Date 2 February 2010
Throughout the current economic downturn we have frequently been asked whether or not the credit crunch and/or the recession constitute a “force majeure” event which would enable a party to escape its contractual obligations. As with any question of contractual interpretation the answer will always turn on how any force majeure clause has been drafted, but the usual answer is probably not.
The Commercial Court has recently confirmed this in Mr Justice Hamblen’s decision in Tandrin Aviation Holdings Limited -v- (1) Aero Toy Store LLC and (2) Insured Aircraft Title Service, Inc. [2010] EWHC 40 (Comm) in which he held that a buyer could not use the economic downturn to excuse its failure to complete the purchase of an aeroplane.
The case concerned the sale of a new Bombadier jet by Tandrin to Aero Toy Store (“ATS”) for US$31.75m. Pursuant to the terms of the sale agreement ATS paid a US$3m deposit to the Second Defendant to hold as an escrow agent. The deposit and the balance of the purchase price were due to be paid to Tandrin after it had delivered the aircraft to ATS. However, ATS failed to participate in the pre-delivery contractual procedures, take delivery of the jet and pay the balance of the purchase price. To make matters worse ATS also subsequently failed to instruct the escrow agent to pay the deposit to Tandrin. As a result, and in accordance with the terms of the sale agreement, Tandrin exercised its right to terminate the contract on the basis of ATS’s breaches of it and forfeited the deposit as liquidated damages.
All of this left Tandrin facing substantial losses and it commenced proceedings to, amongst other things, recover the deposit. ATS sought to defend the claim on three grounds. First, the provisions of the sale agreement which entitled Tandrin to retain the deposit amounted to an unenforceable penalty clause, secondly that England was an inappropriate jurisdiction for Tandrin to seek specific performance against it and thirdly, the economic downturn amounted to a force majeure event.
The Jurisdiction Argument
Hamblen J gave this short shrift as ATS had already unsuccessfully tried to dispute the jurisdiction of the Commercial Court earlier in the proceedings.
Penalty Clause
Again, Hamblen J was not prepared to entertain ATS’s contentions on this issue. He pointed to the fact that the relevant contractual provisions were common in aircraft sale agreements, appeared in all three of the sale agreements involved in the case and also in the precedent agreement contained in a practitioner’s text on such contracts. He also found that the amount of the deposit was not unusual and amounted to a reasonable pre-estimate of Tandrin’s possible losses which, in fact, exceeded the deposit.
Force Majeure
This amounted to ATS’s principal defence by which it sought to justify its refusal to take delivery of the jet because the “unanticipated, unforeseeable and cataclysmic downward spiral of the world’s financial markets” had triggered the force majeure clause in the sale agreement. It argued that the effect of this was that the time in which it was obliged to complete the purchase of the jet (and potentially the price it should pay for it) was postponed.
Hamblen J quite rightly referred to the fact that it has long been settled law that a change in economic and/or market circumstances which affects the profitability of a contract or the performance of parties’ obligations will not be regarded as being a force majeure event. In short, as we are sure many clients have been told over recent months, the law will not relieve you of a bad deal.
Hamblen J went on to consider the precise terms of the force majeure clause in the sale agreement and held that it could not be interpreted as ATS had argued. He held that although the clause stated that a force majeure event could include “any other cause beyond the Seller’s reasonable control” this had to be read in the context of the entire clause. The specific examples of force majeure events in the clause included the usual triggers seen in clauses of this type such as acts of God, war, riots, fires, government actions, strikes and labour disputes. It also referred to an inability to obtain aircraft materials and accessories but significantly did not include any references to either economic and/or market forces or how the transaction was to be financed. The Judge also pointed to the fact that the clause made no reference to matters which were beyond either ATS’s or “either party’s” reasonable control.
Comment
- Hamblen J’s decision is to be welcomed. In the absence of specific wording in the force majeure clause extending to particular and specific economic events, to have found for ATS would have created huge uncertainty which would have been an open invitation to defaulting parties to plead “it’s the credit crunch” in respect of their breaches of contract.
- Force majeure clauses are often considered to be “boilerplate” provisions which do not justify significant negotiation. However, as this case demonstrates, a party seeking to rely on a purported force majeure event must prove that the event falls within the meaning of the clause. Proper thought should therefore be given to any deal specific concerns which are not covered by the usual precedents so that these can be negotiated into the final contract.
If you would like more information or advice relating to a specific matter, please contact Simon Walsh on 01727 798085 or by email at simon.walsh@salaw.com.
© SA LAW 2010
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