Volcanic ash and closure of airspace - airlines' obligations under EU Regulation 261/2004 (Part 2)

Employment Tribunal (ET) and the Employment Appeal Tribunal (EAT)

Before the ET, Ms Williams argued, successfully, that the pilots were entitled to holiday pay at a weekly rate based on all three components of remuneration. The ET said that "paid annual leave" in Regulation 4 of the Aviation Regulations meant "an amount comparable to the contractual pay received when working". British Airways should therefore have applied Sections 221 to 224 of the ERA when calculating the pilots' holiday pay, by averaging their earnings over the preceding 12 weeks.

Following an appeal, the EAT agreed with the ET and held that holiday pay had to be comparable to the pay that workers got when they were actually at work. That meant that British Airways' pilots were entitled to receive holiday pay which included the allowances and supplements to which they were entitled when working, as well as their basic rate salary, in accordance with Sections 221 to 224 of the ERA. British Airways appealed.

Court of Appeal

The Court of Appeal overturned the ET and EAT's decisions, ruling that there had been no breach of Regulation 4 of the Aviation Regulations. The Court said that it was up to member states to decide. As the UK had made clear that the provisions in the ERA for calculating a week's pay did not apply to the aviation industry, airline pilots could not rely on them to argue that their holiday pay should include flying time allowances.

The Court of Appeal held that:

The ordinary meaning of "pay" in "paid annual leave" was not the same as pay earned while working. Regulation 4 of the Aviation Regulations would have set out the method of calculation had that been intended (as other domestic legislation did). Sections 221-224 of the ERA were not relevant. Regulation 18(2)(b) of the Working Time Regulations expressly provides that the provisions of the WTR dealing with the calculation of annual leave do not apply to aviation workers, to whom rather the CAD applies. Ms. Williams appealed the decision, arguing that the CAD required payment of "normal remuneration" during annual leave in order to ensure that the workers on leave are in a position which is comparable to that when they are working.

Supreme Court

The Supreme Court concluded that the main issue in these proceedings required clarification of the meaning of "paid annual leave" in the Aviation Regulations, interpreted with reference to the CAD. The Supreme Court has therefore referred five questions to the CJEU relating to the calculation of payments whilst pilots are on annual leave:

1. Under the WTD and the Aviation Agreement annexed to the CAD:

   (a) to what extent, if any, does European law define or lay down any requirements as to the nature and/or level of the payments required to be made in respect of periods of paid annual leave; and

   (b) to what extent, if any, may Member States determine how such payments are to be calculated?

2. Is it sufficient that, under national law and/or practice and/or under the collective agreements and/or contractual arrangements negotiated between employers and workers, the payment made enables and encourages the worker to take and to enjoy his or her annual leave; and does not involve any sensible risk that the worker will not do so?

3. Or, must the pay either correspond precisely with or be broadly comparable to the worker's "normal" pay?

4. If the answer is yes, is the relevant measure or comparison:

   (a) pay that the worker would have earned during the particular leave period if he or she had been working, or

   (b) pay which he or she was earning during some other period, and if so what, period when they were working?

5. How should "normal" or "comparable" pay be assessed where:

   (a) a worker's remuneration is supplemented while engaging in a particular activity;

   (b) there is an annual or other limit on the time during which the worker may engage in that activity and that limit has been already exceeded or almost exceeded at the time the annual leave is taken

   Impact

   In referring the questions to the CJEU, the Supreme Court neither upheld nor dismissed the appeal. In light of this, until a ruling is given, the decision of the Court of Appeal remains binding for the time being, meaning that pilots of British Airways (and other airlines) remain entitled to holiday pay at the level of Basic Pay only. While it may be some time before the CJEU reaches its decision, once a decision is reached it could have a significant impact on the airline industry.

   Deposits in letters of intent and aircraft sale and purchase agreements

   Aircraft sellers' rights to deposit monies paid under a letter of intent and a sale and purchase agreement respectively were challenged in the two recent cases JSD Corporation PTE Limited v Al Waha Capital PJSC and Second Waha Lease Limited and Tandrin Aviation Holdings Limited v Aero Toy Store LLC., Insured Aircraft Title Service Inc.. Both cases involved attempts by the purchasers to use the prohibition on penalty payments to void clauses allowing deposits to be forfeited for non-performance of contractual obligations.

   A letter of intent is an expression in writing of a party's present intention to enter into a contract at a future date. They are commonly drafted in such a way as to generally avoid legal obligations, subject to legally-binding clauses which seek to allow a party to recover amounts it stands to lose in preparing for the obligations it anticipates under the future contract: indeed, where there has been performance in reliance on a letter of intent, the court may find an ancillary contract, notwithstanding that the letter of intent itself has been expressed to be "subject to contract" (British Steel Corp v Cleveland Bridge and Engineering Co Ltd).

   Deposits can answer several different needs in a transaction. They can be penalties for breaches, securities for performance, part payments of purchase prices, pre-estimates of liquidated damages or simply consideration for keeping an aircraft off the market under a lock-in agreement (as in Waha).

   Waha

   The would-be purchaser of an aircraft, JSD, had paid an initial non-refundable deposit of $1,000,000 on signature of a letter of intent and three further deposits totalling $3,500,000. Unlike the first deposit, the terms governing the refund of the three later deposits were stated to be "... refundable ... pending execution of the Sale and Purchase Agreement ..." Thereafter, or in any event after certain expiry dates, the three later deposits were to become non-refundable unless there had been a "Seller default". "Seller default" was not expressly defined. The expiry dates relating to the later three deposits passed without the sale and purchase agreement having been signed. The only clauses that were stated expressly to be binding related to payment of the deposits, liability for legal costs and confidentiality. Critically, the clause stating the parties' intention to " ... negotiate in good faith towards the prompt execution of [a sale and purchase agreement] ..." was not stated to be binding and no such duty exists outside the terms of a contract.

   In the hearing of the Part 24 application, Smith J went into considerable detail to set out the various ways in which the deposits might be described. The amount of evidence that needed to be led to answer that question meant that he had to direct the matter to be heard at a full hearing. However, on alternative grounds which avoided having to decide how to classify the deposits, he reached a decision on the later three deposits. The LoI created obligations for each party; Waha's only obligations under the LoI were (i) to observe the confidentiality clause, and (ii) to remove the aircraft from the market. In an observation both he and the judge at the full hearing were to repeat, on the face of the terms of the LoI, $4,500,000 (the sum of all of the deposits) was the extraordinarily high price paid by JSD in return for what he described as Waha's "modest obligations". Accordingly, Waha's otherwise trivial breach of its obligation to keep the aircraft off the market by inadvertently leaving an advertisement for the aircraft on a third party's website (on the evidence at the hearing, neither Waha nor JSD was aware of the advertisement during the time they were negotiating the sale of the aircraft) was given strict effect as a "Seller's breach". In the words of Smith J: "Given the expensive nature of that agreement it is right in my view to give strict effect to the provisions so that if there was a seller default, however small and un-noticed, it means precisely what it said." As the later three deposits were repayable on seller default, and the court had found such default to have occurred, Smith J ordered the repayment of the later three deposits.

   Waha's default had no bearing, on the face of the express terms of the LoI, on the refundability of first deposit. Smith J determined that JSD's claim to be repaid the first deposit should be listed for a full hearing of the matter. The relevant part of the clause relating to the first deposit expresses a seller intention commonly found in LoIs:

   " ... [the first deposit] ... shall become non-refundable upon signing of this Letter."

   In the High Court, Sher J showed a far greater understanding for the reasons behind the apparently harsh (from JDS's perspective) terms than Smith J had in the summary judgment: Waha had been let down when JDS had failed to complete a previous transaction and wanted, by way of the threat of loss of the deposits, to incentivise JDS to perform. He decided that the deposits paid under the LoI could not be a guarantee for performance because once the deposits had been paid, there was no obligation left for the purchaser to perform (other than relating to confidentiality): the deposits were held "... to discourage JSD from pulling out again ..."

   Following several alternative arguments which had no bearing on the classification of the first deposit, and...