Good Faith And Maintenance Agreements

• Published date: 31 July 2020
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Contracts and Commercial Law, Trials & Appeals & Compensation
• Law Firm: Quadrant Chambers
• Author: Ms Stephanie Barrett

In Cathay Pacific Airways Limited v Lufthansa Technik AG [2020] EWHC 1789 (Ch) John Kimbell QC, sitting as a Deputy High Court Judge in the Chancery Division, decided a dispute under a long-term contract for the maintenance, repair and overhaul of aircraft engines ("the Contract"). The ten-year term of the Contract expired in May 2018, and Lufthansa sought payment of US$35.8m due in End of Term Charges thereunder. Cathay agreed that this sum was due but sought to set off sums including US$42.9m as a reconciliation under Schedule 13 to the Contract.

Entitlement to the Schedule 13 reconciliation depended on the valid exercise of an express option in the Contract to remove engines from the "Flight Hours Service Program" ("FHSP") prior to expiry of the Contract Term ("the Option"). Under the terms of the Contract, and due to factors such as the anticipated timings of shop visits, if the engines were removed from the FHSP before the Contract ended this would trigger a financial reconciliation in respect of each engine under Schedule 13 and result in a significant credit to Cathay. Cathay exercised the Option in respect of all of the engines covered by the Contract before the Contract term expired. The Option was therefore exercised for commercial reasons, and the engines were still used in Cathay's fleet.

Lufthansa argued that the Option was not validly exercised, primarily because:

(i) on true construction, or by necessary implication, the Option only applied if Cathay were to remove engines from their fleet for operational reasons;

(ii) the Option was subject to a limitation that it may not be exercised in an arbitrary, capricious and/or unreasonable manner (see Braganza v BP Shipping [2015] UKSC 17 and Socimer International Bank v Standard Bank London [2008] 1 Lloyd's Rep. 558);

(iii) the Contract was a relational contract and therefore subject to a general good faith limitation, so that the Option could only be exercised in a way that would be regarded as commercially acceptable by reasonable and honest people.

Operational Purpose

The exercise of the Option was not restricted to removal of engines from the fleet for operational reasons. The language used was unambiguous and granted a unilateral option, albeit potentially a price would be paid for its exercise under Schedule 13. The Option operated as a partial termination because the engine(s) would be withdrawn from the FHSP only. The Contract would otherwise continue and would govern e.g. other work...