A Case Study in Rental Engine Warranties – Agape v. Covington

A Case Study in Rental Engine Warranties – Agape v. Covington

For aircraft owners planning is the key to a successful scheduled engine overhaul event.  Owners seek estimates, select an overhaul shop, arrange for a rental engine and set the date for an engine exchange months in advance of a scheduled overhaul.  Typically there will be at least two significant legal documents associated with this event.  One is the engine overhaul agreement which sets forth the key liability terms, the detailed scope, a schedule and the expected cost associated with the engine overhaul.  The second is the engine lease agreement which governs the lease of a substitute engine for use during the period needed to complete the engine overhaul.  This “rental”, as they are commonly referred to, is often supplied by an overhaul shop as an accommodation while the customer’s engine is in the shop so that their aircraft can remain operational.  The accommodation, which is not free, is an alternative to being grounded.

Of all the details associated with this process the one that gets the least attention is usually the engine lease agreement.  These documents are often short form agreements described as “standard”.  To the extent they get much attention the negotiation usually revolves around commercial issues related to the hourly rate for the rental.  In most instances the boilerplate goes unread but if questioned an Owner may be told “take it or leave it – no one is required to accept a rental in association with an overhaul”.

The recent case Agape Flight, Inc. v. Covington Aircraft Engines, Inc. (E.D. Okla., 2012), presents a strong argument for the use of good warranty language in an engine lease agreement.  In a Motion for Summary Judgment, the plaintiff, Agape, made numerous claims including a breach of warranty claim arising out of the December 2007 crash of their aircraft.  One of several defendants, Covington, supplied the rental engine.  Covington argued that the claim fails because they complied with the express warranty in the contract between the parties, and that the contract excludes all implied warranties.

In its simple form the background is not unusual.  Agape operates an aircraft powered by a PT6A-11a engine manufactured by Pratt & Whitney Canada Corporation.  In association with a schedule engine overhaul it contracted with Covington to provide a rental engine.  At the time of the installation of the rental on Agape’s aircraft there were no FAA required inspections due on the rental or its associated fuel pump.  Covington conducted a run-up of the rental prior to placing it on Agape’s aircraft and had certified the engine as compliant with FAA requirements.  After operating the rental engine for approximately five weeks (93 hours), Agape conducted a required in-situ inspection of the fuel pump and detected no unusual wear or tear.  It was 33 hours of service later when the aircraft crashed in the ocean near the Bahamas.

The rental agreement between Covington and Agape included an express warranty by Covington that “at the time of delivery the rental engine will be in flight-worthy condition and conform to applicable P&WC specifications.”   The rental agreement further excluded all other warranties by providing that “this warranty is given in place of all other warranties, express or implied, including without limitation any warranties as to the merchantability or fitness for purpose of the rental engine.”  Agape claimed that the warranty provision should be rescinded and if rescinded that the warranty of fitness for a particular purpose and merchantability can be imposed on Covington.  The Court responded as follows:

“With respect to the existing limited warranty provision that the Engine would be flight-worthy, the record is undisputed that Covington complied with its obligations. Prior the Engine being placed in Agape’s Aircraft pursuant to the November 7, 2007, Rental Agreement, the Engine had been certified as airworthy … In addition, Covington conducted run-ups of the Engine before placing it on Agape’s Aircraft. … Moreover, Agape itself conducted an inspection some five weeks and 93 hours of service after taking delivery from Covington and Agape certified the Engine as airworthy at the conclusion of its inspection.” 

Finding in favor of Covington the Court issued a summary judgment on the breach of warranty claim.  In this instance the often overlooked rental agreement and warranty language protected them from becoming the insurer of Agape’s flight operations.

 

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