The Pindell case:
contractual indemnities did not cover loss of a planned sale,
writes Marianne McMahon.
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In Pindell
and BBAM Aircraft Holdings 98 (Labuan) vs AirAsia Berhad [2010]
EWHC 2516, a recent commercial court case, the lessee, AirAsia
Berhad (AirAsia), redelivered an aircraft late and in breach of
contract.
However, it was found that
AirAsia did not have to pay damages to compensate the owners for
losing a lucrative sale contract for that aircraft which was
cancelled as a result of the late redelivery and further, that the
contractual indemnities did not cover this type of loss
either.
While the circumstances of
this case were extreme, parties should bear the findings in mind
when negotiating and drafting future leases. AirAsia leased a
Boeing 737-300 aircraft from the lessor, BBAM Aircraft Holdings 98
(BBAM), pursuant to a five-year operating lease. BBAM in turn had
leased the aircraft from the owners, Intec Leasing Inc, who later
sold the aircraft to Pindell.
The aircraft was delivered to
AirAsia on 17 June 2003 and was to be redelivered on 17 June 2008.
A contract for the sale of the aircraft was entered into by the
owners and NAC Nordic Aviation Contractor A/S (NAC) on 7 February
2008 for $12m (€9m) (the sale contract).
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By GlobalDataThe sale contract provided
that the scheduled delivery date of the aircraft was to be 17 June
2008 with a final delivery date of 1 August 2008. If the aircraft
was not delivered by then, NAC had the option to terminate the sale
contract. AirAsia, however, was unaware of the sale contract and it
was not until some time in June 2008 that AirAsia became aware that
NAC was the purchaser of the aircraft and therefore why the final
delivery date of 1 August 2008 was so significant.
AirAsia was in the process of
redelivering aircraft to other lessors at around the same time. As
a result of selecting other aircraft for redelivery maintenance
before the aircraft in question, the required redelivery
maintenance on the aircraft was only started on 26 May 2008, three
weeks before the target delivery date of 17 June 2008.
Given that the aircraft was
20-years-old, it was unsurprising that delays occurred and both the
target delivery date and the final delivery date were
missed.
On 1 August 2008, NAC
terminated the sale contract and the aircraft was finally
redelivered on 4 November 2008.
On the issue of whether
AirAsia was in breach of contract, the judge, Mr Justice Tomlinson,
concluded that on the facts of the case, AirAsia was under an
obligation to present the aircraft for technical acceptance before
17 June 2008 and by failing to do so, they were in breach of
contract.
The next issue to determine,
therefore, was what damages were payable and whether AirAsia was
liable in respect of the loss of the sale contract.
The classic test as to what
damages are recoverable in a breach of contract case is whether the
loss claimed either:
(1)
is of a kind or type which arose naturally, in the ‘usual course of
things’; or
(2)
would have been within the reasonable contemplation of the parties
at the time the contract was made as being not unlikely to result
from the breach.
In the Pindell case, the sale
contract had been negotiated at the very top of the market for a
very good price. The market then collapsed during the course of
2008. The judge was of the view it would be surprising if this loss
of a sale was in principle recoverable under a standard form
aircraft operating lease, particularly for an aircraft over 20
years old.
The judge held that, in light
of the evidence as to the nature and structure of the contract,
damages for loss of a future sale were not within the reasonable
contemplation of the parties as being likely to result from the
breach, and was not a type of loss for which the lessee assumed
responsibility.
Factors the judge considered
included the fact that there had been no discussion during the
lease negotiations about BBAM’s future plans for the aircraft, and
the fact that AirAsia had no control over the terms of the sale
contract.
The reality is that late
redelivery is common and in most cases, particularly if the
aircraft is old, late redelivery does not result in this type of
loss. Further, the judge concluded that the loss of the sale
contract was in fact caused by extremely volatile market
conditions, which meant that Pindell was unable to find another
deal on similar terms.
Having found that the claim
for the loss of the sale contract failed at common law, the judge
went on to find that although AirAsia had committed an event of
default, the claimants could not rely on the contractual
indemnities either to compensate them for the lost sale.
The lease contained a clause
purporting to indemnify the lessor against ‘any loss’ caused by an
event of default or termination of the leasing.
The judge, however, found
that the type of loss it was meant to cover was loss of a bargain
within the lease and it did not extend to the loss of a future sale
or lease following redelivery.
This particular clause
contained two specific examples which provided the context in which
the words ‘any loss’ had to be interpreted.
In fact, AirAsia’s liability
was limited to paying ‘holdover’ rent from the date the aircraft
was meant to be redelivered to the date of actual redelivery and
certain overhaul and maintenance costs.
The judge did not feel that
the parties had addressed the issue of what other costs were
recoverable in sufficient detail and so gave them the opportunity
to make further submissions on this point.
He did, however, give his
preliminary conclusions on what would be recoverable, namely that
AirAsia would be liable for those costs and expenses that were
incurred as a result of the delay in redelivery.
This case highlighted the
type of factors that judges will take into consideration when
assessing liability for damages for breach of contract. Following
this case, therefore, parties would do well to consider carefully
the wording in indemnity clauses and to clarify contractually which
party assumes responsibility for particular losses.
Marianne McMahon is a senior associate in dispute
resolution at Norton Rose
