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April 10, 2024 Feature

Focus on General Terms Agreements

Faraz Naqvi and Sengova Kailondo

An airframe or engine general terms agreement (GTA) is an umbrella term for any agreement between (a) an entity that has an interest in an airframe or engine (for example, an airline or a lessor) and (b) a maintenance and repair organization (MRO), in relation to the MRO’s provision of certain services in respect to such airframe or engine. The types of services that GTAs cover are diverse and can range from airframe maintenance, to engine overhaul, to flight-testing and even fuel-related services. This article focuses on MRO-type services.

Why are GTAs of vital importance these days?

Imagine a scenario where the technical team of an aircraft leasing company receives an email late Friday in relation to the entry by the company into an engine GTA. The context is that an aircraft is coming off lease with an unserviceable engine—and that engine needs to be inducted with the MRO by the following Monday to ensure it is repaired in time for onward lease to a new airline customer. The MRO sent the technical team a “standard” agreement for signing only, informing them no changes are allowed “for us to get this done by Monday.” The technical team assumes the GTA is nonnegotiable, and with a view toward not losing the induction slot with the MRO, the agreement is signed as is. Fast-forward six months and it is clear that the MRO negligently repaired the engine and the airline customer is required to ground the aircraft. As a matter of urgency, the technical team now sends a copy of the engine GTA to you as in-house legal counsel for review so you can advise on the company’s legal options. Following your review of the GTA, it is unfortunately clear that the warranty clauses in the GTA are very limited, the warranty claim process is subject to the full discretion of the MRO, and you can only litigate the GTA in the local courts of the MRO’s jurisdiction.

The reality is that many airlines and lessors primarily focus their attention on their aircraft financing, leasing, and sale documentation and tend to devote less attention to GTAs. GTAs come in various forms (from one-pagers to long-form documents), and it can be tempting to simply execute these GTAs in the form provided by an MRO to save time and money, as in the example above, but doing so does not often achieve the desired results.

Moreover, the post-COVID, high-inflation landscape has impacted MROs disproportionately. The aviation industry is not immune to the supply chain issues and labor and materials shortages that plague the wider economy and, as a result, MROs are claiming excusable delays like never before. In addition, recent manufacturing defects have significantly disrupted entire aircraft or engine types, creating significant pressure on the relevant manufacturers and their approved MRO network. Such events have prompted customers to review exclusivity arrangements through a new lens, recognizing that delays need to be managed actively to return aircraft to revenue-generating service as soon as possible. All the while, prices have been consistently escalating and without well-negotiated caps and collars, longer-term GTAs could result in expensive, unplanned costs and prove to be even more disruptive to business.

Well-negotiated GTAs can address lessons learned in the past, but, crucially, they can also have an eye on the landscape that customers will find themselves in for years to come. GTAs can have high-value implications and are the most likely source for disputes and litigation. Well-drafted GTAs are therefore vital for avoiding issues in the future and preventing any negative impact on an airline’s or lessor’s business.

The Five Ws for Negotiating GTAs

So, how can you protect your business or client when entering into a GTA? You should ask and be able to answer the following questions that begin with five crucial “Ws”:

  1. Who: Who are you contracting with? Check whether the party entering into the contract is one who has the expertise and credit standing to perform its obligations, rather than, for example, a local subsidiary that may not provide the same warranty coverage as its more established parent.
  2. What: What is being contracted for? Ensure that the scope of the services is clearly defined and there is clarity on the performance required from the MRO.
  3. Where: Where are the services to be performed? Determining the location of the services is key, especially if you need to exercise inspection rights or arrange a ferry flight to resolve warranty claims, for example.
  4. When: When are the services to be performed? Consider the slot or induction obligations and the relevant timing considerations for when the services need to be completed by; and
  5. Why: Why do you need a GTA? Check whether having the work performed by the MRO under a GTA is necessary or whether the relevant work can be managed through a lessee or buyer as a predelivery or postdelivery obligation.

Key GTA Clauses

Though forms of GTAs can vary wildly, there are certain clauses you should look out for or request to insert when negotiating GTAs. The below is not an exhaustive list but is intended as a useful prompt:

  • Standard of work: The GTA should expressly state an objective standard of service that the MRO must comply with, especially as this will support the standard of care in relation to a potential negligence claim should the work not progress as hoped.
  • Quality of materials: If products are being supplied, a specific description of the type and quality of such products should be detailed in the GTA; do not forget to include restrictions on PMA (Parts Manufacturer Approval) parts and DER (Designated Engineering Representative) repairs, if needed.
  • Staged payments: Usually, GTAs that cover extended maintenance require payment following the completion of certain milestones, so ensure that you have a degree of control in determining when the relevant milestone has been achieved and the ability to dispute payments without the MRO being entitled to suspend its work.
  • Repairer’s lien: Many legal systems, including English and New York law, will impose a repairer’s lien on an aircraft for unpaid amounts; ensure that the MRO cannot extend these rights beyond the affected aircraft to the rest of your fleet.
  • Warranty: The warranty clauses should be connected to the standard of work expected (i.e., you can claim under the warranties if the relevant standard is not complied with) and the process for bringing a warranty claim should be clearly set out.
  • Exclusion of liability: English and New York courts will generally enforce a limitation of liability clause in favor of an MRO, so you should not agree to any provision that limits claims against an MRO for its negligence or willful misconduct.
  • Indemnity: Ensure that the indemnity granted by the MRO in your favor is not unduly limited and that you are not being asked to indemnify the MRO in circumstances that are not appropriate.
  • Insurances: Ask the MRO for copies of the MRO’s insurance policies in relation to hangar keepers and product liability coverage at levels acceptable to you so you have the relevant information should you ever need to rely on their insurances.
  • Intellectual property (IP): If IP rights will arise in the provision of services by the MRO, ensure that these IP rights relating to the aircraft are assigned or transferred to you or, if not capable of being transferred, that you and the relevant operator are licensed to use such IP rights for operation and ownership purposes.
  • Delays: Distinguish between excusable and inexcusable delays and include an express resolution process to identify and notify the occurrence of a delay and to mitigate the effect of delay events. As an MRO’s timely completion of services can often be the gating item to a lessor delivering an aircraft to a lessee or the return of an aircraft to revenue service, it is important to ensure that there are clear contractual terms in place with the MRO to limit the impact of any delay.
  • Subcontracting: MROs often require the ability to subcontract their services to third parties. While this may be reasonable for specialist repairs, ask yourself where your equipment will be and what coverage you have if the repair by the subcontractor does not go according to plan.
  • Sanctions, anti-bribery, and corruption: Ensure that there are protections in place that require compliance by the MRO and allow you to terminate the GTA if a breach occurs.
  • Governing law and jurisdiction: Ensure that the chosen governing law and the forum for resolving disputes enable the parties’ rights to be determined with clarity and disputes to be settled efficiently and without undue expense.

Though there are other points to consider, the above should provide a helpful checklist when reviewing any GTA and be a reminder of the provisions you should expect to see.

Clients and internal teams (including commercial and technical teams) should, as a matter of custom, ensure that each GTA is reviewed by in-house or external counsel for the reasons set out in this article. Despite an MRO insisting their form of GTA is non-negotiable, there is usually scope to negotiate any problematic provisions, even if that requires entering into a separate amendment agreement.

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Faraz Naqvi

Hogan Lovells International LLP

Faraz Naqvi, [email protected], is counsel in the asset finance practice in Hogan Lovells International LLP’s London office.

Sengova Kailondo

Hogan Lovells International LLP

Sengova Kailondo, [email protected], is a senior associate for the asset finance team in the same office.