Something doesn’t add up

An aviation charter broker (Broker) had arranged a long running contract between the operator of an aircraft (Operator) and their flying customer (Charterer), who required flight services to move their staff to and from a specific location. The contract called for the Charterer to make a certain specified minimum number of flights per annum. This was set at 100.

The agreement was evidenced in two contracts. One between the Broker and the Operator (whereby the Broker is named as charterer) and a second between the Broker and Charterer (whereby the Broker is named as the operator). These contracts were made on a back to back basis.

The contracts worked well for a number of years. However, the Charterer decided to close some of their operations in the location and therefore did not require so many flights. In fact, after a number of months, they had only used five flights. They decided that terminating the contract early may be necessary.

The Broker advised that rather than terminating the contracts, it may be possible, and to everyone’s mutual benefit, to amend the current terms. Following a meeting between all the parties it was decided that the contracts would continue but with a new pricing structure in place – to take into account that it was extremely unlikely that all 100 flights would be used.

The new arrangement split the costs of the flights into “fixed” and “variable”. A lower fixed cost amount would be paid by the Charterer per flight whether it was used or not. A higher variable cost would be paid on flights that were actually used. An endorsement was concluded and added to both contracts. This endorsement was drafted by the Broker.

Unfortunately, the Broker appeared to make an error in the endorsement, which should have been the same (back to back) in both contracts. By mistake the Broker added a “+” sign in one contract and a “-“ in the other. This error meant that Charterer potentially owed a significant amount of money in respect of variable costs to the Operator in respect of unused flights. The Charterer claimed that this was not what was agreed. They argued that the contract endorsement was clearly an error by the Broker as there was no way the Charterer would have agreed to put themselves in a worse position than they were already in under the original contract.

The Operator ignored these arguments and issued court proceedings for their unpaid invoice in the sum of EUR 1m.

Eventually, considering the costs of litigation, the time involved and the litigation risk, it was decided that a settlement at an appropriate level would be preferable. Therefore, following a period of negotiation the matter was settled for EUR 200,000. ITIC covered the Broker’s settlement and legal costs.