FINANCE LITIGATION UPDATE – JULY 2022 23 Decision The Court held that the Lender had validly terminated the Loan Agreement (and therefore validly enforced its security over the aircraft). This conclusion was based on the following findings. 1- Did it matter whether the arrears were outstanding at the point of termination (i.e. did the breach need to be continuing)? No. The Termination Clause did not, as a matter of construction, require the default to be continuing at the date the notice was served. Rather, it specified that the right could be exercised "at any time" after an Event of Default had occurred. Therefore, it was irrelevant whether the arrears were outstanding at the point of termination: there was no dispute that the Borrower had historically been in arrears. Interestingly, the Court considered that even if the Termination Clause had required the arrears to be outstanding at the point of termination, a failure to pay a sum even as small as $179.99 (which the Lender claimed was an undisputed outstanding sum) would have been sufficient to justify termination1. 2- Did the Lender 'waive' the right to terminate for the arrears? Yes. The apparent harshness which resulted from a creditor exercising a right to terminate for historic breaches was moderated by the legal concepts of 'waiver' and/or 'estoppel'2. In this case, the Lender had waived the right to terminate by offering the Borrower additional time to pay the arrears and asserting its right to penalty charges on the Borrower's late payments (which was inconsistent with the Lender terminating the Loan Agreement). Although there was a 'no waiver clause' in the Loan Agreement which stated that "[n]o failure or delay in exercising… any right… shall operate as a waiver…", this could not overcome a waiver of this kind, namely one resulting from positive statements and assertions and not merely a failure or delay in exercising the right to terminate3. Nor could the Reservation Statement prevent things previously said or done from having their objective effect. 1 The Court nevertheless considered that there might be jurisdiction in appropriate circumstances to grant relief against forfeiture so far as enforcement of the aircraft mortgage was concerned (para.102). 2 Whereby a party can lose a contractual right to terminate by acting in a way which is inconsistent with the termination of the contract. 3 Para. 87. 4 Arising from the case of Boston Deep Sea Fishing v Ansell (1888) 39 Ch D 339. 3- Was the Lender entitled to terminate for another reason? Yes. Although the notice specified alleged arrears as the reason for termination, the Lender could rely on other reasons not specified in the notice as a basis for termination. This was because the Termination Clause did not require the basis of termination to be specified. This conclusion was consistent with the 'Boston Deep Sea Fishing principle'4, namely that it is possible to terminate at common law for a 'repudiatory breach of contract' without identifying (or correctly identifying) the breaches justifying termination. In this case, there were other reasons which justified termination including (but not limited to) the Borrower's financial position (this being an Event of Default under a so-called 'material adverse change' clause5). 4- Was the Lender precluded from terminating on the basis of the following: (a) That the Termination Clause was an unenforceable 'penalty'? No. The Borrower argued that the Termination Clause was a 'penalty' (being a clause that is void and unenforceable due to its oppressive and unconscionable nature). This was on the basis that the Termination Clause entitled the Lender to terminate for what might be a trivial Event of Default, rendering the full amount of the outstanding balance immediately payable. The Court considered this a "hopeless" argument. The events which entitled the Lender to require repayment of the full outstanding balance were ones which, objectively, raised the risk of default.6 (b) That the Lender owed the Borrower a contractual duty of good faith? No. The Borrower argued that the Lender was subject to an implied contractual duty of good faith (the so-called 'Braganza duty'7). The Court rejected this argument, adopting the reasoning of recent High Court authority that termination rights were not contractual discretions to which such implied duties applied (rather they were 'absolute' contractual 5 This having been triggered where, in the opinion of the Lender, a material adverse change occurred in the business, assets, condition, operations or prospects of any group company. 6 Neither did the fact that: (i) the rate of interest payable following default effectively quintupled the minimum base rate that became due; (ii) the default interest was compounded (there being nothing inherently penal about compound interest); or (iii) an Event of Default triggered the Lender's right to take possession of the aircraft (para.150). 7 Being a duty which qualifies the manner in which a contractual discretion should be exercised, arising from the Supreme Court's decision in Braganza v BP Shipping Limited [2015] UKSC 17.
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