Commercial Court rules ‘No Penalty’: De Havilland lands US$43m summary judgment against SpiceJet

23/02/21

De Havilland Aircraft of Canada Ltd (“De Havilland”) has today secured summary judgment against SpiceJet, one of India’s largest airlines, on its Commercial Court claim for the sum of approximately US$43 million (plus interest) owing under a Purchase Agreement for 25 Dash 8-400 aircraft (“Aircraft”). The Court also dismissed SpiceJet’s Counterclaim for damages.

Under the Purchase Agreement SpiceJet was required to make advance pre-delivery payments (“PDPs”) for each Aircraft a number of months before its Scheduled Delivery Month. If SpiceJet defaulted on the PDPs, De Havilland was entitled to terminate the relevant Aircraft and claim liquidated damages under Article 15.4(c) (“Liquidated Damages Provision”). If De Havilland lawfully terminated a total of four or more Aircraft, it was entitled to terminate the entire Purchase Agreement.

In January 2020, De Havilland terminated two sets of Aircraft (in reliance upon SpiceJet’s failure to pay the relevant PDPs); and, having terminated the requisite four Aircraft, De Havilland terminated the entire Purchase Agreement in February 2020 and commenced proceedings for liquidated damages and declaratory relief. SpiceJet relied, primarily, on three defences to De Havilland’s Claim:

1. a change order to the Purchase Agreement (“CO6”), which suspended the Scheduled Delivery Months of 16 Aircraft, also had the effect of suspending accrued PDP payment obligations for 11 of the Aircraft upon which De Havilland had relied in terminating the Purchase Agreement;
2. a letter agreement (“LA13”) forming part of the Purchase Agreement contained an enforceable obligation on De Havilland to provide “finance assistance” to SpiceJet and, because of De Havilland’s breaches of that obligation, SpiceJet was not obliged to pay the PDPs for three Aircraft (the same allegations formed the basis of SpiceJet’s Counterclaim for damages, which it sought to set-off against the Claim; and
3. the Liquidated Damages Clause was an unenforceable penalty.      

After a two-day hearing before Sir Michael Burton GBE, the Commercial Court handed down Judgment today by which it rejected each of SpiceJet’s three defences. First, the Court held that CO6 did not amount to an agreement which suspended or excused payment of PDPs for those Aircraft which had already accrued due and owing from SpiceJet by the time of CO6. De Havilland was therefore ultimately entitled to terminate the Purchase Agreement because SpiceJet had defaulted in relation to at least four Aircraft. (SpiceJet has been given leave to appeal on this issue).

In relation to LA13 the Court held that it was not arguable that it contained any obligations of the nature contended for by SpiceJet The Court went on to hold that it was unarguable that: (a) any breach of LA13 by De Havilland could be a ground for not enforcing SpiceJet’s obligations to pay PDPs (having regard to the so-called ‘prevention principle’ as articulated in Alghussein Establishment v Eton College [1988] 1 W.L.R. 587 and more recently in TMF Trustee v Fire Navigation Inc [2020] 2 Lloyd's Rep. 662); and (b) SpiceJet had any realistic Counterclaim for damages: Judgment.

Liquidated Damages or Penalty?

The Judgment is noteworthy for its treatment of the penalty issue and application of the law following the seminal decision of the Supreme Court in Cavendish Square Holding v Makdessi [2016] A.C. 1172 and is a helpful illustration of how parties may seek to have penalty challenges resolved summarily.  

SpiceJet contended that it was inappropriate to decide whether the Liquidated Damages Provision was penal on a summary basis, arguing that disclosure from De Havilland was necessary in relation to matters of factual matrix, evidence as to the loss in fact suffered by De Havilland, and evidence as to how it would quantify the maximum conceivable loss it might have suffered in relation to each Aircraft.     

The Court accepted that the onus would be on SpiceJet at trial to establish that the Liquidated Damages Provision was unenforceable, and that the penalty question must be considered at the time that the Purchase Agreement was entered into. There was, therefore, in the Court’s view no reason why the penalty issue was inappropriate for summary judgment. The Court further noted that: the parties were both represented at the time of the Purchase Agreement by experienced lawyers; were both substantial commercial operators in the aircraft industry with a long-standing commercial relationship; there was clearly comparable bargaining power; and SpiceJet (with the benefit of advice) had expressly agreed that “such liquidated damages do not constitute a penalty”.

The Judge accepted De Havilland’s submissions that: (a) SpiceJet had not begun to satisfy the onus of showing a penalty, or of meeting the “strong presumption” in favour of the agreed provision); (b) no evidence of actual loss was appropriate ; and (c) SpiceJet had not 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 (applying the test of Lord Hodge in Cavendish at [220]).

The Judgment is here.