When the engine becomes the deal (article by Lina Taletavičiūtė-Misiūnienė)
Engine availability and maintenance capacity remain significant issues in aviation. Longer maintenance turnaround times, parts constraints and delays in new aircraft deliveries continue to affect how airlines and lessors manage their fleets.
These market conditions also affect aircraft and engine transactions. Maintenance status, remaining LLP life, technical records and the timing of the next shop visit may affect the value of the asset and the risks assumed by each party. In an aircraft transaction, the condition and maintenance status of the engines may represent a substantial part of that picture.
Technical acceptance – what has actually been accepted?
Technical acceptance and contractual warranties need to work together.
A buyer will normally inspect the aircraft or engine and review its records before delivery. Once this has been completed, the question is which matters have been accepted by the buyer and which should remain the seller’s responsibility.
There is a difference between accepting the technical condition of an aircraft or engine and requiring the seller to warrant matters which the buyer and its technical advisers had an opportunity to verify during inspection.
Technical acceptance should not, however, affect the seller’s responsibility for fundamental matters that are not established by a technical inspection – title, authority to sell, absence of undisclosed security interests or compliance with specifically agreed delivery requirements.
This distinction should be clear in the SPA.
Aircraft and engine records
Requirements concerning the completeness of records, an agreed records index, missing historical documents or discrepancies identified before delivery can become heavily negotiated parts of the SPA.
Inadequate records may affect maintenance planning, a future sale or lease and the value and marketability of the asset.
Broad warranties concerning the accuracy or completeness of technical documentation therefore require careful consideration, particularly where the buyer and its technical advisers have already completed a detailed records review.
The allocation of responsibility should reflect the scope of the inspection and whether the buyer had the opportunity to inspect and verify the relevant matters, in which case responsibility for the technical condition, to the extent inspected and accepted, will generally rest with the buyer.
Payment, delivery and transfer of title
Payment, release of the bill of sale, physical delivery, confirmation of receipt and transfer of title and risk may have to occur in a specific sequence, sometimes involving several jurisdictions and time zones.
For the seller, it is particularly important to coordinate payment with the transfer of title. The SPA should not allow title to pass before the purchase price has actually been received. An escrow arrangement can be useful where the parties need to coordinate the release of funds and transaction documents with the transfer of title.
In international transactions, the structure and place of delivery also need to be considered from a tax and customs perspective, with the SPA clearly allocating responsibility for any applicable taxes, duties and related costs.
The agreement should also address the possibility that the transaction does not close. This includes the consequences of a missed payment, whether an initial payment is refundable or may be retained, the final delivery date and the parties’ termination rights.
Making the documents work with the deal
Aircraft and engine SPAs bring together technical, commercial and legal matters. The drafting needs to reflect what was inspected and accepted, which records must be delivered, when payment is made, when title and risk pass and which obligations remain after delivery.
Current engine and maintenance constraints make some of these issues more commercially relevant, although the legal principles themselves are not new.
These are some of the issues I have dealt with in aircraft, engine and other aviation asset transactions. The details differ from deal to deal, but they are worth getting clear before the parties get to delivery.
