UK: Detailed Analysis Of International Supply Contracts Under UCTA

Last Updated: 26 March 2012
Article by Mark Alsop

Air Transworld Limited v Bombardier Inc [2012] EWHC 243(Comm)

Bombardier, a Canadian company, sold one of its aircraft to Angoil, an Angolan company controlled by a Mr Mosquito. Immediately after the sale, the parties entered into an assignment under which the purchase agreement was assigned to Air Transworld, another corporate vehicle of Mr Mosquito. The purchase agreement was negotiated mostly in London by an English solicitor, Mr Meer and Ms Ribeiro, a Portuguese resident, on behalf of Mr Mosquito, and two representatives of Bombardier. There was some disagreement as to what exactly happened at the final meeting, but the Judge found that one of Bombardier's representatives initialled all the pages of the purchase agreement, but made it clear to Mr Meer that there was an approval process to be gone through in Canada before the purchase agreement could be signed by Bombardier. Mr Meer signed the purchase agreement and faxed it to Bombardier in Canada. The next day, the relevant approval processes within Bombardier occurred and a copy signed on behalf of Bombardier was sent back to Mr Meer. Immediately afterwards, Miss Ribeiro asked for an assignment of the contract to Air Transworld. Bombardier sent an assignment agreement with blanks for filling in by Mr Mosquito. The assignment was signed by Mr Meer on behalf of Angoil and Transworld in London and faxed to Bombardier in Canada. Mr Meer asked for a copy of the assignment to be faxed to Miss Robeiro in Lisbon when it had been executed by Bombardier. Later that day, Bombardier emailed Mr Meer a copy of the signed assignment agreement.

Some 14 months after delivery, the aircraft developed a serious fault with the main engine driven pump. Air Transworld purported to rescind the contract and claim a refund of the purchase price.

The case turned on a number of points arising out of the wording of the Aircraft Purchase Agreement. Article 4 contained the exclusion clauses (which were in capital letters) and governing law clause, including:

  • 4.1 The warranty, obligations and liabilities of the seller and rights and remedies of the buyer set forth in the agreement are exclusive and are in lieu of and the buyer hereby waives and releases all other warranties, obligations, representations or liabilities, express or implied, arising by contract, in law, civil liability or in tort, or otherwise, including but not limited to (A) any implied warranty of merchantability or of fitness for a particular purpose, and (B) any other obligation or liability on the part of the seller to anyone of any nature whatsoever by reason of the design, manufacture, sale, repair, lease or use of the aircraft.
  • 4.3 The parties...agree that the limited warranties and the limitation of liability provisions contained herein and the specification have been expressly agreed to in consideration of the purchase price and other provisions of this agreement.
  • 4.4 This agreement shall be governed by and interpreted in accordance with the internal laws of England and Wales, excluding any conflicts of law provisions thereof.

Paragraph 15 of Schedule A contained warranties that the aircraft would be free from defects. In the case of defects, Bombardier's sole obligation was limited to repair, replacement or rework of the defect. There were different time periods for the warranties according to the item affected.

The main legal issues to be decided were:

  • whether, on its construction, the exclusion clause operated to exclude the implied Sales of Goods Act condition of satisfactory quality;
  • whether the purchase agreement and assignment were an "international supply contract" within the meaning of Section 26 of UCTA (in which case the relevant provisions of UCTA would not apply);
  • whether the governing law clause operated to exclude the choice of law provision in s27 UCTA (i.e. so that UCTA applied) or, if not, whether s27 applied to exclude UCTA;
  • if the agreements were not an international supply contract (i.e. UCTA applied), whether:
    - the purchaser was a consumer (in which case the implied SGA condition could not be excluded) and

    - if not, the exclusion clause was reasonable.

The High Court (The Honourable Mr Justice Cooke) found in favour of Bombardier. The principal matters in his decision were as follows:

  • Exclusion of SGA implied condition as to satisfactory quality. Air Transworld had argued that at no point in the exclusion clause was the word "conditions" mentioned. Case law was clear that in order to exclude the SGA conditions, there had to be an explicit exclusion of all conditions. The Judge agreed with the case law analysis in principle, but decided that the first lines of Article 4.1 could only be read as saying that the seller's obligations were to be found exclusively in the agreement and its appendix. The wording was all embracing and there was plainly intended to be no room for the operation of any primary or secondary rights or obligations outside the terms of the contract itself. No person reading the article could be in any doubt that every promise implied by law was excluded, in favour of the contractual promises in the warranty clause. The words "all other...obligations...or liabilities express or implied arising by law" necessarily included the conditions implied by the SGA. Furthermore, Article 4.3 reinforced this by saying that the limited warranties and liabilities provided in the agreement were expressly agreed in the light of the agreed purchase price and other provisions of the agreement, which must be intended primarily to refer to the warranty in Article 15 of the appendix. This therefore reinforced that the warranty was given in substitution for all other rights which might be implied by the SGA. There was no ambiguity in the clause. There was only one meaning which could fairly be applied to it.

    Comment: recent cases have held that the SGA conditions can only be excluded by explicit wording to this effect. This case shows that this is not always the case

    They will be validly excluded as long as the clause makes it clear that the parties are intending that the only remedies that they will have are those contained in the agreement itself. It will obviously help if, as here, alternative warranties are included in the agreement.
  • International supply contract. Bombardier argued that the contract was an "international supply contract" within the meaning of 26 of UCTA. Section 26(2) provides that the terms of such contracts are not subject to any requirement of reasonableness. A contract is an international supply contract if (i) it is a contract for the sale of goods (or one under which possession or ownership of goods passes, e.g. a contract for hire) made between parties whose places of business are in different States and (ii) one of the following S24(4) conditions is satisfied:

    - the goods will be carried from the territory of one State to another; or

    - the acts constituting offer and acceptance are done in the territories of different States; or

    - the contract provides for the goods to be delivered to the territory of a State other than that within whose territory those acts were done.

    The Judge considered the facts and sequence of events carefully. He considered the "limited" case law and in particular the case of Amiri v BAE [2003]. He also compared the terms of Section 26 with the similar provisions of Article 1 of the Uniform Law on International Sale of Goods scheduled to the Uniform Laws on International Sales Act 1967 (ULIS) - (a similar comparison was also used in the Amiri case. This was a contract for the sale of goods and the parties were in different States, so analysis centred on the three alternative conditions. It was acknowledged that the drafting of the section was not good.
  • Offer and acceptance in same State. A natural starting point had to be the second condition where offer and acceptance were "done" in different territories. The wording in the equivalent provision of the ULIS is "effected" rather than "done" and contains an explanation making "effected" the place of contractual formation. In contrast, "done" cannot be taken to involve the concept of something taking effect in law. A distinction has to be made between the place where the offer/acceptance is made and the place where it is the communicated – which, under common law rules, happens in the place of receipt where there is instantaneous communication.

    The upshot in this case was that when Mr Meer faxed the contract to Canada, he was making an offer in the UK, but communicated to Canada. When Bombardier signed and returned the contract, the acceptance was made in Canada, but communicated in the UK. The Judge considered that "the acts constituting the offer and acceptance" took place in different countries, whether one looks at the making of the offer/acceptance or the place of communication. In the Judge's view, "the act constituting the offer and acceptance" refer to the totality of acts which constitute the offer and acceptance, including both the making and receiving of each. What is at issue is the "international" nature of the contract. What this condition (s26(4)(b)) is intended to exclude, as an international supply contract, are cases where there is an international element in the formation of the contract, so that all elements of the offer and acceptance must occur in the same State if the provisions of UCTA are to apply. Thus, if any of the making of the offer, making the acceptance, communication of the offer or communication of the acceptance happen in different Member States, then the contract is capable of being an international supply contract under this condition. The same considerations applied to the assignment agreement (which was the agreement to be analysed to determine whether UCTA applied).

    If the purchase agreement had not been an international supply contract but the assignment agreement had been, then UCTA would still not apply to the rights and obligations arising under the two contracts, as between the parties – the assignment would bring the international element into the equation. Alternatively, if all the acts constituting offer and acceptance for both the purchase agreement and the assignment had been done in the same territory, then UCTA would apply, but otherwise it would not.
  • Carrying goods from one State to another. Where the goods will be carried from the territory of one State to another, case law showed that the requirements of this condition (s26(4)(a)) were satisfied even though there was no express obligation to deliver the goods to another State. There simply has to be an intention on the part of the parties that the goods will be used in another country. This was the finding in the Amiri and Trident cases. The purchase agreement and the assignment contemplated delivery in Canada, even if the agreement did not expressly so provide, whilst the intention of the purchaser was to use the aircraft elsewhere, probably in Africa.
  • Offer and acceptance in one State, delivery to another. Where delivery of goods was to be made to another State other than that in which offer and acceptance was made (s26(4)(c)), the Judge was bound to follow the Court of Appeal ruling in Amiri to the effect that, as the section requires delivery "to" the territory of another State, not delivery "in" another State, this subsection would not apply if offer and acceptance had been in the UK, with delivery to be in Canada where the aircraft was manufactured. Bombardier reserved its right to argue the point if the case went to the Court of Appeal.

    Comment: note how easily a contract can be classed as an international supply contract – as long as the parties are from different States, if any part of the contract process happens in different countries, the contract is likely to be an international supply contract.
  • Choice of English law. Two points arose under Section 27 of UCTA which provides that "where the law applicable to the contract is the law of any part of the United Kingdom only by choice of the parties (and apart from that choice would be the law of some country outside of the United Kingdom), Sections 2-7...of this Act do not operate as part of the law applicable to the contract."

    The governing law clause provided that English law was to apply "excluding any conflicts of law provisions". Air Transworld argued that s27 gave rise to a conflict of laws which meant that the parties had agreed that s27 should not apply. The Judge disagreed. The section was a "self-denying statute" and not "an overriding provision". It's effect was that some provisions of the Act were not to operate as part of the law applicable to the contract, i.e. there was no question of reference to a foreign law at all.

    English law was the governing law of the purchase agreement solely as a result of the express choice of law clause, so s27 applied to exclude UCTA. Under English conflicts of law (i.e. the country with which the contract has its closest connection) and the Rome Convention (i.e. the country where the party was to effect performance that was characteristic of the contract) , the law of Canada would have been the governing law. Even if contracts had been concluded in London, the "lex loci contractus " (i.e. the place where the contract was made) was a weak basis for determining the governing law, not least because it would be a mere matter of chance where the contract was concluded.
  • Buying as a consumer. Air Transworld argued that it was dealing as a consumer and therefore liability under the SGA could not be excluded. The answer to this question depended on whether the transaction was an integral part of the business or only incidental to its business. The Judge considered the background of Angoil and Air Transworld. Angoil was a substantial company, but never involved in the aviation business. Air Transworld had bought and sold aircraft many years before but now was doing nothing. Mr Mosquito claimed that the private jet was being purchased for his own use and therefore not in the course of a business. The Judge found that the nature of the business carried on by Air Transworld at the time of the contract could only be that of owning and operating an aircraft, because that was its sole function in the past and sole intended function in the future. There was also evidence that it had been negotiating to purchase another aircraft from Dassault. Therefore, Air Transworld did not deal as a consumer. The Judge did indicate, incidentally, that a jet could be "of a type ordinarily supplied for private use or consumption", despite the $27m price tag.

    Comment: indications from this and other cases are that it will generally be difficult for a company to show that it is acting as a consumer. The point does not arise in relation to use of the word "consumer" in legislation originating from Europe, because in that legislation consumers can only be individuals.
  • Reasonableness of exclusion clause. The Judge considered the reasonableness test if the contract were not an international supply contract and if Section 27 of UCTA did not apply. Air Transworld had submitted that the aircraft was seriously and dangerous defective. It was incapable of consistently conducting safe flights: it was not a satisfactory quality; it was unfit for purpose. The Judge found that the warranty in Article 15 of Appendix A was the sole remedy available to the vendor. It covered all defects, but the sole liability was repair, replacement or rework, with no liability in damages nor liability for consequential loss. The real issue of reasonableness, in the circumstances, depended on a comparison of the implied conditions under the SGA and the warranty in the agreement. Given that (i) the provisions of the agreement were sufficiently clear to exclude the SGA implied conditions, (ii) the parties were of equal bargaining power, (iii) the exclusion clause was set out in capital letters and (iv) the terms of the warranty were drawn to the lawyers' attention, the Judge found it hard to see why the court should conclude the terms were unreasonable in the context of a bargain made by the parties to a commercial agreement. The allocation of risk between the parties was a matter which must be taken to have considered and agreed in consideration of the purchase price. Air Transworld had argued that the obligation to repair etc was inadequate, but if there were to be a defect which could not be put right at all or could only be put right in an extended and reasonable period of time, Bombardier could be held to be in repudiatory breach of its obligations. In those circumstances, damages would flow from the breach.

    Comment: the fact that there was a relatively full specific warranty was always going to make it difficult to maintain that the exclusion of the SGA implied terms was unreasonable, but all the same the case does continue the line of cases in which the courts are reluctant to interfere with terms agreed by the parties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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