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Certificates of Acceptance

A recent decision on aircraft leasing in the Commercial Court has provided authoritative guidance on the extent to which a Certificate of Acceptance is binding on a Lessee.

Before the decision the only relevant reported case on the effect of a Certificate of Acceptance in asset finance was the decision of the Court of Appeal in Lowe v Lombank Limited [1960] 1 WLR 196. The Lessee was a widow aged 65 who took a second–hand car on Hire-Purchase following an assurance by the dealer that the car was in perfect or almost perfect condition. She signed the Agreement without reading it, the court noted “like many other hirers” . The car was delivered to her at her house when she saw it for the first time, but the dealer immediately took it away on the excuse that some minor adjustment was required, and when it was subsequently returned to her she signed a document headed “Delivery Receipt” which stated:–

“I/we acknowledge and agree that I/we have read the hire–purchase agreement made between us and fully understand the terms and conditions thereof before signing. I/we confirm that I/we have examined the goods described in the schedule to the agreement and acknowledge that the same is/are in good order and condition and to my/our satisfaction in every respect and that I/we have taken delivery of the said goods at this date.

This form should not be signed until delivery of the goods has been taken”.

The car turned out to be not only unroadworthy but a danger to its occupiers and other road users from the very beginning of the transaction. The dealer was described somewhat laconically by the court as a “careless optimist” .

The Financier argued that the law permits persons to make whatever contractual bargains they please and will enforce those bargains, subject to some restrictions based on public policy. The court gave short shrift to this argument in words which apply equally over 50 years later:–

“This general principle, of which the underlying assumptions are that persons entering into contracts are of equal bargaining power and read and understand what they sign, ignores the fact that under modern conditions many transactions, particularly of hire-purchase, are entered into by ignorant persons whose only choice is either not to enter into the transaction at all or to enter into it upon the terms of a standard agreement drafted by the hire–purchase company containing numerous clauses, printed in miniscule characters, which the hirers do not in fact read and, if they did, would be incapable of understanding.”

The Financier argued that the effect of the Delivery Receipt was to preclude or estop the plaintiff from now contending that the car was anything other than in good order and condition upon delivery.

The court said:–

“In order to found an estoppel on this statement in the delivery receipt, which is in a printed form drafted and supplied by them, the [financier] must show:-

(1) that it is clear and unambiguous;

(2) that the plaintiff meant it to be acted upon by the [Financier] or at any rate so conducted herself that a reasonable man in the position of the [Financier] would take the representation to be true and believe that it was meant that he should act upon it…;

(3) that the [Financier] in fact believed it to be true and were induced by such belief to act upon it.”

The court ruled that the Delivery Receipt failed to satisfy any of these requirements. Far from being clear and unambiguous, it amounted merely to a statement that the car was free from patent defects but did not extend to latent defects which would not immediately be revealed by an inspection.

As to the second requirement, the court pointed out that there was no suggestion that the plaintiff had any idea of the mechanics of a Hire-Purchase transaction or intended the Financier to take any action as a result of her signature on the Delivery Receipt, and nor would a reasonable man have believed that it was meant that he should act on the representation as to the condition of the car contained in the Delivery Receipt.

Thirdly, the Financier failed to establish that it had executed the Agreement on the faith of the truth of the plaintiff’s representation as to the condition of the car because no witness from the Financier said so.

As a result of the hostile approach demonstrated by the Court in this case attempts have been made in the subsequent decades to improve the Financier’s position by drafting more sophisticated Certificates of Acceptance, which for example:–

(1) explicitly request the Financier to pay the Supplier as a result of confirmation of delivery;

(2) confirm that instalments will immediately become due and that no trial period applies;

(3) acknowledge that the Supplier is not the Financier’s agent and that there are no side agreements in place to affect the overriding validity of the Terms and Conditions of the Finance Agreement; and

(4) confirm that the equipment is new and unused.

In the alternative some Financiers rely on verbal confirmations of delivery, which are recorded either against an internal check sheet or in some cases the relevant telephone conversation is digitally recorded and stored for use in subsequent court proceedings should that be necessary.

The Olympic Airlines Case

ACG Acquisition XXLLC v Olympic Airlines (in special liquidation) [2012] EWHC 1070 (Comm) concerned an operating lease of a used Boeing 737, which would normally be expected to impose an obligation on the Lessee to undertake a detailed inspection of the aircraft which inspection would be confirmed in a Certificate of Acceptance confirming that the aircraft was delivered on an “as–is, where–is” basis with a “hell or high water” clause requiring rentals to be paid on an absolute and unconditional basis. In this particular case the Lessee had managed to negotiate a variation to standard practice in that the Lessor assumed obligations to supply an aircraft in compliance with specific conditions set out in a Schedule to the Agreement.

The aircraft was inspected by the Lessee, and the Lessee signed a Certificate of Acceptance which stated:–

“Lessee irrevocably and unconditionally accepts and leases from Lessor…the Aircraft…

Lessee confirms that as at the time indicated above, being the time of Delivery…the Lease Property complied in all respects with the conditions required at delivery…except for the items, if any, listed on the attached Annex 2 (the “Discrepancies”). Lessor and Lessee agree that the Discrepancies, if any, shall be corrected as set forth on the attached Annex 2.”

Despite the Lessee’s inspection the aircraft turned out to be dangerously defective to the extent that it was refused an airworthiness certificate and was never flown by the Lessee.
The key issue for the court to determine was the effect of the Certificate of Acceptance on the Lessor’s contractual obligation to supply an aircraft in accordance with the specified conditions, which had clearly never been met.

The Agreement also contained a conclusive evidence clause which stated:–

“Conclusive Proof

Delivery by Lessee to Lessor of the Certificate of Acceptance will be conclusive proof as between Lessor and Lessee that Lessee has examined and investigated the aircraft, that the aircraft and 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 court had little difficulty in concluding that the aircraft failed to meet the express conditions set out in the Schedule with which the Lessor was obliged to comply. Nevertheless the Lessor sought to claim arrears and future rentals for the whole period of the Agreement notwithstanding that the aircraft had in effect never been used by the Lessee.

Firstly, the Lessor sought to rely on the conclusive evidence clause as setting up a contractual estoppel preventing the Lessee from questioning the matters of which the delivery of the Certificate of Acceptance was said to be conclusive proof. The judge rejected this argument in applying a narrow construction to the effect of the conclusive evidence clause and held that on its precise wording it had the effect of waiving any right the Lessee might otherwise have had to refuse to accept the aircraft, but did not purport to wave any right the Lessee might have to claim damages for breach of the Lessor’s obligation to deliver the aircraft in the requisite condition, which was a separate and distinct right. The judge seems to have accepted that in principle sufficiently clear words could have had this effect, but said that this had not been achieved by the wording used in the present case.

Secondly, the Lessor argued that the Lessee was estopped from alleging that the aircraft did not comply with the condition required at delivery.

The judge pointed out that the representation was clear, unambiguous and unequivocal, and it was accepted by both sides that they must have intended the representation to be acted upon by the Lessor.

The judge found that there was reliable evidence of reliance by the Lessor and that such reliance was reasonable since it immediately followed a detailed and extensive inspection of the aircraft by the Lessee before it became contractually bound to the Agreement.

The judge then had to go on to consider whether it would be equitable to allow the Lessee to resile from its representation and to challenge the Lessor’s right to damages under the Agreement. The judge held that in view of the context of a formal Certificate of Acceptance being signed immediately after a detailed inspection of the aircraft and an opportunity to require the Lessor to make good such defective items as had been found, and of the need for certainty in a commercial transaction of this nature, the reasonable man with knowledge of the background would be surprised if the Lessee’s representation did not have the consequences it was stated to have.

The judge distinguished Lowe v Lombank on the grounds that it was one thing to state that a car was in “good order and condition” following a cursory inspection but quite another to state that an aircraft “complied in all respects with the condition required at delivery” following a detailed exhaustive examination. Further, the plaintiff in Lowe v Lombank had agreed to buy the car without inspecting it before signing the Delivery Receipt, whereas in the present case there had been a detailed inspection by experts. Thirdly, whereas it was improbable that in Lowe v Lombank the Hire-Purchase company acquired the car from the dealer or executed the Hire–Purchase Agreement because it believed the representation by the plaintiff to be true, in the present case it was probable that the Lessor itself accepted redelivery of the aircraft from a previous Lessee at least in part because it believed the representation made by the current Lessee on the Certificate of Acceptance.

Analysis

In a sense the cases of Lowe v Lombank and Olympic Airlines represent two ends of the spectrum. The first deals with a consumer purporting to accept a vehicle which she had no expertise to inspect, whereas at the other end of the spectrum Olympic Airlines involves a sophisticated commercial Lessee which in fact used its expert knowledge to carry out a detailed inspection of an aircraft with the opportunity to require the Lessor to remedy defects before becoming contractually bound.

In relation to performance of the equipment a Certificate of Acceptance is likely to have limited use for Lessors for 2 reasons:-

(1) any statement or representation limiting a Lessee’s rights in relation to the performance of equipment will be an exclusion clause which will normally be subject to the statutory test of “reasonableness” under the Unfair Contract Terms Act 1977; this did not apply in Olympic Airlines because of the cross-border nature of the transaction, but normally the courts can be expected to be hostile to statements or representations made by Lessees on standard documentation prepared by Lessors seeking to have the effect of restricting or excluding the Lessee’s rights to a remedy; and

(2) in any event Certificates of Acceptance would be restrictively construed so as to cover only obvious defects which should have been revealed by a non-expert inspection, and in the case of most modern equipment involving software or relatively sophisticated technology inspection by a Lessee without the benefit of expert assistance would be unlikely to reveal defects.

Confirmation of Delivery

However, Certificates of Acceptance have a vital role to play in protecting Lessors against complaints by the Lessee of non–delivery or delivery of the wrong equipment. Even in the case of Lowe v Lombank the Lessee would have struggled to challenge the fact of delivery of the correct car as opposed to the accuracy of her statement confirming that the car was satisfactory in all respects.

In practice there are many occasions in which a Lessee seeks to dispute the fact of delivery either at all or by alleging that the wrong specification of equipment was delivered, and it is in these cases that the presence of a Certificate of Acceptance has proven to be a vital weapon in Lessors’ armoury in litigation over recent years. The whole point of a Certificate of Acceptance or a delivery check carried out by a Financier is to ensure that it is in order for the Supplier to be paid in circumstances where the Financier never has sight of the equipment, and is therefore relying on the Lessee to confirm delivery in accordance with its requirements.