A party should not assume that the failure of its counterpart to provide or satisfy conditions precedent gives rise to an automatic right to terminate or not perform a contingent obligation, where it could have obtained or satisfied those conditions precedent itself.
The recent Odyssey Aviation Ltd v GFG 737 Limited in the English High Court saw both the buyer and seller under an aircraft purchase agreement (the ‘APA’) claiming the deposit, as both parties attempted to terminate the APA on the basis of various alleged breaches of warranty, failure to satisfy conditions precedent and non-payment of purchase price and fees.
The case is significant for aviation sale and leasing practitioners, especially in relation the satisfaction of conditions precedent which is noteworthy for transactional lawyers more generally. It was held that a term should be implied in the APA where a party was to ‘have received’ certain documents, evidence or confirmations, or that the sale would take place ‘subject to the fulfilment’ of conditions precedent, the recipient should take ‘reasonable steps’ to obtain them themselves. This was held to be the case even where there is no express obligation to this effect. Failure to take these steps will mean that the intended recipient would not be able to rely on the other party’s failure to satisfy the condition precedent as a ground for termination.
Odyssey Aviation Ltd (‘Odyssey’) agreed to sell a Boeing Business Jet B737-72U to GFG 737 Limited (‘GFG’) pursuant to the APA. GFG paid a refundable holding deposit to an escrow agent (the ‘Deposit’).
Delivery of the aircraft did not go ahead on the scheduled delivery date. GFG claimed that there had been a breach of the title warranty by Odyssey as seller and that they had failed to fulfil certain conditions precedent, and accordingly attempted to terminate the APA. Odyssey denied these claims and, referring to the failure by GFG to pay the outstanding purchase price and the relevant portion of the escrow agent fees, also attempted to terminate the APA a month later.
In relation to the conditions precedent claim, the contested points of the relevant provision read as follows:
“2.4 Buyer’s condition precedent
The obligation of the Buyer to purchase the Aircraft from the Seller shall be subject to the fulfilment of the following conditions precedent:
- on or before the date of this Agreement, the Buyer shall have received evidence reasonably satisfactory to the Buyer that the Seller has duly authorised the execution and delivery of this Agreement and all matters contemplated by the Agreement;
- on or before the Scheduled Delivery Date, the Seller shall have positioned the Aircraft in the Delivery Condition at the Delivery Location at Buyer’s sole cost …
- on or before the Scheduled Delivery Date, the Buyer will have received evidence of the establishment of the Seller as a transaction user entity with the International Registry;
- on or before the Scheduled Delivery Date the Buyer will have received copies of all back to birth bills of sale …”
In relation specifically to 2.4(a), (f) and (g), Odyssey submitted that:
- as these documents had not been requested by GFG ahead of the scheduled delivery date, and
- as GFG had not raised their absence as an obstacle to the delivery going ahead; and
- as GFG could have requested copies of these documents from Odyssey or from others but did not, and could have satisfied itself in relation to 2.4(f) by conducting a search on a publicly accessible register but did not,
GFG could not rely on Odyssey’s non-compliance with the condition precedent as a ground for termination.
According to the provisions of the APA, if GFG’s termination was valid, it would be entitled to have the Deposit returned. However, if Odyssey’s termination was valid, it would be entitled to keep the Deposit.
The High Court agreed with the Odyssey submission in relation to 2.4 of the APA, and found that this provision contained an implied term that:
- GFG (as the recipient of the condition precedent) shall take reasonable steps to seek and request the document, evidence or confirmation required;
- if the party entitled to receive the condition precedent was unable to obtain such document, evidence or confirmation, notwithstanding the taking of reasonable steps to obtain the same, it should inform its counterparty accordingly; and
- If the party entitled to receive the condition precedent fails to take reasonable steps to obtain the document, evidence or confirmation in question and fails to inform its counterparty accordingly it is not entitled to rely on the non-provision of the condition precedent in the exercise of a right of termination.
In summarising the reason for implying such a term into the contract, it was found that the term was reasonable and equitable, and was “necessary to give business efficacy to the contract”.
Of particular interest to parties to loan agreements, lease agreements, and sale and purchase agreements (amongst others) is that it was held that there is an obligation upon the party responsible for satisfying the condition precedent to make enquiries of its counterpart whether it has received the document, evidence or confirmation, but that the party requiring the document, evidence or confirmation must inform the other party that the condition precedent has not been received and is still required, otherwise the party obliged to provide it might reasonably assume that satisfactory evidence has been received.
It is established practice in commercial aviation transactions to circulate a schedule of conditions precedent to be satisfied (the CP List) at an early stage of the transaction once agreed in the sale agreement or lease, which will then be referred to by all parties as a measure of progress towards delivery, and regularly discussed and exchanged by all parties as a key element of the preparation for closing. This process is often less firmly entrenched and less regimented in private aviation transactions, and as the aircraft the subject of the APA in question was a Boeing Business Jet, this may have been a factor in the running of the transaction.
Conclusions and recommendations
The summary judgement was ultimately given in favour of Odyssey, the seller, in relation to the points argued on the title warranty, the implied term at 2.4, and also specifically on each of the conditions listed above under 2.4. Its termination of the APA was found to be valid, and it was entitled to be paid the Deposit.
This finding will have an impact both on how we draft conditions precedent provisions, and how we conduct aviation transactions in practice.
A well-drafted conditions precedent clause will allocate responsibility for providing each item to a particular party where appropriate, drafted as a requirement that each be proactively provided by the responsible party, to clarify the obligations to the extent possible. It is also crucial that the satisfaction of these conditions be carefully and thoroughly managed, by the parties and/or by their assisting counsel. The regular updating and circulation of the CP list is a familiar part of the transaction process for many of us, but it is important to maintain open dialogue between the parties as to progress towards satisfaction of any outstanding items. All parties should be asked to confirm in writing when they consider all conditions precedent to be provided for their benefit to be satisfied, and any amendment, waiver or deferral should similarly be clearly documented.
Click here to read the full text of the judgment.