Australia: When is loss indemnifiable?

Legalflyer - July 2011
This article is part of a series: Click Introduction - July Edition of Legalflyer for the previous article.

With the ever-increasing practice of leasing aircraft for operation across Africa, owners and financiers would be well-advised to familiarise themselves with their insurance policies, and to look beyond their policies for additional security in the form of registering rights and mortgages. In addition, the conduct of owners and lessors in their business practices could become the subject of some scrutiny in determining whether a claim is indeed an indemnifiable one.

Air service operations in Africa differ vastly from country to country. Within this competitive and tricky market, many commercial transactions have resulted in disputes, some even resulting in a complete breakdown of the relationship and the retention of aircraft by lessees. Matters are complicated further as the enforcement of written lease agreements is problematic in the foreign legal jurisdiction, and owners can find themselves in a difficult position minus one expensive asset. So what are the owner's options? The majority of African countries are not signatories to and have not incorporated the Cape Town Convention into their law and do not recognise the far-reaching rights and remedies of lessors and financiers set out in the Convention. Furthermore, many African countries are geographically excluded in aviation policies, and war risk cover in addition to all risk cover is often an essential. Even if the requisite all risk and war risk cover is effected, owners and financiers would be imprudent to assume that the loss is covered. The conduct of both parties to the lease will be carefully considered when determining whether there is a loss, and secondly whether that loss is an indemnifiable one. Indemnity is not a foregone conclusion.

In a matter in which we were involved, following a series of events an operator lessee in Chad refused to relinquish possession of an aircraft to its South African owner. Claims made by the owner under its South African all risk and war risk policies were rejected. The insurers' rejection was upheld in a subsequent arbitration. The unique circumstances leading to the claims had a significant bearing on the decision of the insurer and the arbitration panel. In a nutshell, in a period of just less than a year, a South African owner concluded a number of contracts with an operator based in Chad relating to a Kingair 200 aircraft. During this period, and all the while not having possession of the aircraft, the Chad operator made various payments to the owner as instalments under various lease/purchase agreements and paid for improvements to the aircraft. The aircraft eventually left for Chad after further agreement, this time a mere rental agreement, was concluded. After some months of operation in Chad, the owner demanded that the aircraft be returned to South Africa for maintenance. Predictably, the operator was not prepared to release the aircraft without reimbursement of the money it had already expended, which the owner sought to retain in terms of a very onerous provision in the agreement. By all accounts the parties came rather close to a settlement, but at a point in the frequent exchange of correspondence, the insured owner elected to abandon the negotiations and pursue a more formal legal route. A South African court order for the return of the aircraft was obtained without notice to the operator and on an urgent basis, and a posse, as the initial arbitrator described it, flew into Chad in the middle of the night to repatriate the aircraft. The Chadian aviation authorities were alerted and put a hold on the aircraft for a period of 30 days so as to enable the operator to exercise its rights in Chad. The mission was a failure and the group returned to South African empty-handed.

It was at this point that the owner lodged a claim for indemnity under a war risks policy issued by a South African insurer, claiming that the aircraft had been seized by a foreign government. The insurer rejected the contention of seizure, and in addition relied on an exclusion contained in the war risks policy excluding any loss caused by a financial dispute. The owner disputed the rejection, and launched proceedings for indemnity. By agreement, the matter was referred to arbitration. Shortly before the close of the owner's case, the claim was amended to include a claim under the all risks section of the policy for theft or accidental loss, and a further claim under the war risks section for a loss caused by a malicious act.

Turning briefly to the claims under the war risks section of the policy, a unanimous panel of three appeal arbitrators upheld the decision of the initial arbitrator in dismissing the claims. The panel found that the conduct of the operator did not constitute a malicious act as required by the policy, because it lacked the requisite sinister intention or ill-will. In addition, the panel found there to be no seizure, as any restraint by the Chadian aviation authorities was not for it or its government's title or use as specified by the policy.

The pivotal point in the claim under the all risks section was whether on the facts, an aircraft in a foreign jurisdiction which the owner had failed to recover had been lost within the context of the policy, and if so, whether that loss was accidental as envisaged by the policy. On a 2:1 majority, the appeal panel found that the aircraft was indeed lost for purposes of the policy, as there was an uncertainty of recovery. However, on a reverse 2:1 split, the panel found that the failure to recover the aircraft (i.e. the loss) was as a result of the sudden breakdown of settlement negotiations brought by the deliberate decision of the owner not to pursue the dialogue. The resulting loss of the aircraft, although not desirable, was predictable. One panel member found that the non-return of the aircraft was not the result of an unexpected external event, but was the predictable aftermath of a commercial dispute between contracting parties. This result was not in the nature of an accident and accordingly is not a peril covered by the policy. As a panel member put it "This is a business risk, not an insurance risk."

The result was that based on the particular set of facts, the insurer's decision to reject the claims for indemnity under both the all risks and the war risk sections of the policy was upheld.

Many aircraft owners lease aircraft to operators positioned and operating all over Africa. Often, armed with an iron-clad lease and a comprehensive insurance policy, owners and financiers don't give a second thought to the security of what is a fairly substantial asset. The time has come for owners and financiers to remove the rose-tinted glasses and acknowledge what may be considered a harsh reality.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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This article is part of a series: Click Introduction - July Edition of Legalflyer for the previous article.
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