Austrian Airlines Oesterreichische Luftverkehrs AG v. UT Finance Corp.
Not Reported in F.Supp.2d (2008)
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Rule of Law:
Where a contract for the sale of goods explicitly grants a buyer the absolute right to reject a non-conforming tender, the buyer does not breach the duty of good faith by exercising that right, even if its decision is motivated by a decline in the goods' market value. An alleged industry custom of accepting minor non-conformities cannot override such express and unambiguous contract terms.
Facts:
- In 1996, as part of a larger deal for jet engines, UT Finance Corporation (UTF) agreed to purchase a used Airbus A310 aircraft from Austrian Airlines for $32 million, with delivery scheduled for March 2004.
- The Aircraft Purchase Agreement (APA) conditioned UTF's obligation to purchase on Austrian satisfying numerous detailed delivery conditions, including the aircraft being fully eligible for an FAA Certificate of Airworthiness and for 180-minute ETOPS flights.
- The APA contained a unique, specific clause stating that UTF "has no obligation to purchase the Aircraft in the event such delivery conditions are not met."
- Following the September 11, 2001 terrorist attacks, the market value for the aircraft plummeted to approximately one-third of the contract price.
- By the March 31, 2004 delivery deadline, Austrian had failed to deliver a conforming aircraft; key deficiencies included unapproved auxiliary center fuel tanks (ACTs) which made it ineligible for an FAA airworthiness certificate, and the lack of FAA design approval for ETOPS.
- Austrian continued working on the aircraft and attempted to tender it on May 3, 2004, but it still suffered from the same major non-conformities regarding FAA approvals.
- UTF rejected the non-conforming aircraft.
Procedural Posture:
- Austrian Airlines sued UT Finance Corporation (UTF) in the U.S. District Court for the Southern District of New York, alleging breach of contract.
- The case was tried before the Court without a jury.
- At the close of the plaintiff's (Austrian's) case, the defendant (UTF) moved for a judgment of dismissal on partial findings.
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Issue:
Does a buyer breach the implied duty of good faith and fair dealing by rejecting a non-conforming tender of goods when the contract explicitly grants the buyer the right to reject for any non-compliance, even if the buyer's motive is influenced by a significant decline in the goods' market value?
Opinions:
Majority - Kaplan, District Judge
No. A buyer does not breach the implied duty of good faith by rejecting a non-conforming tender when the contract's express terms give it the absolute right to do so, regardless of market conditions. First, the contract was governed by the New York UCC's 'perfect tender' rule. Crucially, the APA's unique Section 2.2A explicitly abrogated any alleged industry custom by stating UTF had 'no obligation to purchase' a non-conforming aircraft. This express term is controlling. Second, Austrian failed to deliver a conforming aircraft by the 'time is of the essence' deadline of March 31, 2004, and the court found no evidence that UTF waived this deadline. Third, the non-conformities, particularly the lack of FAA approval for the auxiliary fuel tanks and ETOPS, were material defects that affected the aircraft's airworthiness and value, not minor issues. Finally, while UTF was likely motivated by the market crash to insist on strict compliance, this does not constitute bad faith; it is commercially reasonable for a party to demand the full benefit of its bargain, and the contract gave UTF the explicit right to walk away if that bargain was not met.
Analysis:
This decision strongly upholds the principle of freedom of contract, particularly between sophisticated commercial entities. It clarifies that an unambiguous, specifically negotiated contractual term granting an absolute right to reject for non-conformity will trump general UCC doctrines like industry custom or even arguments about bad faith based on market-driven motives. The ruling reinforces that courts will give full effect to clear contractual language, insulating a party's decision to enforce its rights from judicial scrutiny of its underlying commercial motivations. For future transactions, this case underscores the power of drafting precise, unequivocal terms to allocate risk, as it demonstrates that such terms can provide a safe harbor for a party to exit a deal that has become economically disadvantageous.
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