

As this issue progresses, please check back to this blog for updates.

Inclusion Date of Long-Haul Flight Under the EU-ETS Postponed Until 2017

As mentioned in the March 20, 2014 post, a deal to exempt intercontinental flights from regulation under the European Union's Emissions Trading System (EU-ETS) until the end of 2016 failed in the European Parliament's Environment Committee. Many in the industry thought that this could be an indication of whether the proposed exemption could pass the full EU Parliament. Instead, the Parliament voted 458-120 to postpone the date of application of the EU-ETS to long-haul flights originating or arriving in the EU until 2017. As discussed in an earlier post on October 17, 2013, by 2017 the International Civil Aviation Organization (ICAO) hopes to develop a market-based approach to reduce greenhouse gas emissions from the aviation industry through the use of technology, the adoption of carbon standards, and the utilization of sustainable alternatives to jet fuel.

It appears that this controversial issue is over and in the hands of ICAO, for now. As this issue progresses, please check back to this blog for future posts.

ETS Exemption Deal Rejected by Parliament's Environment Committee

A deal to exempt intercontinental flights from regulation under the European Union’s Emissions Trading System (EU-ETS) until the end of 2016 failed March 19 in the European Parliament’s Environment Committee. This could be an indication of whether the proposed exemption can win enough support when the measure goes before the full EU Parliament early next month. If the measure fails, tensions may be reignited between the EU and major opponents of the inclusion of non-EU airlines, such as the United States, China, Russia, and India.  

As this issues progresses, please check back to this blog for future posts.

Market Based Approach to Reduce Worldwide Greenhouse Gas Emissions Approved by United Nation's Aviation Agency

After two weeks of negotiations, a deal was reached at the International Civil Aviation Organization (ICAO) meeting in Montreal. The assembly of nations agreed to develop a market based approach by 2016 to be implemented in 2020. This resolution encourages countries to create new aircraft technology, adopt carbon dioxide standards, and utilize sustainable alternatives to jet fuel. Further, the measure promotes the engagement of member states in talks about the design of new carbon markets and the implementation of existing programs. This resolution makes air transport the first major industry sector to have a global model in controlling greenhouse gas emissions. The air transport industry currently accounts for 2 percent of global greenhouse gas emissions with projections of higher emissions by 2050.

As discussed in this blog previously, the European Union has been a leader in the effort to reduce greenhouse gas emissions and a driving force behind ICAO’s decision to address emissions on a global scale. On October 16, the European Commission relaxed its own controversial emissions regulations which would have included all flights to, from, and between European Union airports in the EU Emissions Trading System (ETS). A proposed directive by the European Commission to the member states and the European Parliament would require inclusion of only the portions of flights that take place in EU airspace to be included in the ETS. The directive would amend the ETS to include international flights by foreign airlines. Although not as burdensome as the original plan, it is possible that Indian, Chinese, Russian, and Unites States’ based airlines will still refuse to comply.

As this issue progresses, please check back to this blog for future posts.

Special thanks to Sullivan & Worcester’s Emma Spath, Environmental Intern, for assistance in preparing this post.

ICAO Council Compromises on International Aviation Emissions

Last week, the Council of the International Civil Aviation Organization (ICAO), a permanent body comprised of thirty-six ICAO members, met in Montreal to discuss international aviation emissions. This meeting proceeded the September 24 – October 4, 2013 meeting of the full ICAO membership. The Council agreed to a temporary framework that would allow regional emissions trading systems to regulate portions of flights in their airspace.  In contrast to the European Union’s (EU) earlier attempt to regulate the full distance of all flights taking off or landing in the EU, this new agreement would allow regulation only of the flight portion in EU airspace. This agreement fell short of what many had hoped for – the adoption of a global, market-based system to reduce carbon emissions. The Council did agree, however, that such a comprehensive international plan would be secured by 2020. The agreement still must be approved by the full ICAO membership later this month at the Assembly.

In the end, the agreement is a compromise between the EU, which desires stronger emissions standards, and countries such as the United States and China, who have pushed to find a global solution. Hopefully, the Council’s decision will keep the peace until a global management plan is developed.

 

As this issue progresses, please check back to this blog for future posts.

Report Pushes ICAO Towards Market-Based Measures to Address International Aviation Emissions

As we have previously discussed, the 38th Session of the International Civil Aviation Organization (ICAO) Assembly is set for September 24 – October 4, 2013. On the agenda is how and when to address international aviation emissions. In preparation for this meeting and to provide information to policymakers, Manchester Metropolitan University’s Center for Aviation, Transport, and the Environment (CATE) released a report, Mitigating Future Aviation CO2 Emissions: Timing is Everything, on August 27, 2013. This paper concluded that market-based measures, rather than alternatives such as biofuels or efficiencies, are the most cost-effective methods of mitigating emissions and climate impacts. This is because market-based measures, such as carbon emissions trading, have the potential for immediate reductions in emissions while the world must wait for improved technologies. If such market-based measures can be successfully implemented by ICAO, it would avoid reinitiating the battle between the European Union (EU) and other countries over the regulation of all flights originating or landing in the EU by the Emissions Trading System (ETS).

The CATE report can be found here. As this issue progresses, please check back to this blog for future posts.

EPA Has No Mandatory Duty to Find that Lead Emissions from General Aviation Gasoline Cause or Contribute to Air Pollution

Recently, the U.S. District Court for the District of Columbia held in Friends of the Earth v. EPA, D.D.C., No. 12-363, that the Environmental Protection Agency (“EPA”) has no mandatory duty under the Clean Air Act to find that lead emissions from general aviation gasoline cause or contribute to air pollution and endanger human health and the environment. In a previous post, we commented on the question before the Court - whether EPA has a mandatory or discretionary duty to make such a finding. Finding no mandatory duty, Judge Amy Berman Jackson granted the agency’s motion for summary judgment. The Court analyzed the language, structure, and purpose of the statute and the Court found nothing that defined the endangerment determination to be a nondiscretionary EPA duty.

This opinion is open to being appealed to the U.S. Court of Appeals for the District of Columbia. If so, please check back to this blog for updates.

ICAO Considering Global Carbon Emissions Offset Program that Requires Funding Emissions Reducing Projects

Late last month, executives gathered in London for the Aviation Carbon 2013 summit. A few themes developed from this summit.  Among the themes was that  any adopted carbon emissions offset program must show a verifiable difference to the health of the environment, and that any carbon emissions offset program must be simple to join.  Discussion also concentrated on the International Civil Aviation Organization's (“ICAO”) meeting in September 2013.  As we reported earlier in this blog, in November 2012 the European Union suspended the inclusion of the non-EU aircraft industry in the EU Emissions Trading Scheme (“EU-ETS”) for one year until ICAO had an opportunity to develop a global consensus on a plan to reduce emissions.  The September meeting of ICAO's High-Level Group on International Aviation and Climate Change is that opportunity. 

The working group is reviewing at least three market-based mechanisms:  (No. 1) a carbon emissions offset program that requires the funding of projects that reduce carbon emissions; (No. 2) a carbon emissions offset program similar to that proposed in No. 1, but with an additional revenue mechanism, most likely a tax; and (No. 3) a global carbon emissions cap-and-trade system.  It has been reported by news outlets after the Aviation Carbon 2013 summit that the mechanism showing the most promise is No. 1, which will require participants to engage in carbon offset projects such as those that support renewable energy, promote reforestation, avoid deforestation, and boost energy efficiency.  If the working group fails to come to a consensus, then we could see a stand-off again between the EU and the non-EU aircraft industry on this controversial measure.

As this issue progresses, please check back to this blog for future posts.