Contracts - a salutary tale…

Sydney Mitchell LLP

For those who like horror stories, a recent case provides a stark reminder to businesses and their owners of the importance of not allowing themselves to be bullied, cajoled or tempted into entering into contracts without advice and a good understanding of the implications of the terms.

It also makes clear that businesses that do chose to enter into a bad bargain should not expect the Courts not to enforce the terms to which they have agreed.

The facts concerned a prominent airline and a supplier who contracted to manufacture seats for the airline’s aircraft.

The volumes on offer to the supplier were such that the contract included provisions requiring it to get a larger plant, invest substantially in its existing facilities and even agree not to take on new work for other customers so that it was pretty much wholly committed and very exposed to the airline.

This being so, it was unwise in the extreme for the supplier also to accept a provision in the contract which allowed the airline to terminate the contract for convenience. The deal was not a good one, but the supplier succumbed to the temptation.

Difficulties first arose for the supplier due to circumstances outside of its control connected to the Covid pandemic. The supplier sought to take advantage of a force majeure type clause included in the contract to excuse its delay in performance by giving a contractual notice to the airline which gave rise to a separate right for the airline to terminate.

The airline promptly exercised its right to terminate for convenience.

The court did not accept the supplier’s submissions that the existence of the separate right under the force majeure provision excluded the airline’s right to exercise the right to terminate for convenience.

It did not accept the supplier’s submission that the inclusion of a good faith provision in the contract excluded the airline’s right to exercise the right to terminate for convenience.

 Most painfully of all for the supplier, in the absence of any provision in the contract providing otherwise, the court did not accept the supplier’s submission that it should be entitled to any damages or compensation for the very substantial multi-million euro losses it had incurred as a result of the airline’s termination.

It is understandable, particularly at present, that businesses look to enter into lucrative contracts and that they are often prepared to “take a view” on the terms but, as the case shows, it can be critically important not to be blind to the risks that these can present.

If you or your business requires advice on any contractual matter, please contact Julian Milan on 08081668827.