Tandrin Aviation Holdings Ltd v Aero Toy Store Llc & Anor

The Claimant (“Tandrin”) applies for:

ATS have not appeared to dispute the application. On Monday 11^th January 2010 ATS’s solicitors sent to Tandrin’s solicitors a letter stating:

ATS had previously unsuccessfully sought to challenge the jurisdiction of the Court and adduced evidence in support of that application. The only evidence served specifically for the purpose of the present applications is Mr. Irvine’s 2^nd statement and 3^rd statement on behalf of Tandrin. However, parts of the statements served for the jurisdictional challenge also have some relevance. Given the absence of ATS, I have read that evidence and in particular in addition to the Defence I have read:

This action concerns the sale by Tandrin to ATS of a new Bombardier executive jet aircraft (“the Aircraft”) for US $31.75m. Pursuant to the Aircraft Sale Agreement (“the Agreement”) ATS paid a US $3m deposit (“the Deposit”) to D2 as escrow agent. Both the Deposit and the balance of the purchase price were due to be paid to Tandrin on delivery of the Aircraft. Once the Aircraft had been manufactured, Tandrin completed its purchase of the Aircraft from the original vendor (JetCoast 6051 LLC), paid a total of about US $26.5m for the Aircraft and took delivery of it. However, ATS failed to participate in the pre-delivery contractual procedures and in alleged breach of contract failed to accept Tandrin’s tendered delivery of the Aircraft on about 16^th January 2009 or pay the balance of the purchase price. Ultimately, after expiry of the “cure period”, on about 9^th February 2009, Tandrin purported to exercise its contractual right to terminate the Agreement on the grounds of ATS’s alleged breach, the consequence of which was (according to the Agreement) that the Deposit became payable to Tandrin as liquidated damages for the breach. However, in further alleged breach of contract (viz. cl.7.4.2 of the Agreement), ATS then failed to instruct D2 to pay the deposit to Tandrin.

Tandrin’s evidence is that it is very heavily out of pocket; it has had to pay JetCoast for the new Aircraft, which it was ultimately forced to sell on for only US $24m, i.e. at a significant loss. One year later Tandrin has yet to receive a cent from ATS, yet has had to bear entirely out of its own resources the substantial costs of financing not only the purchase price from JetCoast but also the shortfall after the resale of the Aircraft.

The most relevant terms of the Agreement are as follows:

Clause 7.4.2 provided as follows:

“Purchaser’s Default. In the event Purchaser fails to accept delivery of the Aircraft and pay the Purchase Price to Seller in violation of the terms and conditions of this Agreement, and provided Seller is not then in breach or default in timely performing its written obligations hereunder, Seller shall have the right, after ten (10) Business Days’ prior written notice from Seller of such breach or default and Purchaser’s failure to cure (or commence curing) the same with such 10-day period, to terminate this Agreement by written notice to Purchaser and the Escrow Agent. If Seller elects to terminate this Agreement pursuant to this Section 7.4.2, the Escrow Agent shall pay the Deposit to Seller as liquidated damages (and Seller and Purchaser shall promptly give written instructions to the Escrow Agent to that effect), and this Agreement shall be of no further force or effect. Seller acknowledges and represents that the liquidated damages amount provided for in this Section 7.4.2 is a reasonable estimate of the damages that would be incurred by Seller in the event Purchaser defaults on Purchaser’s obligations under this Agreement. Seller’s right to receive the Deposit as liquidated damages, shall be cumulative and not alternative, and shall be the sole remedy available to Seller in the event Purchaser defaults on Purchaser’s obligations under this Agreement (other than a default under this Article 7.4.2); and Seller waives any other remedies that may be available to Seller, at law or in equity, as a consequence thereof.”

Clause 7.17 provided as follows:

“Force Majeure. Neither party shall be liable to the other as a result of any failure of, or delay in the performance of, its obligations hereunder, for the period that such failure or delay is due to: Acts of God or the public enemy; war, insurrection or riots; fires; governmental actions; strikes or labor disputes; inability to obtain aircraft materials, accessories, equipment or parts from vendors; or any other cause beyond Seller’s reasonable control. Upon the occurrence of any such event, the time required for performance by such party of its obligations arising under this Agreement, shall be extended by a period equal to the duration of such event.”

On 16^th February 2009 Tandrin issued an Application for permission to serve proceedings out of the jurisdiction on ATS and D2.

The Claim Form (with attached Particulars of Claim) was issued on 16^th February 2009.

On 18^th February 2009 an Order was made by Mrs. Justice Gloster (without hearing the parties) granting permission for service out of the jurisdiction. Service was duly effected in compliance with that Order.

D2 did not acknowledge service and has played no part in the English proceedings. However, ATS acknowledged service on 25^th March 2009, and on 8^th April 2009 issued a Notice of Application to set aside the Order of Gloster J. on the grounds that England was not the appropriate jurisdiction.

On 4^th June 2009 the application was argued before Mr. Justice Field, who made an Order dismissing the application with costs. Leave to appeal was refused by Field J.; and (so far as Tandrin is aware) no further application for leave to appeal was made to the Court of Appeal.

On 26^th June 2009 ATS served a fresh Acknowledgement of Service, and on or soon after 30^th July 2009 served its Defence.

On 19^th October 2009 Tandrin issued its Application Notice for the relief sought on this hearing, supported by Mr. Irvine’s 2^nd statement and 3^rd statement. As noted above, no evidence in response has been served by ATS.

The Particulars of Claim claims the following relief against ATS:

On this Part 24 application for summary judgment, Tandrin seeks as against ATS:

In support of its application Tandrin has referred me to a number of underlying documents, and in particular:

The Defence pleads three 3 positive defences:

The Aircraft Sale Agreement was subject to English law and contains an English non-exclusive jurisdiction clause.

In order to succeed on its Part 24 Application Tandrin has to establish that none of these defences has a real prospect of success.

The Defence pleads that the provisions of the Aircraft Sale Agreement, which provide for Tandrin to retain the deposit in the event of failure by ATS to take delivery, amount to a penalty clause.

The law:

Tandrin contends that this defence has no real prospect of success and relies in particular on the following facts and matters.

Deposit / liquidated damages clause common in aircraft sale agreements: There is unchallenged evidence from Mr. Irvine that clauses of this sort are common in aircraft sale agreements. Further:

Amount of deposit not unusual: There is unchallenged evidence from Mr. Irvine that the amount of the deposit in the Agreement (less than 9.5%) is neither unusual nor excessive.

Amount of deposit was a reasonable pre-estimate of Tandrin’s possible loss: There is unchallenged evidence from Mr. Irvine as follows:

Amount of deposit in fact is an under-estimate of Tandrin’s loss: There is unchallenged evidence from Mr. Irvine that Tandrin’s loss is in excess of US $7.75m, a sum far greater than the US $3m amount of the deposit. This provides some empirical support for the proposition that the parties’ decision to treat the amount of US $3m as a pre-estimate of loss was anything but unjustifiably harsh to the purchaser; it proved in fact to be a significant under-estimate of the actual loss.

Not open to ATS to take this point: There is unchallenged evidence from Mr. Irvine that:

Addressing each of the 4 tests which Lord Dunedin said at paragraph (4) of his formulation would assist the task of construction against the above factual background, I accept that ATS has no real prospect of establishing that cl.7.17 is to be construed as a penalty by reference to any of those tests. In particular:

I therefore conclude that there is no triable argument that cl.7.4.2 is unenforceable as a penalty.

The Defence pleads that it is inappropriate and contrary to principle for Tandrin to seek an equitable specific performance remedy in an English court against foreign defendants for three reasons.

First, it is said by ATS that the appropriate jurisdiction in which to seek such a remedy would have been Florida or Oklahoma. However, the issue of whether the English court has jurisdiction to do so has been determined against ATS by Field J’s judgment, which judgment has not been appealed. ATS cannot go behind Field J’s judgment.

The next reason relied on by ATS is that there are in existence established proceedings between Tandin and ATS relating to the same subject matter as the subject matter of these proceedings. But again, this issue was central in the argument on the jurisdictional challenge, resulting in Field J’s judgment, which judgment has not been appealed. Again, ATS cannot go behind Field J’s judgment on this.

The last reason relied on by ATS is that Tandrin will have to start fresh proceedings either in Florida or Oklahoma should it wish to enforce any specific performance order made by the English court. As to that:

For completeness, I note that at the jurisdictional hearing before Field J. counsel for ATS relied on Dicey & Morris on Conflict of Laws Rule 35(1) and para 14-020 thereof in support of its argument that a foreign court (such as Oklahoma or Florida) would not enforce an English court order for specific performance. This argument was adverted to by Field J. at paragraph 20 of his judgment, but did not stand in the way of his dismissal of the application. I accept Tandrin’s submission that this argument (which was later also reflected in paragraphs 8-9 of the Defence) should not stand in the way of the court making such an order against ATS (or D2):

I therefore conclude that there is no triable argument that it is inappropriate for the court to make an order for specific performance.

The principal defence which ATS has advanced to seek to justify its refusal to accept delivery of the Aircraft is that the alleged “unanticipated, unforeseeable and cataclysmic downward spiral of the world’s financial markets” triggered the force majeure clause in the Agreement, thereby postponing the time for ATS to complete the purchase and potentially affecting the price at which ATS should be entitled to purchase the Aircraft.

Tandrin submits that this argument is bad in law because an economic downturn or tightening of credit markets has never been held to be force majeure in English law, and unworkable in practice because the result of the operation of the force majeure clause (as articulated by ATS’s solicitor Mr. Lederman at paragraph 11 of his statement) is that ATS “should retain its contractual right to purchase the aircraft in question in a commercially reasonable time and in a commercially reasonable manner; and [D2] should continue to hold the Deposit in the meantime”. This is vague and unworkable and the antithesis of the certainty required in commercial transactions.

It is well established under English law that a change in economic / market circumstances, affecting the profitability of a contract or the ease with which the parties’ obligations can be performed, is not regarded as being a force majeure event. Thus a failure of performance due to the provision of insufficient financial resources has been held not to amount to force majeure - see The Concadoro [1916] AC 2 AC 199; and likewise a rise in cost or expense - see Brauer & Co. (GB) Ltd. v. James Clark (Brush Materials) Ltd. [1952] 2 All ER 497 and generally the discussion in Chitty on Contract, 30^th Ed., para 14-148.

A helpful summary of which matters are, and which are not, capable of constituting force majeure is set out in Chitty on Contract, 30^th Ed,. para 14-148. The matters which are listed as having been held not to be capable of constituting force majeure include “a failure of performance due to the provision of insufficient financial resources or to a miscalculation, a rise in cost or expense, …”

A recent judicial statement disapproving the notion that economic circumstances can generally found a claim for force majeure or frustration appears in Thames Valley Power Ltd. v. Total Gas & Power Ltd. [2006] 1 Lloyd’s Rep. 441, where Christopher Clarke J. said this:

“ … It does not at all follow that the supplier is entitled to rely upon an increase in the market price in comparison to the contract price as a force majeure circumstance. ……... This conclusion is consistent with a line of cases, both on force majeure clauses and on frustration, ….., to the effect that the fact that a contract has become expensive to perform, even dramatically more expensive, is not a ground to relieve a party on the grounds of force majeure or frustration. I take as an example Tennants (Lancashire) Ltd v CS Wilson & Co Ltd [1917] AC 495, a force majeure case where Lord Loreburn observed at page 510:

“The argument that a man can be excused from performance of his contract when it becomes "commercially impossible" seems to me to be a dangerous contention which ought not to be admitted unless the parties plainly contracted to that effect.””

Whether a force majeure clause in a contract is triggered depends on the proper construction of the wording of that clause; “force majeure” is not a term of art. Here, there are a number of hurdles in the way of cl.7.17 being construed in such a way as to permit ATS to rely on market conditions as a force majeure event.

The phrase “any other cause beyond the Seller’s reasonable control” should be read in the context of the entire clause. The specific instances of force majeure in the preceding words are as follows: “act of God or the public enemy; war; insurrection or riots; fires; governmental actions; strikes or labour disputes; inability to obtain the aircraft materials, accessories, equipment or parts from the vendors”. Whilst there is no requirement to construe the phrase “any other cause beyond the Seller’s reasonable control” ejusdem generis with those earlier specific examples, it is telling that there is nothing in any of those specific examples of force majeure in cl.7.17 which is even remotely connected with economic downturn, market circumstances or the financing of the deal.

Further, it is striking that the clause does not refer to “any other cause beyond the Purchaser’s reasonable control” or “any other cause beyond either party’s reasonable control” but only to “any other cause beyond the Seller’s reasonable control”. The natural and ordinary meaning of such a provision is that it is addressing the position of the seller rather than the purchaser and is a force majeure circumstance that only the seller can rely upon. There would be nothing particularly surprising if this part of the force majeure clause was limited in this way since it is the seller who has the principal performance obligations under the Agreement. The purchaser’s essential performance obligation is to pay the price and accept delivery, obligations that are far less likely to be affected by force majeure circumstances.

Further:

This conclusion as to construction is further supported by a consideration of the element of causation:

Under English law, just as the burden of proof is on the party seeking to rely upon a force majeure clause to prove the facts bringing the case within the clause, so the burden of proof is on ATS to show that this force majeure clause is capable of being construed so as to include any funding difficulties it is encountering. For the reasons above, I accept Tandrin’s submission that ATS cannot show this.

At the jurisdictional challenge before Field J., ATS sought to rely on two authorities to support its argument that economic circumstances can constitute force majeure. However, ATS’s reliance on those authorities is misplaced:

Finally, to the extent that there may be some overlap between the operation of force majeure clauses and the doctrine of frustration, Lord Simon made clear in National Carriers Ltd. v. Panalpina (Northern) Ltd that an increase in the mere expense or onerousness of the contract cannot constitute frustration:

“Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.” (emphasis added)

So there is nothing in the doctrine of frustration which assists ATS in its argument. For the doctrine of frustration generally, see Chitty on Contract, 30^th Ed., para 23-001 to 23-021.

For all these reasons, I accept and hold that ATS has not shown that as a matter of principle extreme economic circumstances can arguably give rise to force majeure in the context of a clause such as cl.7.17. I hold that ATS has no real prospect of establishing either that cl.7.17 should be construed as ATS asserts or that as a matter of law it is arguable that the circumstances contended for by ATS can give rise to force majeure under cl.7.17.

I therefore conclude that there is no triable argument that ATS can rely on the force majeure clause to excuse its non performance.

Declarations and Order: I accept that the declarations (at paragraph (1) of the Prayer) and the order (at paragraph (2) of the Prayer) flow from the conclusion that I have reached, namely that ATS’s defences disclose no triable defence.

Damages: In addition, Tandrin seeks judgment for damages to be assessed, with an interim payment of £37,785.41. In support, Tandrin makes the following submissions:

I accept that Tandrin is entitled to judgment for damages to be assessed for the reasons stated. However, I do not consider that it would be appropriate to order an interim payment for the full amount of damages claimed to date. In my judgment and in the exercise of my discretion I hold that there should be an order for interim payment on account of damages in the sum of £25,000.

Interest: The claimed losses have been sustained over the period from 13^th February 2009 to date. I consider that the interim payment should include interest at 1% above base rate over the period from 13^th February 2009. Up until 1^st January 2010 that has been assessed as being £336.30 so that the total interim payment shall be £25,336.30.

Further relief / costs: Tandrin seeks its costs of the application against ATS. It submitted a costs schedule and invited me summarily assess the costs which I do in the sum of £30,000.

Striking out: if, as is the case, judgment is given on the Part 24 application, Tandrin does not pursue the alternative relief of seeking an order striking out ATS’s Defence pursuant to part 3.4(2)(a), which was only included in the Application Notice as a fall-back alternative to Part 24.

D2 has played no part at all in either the Oklahoma or the English proceedings. D2 has not acknowledged service of process in either set of proceedings nor service of any subsequent application notices.

D2’s position is as follows:

As regards the English proceedings, the evidence as to proper service on D2 is as follows:

Tandrin seeks as against D2 judgment in default of acknowledgement of service pursuant to CPR Part 12. The Particulars of Claim pleads the following relief against D2:

It might be questioned whether it is appropriate for the court to order D2 to pay the Deposit to Tandrin, where (at least arguably) D2 is under no contractual obligation to pay the Deposit to Tandrin until it receives instructions from ATS to do so. However, Tandrin submits and I accept that there are good answers to that point.

First, the relief sought against D2 is essentially equitable relief; it is an order for specific performance or a mandatory injunction. There is a well known maxim of equity:

“Equity looks on that as done which ought to be done”

The ambit of that maximum is set out in Snell’s Equity, 2005 Ed., para 5-25. The Court should treat as done that which ATS ought to have done, namely the giving of instructions to D2 to transfer the Deposit to Tandrin. It is not only as against ATS but also as against D2 that the court should treat that step as having been done. It follows that (in equity) D2 is already treated, or capable of being treated, as being under an obligation to pay the Deposit to Tandrin.

Further or alternatively, the court will be making certain declarations at paragraph 1 of the Order (mirroring the relief sought at paragraph 1 of the Prayer to the Particulars of Claim). These include the declarations that Tandrin is entitled to the Deposit and that the Deposit is not refundable or payable to ATS. Accordingly, it can be said that D2 is to be treated, or is capable of being treated, as being the trustee of the Deposit for the benefit of Tandrin alone. If so, it follows that the absence of a contractual obligation on D2 to pay Tandrin no longer matters, since D2 as trustee now falls under a duty in that capacity to do so.

In any event, D2 has effectively accepted that it will deal with the Deposit in accordance with “instructions from both parties or a court order stipulating what is to be done with the funds”.

For the above reasons, I accept that there is no bar to the court making an order on this application in the form of paragraph 6 of the Prayer to the Particulars of Claim, namely that D2 forthwith pay the Deposit to Tandrin; and that, in all the circumstances, it is appropriate for the court to do so.

For the reasons set out above I accept that Tandrin is entitled to and should be granted the relief sought by it.