UK: Aircraft Leasing: Commercial Court Decisions

Last Updated: 5 February 2003
Article by Hilary Pullum

Two recent decisions relating to breach of aircraft leases, demonstrate how much the choice of English law or jurisdiction, to which many aerospace businesses subject their contracts, gives worldwide influence to the Commercial Court in London.

Protea Leasing Limited v
(1) Royal Air Cambodge Company
(2) Malaysian Airline System Berhad
(3) Naluri Berhad Commercial Court, 12 December 2002

In 1994 the Royal Air Cambodge Company ("RAC") was established as the sole air carrier in Cambodia. RAC leased three aircraft from the Claimant and two from the Second Defendant, Malaysian Airline System Berhad ("MAS"). RAC entered into a shareholders’ agreement with the third defendant which provided that RAC would be managed by MAS in accordance with the terms of a management agreement, whereby MAS would second some of its employees to RAC.

The Claimant was a subsidiary of Avions de Transport Regional GIE ("ATR"), which had been established for the purposes of leasing aircraft.

After a coup d’état in 1997 RAC’s monopoly status was revoked and this, in addition to the fall in tourist revenues, had a detrimental effect on RAC’s finances such that it was unable to make the payments under the leases.

The Claimant terminated the leases and brought a claim against RAC for the outstanding rent and termination payments due. The Claimant joined MAS to the proceedings alleging that MAS, acting through its seconded employees, failed to manage RAC in its best interests and thereby induced RAC to breach the leases. The Claimant further alleged that MAS had preferred its own interests to that of RAC by causing funds which should have been used to satisfy RAC’s debt to the Claimant to be used to satisfy RAC’s debt to MAS. The Claimant made a similar claim against the third defendant but this was resolved before trial.

RAC effectively ceased trading in October 2001 and was not represented at the hearing. The Court acknowledged that the Claimant was unlikely to recover a significant amount from RAC.

The Claimant alleged that MAS had committed a tortious wrong, but as none of the events giving rise to the tort occurred in England, English law states that the applicable law is the law of the country in which the most significant elements of the tort took place, in this instance Cambodia. Therefore whilst the claim against RAC was decided under English law, the case against MAS was decided under Cambodian law.

It was held that MAS’ employees did not have the final control of the lease payments, and insofar as they were responsible for RAC’s management they acted in good faith and in what they believed to be the best interests of RAC and its shareholders.

The Claimant leased the aircraft from ATR. Under the lease ATR agreed to indemnify the Claimant against any losses arising from the Claimant’s sub-leases to RAC. It was therefore argued that the Claimant suffered no loss as a result of RAC’s default. The Court rejected this argument.

The Claimant had effected an assignment of the leases to another company as part of its financing arrangements, but the Court held that even though notice had been given to RAC of the assignment, it was not intended to have any practical effect until a notice of default had been served under a related credit agreement and thus did not prevent the Claimant from bringing its claim.

It was therefore held that RAC was liable to pay the outstanding rent and termination payments to the Claimant, but the claim against MAS failed.

Indian Airlines v GIA International Limited
Commercial Court, 1 November 2002

English Law rules against penalties are well known and this case illustrates how reluctant courts are to interfere with the freedom of contract by striking out contractual terms.

The Claimant was an Indian domestic airline. The defendant, GIA International Limited ("GIA"), was a US company based in Delaware which contracted to lease five aircraft to the Claimant. Each of the five aircraft leases was subject to the nonexclusive jurisdiction of the English and Indian Courts. The leases included a penalty clause which stated that if GIA failed to deliver the aircraft on the delivery date it had to pay the Claimant US$8,500 each day after the delivery date until the aircraft was delivered, or until the Claimant exercised the option to terminate its obligation to lease the aircraft.

None of the aircraft were delivered, the Claimant terminated its obligation under the leases and chose to bring a claim for summary judgment in the English Courts.

The Claimant’s main claim was for the amount due under the penalty clauses, which was US$5,550,500. GIA argued that the penalty clause was not applicable as the Claimant had not delivered one of the documents which it was required to provide as a condition precedent to GIA’s obligations under the leases. The Court held that GIA had waived this breach by failing to comment upon the draft version of the document, and by subsequently treating its failure to deliver the aircraft as a breach of the leases.

GIA also argued that the clause was an unenforceable penalty insofar as the amount claimed bore no relation to the loss caused to the Claimant.

The Court gave summary judgment for the Claimant and held that although such a penalty would be unenforceable if the amount was extravagant and unconscionable in comparison with the greatest loss that could have been caused by breach of the contract, the sum stipulated was not extravagant and unconscionable. Furthermore, as there was no inequality of bargaining power between the parties, to strike down the penalty clause would interfere with the principle of freedom of contract.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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