Seller beware! The dangers of over-optimism when signing a contract

The court had to ascertain whether the airline had the right to terminate the agreements without incurring any liability.  It was noted in the judgment that the terms of agreements, which were negotiated to some extent between the two parties, were clearly in favor of Qatar Airways who had a superior bargaining power. However, it was apparent that Optimares was “keen” to enter into the agreements to secure business and “made the choice” to contract on those terms.⁴

THE AGREEMENT

In 2018 and 2019, Optimares signed Purchase Agreements with Qatar Airways to design, manufacture, and supply business and economy class seats for Boeing 787-9, Boeing 777-9 and Airbus A321 aircrafts. These Purchase Agreements included work done by Optimares prior to their signature. 

The parties agreed that Qatar Airways would issue Purchase Orders to Optimares  for shipsets (groups of seats) to install into the aircrafts.  The Purchase Orders would be governed by the terms of Qatar Airways’ Standard Conditions and the Purchase  Agreements. On delivery and acceptance of the shipsets referred to in the relevant Purchase Order by Qatar Airways, Optimares would invoice it and that invoice would be payable by Qatar Airways within 45 days of receipt.

The Purchase Agreements also provided for the payment of non-recurring costs (NRC) incurred by Optimares for developing and producing the shipsets.  This payment would cover the phases of design, development, engineering, and final certification of the seats.

The relevant termination clause 12.2.3 of Standard Conditions  provided that:

“Notwithstanding anything to the contrary contained in these Standard Condition or the applicable Purchase Agreement, Qatar Airways shall be entitled to terminate these Standard Conditions, the Purchase Agreement and/or any Purchase Order for its convenience and without incurring any liability by providing three (3) months prior written notice to the Supplier for termination of these Standard Conditions and/or Purchase Agreement and fourteen (14) days prior written notice for termination of the Purchase Order.”

Clause 12.3.2 (a part of clause 12.3 heading –  Effect of Termination) provided that:

“The Supplier shall repay or credit to Qatar Airways, at Qatar Airways' option, within ten (10) calendar days after the date of termination, expiry or suspension, all sums previously paid by Qatar Airways to the Supplier together with Interest thereon. The Supplier shall also reimburse to Qatar Airways all Freight Charges paid or incurred by Qatar Airways for Products and Spare Parts affected by such termination, expiry, or suspension. All such payments shall be in addition to any liquidated damages payable or claimable pursuant to these Standard Condition and the Purchase Agreement.”

Clause 13.1.7 (Termination or cancellation for excusable delays) provided that:

“If (i) such Excusable Delay lasts or could reasonably be expected to last for more than thirty (30) calendar days; or (ii) the recovery programme is in the sole opinion of Qatar Airways regarded as not being feasible; or (iii) if no agreement is reached on the recovery programme within thirty (30) calendar days from the date of commencement of the Excusable Delay, then Qatar Airways shall have the right, at its own choice and upon written notice to the Supplier, to forthwith cancel all or part of the undelivered portion of these Standard Conditions and the Purchase Agreement. In such cases of cancellation, Qatar Airways shall have no liability whatsoever other than payment by Qatar Airways of properly substantiated costs incurred by the Supplier for labour already performed on, and parts already installed on the Aircraft prior to such date of commencement of the Excusable Delay,  provided that the Supplier shall on written demand from Qatar Airways reimburse to Qatar Airways all predelivery payments and other payments already effected by Qatar Airways that the Supplier is not able to substantiate in accordance with the foregoing"

Clause 16.13 (Reasonable Acts) provided that:

“Both Parties shall act in good faith in the performance of their respective responsibilities and obligations under these Standard Conditions and the Purchase Agreement ….”

EVENT TRIGGERING THE DISPUTE

By March 2020, Optimares had incurred millions of euros in progressing the works and was on the verge of commencing deliveries of the shipsets, when Qatar Airways served termination notices (pursuant to clause 12.2.3) in respect of all four Purchase Agreements and the Purchase Orders placed under them demanding repayment of sums that it had paid to Optimares. The termination notices were served in response to Optimares’ notices claiming “excusable delay” on the ground of COVID-19 pandemic that had rendered manufacturing processes for the seats, impossible.

CRUCIAL ISSUES BEFORE THE COURT

1. Did the “excusable delay” claim -- which would trigger right of termination under clause 13.1.7 -- prevent Qatar Airways from relying on the termination for convenience provision in clause 12.2.3?

2. What are the financial consequences of a termination in accordance with clause 12.2.3? Specifically, (i) what is the meaning of "without incurring any liability " in clause 12.2.3 and  (ii) do the consequences stated in clause 12.3.2 apply to a termination for convenience?

3. Whether clause 12.2.3 of the Standard Conditions creates an unfettered right to terminate at will or whether the clause is qualified by other contractual provisions, notably the duty of good faith in clause 16.13 of the Standard Conditions?

LEGAL PRINCIPLES FROM LEADING CASES

To arrive at its decision, the court relied on the following key principles of contractual construction derived from leading cases, most recently summarized in Deutsche Trustee v Duchess & Others.⁵

1. When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to all the background knowledge which would have been available to the parties. 

2. Following the judgement in Arnold v Briton,⁶ to identify the meaning of a clause, the meaning of its words are to be assessed in the light of (i) the natural and ordinary meaning of the clause; (ii) any other relevant provision of the contract; (iii) the overall purpose of the clause; (iv) the facts and circumstances known or assumed by the parties at the time of entering into the contract; and (v) commercial common sense; but (vi) disregarding subjective evidence of any party's intentions.

3. The mere fact that a contractual arrangement, when interpreted according to its natural language produces an undesired, or even a disastrous result for one of the parties, must not be a reason for departing from the natural language.

4. Though commercial common sense is a significant factor to be taken  into account when interpreting a contract, a court must be cautious in ignoring the natural meaning of a provision just because it appears to be a very bad bargain for one of the parties. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that the parties should have agreed. Accordingly, the court should avoid rewriting a contract in an attempt to assist an unwise party or to penalize an astute party.

5. The court’s approach should be iterative requiring to check  each of the suggested competing interpretations against other provisions of the contract to assess commercial consequences. 

DEALING WITH THE ISSUES AND DECISION

Issue 1 – was “excusable delay” the only available cause for termination?

With regard to  termination, the questions before the court were -  

1. in the event of an excusable delay occurring, whether Qatar Airways could choose which termination clause to rely upon, being either:

   • clause 13.1.7 as the delay satisfies one of the conditions specified in the contract (e.g., the delay lasts or is expected to last for over 30 days); or

   • termination right for convenience (clause 12.2.3); or

2. whether the termination for convenience (clause 12.2.3) ceases to be operable once an excusable delay occurs and Qatar Airways’ right to terminate is limited to excusable delay provision (clause 13.1.7).

Optimares argued that if the two termination provisions were available simultaneously, clause 13.1.7 would become redundant, because Qatar Airways would always prefer to terminate for convenience and could walk away without suffering any reprisal. But Qatar Airways’ counter argument was that because the two clauses coexisted, it was irrelevant that they also had the option to terminate for any excusable delay if they wished to do so.

The court observed that the consequences of termination may vary, depending upon which termination clause Qatar Airways chose to rely upon.  Contrary to clause 13.1.7 which provided immediate termination, clause 12.2.3 required serving notices.  This meant even after a termination notice served under clause 12.2.3, Optimares could still issue invoices for executed Purchase Orders, or could make deliveries under relevant Purchase Orders within 14 days and issue invoices.  And, Qatar Airways would then be required to pay all such invoices.  That’s why Clause 12.2.3 would not necessarily allow Qatar Airways to terminate and walk away free of any consequences.

Considering the clear and unambiguous language of clause 12.2.3, which was the starting point of contractual interpretation -- particularly the wording, “notwithstanding anything to the contrary” -- the court held that the two provisions (12.2.3 and 13.1.7) for termination co-existed.  Therefore, Qatar Airways, at its discretion, was entitled to terminate in accordance with either of the termination provisions. The existence of an excusable delay -- which would generate a termination right in accordance with clause 13.1.7 -- did not prevent Qatar Airways from terminating for convenience under clause 12.2.3 of the Standard Conditions.

Issue 2 – financial consequences of termination

Optimares contended that termination for convenience triggered Optimares’ right to claim common law damages which meant that the phrase without incurring any liability only included loss of profit but did not include wasted cost given the significant financial risks it had agreed to bear to prioritize Qatar Airways contracts.

But the court rejected Optimares’ contention, ruling that the wasted cost was not payable by Qatar Airways, because the termination was not following a repudiation, but was in accordance with a contractual right. As such, the exercise of the contractual right of termination did not create any entitlement to common law damages. The consequences of termination for convenience were all that were stated in the clause itself which did not include any provision for wasted cost.

Optimares further contended that Qatar Airways could not rely on clause 12.3.2 which, according to Optimares, applied only to termination for cause. Optimares submitted that if provisions of clause 12.3.2 did apply to a termination under clause 12.2.3, it would produce an absurd situation, because Qatar Airways could, after termination for convenience, be entitled to keep the seats and, as well, receive reimbursement for all the sums paid for the seats, because “all sums previously paid” would include invoices for shipsets already paid by Qatar Airways.

The court clarified (and also admitted by Qatar Airways) that all sums previously paid did not include payment of purchase price for delivered shipsets; however, it did include instalments of the nonrecurring costs (NRC) for the design work paid in advance before the delivery of the shipsets. Optimares’ entitlement to retain the NRC depended upon Optimares reaching the stage at which it delivered -- or was able to deliver  the completed shipsets and invoice for the purchase price.  But until that time -- as envisaged by clauses 12.3.2 and 13.1.7 -- Optimares had borne the risk of not completing their obligations before termination requiring them to repay the relevant NRC paid as advance.

Issue 3 – was “good faith” a deterrent to termination?

Optimares argued that clause 12.2.3 did not provide an unfettered right to terminate, but rather was qualified by the good faith provision.  Qatar Airways was under a positive obligation to allow Optimares to perform its work, or at least an obligation not to take steps to frustrate the work process by terminating the contract.

Qatar Airways, relying on the wordings of clause 16.13, contended that its duty of good faith applied only to the performance of its respective responsibilities and obligations and exercising a termination right did not constitute performance of any responsibility or obligation. Additionally, as emphasized by Qatar Airways, clause 12.2.3 was stated to apply “notwithstanding anything to the contrary” and provided an unfettered right to terminate for convenience.

The court held that good faith in clause 16.13 applied only to the performance of the subject matter of the contract such as, the obligation to deliver seats and respond to all associated matters that required the parties' cooperation.  This had no relevance to clause 12.2.3, because the exercise of a termination right neither constituted a responsibility nor an obligation. 

The court dismissed Optimare’s claim in excess of USD 20 million and ordered it to pay a substantial sum on Qatar Airways’ counterclaim.

CONCLUSION

This case demonstrates that there could be significant differences between the consequences of termination when it comes to termination for convenience (a contractual right) and for breach of contract. Standard common law damages may not be applicable at all for termination for convenience unless that is specifically stated in the contract. Although not all commercial contracts have provisions for termination for convenience, other contractual termination provisions like bankruptcy or other specified events are likely to exist. If multiple provisions exist for the same matter (termination, for example), the interactions between the provisions must be considered.

The judgment reiterated the principles around contractual interpretation. It clarified – notwithstanding -- that a contractual provision may be weighted in favor of one party over another -- in circumstances where the parties have negotiated and prepared a written contract assisted by skilled professionals  -- the court will adopt a textual analysis when interpreting the contract and look to the natural and ordinary meaning of the clauses.⁷

English courts are unlikely not to give effect to the strict wordings of a contract between two sophisticated commercial entities especially when the contract is drafted with assistance from legal experts -- even if the wording produces an outcome later that appears to be catastrophic for one of the parties. While considering clause wordings in the context of commercial common sense, it will not be invoked retrospectively by the courts. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, at the date a contract was made. ⁸

The legal opinions in this article are the author’s own, not WorldCC’s, and this is not legal advice.

ABOUT THE AUTHOR

Pallab Mukherjee, a Chartered Engineer with a master’s degree in Construction law, is a commercial management expert having more than 30 years of diverse experience across Middle East and India in various industry sectors including Oil & Gas and Petrochemicals.  He has played pivotal roles in commercial management transformation projects and assumed key commercial roles in brown and green field projects that have built some of the largest down-steam assets in the Middle East North Africa (MENA) region. He actively promotes awareness on commercial management principles and best-practices; and conducts contract-management workshops. He is a public speaker, mentor, and coach. He is also a World Commerce & Contracting (WorldCC) Council member.

END NOTES

1.S.p.A. v Qatar Airways Group Q.C.S.C. [2022] EWHC 2461 (Comm)

2.Qatar Airways

3.Optimares

4.Flight Global, airlines article titled Italy’s Optimares loses legal case over axed Qatar Airways seat-supply contract

5.Trustee v Duchess & Others [2019] EWHC 778 (CH)

6.Arnold v Britton [2015] UKSC 36

7.See also “Termination for convenience unseats airline supplier”, (CMS Law-Now, 13^th October 2022)

8.See also “Termination provision: The English High Court continues to adopt a strict approach to contractual construction”, (Mayer Brown, 31^st October 2022)