UK: Volcanic ash and closure of airspace - airlines' obligations under EU Regulation 261/2004 (Part 2)

Last Updated: 24 June 2010
This article is part of a series: Click Volcanic ash and closure of airspace - airlines' obligations under EU Regulation 261/2004 (Part 1) for the previous article.

Employment Tribunal (ET) and the Employment Appeal Tribunal (EAT)

Before the ET, Ms Williams argued, successfully, that the pilots were entitled to holiday pay at a weekly rate based on all three components of remuneration. The ET said that "paid annual leave" in Regulation 4 of the Aviation Regulations meant "an amount comparable to the contractual pay received when working". British Airways should therefore have applied Sections 221 to 224 of the ERA when calculating the pilots' holiday pay, by averaging their earnings over the preceding 12 weeks.

Following an appeal, the EAT agreed with the ET and held that holiday pay had to be comparable to the pay that workers got when they were actually at work. That meant that British Airways' pilots were entitled to receive holiday pay which included the allowances and supplements to which they were entitled when working, as well as their basic rate salary, in accordance with Sections 221 to 224 of the ERA. British Airways appealed.

Court of Appeal

The Court of Appeal overturned the ET and EAT's decisions, ruling that there had been no breach of Regulation 4 of the Aviation Regulations. The Court said that it was up to member states to decide. As the UK had made clear that the provisions in the ERA for calculating a week's pay did not apply to the aviation industry, airline pilots could not rely on them to argue that their holiday pay should include flying time allowances.

The Court of Appeal held that:

  • The ordinary meaning of "pay" in "paid annual leave" was not the same as pay earned while working.
  • Regulation 4 of the Aviation Regulations would have set out the method of calculation had that been intended (as other domestic legislation did).
  • Sections 221-224 of the ERA were not relevant. Regulation 18(2)(b) of the Working Time Regulations expressly provides that the provisions of the WTR dealing with the calculation of annual leave do not apply to aviation workers, to whom rather the CAD applies.

Ms. Williams appealed the decision, arguing that the CAD required payment of "normal remuneration" during annual leave in order to ensure that the workers on leave are in a position which is comparable to that when they are working.

Supreme Court

The Supreme Court concluded that the main issue in these proceedings required clarification of the meaning of "paid annual leave" in the Aviation Regulations, interpreted with reference to the CAD. The Supreme Court has therefore referred five questions to the CJEU relating to the calculation of payments whilst pilots are on annual leave:

1. Under the WTD and the Aviation Agreement annexed to the CAD:

(a) to what extent, if any, does European law define or lay down any requirements as to the nature and/or level of the payments required to be made in respect of periods of paid annual leave; and

(b) to what extent, if any, may Member States determine how such payments are to be calculated?

2. Is it sufficient that, under national law and/or practice and/or under the collective agreements and/or contractual arrangements negotiated between employers and workers, the payment made enables and encourages the worker to take and to enjoy his or her annual leave; and does not involve any sensible risk that the worker will not do so?

3. Or, must the pay either correspond precisely with or be broadly comparable to the worker's "normal" pay?

4. If the answer is yes, is the relevant measure or comparison:

(a) pay that the worker would have earned during the particular leave period if he or she had been working, or

(b) pay which he or she was earning during some other period, and if so what, period when they were working?

5. How should "normal" or "comparable" pay be assessed where:

(a) a worker's remuneration is supplemented while engaging in a particular activity;

(b) there is an annual or other limit on the time during which the worker may engage in that activity and that limit has been already exceeded or almost exceeded at the time the annual leave is taken

Impact

In referring the questions to the CJEU, the Supreme Court neither upheld nor dismissed the appeal. In light of this, until a ruling is given, the decision of the Court of Appeal remains binding for the time being, meaning that pilots of British Airways (and other airlines) remain entitled to holiday pay at the level of Basic Pay only. While it may be some time before the CJEU reaches its decision, once a decision is reached it could have a significant impact on the airline industry.

Deposits in letters of intent and aircraft sale and purchase agreements

Aircraft sellers' rights to deposit monies paid under a letter of intent and a sale and purchase agreement respectively were challenged in the two recent cases JSD Corporation PTE Limited v Al Waha Capital PJSC and Second Waha Lease Limited and Tandrin Aviation Holdings Limited v Aero Toy Store LLC., Insured Aircraft Title Service Inc.. Both cases involved attempts by the purchasers to use the prohibition on penalty payments to void clauses allowing deposits to be forfeited for non-performance of contractual obligations.

A letter of intent is an expression in writing of a party's present intention to enter into a contract at a future date. They are commonly drafted in such a way as to generally avoid legal obligations, subject to legally-binding clauses which seek to allow a party to recover amounts it stands to lose in preparing for the obligations it anticipates under the future contract: indeed, where there has been performance in reliance on a letter of intent, the court may find an ancillary contract, notwithstanding that the letter of intent itself has been expressed to be "subject to contract" (British Steel Corp v Cleveland Bridge and Engineering Co Ltd).

Deposits can answer several different needs in a transaction. They can be penalties for breaches, securities for performance, part payments of purchase prices, pre-estimates of liquidated damages or simply consideration for keeping an aircraft off the market under a lock-in agreement (as in Waha).

Waha

The would-be purchaser of an aircraft, JSD, had paid an initial non-refundable deposit of $1,000,000 on signature of a letter of intent and three further deposits totalling $3,500,000. Unlike the first deposit, the terms governing the refund of the three later deposits were stated to be "... refundable ... pending execution of the Sale and Purchase Agreement ..." Thereafter, or in any event after certain expiry dates, the three later deposits were to become non-refundable unless there had been a "Seller default". "Seller default" was not expressly defined. The expiry dates relating to the later three deposits passed without the sale and purchase agreement having been signed. The only clauses that were stated expressly to be binding related to payment of the deposits, liability for legal costs and confidentiality. Critically, the clause stating the parties' intention to " ... negotiate in good faith towards the prompt execution of [a sale and purchase agreement] ..." was not stated to be binding and no such duty exists outside the terms of a contract.

In the hearing of the Part 24 application, Smith J went into considerable detail to set out the various ways in which the deposits might be described. The amount of evidence that needed to be led to answer that question meant that he had to direct the matter to be heard at a full hearing. However, on alternative grounds which avoided having to decide how to classify the deposits, he reached a decision on the later three deposits. The LoI created obligations for each party; Waha's only obligations under the LoI were (i) to observe the confidentiality clause, and (ii) to remove the aircraft from the market. In an observation both he and the judge at the full hearing were to repeat, on the face of the terms of the LoI, $4,500,000 (the sum of all of the deposits) was the extraordinarily high price paid by JSD in return for what he described as Waha's "modest obligations". Accordingly, Waha's otherwise trivial breach of its obligation to keep the aircraft off the market by inadvertently leaving an advertisement for the aircraft on a third party's website (on the evidence at the hearing, neither Waha nor JSD was aware of the advertisement during the time they were negotiating the sale of the aircraft) was given strict effect as a "Seller's breach". In the words of Smith J: "Given the expensive nature of that agreement it is right in my view to give strict effect to the provisions so that if there was a seller default, however small and un-noticed, it means precisely what it said." As the later three deposits were repayable on seller default, and the court had found such default to have occurred, Smith J ordered the repayment of the later three deposits.

Waha's default had no bearing, on the face of the express terms of the LoI, on the refundability of first deposit. Smith J determined that JSD's claim to be repaid the first deposit should be listed for a full hearing of the matter. The relevant part of the clause relating to the first deposit expresses a seller intention commonly found in LoIs:

" ... [the first deposit] ... shall become non-refundable upon signing of this Letter."

In the High Court, Sher J showed a far greater understanding for the reasons behind the apparently harsh (from JDS's perspective) terms than Smith J had in the summary judgment: Waha had been let down when JDS had failed to complete a previous transaction and wanted, by way of the threat of loss of the deposits, to incentivise JDS to perform. He decided that the deposits paid under the LoI could not be a guarantee for performance because once the deposits had been paid, there was no obligation left for the purchaser to perform (other than relating to confidentiality): the deposits were held "... to discourage JSD from pulling out again ..."

Following several alternative arguments which had no bearing on the classification of the first deposit, and recognising that his implied term was contrary to the express provision in the LoI, he found that the first deposit was retainable by Waha only if JSD pulled out of the LoI, as distinct from being refundable to JSD only on the default of Waha. Chief amongst the arguments was that the LoI required an implied termination clause in order to be a binding contract at all, and under that clause the notice period given to JSD by Waha to sign a sale and purchase agreement had been too short. Waha had given only 4 days for JSD to sign the sale and purchase agreement, in the knowledge that the relevant person was not in his office for the first half of that period and that the purchase of the aircraft would need to be financed. By acting precipitately in providing too short a notice period for termination, Waha had repudiated the LoI and the first deposit had to be repaid to JSD.

In obiter, he noted that the fact that the first deposit payment was refundable under the terms (including the implied terms) of the LoI meant that the question of it being a penalty did not arise: refundability is inimical to the nature of a penalty.

Aero Toy Store

Under the terms of the aircraft sale and purchase agreement, the deposit was to be paid to the seller, Tandrin, as liquidated damages. The purchaser, Aero Toy Store, had failed to accept delivery of the aircraft on the agreed delivery date. After a cure period, Tandarin purported to terminate the sale and purchase agreement.

The facts of the case illustrate how, in the depressed market for business aircraft in January 2009, the failure of a purchaser to perform under a contract can lead to serious financial loss for the seller. ATS was not represented at the Part 24 application hearing, but did serve a defence against the claim that the escrow agent be ordered to release the deposit to Tandrin. In such circumstances, there was nothing to challenge the evidence led by the claimant. Rejecting ATS' written defence that the clause relating to the deposit was a penalty clause, the judge decided as follows:

  • The deposit (of 9.5% of the purchase price) was not extravagant or unconscionable in comparison with the greatest loss that could conceivably have followed from the breach;
  • The deposit was lower than the balance of the purchase price owed to Tandrin – i.e. the amount payable for breach of the payment obligation was lower than the amount ATS would have paid had it performed its payment obligation under the sale and purchase agreement;
  • Payment of the deposit as liquidated damages was not triggered on the occurrence of a variety of breaches; it was specific to failure to accept delivery and to pay the balance of the purchase price (i.e. likely to result in significant losses for Tandrin); and
  • Precise pre-estimation of Tandrin's losses resulting from ATS' breaches of the delivery and payment obligations was near impossible from the outset of the sale and purchase agreement, and so the pre-estimate "... should be taken to be the true bargain between the parties ..."

Comment

Aero Toy Store represents an orthodox approach to the distinction between penalties and deposits and was deemed suitable for disposal at Part 24 stage. It was different from Waha in that the terms on which the deposit was retainable were clearly set out in the sale and purchase agreement, allowing the judge to make a decision that might have been expected by the parties at the time the sale and purchase agreement was entered into. The deposit was also far less, on the uncontested evidence led by Tandrin, than the amount of the loss caused by the failure of ATS to pay the purchase price and accept delivery of the aircraft.

In Waha, as is often necessarily the case with letters of intent, not every contingency had been dealt with in drafting. Once the court had departed from a literal interpretation of the LoI (by implying terms relating to term and termination) to save it from being void for uncertainty, the process of assuming what reasonable parties might have intended when constructing harsh terms plainly drafted for the benefit of the seller did not end there. From the outset, perhaps unsurprisingly in light of the history between them, the parties appear to have considered largely purchaser default. There was insufficient detail in the LoI on the consequences of seller default and this lacuna had to be filled with implied terms.

Given the apparently unambiguous express terms governing the first deposit, without doubt the order to repay it to JSD would have come as a surprise to Waha. Having at the earlier hearing lost the later three deposits on a strict interpretation of the meaning of "Seller default", they were to lose the first one at the full hearing on implied terms.

In addition to reminding parties of the simple point that, if obligations are to be enforceable under a letter of intent, there must be a valid contract, the judgments in Waha should serve as a warning to set out clearly and identify the parties' enforceable obligations and what are the consequences that flow from them.

Celestial v Paramount: a limit on rights to relief against forfeiture of aircraft

In denying the lessee the equitable remedy of relief against forfeiture of three aircraft operating leases, the judgment of Hamblen J in Celestial Aviation Trading 71 Limited v Paramount Airways Private Ltd on 11 February 2010 has clarified the court's jurisdiction to grant such relief in respect of operating leases. In so doing, he has provided comfort to aircraft lessors that the existence of the jurisdiction to grant relief against forfeiture will not be extended in respect of operating leases.

Background to the judgment

At the summary hearing of this case in 2009, Teare J had refused to make an order for delivery up of aircraft. The only evidence that had been led related to Paramount's failure to pay rent. No breach of other "non-payment" obligations, such as to maintain the aircraft, had been established; in such circumstances Paramount had a " ... realistic prospect of establishing at trial ... [that] the court [had] discretion to grant relief against forfeiture." The issue of relief against forfeiture for breach of payment obligations was split off from other disputes related to inspection rights and set down for an expedited hearing.

Transfer of proprietary rights only

Celestial argued that the jurisdiction to grant relief against forfeiture had never been extended to operating leases. Under the terms of the operating leases, only possessory rights to the aircraft had been transferred – there was no provision for any transfer of proprietary rights to the lessee. Hamblen J accepted that the Court of Appeal's decision in On Demand Information plc v Michael Gerson (Finance) plc provided support for the argument that jurisdiction to grant relief against forfeiture existed in respect of contracts that transferred possessory rights only. However, he distinguished On Demand because, in that case, the lessee had an indefinite right to possess the chattels under the leases, making them analogous to leases under which the lessee would ultimately acquire ownership. It is worth remembering that in On Demand, the rental payments had been successively reduced to a nominal amount; the lessor had recouped the costs and profit associated with the transaction. Ownership remained with the lessor for tax reasons only and the lessor had no real reversionary interest in the leased assets.

Hamblen J recognised that, in Paramount, the distinguishing feature of operating leases, as distinct from other agreements was the return of the aircraft to the lessor before the end of their useful economic lives. In terms that will resonate with operating lessors, he stated that "... Celestial retains a very real interest in the Aircraft themselves, including their proper maintenance, the extent of their use, their condition, and their rental and resale value ... Celestial ... retains many of the risks and rewards of ownership." The contrast with On Demand was stark. He concluded the point by observing that "for the relief jurisdiction to apply to contracts transferring a bare possessory right for only a portion of the economic life of the chattel would represent a major extension of existing authority."

Forfeiture as security

He applied the jurisdiction guidance set out in Shiloh Spinners v Harding to the matter in Paramount. He considered whether:

  • "it is possible to state that the object of the transaction and of the insertion of the right to forfeit is essentially to secure payment of money"; or
  • "the primary object of the bargain is to secure a stated result which can effectively be attained when the matter comes before the court, and where the forfeiture provision is added by way of security for the production of that result."

By pointing to certain similarities between aircraft operating leases and bare-boat charters, Paramount had argued that authority to grant relief could be found in the dicta of Cooke J in "The Jotunheim". Rejecting this, Hamblen J affirmed Cooke J's emphasis in The Jotunheim on the hire/purchase elements included in the bare-boat charter agreement and the owner's expectations: " ... [the] owners provide the ship in anticipation that they will do nothing further after delivery. They receive the charterers' payments and, if all goes well, transfer the vessel to the charterers on receipt of the final instalment."

That is clearly different from the case of an operating lease, and he concluded that "... one of Paramount's primary obligations ... was to redeliver the Aircraft in the appropriate condition upon termination." Addressing the guidance on jurisdiction in Shiloh, he found that the forfeiture provision served to ensure that Celestial could effectively be released from the leases and have its aircraft returned, rather than to secure the obligation to pay money. Further, he commented that the letters of credit provided by Paramount were the security for payment, which indicates that in the judge's mind the provision of monetary or other security under the terms of an operating agreement goes some way to excluding the implication that the true purpose of the forfeiture provision is to secure a payment obligation.

Legal policy

On the grounds of the importance of commercial certainty when leasing high-value moveable assets in which the lessor has a reversionary right, the judge dismissed the idea that there might be legal policy reasons for the extension of relief to operating leases.

Comment

In the judgment of Hamblen J the importance placed on the lessor's reversionary interest in the aircraft (itself a function of the equipment's economic life) serves to highlight the fact that the jurisdiction to grant relief remains in respect of finance leases, particularly towards the end of the term of the lease, where such reversionary interest in the equipment has been substantially diminished or extinguished.

Aircraft lease delivery condition and acceptance

Articles appearing recently on ACG Acquisition XX LLC v Olympic Airlines SA have tended to paint Hamblen J's judgment on the Part 24 application in dramatic terms: some recommend changes to the drafting of leases to protect lessors concerned by the apparent ineffectiveness of certificates of acceptance and related lease provisions in the wake of Olympic. A closer look at the judgment reveals that the case involves ordinary contractual principles applied to an extraordinary set of facts and that in such circumstances, as indicated by the strength of the terms used by Hamblen J, the court will endeavour to construe the lease to prevent a lessor from avoiding liability for failure to perform its most basic lease obligation – to deliver an aircraft in an airworthy condition.

As this was a Part 24 application, to defeat ACG's claim for summary judgment Olympic had only to show that it had a real prospect of establishing that it was entitled to counterclaim that it did not owe rent to ACG (because the delivery of an aircraft that was not airworthy represented a total failure of consideration under the lease) or alternatively that it was entitled to damages to include any liability to pay rent, and that there was a real prospect that either of such counterclaims could be relied upon to defeat ACG's claim.

The facts

The aircraft had been on lease to Air Asia prior to going on lease to Olympic. Olympic had several opportunities to inspect the aircraft prior to signing the lease, but such inspections were limited to areas of the aircraft that were readily accessible (Olympic being granted no opportunity to open up the aircraft). Some defects were detected, and Olympic claimed it notified them to ACG for rectification, although ACG contested this. No diagnostics could be run on the airframe or the aircraft systems, and ACG denied Olympic permission to inspect the airframe more closely, although it is not clear from the reports on the case how persistent Olympic was in attempting to get ACG to allow a thorough inspection. In any case, the aircraft went into shop for a C-check clearing it for 4,000 flight hours operation shortly before delivery to Olympic, who relied on the accuracy of the technical documents when considering the aircraft's maintenance status. The technical documents, in the words of Hamblen J, "... painted a falsely reassuring picture and recorded work which had not been carried out adequately, if at all."

Olympic signed the lease and took delivery of the aircraft "as is, where is" and provided a certificate of acceptance to ACG. The Greek civil aviation authority issued a certificate of airworthiness in respect of the aircraft. Fourteen days into the lease term, the aircraft was unexpectedly taken out of service to rectify a problem caused by corrosion, which had been certified as having been remedied prior to delivery. Further investigations revealed more serious airworthiness and maintenance defects with the aircraft and its technical documents, which resulted in the Greek civil aviation authority withdrawing the certificate of airworthiness. A further C-check was recommended by Boeing to address the defects, with estimated costs for rectification and recertifications exceeding the value of the aircraft. Olympic did not commission the works to make the aircraft airworthy and never made rent or maintenance reserve payments. It was not operated by Olympic again. In counterclaiming against ACG's application for summary judgment for payment of rent, maintenance reserves and damages, Olympic claimed that i) there had been a total failure of consideration and therefore that it had no obligation to pay rent, and alternatively ii) it was entitled to claim damages for breach of contract, which would cover any liability to pay rent.

The lease

The terms of the lease and the certificate of acceptance were not untypical of those found in operating leases. The lessor had the benefit of exclusions of liability, and a lessee waiver of liability in respect of representations and warranties made by the lessor, except for those that were expressly stated in the lease. Under the lease, ACG had an obligation to deliver the aircraft in a condition corresponding to that of an aircraft fresh from C-check. Concessions made in oral arguments by ACG in respect of the waiver and the exclusion meant that it ended up relying heavily on the terms of the lease relating to the certificate of acceptance: delivery of the certificate of acceptance by Olympic was stated to be " ... CONCLUSIVE PROOF ... THAT LESSEE HAS EXAMINED AND INVESTIGATED THE AIRCRAFT, THAT THE AIRCRAFT DOCUMENTS ARE SATISFACTORY TO LESSEE AND THAT LESSEE HAS IRREVOCABLY AND UNCONDITIONALLY ACCEPTED THE AIRCRAFT FOR LEASE HEREUNDER WITHOUT ANY RESERVATIONS WHATSOEVER (EXCEPT FOR ANY DISCREPANCIES WHICH MAY BE NOTED IN THE CERTIFICATE OF ACCEPTANCE)."

The judgment

Olympic's counterclaim was greatly assisted by the judge's decision that Olympic was entitled to assume that the aircraft would be delivered in compliance with the lessor's obligation under the lease.

The exclusion and waiver clauses had carve-outs in respect of express terms of the lease. The delivery conditions were express terms of the lease, and so neither clause could be relied on by ACG. The term "as is, where is" of the exclusion clause had to be read together with Olympic's legitimate assumption that ACG would deliver the aircraft in an airworthy condition, which resulted in the construction that the aircraft was to be delivered for acceptance "as is, where is" and in the condition required by the lease

ACG fell back on its main argument that, however serious the breach of contract in delivering the aircraft in a condition that did not conform with the lease, Olympic had irrevocably accepted delivery of the aircraft which precluded any claim regarding its condition. Only in the case of fraud should this construction be challenged and, absent fraud, there "... was no good reason why the lessee rather than the lessor should not assume the risk of latent defects ...". Hamblen J's first comments on this argument were not auspicious for ACG. The risk involved a breach of the lessor's obligations and this was a good reason why the risk should not be transferred to the lessee. Foreshadowing his decision, he added: "... it may involve a breach that goes to the root of the contract and which deprives the lessee of substantially or indeed all the benefit of the contract and may, absent fraud, still involve negligence or gross negligence on ACG's part."

Turning to the contractual function of the certificate of acceptance itself, ACG argued that it was to provide conclusive proof of three things: first, that Olympic had examined and investigated the aircraft; second, that the aircraft and its documents were satisfactory, and third, that Olympic's acceptance of the aircraft was irrevocable and unconditional. The first and second functions were disposed of by reading them in the light of the assumption that the aircraft was being delivered by ACG in compliance with its obligations under the lease. The judge decided with regard to the third point that the aircraft was irrevocably and unconditionally accepted only for the purpose of providing certainty that the lease term had commenced. On the terms of the lease, what the certificate of acceptance did not do was to "... constitute conclusive proof that the aircraft complied [with the delivery condition set out in the lease] ..." or, " ... create any kind of contractual estoppel preventing Olympic from alleging and establishing a breach [of the requirement to tender the aircraft for delivery in that condition] ...". With reference to Olympic's second counterclaim, the judge commented that a proper construction of the term referring to the certificate of acceptance did not preclude Olympic from accepting the aircraft and suing for damages for breach of contract, "... the conclusive effect of the acceptance of the aircraft is limited to the right of rejection and does not extend to the right to claim damages, still less to claim total failure of consideration." He agreed that Olympic's claim for damages was equal in amount to ACG's legal right to receive rent, adding "[i]f ever there was a case which, on Olympic's evidence, in justice a claim for rent should be capable of being resisted, then this is that case."

Hamblen J repeated that this was a case of extreme facts. ACG's principal obligation under the lease was to deliver an aircraft in an airworthy condition. The aircraft was in fact not airworthy and the cost of putting it into such an airworthy condition would exceed its value. This represented a total failure of consideration.

Comment

Besides noting that the facts behind the judgment in Olympic are relatively unique, observers should wait and see whether ACG appeals against the judgment so that ACG's claim can be determined at a full hearing of the matter. In the interim, there are a few points to consider. First, the judge was clearly impressed by the high cost of putting the aircraft into a condition for commercial operation and by the lessor's failure to perform its most basic lease obligation, so that he found a total failure of consideration. There is no indication as to where the tipping point should lie - how much should the repair works cost relative to the value of the aircraft for the failure of consideration to be total? Secondly, Olympic was held to be entitled to assume that ACG was tendering the aircraft in accordance with the lease delivery condition – the judge suggesting that a lessee might be prevented from alleging and establishing a breach of delivery condition obligations if the "conclusive proof" clause of the lease agreement stated that execution of the certificate of acceptance would constitute conclusive proof that the aircraft had complied (as between lessor and lessee) with the delivery condition requirements (rather than just conclusive proof of delivery and acceptance). Thirdly, was Olympic entitled to continue to rely on all of the technical documents where even the limited inspections allowed by ACG revealed that, in the instance of the corrosion, they were not accurate?

EU external aviation relations – generally and with Brazil in particular

Since the successful completion of the internal EU aviation market as from the beginning of 1993, the European Commission's attentions have increasingly focussed on extending the common EU aviation area to other countries. Its initiatives have fallen into three broad categories:

Horizontal agreements

Since the European Court of Justice's judgment in the "open skies" cases in November 2002 gave the Commission the legal impetus to do so, the Commission has been negotiating and concluding so-called "horizontal agreements" with other countries. Under such agreements, the other country agrees to replace, in its bilateral air services agreements with EU member states, the traditional nationality clause (under which it can refuse or withdraw traffic rights if the airline is not locally owned and controlled) with one recognising ownership and control of EU airlines by nationals of any EU member state. A country which has signed such an agreement can no longer, for example, threaten to withdraw traffic rights from Austrian Airlines on the grounds that it is owned and controlled by German rather than Austrian nationals. To date, such agreements have been concluded with a little over 40 countries, including Australia, Canada, Chile, Malaysia and Mexico. Interestingly, the agreements are by no means all in standard form, and some countries have managed to negotiate safeguards and reciprocal provisions which do not appear in other agreements.

Neighbouring countries

For some time Norway, Iceland and Liechtenstein have been part of the European common aviation area by reason of being party to the EEA Agreement with the EU. Switzerland has a similar status by reason of a special agreement between the EU and Switzerland covering aviation, as well as other sectors.

In 2006, a specific agreement was concluded between the EU and the eight non-EU countries in the Balkans bringing them into the common aviation area, with transitional provisions.

More recently the Commission has adopted similar initiatives with less contiguous but nearby countries, starting with Morocco, with which an agreement was concluded in December 2006. Agreements were initialled with Georgia and Jordan in March 2010, and discussions are ongoing with Lebanon, Ukraine, Israel, Algeria and Tunisia.

Other comprehensive aviation agreements

More ambitious were the Commission's attempts to reach an agreement with the US, clearly the most important aviation market, and, after a number of delays and setbacks, these finally resulted in the conclusion of an "open skies" agreement, which entered into provisional effect in March 2008. While this did not go as far as the Commission had hoped, and recent attempts to take the process further, in the second stage negotiations, had only limited results, it has led to some significant opportunities and changes – perhaps most visibly in the form of the commencement of operations at Heathrow in 2008 by airlines such as Continental, Delta and US Airways.

A similar agreement was signed with Canada in May 2009, and the Commission has been granted by the Council mandates to pursue discussions with Australia, Chile, China, India and New Zealand.

Brazil

The latest development in this area was in May 2010, when the Commission asked the Council for a mandate to open negotiations on a comprehensive aviation agreement with Brazil. Later in May, in the context of a joint EU-Latin American Civil Aviation Summit held in Rio de Janeiro, agreement was reached in principle between the EU and Brazil on a horizontal agreement and an agreement on aviation safety.

The existing air services agreements between EU Member States and Brazil limit the number of weekly flights, constraining particularly the operations between the EU and São Paulo and Rio de Janeiro. The considerable variation across the bilateral agreements has led to a patchwork of air services between the EU and Brazil with the traffic rights exchanged ranging from two to eight weekly flights. The Commission points out that these differences have led to inequalities in the opportunities available to EU airlines. For example TAP currently operates 63 weekly frequencies from Portugal to Brazil, far more than any other EU carrier. Air France comes second with 24 frequencies from France to Brazil.

According to a study undertaken for the Commission, liberalisation of aviation between the EU and Brazil could generate up to almost €500 million worth of consumer benefits per year, and could have significant effects in view of the holding of the World Cup in Brazil in 2014 and the Olympic Games in 2016. In addition to increased traffic to Brazil, due to the strengthening of the Brazilian economy and the consequent increase in the proportion of the country's 191 million inhabitants having access to travel, there is also likely to be continued increasing demand for air travel to the EU, given the strong cultural ties.

If the agreement follows the form of the US and Canada agreements, it is likely to provide for:

  • unlimited third and fourth freedom rights;
  • free pricing;
  • (possibly) fifth freedom rights;
  • (possibly) seventh freedom rights for cargo services;
  • the right for airlines to enter into codesharing, franchising and branding arrangements with other airlines;
  • relaxation of restrictions on wet leasing;
  • cooperation in areas such as security, safety, competition law and environmental protection;
  • liberalisation of restrictions on ownership of airlines (at least up to the level of 49%).

If concluded, therefore, the agreement will create significant opportunities for airlines from both Brazil and the EU, as well as competitive pressures for those already operating.

Caveat suppliers! The impact of a recent English law case on fraudulent and pre-contractual misrepresentations

In January 2010 the High Court delivered its judgment in the case of BSkyB v EDS, ruling that EDS (the supplier under a services agreement with BSkyB, now merged into Hewlett- Packard) was liable to pay hundreds of millions of pounds in damages to BSkyB for misrepresentations made during negotiations and before a contract had been executed. Although this is an English law decision involving an IT services company and the exact amount of damages for which EDS is liable has not yet been decided (EDS was ordered to make an interim damages payment of £200 million in February), the outcome applies to all contracts and will undoubtedly have a significant impact on all suppliers (including, of course, those providing services in the aviation sector).

The facts

In 2000, BSkyB conducted a competitive tender process for a customer relationship management system which EDS won. After the contract was signed, EDS ran into difficulties and the parties entered into renegotiations to amend some of the contractual terms. Despite this, the project was completed four years behind target and at a cost of over five times the original budget.

BSkyB alleged that prior to signing the first contract EDS claimed to have conducted a proper analysis of the timescales involved in running the project and represented that there were reasonable grounds for believing it could carry out the work within the proposed timeframe. BSkyB argued that EDS was guilty of fraudulent misrepresentation as these representations were false, EDS had knowingly made these false statements during the tender process with the intention of BSkyB relying on them and, as a result, BSkyB had been induced into entering into the contract. BSkyB also claimed that, during the contract renegotiations, EDS had negligently misrepresented that it had drawn up an achievable plan to deliver the system.

What the court said

The High Court upheld BSkyB's allegation of fraudulent misrepresentation as to the timing of the project. The judge found that EDS's lead sales employee had been "palpably dishonest" and had intentionally made false representations about the project timescales and EDS' ability to meet the set deadlines. EDS was found liable to pay damages for fraudulent misrepresentation which, under English law, cannot be capped and are not subject to the usual rules on foreseeability and remoteness of damage.

The court also decided that EDS had negligently misrepresented that it had developed an achievable plan to complete the work. Significantly, the judge found that the "entire agreement" clause, as drafted, was insufficient to exclude liability for negligent misrepresentation as it had failed to expressly exclude liability for negligent pre-contractual misrepresentations. EDS was therefore held liable for damages for negligent misrepresentation, albeit that this liability was subject to the contractual cap on liability and the standard exclusions contained in the contract (excluding liability for consequential and indirect loss and so on).

Impact on airlines and the aviation sector

Although this case does not break new legal ground, it serves as a salient reminder to suppliers to exercise caution and restraint when making statements to customers (whether during negotiations or after contract execution). It is also apparent from this case that the actions of a single employee can be a crucial factor in the finding of fraudulent misrepresentation, which could potentially expose businesses to unlimited damages. In light of this, suppliers are strongly advised to examine their sales and customer management procedures in order to ensure that they impose sufficient restrictions on and reviews of the sales conduct of their customer-facing employees

The case also highlights the importance of keeping a close eye on contractual boilerplate clauses so as to ensure not only that they are up to date and function as intended, but also that they are applied with consideration as to the context in which they are to operate. In order to avoid the consequences suffered by EDS, whose "entire agreement" clause failed to shield it from liability for negligent misrepresentation, suppliers should review – on a contract by contract basis - their standard terms to ensure that the drafting reflects the intention of the parties and is appropriate to the current contractual environment.

German Supreme Court rules on airlines' requirements for sequential use of ticket coupons

In order to compete effectively on some routes, particularly on lucrative long-haul routes, airlines often offer concessions on ticket prices where passengers are willing to purchase two indirect flights to their destination from them rather than flying direct with competitors. Typically, this means connecting with these airlines' long-haul services by using so-called 'feeder' flights.

However, this can sometimes mean that passengers benefiting from such concessions, who are often based abroad, pay less in total for their feeder and long-haul flights than those passengers who live near to the point of departure of the long-haul services and who only purchase the long-haul flights. This creates an incentive for passengers who only require the long-haul flights to try to benefit from the concessions themselves by buying their tickets abroad, even though they have no need for feeder flights and have no intention of using them.

In order to prevent passengers from undermining their tariff structures in this way (this is often referred to by airlines as 'fare abuse'), airlines generally stipulate in their conditions of carriage that, if the flights purchased are not used in the order booked, the whole ticket is automatically invalidated. This means that any passengers who fail to turn up for the feeder flights are automatically refused boarding on the subsequent long-haul flights. Although the purpose of such 'non-sequential use' clauses is understandable from the airlines' point of view, such provisions can also punish those passengers who fully intend to use the feeder flights at the time of purchasing the ticket but who, for some valid reason, are unable to do so. For example, a passenger might unintentionally miss a feeder flight for reasons out of his or her control, but still be able to connect with the long-haul flight by buying another connecting flight, even if this is with another carrier.

Take also the example of a passenger, possibly a businessman, who unexpectedly has to travel to the point of departure of the long-haul flight prior to the departure of the feeder flight, but who still wishes to use the long-haul flight.

In response to concerns regarding the fairness of 'non-sequential use' clauses, the Federation of German Consumer Organisations (FGCO), a non-governmental organisation representing some 42 German consumer associations, brought a claim against British Airways and Lufthansa in the German Supreme Court, seeking a ruling regarding their enforceability. In a judgment handed down on 29 April 2010, the Court ruled that 'nonsequential use' clauses which automatically invalidate passengers' tickets were unfair and were therefore unenforceable.

The Court did, however, rule that airlines should be allowed to protect their tariff structures by using a more reasonable 'non-sequential use' clause. The Court suggested that, instead of automatically invalidating tickets, airlines could levy an additional charge (this would need to be mentioned in the conditions of carriage) if passengers failed to fly part of the booked route but still wished to fly on the remaining segment(s). Such a charge would reflect what the cost of the remaining segment(s) would have been if purchased in isolation at the original time of booking. This ruling offers some much-needed clarification for airlines selling carriage by air in Germany because the Regional High Court of Cologne had previously held 'non-sequential use' clauses which automatically nullify tickets to be enforceable while the Regional High Court in Frankfurt had held them to be unenforceable.

New UAE rules on minimum insurance coverage

At the beginning of this year, the General Civil Aviation Authority of the United Arab Emirates issued an Information Bulletin setting new minimum insurance coverage requirements for carriers. This initiative, affecting both passengers and cargo carriers (irrespective of their nationality) flying to/from or overflying UAE territory, purports to bring the UAE's civil aviation regulations in line with those in Europe, "in the interest of public protection [...] to insure a proper minimum level of insurance...".

It is generally considered that the new requirements will have little impact on most passenger airlines, which have such levels of insurance anyway, but that there will be a greater impact on the UAE's freight sector, which contains a number of small operators with traditionally lower levels of insurance cover.

The new rules came into effect on 1 February 2010 and will be implemented in a three step approach:

  • 1 April 2010 onwards - carriers will have to provide to the GCAA documents evidencing compliance with the minimum insurance requirements ("a valid insurance certificate or other evidence of valid insurance");
  • 1 July 2010 onwards - if a carrier fails to comply with requirement, its operations to/from the UAE will be suspended;
  • 1 January 2011 onwards – these rules will be extended to overflights in the UAE's airspace, and the GCAA may, in accordance with international law, request evidence of compliance by carrying out random checks.

The insurance taken out by carriers is required to cover aviation specific liability in respect of passengers (for death and personal injury), baggage, cargo (for loss or destruction or damage) and third parties (for death, personal injury and damage to property). In addition, insured risks must include acts of war, terrorism, hijacking, acts of sabotage, unlawful seizure of aircraft and civil commotion.

The minimum insurance coverage amounts introduced by the new regulations are influenced by the international conventions that regulate international civil aviation. The level of third party liability cover follows that established in the Convention on Compensation for Damages Caused by Aircraft to Third Parties – known as the General Risks Convention – adopted (but not yet in force) at the International Conference on Air Law held last year as part of an initiative to modernize the Rome Convention of 1952. The coverage minima are expressed in Special Drawing Rights (SDRs) and are pegged to the Maximum Take-Off Mass (MTOM) of the aircraft, ranging from SDR750,000 for aircraft with a MTOM of less than 500Kgs to SDR700 million for aircraft with a MTOM of 500,000Kgs.

Requirements with regard to liability for passengers, baggage and cargo are based on the limits for strict liability established in the Montreal Convention (except as regards passengers on commercial flights and passengers on non-commercial flights with aircraft exceeding 2,700Kgs MTOM, for which a minimum coverage of SDR250,000 per passenger is required). However, although issued in 2010 and although the UAE is party to the Montreal Convention, the minima stipulated by the regulations mirror the previous limits of the Montreal Convention rather than those increased to take account of inflation in force since the beginning of 2010

In addition, both the insurers and the operators, respectively, must provide information to the GCAA, in advance, of any circumstance that may affect the validity of the insurance (with such duty to be mirrored in the terms of the policy) and must notify the GCAA in advance of any cancellation/change to the insurance cover.

Finally, in addition to the sanction of suspension of operations mentioned above, failure to comply may lead to:

  • withdrawal of the operating licence and refusal of landing or take-off rights " enforced landing
  • suspension or withdrawal of the Certificate of Airworthiness of the relevant aircraft
  • suspension or withdrawal of flight crew licences
  • a fine up to AED50,000 and/or imprisonment up to one year,

although, obviously, some of these penalties can only be applied to UAE licensed carriers.

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 Volcanic ash and closure of airspace - airlines' obligations under EU Regulation 261/2004 (Part 1) for the previous article.
 
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