Aviation Related Themes in Breach of Contract Cases

By: Leo K. Barnes Jr.*

*Mr. Barnes, a member of Barnes & Barnes, P.C. in Melville,

can be reached at LKB@BARNESPC.COM

 

This month we review two recent decisions concerning commercial issues which touch the aviation industry.  In Wells Fargo Bank Northwest, N.A. v. U.S. Airways, Inc., 2012 WL 3288834 (1st Dep’t 2012), plaintiff Wells Fargo brought suit against defendant U.S. Airways for breach of contract relating to a lease agreement for three commercial aircraft.  According to the decision, U.S. Airways’ predecessor company acquired three 737-3G7 aircraft from Boeing.  At the time, although each aircraft had a maximum takeoff weight (MTOW) of 124,000 pounds, a special program offered by Boeing permitted each aircraft to operate at an increased MTOW of 138,500 pounds.

 

In 2005, Wells Fargo purchased the three aircraft from U.S. Airways and then leased the aircraft back to U.S. Airways for a three-year term.  Each purchase agreement specified that the MTOW of each aircraft was 138,500 pounds.  In addition, the purchase agreements set forth that Wells Fargo would provide U.S. Airways with a “Redelivery Certificate” acknowledging and confirming that U.S. Airways had redelivered the aircraft to Wells Fargo in accordance with the agreement after Wells Fargo completed its final inspection of each aircraft and its corresponding documents.

 

At the end of the lease term, Wells Fargo had a team of experts conduct the final inspection of each aircraft, and subsequently accepted the aircraft and executed Redelivery Certificates pursuant to the lease agreements.  However, it was later discovered that U.S. Airways redelivered each of the three aircraft back to Wells Fargo at a MTOW of 124,000 pounds, not 138,500 pounds, because the increased MTOW obtained from Boeing was not transferrable.  Subsequently, Wells Fargo filed suit against U.S. Airways alleging breach of contract and rescission of the Redelivery Certificates.

 

Wells Fargo moved for partial summary judgment on its breach of contract claim, which was granted by the trial court on the ground that U.S. Airways breached its contractual obligation to return the aircraft with a MTOW of 138,500 pounds.  On appeal, the Appellate Division, First Department reversed.  Although the First Department agreed with the trial court that the leases required U.S. Airways to return the aircraft with a MTOW of 138,500 pounds (the MTOW that the aircraft had at the time the leases commenced), the Court held “that Wells Fargo’s execution of the Redelivery Certificates without reference to the MTOW discrepancy preclude[d] it from raising or seeking relief for that breach.”  The Court noted that a section of the leases provided that upon execution of the Redelivery Certificates, the leases were deemed terminated, subject only to specific delineated circumstances.  The Court found that the MTOW discrepancy did not fall within those delineated circumstances, and as such the section of the lease mandating that the MTOW at redelivery be the same as that at commencement of the leases did not survive the termination of the leases once the Redelivery Certificates were executed.  Further, the First Department cited Jet Acceptance Corp. v. Quest Mexicana, 87 A.D.3d 850 (1st Dep’t 2011), for the proposition that by executing the Redelivery Certificates, Wells Fargo expressly confirmed that U.S. Airways had fully performed all of its obligations, and by doing so Wells Fargo effectively waived any claim that the aircraft were not in compliance with the return conditions of the lease.

 

In another recent commercial case involving the aviation industry, the U.S. District Court for the Southern District of New York in B/E Aerospace v. Jet Aviation St. Louis, 2012 WL 1577497, 11 Civ. 8569 (S.D.N.Y. 2012), addressed the validity of an arbitration award issued following a dispute between an aircraft interior manufacturer and an installer of aircraft interiors.

 

B/E Aerospace (B/E) is a developer and manufacturer of interior products for commercial aircraft and business jets.  Jet Aviation, formerly known as Midcoast Aviation, installs interiors on private jets.  In 2005, Midcoast and B/E entered into an agreement whereby Midcoast would pay B/E $1.4 million, and in exchange B/E would provide aircraft seating for installation in compliance with Federal Aviation Administration (FAA) regulations.

 

As a result of incorrect installation instructions provided by B/E along with the seating, the seating was not certifiable by the FAA, and as a result Midcoast incurred over $3.3 million in costs attributed to engineering and payments to its customers.  Thereafter, Midcoast initiated arbitration proceedings against B/E for breach of contract and negligent misrepresentation.  Following the arbitration, the arbitration panel issued an award of $3.3 million in Midcoast’s favor, including $84,543 in attorney’s fees.  Subsequently, B/E filed an action to vacate the award in the U.S. District Court for the Southern District of New York, and Midcoast filed a cross-motion to the confirm the award.

 

In seeking to vacate the arbitration award, B/E argued that the arbitration panel manifestly disregarded New York law and the parties agreement by awarding damages based on duplicative contract and tort claims in contravention of existing New York law.  In addition, B/E sought to vacate the award of attorney’s fees on the ground that the parties contract stated that “[e]ach party shall be solely responsible for its own attorneys fees.”  The Court rejected both of B/E’s arguments and confirmed the arbitration award in its entirety.  In doing so, the Court held that the award of damages based on both breach of contract and negligent misrepresentation was not a manifest disregard of New York law because the arbitration panel explicitly found that Midcoast reasonably relied on the specialized expertise of B/E (based on B/E’s presentations of its expertise prior to the parties entering into the contract), which thereby created an independent legal duty to Midcoast beyond the contractual relationship.  See also, Kimmel v. Schaefer, 89 N.Y.2d 257, 263 (1996)(liability for negligent misrepresentation arising from a commercial transaction is imposed only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified).

 

Additionally, in rejecting B/E’s argument for the vacatur of the award of attorney’s fees, the Court found that the award was not a manifest disregard of New York law because the American Arbitration Association (AAA) rules were expressly incorporated into the parties’ agreement.  In so finding, the Court noted that AAA Rule 43(d) states that an arbitrator’s award may include attorneys fees if all parties have requested such an award.  In both Midcoast’s and B/E’s respective demand and answer, both parties sought an award of counsel fees.  As such, the Court found the arbitration panel’s award of counsel fees to be proper.

 

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