NON-ASSIGNABILITY - THE ONLY SOLUTION...

We have discussed previously that many aircraft manufacturers adopted a policy seeking to prohibit the buyer from assigning the aircraft purchase contract to an unrelated third party (see August 2010 issue p54). Conversely, most new aircraft buyers feel that this kind of policy unduly restricts them from dealing with a significant change, or changes in circumstances that could arise long after the contract is signed.

Ownership

AvBuyer | 1st January 2011

Back to articles

AvBuyer

The AvBuyer editorial team includes Matt Harris and Sean O'Farrell who contribute to a...
Read More

Is ‘Non-Assignability’ the Only Solution?

We have discussed previously that many aircraft manufacturers adopted a policy seeking to prohibit the buyer from assigning the aircraft purchase contract to an unrelated third party (see August 2010 issue p54). Conversely, most new aircraft buyers feel that this kind of policy unduly restricts them from dealing with a significant change, or changes in circumstances that could arise long after the contract is signed.

To recap briefly, the manufacturers’ perspective focuses on:

(i) the financial solidity of their order backlogs;
(ii) the timely availability of aircraft from their backlogs;
(iii) the absence of price inflation created by artificial demand; and
(iv) production-scheduling, based on booked order backlogs (especially with respect to the capabilities of its suppliers and sub-contractors).

We also looked at how, as the booked backlog increases, existing order-holders may be able to sell delivery positions that will give a prospective buyer a position in the backlog earlier (and possibly cheaper, due to artificially inflated pricing resulting from artificial ‘demand’) than the next available position the manufacturer could offer them.

The manufacturer’s viewpoint is that the sale of a delivery position costs them an incremental sale (and the incremental profit that comes with that sale), and the possibility that the buyer will buy an aircraft from the competition absent the ‘earlier’ delivery position.

Finally, it is considered that buyers who place orders with the sole intent of reselling those orders to third parties at a premium for an earlier delivery position are not ‘real’ buyers, and tend to skew accurate supply and demand analyses.

What the manufacturers’ unwillingness to allow sale and assignment of a delivery position fails to recognize, however, is the possibility of legitimate changes in their customers’ transportation needs, mission requirements, financial circumstances, and/or personal influences (i.e., divorce; catastrophic damage to the buyer’s business or personal holdings; a decline in the buyer’s health; or even death).

Most manufacturers will work with a buyer to address personal issues, but most continue to take a cavalier attitude about anything else.

The foregoing - then - leads us to the critical questions: Do delivery position order-holders truly have no way to get out of their contracts without suffering a fairly harsh financial impact? Conversely, do people or companies wishing to buy a delivery position from an existing order-holder have no way to do so?

BUILDING A PROPER FRAMEWORK
Legitimate solutions are available, but since they are presumed to be based on real changes in circumstance, they must be documented very carefully, and unfortunately must be done under a veil of extreme confidentiality because most manufacturers have refused to allow (and are, indeed, more aggressively defending against allowing) the sale and/or assignment of an order.

With the intent of establishing a proper framework for a delivery position sale transaction, four specific components of a typical ‘non-assignability’ provision must be understood and dealt with properly.

First, it is important to note that manufacturers who include a non-assignability provision in their contracts understand, and have been careful to protect against the buyer’s establishment and subsequent sale of a special purpose company (SPC) whose only asset is the contract (i.e., the aircraft, following its delivery). Many buyers of new aircraft/delivery positions routinely utilize an SPC to manage and operate their aircraft for tax, employee/public awareness, and other perfectly legitimate reasons.

To prevent the sale of the delivery position via sale of the SPC, the manufacturer(s) have created language to the effect that a direct or indirect change of ownership of an asset of the buyer in which the principal asset is (or becomes) the original contract to purchase the aircraft is not allowed. Thus, the designation or post-execution assignment of the contract to an SPC whose only asset is the contract creates a condition that prevents the SPC’s sale to a third party.

Second, the provision usually prohibits an agreement to sell the aircraft prior to its delivery even if the transaction is not consummated until after delivery. Thus, a buyer whose business and/or personal circumstances change – despite their best efforts to prevent the change(s) – long after they enter into the contract is prevented from canceling the contract without incurring significant financial harm in the form of several million dollars in liquidated damages.

Third and fourth are two components of the provision that do, in fact, provide avenues for assignment of the contract to a third party. Specifically, the manufacturer will agree to an assignment to a third party if that party is affiliated with the buyer or is an entity that is providing financing to the buyer for the acquisition of the Aircraft.

Recognizing and understanding these four key components of a typical non-assignability provision can form the basis for certain transaction structures that do not violate the letter of the provision.

That said – and this is critical – both sellers and buyers of delivery positions under contracts containing non-assignability language must thoroughly understand and acknowledge that the terms of the transaction must be structured in recognition of, and without violating the four aforementioned components of this provision.

Further, the optimal approach is one in which the original buyer remains involved through the delivery of the aircraft, and the buyer understands that he will not become the manufacturer’s customer once the transaction is consummated.

In any event, both the buyer and the seller are well advised to seek the guidance of a consultant who has experience in this kind of transaction – of which there are a lot fewer than are claimed!

CONSIDERED LEGAL OPINION
An important consideration for the parties, which should be confirmed by their aviation counsel and/or contracting consultant, is that of the possible result if, even given extreme care on everyone’s part, the transaction is discovered by the manufacturer and the contract is terminated – i.e., the worst case scenario.

Considered legal opinion advises that the basis for the sale and, moreover, the intent of the seller, will provide a compelling defense: if the seller’s circumstances truly have, or are predicted more likely than not to change prior to the aircraft’s delivery, the seller will probably not be found to have speculated on the order.

Further, given the ‘threat’ of the manufacturer’s retention of significant monies (i.e., liquidated damages) if the contract is terminated, the seller can legitimately argue that the sale of the delivery position was the only reasonable means available to avoid financial harm.

Does this opinion suggest that the transaction must be based on the original purchase price of the aircraft (i.e., not provide for any ‘upside’)? In other words, will the argument that the seller was merely trying to avoid financial harm because their circumstances changed fail if the resale price is higher than the original contract price?

Certainly, a higher resale price weakens the argument, but it does not necessarily prove that the seller speculated. Indeed, the burden on the seller will increase, but several factors can help win the argument, including that the seller:

• assumed the risk of the original contract;

• incurred cost-of-money expense relative to all payments made to the manufacturer prior to the resale;

• incurred the expense of counsel and/or consultant
fees and/or commissions for assistance with the transaction;

• did not seek, but took advantage of available market demand – as he/she would have done had the resale waited until after the aircraft’s delivery; and, most importantly

• truly did find, or anticipate finding their circumstances changed in the course of their performance of the contract.

Unfortunately, these arguments will likely only be presented and explained if the manufacturer discovers a resale transaction and moves to terminate the contract, so it is particularly critical that only those with a genuine ‘need to know’ about the transaction be made aware that it is occurring or has occurred. To that end, it is vital that pilots and maintenance technicians, in particular, not share with their colleagues in the industry that ‘my boss bought so-and-so’s delivery position!’

Obviously, this article is not intended to provide legal expert advice. Rather, because the manufacturers whose contracts contain non-assignability language have demonstrated that they aren’t ready or willing to soften their stance on the subject, it seemed appropriate that delivery position sellers and buyers hear the message that there are solutions available, and that there are a few experienced and capable professional aviation consultants who can guide buyers and sellers through this unique process.