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A recent Fifth Circuit case highlights the importance of making sure that indemnity clauses in commercial goods sales are airtight.
In Perry Luig v. North Bay Enterprises, the First Circuit Court of Appeals reversed a lower court's ruling that a defendant company should not be heard to present evidence that they had been bilked into buying a helicopter that was not "airworthy." Was this a material question of fact? Probably.
The plaintiff and defendant (Luig and North Bay, respectively) entered into a contract for North Bay to buy a vintage helicopter from Luig. North Bay foot the bill to purchase a look over service of the helicopter generally known in the business as a "pre-buy" -- the aviation equivalent of a "home inspection" before sale.
Under standard practices, if there are discrepancies between what the buyer's description of the aircraft and what an independent inspection shows during the pre-buy, or if the aircraft is not "airworthy," the buyer can walk away without consequences. The contract also contained an "as is-where is" provision, the equivalent of an indemnity clause.
In this case, North Bay asked Luig to cure discrepancies and the helicopter changed hands. But soon after, North Bay started suspecting something was amiss with its new-used craft. It turned out that the engine had been replaced with a less powerful motor and that under the applicable FAA guidelines, this made the craft per se "un-airworthy," raising issues as to whether or not the as-is-where-is provision of the contract should be enforced.
This issue has been a contentious one in contract cases. In this case, the district court, for some reason, sua sponte granted summary judgment in favor of Luig and refused to hear any evidence North Bay wished to present before the court as to why they didn't seek to back out of the purchase sooner. Appeal followed.
The Fifth Circuit clarified a clear doctrine in appellate review: if the district court considers evidence and grants summary judgment, then the proper standard of review is de novo. But if the lower court refused to hear evidence from the movant, then proper standard is abuse of discretion.
There were a number of steps here that were screwed up, in the view of the Fifth Circuit. First, the court said, the evidence that North Bay sought to present was highly probative as to why there was post-consummation breach or why there was some other form if relief required under the facts. Why did the lower court refuse to hear North Bay's case? The evidence was clearly there before the summary judgment motion. Also, the Fifth Circuit concluded that Luig would not have been unfairly prejudiced if the court heard North Bay's evidence as it should have done int he first place. Not even Luig himself alleged prejudice.
With that in mind, the circuit reversed the summary judgment in favor of Luig and remanded the case back to the district court with orders to consider North Bay's evidence. The case is interesting for two major reasons: proper standards of review and the effectiveness of aviation indemnity provisions.
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