In this month’s blog we focus on the liability regime relating to aviation product manufacturers. For the purposes of this discussion will assume that the product being purchased is a new item which is either an aircraft or a major aircraft component such as an engine or landing gear. Manufacturers of smaller, lower value components/products may seek to impose terms which are less comprehensive than those which we refer to here.

In considering the potential exposures faced by product manufacturers we need to consider two primary categories of potential claimants:

1. The entities which purchased the product, for example aircraft operators, whose rights and obligations will be derived from the purchase contract; and
2. Passengers and other entities who have no contractual link to the product manufacturer, but who sustain loss, damage, personal injury, or death as a result of a defect in the product.

Turning first to the purchasers of the product, their relationship with the product manufacturer will be governed by the terms of a Purchase Agreement. Frequently, these agreements comprise a relatively short Purchase Agreement detailing the product being purchased, the agreed price, delivery date etc. However, this agreement will incorporate by reference a more comprehensive and frequently standard form set of terms and conditions which sets out in detail the provisions relating to the manufacturer’s liability to the purchaser for any defects in the product being sold.

Although the detail will vary from manufacturer to manufacturer, the general principle behind the drafting of the standard terms and conditions can be summarised as follows:

1. The manufacturer will warrant that the product will be free from defects in either manufacture or design. That warranty will be limited either by time or usage. For example, the product may be warranted for a period of 12 months after the date of delivery, or the warranty may be limited to perhaps 10,000 flight cycles after delivery.
2. The warranty will be provided in substitution for any and all other causes of action and claims that the purchaser may have against the product manufacturer for any defect in the product. In effect, the purchaser relinquishes all other potential legal recourse against the manufacturer other than claims under the warranty.
3. In the event that there is a defect in the product, the purchaser will have to notify the manufacturer within specified strict time limits. The manufacturer will then assess the claim and, if the product is found to be defective, it will either be replaced or repaired, usually at manufacturer’s discretion.
4. Liability for any consequential losses arising out of a defect in a product usually are expressly excluded. So, for example, if there is a defect in an engine fan blade which causes it to disintegrate and it then severely damages the rest of the engine, the manufacturer’s liability usually will be limited to the cost of replacing the defective fan blade rather than the cost of repairing the entire engine damaged by the defective fan blade.

Whilst the reader may think that the above is quite onerous from a purchaser’s perspective, it is not the end of the story. In addition to the above, manufacturers frequently impose the following obligations on prospective purchasers:

1. The purchaser may be required to indemnify the manufacturer against claims made against it by third parties. In particular, aircraft manufacturers are anxious to protect themselves against claims in respect of passengers who have either been killed or injured during accidents in circumstances where some defect in the aircraft design or manufacture may have been responsible for the death or injury in question.
2. The indemnity may be unlimited or subject to a specified cap. Either way the manufacturer will frequently insist that the purchaser procures liability insurance adequate to cover the indemnity.
3. As a further layer of protection manufacturers often insist that they are named as additional insureds under the purchaser’s aviation hull and liability policies, with specific waivers of subrogation in favour of the manufacturer.

The net effect of these provisions is to protect the manufacturer, not only from claims made by third parties against them arising out of defective products, but also from subrogated recovery claims by the purchaser’s/air operator’s insurers.

The fact that manufacturers are able to impose such onerous conditions reflects, in large part, the relative bargaining position between manufacturers and purchasers. The reality is that air operators have a relatively limited choice when it comes to commercial aircraft types.  As all of the major manufacturers adopt more or less the same contractual risk management strategy, purchasers have little choice but to except these terms.

Turning now to the second category of potential claimants i.e., third parties to the purchase agreement, for example passengers, absent any contractual agreement, claims by third parties usually will fall to be dealt with either under tortious legal principles i.e., negligence, or under statute, for example, legislation imposing liability for surface damage caused by aircraft.

It will be apparent from the above that the manufacturer will be looking to the purchaser to protect it from claims of this nature by invoking the indemnity provisions in the purchase agreement and/or seeking an indemnity (as an additional insured) directly under the terms of the purchaser’s liability insurance policies.

One issue which does need to be considered is the jurisdiction in which third-party claims may be brought. Many of the major aircraft and large component manufacturers are based either in the United States, the UK, or Europe. As readers no doubt will be aware, the levels of damages awarded in respect of death and personal injury claims in these jurisdictions and, in particular in the United States, can be substantially higher than the damages awarded by the courts in many jurisdictions within the Middle East and Asia. Consequently, even if an air operator is confined to domestic operations within a Middle Eastern/Asian jurisdiction, there is significant potential for claims to be brought against a manufacturer in the United States, the UK or Europe.  Indeed, purely because of the disparity in the potential level of damages that might be awarded, claims against US manufacturers in cases involving non-US carriers following accidents or incidents outside of the United States appear to be the default for US based plaintiff law firms.  Unfortunately, the purchaser (or its insurers) will have to deal with claims wherever they are brought and either settle them or pay judgements at levels which reflect the norms in those jurisdictions.  Inevitably, these potential exposures will be reflected in the costs of insurance.

Readers will appreciate that it is impossible in a blog of this nature to deal comprehensively with all of the issues that may arise in relation to product liability claims. Nevertheless, we hope that it is clear that, because of the contractual risk management strategies adopted by the major aerospace manufacturers, the pursuit of claims alleging defective design and manufacture, either by the purchaser of the product or by third parties who have suffered loss, injury, or death as a result of the same, is likely to be challenging.  

In these circumstances it is imperative that air operators ensure that appropriate insurance is put in place to cover, not only the exposures anticipated in the jurisdictions where the operator conducts business, but also those in which claims against the manufacturer of aircraft or major aircraft component might be made.

Deinon insurance broker will be able to guide you on what products best suit the demands of your business.

Read more about Aviation insurance here or write to us at: aerospace@deinon.ae