Do not rely on terms being implied
DURHAM TEES VALLEY AIRPORT v BMI (CA) [2010]
This case emphasises the need for drafting to be explicit if a particular commitment is important rather than simply relying upon terms to be implied. Courts will not impose an obligation on a contracting party to ‘act reasonably’ when performing a contract.
facts:
D reached a 10 year agreement with the airline B, for B to base a minimum of two aircraft at Tees Valley Airport and thereafter to operate a flying programme from the Airport. The value of the contract to D was dependent upon the volume of passengers since it earned a fee per passenger. In addition, the greater the number of passengers using D, the greater the revenue that would be earned from shops, restaurants, car parking and the like. It was therefore critical that B actively exploited its rights and promoted the Airport as a departure point.
decision:
- B was found to be in breach of contract in that it failed to base two aircraft at the Airport and this entitled D to damages. However, the Court of Appeal (CA) went on to consider whether the contract contained an implied term that B would operate the aircraft in a manner that was ‘reasonable’ in all the circumstances. The court said that it would not imply such a term. The question of how many flights B scheduled and to which destinations were, under the contract as drafted, held to be matters for B’s discretion.
- However, the court had to look at a related issue when assessing the correct level of damages. D had argued that when assessing damages the court should assess what level of profit would have been made had B acted ‘reasonably’. The court declined to follow that approach. Instead it said that when awarding damages in circumstances where the performing party has discretion, the court had to:
- conduct a factual inquiry as to how the contract would have been performed had it not been breached;
- consider the relevant economic and other surrounding circumstances to decide on the level of performance which B would have adopted; and
- assume that B would not have acted outside the terms of the contract but would have performed the contract in its own interests having regard to the relevant factors prevailing at the time.
- The court will not assume that the contracting party would have acted uncommercially simply to reduce the entitlement of the party claiming damages. The parties are assumed to act in good faith but with their own commercial interests very much in mind.
points to note:
- The courts are very reluctant to impose an implied obligation on a contracting party to act ‘reasonably’ particularly where it is not absolutely essential to do so. It is therefore necessary to be explicit about precisely what minimum level of performance you are expecting from the other contracting party. Had B not been found to have broken an express term of the contract, D would therefore have had no right to damages whatsoever.
- The express terms of the contract are also very important in relation to the assessment of damages. Courts will sometimes look at what is ‘reasonable’ to give effect to a contract. Often these are situations where the price or standard of performance has not been specified in any detail but there is readily available objective evidence about the ‘market rates’ or ‘trade standards’ that are applicable generally and the court will apply these instead. However, this is the exception to the rule. If in doubt, be explicit!