In the current climate, it is not unusual for a lessee to allege non-delivery. Aurora Leasing’s Michael Gerson and his solicitor, David Farnell, fought such a case recently. Farnell explains what happened.
Michael Gerson told me that Aurora always insists that the lessee signs an acceptance certificate. "In our position, it would be imprudent to do anything else," he said. "We are not experts in the types of assets which our customers want to acquire, nor do we have the resources to be able to send someone to inspect the assets as they are being delivered."
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The safeguard which may be afforded by the acceptance certificate is two-fold. Most acceptance certificates try to cover two things.
Is it what you ordered?
Fundamentally the acceptance certificate confirms that the lessor has delivered the asset and it corresponds with the description given in the lease itself. Sometimes they will also confirm that the lessee is satisfied with the asset.
The first bit is always useful – the second may not be quite as effective, especially if the lessee is a consumer.
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By GlobalDataIn Michael’s case, the acceptance certificate became important when Aurora Leasing became embroiled in an historic dispute between supplier and lessee.
Michael told me that "Whereas the supplier assured us that it had delivered the assets, which were intangible because they consisted of software and licences, the customer was equally adamant that it had received nothing."
A tricky situation
A confidentiality agreement prevents Michael from publicising all the details of this tricky situation, but he told me how the dispute kept Aurora from recovering any money for several months.
"From the first day we could not understand how the lessee could deny having received the assets, in contradiction of the certificate which its director had signed. Unfortunately the lessee felt so aggrieved that it alleged fraud against the supplier. We of course were piggy in the middle."
Had the case gone all the way to a trial, it would have carried a high degree of risk for both sides involved. There was no contemporaneous documentary evidence to show the assets had been physically delivered or installed. It boiled down to whose witness’s testimony the judge thought was the most credible and which version of the contradictory evidence he had listened to he preferred on the day of the case.
From the outset we identified an argument which could sidestep the conflict of evidence between the supplier and the lessee.
We argued the lessee should be prevented from denying that it had taken delivery of the assets. This is known as estoppel. The idea is that if the lessee represented to Aurora that the assets had been delivered and Aurora relied on that by committing to the lease, then it would be unconscionable for the lessee to contradict its representation. The court should then step in and say to the lessee "no – we’re not going to allow you to do that".
But Aurora had to prove unconscionability. We were concerned that the trial judge might find the lessee had never received the assets and shy away from the estoppel.
Contractual estoppel
We decided to argue a contractual estoppel, following JP Morgan v Springwell [2010] EWCA Civ 1221.
In that case the Court of Appeal decided that if sophisticated commercial parties agree on a factual background for their contract, then the courts should not allow one of them to take issue with that background if it is later shown to be untrue. Springwell concerned a bank’s alleged mis-selling of financial instruments.
The parties contracted on the basis that there had been no pre-contract representations by the bank, even though in reality there had been.
The character of the contract and parties involved made it reasonable for the court to prevent any contradiction of the agreed factual background. We thought there were strong parallels with Aurora’s case, because the parties had entered the lease on the agreed premise that the assets had been delivered.
The contractual estoppel argument may be under-utilised. In an appropriate case, it is a potent weapon for the lessor’s legal team.
Obviously the wording of the acceptance certificate and the character of the parties have to be considered carefully.
The recent case of ACG Acquisition XX LLC v Olympic Airlines (In Liquidation) [2012] EWHC 1070 (Comm) (2012) shows that the courts are increasingly willing to apply the doctrine of estoppel in commercial disputes.
Readers may remember that in that case, the lessee signed a certificate to the effect that an aeroplane had been delivered in accordance with the lease. The Commercial Court held that the lessee should be estopped from contending that the aeroplane’s condition fell short of the standard prescribed by the lease. It will be interesting to see whether the Court of Appeal upholds the decision.
David Farnell is a managing associate at Addleshaw Goddard and specialises in asset finance disputes
