LOMBARD NORTH CENTRAL PLC EUROPEAN SKYJETS LIMITED (IN LIQUIDATION)

A contractual right to terminate for a payment default may arise when payment is not made punctually, even if the default is later remedied, unless the creditor has waived the right or is estopped from relying on it. Waiver may result from positive conduct, despite a contractual reservation of rights.

A termination notice need not identify the precise event of default or state the exact amount due unless the contract requires this. An acceleration clause in a secured commercial loan is not, merely for that reason, an unenforceable penalty. A lender exercising an asset-cover power must form its opinion reasonably, but may use a realistic distressed-sale valuation.

Lombard made a secured loan to Skyjets to finance a business aircraft. Following repeated late payments, concerns about the aircraft’s asset-cover ratio, cancellation of an engine-maintenance plan and deterioration in the borrowers’ financial position, Lombard served a notice terminating the loan and enforcing the mortgage.

Skyjets and Skytime contended that termination was invalid, that Lombard had breached duties owed in relation to the arrears and sale process, and that they had suffered substantial losses. The central issues were whether Lombard was entitled to rely on payment and non-payment defaults, whether the notice was effective, and whether the aircraft was sold in breach of the mortgagee’s duty.

1. Termination for payment defaults. Clause 9.1(a) created a default when an instalment was not paid when due. Clause 9.2 permitted termination at any time after the default and did not require the default to continue when notice was served. The reasoning in Mardorf Peach & Co Ltd v Attica Sea Carriers Corporation of Liberia (The Laconia) supported that construction. Lombard had nevertheless waived reliance on earlier late payments by its positive communications on 10 October 2012, which gave Skyjets further time to regularise the account. The contractual no-waiver clause and reservation of rights did not prevent that limited waiver.
2. Other events of default. The cancellation of the MSP Service Plan breached continuing representations and warranties concerning the maintenance arrangements. Lombard had also honestly and rationally formed the opinion that a material adverse change had occurred. The notice could rely on those events even though they were not identified in it.
3. Asset-cover call. Lombard had to act reasonably when valuing the aircraft for asset-cover purposes. It was entitled to use a realistic value achievable on a distressed sale rather than an idealised open-market value. Although Lombard’s calculation was excessive and mathematically wrong, the informal communications had not established that the asset-cover call was immediately due before termination.
4. Notice and penalty arguments. The notice remained effective despite misstating the amount due. The acceleration provision was not an unenforceable penalty. A contractual termination right of this kind was not a Braganza-type discretion.
5. Mortgage sale. Lombard owed an equitable duty to obtain the best price reasonably obtainable, exercising informed and reasonable judgment. The storage, marketing and pricing complaints were rejected. The sale price fell within the range of reasonable market values.
6. Disposition. Lombard validly accelerated and terminated the loan and was entitled to enforce the mortgage. Judgment was entered for Lombard against Skyjets in the sum of $3,566,297.40. The claims and counterclaims advanced by the Sky Parties failed.