Novus Aviation Ltd v Alubaf Arab International Bank BSC(c)

A commitment letter may create binding contractual obligations even though further transaction documentation remains to be completed. The question is determined objectively from the words and conduct of the parties. A condition requiring documentation to be satisfactory ordinarily gives the relevant party a contractual discretion, which must be exercised in good faith, for proper purposes and without arbitrariness, capriciousness or irrationality. Contractual signature requirements may be waived by conduct, but a requirement intended for the benefit of both parties requires clear evidence of mutual waiver. A party which withdraws for a reason outside its contractual conditions commits repudiatory breach. Loss of the chance to earn contractual fees is assessed on the evidence and probabilities, including the current information available when damages are assessed.

Novus arranged aircraft finance and sought equity funding from Alubaf for the purchase and lease of an Airbus aircraft to Malaysia Airlines. Alubaf’s investment committee approved the transaction, after which its Head of Treasury and Investments signed a commitment letter and a management agreement. Novus proceeded with preparatory work but did not return a counter-signed copy of the management agreement before Alubaf withdrew because of accounting and consolidation concerns.

Novus claimed damages for breach of the commitment letter and management agreement. The principal issues were whether the documents were binding, whether the signatory had authority, whether Novus’s acceptance or signature was required, whether Alubaf’s withdrawal was repudiatory, and how any loss should be quantified.

1. Commitment letter. The commitment letter was objectively intended to create legal relations. Its governing law and jurisdiction clause reinforced that conclusion. Its substantive provisions used mandatory language, including “shall” and “covenants”. The alleged aviation-finance practice did not alter the clear meaning of the document.
2. The funding obligation was conditional upon Alubaf’s satisfactory review and completion of the transaction documentation and upon the projected return being around 9.5% per annum. “Satisfactory” meant satisfactory to Alubaf, but the resulting contractual discretion had to be exercised in good faith, for proper purposes and without arbitrariness, capriciousness or irrationality. Alubaf’s withdrawal for commercial and accounting reasons was outside those conditions.
3. Authority. The investment committee had authorised the transaction and Mr Abdullah had actual authority to execute the necessary documents. In any event, his position, the internal approval and Alubaf’s conduct gave him apparent authority, on which Novus reasonably relied.
4. Acceptance and management agreement. Novus accepted the commitment letter by conduct, including progressing the transaction and treating the commitment as in place. The management agreement differed: clause 2.4 required execution by both parties, and that requirement benefited both parties. It was not waived by the parties’ conduct. The agreement therefore never became binding. Clause 2.5 was unclear and redundant and had no legal effect in relation to the pre-acquisition period.
5. Breach and damages. Alubaf’s communicated decision not to proceed was an anticipatory repudiatory breach of the commitment letter, which Novus accepted. Novus had not failed to mitigate. The lost-fee claim was assessed as a loss of a chance. The court assessed an 85% chance that the transaction would have completed, used the best current valuation evidence, assumed disposal in 2022, and directed the parties to calculate and agree the resulting judgment sum.