English law aircraft lease valid despite alleged breaches of foreign procurement laws

Aircraft lease negotiations

The first defendant (a company wholly owned by the Government of Tanzania) entered into an aircraft lease agreement with the claimant, backed by a guarantee from the second defendant.  Prior to entry into the lease, the first defendant had sought commercial proposals from Airbus, Boeing and Embraer for the lease of aircraft, but had only received a proposal from Airbus, which later effected an introduction to the claimant.  The Attorney General for Tanzania and the board of the first defendant approved the lease on the condition that the management team of the first defendant would try to re-negotiate certain terms of the lease, which were thought to be too favourable to the claimant.  The management team successfully re-negotiated some, but not all of these provisions. 

The board of the first defendant delegated authority to its management to sign the agreement.  Both the lease and the guarantee contained the usual representations and warranties regarding authority, legal and valid effect, and illegality. The lease also contained condition precedents which required the first defendant to provide evidence, by way of a board resolution, of the delegation of authority to management to sign the lease.  The board resolution was provided shortly after execution of the lease.  

The proceedings were issued for breach of contract when the first defendant stopped paying rent under the lease and a related settlement agreement.

Defences raised by the defendants

The first defendant raised 11 defences or counterclaims.  The most important of these defences were claims that the lease was invalid by reasons of: (i) breaches of the Tanzanian Public Procurement Act 2004 (the PP Act); and (ii) a lack of authority on behalf of the management of the first defendant who executed the lease.  The first defendant also raised issues regarding misrepresentation, non-compliance with conditions precedent under the lease and unconscionability.  This article focuses on the key illegality and authority defences raised by the first defendant.

Alleged invalidity by reason of non-compliance with Tanzanian law

The first defendant argued that the lease was invalid and null and void as it was entered into in breach of the PP Act.  The defendants claimed that, as the first defendant had the same status as a public entity, under Tanzanian law it should have gone through a proper tender process before entering into the lease and its failure to do so rendered the lease invalid. 

The judge dismissed this argument because, under Article 8 of the Rome Convention on the law applicable to contractual obligations (given the force of law in the United Kingdom by the Contracts (Applicable Law) Act 1991), the material validity of a contract is to be determined by the law which would govern the contract under the Convention if the contract were valid.  The lease is governed by English law and therefore the laws of Tanzania were irrelevant to the question of validity of the lease.

However, the judge also held that, even if this was not the case, the first defendant was contractually estopped from relying on such a breach of Tanzanian law by virtue of: (i) the authorisation; and (ii) the legal and valid binding effect representation and warranties it gave in the lease.  

Alleged unenforceability by reason of illegality

The first defendant also argued that non-compliance with the PP Act would activate the English law principle that the English courts will not enforce an obligation which requires a party to undertake an act which would be unlawful in the law of the place of performance. However, as lease payments were to be made to the claimant’s bank account in Switzerland, the judge dismissed this argument on the basis that the first defendant did not suggest that making payment under the lease was illegal as a matter of Swiss law. Further, the defendants had failed to show, in any case, that entering into a contract in breach of the PP Act was illegal.

Alleged lack of authority

By way of secondary argument, the first defendant argued that Mr Mattaka (who signed the lease on its behalf) lacked authority to do so because: (i) he acted in breach of his fiduciary duties to act in good faith; (ii) any delegation of authority was conditional upon Mr Mattaka re-negotiating certain unfavourable provisions of the draft lease; and (iii) Mr Mattaka should have complied with the PP Act.   

The judge held that there was no evidence to show that Mr Mattaka had acted dishonestly or otherwise than in good faith. In fact, the evidence showed that he had tried to further the first defendant’s interest by negotiating the terms of the lease despite ATCL being in a weak negotiating position. The commercial terms of the lease reflected the shortage of Airbus A320 aircraft at the time and the credit and other risks associated with ATCL.  The judge noted that, even if he had found that Mr Mattaka had acted in breach of his fiduciary duties, this would not have been sufficient to render the lease void as a matter of English law.

The judge held that the delegation of authority being conditional argument failed because the claimant was not aware of any such conditions being imposed on Mr Mattaka’s authority and as such Mr Mattaka had ostensible authority to enter into the lease.  Even if this was wrong, the first defendant had ratified the execution of the lease, by, inter alia, accepting the aircraft and flying it.

The judge held that the first defendant was contractually estopped from arguing that Mr Mattaka lacked authority, due to him acting in breach of the PP Act, by the authority representations and warranties it had given in the lease.

Comment

This decision highlights the utility of including standard representations and warranties regarding validity and authority in helping to defeat later illegality/lack of authority claims.   The judgment also reconfirms the position that illegality defences will only be successful if performance of the contractual obligations is illegal under the laws of the place of performance or the law governing the contract.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  If you wish to receive this publication, please contact Amy Edwards, amy.edwards@allenovery.com