Aircraft component exchanges: disputes over the returned core (article by Lina Taletavičiūtė-Misiūnienė)

A supplier delivers an overhauled landing gear unit on exchange terms. The customer pays an exchange fee and agrees to send back the removed unit (the core) within an agreed period. The replacement is installed, and the core is returned on time. When the supplier inspects it, some records are missing and there is damage. The customer’s view is that it returned the core as promised and its obligation is done. The supplier’s view is that the core has not been accepted, so the daily charges keep running. It may also reject the core altogether.

The parties now disagree about what the exchange fee covered, whether the returned core is good enough, and how much is still owed. Many exchanges run on a quotation, a purchase order and the supplier’s standard terms rather than a negotiated agreement. The points below are worth checking in those documents before the order is placed, when they are still easy to change.

Who owns the core

The first question is whether the customer can transfer the core at all. The customer is often not the owner of the aircraft, so it may not own the parts on it either. The aircraft may be leased, or owned by another company in the group. In that case, the supplier needs proof of who owns the unit. Where relevant, it also needs the owner’s consent and releases from anyone else with rights in the unit. The documents should identify the specific unit. The supplier should not hand over the core if the customer only promises to get the documents later.

If the aircraft is leased, the lease itself needs to be read. Most leases allow the lessee to remove a part only if it installs a replacement that it owns outright and free of other rights. Title to the replacement then passes to the lessor. A supplier that keeps title to the exchange unit may therefore be asking the customer to do something its lease does not allow. Some leases make an exception for pooling or exchange arrangements, but many do not.

There is also a question about the replacement unit. If the supplier keeps title to it and it is fitted to someone else’s aircraft, the supplier will usually want an acknowledgement from the aircraft owner. In it, the owner confirms the supplier’s ownership and agrees to cooperate if the unit has to be removed. How much protection this gives depends on the law governing ownership of the installed component, which may differ from the law chosen in the contract. Under some legal systems, installation may cause the supplier to lose its separate ownership through accession. Where the Cape Town Convention and its Aircraft Protocol apply, ownership of a qualifying aircraft engine is not affected by installation or removal. Landing gear and other components have no equivalent protection under the Convention, so the applicable law decides whether separate ownership survives.

What condition the core has to be in

An exchange core is normally not expected to be serviceable. The exchange fee assumes it will need the usual repair or overhaul. But suppliers usually charge extra for things outside that, such as missing parts, damage beyond normal wear or incomplete records. They may also reject a unit that is beyond economical repair (BER). If the agreement does not say where these lines are, the supplier’s own repair quote decides whether the customer pays a small extra charge or the full price of the unit. The parties can agree in advance how BER will be assessed, for example as a percentage of the list or outright price.

With landing gear, the records are often the bigger issue. The unit contains life-limited parts. If the back-to-birth records are incomplete, the unit may be worth very little as a core, even if it looks fine. So the agreement should say what has to come back with the unit: the part and dash number, the modification status, and documents such as the removal tag and a non-incident statement. A phrase like „an equivalent core” is not enough.

How long the supplier has to inspect

Since the core arrived on time, the customer will probably object to paying anything while the supplier inspects it. The supplier does need time to inspect the unit and review the records. But the customer should know how long this will take and what can happen next.

A workable process sets an inspection period and says what findings justify rejecting the core or charging extra.

When damage is found, the first argument is often about whether it happened in transit. Packaging requirements, and who bears the risk while the core is on its way back, are easy to agree at the start and hard to prove later.

Some problems can be fixed quickly, such as a missing document the customer can send in a few days. The agreement should say who fixes them and by when. If inspection takes three weeks and the core then passes, the customer will not expect to pay for those three weeks. The supplier may see it differently, especially if the customer caused part of the delay. This needs an answer in the terms, including for delays caused by the supplier.

Working out what is payable

Late return charges, extra repair costs and the outright price cover different things, and sometimes more than one applies. The agreement needs to say how they fit together. For example:

• If the core is late but accepted in the end, when do late charges stop?
• How will extra repair costs be proven to the customer?
• If the core is rejected, as BER or for another reason, and the exchange becomes a sale, are the exchange fee, any deposit and the charges already paid credited against the price?

The outright price is best fixed in advance, together with what triggers it and the payment deadline. Negotiating it after the core has been rejected is difficult.

Daily charges also need to be defensible. Depending on the governing law, a court may treat them as a penalty, or reduce them if they are out of proportion to the supplier’s actual loss. Charges linked to a real cost, such as the supplier’s loss of use of the unit, are easier to enforce.

If no acceptable core is delivered

Finally, the agreement should cover the case where the customer never provides a core that qualifies. The usual options are: the supplier takes the replacement back, accepts a different core, or treats the exchange as a sale. The agreement should say who chooses and whether the customer gets a chance to put things right first.

In practice, taking a landing gear back from an operating aircraft is rarely realistic. It needs access to the aircraft, downtime and usually the cooperation of the owner, which may be in another country. A substitute core needs its own acceptance criteria and deadline. A sale needs a price, payment terms and a point at which ownership passes.

For the supplier, the real protection is usually a deposit, a letter of credit or a parent company guarantee, together with a fixed outright price. Retained title matters most if the customer becomes insolvent, and that is when the lease terms and the law on installed parts decide whether it is worth anything.