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Inability to Prove Counterclaim Fatal

Running an airline profitably is critically dependent on keeping planes in the air as much of the time as possible, so when an airline enters into a contract relating to its fleet, 'on-time' delivery is very important.

Also key is the need to provide a competitive in-flight experience, and seat comfort standards are very important in achieving that. The Internet now has several websites which focus on this aspect of flying (e.g. www.seatguru.com) and this means that airlines face the need for continuous investment in their cabins and seat quality.

So, when a manufacturer failed to deliver seats on time and to standard, an airline which was left with half its fleet of aircraft unable to carry passengers understandably sought compensation. The manufacturer denied that it had breached the contract and refused to pay.

Commercial realities dictated that the planes needed to be in the air, so seats needed to be procured – fast. As a first step, the airline therefore terminated the contract on the basis that the manufacturer had committed a material breach.

As a stop-gap measure, the old seats were put back, which not only incurred costs for the refitting but also failed to provide the desired standard of passenger comfort. Three other aircraft were leased until the airline's own could be outfitted properly with seats from a different manufacturer.

Needless to say, the computation of the airline's resulting loss was extremely complicated. When a loss is suffered, it is a principle of law that the party suffering the loss should seek to mitigate (take reasonable steps to reduce) the loss. Failing to do so can lead to a reduction in an award of damages.

Having established that the manufacturer did breach the contract, the next stage was to ascertain what losses it was liable to compensate. For some aspects of the losses (the cost of the replacement seats, less the fuel savings to be gained because they were lighter than the seats originally ordered) this was complicated but calculable.

However, the reduction in the claim sought by the manufacturer because of the additional profits made by the airline as a result of leasing the new planes, which had lower operating costs, compared with those it would have made had the seats been delivered on time, thus enabling the airline's existing planes to be used, proved impossible to calculate on account of the highly fluid nature of the airline business.

The net effect was that the whole of the cost of leasing the three aircraft (more than $100 million) was deemed to be recoverable by the airline.

If you find yourself unable to comply with a contract you have undertaken, taking prompt legal advice as to your best course of action is important. The potential losses may be far greater than the value of the contract.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.