Despite often referring to themselves as “aircraft suppliers,” aircraft lessors are more accurately described as aircraft financiers who also take residual aircraft value risk. In an aircraft lessor’s perfect world, the lessor would never take possession of an aircraft or become involved in the manufacture, configuration, maintenance, repair or operation of an aircraft–because all of those things open the lessor up to claims from a lessee and possibly from third parties in the case of an accident involving the aircraft. In general, aircraft lessors will go to great lengths to avoid taking any risks associated with the physical (as opposed to financial) aspects of an aircraft.
The Disclaimer and General Indemnity sections of the lease agreement reflect this distancing of the lessor from the aircraft. The Disclaimer and General Indemnity sections of an aircraft lease agreement provide that, respectively, (1) as between the lessor and the lessee, once the aircraft is delivered to the lessee, the lessor has no responsibility or liability with respect to the condition of the aircraft and (2) during the lease term the lessee will bear all risks and costs, and will indemnify the lessor for all claims, arising out of the operation, maintenance, etc. of the aircraft. Lessees understand this allocation of risk and responsibility, and it’s rarely questioned in any meaningful way during the negotiation of the lease documentation. “Lessors don’t take operational risk” is a fundamental tenet of the aircraft leasing business.
And so I’m always surprised when I’m working on an aircraft purchase agreement and the lawyer on the other side (representing another aircraft lessor) says “my client insists on cross-operational indemnities in the purchase agreement.” Cross-operational indemnities in this context mean that (simplifying) the seller indemnifies the buyer for claims arising out of the operation of the aircraft prior to the purchase and the buyer indemnifies the seller for claims arising out of the operation of the aircraft after the purchase.
Here’s the seller half of a cross-indemnity (redacted) from a draft agreement I reviewed (representing the buyer):
Without prejudice to the disclaimers in Clause 7 (Condition of Aircraft), the Seller shall indemnify the Purchaser in full on demand on a net after-Tax basis in respect of all Losses suffered or incurred by the Purchaser or any of its officers, directors, employees, servants, representatives or agents arising out of or connected in any way with . . . the purchase, manufacture, ownership, possession, registration, performance, transportation, management, sale, control, use, operation, design, condition, testing, delivery, leasing, maintenance, repair, service, modification, overhaul, replacement, removal or redelivery of such Aircraft, or any loss of or damage to the Aircraft, or otherwise in connection with the Aircraft or relating to loss or destruction of or damage to any property, or death or injury to any Person caused by, relating to or arising from or out of (in each case whether directly or indirectly) any of the foregoing matters and regardless of when the same arises or occurs, or whether it arises out of or is attributable to any act or omission, negligent or otherwise of the relevant Purchase . . . provided that such indemnities shall not extend to Losses . . . to the extent that such Losses arise out of any occurrence or event which occurs after Delivery in respect of such Aircraft.
There was a mirror indemnity given by the purchaser.
In this particular transaction, the aircraft was being sold subject to lease. So, my first question was “why do we need cross-indemnities given that, pursuant to the lease novation, both the purchaser and the seller will be covered by the lessee’s operational indemnity and by the lessee’s insurance?” I also pointed out that as aircraft lessors we usually strenuously try to avoid ANY operational risk on aircraft, but in the draft we are each expressly taking broad, unlimited operational risk for an aircraft operated by a third party. The actual response I received: cross-indemnities are “standard.”
A better response would have been something like “cross-indemnities just fairly allocate existing risk between the purchaser and the seller, they don’t create any risk that isn’t already there.” Well said, but (1) do the cross-indemnities really allocate the risk fairly and (2) would the parties be better off without the cross-indemnity? The same question another way: Does the before-after split really allocate the risk fairly?
One example: seller and buyer agree to cross-indemnities using the above wording and the sale/purchase of the leased aircraft closes. The aircraft crashes and there are lawsuits for injury/death and property loss. Neither the seller nor the purchaser was at fault (no negligence or other misconduct), but the jurisdiction where the aircraft crashed is a strict liability jurisdiction that imposes liability on the owner of the aircraft regardless of fault (e.g., Sweden last time I checked). The cause of the aircraft crash was faulty maintenance by the operator that occurred prior to the sale of the aircraft. Without the cross-indemnities, the purchaser, as owner at the time of the crash, would bear the full liability for the crash (as between the purchaser and the seller); with the cross-indemnities, the seller bears the full liability. Reasonable people could argue about which is the “fair” result, but for the seller the cross-indemnities definitely created an operational risk that it did not have before (once it sold the aircraft).
Another example: Same as the above except the lessee had a history of sloppy recordkeeping of which the seller was aware, but the seller did not tell the purchaser. The crash–in a non-owner strict liability jurisdiction–was the result of bad recordkeeping that occurred after the sale of the aircraft. The purchaser was wholly unaware of any recordkeeping problem. The seller is sued because it was aware of the sloppy recordkeeping, and the seller makes a claim under the cross-indemnity. The cross-indemnity would put at least some (and possibly all) of the seller’s liability on the purchaser–an unfair result in my opinion.
My preference in purchase agreements is to not include operational cross-indemnities and, by remaining silent, to make each party responsible for managing its own liability with respect to the aircraft–regardless of whether that liability could be characterized as arising before or after the sale.
What about naked aircraft (that is, aircraft not on lease at the time of sale)? I think it is the same answer. Parties should manage their own liability (through insurance, prior and future operator indemnities, due diligence, etc.) without assuming broad, uncapped liability under cross-indemnities in a purchase agreement.
P.S., bonus points to those of you who paused on clause “Without prejudice to the disclaimers in Clause 7 (Condition of Aircraft), . . .” in the quoted language above. Yes, I too wonder how that would undercut the seller’s indemnity. Even without that clause, I think you still have a possible conflict between the seller’s disclaimer and the seller’s cross-indemnity. The above clause would make more sense if it said “Notwithstanding the disclaimers in Clause 7 (Condition of Aircraft), . . . .”