Air Charter Association of North America – Contract Best Practices
As part of ACANA’s mission to enhance and foster the air charter industry by promoting best practices and professionalism, we are providing our members with this document to help them have a more complete understanding of the primary elements of an air charter broker contract, and to provide guidance on best practices when considering those elements. It is directed primarily for brokers who act as the agent of its client in arranging charter flights, although many of the areas discussed, such as insurance, have general applicability to all broker operations.
This document is also applicable to air carriers that are brokering aircraft that they do not operate. While we remain willing to assist members in any way possible, this Contract Best Practices (CBP) document is intended to provide general advice on the matters covered, and is not intended to provide legal advice covering every air charter situation. Readers should consult their own legal counsel if they have questions about their individual situation. This CBP document, finalized October 31, 2014, is up to date with regard to any regulations issued up to that date. Questions about this document should be addressed to the ACANA Board at www.FlyAcana.org/contact.
As ACANA members are aware, it isn’t as easy as some believe to be in business as a broker, at least if one goes about it the correct way. Various federal agencies have a hand in regulating air charter flights, if not broker activities themselves. Some of the more important ones a broker needs to be familiar with include the following:
– Department of Transportation (DOT): economic regulatory authority; and a primary enforcer of unlawful broker activities
– Federal Aviation Administration (FAA): safety regulatory authority over air carriers
– Department of Homeland Security’s (DHS) Transportation Security Administration (TSA), which regulates air carrier security programs, as well as Customs and Border Protection (CBP), which inspects flights and passengers entering the United States from foreign points
– Internal Revenue Service (IRS): regulates the assessment and collection of federal excise taxes on air transportation
In addition, brokers should acquaint themselves with any state, local business licensing and registration requirements in which they are headquartered and conduct business: in particular, those related to travel. It is always wise to consult an attorney about such matters.
Before entering into a contract with a customer, you must as a broker understand and communicate to the customer the capacity in which you are acting. You may be the agent of the customer, the agent of the operator, a middleman who puts the two parties together or an indirect air carrier, who after proper DOT authorization can sell charter flights in its own right. Importantly, you are not limited to choosing one or the other for your business.
The important thing is to make clear to your customer—for any particular transaction—the capacity in which you are acting and include that status in your contract with your customer. This can provide you protection against DOT enforcement action. Because operating with DOT authority as an indirect air carrier carries its own regulatory requirements, our advice here does not cover such operations.
If you are interested in such operations, you may wish to review the order granting authority to brokers arranging air ambulance charter flights, Air Ambulance Operators, Blanket Exemption, Order 83-1-36, 99 C.A.B. 801 (1983) or DOT’s regulations authorizing persons to sell Public Charter flights, 14 CFR Parts 380 and 381. We also suggest you contact an attorney familiar with DOT requirements if you desire to pursue such authority. Our advice here pertains to brokers—or air carriers that broker aircraft that they do not operate—who seek charter air transportation on behalf of their customers, which primarily means they are intending to act as the agent of the customer, as opposed to the agent of the carrier or a middleman.
Charter Type (Single Entity, Pro Rata, or Public Charter)
It also is important to distinguish in your agreement what type of charter is being arranged, e.g., single entity charter, pro rata charter or public charter. (see 14 CFR Part 212.2 for definitions). DOT expects operators and brokers to know what type of charter they are operating or arranging. For example, if you or a client wants to arrange a public charter flight and sell individual seats on an aircraft, DOT requires that you first obtain authority as an indirect air carrier by filing a public charter prospectus (see 14 CFR Part 380).
Having the charter type clearly stated in the air charter agreement can provide the broker with protection against DOT enforcement action where a client acts unlawfully without the knowledge of the broker, e.g., by selling individual seats on a charter flight without having obtained authority to do so.
At a minimum, we suggest contacting an attorney that is familiar with DOT regulations concerning charter air transportation in order to develop language pursuant to this topic. You also should ask your attorney about the benefits of requiring the customer to certify that the charter will be limited to that described in the agreement, and defining the charter type in the agreement.
Be Clear You Are a Broker
All ACANA member brokers understand and have agreed to avoid consumer confusion about their status as brokers, and not air carriers, including providing prominent notice on their websites of this fact. However, since this has been the primary focus of DOT’s enforcement efforts to date, the need for such clarity is evident in a broker’s contracts as well as its dealings with all concerned with its charter services. As discussed below, a broker’s agreements with its customers should clearly state its relationship as agent of the customer in contracting with a carrier for air transportation.
While many brokers try to personalize services for clients, some brokers have caught the attention of DOT for their use of “branding materials” that DOT sees as creating the impression that they are air carriers. For example, DOT has said it would be concerned with a broker who directed an air carrier to use only the broker-branded napkins on a flight, which contained an aircraft logo, perhaps coupled with the flight crew handing out the broker’s business cards. DOT’s general guidance on the role of the air charter broker can be found at http://www.dot.gov/sites/dot.gov/files/docs/BrokerNoticeFinal.pdf.
In addition, in September 2013, DOT proposed, among other things, to license brokers to sell air transportation in their own right as indirect air carriers, while at the same time imposing certain consumer protection requirements on brokers with such authority. ACANA, which has always been a leader in suggesting improvements to DOT’s approach to regulating brokers, filed comments in support of the proposal, with certain conditions. DOT’s proposal in its entirety can be found at http://www.gpo.gov/fdsys/pkg/FR-2013-09-30/pdf/2013-23142.pdf and ACANA’s comments can be found at http://www.regulations.gov/#!documentDetail;D=DOT-OST-2007-27057-0046. DOT set a target date for a final rule in the fall of 2014, but that date could slip.
Broker agreements with a client should authorize the broker to enter into an air charter agreement(s) on behalf of the client, i.e., the client agreement should designate the broker as the agent of the customer in procuring charter flights on the client’s behalf. The watchword for brokers dealing with a client (or one-time customer), both orally and by written contract, is trust. Disclosure can help you earn that trust, not to mention avoiding regulatory issues. Full disclosure up front can help avoid later misunderstandings that might crop up.
Disclosure by a broker not only involves being up front with a client about the broker’s status but advising the client in advance of any relationships with carriers or other vendors that might be perceived to bias the broker’s recommendations to the client.
A broker can also protect itself by including a provision in the broker-client agreement that provides for client approval of a charter flight before the contract with a carrier is signed and ensuring it actually obtains the client’s approval for the trip in writing before signing a contract with a carrier. Brokers should always make clear that the agreement they are signing with a carrier for a charter flight is signed on behalf of the client, e.g., “As Agent for Customer XYZ.” This is because DOT looks for “privity of contract” between the customer (your client) and the carrier. This means the client should be able to hold the carrier to the terms of contract as signed even without your future involvement, if necessary. Omission of this agency language may be construed by DOT as the broker entering into a contract as a principal, which is presently prohibited, and lead to an investigation by the agency. Thus, a broker who is viewed by DOT as having signed a contract for air transportation with a carrier and having resold that air service to a customer will be subject to enforcement action for having held out and sold air transportation without authority. That is why it is important for a broker to have both the actual authority of the client to act as their agent and to ensure that agreements with carriers on behalf of the client reflect that arrangement.
Other Matters to Consider When Drawing Up a Contract
Quotes to clients for an air charter flight or related services should state clearly that they are not binding contracts. If the quote is an estimate, not based on actual aircraft availability, the quote should disclose that fact as well.
A broker should include language in its agreement with their client that states departure times and anticipated flight schedules are not guaranteed and can be affected by a host of factors, such as weather, air traffic control requirements, slot approvals, availability of aircraft and passenger services. The actions that will be taken in such an event and who bears responsibility should clearly be spelled out in both the broker-client and broker/client-carrier contract.
Payments & Cancellation
Client funds should be paid into an air carrier escrow account whenever possible, but in all instances when required by law. When such an account is required by law or otherwise used, brokers should require carriers to verify in writing that the account is an escrow account as well as independently verify this information with the bank. If funds are not required to be escrowed, it is important to ensure that the customer is aware of this fact.
Brokers are strongly encouraged to offer escrow capability to customers for funds under the broker’s care and control. Cancellation terms contained in the broker-client and broker/client-carrier agreements must be consistent to ensure that any cancellation charges owed by the customer are sufficient to cover the cancellation charges of the operator. Both agreements should also contain language making clear that failure to make payment pursuant to the agreement is a breach of the agreement that may trigger cancellation of the flight(s).
Credit Card Payments
There are a number of compliance requirements relative to credit card payments. Some credit card companies do not allow the credit card to be charged until after the flight has operated. Instead, the broker or operator should authorize the card, and then charge the card (or accept some other form of payment) after the flight. This can create issues with customers disputing charges in order to avoid payment (or to negotiate a lower payment) for the charter services. ACANA strongly encourages members to seek the advice of an attorney in order to develop agreement language that protects them to the fullest extent possible.
It’s also important that the identity of the cardholder is verified. This can include requiring a copy of a government issued photo ID and a copy of the front and back of the credit card. You can additionally ask the credit card company to contact the cardholder to verify his/her purchase isn’t fraudulent.
Although not part of the air charter service contract itself, but important to know regarding the use of credit cards: federal law requires that all credit refunds be processed (transmitted to the credit card issuer) within seven days of the day that complete information on the refund has been provided to the company that charged the card.
Agreements between broker and client should be as specific as possible, spelling out who is authorized to request or to approve additional charges, as well as how those additional charges will be paid. These might include de-icing; excess block hours; taxes; what will occur and who is responsible in the event of a mechanical or other event that delays the operation of a flight or necessitates subservice; diverts the flight; or requires a flight cancellation. This will help avoid or resolve situations where customers assert they did not request or approve additional services and are reluctant or refuse to pay.
Given the volatile nature of fuel surcharges and variable manner in which they are calculated, they deserve special consideration and explanation by a broker to its client. Agreements with carriers should include not only the fuel base utilized for the pricing but should also include how fuel surcharges are calculated.
Force majeure clauses are generally included in contracts to absolve parties from extraordinary and unforeseen matters deemed beyond their control, such as war or strikes or matters considered “acts of God,” such as hurricanes or other weather events. Brokers should ensure that any such provisions are consistent between broker-client and broker/client-air carrier contracts. If for example an air carrier includes “weather” as a force majeure event, a similar provision should be included in the broker-client contract for this particular trip if that eventuality isn’t already covered in any general agreement between the two, such as the agency agreement. Otherwise, the customer may assume that the carrier is responsible for providing a substitute aircraft in the event of a weather-related event, when in fact, contractually they are not, and the customer may look to the broker to make good on any additional expenses the customer incurs.
In addition, careful review should be made of claims by a carrier involving so-called force majeure, which may be deemed not to be beyond the control of the carrier. For example, in at least one case, DOT found that an air carrier had improperly sought to invoke its general force majeure clause to absolve itself from responsibility for expenses otherwise due passengers arising out of cancellations caused by a computer malfunction, an event DOT found to be within the carrier’s control.
Brokers should include in all contracts a clause that states that the agreement is the entire agreement, and that no other communications whether oral or in writing apply in order to avoid disputes over the terms of the contract. This is especially important for protracted and/or drawn out negotiations whereby the terms may have changed over time.
Federal Excise Taxes
It is essential for contractual purposes that brokers be familiar with federal excise taxes (FETs) applicable to air transportation of persons and property, including not just the amounts of FETs but when they are assessed and who collects and remits FETs to the government. For example, as a general matter items not related to the air transportation itself, such as commissions, catering, and limo service are not taxable so long as they are stated separately on an invoice, and there are other exemptions based on aircraft size and/or nature of the operation. Knowledge of these provisions is essential when drawing up a contract with a carrier.
A broker’s agreement with a carrier on behalf of its client must be consistent with the broker’s agreement with its client, particularly when it comes to responsibility for costs associated with required services in addition to the basic air transportation. This includes all material terms and conditions, both inclusions and exclusions, such as de-icing; excess block hours; taxes; what will occur and what the parties’ respective responsibilities will be in the event of a mechanical or other event that delays the operation of a flight or necessitates subservice; diverts the flight, or requires a flight cancellation.
Brokers must be careful not to indemnify the client on behalf of the air carrier unless the carrier has agreed to include corresponding indemnity language in the charter flight agreement.
Dual indemnity affords the benefits of indemnity to both parties of a transaction. A sample indemnity clause follows:
Charterer agrees to indemnify and hold (broker/carrier) free and harmless from, and to defend (broker/carrier) against any and all claims, actions, and demands asserted against (broker/air carrier), including any legal fees and expenses incurred in the defense of such claims actions, demands, arising out of act(s) or omission(s) of Charterer or Air Carrier(s), its agents, officers, employees or flight participants.
(Broker/air carrier) agrees to indemnify, to the extent allowed by law, and hold Charterer free and harmless from, and to defend Charterer against any and all claims, actions, and demands asserted against Charterer including any legal fees and expenses incurred in the defense of such claims, actions, demands, arising out of act(s) or omission(s) of broker or Air Carrier(s), its agents, officers, employees or flight participants.
As a general matter, governing law language allows the parties to agree what state law will apply to any agreement in the event of litigation. If litigation is commenced, brokers would benefit by requiring that any lawsuits be filed in the state where they are best-equipped to bring or defend the claim. Let’s say for example there is a dispute with a client that is based in New York, and the broker is based in California. Unless there is governing law language in the agreement, chances are the client will file the suit in New York. The result will be costly travel and time spent in New York. Perhaps just as significant, unless your attorney is licensed to practice in New York, you will have to retain a different law firm. This issue also may arise with respect to contracts with a carrier that a broker enters into on behalf of its client and the same principle applies.
Arbitration clauses often are an effective means of dealing with disputes without the high cost and drain on resources associated with litigation. They might be used in connection with your agreement with a charter customer or your agreement with a carrier on behalf of a customer. Check with your attorney regarding their effectiveness overall in your state as well as how to craft an arbitration clause, as state laws vary significantly. Following is a sample arbitration clause provided by United States Arbitration & Mediation. While this clause refers to lease agreements and was not designed for air charter agreements, it may be a beneficial starting point to understanding arbitration clauses and to whether you think they might be useful in your business. As always, contact your attorney for any advice regarding your agreement. This clause has been modified for use in a variety of states.
Dispute Resolution. Any controversy or claim arising out of or relating to this
Lease, the relationship resulting in or from this Lease or breach of any duties hereunder
will be settled by Arbitration in accordance with the Commercial Arbitration Rules of the
1. S. Arbitration & Mediation, Midwest (“USA&M”) or the American Arbitration
Association (“AAA”). All hearings will be held in _____________________ before an
Arbitrator who is a licensed attorney with at least 15 years of experience in commercial
law. A judgment upon the award rendered by the Arbitrator shall be entered in a Court
with competent jurisdiction. The Federal Arbitration Act (Title 9 U.S. Code Section 1 et.
seq.) shall govern all arbitration and confirmation proceedings. As a condition precedent
to the filing of an arbitration claim, the parties agree to first mediate any claims between
them at USA&M or AAA. Any party refusing to mediate shall not prevent the other
party or parties from pursuing their claims in arbitration. The parties will share the cost
of mediation equally. Nothing herein will be construed to prevent any party’s use of
injunction, and/or any other prejudgment or provisional action or remedy. Any such
action or remedy will not waive the moving party’s right to compel arbitration of any
dispute. The parties agree to also meet and negotiate in good faith in order to resolve any
disputes which may arise between them.
Below is another sample found on the JAMs website www.jamsadr.com/clauses:
JAMS Standard Arbitration Clause for Domestic Commercial Contracts
Any dispute, claim or controversy arising out of or relating to this Agreement or the breach, termination, enforcement, interpretation or validity thereof, including the determination of the scope or applicability of this agreement to arbitrate, shall be determined by arbitration in
JAMS Standard Arbitration Clause for International Commercial Contracts
Any dispute, controversy or claim arising out of or relating to this contract, including the formation, interpretation, breach or termination thereof, including whether the claims asserted are arbitrable, will be referred to and finally determined by arbitration in accordance with the JAMS International Arbitration Rules. The Tribunal will consist of [three arbitrators/one arbitrator]. The place of arbitration will be [location]. The language to be used in the arbitral proceedings will be [language]. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.
A confidentiality clause is a useful step for protecting both parties from having the terms of an agreement disclosed to the public, including competitors. With certain limited exceptions, however, e.g., attorney-client privilege, the government, including the DOT, FAA, IRS, and DHS, will be able to obtain access to any communication between you and your client (or an air carrier) relevant to an investigation.
No federal regulation currently requires a broker to carry insurance of any kind (but check state and local laws related to your business). DOT has minimum third party liability insurance requirements applicable to air carriers, but they haven’t been updated for many years; they’re generally considered inadequate for today’s air carrier operations. Although many if not most carriers far exceed DOT’s minimum requirements, a broker should confirm with each carrier it uses the types and amounts of coverage it carries, for your client’s protection as well as your own.
Errors and Omissions Insurance
Errors and Omissions insurance (E&O) is also referred to as professional liability insurance. As the name implies, it protects businesses and their owners if they are sued for errors, omissions or negligent acts allegedly committed while providing services to a client that resulted in financial loss for the client.
ACANA recommends that members carry an E&O policy and that the policy covers defense, settlement and judgment costs. Even if you prevail in a lawsuit, the cost of defending the suit can be a significant drain on your company’s financial resources regardless of the merit of the case.
While there is no “one size fits all” when it comes to insurance for a broker, we believe insurance appropriate to a broker’s operations is essential. E&O insurance typically covers business owners, employees and in some cases subcontractors. It is particularly important to verify if your policy covers legal fees, settlement costs and judgments. Even if you are successful in defending a claim, the legal costs incurred can be very significant.
Subrogation & Waiver of Subrogation
First, let’s define subrogation and the purpose it serves in an insurance contract. When you purchase insurance, you’re transferring the risk of what you’re insuring to the insurance company. The insurance company gives you a contract that promises to indemnify you for a covered loss by payment of a claim. By transferring fiscal responsibility to the insurance company, you in effect waive any right of recovery made by you for restitution from a third party. The insurance company is allowed to subrogate for recovery of damages if a third party is deemed liable.
Think of it as if someone hit your car with a baseball. If you didn’t have insurance, you’d pay for the damage yourself and seek damages from the person who threw the baseball to compensate your out of pocket loss. With insurance, your insurance company pays you for the damage to your car and then the insurance company goes after the baseball thrower— it’s subrogated to your claim for damages against the party that injured you or your property. A Waiver of Subrogation (WoS) prevents an insurance company from subrogating against a particular company or individual.
Let’s set this up in an industry example:
Say that you’ve recently booked a charter flight on behalf of a client. The client’s passengers caused significant damage to the aircraft.
The air carrier’s insurance company will cover the value of the loss, less any deductibles. However, the insurance company can subrogate against the client or the broker (or both) for recovery of damage. A waiver of subrogation on behalf of the broker prevents the insurance company from seeking to recover losses from the broker that were caused by the client. If you requested and received a WoS on behalf of the client from the air carrier’s insurance company, the insurance company would be unable to recover any funds from the client.
It’s important to note that most WoS’s apply to physical damage only. It is rare that a WoS will apply to liability damages (third party property damage or bodily injury). If a WoS does apply to liability, it is often at an additional premium.
Broker Requests for a WoS
A WoS is requested when a party wants to remove its responsibility or another party’s responsibility for any physical damage to a third party aircraft associated with that party’s actions (or inactions). As a broker, provided you have no direct dealing with the aircraft being used, such as maintaining, operating or crewing the aircraft, you may wish to request a WoS as a matter of course.
Client Requests for a WoS
Clients will sometimes request that a broker seek a WoS to guarantee that an aircraft operator’s insurance company will not go after the client for any physical damage to the aircraft. ACANA recommends obliging only the best of clients, those whom you trust and have had previous dealings. As a general matter, insurance companies aren’t likely to grant WoS to clients of chartered aircraft. This would give the insurance company no recourse of recovery from the chartering client if the client damaged the aircraft (think of chartering a rock band and a worst-case scenario inside the aircraft).
A broker should request a WoS in most all cases if able. This further removes the risk from your company by confirming that the aircraft insurer will not subrogate against the broker for its part in chartering an aircraft that suffers third party damage due to the client.
A robust contract should have this set up to where the broker takes no responsibility for the client’s actions in part for damage or liability, and it should also have a proviso for WoS for hull damage when able to secure. It’s important to note that while the WoS request is common, it is dealt with by underwriters on a case-by-case basis in most instances.
The problem with obtaining additional insured status for off-hour or short-notice flights can normally only be managed contractually or via endorsement to an insurance policy. It would behoove all charter brokers and operators to have contracts listed as an “insured contract” under a charter aircraft policy. By having the underwriter recognize your charter contract as an insured contract, it confirms that the underwriter is aware of the contract provisions and the contract becomes approved under the aircraft policy.
Named Additional Insureds
Additional insured status for the broker and the client should be confirmed on all aircraft policies of carriers with which you do business. This guarantees that the insurance company for the carrier will pay defense costs if either brokers or clients are named in a lawsuit against the carrier. Anyone not named as “additional insured” who is named in a suit, along with a carrier, will likely have to pay for their own defense.
In the event of a claim involving additional insured parties, absent a settlement, courts will decide the award amounts to various parties. Accordingly, even though you are an additional insured, you may wish to retain your own counsel to ensure that your individual interests are adequately represented.
Recommended Insurance Levels
Here, we are talking about “non-owned aircraft” liability insurance. As stated above, the type and amount of coverage a broker should have depends on the nature and extent of its operations, including the risk it can afford to take on.
Some insurers recommend that for a broker involved with chartering heavy commercial aircraft, with passenger exposure, a minimum liability limit of $100,000,000 is advisable, while a limit of $5,000,000 may suffice for a broker involved only in chartering small piston aircraft, with light passenger exposure. For brokers that arrange charters that utilize commercial aircraft such as those manufactured by Boeing and Airbus, the minimum recommended liability limit is $750,000,000 or $4,000,000 per passenger seat, whichever is greater.
A broker should consult an expert in this area to assess its coverage needs, as well as which insurer to use based on financial strength, solvency and reputation for handling claims.