March 1, 2001
By John S. Yodice
Anyone who has been involved in the buying or selling of a used aircraft has probably wrestled with this nagging legal problem: Who is responsible for defects discovered in the aircraft after it has been sold?
There are some standard techniques that we have developed over the years to try to address this problem. They are usually very helpful, and they work most of the time, but, as we will see, imaginative lawyers may attempt to find ways around them.
There are two perspectives to consider in this problem: the buyer's and the seller's. The buyer wants to be sure that he is getting the used aircraft in as good a condition as the buyer believes it to be. One of the traditional ways a buyer tries to achieve this is through a warranty, essentially a promise from the seller about the condition of the aircraft. For example, a seller could warrant that the aircraft is in airworthy condition. If the aircraft later proves to have defects making it unairworthy, defects that existed at the time of sale, the buyer has a legal right to go against the seller for breach of this warranty.
But the seller, especially a seller of a used aircraft who is not an aircraft dealer, wants the sale to be final. The seller does not want to be faced with later claims by the buyer about defects in the aircraft. The seller's typical technique is to sell the aircraft "as is" without any warranties as to the condition of the aircraft.
If a buyer is willing to go forward on an "as is" basis, then he is well advised to arrange for a prepurchase inspection by a licensed mechanic or repair station — preferably one independent of the seller. The prepurchase inspection should include not only the aircraft itself, but also the logbooks, and if possible the maintenance records. A variation on this technique is to get a fresh annual inspection prior to the sale. A fresh annual gives the buyer a current certification by a qualified third party that the aircraft is in airworthy condition. This is a good practice, highly recommended, but even an annual inspection doesn't always pick up defects that later come to light.
So, we say from long experience that even with a prepurchase inspection (and even a fresh annual) and a sale "as is," these techniques don't always stop legal claims about defects that are discovered by the buyer after the sale.
Here is a legal decision that illustrates the kind of claims that can be made. It is worth noting because there are not a lot of reported legal decisions dealing with this situation. That's mainly because these cases are expensive to litigate when compared to the costs of repairs, and so they are usually settled. This case involved a multimillion-dollar aircraft, which probably accounts for the fact that we have the benefit of a legal decision that must have cost the parties a lot of money to litigate.
The case involved the sale and resale of a 1969 Hawker-Siddeley business jet. The first seller had owned it for more than 27 years. Then the owner sold it "as is, where is" to a commercial airplane refurbisher. The refurbisher, perhaps after some spiffing up, then sold it to our plaintiff-buyer, again "as is, where is." (The buyer became the plaintiff in the lawsuit we are reporting, so we'll call it the "plaintiff-buyer" to distinguish it from the refurbisher-buyer-then-seller.) It sold for $2.2 million. Because the sale was "as is," the plaintiff-buyer had a prepurchase inspection done on the aircraft, and based on the inspection, bought it.
Guess what? More than a year after buying the Hawker, the plaintiff-buyer discovered corrosion on various parts. It came to light when the plaintiff-buyer hired an aircraft repair and maintenance company to do an inspection of the plane. The corrosion was extensive enough to render the airplane unairworthy, and very expensive to repair.
The plaintiff-buyer wanted satisfaction from someone and ultimately sued the first seller as well as the company that did the prepurchase inspection. For some reason not explained in the court decision, the plaintiff-buyer did not sue the refurbisher from whom he bought the plane. And the decision does not tell us what happened to the part of the suit against the prepurchase inspector. But the decision goes into some detail about the claims against the first seller, and gives us some interesting insights into the law that was applied.
The plaintiff-buyer, who paid $2.2 million for the plane, claimed as damages in the lawsuit $2.45 million in losses, consisting of the costs for repairing the corrosion, lost leasing profits, and the subsequent sale of the diminished-value Hawker for $950,000.
The plaintiff-buyer alleged three causes of action against the first seller. The first two were in tort (as distinguished from contract, since there was no contract of sale between the first seller and the plaintiff-buyer). The torts were fraudulent misrepresentation and negligent misrepresentation. The third cause of action was for breach of express warranty.
All three of these causes of action relate to a very familiar and recommended technique — the review of the aircraft's logbooks prior to purchase. The Hawker's logbooks indicated that the aircraft had undergone a 600-hour and a 48-month radiographic (X-ray) inspection. The results of the inspection were recorded in the Hawker's logbooks. The logbook entry noted no problems and stated that the Hawker was "approved for return to service." In fact, the results of the X-rays revealed 22 points of corrosion. The logbook entries, however, do not indicate that the first seller discovered or repaired the corrosion.
Based on the logbook entries and the X-rays, the plaintiff-buyer alleged that the corrosion existed when the first seller owned the Hawker, and the first seller either had actually discovered or should have discovered the corrosion.
In these misrepresentation (tort) claims, the plaintiff-buyer alleged that the first seller misrepresented the Hawker's condition when the first seller's mechanics failed to record the corrosion in the airplane's logbook. The plaintiff-buyer claimed that it relied on these misrepresentations in the logbook before deciding to purchase the Hawker from the refurbisher. In the breach of warranty (contract) claim, the plaintiff-buyer claimed that the logbook entries constituted express warranties of the Hawker's condition and airworthiness.
The first seller filed motions to dismiss the plaintiff-buyer's claims. As a procedural matter, in ruling on a motion to dismiss, the court accepts as true the well-pled allegations of the complaint. Even considering the allegations as true at this stage in the proceedings, the court, in a written decision, dismissed the fraudulent misrepresentation and negligent misrepresentation claims. The court asked for further briefing on the breach of express warranty claim.
In dismissing the misrepresentation claims, the court applied the Michigan economic loss doctrine. Under that doctrine there is no cause of action in tort for fraudulent or negligent misrepresentation in connection with the sale of an allegedly defective good where the only loss suffered is economic (as opposed to "unanticipated physical injury"). Rather, "where a purchaser's expectations in a sale are frustrated…his remedy is said to be in contract alone, for he has suffered only ‘economic losses.'" Of course, in this case, there was no contract between the first seller and the plaintiff-buyer, and the losses were economic.
Many of you may remember that I previously reported two cases indicating that the display of aircraft logbooks by a seller to a buyer can constitute an express warranty in contract that the entries are accurate (see " Washington Counsel: Warranties — Expressed and Implied," June 1981 Pilot). Since there was no contract in this case, the plaintiff-buyer presented a different question. That is, do logbooks in and of themselves create a duty that may be the basis of a lawsuit in tort by a purchaser who relied on them? The court had something to say on this interesting question. The plaintiff-buyer sought to avoid the application of the economic-loss doctrine by arguing that the former owner had an "extra-contractual" obligation to make accurate and complete disclosures in the Hawker's logbook. This was an attempt to create a duty based on the federal aviation regulation that requires accurate logbooks. The court held that the Federal Aviation Act does not provide for a private right of action for violations of the act or regulations promulgated under the act.
On the breach of warranty claim, the first buyer sought dismissal on the basis that there was no contract between the parties, and furthermore that there was no legal basis for extending the alleged warranties to remote buyers. The court indicated that it was not ready to address the breach of warranty claim. It raised the issue of whether the plaintiff-buyer's failure to sue the refurbisher from whom it bought the plane may preclude the court from rendering a judgment on the dispute between the first seller and the plaintiff-buyer. The court considered this a threshold issue to the breach of warranty claim, and wanted more briefing from the parties on this issue.
Two of the three causes of action were dismissed, and the third is awaiting further briefing by the attorneys. The current status of the case is that it is now stayed because of an intervening bankruptcy, so we will not soon know the end of the story. Nevertheless, this legal decision gives us some interesting insights into how enterprising lawyers may try to avoid the techniques that have been developed to put some certainty into aircraft sales transactions.
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