Caught in the middle: the risks of tripartite agreements for aircraft managers
Tripartite agreements are commonplace in aircraft financing, but for aircraft fleet managers they can create competing obligations to owners and financiers, as well as significant liability exposure. Understanding where those responsibilities lie, and where they may conflict, is essential when managing the risks involved.
Melanie Daglish, Aviation Director, ITIC
Aircraft financing can involve multiple interrelated contractual relationships between owners, operators and financiers. One of these is the tripartite agreement, a three-way agreement often entered into at the financier’s request. While the financier has also entered into a loan agreement with the owner, it is the AOC/Part 135 holder and aircraft fleet manager who are the eyes and ears on the asset.
As the party that possesses and operates the aircraft, the fleet manager’s actions can have a material effect on the aircraft’s value, location, insurance and registration. In the event of a breach by the owner of a condition of the finance agreement, the financier will depend on the fleet manager to ensure swift and successful repossession of the aircraft. The tripartite agreement will therefore impose contractual obligations on the fleet manager to co-operate with the financier, especially if the financier is required to enforce their security over the collateral.
This complex contractual structure can give way to some tricky situations for the fleet manager. While engaged by the owning SPV or trust under the management agreement, the fleet manager also assumes obligations to the financier under the tripartite agreement. In the event of a dispute, the financier and the owner may well have different interests. The two agreements co-exist, but not necessarily harmoniously, and could very easily conflict with one another.
So, where does all this leave the aircraft fleet manager?
Their position can certainly be a precarious one. Although tripartite agreements are widely accepted within the aviation industry, the challenge of balancing contractual obligations to both parties should not be underestimated. In the event of a dispute between the aircraft owner and financier under the tripartite agreement, the aircraft fleet manager could find themselves in an impossible situation. By fulfilling their contractual obligations to the financier, they could jeopardise their commercial relationship with the owner.
The tripartite agreement also has significant liability implications for the aircraft fleet manager. By creating a direct contractual relationship with the financier, the tripartite agreement gives the financier a potential cause of action against the fleet manager for losses arising from a negligent breach of the manager’s obligations under the agreement. Without the tripartite agreement, the financier would ordinarily have no contractual claim against the fleet manager, and so the manager assumes a materially greater liability exposure than would otherwise be the case. Crucially, these liabilities are not necessarily intended to be covered by the aircraft hull and liability insurance, which is designed primarily to protect the aircraft and respond to aviation liabilities. The manager’s liabilities are protected primarily under the professional indemnity and directors’ and officers’ liability policies.
By way of example, an aircraft manager may be instructed by the owner to continue operating the aircraft for charter revenue, whilst the financier, concerned about a developing default, requires the manager to restrict charter operations, secure the aircraft’s records and closely monitor its whereabouts. If the manager negligently fails to maintain accurate records or comply with obligations contained within the tripartite agreement, that negligent breach of contract could potentially expose them to two claims: one from the financier under the tripartite agreement, and another from the owner under the management agreement. In those circumstances, the aircraft manager may find themselves facing allegations from two separate counterparties arising from the same negligent act or omission. This reinforces the importance of understanding precisely what contractual duties are owed to whom under each agreement.
The placement of the aircraft’s insurance can also be fraught with danger. Aircraft fleet managers can be contractually responsible under the management agreement for ensuring that appropriate insurance is in place, complying with the requirements of both the owner and financier. If, through negligence, the manager fails to notify insurers of a material change in operation, that omission could result in a coverage issue, the consequences of which could be felt by all parties. The owner may claim that the manager negligently breached the management agreement by failing to preserve the aircraft’s insurance arrangements. The financier, meanwhile, may argue that the same negligent omission amounts to a breach of the tripartite agreement because it has impaired the protection afforded to its security interest. Again, a single negligent act can give rise to a claim for negligent breach of contract from more than one source.
Taking all of this into account, you may be wondering why the owner and aircraft fleet manager would enter into a tripartite agreement in the first place. Often, there is no choice. The loan or lease agreement between the financier and the owner may require a tripartite agreement, which also imposes obligations on the fleet manager that are primarily intended to protect the financier’s interests. However, it should also be remembered that the terms of the tripartite agreement are not entirely unfavourable to the aircraft’s owner and operator. Under the agreement, both benefit from quiet enjoyment of the loan collateral whilst no default exists. Where the operator is an aircraft manager, their right for their management fees to be paid from operating revenue can be recognised in the agreement.
