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The Dilemma of Liquidated Damages: Even after Default, Fairness Remains a Key Component of Enforceability

By Merrick J. Benn
May 26, 2005

A recent court decision striking down the liquidated damages provision of an aircraft lease should cause lessors to rethink (and possibly redraft), their standard remedies clauses.

In AAR International, Incorporated v. Nimelias Enterprises S.A., Vacances Heliades S.A. and Princess Airlines S.A., 2004 WL 2966659 (N.D. ILL.), No. 99 C 8090 (Dec. 1, 2004), the U.S. District Court for the Northern District of Illinois, applying Illinois law, declared the lessor's liquidated damages clause in an aircraft lease as an unenforceable penalty since such calculation both: 1) permitted spontaneous recovery by lessor of both actual and liquidated damages, and 2) did not take into account the early recapture of the leased aircraft and credit lessee with the difference between the estimated residual value at the end of the lease term and the greater value of the aircraft when it was repossessed.

Whether viewed as an anomaly or not, the AAR decision should serve as a warning to lessors (as well as investors purchasing or taking collateral assignments of leases) to pay special attention to the way their remedy provisions are drafted so as to avoid the unfortunate outcome that befell AAR International, Incorporated (“AAR”).

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