Trisha Shreyashi[i]

India hosts one of the fastest growing aviation markets. The Indian aviation market  prefers leasing planes in order to avoid cost overruns andcumbersome maintenance costs, to plummet debt burdens, and to preserve working capital and  eliminate risks associated with ownership of superseded assets. It is pertinent to note that Indian budget airlines like to procure carriers from international corporations like Airbus & Boeing. Further, Indian airlines prefer to lease carriers from tax efficient jurisdictions like Ireland, China, Singapore, Hong Kong etc. However, since in India, there is no principal legislation governing aviation finance and leasing, this article aims to explore the contemporary developments in the Indian regime with regards to aircraft leasing and the need for aviation policies.

Contemporary developments in Indian regime

Union Budget’21 has proposed tax holiday for capital gain incomes of aircraft leasing and financing corporations. It has also provided for tax exemptions for aircraft lease rentals and royalties paid to foreign lessors. These incentives offer better terms to Indian & foreign carriers who establish themselves in Gujarat International Finance Tec-City (GIFT city). GIFT city has been projected as a global financial hub. In a bid to promote leasing aircrafts from within India, tax incentives have been announced to the International Financial Services Centre (IFSC) in GIFT city.

Aimed at boosting India’s growing aviation strength, these announcements and incentives have attracted set ups of foreign and domestic aviation financiers & lessors alike. Additionally, the pandemic has triggered the demand for private jets and chartered flights, given the need of autonomy, flexibility, privacy, security and convenience of use. The Indian market is thus perfectly set to welcome the arrival of local aircraft lessors and financiers. However, one of the significant questions posed against these incentives is the liability of the lessors and financiers in cases of mishaps and accidents.

Indian position among the international scale

India has ratified and is a signatory to major international air law instruments such as Warsaw convention 1929 i.e., Convention for the Unification of Certain Rules Relating to International Carriage by Air, Hague convention 1970 i.e., Convention for the Suppression of Unlawful Seizure of Aircraft, Montreal convention 1999 i.e., Convention for the Unification of Certain Rules for International Carriage by Air, Chicago convention 1944 i.e., Convention on International Civil Aviation, Cape town convention 2001 i.e., Convention on International Interests in Mobile Equipment and Cape Town Protocol 2001.

Warsaw convention, Montreal convention and Guadalajara convention are key instruments in deciding the international liability for aircrafts. It is to be noted that India is not a party to the Guadalajara convention, 1961. However, as it stands as one of the crucial legal instruments, analyzing it would help us attain a fair idea about how aircraft liability is dealt with.

The Warsaw convention imposes liability on the carrier in cases of death, bodily injury, loss or damage of baggage or cargo. Article 17 imposes liability on the carrier for death, wounding or any bodily harm sustained by the passenger “on board” of the aircraft or in the course of “embarking or disembarking” of the aircraft. Article 18 imposes liability on the carrier for damage or loss of luggage or any goods which occurred during the course of “carriage by air” i.e., when the luggage or goods are “in charge of the carrier”. This liability extends only to the carriage by air, thus, excluding carriage by land, sea or any other means.

However, liability of aircraft carrier under Warsaw Convention is not absolute. Article 20(1) enables the carrier to escape the liability if it has taken all “necessary measures” to avoid the damage. Article 20(2) provides “negligent pilotage” as another escape route to avoid liability i.e., when the pilot is at fault in handling the aircraft in such a way so as to cause damage provided all other agents have taken all necessary measures. Article 21 exonerates liability of carrier partly or in full if it can prove negligence on the part of injured party.

Guadalajara Convention which is often opined as the extension to the Warsaw convention draws a formal distinction between the contracting carrier and the actual carrier. While contracting carrier is a person who makes an agreement with other person or consignor for the carriage of goods, actual carrier is the one who actually performs the carriage. It provides rules to ensure that both actual carrier and contracting carrier are subject to the rules of Warsaw Convention.

As provided under the Montreal Convention, Article 17 and Article 18 imposes liability on the carrier for the death, injury, or bodily harm to the passenger and for loss, delay or damage of goods or baggage. Accordingly, in cases of death or injury of the passenger, the carrier is exonerated from liability only in cases of contributory negligence or any other wrongful act or omission of such passenger. Montreal Convention, thus, imposes a strict liability on the carrier in cases of any injury, bodily harm or death of the passenger.

It is to be understood that the passenger need not prove negligence on part of the carrier, nor can the airline claim the defence that all necessary requisites to avoid the damage has been undertaken. The safety and protection of passengers is of paramount importance under the Montreal Convention. However, in cases of loss or damage to cargo or baggage, Article 18  provides for exceptions in cases of inherent defect, quality or vice of that cargo, defective packing of that cargo performed by a person other than the carrier or its servants or agents, act of war or an armed conflict, and act of public authority carried out in connection with the entry, exit or transit of the cargo.

It is to be noted that this convention prescribes a cap on the damages recoverable from the air carrier under Article 21. Such damages are recoverable as special drawing rights (‘SDRs’), which are supplementary foreign exchange reserves/assets maintained by International Monetary Fund (‘IMF’). If the damages claimed by the passenger exceeds the cap of 100,000 SDRs, the carrier has to prove no negligence or wrongful act or omission on the part of third party so as to limit the damages within the threshold.

Policy framework within India

In India, there is no principal legislation governing aviation finance and leasing and, the rights and liabilities arising thereof. However, various aspects of aircraft leasing and financing are governed under The Aircraft Act (1934), The Aircraft Rules (1937), The Civil Aviation Requirements, and the Carriage by Air Act (1972). The rules contained in the international instruments shall also have the force of law in the country by virtue of Article 3 of the Carriage by Air Act 1972.

Aircraft leasing and financing finds mention under Section 3 – ‘Air Transport’ of the Civil Aviation Requirements. This section elaborates on criteria for leasing of aircraft by Indian operators and applies only to operational lease arrangements, thus, excluding financial and capital leasing. This section mentions three types of operational leasing arrangements i.e., wet lease, dry lease and damp lease. Wet lease is a leasing arrangement where a lessor is in the operational control of the aircraft and provides the entire crew to the lessee. In cases of dry leasing arrangements, the lessor provides the lessee only with the aircraft and the lessee is in the operational control of the same. A damp leasing arrangement is a mix of both wet lease and dry lease, where the lessor provides the aircraft along with a few crew members. Sub-clause 6.3.3 of section 3  makes it clear that in cases of wet or damp lease, the lessor will be “responsible” for the operational control of the aircraft for the duration of the lease. Further, sub-clause 6.4.2 of section 3  specifies that the lessee will be “responsible” for the operational control of the aircraft in cases of dry lease. Thus, the Indian law does not impose liability on the lessors or financers unless such lessor or financer is in the ‘operational control of aircraft’.

It is pertinent to note in here that the term “carrier” has not been defined in any of the conventions discussed above. Strictly interpreting the sections, it is unclear whether carrier includes lessors or not. However, it is a general and common law practice that the lessor and financer are generally not held liable for operator’s actions as long as the ownership and operation can be distinguished and the lessor or financer is not, in any way, involved in the actual operation of the aircraft.

Perusing UK’s Section 76(4) of the Civil Aviation Act, one can observe that when an aircraft has been hired or leased for a period of over fourteen days and the crew operating the aircraft is not under the employment of the owner, lessor or financer, then the hired or lessee is considered owner and they, rather than lessors, are usually held liable. US Federal statute 49 USC § 441122 limits the liability of lessors, owners or secured parties only to those instances where the lessor, owner or financial party is in actual possession or operational control of the aircraft when such death, injury, loss or damage occurred. The same is the case in India as mentioned above.

When we look at the jurisprudence around Article 17 of the Warsaw Convention, there’s a significant dilemma with respect to the terms “embarking or disembarking”. It is unclear whether such terms include any damage while in the airport or while going from the terminal to board the plane. There have been  instances where courts have resorted to two different interpretations. For instance: Day v Trans World Airlines, Inc (1975) and Evangelinos v Trans World Airlines, Inc (1975). In a broadest sense, these terms cover the situations of passengers walking from terminal to the plane and back to the terminal while, in a narrower sense, the terms only cover instances of getting on board and the plane taking off.

Thus, there is bound to be some confusion when there is an integrated approach that is followed for both damage in air and damage on ground. This would lead to different interpretations by different courts. If passenger safety and protection of the plaintiffs is of paramount importance for these conventions, it would be better if the two are distinguished so as to avoid confusion and enable the plaintiff to recover his or her damages from the loss. This lacuna might act as a repellent for the lessor and financier groups willing to move into the local aviation business. Therefore, it is necessary that the policy makers address these issues first, so as to strengthen the Indian aviation ecosystem in essence.

[i] Trisha Shreyashi is a legal draughtswoman and columnist. She is presently pursuing Masters in Law (LL.M.) from National Institute of Securities Market, Mumbai, India.