When a Business Jet Seller Breaches the Purchase Contract

Business jet prices have risen sharply in recent years, tempting sellers to default on purchase agreements to unload their aircraft to someone else for a higher price.  An important new court case addresses the remedies available to buyers in such situations.

Let’s look first at how these defaults occur and the ramifications they can have.

Disputes between the parties to an aircraft purchase agreement arise either prior to closing, when the parties are usually engaged in evaluating, inspecting, and repairing the airplane, or after closing, when the buyer owns and operates it. Post-closing legal battles are rare because, except for the warranty of title, business jets are generally sold on an “as-is” basis.

Most airplane purchase contracts provide that if the seller breaches the agreement, it must reimburse the buyer for transaction expenses, such as for the pre-purchase evaluation and movement of the aircraft in connection with the deal. Sellers often insist on placing a cap on costs they’re responsible for or refuse to pay for certain expenses, like legal fees. As a result, in many cases, buyers are reimbursed for only a portion of their costs.

Buyers, on the other hand, almost always put down a significant deposit when purchasing a jet that is held in escrow. The deposit may or may not be refundable until the buyer commits to the transaction following the pre-purchase evaluation. Deposits for preowned business jets are rarely less than $100,000 or more than $1 million and are often in the neighborhood of $250,000 to $500,000, depending on the aircraft’s purchase price. If buyers default, they generally forfeit the deposit and are often required to reimburse sellers for expenses as well, such as the cost of a demo flight. No wonder that, in a strong market, sellers sometimes hope the buyer will default so they can keep the deposit and do a better deal with someone else.

Thus, if the buyer defaults, the seller collects a significant deposit from the buyer and can often turn a profit, whereas if sellers default, the buyer will have the deposit returned and may also have expenses reimbursed.

A Different Approach to Seller Defaults

A decision last May in the U.S. District Court for the Southern District of New York, however, takes a somewhat different approach to seller defaults. In Jet Experts, LLC v. Asian Pacific Limited, the plaintiff, a medical doctor, contracted to purchase a 2012 Challenger 300 in April 2021. He planned to use the aircraft in connection with performing organ transplants. According to the court’s decision, as the deal was about to close, the seller unilaterally declared that the contract was terminated because it found another buyer willing to pay a substantially higher price. The plaintiff sued, seeking “specific performance”—that is, a court order requiring the seller to complete the sale. 

The seller claimed a right to terminate the contract, but in the court’s view, this right applied only if the purchaser was in default, which was not the case. Indeed, it was the buyer who had a right to terminate. The “seller’s default” provision in the purchase agreement provided that, if the purchaser “elects to terminate” the agreement when the seller defaults, the seller must return the deposit and reimburse the buyer for a list of transaction expenses (capped at $100,000). The provision went on to say that the right to receive this reimbursement was the sole remedy available to the purchaser if the seller defaults.

The court pointed out, however, that the purchaser was not electing to terminate the agreement; on the contrary, the purchaser was suing because it wanted the seller to perform and deliver the aircraft. The court then rejected the idea that the “sole remedy” clause applied whether the purchaser elected to terminate or not. In sum, said the court, the case “is to be regarded as a simple unjustifiable termination of contract subject to normal remedies provided by law.”

The issue then came down to whether the specific performance sought by the plaintiff was one of those remedies. The decision noted that courts are reluctant to grant specific performance where an injury is equally well-remedied with monetary damages. If a seller defaults on selling a mass-produced item, specific performance may be inappropriate; if it defaults on selling an original portrait by John Singer Sargent, the case for specific performance is vastly better. What is appropriate for a business jet?

Citing the Uniform Commercial Code, the court made a lengthy case for specific performance for this aircraft, including consideration of Challenger 300s available for sale as of April 2022; operating parameters of the Challenger 300; number of flight hours and the maintenance status of the aircraft; and comparison of the Challenger 300 to other aircraft such as the Gulfstream 200 and Falcon 2000 (most of which did not have an FAA-approved kit to retrofit them for exclusive medical purposes). The court concluded that the Challenger 300 in question “is a unique chattel that uniquely satisfies plaintiff’s particular need for a medical aircraft” and directed the seller to transfer it to the plaintiff, to be held in trust pending an appeal of the ruling by the Court of Appeals.

Although some aspects of the court’s reasoning on the uniqueness of this specific Challenger 300 were not always persuasive, there is a good argument that business jets, especially preowned ones, are unique assets often suitable for specific performance when all factors—including pedigree, configuration, cosmetics, flight time, equipment, maintenance history, damage history, and so on—are considered. Any of these factors can bear on the suitability of one jet for the buyer’s purposes as opposed to another. In 2013, for example, the U.S. Tax Court in Brown v. Commissioner held that a jet had not been placed in service in the taxpayer’s business in a given year because its lack of a conference group and larger display screens meant it wasn’t in a state of availability for the “specific intended function” of the taxpayer that year. 

The outcome of the Jet Experts case may change on appeal. Bombardier has submitted an amicus brief arguing that permitting specific performance for business jets creates uncertainty as to the real owner’s identity for purposes of complying with regulatory obligations and makes it virtually impossible to sell the aircraft until the issue is resolved. But the case makes one thing clear: if a party wants a unilateral right to terminate an aircraft purchase agreement or to permit or block specific performance, careful drafting of default provisions is required.