In 1996, Austrian Airlines agreed to order Airbus A330 aircraft using Pratt & Whitney engines, an arrangement worth tens of millions of dollars to Pratt & Whitney, an affiliate of United Technologies Corporation. As part of the inducement for that engine deal, UT Finance Corporation agreed to buy Austrian’s used Airbus A310-325 in March 2004 for $32 million.
The Aircraft Purchase Agreement made time of the essence and conditioned UTF’s duty to purchase on Austrian’s strict satisfaction of detailed delivery requirements. Among other things, Austrian had to provide a current FAA-approved airplane flight manual, deliver an aircraft eligible for an FAA certificate of airworthiness, and deliver an aircraft eligible to be promptly registered and operated under FAA Part 119 or 121 in 180-minute ETOPS service. The agreement expressly stated that UTF had no duty to buy a nonconforming aircraft, although it could choose to accept one and deduct up to $1 million for the cost of curing deficiencies.
After the post-September 11 collapse of the used-aircraft market, the aircraft’s market value fell sharply. Austrian did not tender a conforming aircraft by the March 31, 2004 deadline. The aircraft lacked FAA approval for its auxiliary center fuel tanks, lacked an applicable current FAA-approved flight manual, was not eligible for FAA 180-minute ETOPS operations, and had additional deficiencies involving the cabin, landing-gear records, and an enhanced ground-proximity warning system. Austrian argued that UTF waived the delivery deadline and then rejected a substantially conforming tender on May 3 in bad faith to escape an unfavorable bargain.
The case was tried to the court without a jury. At the close of Austrian’s case, UTF moved for judgment on partial findings. Judge Kaplan granted the motion, dismissed Austrian’s breach-of-contract claim, and held that UTF, as the prevailing party, could recover reasonable attorneys’ fees and costs under the agreement.
Issue #1
Whether UTF waived the APA’s March 31, 2004 delivery deadline and its right to insist that time was of the essence.
Holding
No. Austrian did not prove an indisputable mutual departure from the written agreement, so UTF retained the right to enforce the March 31 deadline.
Reasoning
The APA expressly made time of the essence and required written, signed amendments. Although New York’s UCC permits waiver despite a no-oral-modification clause, waiver by conduct requires conduct that is incompatible with the agreement as written and demonstrates an indisputable mutual departure from it.
UTF’s March 11 email did not waive timely delivery. UTF said it would consider a delivery date beyond March 31 only if the parties agreed on financial compensation for the delay caused by UTF’s inspection period. That condition never occurred, and Austrian rejected UTF’s proposal by continuing to insist on a March 25 delivery date.
UTF’s continued inspections, status reports, and work after March 31 were also consistent with the existing agreement. UTF could have continued those efforts while treating Austrian’s failure as a breach and exploring a possible negotiated resolution. Those actions did not establish that UTF surrendered its contractual rights.
Austrian’s evidence that UTF had not marketed the aircraft and that a UTF executive viewed timing as practically unimportant was unpersuasive. The evidence showed that UTF had received multiple market inquiries, and the cited deposition testimony, read in context, reaffirmed that the parties had made time of the essence in their 1996 contract.
Issue #2
Whether Austrian made a conforming tender by the March 31 contractual deadline.
Holding
No. Austrian conceded, and the record overwhelmingly established, that the aircraft materially failed to satisfy the APA’s delivery conditions by March 31.
Reasoning
The transaction was a sale of goods between merchants governed by New York UCC Article 2. Under the UCC’s perfect-tender rule, a buyer may reject the whole tender if the goods or tender fail in any respect to conform to the contract.
Austrian acknowledged that the aircraft did not meet several delivery conditions by March 31. Its deficiencies included the absence of required FAA approvals and documentation, noncompliant cabin conditions, missing historical records for certain life-limited landing-gear parts, and the failure to install the required enhanced ground-proximity warning system.
Because UTF did not waive the deadline, Austrian’s failure to deliver a conforming aircraft by March 31 meant that Austrian failed to satisfy conditions precedent to UTF’s duty to purchase. That failure alone defeated Austrian’s claim that UTF breached the APA.
Issue #3
Whether the aircraft conformed to the APA by May 3, 2004, assuming UTF had waived the March 31 deadline.
Holding
No. Even under that assumption, Austrian did not establish that the aircraft met the FAA airworthiness, ETOPS, and flight-manual conditions required by the APA.
Reasoning
The aircraft was not fully eligible for an FAA certificate of airworthiness because its two auxiliary center fuel tanks were not included in the FAA type certificate for the A310-325 and had not otherwise received FAA approval by May 3. Austrian’s anecdotal evidence about other aircraft with similar tanks did not prove approval of these tanks. Airbus’s later application for, and the FAA’s later grant of, approval further undermined Austrian’s claim that approval already existed.
The contract’s airworthiness provision was not limited to the aircraft’s physical condition. The unapproved fuel tanks were part of the aircraft’s physical configuration and caused it to deviate from the FAA-approved type design. Austrian’s own contemporaneous efforts to obtain approval showed that it understood such approval was necessary to comply with the APA.
The aircraft also was not fully eligible to be promptly registered and operated under FAA Part 119 or 121 in 180-minute ETOPS service. The contract required FAA design approval necessary for that capability, not merely compliance with European standards or a future possibility of obtaining approval. Austrian had recognized during performance that FAA ETOPS approval was required, but it pursued the issue too late and did not prove that the FAA ever approved the A310-325 for 180-minute ETOPS operations.
Austrian’s alternative ETOPS theory rested on repairs and return-to-service documentation for another A310-325. The court rejected that theory because compliance with Airbus ETOPS standards did not establish compliance with FAA standards, and no FAA 180-minute ETOPS standard existed at the relevant time. A repair station’s Form 337 for a different aircraft could not substitute for the FAA’s rigorous design-approval process.
Austrian also failed to provide the required current FAA-approved airplane flight manual applicable to this aircraft. The existing manual did not reflect the additional fuel capacity of the auxiliary tanks, and Austrian’s own witness acknowledged that the manual was not applicable without the needed revisions. Those revisions were not approved until July 2004.
Issue #4
Whether UTF acted in bad faith by rejecting the aircraft rather than accepting nonconformities with a price adjustment.
Holding
No. UTF was entitled to insist on the contract’s express delivery conditions and to reject Austrian’s nonconforming tender, even if the aircraft’s declining market value gave UTF an economic reason to do so.
Reasoning
The UCC required a merchant buyer to act honestly and observe reasonable commercial standards of fair dealing. But any alleged aircraft-industry custom of accepting minor defects in exchange for a price allowance could not override the APA’s express terms.
Section 2.2A expressly gave UTF the option, not the obligation, to accept a nonconforming aircraft with a deduction. It plainly provided that Austrian was obligated to meet all delivery conditions and that UTF had no duty to purchase if those conditions were not met. Sophisticated parties were free to contract for that allocation of risk.
The aircraft’s defects were not minor in any event. The unapproved auxiliary tanks prevented the aircraft from qualifying for an FAA certificate of airworthiness, directly affecting both safety-related regulatory eligibility and the aircraft’s marketability.
The evidence did not establish that UTF obstructed Austrian’s performance. At most, it showed that UTF, faced with a severe market decline, insisted on receiving the complete benefit of its bargain and considered using Austrian’s nonperformance to avoid an economically disadvantageous transaction. That was commercially understandable and legally permissible under this contract.
Austrian’s reliance on Joe Oil was misplaced. That case concerned a seller’s UCC right to cure a defective tender where time was not of the essence and the seller promptly offered a conforming substitute. Here, time was expressly of the essence, the APA permitted UTF to reject any nonconforming tender, Austrian had contracted away any claimed right to cure after the deadline, and Austrian never tendered a conforming aircraft.
Issue #5
Whether Austrian or UTF was entitled to damages, attorneys’ fees, and litigation costs.
Holding
Austrian was entitled to none; UTF was entitled to reasonable attorneys’ fees and costs as the prevailing party under the APA.
Reasoning
Austrian could not prove the essential elements of its breach-of-contract claim because it did not perform the conditions precedent to UTF’s purchase obligation and did not show that UTF breached or acted in bad faith.
The APA’s fee-shifting provision entitled the prevailing party to recover reasonable attorneys’ fees and other costs. Because UTF prevailed on dismissal of Austrian’s claims, the court authorized UTF to move within fourteen days to fix the amount of its recoverable fees and costs.