18 March 2021
De Havilland Aircraft of Canada’s recent successful claim for summary judgement against SpiceJet in the English High Court serves as a timely reminder of the issues that can arise in aircraft purchase agreements.
The judgment[1] centres on a purchase agreement for 25 Q-400 aircraft (the Purchase Agreement) between De Havilland Aircraft of Canada Limited (De Havilland) and SpiceJet Limited (SpiceJet). Relevantly, under the Purchase Agreement, De Havilland was entitled to:
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terminate the delivery of an aircraft if SpiceJet defaulted on the pre-delivery payments (PDPs) for that aircraft and claim liquidated damages; and
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terminate the entire Purchase Agreement if it had terminated the delivery of four or more aircraft.
While SpiceJet did pay for and take delivery of the first 5 aircraft, it failed to make the PDPs for the next 20 aircraft and failed to take delivery of aircraft 6 to 8. De Havilland sought to terminate the undelivered aircraft and the Purchase Agreement and claimed liquidated damages in the sum of US$42.95 million.
The main issues considered by the Court were:
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whether SpiceJet’s liability to make the PDPs for aircraft 9 to 25 was suspended by an amendment agreement made between the parties that amended the scheduled delivery months for those aircraft;
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whether De Havilland breached the agreement by failing to provide assistance in arranging financing as per the terms of a subsequent letter agreement; and
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whether De Havilland’s liquidated damages claim amounts to an unenforceable penalty.
Suspension of liability to make PDPs
An amendment agreement to the Purchase Agreement (CO6) stated that the original scheduled delivery months for aircraft 9 to 25 were suspended and that the parties would make good faith efforts to agree upon revised terms and conditions for those aircraft. The amendment agreement stated that all other terms remained unchanged.
SpiceJet argued that the suspension of the scheduled delivery months amounted to a suspension of the date for payment of the PDPs since the dates on which the PDPs became payable were dependent upon the scheduled delivery months. This was not accepted by the Court, which preferred De Havilland’s argument that the PDPs were not suspended since CO6 made no mention of the PDPs being suspended and stated that all other terms remained on foot. The Court accepted that there was still business sense in requiring the payment of the PDPs even if the scheduled delivery dates had been suspended.
Failure to assist with arranging financing
The subsequent letter agreement (LA13) stated that De Havilland would assist SpiceJet in ‘developing, in consultation with [SpiceJet] and its aircraft finance specialists, third party financing structures for the financing of [SpiceJet’s] acquisition of the Aircraft’. LA13 also stated that ‘[s]uch assistance shall not include any responsibility on the part of [De Havilland] for any fees, charges, disbursements or expenses of [SpiceJet], any financiers or any other person (including [De Havilland]) in connection with sourcing and implementing any financing facility’.
SpiceJet claimed that De Havilland was in breach of its obligation to provide assistance because it failed to obtain financing from potential finance counterparties, with whom it had been negotiating with De Havilland. However, De Havilland argued that the obligation to provide assistance as contemplated in LA13 was insufficiently certain to be enforced. The Court found that such assistance was limited to consultation, and did not include sourcing or implementing financing. The Court also agreed with De Havilland that insofar as De Havilland was obliged to do anything more than consult, that obligation would be uncertain and unenforceable.
Liquidated damages as an unenforceable penalty
The Court concluded that the liquidated damages provision in the Purchase Agreement did not amount to an unenforceable penalty. The provision was found to provide substantial opportunity to SpiceJet to remedy any breach, and was generally favourable in its terms to SpiceJet. The Court considered the parties each had comparable bargaining power given they were both represented at the time by sophisticated and experienced lawyers and were themselves substantial commercial operators in the aircraft industry. The parties had also specifically agreed that the liquidated damages provision did not constitute a penalty and was a reasonable estimate of the anticipated or actual harm suffered by De Havilland as a result of SpiceJet’s breach.
Conclusion
The case is a clear reminder for the need for clarity when it comes to amending aircraft purchase agreements. The case may well have been decided differently if specific drafting suspending the PDP payments was included.
Parties should also be conscious of the limitations of including obligations on other parties to provide ‘assistance’ with certain activities. The case demonstrates that such obligations may be limited to just consultation or cooperation and in any case will be limited to what is sufficiently certain to be enforceable.
Finally, the case is also a helpful demonstration of how the question as to whether a clause amounts to a penalty can be determined summarily. The onus is on the person asserting that the clause is unenforceable and the question is one of construction at the time the contract was entered into. Relevantly, the Court noted that evidence as to actual loss suffered was not appropriate in the context of a liquidated damages clause which sought to avoid the expense and time incurred in calculating the actual extent of loss.
[1] De Havilland of Canada Limited v SpiceJet Limited [2021] EWHC 362 (Comm).
For further information, please contact:
May Tai, Managing Partner, Greater China, Herbert Smith Freehills
may.tai@hsf.com
