Austrian Airlines Oesterreichische Luftverkehrs AG v. UT Finance Corp.

United States District Court for the Southern District of New York · Contracts

Contractsperfect tenderwaivertime of the essenceArticle 2goodsmerchantgood faith

Facts

UTF agreed to buy Austrian's used Airbus A310 for $32 million as part of a larger commercial arrangement, but the APA made UTF's duty to purchase contingent on Austrian's satisfaction of numerous delivery conditions and stated that UTF had no obligation to purchase if those conditions were not met. The agreement required closing during March 2004, made time of the essence, and required any modification to be in a signed writing. By March 31, 2004, the aircraft concededly failed to comply with multiple delivery conditions, including the lack of a current FAA-approved flight manual applicable to the aircraft, unresolved approval issues concerning auxiliary center tanks, passenger-cabin defects, missing historical records for certain life-limited parts, and failure to install an enhanced ground proximity warning system. Austrian argued that UTF waived timely delivery and later acted in bad faith by rejecting the aircraft on May 3, 2004, but the aircraft still lacked compliance with key FAA-related delivery conditions, including FAA approval issues tied to the tanks and eligibility for FAA-related ETOPS operation.

Issue

Did UTF waive the APA's March 31, 2004 delivery deadline, and if not, could Austrian still recover by showing that UTF acted in bad faith when it rejected the aircraft despite nonconformities? More specifically, did Austrian satisfy the conditions precedent to UTF's duty to purchase either by March 31 or by May 3, 2004?

Rule

Under New York law and UCC Article 2, a buyer may reject goods if the goods or tender fail in any respect to conform to the contract. A contractual deadline, even where time is of the essence, may be waived by conduct only if the conduct is incompatible with the written agreement and evidences an indisputable mutual departure from it. In a merchant transaction, good faith means honesty in fact and observance of reasonable commercial standards of fair dealing, but alleged industry custom cannot override express contract language giving the buyer no obligation to accept a nonconforming tender.

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Blue Mesa Imaging, a merchant seller in Denver, agreed to sell a used mobile MRI unit to Harbor Clinical Leasing, a merchant buyer in Newark. Their written agreement stated that Harbor had no obligation to purchase unless all listed delivery conditions were met at closing, including delivery of a current regulator-approved operating manual applicable to the unit and all traceability records for listed life-limited components; on the closing date, the unit lacked several component traceability records, though it was otherwise operational.

If Harbor rejects the unit on the closing date, which is the strongest argument that the rejection is proper?

Explanation. Under New York Article 2, the buyer may reject if the goods or tender fail in any respect to conform to the contract. The majority opinion emphasized that where the contract expressly makes the buyer's obligation contingent on satisfaction of all delivery conditions and states the buyer has no obligation to purchase if they are unmet, rejection is proper for any unmet condition. The court did not require substantial impairment. (Derived from Austrian Airlines Oesterreichische Luftverkehrs AG v. UT Finance Corp. (n.d.).)