An aircraft owner must consider a variety of issues when the owner is entering into a purchase agreement to sell an aircraft. One of the biggest concerns an aircraft owner faces is making sure that the buyer is not able to assert claims against the owner after the buyer takes delivery and the transaction closes.
To help limit that risk, aircraft owners prefer to sell their aircraft “as-is, where-is” with no representations or warranties regarding the condition of the aircraft (e.g. airworthiness, all systems functioning, etc.). However, an aircraft buyer doesn’t want to take delivery and close on an aircraft purchase unless the buyer knows the aircraft is in the condition the buyer expects/requires.
One way to address both parties concerns is to use “conditions precedent.” A condition precedent is a requirement that must be met before a party becomes obligated to perform under a contract. In the context of an aircraft purchase agreement, rather than the seller representing certain conditions about the aircraft, the parties agree that the aircraft must be in the agreed upon condition before the buyer is obligated to take delivery and close.
The buyer must then confirm the condition of the aircraft, usually through a pre-purchase inspection. If the condition is satisfied (e.g. the buyer accepts the condition of the aircraft) and the buyer closes on the transaction, then the buyer cannot later claim that the seller somehow misrepresented the aircraft.
The Texas Supreme Court recently issued a decision in which it affirmed the ability of parties to contract for conditions precedent in agreements to preclude unintended consequences. In Energy Transfer Partners, L.P. v. Enter. Prods. Partners, L.P., the Court held that “parties can contract for conditions precedent to preclude the unintentional formation of a partnership.” The Court also observed that a condition precedent can be “waived or modified by the party to whom the obligation was due by word or deed.” But, in the absence of waiver the condition precedent must be satisfied to trigger the parties’ obligations.
Although the Energy Transfer case discusses conditions precedent in the context of whether the parties had entered into a binding agreement or unintentionally created a partnership, the analysis applies equally to other situations, including aircraft purchase and sale transactions. Thus, when an aircraft seller does not want to make representations about an aircraft, inclusion of a condition precedent in the aircraft purchase agreement requiring that the aircraft be in the agreed upon condition will protect the seller and the buyer.
If the aircraft is not in the agreed upon condition, the buyer will not be obligated to take delivery and close. And if the deal does close, the seller should be protected from later claims regarding the condition of the aircraft.
Conditions precedent in aircraft purchase agreements provide protections to both seller and buyer. And here in Texas, clearly drafted conditions precedent in contracts are definitely enforceable.