07 July 2020

UK High Court: when will standard representations amount to contractual estoppel

This article was written by Lequn Su (Joe) and Rosanna Munoz-Britton.

Wallis Trading Inc v Air Tanzania Co Ltd [2020] EWHC 339 (Comm)

Summary:

The facts of this case involved claims by an aircraft leasing company, Wallis Trading Inc. (‘Wallis’ or the ‘claimant’) against Air Tanzania Company Ltd (‘ATCL’) and the Government of the United Republic of Tanzania (the ‘Government’ and together with ATCL, the defendants). Wallis as lessor negotiated a lease with ATCL as lessee (the ‘Lease’). The Lease was governed by English law and contained standard representations. Amounts payable under the Lease were subsequently not paid when due. The defendants argued that due to lack of authority, breaches of fiduciary duties and failures to comply with certain Tanzanian procurement legislation, the Lease was invalid, unenforceable by reason of illegality and there were grounds for unconscionability and unjust enrichment. 

It was found that non-compliance with the Tanzanian procurement legislation did not affect the validity of the Lease on the basis that the applicable governing law was English law and the procurement legislation did not form a part of that law. It also did not matter that there had been non-compliance with the procurement legislation as that legislation and Tanzanian law in general did not state that performance of a contract would be considered illegal if local laws had not been complied with. 

Further, ATCL was contractually estopped from claims based on non-compliance with the procurement legislation due to various representations made in the Lease. In addition, the defendants failed to demonstrate that performance of the Lease was unlawful and on the basis that compliance with directors’ duties is a subjective test, there was no breach in this case. The defendants’ other arguments as to unconscionability and unjust enrichment also failed due to insufficient basis and the Lease was found to be valid, enforceable and binding on ATCL. 

Facts:

In September 2007, Wallis as lessor proposed leasing an aircraft (the ‘Aircraft’) to ATCL as lessee. The Government as a shareholder of ATCL was also required to provide a guarantee worth US$60 million (the ‘Guarantee’) as part of the transaction. The Lease, governed by English law, was subsequently negotiated between the parties. As part of the approval process, ATCL submitted the Lease to its board which then required onward approval from the Attorney General of Tanzania. Correspondence from the Attorney General at the time observed that “generally, the Agreement appears to have too many disclaimers and waivers of liabilities on the part of the Lessor while placing a lot of duties on the Lessee. Ordinarily, parties to an agreement are supposed to have duties that balance their rights […] You are advised to act on the above comments before the Agreement is signed”.[1]  The Lease was then completed in October 2007. 

As part of its terms, the Lease included the following representations and warranties: 

“Representations and Warranties

2.1  Lessee’s Representations and Warranties: Lessee represents and warrants to Lessor that:-


 
(b)  Power and authority : Lessee has the corporate power to enter into and perform, and has taken all necessary corporate action to authorise the entry into, performance and delivery of, this Agreement and the transactions contemplated by this Agreement;
 
(c)  Legal validity : this Agreement constitutes Lessee’s legal, valid and binding obligation;
 
(d)  Non-conflict : the entry into and performance by Lessee of, and the transactions contemplated by, this Agreement do not and will not:-
 
(i)  conflict with any laws binding on Lessee
 

 
(e)  Authorisation : all authorisations, consents, registrations and notifications required in connection with the entry into, performance, validity and enforceability of, this Agreement and the transactions contemplated by this Agreement, have been (or will on or before the Delivery Date have been) obtained or effected (as appropriate) and are (or will on their being obtained or effected be) in full force and effect…
 
…”[2] 

 
A certificate of acceptance in relation to the Aircraft was subsequently issued which, amongst other terms, included a repetition of the representations and warranties. Prior to the Guarantee being entered into, ATCL notified Wallis that it has not complied with certain provisions of the Tanzanian Procurement Act 2004 (the ‘Procurement Act’). However, retrospective approval was granted and the Guarantee was also delivered. 

After a short period of being in operation, the Aircraft was grounded and subsequently, amounts were not paid under the Lease, the Aircraft was redelivered early to Wallis and the Lease was terminated. The parties subsequently agreed to a settlement agreement for payment of sums owed by the defendants to Wallis on 4 October 2013 in lieu of unpaid amounts due under the Lease (the ‘Settlement Agreement’). 

Arguments:[3]   

The principal argument advanced by the defendants was that the Lease was invalid due to breaches of the Procurement Act and the Public Procurement (Goods Works Non-Consultant Services and Disposal of Public Assets by Tender) Regulations GN No. 97 of 2005 (the ‘Procurement Regulations’ and together with the Procurement Act, the “Procurement Legislation”). Further, the defendants argued that the ATCL signatory who has signed the Lease did not have the required authority to do so and had breached his fiduciary duties. Separately, it was put forth that Wallis had been aware of the lack of authority of the ATCL signatory which rendered the Lease void or voidable. In addition, that the Guarantee was unenforceable as it lacked an underlying enforceable primary obligation and, on the basis that the Settlement Agreement collectively formed a single agreement together with the Lease and Guarantee, it was also void, voidable or unenforceable due to illegality. Arguments of unconscionability together with unjust enrichment of Wallis by the Lease arrangements were also put forward. 

Judgement: 

1. The Lease

a. The Lease was invalid due to non-compliance with Procurement Legislation
– with regard to this argument, it was noted that Article 8 of the Rome Convention which is scheduled to the Contracts (Applicable Law) Act 1990 sets out that the existence and 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 governing law of the Lease was English law and the Procurement Legislation was not part of English law so non-compliance therewith did not affect the validity of the Lease.[4]  Further, that the representations (as listed above) given by ATCL meant that ATCL was contractually estopped from arguments based on the invalidity of the Lease, with the guiding principles of contractual estoppel including:

‘There is no reason in principle why parties to a contract should not agree that a certain state of affairs should form the basis for the transaction, whether it be the case or not’[5] 

And 

‘[…] that parties can bind themselves by contract to accept a particular state of affairs even if they know that state of affairs to be untrue.’ [6]

b. The Lease was unenforceable due to illegality – in relation to this defence, it was found that the defendants had failed to show that performance of any of the obligations under the Lease were unlawful under Tanzanian law. In addition, it was not suggested that other payment obligations under the Lease which were performed in Switzerland were unlawful. It did not matter that there had been non-compliance with the Procurement Legislation as that legislation and Tanzanian law in general did not state that performance of a contract would be considered illegal if local laws had not been complied with. 

c. There was a lack of authority to enter into the Lease by reason of the ATCL signatory lacking the required authority – this argument was advanced on the basis that the ATCL signatory (i) had breached his fiduciary duties; (ii) had not complied with certain conditions imposed by the ATCL board prior to the Lease being entered into; and (iii) had not obtained the relevant approvals to confirm compliance with the Procurement Legislation. It was noted that there was no material difference between Tanzanian and English law with respect to fiduciary duties and that such duties were subjective in nature. On the facts, there was no evidence found that there had been a breach and even if there had, it would not have been sufficient to cause the Lease to be void. Further, even if the ATCL signatory had not complied with certain conditions required by the ATCL board, Wallis was not aware of this and was entitled to rely on the ostensible authority of the ATCL signatory. The defendants were also contractually estopped from relying on the approvals not having been obtained due to the representations given in the Lease (as set out above). 

Based on the above, the Lease was found to be a valid and enforceable contract which was binding on ATCL. Similar arguments based on non-compliance with Tanzanian legislation with regards to the Guarantee were also rejected. 

With regard to the Settlement Agreement, it was found in any event that regard did not have to be had to the Lease and Guarantee in order to determine the liabilities thereunder and an obligation to pay had been independently established between the parties which replaced the obligations under the Lease and Guarantee. 

Comment: 

This case is useful in confirming the grounds and circumstances that will amount to contractual estoppel, particularly in relation to the importance of standard form representations and warranties that are commonplace in many contracts. 

It is also interesting in terms of its analysis that unless local laws expressly state that performance of a contract is illegal if local laws are not complied with, an English law governed contract will not be rendered unenforceable by general non-compliance with local laws. 


[1]Wallis Trading Inc V Air Tanzania Co Ltd [2020] EWHC 339 (Comm), at [30]

[2]Wallis Trading Inc V Air Tanzania Co Ltd [2020] EWHC 339 (Comm), at [32]

[3]Wallis Trading Inc V Air Tanzania Co Ltd [2020] EWHC 339 (Comm), at [57]

[4]Wallis Trading Inc v Air Tanzania Co Ltd [2020] EWHC 339 (Comm), at [76]

[5]Peekay International v Australia and New Zealand Banking Group Limited [2006] EWCA Civ 386, at [56]

[6]First Tower Trustees Ltd v CDS [2019] 1 WLR 637, at [47]

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