Loading please wait....
Login

If you are a registered, please log in. If not, please click here to register.

BOARDROOM GUIDE - CONTRACT ISSUES

For at least a year and a half, much of the world’s business and economic stability have been dramatically affected. Obviously, business aviation has also suffered setbacks from several different influences—both direct and indirect— including negative political and public perception, tightened credit markets, and the difficulty (if not outright inability) of some manufacturers to cope with the cataclysmic decline in new orders and the resulting need for reduced production rates.

AvBuyer   |   8th January 2010
print
Back to articles
AvBuyer AvBuyer

The AvBuyer editorial team includes Matt Harris and Sean O'Farrell who contribute to a...
Read More

The Letter Of The Law:
Is “Contractual Relationship” an Oxymoron?


For at least a year and a half, much of the world’s business and economic stability have been dramatically affected. Obviously, business aviation has also suffered setbacks from several different influences—both direct and indirect— including negative political and public perception, tightened credit markets, and the difficulty (if not outright inability) of some manufacturers to cope with the cataclysmic decline in new orders and the resulting need for reduced production rates.

Concurrently, customers with existing orders began requesting payment schedule adjustments or outright contract cancellations, because they had signed contracts before obtaining financing which had since become unavailable, due to the fear of negative perception from their employees or the public, or because the customer or his business had suffered severe financial setbacks.

Whatever the cause, these events severely strained both the manufacturers’ financial well-being and the relationships between the customers and the manufacturers, which, in some cases, had been in place for many years. Faced with the potentially catastrophic impact of these events to their bottom lines, business aircraft manufacturers have had some basic decisions to make: Do we enforce the strict language of the contract, do we agree to some customers’ requests while seeking offsetting concessions, or do we stay the course and attempt to weather the storm?

Former President Gerald Ford, in describing the qualities of good leadership, once wrote: “No good leader approves short-term benefits if they undermine long-range purposes… [A] good leader concerns himself with the next generation, not the next election. If he lays the proper groundwork, he can be sure that the proper results will be forthcoming.”

Applied to the earlier decisions the business aviation manufacturers have had to face, President Ford’s message is clear - that the manufacturer who took a hard line, black or white position with customers for requesting relief from his contractual obligations (even if the request was completely selfish and unmindful of the manufacturer’s stress) provided only short-term benefits and almost certainly created larger problems that may never be rectified.

Then what the contract says doesn’t matter, right? Of course it matters - but its intent, and the method of enforcement when a customer relationship is at stake can result in dramatically different results than when the ‘letter of the law’ is the sole basis for contractual decisions.

Certainly, each party to a contract deserves to know what rights they have should something go wrong during the course of that contract. Those rights, and the resulting remedies, tend to address contractual breaches, not requested changes based on legitimate (or perceived) needs, and there is a fine line between protecting contractual rights and preserving a relationship that will garner good will for years to come.

WHAT GOES AROUND…
Now that buyers are reappearing, our challenge as consultants and brokers is to properly guide our clients in selecting the manufacturer with which to do business, and to ensure that the resulting contract effectively addresses both the intent and the likely reality in the event of another market decline.

We all know, or have a pretty good idea, which manufacturers have relied more on the letter of the law than the importance of customer relationships. Accordingly, our responsibility is to either steer our clients away from those manufacturers or do everything possible to allow for reasonable adjustments should the need arise. If the manufacturer is unwilling to agree to some flexibility in the face of certain kinds of problems our clients are most likely to encounter—reduced cash flow, unavailability of financing, etc. — we must at least alert our clients that they will not receive any sympathy should any of these kinds of issues arise.

Manufacturers should heed this advice as well: That is, consider how many times we’ve heard about customers or their representatives complaining widely because of a problem with a manufacturer, whether it involved a delivery schedule, product support, a ‘free’ component or software release. Something relatively minor can take on a life of its own if not dealt with quickly and effectively—often possible without conceding to the original request—and become a public-relations nightmare if the customer is well-connected.

Have you ever heard the phrase, “The squeaky wheel gets the oil?” Even if it doesn’t get the oil, it’ll make the ride miserable! (These same customers are, by the way, frequently the same customers to whom the manufacturer turns to make a payment a little earlier than scheduled, or to take a delivery to help them meet their quarterly performance numbers even though the aircraft isn’t quite ready). Ironically, companies that thrive on strong customer relationships (i.e. are committed to establishing and maintaining those relationships) tend to have customers who make fewer requests. They also tend to have better success saying “no” to requests that would create operational or financial problems, or open the door to other, more problematic requests.

In the context of President Ford’s quote, thinking about “the next generation, [rather than] the next election” helps these companies take the long view when they encounter a customer relationship problem. Similarly, consultants and brokers should take the long view in building relationships with their clients, helping to ensure that clients understand the temperament of a manufacturer, and guiding the client (and, to the extent possible, the manufacturer) through any difficulties to arrive at a mutually-constructive result.

DEGREES OF REACTION
There is no question that the current economic crisis, spanning the many facets of global business it has affected, has far exceeded what anyone could have foreseen. Regardless, it has always been the case that business aviation is cyclical, so reacting to the impact of the downturn is really only a matter of degree.

Unfortunately, many business aircraft manufacturers (and brokers, consultants and financiers, for that matter!) spooled up production rates, headcount, and margin expectations in response to the boom enjoyed by nearly everyone from 2004/2005 through 3rd quarter 2008, so the rapid and severe nature of the “crash” we all experienced in late 2008 through 2009 (and, in many cases, through today) was traumatic for everyone, including many of our customers.

Take, for example, the bank-owner customer whose business was nearly wiped out until his country’s government stepped in with bail-out money to prevent an even more severe impact on the economy. When he approached the manufacturer to tell them that he still wanted to take delivery of his aircraft but wanted to defer delivery (and the progress payments in his contract) until a recovery—which he felt certain would happen, eventually—did the manufacturer agree to try to work something out, or did they tell him that they couldn’t or wouldn’t because other customers might ask for the same “favor?”

What about the venture capitalist customer they’d been helping buy aircraft for the past 20 years, who called to say he’d lost a substantial portion of his net worth and needed to pull out of the aircraft order they had helped him place? He felt certain that he would recover and would be back to buy another aircraft as soon as possible. Did they suggest a delivery deferral or applying (at least a portion of) the contractual liquidated damages in the current contract to the initial payment for that future aircraft?

In many ways, the past behavior
of manufacturers and the consultant/broker community is as much a part of the purchase decision as financial and mission requirements.

The scenarios we’ve faced over these past 15 to 18 months have been many and varied, but how each of us responded to the challenges, regardless of how tough it has been, will almost certainly play a direct role in how quickly the market rebounds. First, because as the domestic and world economy begins to recover, our customers, including many “captains of industry,” will frequently lead the recovery (and want our aircraft as tools to maintain the pace of that recovery).

Second, because they will want to do business with companies and people who worked with them when they needed a sympathetic ear. And their friends and colleagues will join them, staying with the manufacturer and the consultant/broker who worked through the difficulties, or shunning those who refused to do so. Our industry is small and close-knit, and everyone seems to know about everyone else’s situation, both good and bad!

So the question is whether the manufacturer with whom you choose to do business has been willing to take on the challenge of working through difficult times with their customers, or hunkered down under the language of the contract to survive, relying on the nourishment of termination penalties like an Olympic athlete living on sugar cubes. Yes, the contract should provide appropriate protection should something go horribly wrong, but that protective language should not be used as an excuse to dismiss the value and importance of a hard-earned and much-cherished relationship.

Read more about: Contracts

Related Articles

linkedin Print

Other Articles