Credit Suisse AG v Arabian Aircraft & Equipment Leasing Co EC & Ors [2013] EWCA Civ 1169

[2013] EWCA Civ 1169Case No A3/2013/1319
IN THE COURT OF APPEAL (CIVIL DIVISION)
[2013] EWHC 1094 (Comm)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION (COMMERCIAL COURT)
(His Honour Judge Mackie C.B.E., Q.C.)
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 2 October 2013
Before
LORD JUSTICE MUMMERYLORD JUSTICE LLOYDLORD JUSTICE MOORE-BICK
Between
CREDIT SUISSE A.G.Claimant/(1) ARABIAN AIRCRAFT & EQUIPMENT LEASING CO ECDefendants/Appellants(2) MANSOUR IBRAHIM AL-TASSANAppellant(3) BAHRAIN EXECUTIVE AIR SERVICES CO (BEXAIR) W.L.L.Appellant
(Transcript of the Handed Down Judgment ofWordWave International LimitedA Merrill Communications Company165 Fleet Street, London EC4A 2DYTel No: 020 7404 1400, Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Mr. Philip Shepherd Q.C. and Mr. Jonathan Moss (instructed by Gowlings (UK) LLP) for appellantsMr. Andrew Lydiard Q.C.(instructed by Ince & Co LLP) for respondentHearing Hearing date : 29 th July 2013
JudgmentLord Justice Moore-Bick :
[1]This is an appeal by the defendants, Arabian Aircraft & Equipment Leasing Co E.C. (“AA”), Mr. Mansour Al-Tassan and Bahrain Executive Air Services Co (BEXAIR) W.L.L. (“Bexair”), against an order made in the Commercial Court by His Honour Judge Mackie C.B.E., Q.C. requiring them to pay into court the sum of US$2,563,000 as a condition of defending the claim brought against them by Crédit Suisse AG (“the Bank”).[2]The Bank’s claim arises out of an agreement with AA dated 15th March 2004 under which it leased a Canadair Challenger aircraft to AA with a view to its being sub-leased to, and operated by, Bexair. On 14th November 2003 AA had entered into an agreement with a Canadian company, Bombardier Aerospace Corporation (“Bombardier”), to buy the aircraft for the sum of US$13,055,000, but had subsequently obtained financing from the Bank, which took an assignment of the benefit of the purchase contract in order to enable it to lease the aircraft to AA. The lease was guaranteed by Mr. Mansour, who is a shareholder in, and a director of, both AA and Bexair and was supported by an assignment by Bexair of the benefit of insurances and other agreements which it had entered into as operator of the aircraft. The assignment included a covenant on the part of Bexair to discharge the obligations of AA under the lease. The initial term of the lease was eight years from the delivery of the aircraft.[3]The aircraft was delivered in March 2004. For some time AA made monthly payments under the lease in accordance with its terms, but in early 2009 it encountered financial difficulties and failed to make the payments due in April, May and June that year. By clause 18.1(A) of the lease the failure to make payments promptly when due constituted an event of default, the consequences of which are set out in the following parts of clause 18. In view of their importance to this appeal it is necessary to refer in detail to some of those provisions.[4]The material parts of clause 18.2 provided as follows:
“Rights of Lessor on an Event of Default (A) An Event of Default shall constitute a material breach of a condition of and a repudiation by the lessee of its obligations under this Agreement. (B) If an Event of Default shall occur and be continuing during the Term, the Lessor shall be entitled, without prejudice to any of its other rights under this Agreement, by notice in writing to the Lessee: (i) to require the Lessee to surrender possession of the Aircraft Package to the Lessor (without terminating the leasing of the Aircraft Package under this Agreement) . . . ; and/or (ii) to accept such repudiation, to terminate the leasing of the Aircraft Package under this Agreement and to require the Lessee to redeliver the Aircraft Package to the Lessor . . .” “Aircraft package” was the expression used to denote the aircraft and its technical and operational documents. (i) to require the Lessee to surrender possession of the Aircraft Package to the Lessor (without terminating the leasing of the Aircraft Package under this Agreement) . . . ; and/or (ii) to accept such repudiation, to terminate the leasing of the Aircraft Package under this Agreement and to require the Lessee to redeliver the Aircraft Package to the Lessor . . .”
[5]The material parts of clause 18.3 provided as follows:
“Payments on termination during the Term On the termination during the Term of the leasing of the Aircraft Package to the Lessee as a result of an Event of Default and whether or not the Lessor shall have exercised, or shall thereafter at any time exercise, any of its rights under clause 18.2, the Lessee shall pay to the Lessor (by way of agreed compensation for loss of bargain and without prejudice to any right to damages of the Lessor) on demand of the Lessor the amount notified by the Lessor to be the aggregate of: (A) all arrears of Rent . . . ; (B) any loss, damage, expense, cost or liability which the Lessor may sustain or incur as a consequence of the occurrence of any Default or Event of Default and/or any such termination including: (i) any amount of interest, fees or other sums whatsoever paid or payable on account of funds borrowed in order to carry any unpaid amount; (ii) any loss, premium, penalty or expense incurred by the Lessor in prepaying funds raised to finance the Aircraft Package . . . ; (iii) all costs and expenses incurred in recovering possession of the Aircraft Package and in carrying out any works required to bring the Aircraft Package up to the condition required pursuant to this agreement; and (iv) any loss suffered by the Lessor as a result of the Lessor’s inability to place the Aircraft Package on lease with another lessee on terms as favourable to the Lessor as the terms hereof . . . ” (i) any amount of interest, fees or other sums whatsoever paid or payable on account of funds borrowed in order to carry any unpaid amount; (ii) any loss, premium, penalty or expense incurred by the Lessor in prepaying funds raised to finance the Aircraft Package . . . ; (iii) all costs and expenses incurred in recovering possession of the Aircraft Package and in carrying out any works required to bring the Aircraft Package up to the condition required pursuant to this agreement; and (iv) any loss suffered by the Lessor as a result of the Lessor’s inability to place the Aircraft Package on lease with another lessee on terms as favourable to the Lessor as the terms hereof . . . ”
[6]Clause 18.4 provided as follows: “Further Rights of the Lessor In the alternative to the Lessor’s other rights under the preceding provisions of this clause 18 and whether or not the Lessor shall have exercised, or shall thereafter at any time exercise, any of its rights under clause 18.2, but without prejudice to any right of damages that may otherwise be available to it, the Lessor may, if it considers in its absolute discretion that the other remedies herein provided do not adequately or sufficiently quickly compensate it for any loss it might suffer on, or at any time after, any termination of its obligation to lease the Aircraft Package or any termination of the leasing of the Aircraft Package . . . , require the Lessee to pay to the Lessor on the demand of the Lessor by way of agreed further compensation and not as a penalty an amount equal to the aggregate of:(a) (A) all arrears of Rent and any other sums . . . accrued by the Lessee in favour of the Lessor up until the date of such termination . . . ;(b) (B) any loss, damage, expense, cost or liability which the Lessee may sustain or incur as a consequence of the occurrence of any Event of Default . . . ;(c) (C) all amounts of Rent which would have fallen to be paid under this Agreement from the date of such termination up until the Initial expiry Date . . . discounted over the notional balance of the Term at the Discount Rate applicable on the date of such termination;(d) (D) the Residual Book Value; and(e) (E) the value (as reasonably estimated by the Lessor) of all services, covenants and other obligations which would have fallen to be performed by the Lessee but for the termination of the leasing of the Aircraft Package, less the aggregate of the Fair Market Value of the Aircraft on the date of such termination.” “Fair Market Value” was defined for these purposes as an amount equal to the average of the amounts assessed by three independent valuers of recognised international reputation and experience as being the amount that could reasonably be expected to be received on an arm’s length sale of the aircraft in the circumstances at the time of determination and under no unusual pressure for a prompt sale.[7]On 3rd June 2009 the Bank wrote to AA notifying it that events of default had occurred and demanding that they be cured immediately. It also required AA to surrender possession of the aircraft under clause 18.2(B)(i). By the date of that letter the aircraft had been in the possession of Bombardier at its premises at Windsor Locks, Connecticut, for about a year, having been sent there by Bexair in June 2008 for inspection and repair with a view to re-sale under a trade-in purchase agreement between AA and Bombardier. For reasons that remain unclear the aircraft had not been held under approved storage conditions. Its equipment, in particular the engines, had not been powered up during that period and it had been allowed to stand on the tarmac exposed to the weather. As a result it had already suffered a certain amount of deterioration. Bombardier was exercising a lien on it pending payment of an outstanding amount of US$1,104,137.35 which it claimed to be due for work it had carried out.[8]On 4th June 2009 the Bank wrote to Bombardier to inform it that AA was in default under the lease and that it had demanded the return of the aircraft pending the remedying of that default. It asked Bombardier to confirm the extent of the work that had been carried out on the aircraft, whether any sum was outstanding in respect of it and whether the aircraft was airworthy. Bombardier replied on 15th June 2009 saying that extensive work had been done on the aircraft, that there was an outstanding bill for over US$1 million and that it was exercising a lien pending payment.[9]On 28th October 2009 the Bank wrote to AA again terminating the lease and demanding payment of an outstanding sum of US$8,355,546.58. Enclosed with the letter was an invoice showing how that sum had been calculated, but unfortunately it is difficult to relate it directly to the terms of the lease. The largest item by far (US$7,366,205) was described as “Outstanding Net Investment”, a term which is not found anywhere in the lease, but which reflected the outstanding amount due in respect of future rental payments. Importantly, for present purposes, no mention was made of the value of the aircraft and no credit was given for it.[10]The Bank could have obtained possession of the aircraft by paying Bombardier’s bill, but was unwilling to do so until it had investigated its options. In November 2009 it instructed a surveyor, Mr. John Shrout, to inspect the aircraft on its behalf. His initial reported of 21st December 2009 alerted the Bank to the fact that the aircraft was being held under unapproved conditions, which caused it some surprise. However, no steps were taken at that stage to alter the conditions of storage or to prevent further deterioration due to exposure to the weather. Eventually, in February 2011 the Bank negotiated acceptable terms with Bombardier, with which it had a long-standing business relationship, under which Bombardier agreed to absorb a substantial part of the costs of restoring the aircraft to full airworthiness. The work was carried out and the aircraft was eventually sold in February 2012 for US$4,996,040.37, net of commissions and expenses.[11]The lease and all the associated documents are governed by English law. On 3rd September 2012 the Bank started proceedings in the Commercial Court against AA to recover amounts outstanding under the lease and damages for breach of contract in the sum of US$2,869,341.27. Mr. Al-Tassan and Bexair were joined as guarantors. The claim as pleaded is expressed as being based on clauses 18.2 and 18.3 of the lease, but the particulars do not correspond either to the terms of the lease or to any conventional calculation of damages. In paragraph 37 the calculation set out in the Bank’s invoice of 28th October 2009 is repeated, the first item being described as “Outstanding Loan” rather than “Outstanding Net Investment”, but since there was no outstanding loan in any legal sense, it is inapposite. Nor is it clear what part of the claim is said to be for sums that had fallen due at the date of termination and therefore recoverable as a debt, and what part is said to constitute a claim for damages. What is clear, however, is that there is no reference in the particulars of claim to clause 18.4 of the lease or to the value of the aircraft at the date of termination.[12]Following service of a defence and reply the Bank applied for summary judgment against the defendants. Witness statements were served in support of both sides’ cases. They were lengthy, particularly those served by the Bank, and contained a good deal of argument, not all of which was helpful. However, the first indication that the Bank wished to put its case on the basis of clause 18.4 of the lease came in its skeleton argument served in support of the application. There one finds in paragraph 14 the assertion that “The claim in this case is for amounts payable pursuant to [clause] 18.4 of the lease. As at the termination of the leasing the amount notified to be due was $8,355,546.58 as set out in the demand served with the termination notice.” Later, in paragraph 19, it was said to be “inconceivable” that the Fair Market Value at the date of termination could have exceeded the price for which the aircraft had been sold in February 2012.[13]At the hearing of the application the defendants submitted that the Bank was not entitled to make a claim based on clause 18.4, both because it did not reflect the way in which the case had been pleaded and because there had been no assessment of the aircraft’s Fair Market Value in accordance with the terms of the lease. In the course of argument the judge pressed the Bank’s counsel to explain how a claim could be made under clause 18.4 in the absence of a determination of Fair Market Value. Counsel submitted that it was for the defendants to show to what extent, if at all, the Bank’s failure to obtain the required valuation had resulted in their being given insufficient credit. The judge appears to have accepted that submission, though he did not deal with the point in any detail in his judgment, saying simply that the Bank now put its case on the basis of clause 18.4. However, he did reject the defendants’ argument that the value of the aircraft at the time of termination was arguably significantly greater than the price that had eventually been obtained on its sale. Counsel for the Bank made it clear that it did not put its case under clause 18.3, but there was no application at any stage to amend the particulars of claim.[14]Before us Mr. Shepherd Q.C. (who, in common with Mr. Moss, did not appear below) submitted on behalf of the appellants that the judge should not have allowed the Bank to advance a claim under clause 18.4, both because that was not the way in which its claim had been pleaded and because it had made no attempt to determine the Fair Market Value of the aircraft, which was an essential element of any claim based on that clause. He submitted that although the point emerged clearly from the way in which the particulars of claim had been drafted, it was not a mere pleading point; there was a clear conceptual difference between the remedy provided by clause 18.3 and that provided by clause 18.4. They were alternatives and the Bank had chosen quite clearly to put its case on the basis of clause 18.3. A claim under clause 18.4 was bound to fail in the absence of a Fair Market Valuation which complied with the requirements of the clause. Moreover, he submitted, the Bank had failed to take reasonable steps to mitigate its loss by instructing Bombardier to protect the aircraft from the ravages of the weather.[15]Mr. Lydiard Q.C. for the Bank recognised that the particulars of claim did not contain any reference to clause 18.4 and were unsatisfactory, but he submitted that the sum claimed properly reflected what the Bank was entitled to recover under that clause and that the pleading included all the averments necessary to support such a claim, even if it had not been formulated in quite the right way. The Bank, he said, had done enough to enable it to put forward a claim under clause 18.4. The formulation of its claim followed the invoice sent to AA on termination of the lease, which would have been readily understood in the light of the documents which it sent AA from time to time notifying it of the periodic changes in the rent. (The financial structure of the lease was similar to that of a standard variable-rate repayment mortgage, the interest being tied to LIBOR and fluctuating accordingly. Rental payments, which comprised payments of interest and capital, were re-calculated at intervals for the whole of the remaining term of the lease. The most recent re-calculation of rent, which also showed the residual book value of the loan, had been given to AA on 30th July 2009. It showed the residual book value of the aircraft as US$7,366,205.) As to the conditions under which the aircraft had been stored by Bombardier, Mr. Lydiard submitted that the Bank had done all that could reasonably have been expected of it under the circumstances.[16]It is true that the Bank’s letter terminating the lease did assert a claim under clause 18.4 and I am prepared to accept that the invoice accompanying it would have been understood by AA, even though it was not couched in terms which reflected the lease. Nonetheless, the claim was defective in that it gave no credit for the current value of the aircraft. (It also failed to reflect the required discount for acceleration of rental payments, but that was later conceded and can be ignored for present purposes.) More importantly, however, it did not tie the Bank’s hands in the sense that it did not prevent it from advancing a claim under clause 18.3 if and when it became necessary to resort to legal proceedings. The failure to determine the aircraft’s Fair Market Value might have its own adverse consequences, but in principle the Bank was free to pursue a claim on whichever basis better suited its interests.[17]Particulars of claim are intended to define the claim being made. They are a formal document prepared for the purposes of legal proceedings and can be expected to identify with care and precision the case the claimant is putting forward. They must set out the essential allegations of fact on which the claimant relies and which he will seek to prove at trial, but they should also state the nature of the case that is to be made in order to inform the defendant and the court of the basis on which it is said that the facts give rise to a right to the remedy being claimed. In the present case the Bank set out to do that by identifying the terms of the lease on which it relied and the facts which it said entitled it to recover the sum of US$2.869 million (later reduced to US$2.563 million) from the defendants. In paragraphs 5 to 32 the Bank identified the relevant agreements and their key terms. It referred expressly to clauses 18.1, 18.2 and 18.3, but not to clause 18.4. In paragraphs 33 to 37 the Bank set out the facts which it said constituted events of default on the part of AA and referred to the termination of the lease by the notice dated 28th October 2009. It alleged that the sum of US$8,355,546.58 was outstanding at that date and in its calculation of the amount alleged to be due it gave credit for the amount for which the aircraft had been sold in February 2012.[18]Although in its letter terminating the lease the Bank had referred to clause 18.4, on a fair reading of the particulars of claim the Bank was, in my view, clearly putting forward a claim under clause 18.3 of the lease and not under clause 18.4, a conclusion which is reinforced by the witness statements filed in support of the application for summary judgment, which make no reference to clause 18.4. I can well understand, therefore, why the defendants were surprised to find, shortly before the hearing of the application, that the Bank was seeking to rely exclusively on clause 18.4. In those circumstances I do not think that the Bank had done enough to entitle it to put forward a claim under clause 18.4, either on the application for summary judgment or at trial. As the terms of clauses 18.3 and 18.4 make clear, they provide alternative and mutually inconsistent bases for the calculation of damages. Sooner or later, therefore, the Bank would have to decide which one it wished to rely on. The particulars of claim do not contain a claim based on clause 18.4 and it was therefore necessary for the Bank to seek permission to amend if it wished to include one. In the absence of such an amendment the judge should not have allowed it to pursue a claim under clause 18.4, regardless of the dispute relating to Fair Market Value.[19]The Bank did not take steps to have the aircraft valued following the termination of the lease and as a result its Fair Market Value as defined in the lease has never been established. Whether that is fatal to a claim based on clause 18.4 depends on the true construction of that clause. This is not a point that admits of much elaboration. The clause allows the Bank at its discretion to recover the aggregate of five elements (arrears of rent, losses sustained as a result of the default and termination, future rental payments, the aircraft’s residual book value and the value of all other obligations that would have fallen due for performance in the future) from which must be deducted the Fair Market Value of the aircraft at the date of termination. The formula thus contemplates six separate elements, of which Fair Market Value is one. I do not myself think that it was intended to be implemented without a figure for each element (even if in some cases that figure might be zero). No figure for Fair Market Value could be included, however, unless the contractual process for establishing it had been implemented. I do not think that the parties can have intended that the Bank should be entitled to pursue a claim based on only five of the prescribed elements, leaving it to the lessee to prove the extent to which he had been prejudiced by the Bank’s failure to establish and give credit for the aircraft’s Fair Market Value. Practical considerations point the same way. Whether or not the expert valuers would have needed to carry out a visual inspection of the aircraft, if the Fair Market Value had not been established in accordance with the terms of the lease soon after it was terminated, it was likely to be difficult, if not impossible, to establish with any certainty at a later date what it would have been. I am of the view, therefore, that in the absence of a determination of Fair Market Value in accordance with the lease it is not open to the Bank to pursue a claim under clause 18.4. I do not think that the parties can have intended to impose a burden of that kind on the lessee.[20]Mr. Shepherd also submitted that the appellants have a real prospect of establishing that the Bank and Bombardier rather than AA were between them responsible for the deterioration of the aircraft following the termination of the lease, with the result that the losses which the Bank now seeks to recover were greater than they should have been. The argument depends on an examination of the circumstances in which the aircraft was delivered to Bombardier, the circumstances under which it came to be stored under unapproved conditions, when the Bank discovered that that was the case, what steps it took as a result and how it handled the negotiations with Bombardier for its release. The argument may have some merit, but since it is unnecessary to deal with it in order to dispose of the appeal, I prefer to express no view on it one way or the other.[21]For the reasons I have given I do not think that the judge should have allowed the Bank to put its claim on the basis of clause 18.4 and since that was the only basis on which the application for summary judgment was pursued, the right course was for him to dismiss it. I would therefore allow the appeal, set aside the order below and dismiss the application for summary judgment. Lord Justice Lloyd :[22]I agree that the appeal should be allowed for the reasons given by Moore-Bick LJ. Since the Bank had formulated its pleaded case entirely without reference to clause 18.4, and did not seek to rely on that clause until Counsel’s skeleton argument was served just before the hearing of the summary judgment application, it should not have been allowed to rely on that clause without amending its Particulars of Claim. It could have retained its pleaded reliance on clause 18.3, in the alternative, but it could not base its summary judgment application on clause 18.4 without putting its pleading in order. I also agree, however, that it could not succeed under clause 18.4 because of its failure to operate the contractual process for ascertaining the Fair Market Value. That failure is not an issue which gives AA a right to compensation if it can show that the Fair Market Value would have been higher than the amount for which credit is allowed by the Bank. To comply with the contractual procedure is an essential condition of the Bank's rights under clause 18.4. What the position may be under clause 18.3 is another matter, but the Bank did not seek to rely on that on the summary judgment application, as argued, and there has therefore been no assessment of that position, which will have to await the trial. The judge’s assessment of the prospects of the defence succeeding as possible but improbable cannot stand as a justification for requiring payment into court, given that the Bank’s claim under clause 18.4 should not have been allowed to be argued without amendment, and would not in any event have succeeded, and the possible claim under clause 18.3 was not relied on by the Bank and, for that reason, was not addressed by the judge.

Lord Justice Mummery :

[23]I also agree.

Cited in 8 later judgments