District Court Evaluates Express Warranty Of “Airworthiness”

Texas Court Determines That “Airworthy” Is an Unambiguous Term That Controls Over More General Disclaimers of Warranties

HIGHLIGHTS:

• The “as is” clause does not negate the express warranty of an “airworthy” aircraft.
• The terms “airworthy” and “certificate of airworthiness” are technical terms capable of only one reasonable interpretation – compliance with FAA’s technical and legal requirements.

In Luig v. North Bay Enterprises, Inc., a Texas District Court recently considered a seller’s obligation to deliver an “airworthy” aircraft in the context of an aircraft purchase agreement that also contained an “as is” clause.¹ The contract involved the sale of a 50-year-old Bell helicopter that had undergone several changes, including the removal of the turbocharger engine. After the buyer conducted a pre-purchase inspection and indicated several items to be repaired, the seller delivered the aircraft to the buyer with the requested repairs completed.

Subsequent to delivery, the seller commenced suit seeking a declaratory judgment that it delivered the aircraft in accordance with the contract. The buyer asserted a counterclaim seeking damages for breach of contract on the basis that the aircraft failed to meet the contractual delivery condition because it was not “airworthy.” Following discovery, the parties cross-moved for summary judgment. The cross-motions required analysis of two material contract terms.

1. The first provided that the purchaser agreed to “accept the Aircraft in an ‘as is where is’ condition.”
2. The second provided that the aircraft would be delivered “with all systems in an airworthy condition and a current Certificate of Airworthiness.”

The “As Is” Provision Disclaimed All Implied Warranties

With respect to the “as is” clause, the seller argued that the parties intended the clause to waive all express and implied warranties and other objections to the condition of the aircraft. The seller contended that it was irrelevant whether the aircraft was delivered “in an airworthy condition” because the purchaser had agreed to accept the aircraft “as is” after having an opportunity to inspect the aircraft and documentation. Conversely, the buyer argued that the “as is” clause was merely boilerplate language that should not be given effect in light of the nature of the transaction and the totality of the circumstances.

The court stated that where an “as is” clause is an important part of the basis of the bargain and entered into by parties of relatively equal bargaining position, a buyer’s agreement that he is not relying on representations by the seller should be given effect. The pre-purchase inspection indicated that the parties understood that they would disclaim implied warranties upon acceptance. Thus, the court determined that the parties intended, at minimum, to waive implied warranties through the use of the “as is” clause.

The “As Is” Provision Did Not Disclaim the Express Warranty of “Airworthiness”

The court then evaluated whether the airworthiness clause constituted an express warranty and, if so, whether the parties intended to disclaim it. Applying the Uniform Commercial Code, the court stated that any affirmation of fact or promise made by the seller to the buyer that relates to goods and becomes part of the basis of the bargain creates an express warranty that the goods must conform to the affirmation or promise. Citing U.S. Supreme Court precedent,² the court held that the terms “airworthy” and “certificate of airworthiness” are technical terms capable of only one reasonable interpretation – compliance with FAA’s technical and legal requirements – and do not “merely mean that a person may be able to safely fly the aircraft.” Because the term “airworthy” is not ambiguous, the written assurance of airworthiness rises to the level of an express warranty. The court then considered interpretation and construction rules to determine that the parties did not intend to disclaim the specific “airworthiness” warranty by virtue of the general “as is” clause.

Aircraft Not “Airworthy” When It Does Not Conform to the Type Certificate

Because the facts were uncontested, the court found it appropriate on summary judgment to address the seller’s obligations that it deliver an “airworthy” aircraft. The court reiterated the FAA statutory scheme that to be airworthy an aircraft must conform to the type certificate approved for that model aircraft and be in a condition for safe operation. Here, it was uncontested that the prior modifications to the aircraft’s engine altered the aircraft such that it did not meet the specification for the aircraft model type listed in the airworthiness certificate. The court further determined that there was insufficient evidence regarding compliance with certain airworthiness directives. Accordingly, the court found that the aircraft was not “airworthy.”³

Recognizing the Contractual Importance of an “Airworthy” Aircraft

Importantly, courts continue to take the view that “anecdotal” suggestions of an individual aircraft’s compliance with its type certificate do not meet the evidentiary standard necessary to establish airworthiness. For instance, in Luig, the court rejected the seller’s unsupported assertion that an FAA field office had issued a letter stating that the modifications to the engine were properly documented and that FAA did not think a type change was necessary. In an earlier case, a New York District Court rejected a seller’s argument that auxiliary center tanks on a commercial aircraft had been FAA-approved because there were anecdotal reports that a small number of other aircraft of that model type registered and operating in the United States had auxiliary center tanks.⁴

This litigation serves as another reminder that the requirement to deliver an “airworthy” aircraft necessitates the parties’ understanding of the required regulatory approvals at the time they enter into an aircraft purchase agreement. This understanding is especially important because these types of disputes will almost always be subject to expert analysis and scrutiny given the comprehensive nature of the FAA regulatory scheme. Indeed, in Luig, the seller’s own expert witness rebutted his initial opinion and conceded during deposition that “if I had to do it again today, I would say it was unairworthy.”

Footnotes

1. __ F. Supp. 3d __, 2014 WL 5431887 (N.D. Tex. Oct. 27, 2014).

2. See United States v. S.A. Empresa de Viacao Aerea Rio Grandense (Varig Airlines), 467 U.S. 797 (1984). 

3. The court denied the plaintiff’s motion for summary judgment on the breach of contract claims because it found that under Texas law damages were permitted  only when the seller failed to deliver the goods, the buyer rejected the goods, or the buyer revoked its acceptance of the goods. Here, the uncontested facts demonstrated there was no fact issue that the buyer’s acceptance was final. 

4. See Austrian Airlines Oesterreichische v. UT Finance Corp., 567 F. Supp. 2d 579, 592 (S.D.N.Y. 2008), aff’d, 336 Fed. Appx. 39, 2009 WL 1940715 (2d Cir. July 2, 2009).