Take care not to waive rights of enforcement
Lombard North Central v European Skyjets (High Court) [2022]
When a dispute arises, contracting parties need to be very wary about unintentionally waiving rights. For that reason, contracts will typically include provisions aimed at ensuring that a waiver does not occur inadvertently but, as this case demonstrates, there are limits to the ambit of such clauses.
Facts:
Skyjets took out a secured loan from Lombard. Skyjets subsequently failed to make a number of repayment instalments on time. Lombard terminated the loan, took possession of the aircraft on which the loan was secured and sold the aircraft in order to recoup part of its loan.
One of the issues before the court was whether Lombard had waived its right to terminate. On 10th October 2012 Lombard had emailed Skyjets in the following terms “Your account remains in arrears and we remain uncomfortable with your payment history and your short term cash flow. Despite this and as a gesture of goodwill we will allow more time to bring the balance of the arrears up to date. [Your] next scheduled payment is due on 28 October and also last month’s Late Payment Fee also falls due on 28 October 2012. It really is essential to bring your account up to date and to do this you will need to pay the balance of arrears [and] this month's scheduled payments on time …"
Lombard relied upon Clause 12 of the Loan Agreement which said “No failure and no delay in exercising on the part of the Lender …. of any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude the further exercise of such one or any other right, power or privilege whether hereunder or otherwise"
Lombard also relied upon a statement in the 10th October email which said "This correspondence is without prejudice and Lombard fully reserves its rights in respect of the identified breaches being arrears on the Loan Agreement”
Decision:
The judge decided that the email from Lombard on 10th October involved an offer of additional time to clear whatever was outstanding thereby rendering the payment "punctual” and made it clear that it was the position following 28th October which would be determinative. The judge was satisfied that it was implicit that Lombard was waiving any right to treat payments made up to the date of the email, albeit late, as Events of Default so as to give it the right to terminate on 28th October 2012 whatever happened. The decision to assert contractual entitlements arising from the late payments was, in the judge’s view, consistent only with Lombard deciding to keep the contract in being notwithstanding the late payments prior to 10th October. To the extent, therefore, that Lombard seeks to justify its termination on 8th November 2012 by reference to sums paid, but paid late, prior to 10 October 2012, it is not entitled to do so.
Lombard’s reliance upon clause 12 of the Agreement was misplaced because as the judge said this was not just a failure or delay on Lombard’s part in exercising a right or remedy but was instead a positive statement [allowing additional time to pay].
Regarding the ‘without prejudice’ statement included in the email, the judge said, “I do not accept that the ritual incantation [‘the use of words as a magic spell’] of this language can prevent anything said in the letter from having its objective effect.” The judge decided that the clear effect of the 10th October email was to give Skyjets until 28th October 2012 to regularise the position so far as payment was concerned, and that it was implicit in that offer that, if this was done, Lombard was not reserving the right to serve a [termination] notice for past delays in payment. Lombard was therefore bound by the waiver granted by the 10th October email.
The judge also reaffirmed that decisions whether or not to terminate are not subject to an implied duty of good faith. Lombard's decision to terminate was, according to the judge, an "absolute contractual right" for it to exercise for its own purposes, as it sees fit.
Points to Note:
- Take great care to consider the impact of communications with your contracting counterparty. You may be waiving rights however much you try to incorporate legal language to preserve your rights. Despite a fairly standard ‘no waiver’ provision and a ‘without prejudice’ statement contained in Lombard’s email, it was held to be bound by the express terms of that 10th October email which was effective to waive rights in respect of historic late payments unless Skyjets failed to make the payments by the 28th October.