Austrian Airlines Oesterreichische v. Ut Finance

• Decision Date: 18 July 2008
• Docket Number: No. 04 Civ. 3854 (LAK).,04 Civ. 3854 (LAK).
• Citation: 567 F.Supp.2d 579
• Parties: AUSTRIAN AIRLINES OESTEREICHISCHE LUFTVERKEHRS AG, Plaintiff, v. UT FINANCE CORPORATION, Defendant.
• Court: U.S. District Court — Southern District of New York

567 F.Supp.2d 579

AUSTRIAN AIRLINES OESTEREICHISCHE LUFTVERKEHRS AG, Plaintiff, v. UT FINANCE CORPORATION, Defendant.

No. 04 Civ. 3854 (LAK).

United States District Court, S.D. New York.

July 18, 2008.

COPYRIGHT MATERIAL OMITTED

William E. Wallace III, Donna Frances Mulvihill, Aaron L. Renenger, Andrew M. Leblanc, Andrew E. Tomback, Lesley A. Benn, Milbank, Tweed, Hadley & McCloy LLP, for Plaintiff.

John M. Toriello, Marc L. Antonecchia, Holland & Knight LLP, for Defendant.

OPINION

LEWIS A. KAPLAN, District Judge.

During the 1990's, United Technologies Corporation ("UTC") was anxious to have Austrian Airlines specify jet engines made by one of UTC's affiliates for use on new aircraft being ordered by Austrian. It entered into a somewhat complex deal pursuant to which Austrian agreed to do so, and a UTC affiliate, UT Finance Corporation ("UTF"), probably as a "sweetener," agreed to buy a particular used aircraft from Austrian some years in the future for a price in excess of $30 million. But buying a jet aircraft for future delivery for more than $30 million is considerably more complicated than buying a used car for immediate delivery for quite a bit less money. The purchase agreement understandably made UTF's obligation to consummate the purchase contingent on satisfaction of a myriad of conditions.

At least in part as a result of the 2001 terrorist attacks on the World Trade Center and the Pentagon, the bottom fell out of the used aircraft market between the time the purchase agreement was signed and the approach of the date for delivery of the used aircraft. UTF allegedly was anxious to avoid buying an aircraft for far in excess of its market value and, in any event, insisted on strict compliance with the contractual requirements. Austrian failed in major respects to satisfy the conditions precedent to UTF's obligation to purchase, and UTF rejected delivery. Austrian then brought this action for breach of contract, claiming primarily that UTF's alleged desire to avoid what had become a disadvantageous deal led it to reject the aircraft in bad faith.

The case was tried to the Court without a jury. UTF moved for judgment of dismissal on partial findings at the close of plaintiffs case. The Court now grants the motion and makes the following findings and conclusions.

Facts

I. The Parties

Austrian Airlines Oesterreichische Luftverkehrs AG ("Austrian") is a corporation organized under the laws of Austria with its principal place of business in Vienna. UT Finance Corporation ("UTF") is a Delaware corporation with its principal place of business in Connecticut and is a finance arm of UTC that, among other things, acquires used passenger and cargo aircraft, which it typically then leases or sells to other operators.

II. The Underlying Relationship

The contract at issue in this case arose from an underlying agreement, dated December 23, 1996, between Pratt & Whitney, which is an affiliate of UTC and a major manufacturer of jet engines, and Austrian. Austrian there (1) agreed to place a firm order with Airbus Industrie ("Airbus") for a minimum of two and up to four of Airbus's model A330-200 aircraft, each to be powered by Pratt & Whitney's model PW4168 Propulsion System, (2) took an option to purchase up to four additional A330-200 aircraft from Airbus and agreed, to the extent it exercised that option, to ensure that each was powered by the PW4168 Propulsion System, and (3) took an option to purchase up to two additional PW4168 spare engines for use on its A330-200 aircraft.¹ The price for each PW4168 system was approximately $10 million.² The deal therefore was worth between approximately $20 and $100 million to Pratt & Whitney.

III. The Aircraft Purchase Agreement

To induce Austrian to enter into the contract with Pratt & Whitney, a second contract — the Aircraft Purchase Agreement ("APA") — was formed. UTF there agreed to purchase from Austrian the used Airbus A310 aircraft at issue here for $32 million.³ The parties agreed further that

"[t]o the extent that the Aircraft is delivered in accordance with the delivery conditions required by [the APA] and to [UTF's] satisfaction, [UTF] shall make [$1 million] cash credit available to [Austrian] on the Closing Date. To the extent of any non-compliance with the delivery conditions on the Closing Date, [UTF] may accept the Aircraft, in which event [UTF] shall subtract the value of any such noncompliance (to be determined as the amount reasonably required by [UTF] to satisfy the delivery conditions) from such credit; provided, however, that [UTF] shall not be responsible for the value of any such non-compliance in excess of ONE MILLION U.S. DOLARS. For the avoidance of doubt, [Austrian] hereby confirms and agrees that it is obligated to deliver the Aircraft to [UTF] on the Closing Date in accordance with all of the delivery conditions contained in [the APA] and that [UTF] has no obligation to purchase the Aircraft in the event such delivery conditions are not met."⁴

This provision was unique to this contract. The price adjustment term was included to resolve difficulty in the parties' agreeing on a purchase price.⁵

The APA provided that the "purchase of the Aircraft by [UTF] shall occur on a date to be mutually agreed during the month of March, 2004⁶" and made time of the essence.⁷ Moreover, any amendments and modifications to the agreement had to be in writing and signed by both parties.⁸

UTF's obligation to purchase the Aircraft was contingent upon Austrian satisfying conditions set forth in Exhibits C and D of the APA.⁹ Exhibit C required Austrian to provide UTF certain records, including in relevant part (1) the "FAA/ DGAC-Approved Airplane Flight Manual" (the "AFM"), which had to be "current and include all temporary revisions,"¹⁰ and (2) miscellaneous documentation, including historical records for certain "life-limited" parts.¹¹

Exhibit D specified the delivery conditions for the Aircraft itself. Austrian was obligated to deliver the Aircraft (1) "in good operating condition, ready for flight, with all the equipment, components and systems functioning in accordance with their intended use within the limits and/or unrestricted guidelines established by the relevant manufacturers,"¹² (2) with a letter from Airbus "to confirm the Aircraft met the US-Type Certificate Data Sheet (TCDS) at the date of manufacture," ¹³ (3) in a condition that complied with all DGAC and FAA airworthiness directives that "have a known due date for compliance falling within twelve ... months following the Closing Date," ¹⁴ (4) in the condition as it was when the parties entered into their agreement,¹⁵ (5) with at least a minimum amount of time left on all life-limited parts,¹⁶ and (6) with an export certificate of airworthiness from the Austrian aviation authority.¹⁷

One of the principal areas of contention in this case arises out of Section (1)(iii) of Exhibit D, which required that the Aircraft

"shall be in the condition required to be 1) fully eligible to receive a DGAC or FAA (at Buyer's choice) Certificate of Airworthiness and 2) fully eligible to be promptly registered and operated as a FAE Part 119 or 121 (and DGAC equivalent) 180 minute ETOPS for scheduled airlines, under the laws, rules and regulations of the DGAC or FAA (at Buyer's choice)."¹⁸

IV. Regulatory Framework Governing the Aircraft

UTF exercised its option under Section (1)(iii) of Exhibit D in September 2002, informing Austrian that the Aircraft would have to comply with FAA standards.¹⁹ This imposed obligations on Austrian, among other things, to deliver the Aircraft in the condjtion required to be eligible (1) for an FAA certificate of airworthiness and (2) to be promptly registered and operated under Federal Aviation Regulation part 119 or 121.

A FAA Certificate of Airworthiness

The process by which an aircraft manufactured and registered in the United States is certified as airworthy begins with the approval of the aircraft model's design. If an applicant is able to demonstrate that the design meets rigorous safety standards, the FAA will issue a type certificate ("TC") for that model documenting the design and incorporating a type certificate data sheet ("TCDS"), which "prescribes conditions and limitations under which the product for which the Type Certificate was issued meets the airworthiness requirements of the Federal Aviation Regulations."²⁰ Any individual aircraft of that model thereafter may be eligible for a certificate of airworthiness if the applicant can demonstrate that the aircraft conforms to the FAA-approved design documented in the TC and is in a condition for safe operation.²¹

An aircraft manufactured in a foreign country may be eligible to receive a certificate of airworthiness from the FAA, but the process is different.²² As an initial matter, the aircraft must be manufactured in accordance with an FAA-approved TC, which can be issued only if (1) the United States has a bilateral agreement for the acceptance of aircraft for import and export with the country of manufacture, and (2) the country of manufacture certifies that the aircraft has been determined to meet, inter alia, "[t]he applicable airworthiness requirements of [14 C.F.R. § 21.17], or the applicable airworthiness requirements of the country in which the product was manufactured and any other requirements the [FAA] may prescribe to provide a level of safety equivalent to that provided" by the Federal Aviation Regulations.²³ The foreign aviation authority must certify that the aircraft in question conforms to the approved design and is in a condition for safe operation.²⁴ The FAA may rely on that certification but may conduct additional inspections to determine whether the aircraft meets U.S. safety standards.

The FAA had issued a TC for the Airbus model A310-325 on March 22, 1996, in " accordance with the bilateral agreement between the United States and France.²⁵ Accordingly, from that point onward,...