This week, I’m looking at De Havilland Aircraft of Canada v SpiceJet, a case handed down in February this year.
The issues considered include the construction of a variation agreement and liquidated damages and penalties.
The claimant in this case was De Havilland Aircraft of Canada Ltd, a manufacturer of aircraft, and the defendant was SpiceJet Ltd, India’s largest budget airline. The parties entered into an English-law purchase agreement in 2017, under which SpiceJet agreed to buy 25 aircraft from De Havilland. SpiceJet paid for and accepted delivery of the first 5 aircraft, but failed to pay the pre-delivery payments for aircrafts 6 to 20 and refused delivery of aircrafts 6 to 8.
De Havilland served notices to terminate the order for the undelivered aircraft, and the agreement as a whole. It sought to claim US $42.95m in liquidated damages in respect of the undelivered aircraft. If liquidated damages were not recoverable, they also sought damages for breach of the agreement.
There were five issues for the court to consider.
First, there was an issue relating to a 2019 change order which varied the scheduled delivery dates for aircrafts 6 to 8 and suspended delivery of aircrafts 9 to 25, leaving the parties to: “make good faith efforts to find an amicable solution to revised terms and conditions for such Aircraft.” As we all know, an ‘agreement to agree’ is rarely a good idea…
The question arose as to whether SpiceJet’s obligation to make pre-delivery payments for aircrafts 9 to 20 was also suspended.
De Havilland claimed the change order did not impact this obligation – it suspended delivery, not payment. It also argued it was entitled to terminate the agreement in respect of aircrafts 6 to 8 for non-payment, and that it was entitled to terminate the whole agreement in the event of a breach that affected more than four aircraft. However, SpiceJet argued its obligation to make the pre-delivery payments was suspended by CO6, and so it was not in default in respect of aircrafts 9 to 20, and that the claimant had no right to terminate in respect of those aircraft.
It also argued that De Havilland had no right to terminate the whole agreement, as any default only related to three aircraft and so did not trigger the claimant’s right to terminate due to a default affecting four aircraft.
The second issue related to breach of a letter agreement. SpiceJet alleged De Havilland was obliged to assist with procuring ‘finance for the purchase of each aircraft’, and that De Havilland had failed to do so. De Havilland argued the obligation was too uncertain to be enforceable, while SpiceJet sought to rely on the ‘prevention principle’ that “the rule of law… exonerates one… part[y] from the performance of a contract when the performance… is prevented and rendered impossible by the wrongful act of the other contracting party.”
The third issue was connected to issue 2 - if SpiceJet was able to establish a breach of the letter agreement had occurred, whether a “no set-off" provision under the purchase agreement meant that its entitlement to a defence or a right to set-off a counterclaim was excluded.
Issue 4 was whether the liquidated damages of US$42.95m amounted to an unenforceable penalty under the terms of the purchase contract and in accordance with principles addressed in the 2016 case of Cavendish Square Holding v Makdessi.
And the final issue was whether De Havilland would be entitled to recover damages at common law if the liquidated damages were not recoverable.
The Court's Decision
The court granted summary judgment for the claimant in relation to issue 1, the construction of CO6. It was reasoned that De Havilland was still obliged to manufacture and deliver the aircraft and required the pre-delivery payments, even if the payments were no longer payable 12 months prior to the re-scheduled delivery dates. The court was also persuaded by the fact a long stop delivery date of August 2023 had been agreed – the obligations for delivery were not open-ended. As such, the court found that, on the proper construction of CO6, SpiceJet was not relieved of its obligation to pay the pre-delivery payments, and De Havilland was entitled to terminate the purchase agreement due to non-payment.
Turning to issue 2, the court found that any obligation on De Havilland to assist with procuring finance would have been “very limited”, as the claimant had no obligation to incur any expense itself. The court said that, insofar as the claimant had been obliged to do anything more than specifically consult, the obligation would have been “uncertain and unenforceable.”
As such, the court ruled that there had been no breach that could satisfy the requirements of the prevention principle and issue 3 as to whether SpiceJet had a right to set off, became irrelevant.
In relation to issue 4, whether the liquidated damages amounted to a penalty, the court held that the onus fell on SpiceJet to prove that the clause should be unenforceable. The court was comfortable with granting summary judgment in relation to this issue as the parties had comparable bargaining power and were well-represented.
SpiceJet submitted no evidence to suggest that the estimate of losses agreed in the purchase order were unrealistic, and so summary judgment was granted in favour of De Havilland. As such, issue 5 fell away.
In considering keys takeaways from this case, it is worth noting that despite the huge sums involved, the court was still willing to grant summary judgment where the issue is simply one of construction. Another interesting point is that the court deemed an obligation on the claimant to be “very limited” due to the fact that no expense was going to be incurred on their part – this is something worth bearing mind for future negotiations and drafting.
The decision reminds us how important it is to ensure that even the simplest of variations must be tracked through the rest of the agreement – will there be any knock-on effect that needs to be addressed?
In determining whether liquidated damages amount to a penalty, the court will consider whether the pre-estimate is “exorbitant or extravagant” – the court reminded us that liquidated damages clauses set out a pre-estimate of loss to avoid the need to calculate an actual loss, and that to insist that the calculation be done, destroys the whole point of such a clause.
If you’d like to discuss the case further, please do not hesitate to get in touch.
© Melissa Worth 2021