No harm, no foul – liquidated damages clause upheld by the Commercial Court (De Havilland v Spicejet)

Summary

Sir Michael Burton GBE handed down the court’s decision in De Havilland Aircraft of Canada Limited v SpiceJet Limited [2021] EWHC 362 (Comm) on 23 February 2021, awarding summary judgment to the Claimant for the sum of USD 43M. The decision provides useful insight into: (i) the court’s view on the application of the ‘prevention principle; (ii) the application of the law on penalties following Cavendish Square Holding v Makdessi¹; and iii) when the court is able to determine these issues summarily.

Background

The case revolved around a Purchase Agreement (“PA”) entered into between De Havilland Aircraft of Canada Limited (“De Havilland”) and one of India’s largest airlines, SpiceJet Limited (“SpiceJet”), in 2017. The PA governed De Havilland’s supply of 25 aircraft to SpiceJet. Under the terms of the PA, SpiceJet were to make pre-delivery payments (“PDPs”), in advance of contractually agreed Scheduled Delivery Months (“SDMs”). If SpiceJet defaulted on its PDP obligations, De Havilland could terminate the agreement for the affected aircraft, and claim liquidated damages. If a total of four or more aircraft were lawfully terminated, De Havilland was entitled to terminate the entire PA.

SpiceJet paid for and accepted delivery for aircraft 1-5. However, it failed to pay the PDPs for aircraft 6-20, and also failed to take delivery for aircraft 6-8. In January 2020, De Havilland served notice terminating the undelivered aircraft, and the PA, and claimed damages in respect of all the undelivered aircraft under the PA’s liquidated damages clause or, alternatively, damages for breach of contract under the PA. 

Issues

(1) Suspension of PDPs:

SpiceJet argued that any obligation to pay the PDPs for aircraft 9-20 had been suspended by a Change Order dated 15 April 2019 (“CO6”), meaning it was not in default. On that basis, it claimed that De Havilland had not been entitled to terminate the PA, as the ‘tipping point’ of four aircraft had not been met. De Havilland’s position was that CO6 had suspended the SDMs only, and that there was no agreement to suspend any payment dates.

The court determined that CO6 did not amount to an agreement which suspended or excused payment of the PDPs for those aircraft where sums were already accrued as due and owing at the time of CO6. On the rationale behind CO6, the court commented that “the Claimant remained under the obligation to manufacture and deliver the aircraft and still required the security of the PDPs … it was perfectly commercial for the parties to leave the obligation to make the PDPs as they were”. Summary judgment was granted in favour of De Havilland on this issue.

(2) Breach of contractual obligations by De Havilland:

SpiceJet argued that De Havilland was in breach of its obligations under a Letter Agreement of 8 September 2017 (“LA13”), to provide assistance in arranging finance. It claimed that (i) as De Havilland was in breach of that obligation, (ii) SpiceJet was prevented from complying with its PDP obligations.

SpiceJet attempted to advance a ‘prevention principle’ argument, namely that it should be exonerated from payment of PDPs when such action was “prevented and rendered impossible by the wrongful act of the other contracting party” ². The same allegation formed part of SpiceJet’s counterclaim for damages, which it sought to set off against De Havilland’s claim.

The court found that whilst LA13 “was capable of and did constitute a contractual document”, LA13 did not contain any obligation on De Havilland to “work with SpiceJet and its financiers and/or other guarantors to procure finance”. As such, it did not “begin to be arguable” that a breach of LA13 could “amount to a ground for not enforcing the obligations of the Defendant under the PA”. A ‘prevention principle’ argument was not present on the facts. The court summarily dismissed the Defendant’s counterclaim as “unarguable”, and the question of set off did not arise.

(3) Liquidated damages

Finally, SpiceJet argued that the liquidated damages clause of the PA, requiring payment of USD 2.5M per aircraft, amounted to an unenforceable penalty, and that this issue could not be determined on a summary basis. It submitted there was an arguable case that the clause was an irrecoverable penalty for three reasons. The court rejected each ground and determined that the liquidated damages provision should stand.

Factual matrix: contrary to arguments from SpiceJet, no further evidence of the factual matrix was required. The question of whether the clause was a penalty or not was “one of construction at the time the PA was entered into”. The court emphasised that the parties were both represented (both at the time, and still) by experienced and sophisticated lawyers as substantial commercial operators in the market, and with “clearly comparable” bargaining power. Within the drafting of the PA, SpiceJet had expressly agreed that “such liquidated damages do not constitute a penalty”.

Actual loss: no evidence was required or appropriate as to actual loss suffered, as “the whole purpose of a liquidated damages clause is to avoid the expense and time incurred in calculating the actual extent of loss”.

Evidence on maximum conceivable loss: SpiceJet argued that evidence needed to be adduced, at trial, as to how De Havilland would quantify the maximum conceivable loss it might have suffered in relation to each aircraft. The court found that SpiceJet had “not even come close to casting doubt” that the sums stipulated under the liquidated damages provision fell below the highest level of damages that could possibly arise from SpiceJet’s breach, i.e. that 12.5% was a genuine pre-estimate of loss, and not exorbitant or extravagant. SpiceJet failed to cast any doubt on the realistic nature of this estimate, agreed in the PA.

Comment

This judgment provides useful guidance on the court’s approach to the issue of penalties, particularly when raised as a defence to a summary application. The decision follows a series of recent judgments in which the courts have demonstrated their willingness to decide complex issues on a summary basis. The court observed it is appropriate to decide issues summarily: “where there is a short point of law or construction, if the Court is satisfied that it has before it all the evidence necessary for the proper determination of the question and that the parties have had an adequate opportunity to address it in argument”.

It also provides a convenient summary of the steps the court will take when determining an issue of contractual interpretation on a summary basis. As an ever-evolving doctrine, Sir Michael Burton GBE’s step-by-step guide is a welcome re-statement of the current law: “I must look at the whole agreement; I must apply an objective test; I must take into account that the agreement was handled, negotiated and prepared by skilled professionals; particularly in the event of any ambiguity I should apply a commercial approach to it, but always subject to bearing in mind the possibility that one side may have agreed to something which with hindsight did not serve its interest”.