PROTEA LEASING LIMITED v (1) ROYAL AIR CAMBODGE COMPANY LIMITED [2002] EWHC 2731 (Comm)

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

COMMERCIAL COURT

[2002] EWHC 2731 (Comm)

Case No Case No: 1999 Folio 1118

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Between

PROTEA LEASING LIMITEDClaimant

(1) ROYAL AIR CAMBODGE COMPANY LIMITED

(2) MALAYSIAN AIRLINE SYSTEM BERHAD

(3) NALURI BERHADDefendants

Before

Mr Justice Moore-Bick

Mr. Iain Milligan Q.C. and Mr. Akhil Shah (instructed by Slaughter and May) for the claimant

The first defendant did not appear and was not represented

Mr. William Wood Q.C. and Mr. Philip Reed (solicitor advocate) (instructed by Norton Rose) for the second defendant

Date 12 December 2002

[1]Mr Justice Moore-Bick: 1. Introduction The first defendant, Royal Air Cambodge Company Limited ("RAC"), was incorporated in Cambodia on 7 th December 1994 to act as the national air carrier of Cambodia. The third defendant, Naluri Berhad, formerly known as Malaysian Helicopter Services Berhad, agreed to become a minority shareholder in RAC and to provide financial and managerial support for the new company pursuant to the terms of an agreement with the Kingdom of Cambodia and RAC dated 28 th December 1994 ("the Shareholders' Agreement"). The Shareholders' Agreement provided that the business of RAC would be managed and operated by the second defendant, Malaysian Airline System Berhad ("MAS"), a wholly-owned subsidiary of Naluri, in accordance with the terms of a Management Agreement entered into contemporaneously with the Shareholders' Agreement. It also provided that RAC would be the sole provider of domestic and international airline services within Cambodia.

[2]RAC began commercial operations in 1995 employing four aircraft: two Boeing 737-400s and two ATR-72 200s. The Boeings were leased from MAS and the ATRs from the claimant, Protea Leasing Ltd ("Protea"). The ATRs, identified as aircraft Nos 204 and 207, were turbo-prop aircraft manufactured by a French company, Avions de Transport Regional GIE ("ATR"), which established Protea as a separate company for the purposes of leasing, and thereafter selling, the aircraft to its customer. RAC originally took over the leases of these two aircraft from Kampuchea Airlines which had previously been the airline operating in Cambodia, but the contractual arrangements were revised in September 1996 when RAC took a third ATR, aircraft No. 108, on lease from Protea. As a result the relevant contracts for present purposes are to be found in three lease agreements in substantially identical terms each dated 18 th September 1996.

[3]From the very beginning RAC's financial position was weak, partly because Naluri failed to provide the injections of capital called for by the Shareholders' Agreement. Many of the services that it required to support its operations were provided by MAS under the Management Agreement, but MAS was entitled to recover the cost of those services from RAC together with commission. In the event, RAC's ability to finance its operations depended to a large extent on the willingness of MAS to extend credit to it in steadily increasing amounts. However, in July 1997 an event occurred that was to have serious long-term consequences for RAC. A coup d'état was launched by one of Cambodia's joint prime ministers, Hun Sen, who, after some days of fighting in and around Phnom Penh, ousted his rival, Prince Rannaridh, and obtained control of the government. The coup brought a number of changes in its wake. The chairman of RAC, Mr. Vichit Ith, was replaced by a nominee of the new government, Mr. Pan Chantra. More importantly, however, the new government introduced an "open skies" policy, revoking RAC's monopoly status and requiring it to compete with other airlines on both domestic and international routes. Moreover, although the hostilities surrounding the coup were short lived, they had a serious effect on the tourist trade on which RAC depended for much of its income. To cap it all, July 1997 saw the beginning of the so-called 'Asian economic crisis' which put additional pressure on RAC's slender financial resources.

[4]It will be necessary to consider RAC's financial position in greater detail at a later stage, but it is sufficient for present purposes to say that following the events of July 1997 the overriding concern of its management was to keep the company going in the hope that it would eventually prosper. Some creditors, such as suppliers of fuel and ground services, had to be paid promptly to enable it to continue in operation at all. Others could more easily be kept waiting. Throughout the period with which this case is concerned the two main creditors in terms of recurring liabilities were the lessors of the aircraft, MAS and Protea. Both Boeing aircraft had been flown out of Phnom Penh during the coup when fighting erupted around the airport and only one had subsequently been returned. However, the rental payment on that aircraft was US$500,000 a month, more that the rental payable for all three ATRs. Many of the issues in this case revolve around the way in which RAC made use of the limited funds at its disposal during the two years following the coup.

[5]Although the management of RAC had hoped that the tourists would return after the coup and that passenger demand would rise towards the latter part of 1997 and into 1998, it soon became clear that there was not going to be a quick recovery. Passenger numbers did not rise as quickly as had been hoped and revenues did not recover. By the time of the coup RAC had already become indebted to MAS in a sum in excess of US$18 million, but it had managed to keep up the payments due to Protea in respect of the ATRs. After the coup the position deteriorated further: RAC was unable to pay its current debts as they fell due and began to fall behind in payments to Protea. In January 1998, despite having just negotiated more generous payment terms with Protea, RAC began to suggest that Protea should accept redelivery of one aircraft and after some negotiation Protea did eventually agree in September 1998 to take one of the ATRs back. Almost immediately RAC began to press for the return of a second aircraft and further negotiations ensued. Arrangements for the return of two aircraft were well advanced when the Cambodian government intervened, indicating that it would support RAC financially. However, nothing came of that and Protea finally lost patience. On 12 th February 1999 it gave notice of termination under the leases of aircraft Nos 204 and 207 and on 16 th April 1999 notice was given to terminate the lease of aircraft No. 108.

[6]In this action Protea's primary claim is to recover from RAC amounts due in respect of outstanding rent for the three aircraft together with sums due on early termination in accordance with the terms of the leases. RAC effectively ceased trading in about October 2001 and although it served a defence and counterclaim, it subsequently ceased to take an active part in the proceedings and did not appear at the trial.

[7]The collapse of RAC makes it unlikely that Protea will recover any significant amount from that source and that no doubt explains why it has also pursued claims against MAS and Naluri. Its claim against MAS is in substance a claim for damages for inducing breach of contract, although, as will become apparent, it is not one to which the principles of English law apply. The complaint in a nutshell is that MAS, acting primarily through certain employees whom it sent to Phnom Penh as secondees to manage the business of RAC, failed to manage the business in RAC's best interests as required by the Management Agreement and thereby caused RAC to default on its obligations under the three ATR leases. Protea's principal contention is that MAS preferred its own interests to those of RAC by causing funds that could and should have been used to meet RAC's commitments to Protea to be used to pay debts due from RAC to itself.

[8]Protea made a similar claim against Naluri on the grounds that it exercised control over MAS and RAC, but that claim was compromised shortly before the trial and nothing further need be said about it. 2. The commercial background

[9]Before turning in more detail to the claims against RAC and MAS respectively it is necessary to say a little more about the way in which the business of RAC was conducted and about its relationship with Protea and ATR following the coup d'état in July 1997.

[10]Prior to the coup MAS had sent seconded employees to Phnom Penh in order to assist in the management of RAC's business and to train the Cambodian staff. One of these was an accountant, Mr. James Stickney, who was seconded to RAC in December 1996, originally for a limited period expiring at the end of July 1997. In February 1997 he was designated Vice-President, Finance, but during this initial period of his employment with RAC Mr. Stickney's responsibilities were mainly directed to establishing accounting systems and producing up to date financial statements. Between February 1997 and early July that year the Chief Financial Officer was a Cambodian, Mr. George Tam. He left RAC when the change of management took place following the coup. The Chief Operating Officer prior to the coup was Mr. David Chew, who was also a secondee from MAS.

[11]Following the coup Mr. Pan Chantra was appointed chairman and chief executive officer of RAC. Mr. Stickney, who had been evacuated from Cambodia when the coup erupted, returned to Phnom Penh to complete his original assignment. He did not like working in Cambodia and wanted to return to Malaysia as soon as possible, but it seems that MAS was unable to find a suitable replacement for him and in the end he remained there until the end of July 2000. After George Tam left RAC the post of Chief Financial Officer remained vacant. As a result, when Mr. Stickney returned to RAC in July 1997 he effectively took over the role of Chief Financial Officer and head of the Finance Department, although he retained his title of Vice-President, Finance. Later, in February 1998, Mr. Pan Chantra asked him to assume the position of Chief Financial Officer, but this change of designation made no practical difference to his role within RAC and in fact the appointment was never formally approved. One of Mr. Stickney's responsibilities was to identify and train a member of the Cambodian staff who would in due course be able to take charge of RAC's Finance Department as Chief Financial Officer. The person chosen for this role was Mr. Richer San.

[12]In November 1997 Mr. Adrian Sen, another secondee from MAS, replaced Mr. David Chew as Chief Operating Officer. A Cambodian employee, Mrs. Sithea San, the wife of Richer San, was Commercial Director and reported to him.

[13]Whatever may have been the formal management structure of RAC, the day to day administration was carried on in a relatively informal manner. That is not surprising given the size of the business at that time. The operation was very small: RAC operated only five aircraft during the period following the coup (the one remaining Boeing which was wet-leased from MAS, the three ATRs leased from Protea and a Y12 leased from the Cambodian air force in June 1998) and had no more than about fifty employees of whom fewer than ten were secondees. Mr. Pan Chantra was an active chief executive who involved himself closely in all major decisions. It was his practice to begin each day by discussing the business with the Chief Operating Officer and he would regularly, albeit rather less frequently, consult Mr. Stickney as the effective Chief Financial Officer. Both Richer San and Sithea San were regularly brought into meetings and discussions with Mr. Sen and Mr. Pan Chantra.

[14]The engineering side of operations was left entirely to the engineering staff. Prior to the coup another secondee from MAS, Mr. Rosly Kassim, was Vice-President, Flight Operations and Engineering and as such had overall responsibility for engineering and maintenance operations. He left RAC in September 1997 when responsibility for flight operations and engineering were separated. Following his departure Mr. Anthony Sandford became Engineering Manager, reporting to Mr. Thatch Ouk, who was training to be Chief Operating Officer, and through him to Mr. Sen. Mr. Sandford, an Australian who had previously worked for MAS, was directly employed by RAC. A substantial amount of training and support was provided by Mr. Jean Gilibert, one of ATR's field service engineers. He left Cambodia in October 1998.

[15]Protea as the lessor of the three ATR-72s was merely a vehicle of ATR. It was ATR, therefore, that took any necessary decisions in relation to the administration of the three contracts. RAC's primary point of contact with ATR was the Director of Sales for South East Asia, until April 1998 Mr. Pierre Freixes and afterwards Mr. Cristophe Clarenc. They both had numerous discussions and meetings with Mr. Pan Chantra and Mr. Stickney to which I shall return at a later stage. From time to time there were discussions involving more senior members of the ATR management, in particular Mr. Jacques Desbarats the Vice-President, Asset Management. 3.

(a) The Leases

[16]Protea's claim against RAC is made under the three lease agreements. These were all in the form of simple leases of the aircraft alone without any provision by the lessor of aircrew or maintenance. They are lengthy and detailed documents and it is sufficient for present purposes simply to refer in general terms to some of their more important provisions.

[17]The leases for aircraft Nos 204 and 207 were expressed to run to 18 th December 2004; that for aircraft No. 108 to 18 th September 2002. However, in each case RAC was entitled to terminate the lease early on giving the appropriate notice. The leases of aircraft Nos 204 and 207 could be terminated after five years; the lease of aircraft No. 108 after four or five years at RAC's option. Each lease provided for the payment of rental monthly in advance. In the case of aircraft Nos 204 and 207 the rental was US$139,000 a month; in the case of aircraft No.108 it was US$120,000 a month. Each of the leases was in the form of a financing lease, that is, it provided for regular monthly payments of rental over the life of the lease and gave the lessee an option to purchase the aircraft at any time during the term of the lease against payment of a reducing 'termination value'. By clause 21.1 the lessee was obliged to purchase the aircraft at the termination of the lease against payment of any outstanding amounts due under the lease and the current termination value. The sale of the aircraft under these provisions was on an "as is, where is and with all faults" basis.

[18]In each case RAC as lessee was responsible for the maintenance of the aircraft. In particular, by clause 8.1 RAC was obliged, among other things, to keep the aircraft in good repair and operating condition, to keep it clean by international airline standards and in a condition which would comply with a valid certificate of airworthiness issued by the relevant aviation authority and to ensure that regular maintenance was performed outside Cambodia or with a maintenance organisation approved by Protea. By clause 12.2 RAC was also obliged to keep accurate, complete and current records relating to the operation, service, inspection and maintenance, of the aircraft.

[19]In order to ensure that adequate funds were available for regular maintenance RAC was required under the lease to pay Protea a monthly amount in respect of maintenance reserves based on the utilisation of the aircraft during the preceding month. Maintenance reserves were to be held by Protea in an interest-bearing account and used to reimburse RAC in respect of the costs of carrying out certain defined maintenance tasks.

[20]Section 7 of the lease contained provisions relating to redelivery. By clause 19.1 unless RAC had previously exercised its option to purchase the aircraft or the aircraft had become a total loss (neither of which occurred in the case of any of the three aircraft with which I am concerned) RAC was obliged to return the aircraft to Protea at Toulouse in an airworthy condition, clean, maintained and serviced as required by clause 8 and in the condition described in detail in schedule 3 to the lease. This was called 'Return Condition' and was more demanding than simple maintenance inasmuch as it included, for example, a requirement that each of the engines should have not less than 3,500 hours remaining on any component and that each of the aircraft's hard time components should have a minimum of twelve months of approved life remaining to the next overhaul. By clause 19.4, if on its return the aircraft was not in Return Condition, RAC was obliged to pay Protea the amount necessary to compensate it for restoring it to that condition and any consequential loss.

[21]Section 10 of the lease sets out various matters constituting events of default which gave Protea the right to terminate the lease and retake possession of the aircraft. These included failing to pay an amount due under the lease and allowing it to remain unpaid and outstanding for five banking days from the due date (clause 24.1) and, having failed to perform any obligation under the lease, failing to remedy the default within fifteen banking days of receipt of notice to do so from Protea.

[22]Finally, it is necessary to mention the security deposit. A sum of US$405,000 had been deposited with Protea by the original lessee of aircraft Nos 204 and 207 as security for the performance of its obligations under the earlier leases. These amounts were retained by Protea as security for RAC's performance of the new leases relating to these two aircraft. In the case of aircraft 108 RAC itself provided a deposit in the amount of US$360,000.

(b) The termination of the leases (i) Aircraft Nos 204 and 207

[23]The total amount due each month from RAC to Protea by way of rental in respect of the three ATRs was US$398,000. Invoices for that amount were presented by Protea to RAC each month between July 1997 and December 1998. Following the coup RAC made various payments to Protea, but overall there was a shortfall of US$1,852,987 by the end of December 1998. RAC failed to make any payment in respect of rental for the month beginning 18 th January 1999 so that the amount owing increased to US$2,250,987. That sum represented rental payments due in respect of all three aircraft and in each case the amount in question had been outstanding for more than five banking days. On the face of it, therefore, Protea was entitled to terminate each of the leases in accordance with the provisions of clause 24.1.

[24]On 12 th February 1999 Protea wrote two letters to RAC giving notice of termination of the leases relating to aircraft Nos 204 and 207. Those letters were sent by fax and by registered post. The letters sent by post were not received by RAC until 22 nd February, but there is no reason to think that the ones sent by fax were not received in the ordinary way on the day that they were sent. If those notices were effective, therefore, the leases of these two aircraft were terminated in accordance with their terms on 12 th February. By that time the two aircraft were already in Singapore undergoing inspection and maintenance.

[25]In its defence, however, RAC alleged that aircraft Nos 204 and 207 were not repossessed by Protea under the terms of their respective leases but were voluntarily redelivered pursuant to an agreement under which RAC was not be liable for termination payments or for its failure to redeliver the aircraft in Return Condition.

[26]Throughout 1998 RAC had tried to persuade Protea of its need to redeliver first one and then two of the ATRs. ATR initially resisted those attempts, but on 26 th August Mr. Stickney and Mr. Richer San met Mr. Desbarats in Toulouse to discuss the return of one aircraft and the payment of the outstanding debt. Although terms were discussed, no agreement was reached pending further consideration of the matter in September. However, Mr. Desbarats made it clear that if the parties could not agree terms for the payment of the outstanding debt, ATR would be likely to repossess all three aircraft.

[27]On 23 rd September Mr. Desbarats wrote to Mr. Pan Chantra offering to take back aircraft No. 204 as soon as possible in order to assist RAC. That aircraft was chosen in order to relieve RAC of the burden of carrying out an 8-year structural check which had to be completed within a few months in order to retain its airworthiness certificate. Under his proposal RAC would have had to fulfil all the obligations under the lease following early termination, but it was understood that it would not have to pay the termination value of the aircraft. On the assumption that aircraft No. 204 would be returned to ATR Mr. Desbarats offered to allow RAC until 8 th October to pay the rental due for the months of July, August and September, to make proposals for clearing the remainder of its debt and to provide a business plan showing how those proposals could be accomplished. He made it clear that if RAC failed to comply with any of those requests ATR would consider repossessing aircraft Nos 207 and 108.

[28]On 1 st October 1998 RAC responded, thanking Mr. Desbarats for his proposals, but stating that it was now contemplating the return of a second aircraft. A formal request to take back a second aircraft was made shortly afterwards in a letter dated 9 th October written by Mr. Stickney. ATR agreed to consider the return of aircraft Nos 204 and 207 following their inspection by Bureau Veritas, but without prejudice to its rights under the lease agreement. On 19 th November ATR confirmed its willingness to take back both aircraft in accordance with the provisions of the lease relating to early termination and asked RAC to let it know when aircraft No. 204 would be airworthy and ready to be flown out of Cambodia. RAC did not take issue with these proposals (although it later asked for aircraft No. 207 to be redelivered first) and in due course the redelivery procedure was set in motion during the third week of December.

[29]At that point, however, the government of Cambodia intervened, writing to ATR on 23 rd December 1998 to express its disapproval of the redelivery of the two aircraft and stating its intention of enabling RAC to honour its debts to ATR by the end of January 1999. It is likely that the government's action was prompted by the imminent removal of aircraft No. 207 to Singapore for inspection and overhaul, but whatever prompted it, it inevitably brought the arrangements for redelivery of these two aircraft to an abrupt halt. For the following six weeks the position was somewhat confused as discussions took place between ATR and the Cambodian government about the future of the aircraft and during that period aircraft No. 204 was also flown to Singapore. In the end, however, ATR was unable to obtain any satisfactory proposals from the government and on 12 th February it gave notice to terminate the two leases.

[30]In the light of the correspondence between the parties and the subsequent intervention of the Cambodian government I am unable to accept that the two aircraft were redelivered pursuant to an agreement with Protea of the kind alleged by RAC, or indeed at all. It is perhaps worth pointing out that throughout the correspondence from 14 th October when ATR first indicated its willingness to take back two aircraft it insisted on doing so in accordance with those sections of the leases that deal with the condition of the aircraft on redelivery. Even if redelivery had taken place on the terms proposed by ATR, therefore, it would not have relieved RAC of the burdens imposed by the leases in those respects. However, whether or not agreement had been reached between RAC and Protea for the return of the two aircraft, the eleventh hour intervention of the Cambodian government prevented any such agreement from being implemented. After that everything changed and in the absence of any satisfactory proposals from RAC or the government for clearing the outstanding debt Protea was no longer bound to accept redelivery of the aircraft on the old terms. I am satisfied, therefore, that Protea was entitled to, and did, repossess the aircraft under the terms of the leases. (ii) Aircraft No. 108

[31]By 16 th April 1999 RAC was also in arrears in respect of the rental for aircraft No. 108. The total amount outstanding at that time was US$306,205.92. On 16 th April 1999 Protea gave notice to RAC terminating the lease of aircraft No. 108, but RAC continued to operate the aircraft for another year until it was redelivered pursuant to an order of this court made on 20 th April 2000.

[32]Although Protea stopped sending RAC invoices for rental in respect of the aircraft after it had given notice of termination, during the following months RAC made a number of payments to Protea purportedly in respect of rent for aircraft No. 108 until December 1999 when all payments finally ceased. RAC says that by accepting those payments Protea affirmed the lease and could not thereafter treat it as having been terminated on 16 th April 1999.

[33]Clause 25.2 of the lease provided that if an event of default occurred the lessor might ". . . . . declare the lease term to be terminated whereupon the same shall be immediately terminated and retake possession of the aircraft . . . . ." (emphasis added). The effect of giving a notice under that clause was therefore to bring the contract to an end immediately. Subsequent acceptance of rental could, no doubt, be evidence of an agreement to reinstate the contract, but it would have to be evaluated in the context of the evidence as a whole.

[34]In the present case the evidence does not support the conclusion that the parties agreed to reinstate the contract. After the termination notice was given there were no negotiations or discussions between the senior management of the two companies as one would have expected had it been their intention to reinstate the lease, even on a limited basis. RAC simply continued in possession of the aircraft. The last invoice that Protea sent RAC for rent in respect of aircraft No. 108 was No. 099014/99 dated 6 th April 1999 relating to the period from 18 th April to 18 th May 1999. At that time RAC was already in arrears and it made no further payment until July when it remitted the sum of US$120,000. Protea purported to apply that payment partly to the outstanding amount due in respect of an earlier period and partly to invoice 099014/99. In September 1999 RAC made a further payment of the same amount in respect of the month beginning 18 th July which Protea purported to apply partly to invoice 099014/99 and partly to earlier invoices for maintenance reserves. Shortly afterwards Mr. Giobbe, ATR's general counsel, wrote to RAC making it quite clear that any payment made by RAC in respect of the period after notice of termination would be applied in reduction of Protea's claim. Whether or not Protea was entitled to appropriate RAC's payments in that way, it must have been clear from these exchanges between the parties that Protea was not agreeing to treat the lease as continuing beyond 16 th April. Moreover, it is interesting to note that although Mr. Pan Chantra and Mr. Sen both touched on the position of aircraft No. 108 in their evidence, neither suggested that there had been any agreement of that kind. I am therefore unable to accept that the lease continued in force beyond 16 th April 1999.

(c) Outstanding rental (i) Aircraft Nos 204 and 207

[35]On the face of it Protea is entitled to recover arrears of rental in respect of the three aircraft at the rates set out in the respective leases. However, RAC alleged that that in January 1998 Protea had agreed to restructure the payment arrangements for aircraft Nos 204 and 207 by reducing the monthly rental by US$12,000 in each case, increasing the term of the lease from 84 to 92 months and increasing the amount of the final balloon payment from US$405,000 to US$600,000. If that is correct, it would, of course, reduce the amount of rental outstanding at the time of the termination of the leases, although the sums involved are not large enough to prevent the occurrence of an event of default.

[36]Following discussions between the parties RAC wrote to Mr. Desbarats on 15 th January 1998 seeking his agreement to its proposals for revised payment terms in respect of aircraft Nos 204 and 207. On 16 th January Mr. Desbarats replied confirming that the proposed changes were acceptable and enclosing a Settlement Agreement signed on behalf of another subsidiary of ATR, Aero International (Regional) S.A.S. ("AIR"), one copy of which RAC was asked to sign and return to confirm its acceptance.

[37]The Settlement Agreement described itself as "an understanding between Royal Air Cambodge and Aero International (Regional) regarding the rescheduling of the outstanding amount on the rental payments for the three ATR 72s due to Protea and the outstanding amount on the spare parts and services due to AI(R) Eastern Support". It provided that the reduction in rental payments should apply as from 18 th November 1997 and for payments of rent and arrears to be made by RAC in accordance with a schedule set out in the agreement. Separate provision was made for the payment of outstanding amounts due to AI(R) Eastern Support. The schedule provided for an immediate payment of US$405,166.66 in respect of the month beginning 18 th December 1997, a further payment of US$405,166.66 on 18 th January and payments at the same rate each month until November 1998. Thereafter the monthly payments were to be reduced to US$374,000.

[38]A few days later on 23 rd January 1998 Mr. Pan Chantra duly signed one copy of the Settlement Agreement and returned it to Mr. Desbarats by fax. However, RAC failed to comply with its terms: it failed to make the immediate payment of US$405,166 due in respect of the December rental and arrears or the payment due on 18 th January. Moreover, although RAC did make payments of US$405,166 in February and May, it failed to make the regular monthly payments called for by the agreement. For what it is worth, Mr. Stickney accepted that the agreement had simply fallen by the wayside.

[39]Mr. Milligan Q.C. for Protea accepted that the Settlement Agreement did represent an effective agreement to restructure the leases on aircraft Nos 204 and 207, but he submitted that it had been repudiated by RAC's failure to adhere to its terms and that that repudiation had been accepted by Protea which had continued to invoice RAC in the original amount of US$398,000 a month.

[40]The course of events following the conclusion of the Settlement Agreement was certainly unusual. The negotiations which had preceded it had been conducted on the express basis that RAC would continue to fly all three ATRs and had no plans to return any of them. However, on 29 th January, less than a week after signing it, Mr. Pan Chantra wrote to Mr. Desbarats asking for various changes to be made to the agreement and for ATR's agreement to the return of aircraft No. 204. Mr. Freixes made it clear when he replied on 30 th January that ATR would hold RAC to the leases, although he did hint that if the sum of US$810,333 (i.e. the first two instalments) were paid as promised some further compromise might be considered. Shortly afterwards, however, ATR enlisted the assistance of the Cambodian government in order to put pressure on RAC to retain all three ATRs.

[41]A few days later Mr. van Aelst and Mr. Freixes had meetings in Phnom Penh with Mr. Pan Chantra and the senior managers of RAC. It is clear from Mr. Freixes's report that the parties agreed that the current arrangements should continue, at least until July 1998 when the question of returning one of the ATRs would be reviewed again. However, ATR did agree to allow some additional flexibility in relation to the timing of the payments due under the Settlement Agreement. On 17 th February Mr. Freixes wrote to Mr. Pan Chantra reminding him of the payments that ATR expected to receive in accordance with that agreement and on 24 th February Mr. Cousinié also wrote to remind RAC of the amounts outstanding.

[42]The next occasion on which there was a meeting between the two sides was on 25 th February 1998 at the Singapore air show. I shall return to that later, but for the moment it is sufficient to refer to a briefing note prepared by ATR which refers to the Settlement Agreement and to the fact that it had not been possible to put it into effect because of RAC's failure to make payments as agreed. However, in the very next paragraph the writer states that ATR still hoped to receive the two outstanding instalments due under that agreement totalling US$810,000 as promised by Mr. Pan Chantra. Taken as a whole, therefore, the note does not support the conclusion that ATR had decided at that stage to treat the Settlement Agreement as discharged.

[43]On 20 th March RAC made a payment to Protea of US$200,000. On 24 th March Mr. Freixes wrote to Mr. Stickney acknowledging its receipt and expressing disappointment that the payment had not been as large as ATR had expected in the light of the Settlement Agreement. Two days later Mr. Richer San wrote to Mr. Cousinié of ATR pointing out that the rental on aircraft Nos 204 and 207 had been reduced to US$127,000 and asking him to ensure that that was reflected in the invoices sent to RAC. Mr. Cousinié replied in a letter copied to, among others, Mr. Desbarats and Mr. Pan Chantra by saying that the Settlement Agreement "cannot yet be considered in force as regards to your debt situation amounting to US$1,564,603.93". It is not very clear precisely what Mr. Cousinié was seeking to convey by this letter. He had continued to send out monthly invoices for US$389,000 regardless of the existence of the Settlement Agreement and he said in evidence that he understood it to have no legal effect until embodied in a formal amendment to the leases. However, as one can see from the correspondence between the parties, that is not the position that had previously been adopted by the senior management of ATR. Mr. Cousinié's letter does not appear to have provoked any response from RAC, but that may have been because RAC did not in any event intend to make further payments to ATR for the time being.

[44]In June 1998 Mr. Clarenc went to Phnom Penh in an attempt to sort out the problem of RAC's debt. Having failed to obtain what he regarded as a satisfactory opportunity to discuss the position with Mr. Pan Chantra, Mr. Clarenc set out ATR's position in some detail in a lengthy letter dated 24 th June. In it he referred to a meeting he had had two days earlier with Mr. Pan Chantra at which he had explained that the Settlement Agreement was no longer in force as a result of RAC's failure to honour its terms. The day after he wrote that letter Mr. Clarenc managed to arrange another meeting with Mr. Pan Chantra in the course of which they reached agreement on fresh terms for settling RAC's outstanding debt. These are set out in some detail in a letter from Mr. Clarenc to Mr. Pan Chantra dated 26 th June 1998. Mr. Pan Chantra was asked to counter-sign the letter to confirm his agreement. He did not do so, but there is no reason to think that it does not accurately reflect the discussions that had taken place between him and Mr. Clarenc. The essence of the new agreement was that RAC would pay US$1 million in respect of its outstanding debt on 1 st July 1998 and thereafter a proportion of the outstanding debt each month over the ensuing twelve months in addition to the payments due under the leases. The letter makes clear what would otherwise have been implicit, namely, that the Settlement Agreement ceased to have any effect and that Protea's rights under the leases remained enforceable in accordance with their terms.

[45]In these circumstances I am satisfied that Protea is entitled to recover arrears of rental and interest on those arrears in accordance with the terms of the leases. The total amount outstanding after allowing for the fact that the leases on aircraft Nos 204 and 207 were terminated part way through the last month for which rent had become payable is US$2,195,387. Against that Protea must give credit for the amounts held by way of the security deposits and the interest that has accrued on them. A detailed calculation of these amounts was provided by Mr. Cousinié supported by reference to the documents before the court. None of that evidence was challenged and in the light of it I am satisfied that Protea is entitled to judgment against RAC in the sum of US$519,242.87 in respect of arrears of rental relating to aircraft Nos 204 and 207. (ii) Aircraft No. 108

[46]In April 1999 the sum of US$306,205.92 was outstanding by way of rental in respect of aircraft No. 108. In the case of that aircraft, however, the security deposit and interest was sufficient to cover the whole of the amount due and accordingly Protea does not pursue a under this head in respect of aircraft No. 108.

(d) Termination values

[47]Each of the leases provided by clause 25.2(ii)(b) that following termination on the grounds of default RAC should pay Protea the 'termination value' of the aircraft as specified in schedule 11. However, RAC alleged that the termination value was not based on any genuine pre-estimate of loss and that the obligation was therefore unenforceable as a penalty. The argument was based on the fact that the termination value corresponded to the price currently payable under the lease on the exercise of the option to purchase the aircraft. It was said that the effect of these provisions was to impose on the lessee a compulsory purchase obligation. (i) Is the obligation to pay the Termination value a penalty?

[48]It is important when considering an argument of this kind to bear in mind that these were financing leases, the purpose of which was to enable RAC to purchase the aircraft over a period of time and to provide Protea with a reasonable return on its capital. The commercial background to the contracts was explained by Mr. Louis Abraham of ATR whose evidence in this respect was not challenged. He explained that Protea had arranged the financing with a commercial lender, Newcourt Capital Inc., and that the termination value was calculated to reflect the various elements involved in the transaction, including Protea's liability to Newcourt and the risk of default by RAC. It is apparent from his evidence that the termination value of each aircraft was the subject of specific negotiation between Protea and RAC and that RAC was aware of the basis on which it had been calculated. In fact, in each case the termination value was set at a figure that would compensate Protea in respect of losses flowing from the default and provide a satisfactory basis for transferring title in the aircraft to RAC.

[49]In the light of Mr. Abraham's evidence the allegation that the termination values did not involve any genuine pre-estimate of Protea's loss can be seen to have no foundation. It is true that the effect of clause 25.2 was to impose an obligation on RAC to purchase the aircraft immediately, but since the price at which the purchase was to be made had been freely negotiated and fairly reflected the value of the aircraft and the costs of the financing arrangements, I can see no basis for holding that the obligation is unenforceable.

[50]Accordingly, I am satisfied that Protea is entitled to recover US$7,900,000 in respect of the termination value of each of aircraft Nos 204 and 207 and US$9,425,000 in respect of the termination value of aircraft No. 108. In the event RAC was both unwilling and unable to pay these amounts after the leases had been determined so Protea disposed of the aircraft itself. It was common ground that it must give credit for the value of the three aircraft. (ii) The value of the aircraft on redelivery

[51]Protea sold all three aircraft back to ATR under a contract dated 25 th June 1999. Aircraft Nos 204 and 207 were sold on an "as is, where is" basis for a price expressed to be US$6,800,000 each. They were both delivered on 15 th July 1999. At the date of the contract Protea was not in possession of aircraft No. 108 and it was therefore agreed that the sale would occur "upon repossession by the seller" and at a price to be determined at that time having regard to its condition. The price was later fixed at US$6,045,000 from which Protea sought to deduct US$1,874,622 said to have been incurred in carrying out essential repairs. According to Protea, therefore, the total amount for which credit was to be given was US$17,770,378.

[52]The sale agreement was one of a group of interrelated agreements under which the financing arrangements between Protea and Newcourt were restructured so as to substitute ATR as borrower in place of Protea. Clause 3 of that agreement provided as follows:

"3 PAYMENT TERMS In lieu of actual payment of the Price of the Aircraft . . . . . . the Buyer shall assume the aggregate of the outstanding obligations of the Seller under the Credit Agreement as from the Delivery Date of the Aircraft and of all of the costs and expenses payable by the Seller to the Lender for the substitution of the Seller by the Buyer under the Credit Agreement."

[53]This clause was duly implemented by a Novation and Amendment Agreement and a Deed of Release each dated 25 th June 1999. Mr. Reed submitted on behalf of MAS that since the effect of these arrangements was to relieve Protea of its liability to Newcourt under the Credit Agreement, the true financial benefit that Protea derived from the sale of these aircraft was the full amount of that outstanding liability, namely US$22,234,774.92, and that credit must therefore be given for that amount.

[54]Where a claimant is obliged to give credit for a valuable benefit obtained in the form of a chattel the value to be ascribed to that chattel is ordinarily to be measured by reference to its market value at the relevant time, assuming, of course, that there is a market for goods of that kind. If there is no market, its value may be proved by other evidence which may include expert evidence and, if the goods have been sold, the price obtained on their sale. In each case, however, the court is seeking to establish the realisable or "objective" value of the goods, not their peculiar value to the claimant which may be either greater or less than the price they would fetch on the open market. It follows that the court is not concerned with the price at which the aircraft were sold but with their value at the date of repossession, which may not be the same thing.

[55]However, even if am wrong about that, I unable to accept that Protea is obliged to give credit for the full value of the obligations from which ATR undertook to release it. The explanation for clause 3 of the sale agreement lies in the peculiar nature of the relationship between Protea and ATR which provided the incentive for ATR to take over the whole of Protea's liability under the Credit Agreement. Protea was simply a vehicle for ATR which had guaranteed its obligations under that agreement. It had no source of income other than the leases themselves and therefore had to look to ATR to provide the funds needed to meet its liabilities to Newcourt once the leases had been terminated. In those circumstances it made sound commercial sense for ATR to take over the existing liabilities of Protea without regard to the value of the aircraft themselves. In my view Mr. Milligan was right in saying that ATR's agreement to assume Protea's obligations is essentially collateral to the agreement to purchase the aircraft at the prices stipulated in the agreement and does not reflect the value of the aircraft themselves. I therefore reject Mr. Reed's submission on this ground as well.

[56]The price agreed for the aircraft in the present case is some evidence of their market value and although a sale by Protea to ATR could not ordinarily be regarded as one made at arm's length, the price was in this case dictated by the corresponding sale of the aircraft by ATR to the French Postal Authority, L'Aéropostale. Moreover, the experts who gave evidence on this issue, Mr. Combelles and Mr. Spalding, both of whom relied in making their assessments of value on the Airclaims Fixed Wing Aircraft International Price Guide, agreed that US$6,800,000 was a fair reflection of the value of aircraft Nos 204 and 207 sold "as is, where is". I have no hesitation, therefore, in accepting that figure as being correct.

[57]The market value of aircraft No. 108 was more controversial. Although the lease on this aircraft was terminated in April 1999, Protea did not obtain possession of it until April 2000. Since that was the earliest date at which Protea could realise the value of the aircraft it is in my view the appropriate date at which to value it. Even if the value should, strictly speaking, be measured at the date when the lease was terminated, RAC would be bound to compensate Protea for any subsequent depreciation prior to redelivery. Mr. Combelles assessed the value of the aircraft in April 2000 at US$7.25 million, making the assumption that its maintenance condition was not such as to put it at either at the top or the bottom of the range. Mr. Spalding noted that an outline agreement for the sale of the aircraft by ATR to Farnair Switzerland A.G. valued it at US$5,350,000. He clearly regarded that as too low and suggested that it ought to have been capable, following the completion of repairs, of fetching a price much closer to the figure of US$6.9 million representing the lower end of the range indicated by the Airclaims Price Guide.

[58]The absence of maintenance records meant that aircraft No. 108 had to undergo a 'bridge inspection' in order to reconstruct its maintenance history. Despite the completion of such an inspection the price that could be obtained for this aircraft might still be affected by an element of doubt as to its past maintenance, but if it had completed its 'C' check and an 8-year inspection, I doubt whether concerns of that kind would have affected its value to any great extent. Much of the difference between Mr. Combelles and Mr. Spalding turned on the date of the aircraft's manufacture. When he wrote his report Mr. Combelles thought that the aircraft had been manufactured in 1992, but in fact it had first flown in 1989 and had been used as a development model for three years before being delivered to its first commercial customer in 1992. One might have thought that that would affect its value on the open market, but Mr. Combelles did not think so. He explained that an aircraft would normally complete relatively few flying hours while being used for development and on delivery to a customer would incorporate the latest improvements. Moreover, Mr. Combelles explained that a document called a Régistre Individuel de Control Air is issued in respect of each aircraft which states, among other things, the date of manufacture. That is the date by reference to which maintenance requirements, including the 8-year check, are scheduled and is regarded by the market as the date of manufacture.

[59]Mr. Spalding accepted that if aircraft No. 108 had first flown in 1992 its value would be about US$7.25 million, but he did not consider that a purchaser would look with quite the same favour on an aircraft that had been used as a test-bed for three years before entering commercial service. Ultimately this is a matter of assessing market perception. All other things being equal, I would expect a buyer to prefer a younger aircraft that had a conventional history, but I should not expect him to pay much more for it. In my view US$7.2 million is a fair value to put on aircraft No. 108 in good condition in April 2000.

[60]However, aircraft No. 108 was not in good condition when it was returned to Protea. It required a substantial amount of money to be spent on it before it could resume service. Apart from anything else, the bridge inspection was a time-consuming and expensive operation, leaving aside any repairs. The inspections and repairs were carried out by ATR rather than Protea which did not itself have the means to undertake them.

[61]By clause 4 of the Aircraft Sale Agreement title in aircraft No. 108 was to pass to ATR "at the time and location of the return of Aircraft 108 following repossession thereof by the Seller". Mr. Giobbe suggested that this referred to the return of the aircraft to Toulouse, but I do not think that can be correct. At the time the agreement was signed Protea had given notice to terminate the lease, but had not yet succeeded in obtaining possession of the aircraft and did not know when it would do so. The fact that clause 4 refers in general terms to the time and, more importantly, the location of the return of the aircraft suggests that the parties had in mind the time and place at which Protea finally obtained control of it. If they had meant to refer to its return to France, or indeed any other destination, that would surely have been specified.

[62]However, none of this matters very much if, as I think, I am only concerned for these purposes with the value of the aircraft at the date of repossession. In this case the price of US$6,045,000 that was later agreed between Protea and ATR is not reliable evidence either of the value of the aircraft in return condition, or of its actual market value in April 2000 since it was recognised by both parties that it did not fully take account of the cost that would have to be incurred to bring the aircraft up to serviceable condition.

[63]Mr. Combelles inspected the aircraft at Naples in May 2001, by which time a good deal of work had already been done on it. He assessed its market value at that time at US$6.1 million, but he considered that a buyer would have had to spend a lot more money on it to restore it to a condition in which it could be used for commercial operations. Mr. Spalding put its value at US$6 million, so there was really nothing between them on this point. The experts agreed that around US$1 million more would have to be spent to put the aircraft into return condition, leaving a net actual value of about US$5.2 million. The difference of US$2 million between the actual value thus calculated and the value of the aircraft in return condition does not greatly exceed the sum of US$1,874,622 spent by ATR in repairs and reconditioning. Taking all this evidence into account, I find that the actual market value of aircraft No. 108 at the time of repossession was US$5.2 million.

(e) Failure to mitigate

[64]In his report Mr. Spalding suggested that, rather than dispose of the aircraft on "as is, where is" terms, Protea should have repaired and overhauled them before selling them. This point was not pressed by Mr. Wood Q.C. and Mr. Reed, but in the absence of RAC I think it right to deal with it.

[65]When these aircraft were repossessed their condition was in many respects a matter of some uncertainty. Although it was possible to make an estimate of the cost of putting them into fully operational condition, the precise extent of the work that would have to be carried out would not be known until a detailed inspection had been carried out, or in some cases until dismantling had begun. Mr. Spalding confirmed in cross-examination that a purchaser who buys an aircraft "as is, where is" normally considers that there is a reasonable chance that the cost of putting it into flying condition will be lower than the original estimate. Equally, it may be said, the seller is willing to accept a lower price in order to be relieved of what may turn out to be a more expensive exercise than he first thought.

[66]Mr. Spalding's comments had been prompted by his inability to account in terms of necessary repairs for the whole of the difference between the value of aircraft Nos 204 and 207 in fully operational condition and the price at which they were sold to ATR. However, the cost of overhauling some items of equipment, such as engines and landing gear, was potentially high and could not be assessed with accuracy. It is likely that part of the difference to which he drew attention reflects the element of uncertainty to which I have just referred. I do not think that Protea can be criticised for failing to take upon itself the risks inherent in reconditioning those aircraft. It is bound to give credit for their value, but I do not think that it was bound to go further than that and incur the additional costs necessary to recondition them. The evidence does not enable one to say with any confidence that the consequent increase in the sale price would have exceeded the costs that would have been incurred by any significant margin, if indeed it exceeded them at all, and there is no evidence to support the conclusion that it was commercially unreasonable to sell the aircraft "as is, where is". The evidence of the experts makes it impossible to say that the price at which the aircraft were sold was unreasonably low.

[67]As far as aircraft No. 108 is concerned, Mr. Spalding commented adversely in his report on the length of time the aircraft had remained on the ground since being repossessed which, he suggested, would have adversely affected its value. The difficulty I have with this, however, is that Mr. Spalding was unable to identify in concrete terms the respects in which Protea or ATR failed to act in a reasonable commercial manner in response to the situation facing them. A great deal of work had to be done on this aircraft under unfavourable conditions. Moreover, a number of attempts were made during that period to dispose of it by sale or lease without success.

[68]All this is really beside the point, however. As I have already said, Protea is obliged to give credit for the value of the aircraft on repossession, not the price for which they were ultimately sold, insofar as that may have been different. If Protea dealt with the aircraft in a manner which prevented it from realising their full value, it cannot in any event pass the resulting loss on to RAC by giving credit only for the price actually obtained.

(f) Maintenance Reserves

[69]It was common ground that Protea is obliged to give credit for the amount held as maintenance reserves. These amounted to US$534,456.85 in respect of aircraft No. 204, US$453,357.82 in respect of aircraft No. 207 and US$673,256.45 in respect of aircraft No. 108.

(g) Additional costs

[70]Protea seeks to recover various costs which it says it incurred in connection with the repossession of the three aircraft. In relation to aircraft Nos 204 and 207 these are the costs incurred in inspecting the aircraft in Cambodia, carrying out repairs needed to enable them to be flown to Singapore, the ferry flight itself and the subsequent storage and maintenance in Singapore. They amount to US$157,940.39 in all. Protea also incurred repair costs of US$114,080.87 in putting aircraft No.108 in a suitable condition to return to Europe.

[71]By clause 19.1 of the lease in each case RAC was obliged to redeliver the aircraft in Toulouse at its own expense. Accordingly, I am satisfied that Protea is entitled to recover these costs, all of which were incurred in order to enable the aircraft to be flown back to Europe. The only other expenses that Protea seeks to recover are the costs incurred in connection with the proceedings to obtain delivery of aircraft No. 108. However, these have already been the subject of an order and Protea is not entitled to a separate judgment in respect of them.

(h) Interest

[72]Clause 27 of each lease provided that RAC should be liable to pay interest on all amounts outstanding to Protea at the rates specified in the agreement. These were 1% over LIBOR prior to an event of default and 3% over LIBOR thereafter. In addition to the principal sums for which it is entitled to judgment Protea is therefore entitled to recover interest under the contracts in accordance with their terms. The amount due will have to be the subject of calculation in the light of this judgment. 4. RAC's counterclaim

[73]RAC has made a claim to recover the sum of US$601,919.29 paid to Protea in respect of maintenance reserves. Protea accepts that it must give full credit for all sums held by way of maintenance reserves at the termination of the leases which amount to US$1,661,071.10 in all and these have been taken into account in the calculation of its damages.

[74]Subject to one further matter to which I shall return at a later stage, therefore, I am satisfied that Protea is entitled to succeed in its claim against RAC in the various amounts already stated. 5. The Claim against MAS

[75]The main ground of Protea's complaint against MAS is that during the period between July 1997 and April 1999 it caused or allowed RAC to use its limited funds to discharge part of its liabilities to MAS itself rather than its liabilities to Protea under the ATR leases. It is said that that amounted to an actionable wrong because MAS was under a duty to manage the business of RAC in the best interests of RAC and its shareholders, because it was in the best interests of RAC to meet its liabilities to Protea rather than pay its debts to MAS, and because MAS was aware that the consequences of allowing RAC to pay debts due to itself would necessarily mean that it could not, and would not, meet its liabilities to Protea. As a result Protea suffered loss.

(a) The choice of applicable law

[76]The claim made by MAS is thus for damages for what in English law would be characterised as a tort. However, none of the events giving rise to the claim occurred in England, so it is first necessary to identify the law by reference to which the occurrence of a wrongful act is to be determined. This question must be answered by reference to sections 9, 11 and 12 of the Private International Law (Miscellaneous Provisions) Act 1995 ("the 1995 Act"), the relevant parts of which provide as follows:

"9. (1) The rules in this Part apply for choosing the law (in this Part referred to as "the applicable law") to be used for determining issues relating to tort . . . . . . . . . . . . . . . . . . . . . . . . . (4) The applicable law shall be used for determining the issues arising in a claim, including, in particular, the question whether an actionable tort . . . . . has occurred. . . . . . . . . . . . . . . . . . . . . 11. (1) The general rule is that the applicable law is the law of the country in which the events constituting the tort . . . . . in question occur. (2) Where elements of those events occur in different countries, the applicable law under the general rule is to be taken as being – . . . . . . . . . . . . . . . (c) . . . . . . . . . . the law of the country in which the most significant element or elements of those events occurred. 12. (1) If it appears, in all the circumstances, from a comparison of – (a) the significance of the factors which connect a tort . . . . . with the country whose law would be the applicable law under the general rule; and (b) the significance of any factors connecting the tort . . . . . with another country, that it is substantially more appropriate for the applicable law for determining the issues arising in the case, or any of those issues, to be the law of the other country, the general rule is displaced and the applicable law for determining those issues or that issue (as the case may be) is the law of that other country. (2) The factors that may be taken into account as connecting a tort . . . . . with a country for the purposes of this section include, in particular, factors relating to the parties, to any of the events which constitute the tort . . . . . in question or to any of the circumstances or consequences of those events."

[77]Although a number of different suggestions were canvassed in argument, the primary case of both Protea and MAS was that the applicable law in the present case is the law of Cambodia. In my view that is correct. In substance the wrong alleged to have been committed by MAS consisted of improperly managing and conducting the business of RAC. That business was directed entirely from Phnom Penh where all relevant decisions were taken about commercial strategy and the use of the company's assets. The individuals identified by Protea as primarily responsible for the decisions that are said to have led to the wrongful application of RAC's funds, Mr. Stickney and Mr. Sen, were both working in Phnom Penh throughout the relevant period as senior managers of RAC. Even if they acted under instructions from the management of MAS in Kuala Lumpur, it was still their actions as managers of the company in Phnom Penh that caused RAC to dispose of its funds in the manner of which Protea complains. The fact that under the ATR leases payment was to be made to bank accounts in France and that the economic consequences of non-payment were therefore felt in France seems to me to be entirely fortuitous and of no real significance at all.

[78]The learned editors of Dicey & Morris on The Conflict of Laws 13 th ed. at page 1547 suggest that in applying section 11(2)(c) of the 1995 Act the court may derive assistance from the "substance" test used to determine the place of commission of a tort for the purposes of applying the corresponding principles under common law. On that basis they suggest that in the case of inducing breach of contract the country in which the most significant element or elements of the events constituting the tort will be found to have occurred is likely to be the country where the breaches of contract and the resulting economic loss occurred. This reflects the reasoning in Metall & Rohstoff AG v Donaldson Lufkin & Jenrette Inc. [1990] 1 Q.B. 391. For my own part I would be cautious about turning too readily to the earlier authorities for assistance on this problem. The 1995 Act establishes a new set of principles which makes it unnecessary for the court to identify a single country in which the tort was "in substance" committed. Section 11(2)(c) only requires the court to identify the country in which the most significant element of the events constituting the tort occurred. That seems to me to be a much more flexible principle and one which might yield different answers in different cases even in relation to the same kind of tort.

[79]Another important difference introduced by the 1995 Act relates to the law by reference to which the occurrence of a tort is determined. Under the common law rules for determining whether a party is liable in tort in respect of acts committed abroad the court was obliged to determine whether the acts in question would have given rise to liability in tort in English law if they had taken place in England, before going on to determine whether the alleged tort would be actionable in the country where it was committed (the "double actionability" rule): see per Slade L.J. in Metall & Rohstoff AG v Donaldson Lufkin & Jenrette at page 446. Now, however, under section 9 of the 1995 Act the question whether the defendant has committed a legal wrong of a kind that under English law would be characterised as a tort is to be determined by reference to the applicable law. Apart from the question of characterisation, therefore, English law has no part to play and the particular nature of the wrongful act in question, as recognised by the applicable law, may be relevant when deciding what, in the circumstances of the particular case, are the most significant elements of the events constituting it.

[80]The present action provides a good example of a case in which the country in which the economic consequences of the alleged tort were felt was not the country in which the most significant element of the events constituting that tort occurred. The damage alleged in the present case consists mainly of failing to pay sums due under the leases but also partly in a failure to maintain the aircraft as required by the leases. The latter occurred in Cambodia and in the case of the former the location of the bank account to which payment should have been made is entirely unconnected with the conduct on which Protea relies as the basis for its claim. It is true that insofar as any decisions taken by Mr. Stickney and Mr. Sen led to a failure by RAC to meet its obligations under the aircraft leases, some of the consequences of those decisions were felt by Protea outside Cambodia and it follows, since damage is an essential element of the tort, that this is a case in which some of the events constituting the tort occurred in different countries and to which, therefore, section 11(2) of the Act applies. In each case, however, Cambodia is clearly the country in which the most significant elements of the events said to constitute the tort occurred and accordingly, by virtue of sections 9 and 11 of the Act, the question whether an actionable tort has been committed by MAS is to be determined exclusively by reference to Cambodian law.

(b) Cambodian law

[81]The identification of the relevant principles of Cambodian law and their application to the facts of this case give rise to some difficulty. However, there was a limited measure of agreement between the two expert witnesses, Me. François Zimeray and Mr. Bretton Sciaroni, by reference to which some basic findings can be made.

[82]Under the Khmer Rouge régime all previous state institutions in Cambodia were dismantled. The existing laws, as well as the legal system itself, were swept away and few of the country's lawyers survived the purges. The modern Kingdom of Cambodia was established under a Constitution adopted by the Constitutional Assembly on 21 st September 1993. Article 139 of the Constitution provides that existing laws that safeguard private legal rights should continue in force save insofar as they are contrary to the spirit of the Constitution. Accordingly, many laws brought into effect between 1979 and 1993 remain in force. These include the Law of 4 th February 1993 dealing with the organisation and functions of the courts and Legislative Decree No. 38 of 28 th October 1988 dealing with contracts and other liabilities. Cambodian legislation is enacted and published in the Khmer language, but since neither of the experts was able to read Khmer they were forced to rely on translations into French or English.

[83]Article 4 of the Law of 4 th February 1993 sets out the basis on which legal decisions are to be rendered. It provides as follows:

"All courts at all levels must rule on the basis of the laws that are in force and by relying on the laws and regulations adopted by the National Supreme Council. In civil proceedings, if the law is not explicit, or in the event of a lacuna in the law, judgment must be based on custom, tradition, conscience or fairness."

[84]The legal system in modern Cambodia is a codified system broadly similar in its structure to that of the civil law systems, although provision is made for the courts to have resort to earlier sources of law where the legislation is silent. It was common ground that the system does not at present recognise any doctrine of precedent. This makes the task of deciding whether MAS has committed a tort under Cambodian law peculiarly difficult. The existence of broadly-worded legislation and the absence of a doctrine of precedent enable the courts to ensure that the principles contained in the legislation are developed and applied in a manner that reflects changes in society. This is a recognised characteristic of codified systems, including the civil law systems. Over the course of time clear trends may emerge which will provide pointers to the way in which future developments can be expected to occur, but in the early stages of development it may be difficult to know what attitude the courts will take to new problems as they arise, particularly when they raise issues of legal policy. This problem is particularly acute in the case of Cambodia whose legal system is still at an early stage of development. I think that the right course in these circumstances is to ask myself how the Cambodian Supreme Court, properly directing itself as to the law, would be likely to decide the question if the matter came before it today. To do that it is necessary to have regard not only to the terms of the relevant legislation but to cultural influences and to the evidence, such as there is, of the approach of the Cambodian courts to other kinds of commercial problems.

[85]As its title suggests, Decree No. 38 of 28 th October 1988 is primarily concerned with the law relating to contracts. It deals not only with general principles of contract law, but with the law relating to specific types of contracts such as contracts of sale, loan, mortgage of chattels, carriage and bailment. Chapter 3 which contains articles 121 to 135 is headed "Other Liabilities" and contains articles dealing with various aspects of liability for causing damage. It covers what in English law would broadly be regarded as liability in tort.

[86]Article 121 of Decree No. 38 provides as follows:

"Any person who causes damage to others by reason of his/her own fault shall be liable in compensation for such damage. Even where damage is caused by involuntary acts such as carelessness or negligence in control and maintenance the offender shall be liable."

[87]It was common ground that there are no provisions of Cambodian law dealing specifically with economic torts such as inducing or procuring a breach of contract. It was also common ground, however, that the broad language of Article 121 provides an adequate basis for the courts to recognise liability for causing damage to a third party by interfering with the enjoyment of his contractual rights. The real dispute between the parties was whether, in the current state of development of Cambodian law, the courts would recognise such a liability when faced with the facts of this case.

[88]The answer to this question turns on three principal factors:(a) the extent to which the courts of Cambodia would draw on other systems of law, in particular French law, in the development of their jurisprudence;

(b) the current state of development of Cambodian law and the willingness of the Cambodian courts to recognise a liability of that kind;

[89]The experts were sharply divided over the extent to which the Cambodian courts would look to French law in developing the law of Cambodia generally and in interpreting Article 121 of Decree No. 38 in particular. Me. Zimeray was of the view that the political and cultural association between France and Cambodia which stretches back over a century remains strong and that this association, in conjunction with the fundamental similarity between the two legal systems, and particularly the similarity between Article 121 and Article 1382 of the French Civil Code, would lead the courts to turn to French law as a source of inspiration where they encountered gaps in their own jurisprudence. He also pointed to the extensive support provided by French academic lawyers for the new Kingdom of Cambodia which he considered would reinforce the tendency of the judges to look to French law for assistance. Mr. Sciaroni, expressed a different view. He considered that the influence of French law and culture were no longer as strong as Me. Zimeray suggested. He drew attention to Article 4 of the Law of 4 th February 1993 which identifies the sources of law in modern Cambodia and to the fact that many countries in addition to France have provided assistance to Cambodia in re-establishing an effective legal system. Although he accepted that French decisions and writings could be drawn to the attention of the Cambodian courts, he doubted whether they would be readily adopted as providing an immediate answer to the problem in hand. Mr. Sciaroni, moreover, was at pains to emphasise that the Cambodian legal system was not highly developed (it was common ground, for example, that there is no law dealing with insolvency, or the rights and obligations arising in connection with the establishment of joint stock companies) and expressed the view that the whole concept of economic torts of the kind on which Protea's case is based would find little favour with the Cambodian courts.

[90]Both Me. Zimeray and Mr. Sciaroni have had extensive contact with Cambodian lawyers and with the Cambodian legal system over many years, though neither of them speaks or reads the Khmer language sufficiently to enable him to use it for professional purposes and neither is qualified to practise as an advocate before the Cambodian courts. Me. Zimeray practises as a lawyer in Paris with one of the leading French firms. He frequently acts for clients making investments in Cambodia and has visited Cambodia for professional purposes at least fifteen times during the last ten years. On those occasions he has worked closely with local lawyers and on at least six occasions has been present at hearings in the courts assisting in instructing local advocates. In none of those cases, however, was Article 121 considered and in none of them, apparently, was the court asked to consider any aspect of French law.

[91]Mr. Sciaroni comes from a different background altogether. After graduating from the University of California he practised as a lawyer in the United States before going to Cambodia in 1993 to practise with a firm of lawyers in Phnom Penh. Like Me. Zimeray his clients also consist mainly of foreign investors in Cambodia, though Mr. Sciaroni has also acted for the government of Cambodia and for other non-commercial organisations. His clients' interests span the whole range of commercial activities and he has also been involved in criminal as well as a wide range of civil litigation. His firm employs three Khmer lawyers with whom he works closely. Although brought up in the common law tradition, he has the advantage of having lived and worked in Cambodia continuously for the past nine years and of having daily contact with the Cambodian legal system in one form or another. He has, indirectly, extensive experience of litigation in the Cambodian courts.

[92]In support of his conclusions Me. Zimeray placed some considerable emphasis on the historical and cultural links between France and Cambodia. These are not in dispute, but Mr. Sciaroni did take issue with Me. Zimeray's suggestion that the legal system that had existed before 1970 was largely reinstated in 1991. He pointed out that under the guidance of the United Nations Transitional Authority for Cambodia new legislation had been passed dealing with the establishment of the court system as well as a wholly new criminal code. He also considered that Me. Zimeray was inclined to make too great a claim for the influence of Cambodia's historical and cultural links with France and drew attention to the fact that professional bodies in the United States, Australia, Canada, Japan and Norway, among others, had been involved in the efforts to re-establish the legal system in Cambodia. He drew attention to the fact that new Civil and Commercial Codes are currently being drafted with the assistance of Japanese and American lawyers.

[93]Despite the ravages of the Khmer Rouge régime and the more recent contributions to the re-establishment of the Cambodian legal system from a range of countries with different legal traditions, I do not think that the residual influence of French law, culture and education can be ignored. This probably does render the courts more amenable to the influence of French legal thinking, insofar as they are inclined to look to other systems of law for guidance. That is more likely to be the case when the legislation under consideration can be seen to have its origins in the French civil code. It does not follow, however, that the Cambodian courts would instinctively look to French law for the solution to any new problem. Not only is there no doctrine of precedent in Cambodian law, there has hitherto been no systematic reporting and publication of the courts' decisions. Cambodian judges do not, therefore, routinely resort to previously decided cases for guidance when faced with novel situations. Mr. Sciaroni was of the view that the Cambodian courts would not welcome the introduction of French precedents, even for illustrative purposes, and could not recall any occasion on which French legal materials had been placed before a Cambodian court. Me. Zimeray agreed that some caution would have to be exercised in the citation of French decisions and this seems to me seriously to undermine the suggestion that the Cambodian courts would naturally turn to French law for assistance. If that were the case, the citation of French decisions and doctrine would have become, if not routine, at least a recognised feature of litigation in the higher courts. All the evidence suggests, however, that that is not the case. It is possible that Article 4 of the Law of 4 th February 1993 which makes provision for gaps in the law to be filled by resort to "custom, tradition, conscience and fairness" is partly responsible for that. Me. Zimeray suggested that "tradition" is apt to include French influence in the legal field, but I find it difficult to accept that and prefer Mr. Sciaroni's view that these words refer to the customs and traditions of Khmer society.

[94]Me. Zimeray also relied to a considerable extent in support of his opinion on the linguistic similarity between Article 121 of Decree No. 38 and Article 1382 of the French Civil Code. Here, however, I think it necessary to sound a note of caution. The version of Article 121 used by Me. Zimeray in compiling his report was, of course, in French, but it was only a translation from the Khmer language in which the legislation is published. There are certain linguistic similarities between the French translation of Article 121 and Articles 1382 and 1383 of the French civil code, but these seem to me to owe more to the content of the Articles than to their formal structure. Thus in each case one sees the use of words such as "faute", "dommage", "négligence" and "imprudence", but beyond that the structure of the Articles is substantially different. In these circumstances I do not find the argument based on linguistic similarity very persuasive. Me. Zimeray suggested that the obvious differences in the formulation of the two sets of provisions reflects changes in the use of language since the French Civil Code was promulgated at the beginning of the nineteenth century and I can certainly see some force in that. It seems to me, however, that the real similarity between these provisions lies in the codification in broad terms of the principle of liability for causing damage by "fault". In the light of the historical connections between France and Cambodia I have little doubt that the Article 121, which itself replaced Article 812 of the pre-1975 Cambodian civil code, has its origin in the French civil code, though it is clear that some parts of chapter 3 of Decree No. 38 were drafted to reflect what was at the time a socialist society under the influence of the Vietnamese occupation. If, therefore, the Cambodian courts were minded to look to other legal systems for assistance, I think it likely, at least when considering Article 121, that they would turn first to that of France.

[95]However, it was implicit in Me. Zimeray's evidence that he would not merely expect a Cambodian court to turn to French law for assistance, but would expect it to adopt a similar approach to the problem before it and so apply Article 121 in much the same way that a French court would apply Article 1382 of the French civil code. In a moment it will be necessary to say something about French law in relation to inducing breach of contract, but before doing so it is necessary to consider the view expressed by Mr. Sciaroni that Article 121 is likely to be construed as limited to liability for personal injury and physical damage and not as extending to liability for purely economic loss at all.

[96]Article 121 is the first provision in a self-contained chapter of Decree No. 38 dealing with liability in tort. There is no evidence of any other legislation dealing with this area of the law and I think Mr. Sciaroni was therefore right in saying that this chapter contains the whole of Cambodian law on the subject. Article 121 itself is worded in very general terms and is capable, as Mr. Sciaroni himself accepted, of being interpreted as extending to damage of any kind. The articles that follow deal with certain specific matters such as liability for the acts of incompetents, minors and animals, the liability of employers for damage caused by their employees, joint liability and contributory negligence. Some of these are specific instances of the principle contained in Article 121 and it is true that some of them appear to have been drafted with personal injury and physical damage primarily in mind, but few, if any of them, are necessarily confined to such cases. There is no evidence that the scope of Article 121 is necessarily limited by the articles that follow and insofar as it is permissible for me to draw any conclusion about that from the translation of Decree No. 38 before me, I am unable to accept that it is.

[97]However, there is some evidence to suggest that the Cambodian courts have yet to recognise that a claim may be made under Article 121 in the absence of personal injury or physical damage. Mr. Sciaroni was given access to thirteen volumes of reports from a collection of recent decisions compiled by the Ministry of Justice. These contained 685 decisions, of which only six involved claims based on Article 121. In each case the defendant was alleged to have caused damage to the claimant's building. Although in at least one of those cases the claimant recovered economic loss flowing from the physical damage, this evidence tends to support Mr. Sciaroni's opinion that Cambodian lawyers and judges have yet to recognise purely economic loss as a form of damage covered by Article 121.

[98]Since it is an essential part of Protea's case that the Cambodian courts would apply the principles of French law in the determination of its claim against MAS it is necessary for this reason alone to consider what French law has to say on this question. However, I think that an understanding of the approach of French law to the problem of inducing breach of contract is also directly relevant to the question whether the Cambodian courts would in fact be likely to adopt the same or similar principles.

[99]As practising lawyer Me. Zimeray was able to give evidence of French law on behalf of Protea. Since Mr. Sciaroni did not profess to have any knowledge of French law MAS relied on the evidence of Me. Nathalie Meyer Fabre who also practises with a leading firm of lawyers in Paris. As might be expected, there was a good deal of agreement between Me. Zimeray and Me. Meyer Fabre on the approach to Article 1382 of the civil code, the text of which reads as follows: "Tout fait quelconque de l'homme, qui cause à autrui un dommage, oblige celui par la faute duquel il est arrivé, à le réparer".

[100]It was common ground that "faute" as used in Article 1382 means a legal wrong and includes the breach of a legal obligation, though not necessarily one owed to the claimant himself. It has thus been held that a person who, being aware of the existence of a contract, incites one party not to perform his obligations under it commits a legal wrong against the other party to the contract. The principle goes further than that, however, because a breach of contract is itself regarded as a legal wrong. In the present case MAS was undoubtedly aware of the existence of the leases between Protea and RAC and accordingly it was also common ground between the experts that if MAS broke the Management Agreement in a way which caused RAC in turn to break its contract with Protea, MAS would incur liability in damages to Protea under Article 1382. That would be so even in the absence of anything that might ordinarily be characterised as bad faith. Thus, if MAS failed to manage the business of RAC in its best interests and as a result RAC failed to perform its obligations under the lease, MAS could incur liability to Protea under Article 1382, even though it believed at the time that it was in fact promoting RAC's interests.

[101]Part of the evidence given by Me. Zimeray and Me. Meyer Fabre was directed to the effect of Article 1384 of the Civil Code which deals with vicarious liability. The French courts have developed detailed principles dealing with the creation of a relationship of subordination (the relationship of commettant and préposé which is broadly the equivalent to that of master and servant in English law) and its consequences in relation to liability to third parties. As the case developed, however, it became apparent that the legal wrongs on which Protea relied to support its claim were wrongs on the part of MAS itself and not simply wrongs committed by Mr. Stickney or Mr. Sen for which MAS might be held vicariously liable. It is unnecessary, therefore, to make findings about the way in which the French courts have interpreted and applied article 1384. However, it is perhaps worth mentioning that Cambodian law itself is not entirely silent on the question of vicarious liability since Article 126 of Decree No. 38 deals in straightforward terms with the liability of employers for the acts of employees committed in the course of their employment. Neither expert commented on the extent to which, if at all, the Cambodian courts have developed any principles of their own for deciding whether such a relationship exists, but it must be open to question whether they would readily resort to the detailed principles of French law to resolve such an issue.

[102]The question whether MAS committed a tort in this case must await further findings of fact, but it is nonetheless appropriate at this point to make some findings about the present state of Cambodian law. As I have already indicated, I am satisfied that the French cultural background still has influence, especially among the older judges who are more likely to be sitting in the Supreme Court. However, I think the strength of that influence is diminishing and should not be over-stated. I also accept that Article 121 of Decree No. 38 has its origins in the French civil code. However, I am satisfied from the evidence of Mr. Sciaroni that Cambodian judges do not normally look to previous judicial decisions, even within their own system, for assistance. There is, as both Me. Zimeray and Mr. Sciaroni accepted, a strong sense of national independence in Cambodia and I think it unlikely that the court would look to French law for assistance in anything that might be regarded as a straightforward case. There might be a greater willingness to consider the approach of French law in a borderline or doubtful case, but even then I do not think that the court would simply look to French law for a ready-made solution and for this reason I do not think that the Cambodian Supreme Court would import the French understanding of 'fault' in this context wholesale into Cambodian law. Questions of legal policy and cultural attitudes play a large part in the field of economic torts and different legal systems do not always reach the same conclusions about what is and is not to be regarded as lawful. I think it much more likely that the court would decide the matter by reference to its own legal and cultural background and its own concept of what constitutes fault in this context.

[103]I should make it clear that I do not by any means exclude the possibility that the Supreme Court might hold that 'damage' in Article 121 is capable of covering purely economic loss, but I think it would only do so in a case where the defendant's conduct, and therefore his fault, could clearly be recognised as unacceptable and wrong by current standards of social or commercial behaviour. So in the absence of any law dealing with insolvency I do not think that the court would regard choosing between competing creditors as a fault of that kind, if, indeed, it were to regard it as a fault at all. Similarly, I think it unlikely that merely committing a breach of contract would be regarded as a wrongful act in relation to a person who was not a party to the contract unless, perhaps, the quality of the act were such that it could clearly be seen to be morally unacceptable in relation to him. In these circumstances it is necessary to consider the course of events between July 1997 and April 1999 in order to determine whether the conduct of MAS was of such a kind as would be likely to render it liable to Protea under Article 121.

(c) The Management Agreement

[104]The Management Agreement between MAS and RAC lies at the heart of Protea's case. The following are the most important provisions for present purposes:

"WHEREAS:- . . . . . . . . . . . . (B) The Shareholders of RAC have agreed and RAC wishes to take advantage of MAS's experience by engaging MAS to provide and procure the provision of certain management and services to RAC NOW IT IS HEREBY AGREED as follows:- DEFINITIONS . . . . . . . . . . . . 1.8 Where any obligation pursuant to this agreement is expressed to be undertaken or assumed by any Party, such obligation shall be construed as requiring the Party concerned to exercise all rights and powers of control over the affairs of any other person which that Party is able to exercise (whether directly or indirectly) in order to secure performance of such obligation. . . . . . . . . . . . . . . . . . . . . SERVICES 3.1 MAS shall be responsible for management of RAC in accordance with the terms and provisions of this Agreement, and in doing so MAS shall provide the following services and other operational services to RAC (through its Seconded Employees or as the parties may otherwise agree): (a) generally manage and oversee of [sic] the operation of the Business; (b) the secondment from MAS and/or any of its associated companies of fully-trained and competent managers, experts, advisers, engineers, aircrews, ground staff and other employees (the "

Seconded Employees" ) to enable all flights at all times to be operated on a fully-crewed basis and in accordance with all applicable international standards of safety and quality and to enable all other aspects of the Business to be carried out to such standards. . . . . . . (h) maintenance in excellent condition and full working order and protection of the assets of RAC; . . . . . . . . . . . . (k) in co-ordination with the [chief financial officer], the supervision of the collection of trade and other debts, receivables, charges, credits and such other compensation due to RAC; . . . . . . . . . . . . (p) the doing of all such other things, acts and deeds as RAC may request and which RAC may deem necessary for the efficient management, operation and administration of the Business . . . . . . . . . . . . . . . . . . . . BUSINESS MANAGEMENT 5. The CEO shall have the power to organise, lead and carry out the management of RAC. The CEO shall implement the policies of the Board . . . . . . . Without prejudice to the generality of the foregoing, the CEO shall, in addition, have the power to: (i) represent RAC in its dealings; . . . . . . . . . . (iii) be responsible for external relations, signing economic contracts within value limits established by the Board . . . . . . and handling other matters entrusted to him by the Board; . . . . . . . . . . (vi) draw up annual operating plans and budgets and such other plans and budgets for RAC as are considered appropriate and, after they are examined and approved by the Board, implement the same with particular responsibility for planning; . . . . . . . . . . . . . . . . . . . . FINANCIAL AFFAIRS AND ACCOUNTING 7.1 The financial management of RAC shall comply with the following: (a) The CFO shall be under the leadership of and shall report to the CEO. He shall be responsible for the financial management of RAC. . . . . . . . . . . . . . . . . . . . . 7.3 MAS together with RAC shall keep the Board advised of material developments and shall prepare at least quarterly full reports setting out (i) progress reports and reviews of the Business during the preceding period and (ii) MAS's long and short term proposals for the future and viability studies for expanding or improving the Business. . . . . . . . . . . . . . . . . . . . . 9. MAS shall perform the tasks set out in Clause [3] above at the highest international standard, in the best interests of RAC and its shareholders, in a proper and businesslike manner, and with due and proper regard to all laws and regulations applicable in Cambodia."

[105]By clause 19.1 the Management Agreement is governed by Cambodian law, but to the extent that the law of Cambodia is silent on a particular point or otherwise insufficient to allow for the proper interpretation of a point of law, it is to be supplemented by the law of England. In the present case, however, the only issues between the parties relate to the construction of the agreement and there is no suggestion that the rules of construction applicable under Cambodian law differ from those that apply under English law. Nor has it been suggested that there is any other rule of Cambodian law that has a bearing on the construction of the agreement. The correct approach, therefore, is simply to give the words their ordinary and natural meaning having regard to the agreement as a whole and the commercial background against which it was made.

[106]Mr. Milligan submitted that under the Management Agreement MAS assumed general responsibility for the management of RAC's business. He submitted that clause 3.1 of the agreement has two limbs: the first rendered MAS responsible for the management of the business generally; the second obliged MAS to provide the various services described in paragraphs (a) to (p). By virtue of clause 9 MAS was bound to carry out all those obligations, including the general obligation to manage RAC, in the best interests of RAC.

[107]Mr. Wood submitted that the management structure created by the Management Agreement was more subtle than that. He pointed to the terms of clauses 5 and 7 dealing with the position of the chief executive officer and the chief financial officer and to clause 3.8 which expressly recognised MAS's role in training Cambodian employees of RAC to take over from its own seconded employees and the consequent reduction in of MAS's involvement in the management of the company. He submitted that clause 3.1 gave rise to only one obligation, namely, to provide management services of the kind described in that clause through its own seconded employees until such time as they could be provided by RAC's own Cambodian employees.

[108]The Shareholders' Agreement was the instrument by which the government of Cambodia and Naluri agreed to co-operate in the establishment of RAC as a commercial enterprise and as such it provides an important part of the commercial context in which the Management Agreement was made. RAC itself was also a party. The material parts of that agreement for present purposes are the following:

"WHEREAS . . . . . . . . . . . . . . . . . . . . (E) By the terms of a separate management agreement to be entered into between RAC and Malaysian Airline System Berhad ("

MAS ") at the same time as this Agreement is signed (the Management Agreement ), and conditional upon Completion of this Agreement, the Business of RAC shall be managed and operated on an ongoing basis by MAS until and unless the Management Agreement is terminated in accordance with the terms thereof". IT IS AGREED as follows: . . . . . . . . . . . . . . . . . . . . Management Agreement means the agreement referred to in Recital (E) relating to the provision of certain services to RAC by MAS; 3.2 The business of RAC shall be conducted in the best interests of RAC and the nation of Cambodia, on sound commercial profit-making principles with the aim of generating the maximum achievable maintainable profits available for distribution subject to any overriding principles that KOC may deem necessary to institute or adhere to in respect of RAC's unique status as the national airline of Cambodia. . . . . . . . . . . . . . . . . . . . . DIRECTORS AND MANAGEMENT 11.1 The business and affairs of RAC shall . . . . . be managed by the Board in accordance with the Memorandum and the Articles and applicable law. . . . . . . . . . . . . . . . . . . . . MANAGEMENT OF RAC 14.1 The Parties agree that RAC shall be managed by MAS in accordance with the Management Agreement and that RAC shall be managed on an independent commercial basis . . . . . . . . 14.2 [The Government] shall nominate the Chairman, CEO and Chief Financial Officer (CFO) of RAC. MAS shall nominate the Chief Operating Officer . . . . . . . . 14.3 The Board shall delegate to the CEO and COO all powers and functions as are necessary to ensure that the business and operation of RAC can be efficiently carried out."

[109]The agreement contains a governing law clause in the same terms as that of the Management Agreement.

[110]The Management Agreement was a central part of the arrangements agreed between Naluri and the government, but it was clearly not within the contemplation of the parties to the Shareholders' Agreement or the Management Agreement that MAS should have sole responsibility for managing the business of RAC. The board of directors remained the body responsible for the strategic management of the company and it was the CEO and COO who were to have day to day responsibility for running its affairs. Both the CEO and the CFO were to be nominated by the government. This allocation of responsibility is reflected in the Management Agreement itself, in particular in clauses 5 and 7 which deal with the position of the CEO and CFO.

[111]The language of both the Shareholders' Agreement and the Management Agreement is somewhat contradictory. In some parts they each speak unambiguously in terms of MAS's managing RAC or being responsible for its management; in others they speak in terms of the of management RAC being in the hands of the board, the CEO and the COO with MAS simply providing management services. However, I think that the management structure envisaged by the parties to these agreements emerges quite clearly. I have no doubt that the parties intended that a substantial amount of managerial discretion should be entrusted to the CEO and Mr. Milligan did not suggest, rightly in my view, that MAS was responsible for decisions taken by Mr. Pan Chantra over whom it had no control. I think that Mr. Wood was right, therefore, in saying that the responsibility for matters of day to day management imposed on MAS by clause 3.1 of the Management Agreement is limited to the provision by its seconded employees of the services described in that clause. Sub-clause 3.1(a) is apt to impose on MAS a general responsibility to monitor the operations of RAC and in that respect is consistent with clause 7.3 which requires MAS to provide the board with reviews and proposals, but I do not think that it can be read as imposing general responsibility on MAS for everything done in the course of the company's management, otherwise it would conflict with the management structures reflected both in the Management Agreement and the Shareholders' Agreement.

[112]Mr. Milligan's alternative argument was that even if MAS was not responsible for every decision taken in the course of RAC's management, it was at least responsible for the conduct of its own secondees and liable to RAC insofar as they failed to carry out their functions in the best interests of RAC. Here it seems to me he is on stronger ground. Under the Management Agreement MAS's obligations were not limited simply to making available competent secondees. It undertook personal obligations in relation to those aspects of the management of RAC's affairs for which it was responsible through its seconded employees and was therefore personally responsible for carrying out those functions in accordance with the clause 9 of the Agreement, that is, to the highest international standards, in the best interests of RAC and its shareholders and in a proper and businesslike manner.

(d) Breaches of the Management Agreement (i) An overview

[113]The essential thrust of Protea's case is that between July 1997, when RAC resumed operations after the coup, and the middle of 1999 MAS through its secondees Mr. Stickney and Mr. Sen consistently failed to manage the affairs of RAC in the best interests of the company and instead took decisions both in relation to airline operations and particularly in relation to the use of RAC's limited funds to promote the interests of MAS at the expense of RAC and Protea. Mr. Stickney in particular is alleged to have exercised considerable influence over Mr. Pan Chantra whom he is said to have manipulated in such a way as to ensure that RAC's limited resources were directed to paying MAS instead of Protea. In order to put these submissions into context it is necessary to give a brief description of the circumstances surrounding the business before and after the coup in July 1997. Before doing that, however, it is necessary to say something about MAS's main witnesses, Mr. Stickney and Mr. Sen.

[114]Both Mr. Stickney and Mr. Sen gave evidence at some length, Mr. Stickney for the best part of four days and Mr. Sen for nearly two. Mr. Milligan submitted that they were both generally evasive and that their evidence was inconsistent, contradictory and in some cases deliberately untrue. He went so far as to submit that they were both thoroughly unreliable witnesses and invited me to reject their evidence except for those parts which adversely affected MAS's case.

[115]As far as Mr. Stickney is concerned, there is a good deal of force in some of these criticisms, many of which were based on glaring inconsistencies between what he said in the witness box and what he had written in a letter to the personnel manager of MAS in October 2001 in response to allegations of misconduct made against him in internal disciplinary proceedings. He had been accused of having signed a cheque for US$240,000 on behalf of RAC in September 1998 without having included the name of the payee. The cheque, which had been intended for Protea, was subsequently cashed by an unauthorised person causing loss to RAC.

[116]Although the allegation made against him was one of negligence and breach of duty in failing to comply with sound financial practices, I think Mr. Stickney understood it as carrying a thinly veiled suggestion of dishonesty. Moreover, I have little doubt that he viewed the disciplinary proceedings as questioning his loyalty to MAS as well as his personal integrity. His letter in response ran to 18 closely typed pages in which he described in some detail his activities at RAC and the difficulties he encountered while he was working in Phnom Penh. Throughout the letter Mr. Stickney was at pains to describe the steps he had taken to improve the efficiency of RAC's operations and financial systems. He also described the steps he had taken to obtain payment by RAC to MAS and to reduce generally the amount outstanding from RAC and sought to portray himself as a loyal and efficient employee of MAS.

[117]Mr. Stickney was certainly embarrassed by many of the things that he had said in that letter and did not always deal with them satisfactorily. In some cases he simply gave evidence that was at odds with what he had said earlier. In others he sought to pass off what were clearly statements of fact as "assumptions", by which I think he meant something more akin to mere assertions. As he accepted, however, MAS could easily have ascertained whether he was telling the truth or not, so on the face of it that was not a very compelling explanation. Nonetheless, it is obvious from both the tone and content of the letter that when he wrote it Mr. Stickney was trying to convince MAS that he was a loyal and trustworthy employee and I have little doubt that he was setting out to make the best case he could on his own behalf. The letter is, of course, an important part of the evidence, but it has to be viewed in its own immediate context and in the context with the evidence as a whole. Mr. Milligan was able to point to other discrepancies and inconsistencies in Mr. Stickney's evidence, all of which have to be taken into consideration when deciding where the truth lies in relation to individual issues. However, they were not so numerous or so grave as to suggest that he should be treated as wholly unreliable and his evidence disregarded.

[118]It is also fair to say that on many occasions Mr. Stickney gave the impression of being evasive. He was often very slow to respond to simple and straightforward questions, even when the answer was obvious and not particularly damaging to MAS. In some instances I think he was playing for time, but in others I think that there was a measure of genuine confusion and there were also occasions when, somewhat to my surprise, he quite readily gave answers that on the face of it were adverse to MAS. He was certainly at pains to minimise his own role in RAC and to emphasise the role played by Mr. Pan Chantra in decisions relating to the payment of MAS and Protea. In some respects that part of his evidence was at odds with his letter in the disciplinary proceedings which has led me to consider what he said with particular care. However, it is right to say that there is credible evidence from other sources to suggest that Mr. Pan Chantra did play an active role as chief executive and one would expect an active chief executive to interest himself closely in decisions of that kind. In the end, although many criticisms can quite fairly be made of Mr. Stickney as a witness, they are not such would justify rejecting the evidence he gave in its entirety insofar as it supports MAS.

[119]Mr. Milligan was also able to point to deficiencies of a similar kind in Mr. Sen's evidence. Although not all of his criticisms were wholly justified, they have caused me to look critically at his evidence. One particular feature of Mr. Sen's evidence was his desire to explain fully the context in which he had to work at RAC in a manner that was calculated to show both himself and MAS in the best possible light. In general, however, he was a more satisfactory witness than Mr. Stickney and although I have not been able to accept some parts of his evidence, I am satisfied that he was in general a reliable witness.

[120]At this point I return to the commercial context in which RAC carried on business. When RAC was established the intention was that the funds required for its initial capitalisation and day to day operations would be provided by Naluri as a 40% partner in the venture with the government. The precise manner in which that was to be done is set out in some detail in the Shareholders' Agreement, but it is unnecessary for present purposes to describe it. For reasons unconnected with the present dispute Naluri did not provide the capital envisaged by the Shareholders' Agreement and as a result RAC's financial position was and remained weak from the outset. Funds were, however, required to keep the business running and these were provided by MAS, not under a formal arrangement but by allowing RAC extensive credit in respect of services rendered by MAS itself or by third parties on MAS's account. As a result by July 1997 RAC's debt to MAS had grown to nearly US$19 million. Prior to July 1997 it had become the practice, as is common among international airlines, for MAS and RAC to set off amounts due to each other for certain kinds of services under what was known as the Interline Traffic Agreement. Some of RAC's debts to MAS were settled in that way, but overall its level of debt rose inexorably. One of RAC's main sources of liability to MAS was the wet leases of the two Boeing aircraft, each of which cost RAC US$500,000 a month, but apart from that MAS paid for ground support operations at some foreign airports and various other services required by RAC for which it charged RAC together with a fee. Until 1 st February 1997 the Chairman, Vichit Ith, acted as CFO. George Tam was then appointed CFO and occupied the position until the coup in early July.

[121]Prior to the coup RAC had by and large paid all its major creditors apart from MAS. In particular, it had kept up the payments due to Protea under the ATR leases. Although the board of MAS raised the matter of RAC's outstanding debt with its management in Kuala Lumpur, the management thought that the RAC would be successful in the long term and did not put pressure on it to reduce the level of its debt. The coup, however, had a dramatic effect both on the immediate fortunes of RAC and on the perception within MAS of its longer term prospects. It seriously disrupted the tourist trade and the subsequent withdrawal of RAC's monopoly status fundamentally affected its prospects of eventual commercial success. Mr. Suppiah, who had been appointed Executive Vice-President, Group Finance at MAS on 1 st July 1997 and had taken over responsibility for managing RAC's debt, realised that as a result of these developments any prospect that Naluri might provide capital for RAC had vanished. He also realised that without some financial support RAC would not be able to pay its debts as they fell due, let alone pay off its existing debt to MAS. Mr. Stickney, who had returned to Phnom Penh towards the end of July 1997, inevitably became aware of the position as he assumed responsibility for RAC's finance department.

[122]In late July or early August 1997 the Board Audit Committee of MAS decided that steps should be taken to recover the outstanding amount owed by RAC. It gave instructions that current rental payments should be recovered first and the outstanding balance by instalments. In a telephone conversation on 6 th August Mr. Suppiah told Mr. Stickney of that decision and obtained confirmation from him by telex that RAC would immediately take steps to pay the outstanding amount owed to MAS progressively over a period of time. I think Mr. Milligan was right in saying that the coup precipitated a change of heart on the part of MAS which was no longer willing to finance the operations of RAC. However, political considerations came into play on both sides. The government of Cambodia did not want RAC visibly to scale down its operations and the Malaysian government wanted MAS to continue its support of RAC and these two factors exercised their own influence on the course of the parties' relationship.

[123]Protea's case rests to a significant extent on the allegation that after July 1997 decisions about the disposal of RAC's available funds were effectively made by Mr. Stickney who ensured that MAS received payment in full and thus systematically preferred its interests to those of RAC and Protea. Much of the support for this allegation is to be found in Mr. Stickney's letter responding to the disciplinary proceedings to which I referred a little earlier. That letter was written only two to three years after the events in question and insofar as it describes specific procedures or events I am satisfied that it provides reliable evidence of what occurred. Mr. Stickney's memory must have been reasonably fresh at the time he wrote it and I do not think that he was setting out to concoct a purely self-serving account. Nonetheless, I have no doubt that he was seeking to put the best gloss on matters, as might be expected under the circumstances, and I think his account of how he looked after the interests of MAS must be approached with that in mind. I shall return to parts of this letter in the context of the specific complaints made about his conduct during that period.

[124]One matter that Mr. Stickney described in some detail in his letter, and on which some reliance was placed by Protea, was the procedure within RAC for authorising payments. All payments over US$10,000 had to be authorised by two designated signatories. Mr. Stickney became an authorised signatory on 25 th August 1997 and thereafter in practical terms he and Mr. Pan Chantra, who were the only signatories regularly in the office, had to authorise all payments over that amount. The normal procedure, which had been introduced by Mr. Stickney himself, was for him to arrange for a cheque and bank payment voucher to be prepared in the finance department. Provided he was satisfied that the necessary funds were available he would sign the cheque and the voucher before they were sent to Mr. Pan Chantra for signature together with the supporting invoice and any other relevant documentation. After the documents had been signed by Mr. Pan Chantra they would be returned to the finance department for final processing.

[125]Mr. Milligan submitted that through the operation of this procedure Mr. Stickney exercised a high degree of control over the way in which RAC paid its creditors, but in my view that overstates the position. Of course, as head of the finance department it was his responsibility to implement the procedures for payment and to ensure that adequate funds were available to cover the payments he processed, but I am unable to accept that Mr. Pan Chantra simply left all such decisions to him. Quite apart from that, however, it would be a mistake to assume that the procedure described in his letter was invariably followed. RAC was a very small organisation and Mr. Pan Chantra was an active manager. According to Mr. Stickney, if he thought a payment was urgent he would sometimes initiate the process himself, bypassing Mr. Stickney and instructing the finance department to prepare the necessary documents. He would then sign them and send them to Mr. Stickney for him to add his signature. Generally Mr. Stickney would take that as a direction from the chairman that the payment was to be made and would sign accordingly. I do not find this description of events at all surprising in a small company of this kind and I accept Mr. Stickney's evidence on this point.

[126]According to Mr. Stickney, Mr. Pan Chantra in conjunction with himself and Mr. Sen established a policy by which creditors were divided into two classes: those who had to be paid promptly if RAC were to continue in operation at all, such as fuel suppliers, suppliers of ground handling services, staff and so on, and those who could be kept waiting without serious repercussions. I am not persuaded that the policy was as formal as Mr. Stickney suggested, but it is clear that after July 1997 RAC was always under severe financial pressure and could not pay all its debts as they fell due. While RAC remained in business, therefore, decisions had to be made almost on a daily basis about which creditors should be paid and which should not. Although by far the majority of these decisions were left to Mr. Stickney, he was nonetheless subject to the overall supervision of Mr. Pan Chantra.

[127]Between July 1997 and April 1999 RAC paid its current debt to MAS almost in full, partly in cash and partly by set-off under the Interline Traffic Agreement. The amount outstanding, which stood at a little over US$18.7 million at the end of June 1997, had grown by only US$19,000 at the end of April 1999, although at one point during the intervening period it had reached the sum of US$20.4 million. Over the same period, however, RAC began to fall behind on its current debt to Protea so that by February 1999 a sum of about US$2 million was outstanding in respect of rental alone. In purely cash terms Protea was paid more than MAS (US$5,947,102.87 as against US$5,067,660) but MAS had the benefit of set-offs worth US$8.7 million.

[128]In support of his contention that Mr. Stickney had manipulated the system for authorising payments in favour of MAS Mr. Milligan drew my attention to a large number of telex messages passing between MAS and RAC which resulted in payments being made by RAC to MAS. He submitted that Mr. Stickney in conjunction with Mr. Suppiah had prompted the finance department at MAS to make demands for payment by telex in order to provide him with material which he could then use to procure payment by RAC to MAS.

[129]It would be wrong to conclude from the fact that MAS was effectively financing RAC that it took no steps at all prior to July 1997 to obtain payment of the substantial amount owed to it. In February 1996 MAS warned RAC that its failure to pay the rental due on one of the two Boeings for several months was an event of default which could lead to the withdrawal of the aircraft and a few months later in August 1996 Mr. Hussain and Mr. Lee of the finance department went to Phnom Penh to discuss the position with RAC. I think it is fair to say, however, that prior to the coup MAS did not press RAC for payment in a regular or sustained manner. There were very few telexes pressing for payment of the kind that one sees later. Before July 1997 MAS was taking a long view of the matter and expected RAC to become profitable and to pay off the debt in due course.

[130]After the coup telexes from MAS pressing for payment on account of the outstanding debt became more frequent and MAS began to apply pressure on RAC in practical ways, for example, by refusing to make payments on its behalf for fuel. Most of the telexes to Mr. Stickney were copied to Mr. Pan Chantra and the Chief Operating Officer of the day and there were occasional meetings between Mr. Suppiah and Mr. Pan Chantra at which the question of paying off the outstanding debt was discussed. I have little doubt, therefore, that Mr. Pan Chantra was kept informed of the way in which this aspect of RAC's affairs was being handled. One frequently sees Mr. Lee enquiring about the status of payments that had been promised but not made and the general tenor of these telexes is exactly what one would expect of messages passing between a generally well-disposed but anxious creditor and an embarrassed but impoverished debtor. On several occasions Mr. Stickney referred to lack of funds as the explanation for the delay in making payment.

[131]Mr. Stickney accepted that he had told MAS that if it wanted to receive payment it would have to make demands like any other creditor, but that falls a long way short of establishing the existence of a clandestine arrangement of the kind that Mr. Milligan sought to persuade me had been made between Mr. Stickney and Mr. Suppiah. The telexes themselves do not lend any support to an arrangement of that kind and there is really no other evidence to support his contention. Moreover, if Mr. Stickney had been acting in accordance with instructions he received from Mr. Suppiah, it is likely that he would have referred to that in some way in his letter responding to the disciplinary proceedings. In my view the change in the approach of MAS towards the outstanding debt as reflected in these telexes is explained by the change in commercial circumstances brought about by the coup. As from that point MAS was unwilling to extend credit to RAC indefinitely and became more concerned to recover the debt than had previously been the case. The exchanges between Mr. Stickney and Mr. Suppiah simply reflect the increased pressure applied by MAS to reduce the debt by stages and the reluctance of RAC to make payments to MAS or anyone else out of its limited cash reserves.

[132]Mr. Stickney finally left Phnom Penh at the end of July 2000 and thereafter payments by RAC to MAS ceased for all practical purposes. By that time, however, the last of the ATRs had been returned to Protea and the business of RAC was declining. In these circumstances it is not possible to establish any direct link between Mr. Stickney's departure and the cessation of payments to MAS. (ii) Failure to close down the business

[133]Mr. Milligan submitted that in the circumstances that existed following the coup the business of RAC should have been closed down because there were no grounds for thinking that it could become profitable and generate enough revenue to pay its debts. It was not, therefore, in the best interests of the creditors or RAC itself that it should continue in business.

[134]The picture facing RAC in the months immediately following the coup was certainly bleak. The company owed a substantial amount to MAS, it had lost its monopoly status and the tourist trade within Cambodia on which it relied for much of its income had been seriously disrupted. A cash flow projection produced in December 1997 for the six months to 31 st May 1998 showed a steady deficit month on month leading to a fall in the balance in hand from US$7 million at the beginning of the period to US$4 million at the end. The company did not possess substantial assets and was, in fact, insolvent. By ordinary standards, therefore, it should have ceased trading, but RAC was not an ordinary commercial company and was not subject to ordinary commercial considerations.

[135]Mr. Milligan submitted that in failing to close down RAC in July 1997 or in failing to advise the board of directors that the company should be wound up MAS failed to act in the best interests of RAC and its shareholders as required by clause 9 of the Management Agreement. He also submitted that insofar as Mr. Stickney was the person who should have given that advice, he was reckless as to the fate of RAC's creditors.

[136]I think it is very difficult to criticise Mr. Stickney in this respect. He reported to the COO and to the CEO, Mr. Pan Chantra, who was also chairman of the board. Following his appointment as CEO in July 1997 Mr. Pan Chantra kept himself well informed about all aspects of the company's affairs through daily briefings by the COO as well as meetings with Mr. Stickney who was acting as CFO. He was well aware of RAC's financial position and of the difficulties faced by the company in the latter part of 1997 and made it clear that the company was to carry on as best it could. MAS was not in a position to close down the business; a decision of that kind could only be taken by the board, or indirectly by the shareholders. There is no reason to think that the board was unaware of the company's financial position. As far as the shareholders were concerned, Naluri must have been aware of the magnitude of the debt owed to MAS and was certainly aware, at least in a general way, of the commercial difficulties facing RAC following the coup. The government of Cambodia wanted RAC to continue in business for political reasons. In these circumstances I do not think that RAC could possibly complain that MAS or Mr. Stickney failed to act in its best interests by failing to advise Mr. Pan Chantra in terms that it should be closed down. (iii) Failure to pay Protea

[137]Mr. Milligan identified a number of ways in which he said that MAS through Mr. Stickney and Mr. Sen was in breach of the Management Agreement, but these ultimately expressed themselves in two forms: a failure to make regular payments to Protea in respect of rental and maintenance reserves; and a failure to take proper steps to maintain the aircraft. Two main allegations lie at the heart of the case in relation to payments, namely, that Mr. Stickney failed to arrange for the amounts due to Protea to be paid out of the cash reserves maintained by RAC throughout the period in question, and that he allowed funds that could have been used to pay Protea to be used to pay MAS instead. Although he identified these as separate breaches of the Management Agreement, they are closely related, being little more than different aspects of a failure to make payments to Protea when funds were available for the purpose.

[138]Throughout the period between July 1997 and April 1999 RAC maintained a certain level of funds available to be drawn on immediately, in effect a cash balance in hand. At the beginning of the period it stood at about US$8 million; by April 1999 it had shrunk to about US$4 million. Mr. Stickney said that he thought it necessary to keep a minimum balance of about US$4 million available in order to see RAC through difficult times. That was based on normal monthly operating costs of about US$1.2 million and a further US$2-3 million to cover old debts that might have to be paid urgently. The amount owing to Protea in April 1999 in respect of rental was about US$1.63 million, so it is clear that there were always sufficient cash reserves to allow RAC to clear that debt if the decision had been made to do so. Mr. Milligan submitted that it was in the best interests of RAC to pay Protea in order to avoid repossession of the three ATRs and that Mr. Stickney failed to act in the best interests of RAC in insisting on keeping cash in the bank, or, perhaps, in failing to instigate payments to Protea using the funds available.

[139]This submission serves to highlight some of the difficulties raised by Protea's case generally. Between August 1997 and February 1999 RAC was operating one Boeing under a wet lease from MAS and three ATRs leased from Protea, though from quite early in 1998 it had been pressing Protea to take back one, and later two, of the ATRs. All the leases contained provisions entitling the lessor to terminate the contract if rent was not paid promptly, so it was obvious to all concerned that if RAC failed to keep up the payments relating to any of the aircraft there was, at least in theory, a risk that they would be repossessed. However, neither Protea nor MAS was treating RAC as a purely commercial partner. In both cases, but particularly in the case of MAS, considerations of a political nature came into play. From early 1998 there were negotiations between RAC and Protea to which I have already referred in relation to outstanding rental and the return of aircraft and it is clear from the exchanges between them that Protea would not exercise its rights of repossession unless forced to do so. Both sides wanted to find a satisfactory solution and I accept the evidence of both Mr. Stickney and Mr. Sen that their minds were not directed to the risks of repossession as much as to the prospects of achieving a negotiated return of the aircraft. The risk of repossession by Protea was real, therefore, only in the sense that it existed and might become a reality if negotiations irrevocably broke down, as of course, they eventually did. The risk that MAS might repossess the Boeing was considered to be even more remote. Such a step would almost certainly have led to the rapid collapse of RAC because the operation of one jet aircraft was seen as essential to its commercial survival. Throughout the period in question Naluri and MAS were under political pressure to continue their support of RAC and would have found it difficult to justify repossession of the Boeing.

[140]The primary wish of the directors and shareholders of RAC was for the company to continue trading for as long as possible and there is nothing to suggest that Cambodian law prevented its doing so, despite the fact that it was insolvent. It could only survive, however, if it made judicious use of its available funds to placate its most demanding creditors. The interests of RAC and its shareholders must be judged with these considerations in mind. Put another way, it is difficult to see how RAC could complain that MAS was in breach of clause 9 by acting in a way that promoted the company's and the shareholders' primary objective. Mr. Milligan submitted that the interests of RAC were best served by paying Protea in order to remove the risk of repossession of the ATRs, but that is to look at the matter too simply. If RAC was to continue in business its interests were best served by conserving its resources and keeping at bay for as long as possible those creditors who were willing to be patient. The fact is that throughout 1997 and 1998 Protea did not treat RAC's failure to meet its obligations as grounds for repossessing the aircraft and by the time aircraft Nos 204 and 207 were repossessed in early 1999 RAC had already decided not to make any further use of them. I find it difficult, therefore, to accept that any failure on the part of Mr. Stickney to process payments to Protea using the modest cash balance in hand involved a significant failure to act in the best interests of RAC.

[141]The argument presupposes, however, that Mr. Stickney was effectively in a position to decide whether payments should be made to Protea and that if he had prepared the paperwork Mr. Pan Chantra would have signed the bank transfers. With monthly rental payments running at US$398,000 and US$500,000 respectively, Protea and MAS were RAC's two largest current creditors and RAC owed a very large amount to MAS in respect of old debt. Mr. Stickney said that he did not make the decision to pay either Protea or MAS and that it was entirely a matter for Mr. Pan Chantra, but in saying that I have no doubt he was minimising his role in the matter. Mr. Pan Chantra certainly did take an active interest in the business and in the conditions facing RAC and I do not think that he would simply have rubber stamped payments of that magnitude. He would certainly have wanted confirmation from Mr. Stickney that RAC had sufficient funds available and could afford to make the transfer. However, if Mr. Stickney had supported a payment on reasonable grounds, I think it quite likely that Mr. Pan Chantra would have accepted his advice and that it would have been made.

[142]Mr. Milligan submitted that throughout this period Mr. Stickney sought to, and did, serve the interests of MAS by doing what he could to ensure that it received payment in preference to Protea. Mr. Stickney's response to the disciplinary proceedings does at first sight provide some support for this conclusion. At one point he even used the words "I gave preference to Malaysian Airlines' accounts" and later said that he "always acted in the best interests of Malaysian Airlines", but these remarks have to be read in context and in the light of the circumstances in which the letter was written. His reference to preferring MAS accounts, for example, appears in the context of creating new accounting systems in the early months of his secondment before the coup and to his decision to start with accounts due to MAS. It does not mean that he systematically preferred the interests of MAS to those of RAC or other creditors at a later stage in events. His remark that he "always acted in the best interests of Malaysian Airlines" comes right at the end of the letter and clearly forms part of a general plea. Again, I do not think it can properly be taken as an admission that he systematically promoted the interests of MAS over those of RAC. It is necessary, therefore, to look at the circumstances of individual payments on which Mr. Milligan relied to see whether Mr. Stickney did in fact act in a manner contrary to the best interests of RAC.

[143]Mr. van Aelst and Mr. Freixes had a number of meetings with Mr. Pan Chantra in Phnom Penh in the first half of February 1998 in the course of which Mr. Pan Chantra told them that the first (i.e. December) payment of US$405,166 due under the Settlement Agreement would be made on 16 th February and the second 15 days later. The December payment was actually made on 24 th February.

[144]As I mentioned earlier, on 25 th February Mr. Pan Chantra and Mr. Stickney met representatives of ATR including Mr. Freixes at the Singapore air show. It was common ground that there had been a meeting between the two sides followed by lunch at the ATR chalet, but otherwise the accounts of the day given by Mr. Freixes and Mr. Stickney differed widely. Mr. Stickney said that he had been put in an embarrassing position at the meeting before lunch when Mr. Gavin of ATR had asked Mr. Pan Chantra when the next payment would be made to Protea. Mr Freixes, however, did not recall any incident of that kind. Mr. Freixes said that in conversation over lunch Mr. Stickney had warned him that when he paid his next visit to Phnom Penh he would have a gun. He said that the remark was made in a threatening way. Mr. Stickney, on the other hand, denied that there had been any such conversation and said that he could not remember speaking to Mr. Freixes at all.

[145]The exchanges that took place at the air show have little direct relevance to the issues although they have some bearing on the credibility of those involved. I have no doubt that Mr. Freixes was giving me a true account of the day as he remembered it and that Mr. Stickney did make some remark about having a gun when Mr. Freixes next came to Phnom Penh. He had been told to obtain one and did have one in his office when Mr. Freixes made his next visit with Mr. Clarenc in April. However, I doubt whether Mr. Stickney really did intend to threaten Mr. Freixes. Mr. Freixes said that he later asked Mr. Pan Chantra whether Mr. Stickney was serious and it seems to me to be far more likely that Mr. Stickney simply made a reference to having a gun in rather general terms which left Mr. Freixes unsure of his meaning. At all events, I do not think that a great deal of significance can be attached to that particular episode.

[146]Shortly after, on 6 th March 1998, Mr. Suppiah paid a visit to Phnom Penh for discussions with Mr. Pan Chantra, Mr. Sen, Mr. Richer San and Mr. Stickney. One of the matters he raised was the outstanding debt to MAS. He had been pressing since January for US$500,000 to be paid each month to keep up with current liabilities and for additional payments to reduce the outstanding debt. In the typewritten agenda that he had prepared for himself in advance Mr. Suppiah had included a reference to the money owed to MAS. He wanted to know, among other things, what was holding up payment and what MAS needed to do to get things moving. Against that part of the agenda he wrote "Spoken and will arrange for payment USD 200,000 13/3/98". On 13 th March Mr. Suppiah sent a telex to Mr. Lee of the finance department in Kuala Lumpur telling him that "James [Stickney] will arrange payment of USD200,000 by 13 th March 1998". On the basis of that telex Mr. Milligan suggested to Mr. Suppiah that the note he had made on his agenda reflected an agreement he had made with Mr. Stickney in the absence of Mr. Pan Chantra, but Mr. Suppiah denied that that was the case and insisted that it was something he had discussed directly with Mr. Pan Chantra.

[147]I am sure that Mr. Stickney did say that he would arrange payment of that amount since that was part of his job, but I see no reason to think that he did so without reference to Mr. Pan Chantra who would have had to approve it in any event. The amount owing by RAC to MAS at that time was US$18.9 million. I cannot imagine that Mr. Suppiah failed to raise the matter with Mr. Pan Chantra or that he failed to ask him for a payment on account. If he had avoided giving any undertaking, I think that would have been noted by Mr. Suppiah and it is difficult to see how in those circumstances Mr. Stickney could have made effective arrangements for a payment to be made. I accept Mr. Suppiah's evidence on this point and am satisfied that he did discuss the matter with Mr. Pan Chantra who authorised the payment. It was eventually made on 30 th March.

[148]On 17 th March 1998 Mr. Freixes spoke by telephone to Mr. Pan Chantra who promised to pay Protea US$200,000 within two days and a further US$400,000 by the end of the month. In fact US$200,000 was paid on 24 th March in respect of the instalment due on 18 th January, as can be seen from the amended bank payment voucher. Insofar as it may be said that part of the money available to pay Protea was paid to MAS, I am satisfied that that was done on the authority of Mr. Pan Chantra and not as a result of a decision taken by Mr. Stickney.

[149]In April 1998 Mr. Freixes and Mr. Clarenc visited Phnom Penh. The purpose of their visit was twofold: to introduce Mr. Clarenc to RAC as the replacement for Mr. Freixes and to see where they stood with RAC in the light of the fact that its debt to Protea was steadily growing. Their first meeting was with Mr. Stickney and Mr. Richer San who explained RAC's financial difficulties and asked for continued support in the form of allowing RAC to pay by dribs and drabs. For their part Mr. Freixes and Mr. Clarenc demanded that RAC should pay US$600,000 immediately and a further US$600,000 before 18 th May.

[150]The report of these meetings prepared by Mr. Clarenc indicates that he and Mr. Freixes came away with the clear impression that RAC was not favourably disposed to Protea and not anxious to pay off the outstanding debt, although they recognised that it was in no position to do so in any event. They were critical of RAC's management generally and particularly of the way in which Mr. Pan Chantra quickly passed them over to Mr. Stickney instead of dealing with their complaints himself. However, they did ultimately receive what they regarded as reasonably satisfactory assurances from Mr. Pan Chantra that RAC would pay Protea US$1.2 million in two instalments of US$600,000 each. The first instalment was in fact paid in two tranches on 30 th April and 6 th May.

[151]It was during one of these meetings that the matter of the gun arose for the second time. According to Mr. Clarenc, Mr. Stickney referred to the conversation he had had with Mr. Freixes in Singapore and produced a gun from his desk drawer saying that Cambodia was a crazy country and that he had better be ready. Mr. Freixes recalled the incident in a slightly different way. He said that Mr. Stickney put the gun on his desk and said "Now I also have the bullets", and placed a bullet on the desk beside it. Mr. Freixes and Mr. Clarenc were both credible witnesses whose honesty and general reliability was not challenged, but in any case Mr. Stickney did not deny that he kept a gun in his desk or that he had shown it to Mr. Freixes on the occasion in question. Both Mr. Clarenc and Mr. Freixes regarded his behaviour as somewhat menacing, as if he were saying "Mind out. This is a dangerous place and you had better watch out", although Mr. Clarenc accepted that it could have been just an act of bravado on Mr. Stickney's part. Mr. Stickney sought to play down this incident, saying that he was rather frightened of guns in general and had shown it to Mr. Freixes alone in a discreet way. However, in the light of the other evidence I am unable to accept that. He may have acted out of bravado, but I accept the substance of what Mr. Freixes and Mr Clarenc said and I also accept that they found Mr. Stickney's behaviour disturbing.

[152]The second payment to Protea was due on 18 th May but was not made. Given that in his report of the meetings in April Mr. Clarenc had described Mr. Pan Chantra's assurance as firmer in respect of the first payment than the second, that is perhaps not surprising. On 26 th May Mr. Pan Chantra told Mr. Clarenc on the telephone that the payment would be made on 28 th May, but again nothing was forthcoming. Finally, however, on 15 th June RAC made a payment of US$255,511 which represented the sum of US$405,166 due under the Settlement Agreement for the period 18 th March to 17 th April after deducting a sum of US$149,655 claimed by RAC in respect of maintenance.

[153]Mr. Milligan argued that RAC's failure to transfer US$600,000 to Protea in May 1998 was due to a deliberate failure on Mr. Stickney's part to comply with instructions he had received from Mr. Pan Chantra. The difficulty, however, is to know whether he was given any clear instructions of that kind. If the assurance that Mr. Freixes and Mr. Clarenc received in relation to the second payment was less clear than that relating to the first, one is entitled to wonder whether Mr. Stickney was given any definite instructions at that stage in relation to the second payment. But that is really beside the point. Mr. Clarenc made it quite clear to Mr. Pan Chantra on 26 th May that the second payment had not been made. If Mr. Pan Chantra had been sincere in his intention to make that payment by 28 th May, or indeed at all, he could have given clear instructions to that effect to Mr. Stickney, or he could have given instructions direct to the finance department to generate the necessary paperwork. There is no evidence, however, that he did either. On 9 th June Mr. Clarenc sent a fax to Mr. Pan Chantra reminding him that the payment was still outstanding, but again there is nothing to suggest that he took any steps to ensure that it was made.

[154]Mr. Milligan pointed to the fact that RAC paid a further sum of US$200,000 to MAS on 11 th June and suggested that that money could have been used to pay the balance necessary to bring the sum paid to Protea on 15 th June up to US$600,000. As a matter of arithmetic that is correct, but it does not follow that the decision to allocate funds in that way lay with Mr. Stickney. This particular payment had been promised to Mr. Suppiah at a meeting in April and the paperwork had been drawn up a few days later. It had been held up in the finance department, however, and had not sent to Mr. Pan Chantra for signature until the latter part of May. Although RAC was hard-pressed, I do not think that a sum of US$200,000 was critical at that stage. Given the uncertainty surrounding this matter I do not think that there is a sufficient basis for finding that RAC's failure to make the second payment was caused by Mr. Stickney's disobedience to instructions given him by Mr. Pan Chantra.

[155]Mr. Clarenc paid a second visit to Phnom Penh during the week beginning 21 st June 1998 with the specific intention of finding a solution to the problem of RAC's mounting debt to Protea. On Monday 22 nd June he had a brief and rather unsatisfactory meeting with Mr. Pan Chantra; a further meeting with Mr. Pan Chantra fixed for the next day was cancelled at the last minute. On Wednesday 24 th June he met Mr. Stickney and Mr. Richer San, but their discussions did not make much progress beyond agreeing that the total amount outstanding had risen to about US$3.3 million.

[156]Mr. Clarenc was so frustrated at the apparent unwillingness of RAC to take the problem seriously that later that day he wrote the letter of complaint to which I referred earlier which he sent by fax to Mr. Pan Chantra. In it he referred to a proposal put forward by Mr. Stickney to the effect that there should be a complete deferral of further payments and that one of the ATRs should be returned without penalty. Mr. Stickney denied making that suggestion, but when Mr. Clarenc wrote his letter he must have had a clear recollection of what had been said only a few hours earlier and I accept that what he said is correct.

[157]It is apparent that relations between Mr. Stickney and Mr. Clarenc were not very cordial. According to Mr. Clarenc, in the course of the meeting on 24 th June Mr. Stickney showed him a newspaper article referring to the murder of an Australian businessman who had been found dead at the hotel in which Mr. Clarenc was staying. The implication was that Phnom Penh was a dangerous place and that he had better take care not to press RAC too hard. Mr. Clarenc said that he had found Mr. Stickney's behaviour offensive. When the meeting ended he went to the French Embassy where he met the commercial attaché to whom he complained about the approach being taken by RAC. The embassy advised him to change his hotel and as a result he moved into a new hotel that evening.

[158]Mr. Stickney admitted that he knew about the newspaper article in question, but he denied that he had shown it to Mr. Clarenc. On that point, at any rate, there is no room for misunderstanding and I unhesitatingly prefer Mr. Clarenc's evidence to that of Mr. Stickney. The newspaper article clearly existed – that much was common ground – and there was no other explanation of how Mr. Clarenc came to know about it. It is an unlikely story to make up, but most importantly, there is unchallenged evidence that Mr. Clarenc changed his hotel later that day after visiting the embassy. He said that was done on the embassy's advice and no other reason was suggested. Mr. Clarenc did not mention this particular aspect of the meeting in his report to ATR and his witness statement suggested that the main reason for his visit to the embassy that afternoon was his frustration at RAC's failure to take the problem of its mounting debt more seriously. I think it likely that he took the incident involving the newspaper article more seriously after talking to the embassy, but the very fact that it had occurred at all casts Mr. Stickney in a poor light.

[159]The next day Mr. Clarenc had a meeting with Mr. Pan Chantra, the upshot of which was that Mr. Pan Chantra agreed to a structured settlement of RAC's outstanding debt by making a payment of US$1 million on 1 st July and the balance in equal instalments over the following 12 months. These payments were to be in addition to the regular payments that had to be made to Protea under the leases. Whether Mr. Pan Chantra thought that RAC could keep to this arrangement is open to doubt, but he did give Mr. Stickney instructions to make the first payment to Protea of US$1 million. That met with strong opposition from Mr. Stickney, mainly because he was concerned about the adverse effect on RAC's cash balances. Although he was unwilling to admit it in cross-examination, he advised Mr. Pan Chantra against making the payment, but Mr. Pan Chantra threatened to terminate his employment with RAC if he did not comply and so the payment was made in two instalments, one on 3 rd and one on 6 th July. Mr. Sen also advised Mr. Pan Chantra against making this payment, partly because he was worried about its effect on RAC's cash position and partly because he thought it was unfair to pay such a large sum to Protea when RAC owed MAS a far larger amount. In raising these objections I think that Mr. Sen may have been motivated to some extent by his loyalty to MAS, but not to the extent that he was actively seeking to retain funds in order that they could be used to settle RAC's liability to MAS.

[160]In the event neither Mr. Stickney nor Mr. Sen was able to persuade Mr. Pan Chantra not to make the payment to Protea. At best, therefore, all that emerges from this episode is some confirmation that Mr. Stickney and Mr. Sen were averse to making substantial payments to Protea and that Mr. Pan Chantra was quite capable of imposing his will on them both when he so wished.

[161]During the summer and autumn of 1998 there were negotiations between RAC and MAS for an extension to the lease on the Boeing which was originally due to expire on 14 th June. Mr. Pan Chantra and Mr. Sen took it for granted that MAS would extend the lease if asked to do so, but it did not prove to be quite as simple as that. Mr. Pan Chantra and Mr. Sen were seeking an extension of the lease for a year, but when they attended a meeting on 12 th June with Mr. Suppiah and Mr. Harun in Kuala Lumpur MAS was only willing to grant an extension for three months while RAC prepared a business plan for submission to the board of MAS confirming its ability to pay rental at the rate of US$500,000 a month in the future.

[162]On 2 nd September Mr. Sen wrote to MAS enclosing a business plan and cash flow projection and asking for an extension of the lease for a further 3 years from 14 th September. Since the current term was about to expire MAS granted a further extension of 2 months while it examined RAC's material. The Board Audit Committee of MAS was not very impressed and recommended that MAS should not incur any further losses in connection with RAC and should not agree to renew the lease. A further meeting between RAC and MAS was arranged for 15 th October in Kuala Lumpur to discuss the matter. Mr. Suppiah, who had been present at the meeting of the Board Audit Committee, warned Mr. Stickney that there were difficulties ahead and advised him to bring some proposals to the meeting. As a result, on 14 th October Mr. Sen sent a fax to MAS setting out RAC's position and offering to pay rent of US$500,000 each month and US$250,000 a month towards the old debt.

[163]The meeting which was attended by Mr. Sen and Mr. Stickney for RAC and Mr. Suppiah and Mr. Harun for MAS duly took place on 15 th October. Following the meeting someone in the Enterprise Resource Group, the department at MAS responsible for leasing aircraft, produced a memorandum describing the latest developments in the negotiations. That document records that at the meeting RAC, having been told that the board was not willing to renew the lease, asked MAS to reconsider its decision and indicated that it was prepared to make an immediate payment of US$1 million against the old debt if MAS would agree to renew the lease. Mr. Sen denied that any mention had been made at the meeting of a payment of US$1 million but Mr. Stickney did recall it, although he said that he played a very minor role in the meeting. Mr. Suppiah, who was the only other person who attended the meeting to give evidence, said that RAC was already two months behind with rental on the Boeing and had agreed to pay off those arrears (totalling US$1 million) immediately if the lease were renewed. I am satisfied, despite Mr. Sen's denial, that a prompt payment of that kind was discussed at the meeting and was agreed to in principle

[164]Mr. Milligan sought to argue that Mr. Sen failed to act in the best interests of RAC at that meeting because he did not put pressure on MAS to agree to an extension of the lease without any immediate payment. Had he done so, it was said, MAS could not have insisted on the payment since there were strong political considerations that prevented it from withdrawing the aircraft from RAC's service. When Protea applied at the beginning of the trial for permission to amend its case this was one of the allegations it sought to introduce. However, I refused permission to make the necessary amendment because I was not satisfied that MAS would have a fair opportunity to deal with the matter at such a late stage. It is therefore not open to Protea to pursue that argument now.

[165]On 17 th and 18 th December 1998 Mr. Suppiah paid a brief visit to Phnom Penh. He said in his witness statement that it was the only occasion on which he had gone there for the sole purpose of asking RAC to make an immediate payment and had done so because MAS was then in some financial difficulty. He was hoping to obtain an immediate payment of US$1 million. Although Mr. Suppiah denied that the visit had been planned well in advance, it was certainly already in his mind on 4 th December as can be seen from telex messages passing between him and Mr. Stickney that day. Nor does it appear that obtaining a payment on account from RAC was the sole purpose of the visit, at least as originally intended, since on 14 th December Mr. Suppiah sent a telex to Mr. Stickney setting out a list of five things he wanted to discuss with "you, Adrian [Sen] and if possible Pan Chantra". One of those was the outstanding amount due to MAS, but the rest were all of a fairly routine nature. He finished by asking Mr. Stickney to let him know if there were any other matters he wished to include in the agenda. Nothing in that telex suggests that Mr. Suppiah was going to ask for an immediate payment of US$1 million and, as Mr. Milligan observed, if that was his intention, it is surprising that he did not regard a meeting with Mr. Pan Chantra as essential. I do not think that Mr. Suppiah ever thought that Mr. Stickney and Mr. Sen could make a payment of that amount without Mr. Pan Chantra's authority.

[166]The accounts given by Mr. Stickney, Mr. Sen and Mr. Suppiah of the circumstances surrounding Mr. Suppiah's arrival in Phnom Penh on 17 th December and his meeting with Mr. Pan Chantra, if they are to be believed, suggest that whatever may originally have been planned, there was something impromptu about the visit when it actually occurred. I was told that Mr. Suppiah arrived in Phnom Penh during the evening of 17 th December and was met at the airport by Mr. Stickney. In the car Mr. Stickney called Mr. Sen on his mobile telephone to find out where he and Mr. Pan Chantra were. They were in the lobby of the Intercontinental Hotel entertaining guests. Mr. Stickney took Mr. Suppiah to his hotel to check in and leave his luggage and then they went to find Mr. Pan Chantra and Mr. Sen. When they reached the Intercontinental Mr. Stickney called Mr. Sen who brought Mr. Pan Chantra over to meet Mr. Suppiah. Almost without any formalities Mr. Suppiah asked Mr. Pan Chantra for assistance by arranging for an immediate payment of US$1 million. Mr. Sen warned that funds were very tight, but Mr. Pan Chantra said he wanted to assist Mr. Suppiah and agreed to make the payment. Mr. Stickney took no part in the conversation. Mr. Pan Chantra then introduced Mr. Suppiah to his guests, they had a beer together, and Mr. Stickney took Mr. Suppiah back to his hotel. Mr. Suppiah said that he had had to leave Phnom Penh next day by the morning flight and had not gone to Mr. Stickney's office first. Mr. Stickney recalled that he had gone to the office where they had discussed various aspects of the business. At all events, at about 8:50 a.m. local time Mr. Stickney sent a telex to MAS confirming that RAC would make a payment of US$1 million that day. The payment was in fact made on 23 rd December.

[167]Mr. Milligan submitted that the whole story was incredible. He drew attention to various discrepancies between the accounts given by the witnesses and relied on what he submitted was the inherent implausibility of the suggestion that a request for a payment of that kind would have been made in that way, or, if made, would have been acceded to by Mr. Pan Chantra without any apparent reluctance. RAC had paid US$550,000 to MAS only a fortnight before and US$874,000 to Protea three days earlier, so on 17 th December funds must have been particularly tight.

[168]Although Mr. Milligan criticised the evidence of Mr. Suppiah, Mr. Stickney and Mr. Sen, the discrepancies between them seem to me to be no greater than might be expected under the circumstances and not so significant in themselves as to undermine the general substance of the accounts they gave. The only other possibility is that the witnesses had concocted a false account among themselves, but Mr. Milligan did not suggest that and indeed it was common ground that Mr. Suppiah had flown to Phnom Penh on 17 th December and returned to Kuala Lumpur on 18 th December. It was Protea's case that Mr. Stickney had persuaded Mr. Pan Chantra to agree to the payment, not surprisingly, perhaps, since in his letter responding to the disciplinary proceedings he claimed as much.

[169]There is no evidence of any kind to suggest that Mr. Suppiah had a more formal meeting with Mr. Pan Chantra either on 17 th or 18 th December than that described by the witnesses and within an hour or so of starting work on 18 th December Mr. Stickney was sending his telex to MAS confirming that the payment would be made. The suggestion is that Mr. Suppiah had asked Mr. Stickney for his support, probably the previous day, and that Mr. Stickney had spoken to Mr. Pan Chantra first thing that morning. It seems unlikely, however, that Mr. Suppiah would not have spoken to Mr. Pan Chantra himself about a matter of that kind or that Mr. Pan Chantra would have agreed to a payment of that size, knowing that Mr. Suppiah was in Phnom Penh, simply at the request of Mr. Stickney. I think what happened was that a visit that had been planned a fortnight earlier for essentially routine business purposes became at the last minute an exercise in calling in some funds from a substantial debtor with whom Mr. Suppiah could hope to exercise particular influence. Despite the many curious aspects of the story, I think it likely that the events of 17 th -18 th December did unfold broadly in the manner described by the witnesses. I accept that neither Mr. Sen nor Mr. Stickney sought to dissuade Mr. Pan Chantra from acceding to Mr. Suppiah's request and if anything supported it, though I think that Mr. Stickney's suggestion that he was responsible for persuading Mr. Pan Chantra to sign the cheque may overstate his contribution. I also accept that no mention was made at that time of repossessing the Boeing in order to put pressure on RAC.

[170]Mr. Milligan submitted that it was not in the interests of RAC to pay US$1 million to MAS at that time and that if the payment had not been made, the money would probably have been used to pay Protea instead. Given the limited financial resources available to RAC I do not think that it was in its interests to pay such a large sum to MAS if that could be avoided, as I think it could. However, had the payment not been made, I think it very unlikely that the funds would have been paid to Protea. In November ATR had agreed to take back two aircraft and by early December arrangements for inspection and delivery were already well in hand. However, the government had begun to interest itself in the problem and shortly afterwards intervened to prevent any redelivery taking place. It was the failure of the government to stand behind RAC at that critical point that as much as anything else prompted Protea to terminate the leases. I think it unlikely in those circumstances that RAC would have made any further substantial payment to Protea at that time, even if no payment had been made to MAS.

[171]On 24 th February 1999 Mr. Pan Chantra sent a memorandum to Mr. Stickney instructing him to pay US$250,000 to Protea immediately. This instruction, as the memorandum itself makes clear, was intended to give effect to RAC's agreement at a meeting with Protea and Cambodian government officials in December 1998 to pay off its outstanding debt in monthly instalments over a period of two years. In that memorandum Mr. Pan Chantra expressed the view that it was most critical at that moment for RAC to keep its promise to ATR. Nonetheless, the payment was not made. Mr. Milligan submitted that failing to make the payment was not in the best interests of RAC because it was liable to, and ultimately did, lead to the termination of the lease on aircraft No. 108. (Protea had already given notice to terminate the leases of aircraft Nos 204 and 207 on 12 th February.)

[172]It was unusual for Mr. Pan Chantra to deal with a matter of this kind by way of formal memorandum and the way in which the document is written suggests that it may have been intended to serve purposes other than merely communicating instructions to Mr. Stickney. Be that as it may, there is no evidence that Mr. Pan Chantra did not intend Mr. Stickney to act on it. Why the payment was not made is not clear. Mr. Stickney was in correspondence with ATR over the outstanding debt and on 11 th March wrote to Mr. Desbarats with detailed proposals for repayment over the following two years. It seems likely that he did not think it a good idea to make a payment to Protea in the meantime, but whether Mr. Pan Chantra knew that his instructions had not been carried out is unclear. I find it difficult to accept, however, that the failure to make this payment was itself a significant cause of Protea's decision to terminate the lease on the third aircraft.

[173]In relation to these various payments Mr. Milligan submitted that Mr. Stickney was hostile to Protea, that he and Mr. Sen exercised a high degree of influence over Mr. Pan Chantra and that they used their influence systematically to prefer the interests of MAS to those of Protea. Had they acted in the best interests of Protea, as required by the Management Agreement, the various amounts paid to MAS between July 1997 and April 1999 would have been used to pay Protea.

[174]I accept that during 1998 there was an increasing degree of antipathy between Mr. Stickney and those with whom he dealt at ATR. There were many reasons for that. Mr. Stickney was finding his task at RAC increasingly difficult as RAC's fortunes failed to recover following the coup and the company came under pressure from all sides. He resented the continuous pressure from Protea and what he saw as its unwillingness to recognise RAC's difficulties. He did not like working in Phnom Penh which he found an intimidating place and did not think that Mr. Freixes and Mr. Clarenc were sufficiently understanding of the problems he faced. That probably accounts in part for the incidents involving the gun and the newspaper article. For their part Mr. Freixes, Mr. Clarenc and Mr. Desbarats were frustrated by RAC's unreliability, its apparent unwillingness to stick to any agreement and the difficulty of conducting serious negotiations with Mr. Pan Chantra. Having said that, I do not think that Mr. Stickney systematically manipulated the payment procedures to ensure that MAS received payment instead of Protea. Rightly or wrongly, his main concern was to keep RAC in business and to maintain its cash balance at a level which he considered necessary for that purposes. To achieve that he was willing to withhold payment wherever he could.

[175]I do not accept that either Mr. Stickney or Mr. Sen exercised the degree of influence over Mr. Pan Chantra suggested by Mr. Milligan. I have no doubt that he relied on them for advice and that he would listen to what they had to say before making a decision, but the evidence does not support the conclusion that they were able to manipulate him so as to exercise effective control over the company. Although Mr. Stickney was responsible for generating the paperwork that resulted in payments to the company's creditors, including MAS and Protea, he did not effectively exercise sole control over the disbursement of funds, especially where larger sums were involved. Mr. Pan Chantra exercised an independent judgment and would, if necessary, take robust measures to override Mr. Stickney if he thought it necessary.

[176]Between July 1997 and April 1999 RAC made cash payments to MAS totalling a little over US$5 million. Although MAS was able take advantage of the set-off arrangements, it is unrealistic to suggest that RAC should have made no cash payments of any kind to MAS. Although there were considerable political pressures on MAS to continue its support of RAC, I doubt whether it would have been willing to accept an increase of US$5 million in its existing debt. It is true, however, that insofar as funds were not used to pay MAS they would have been available to pay Protea and since Protea was the only other creditor of any real size it is likely that at least some of its debt would have been paid. (iv) Conflict of interest

[177]Mr. Milligan submitted that MAS was faced with a conflict of interest as both manager and creditor of RAC and that any decision on the part of Mr. Stickney to make a payment to MAS without obtaining the informed consent of RAC would involve a breach of its obligation to manage the business in the best interests of RAC and thus a "fault" under Cambodian law. I doubt very much whether putting the case in that way adds anything, as Mr. Milligan was himself inclined to accept. There was no evidence concerning the approach of Cambodian law to conflicts of interest in a situation of the kind under consideration, but it must be doubtful whether it corresponds at all closely to that of English law. However, I do not think that matters. I have no doubt that Mr. Pan Chantra was well aware of the financial and commercial pressures under which RAC was operating and was only too well aware of the relationship between MAS and RAC. It would have been superfluous for Mr. Stickney to have drawn his attention specifically to matters of that kind every time he processed a payment to MAS. (iv) Failure to Maintain the aircraft

[178]Under each of the ATR leases RAC was obliged to service the aircraft, keep it in good repair and operating condition and maintain its technical documentation. Furthermore, by clause 3.1(h) of the Management Agreement one of the services to be provided by MAS was the maintenance "in excellent condition and full working order" of the assets of RAC. Mr. Milligan submitted that following the coup Mr. Stickney had decided to restrict spending on maintenance with the result that RAC failed to maintain the aircraft in the condition required by the leases. That involved both a breach of the maintenance obligation in clause 3.1(h) of the Management Agreement and a failure on the part of MAS to manage the business in the best interests of RAC.

[179]There is evidence from a variety of sources that the ATRs were not generally as well maintained as they should have been. For example, in September 1998 an employee of Bangkok Airways, Mr. Marc Kirner, inspected aircraft No. 204 at Phnom Penh. Despite the fact that its certificate of airworthiness had been renewed only a few months earlier, he identified a number of defects which in his view could not properly be deferred and ought to have been remedied immediately. Moreover, when they were repossessed by Protea all three aircraft required a fair amount of maintenance and repairs.

[180]According to Mr. Stickney, the only reliable records of expenditure on maintenance are those to be found in RAC's annual accounts. These show that US$2.94 million was spent on maintenance in 1997 as against US$1.88 million in 1998. The only other financial records available were cash flow projections and cash flow statements. A comparison of the figures for the first five months of 1998 shows that in each case actual expenditure on maintenance fell a long way short of the projections and a similar picture emerges in relation to the second half of 1998. Mr. Stickney said that the figures for maintenance in the cash flow projections were not based on estimates from the maintenance department but had been produced in the finance department on the basis of "feel" or "hunch". One might well question the utility of that, but however they were produced the figures were clearly not calculated individually. Finally, one can draw a comparison between the expenditure on maintenance of US$1.8 million in 1998 when three ATRs were operating and the expenditure of almost US$840,000 in 1999 when only one was operating. All these figures indicate that for one reason or another there was a significant reduction in expenditure on maintenance in 1998.

[181]Whether that reduction was due, as Mr. Milligan submitted, to skimping on maintenance is less clear. Mr. Stickney agreed that he had taken steps to cut costs in the latter part of 1997 and 1998 by reducing what ATR itself accepted was RAC's excessive stock of spares, but he was adamant that that exercise had been carried out in close co-operation with Mr. Sandford and had not involved reducing the level of spares below that required by the maintenance department. Until November 1998 all three ATRs retained their certificates of airworthiness which suggests that there had been an adequate level of basic maintenance throughout the period leading up to their redelivery. According to Mr. Stickney, spares were ordered by Mr. Sandford from the supplier without prior reference to the finance department. Even accepting that evidence at face value, however, I find it difficult to believe that there was not a good deal of discussion between Mr. Sandford, Mr. Sen and Mr. Stickney about such matters in view of RAC's financial difficulties.

[182]It is true to say that those who inspected the aircraft following redelivery were critical of their condition in many respects. However, that of itself does not really take the matter much farther. Two of the aircraft were due for their 8-year checks and it would not be unusual for non-urgent maintenance items to be deferred to that occasion. Quite apart from that, however, it was not possible for the experts to say what had led to the defects which they identified. In the end the evidence just is not strong enough to establish that deficiencies in maintenance were the result of insufficient funds being made available for the purchase of essential spare parts and accordingly there is no basis for laying the blame for those deficiencies at the door of Mr. Stickney.

[183]Mr. Milligan's submission that the decision not to carry out the 8-year checks on aircraft Nos 204 and 207 involved breaches of the Management Agreement gives rise to rather different questions. The 8-year check is a major structural inspection which can be expensive. In the middle of 1998 RAC was confronted with the need for aircraft Nos 204 and 207 to undergo such checks before the end of the year. According to Mr. Sen, Mr. Sandford had said that they could cost as much as US$1.75 million for each aircraft. None of the expert witnesses considered that an 8-year check on an ATR 72 should cost anything like that amount, but that is what Mr. Sen said he was told and that is the figure on which he said he based his subsequent decisions.

[184]Mr. Sen decided that RAC could not afford to carry out the 8-year checks having regard to its overall financial condition and the profitability of the routes on which the ATRs were employed. By July when he became aware of the need to carry out these checks RAC was already in negotiations with Protea for the return of one aircraft and he accepted that if RAC was unwilling or unable to pay for the 8-year check on the other, it too would have to be returned to Protea.

[185]Mr. Milligan submitted that the decision not to fund the two 8-year checks was itself a clear breach of clause 3.1(h) of the Management Agreement on the part of MAS and not one that was in the best interests of RAC because the cost would have to be incurred, whether as a consequence of keeping the aircraft in operation or allowing it to be repossessed. However, despite its unqualified wording, I do not think that clause 3.1(h) can be construed as imposing an absolute obligation on MAS to maintain RAC's physical assets in excellent condition without regard to its commercial needs. For example, I do not think it would necessarily require money to be spent on maintaining equipment which RAC intended to dispose of. I doubt very much, therefore, whether in the present case clause 3.1(h) adds anything to the general obligation to manage the business in the best interests of RAC.

[186]I have little doubt that from as early as July 1998 RAC was coming to terms with the fact that it would not be able to operate two ATRs during the winter period. Planning of the winter schedules started in July and it was at about that time that Mr. Sandford warned Mr. Sen of the need to carry out the 8-year checks and their likely cost. It was obvious to Mr. Sen that RAC would almost certainly not be able to pay for the checks without digging deep into its cash reserves (which of course it was unwilling to do) and that the two aircraft would be unavailable for service after the end of the year. Following the meeting between Mr. Stickney and Mr. Desbarats in Toulouse in August 1998 at which ATR agreed to take back one aircraft RAC decided to press for the return of a second and the decision to operate the winter schedule with only one ATR was taken before there had been time to reach any agreement to that effect.

[187]Whether the decision not to undertake the 8-year checks and to return both aircraft to Protea was contrary to the best interests of RAC and its shareholders raises once again the question of what at the time really was in their best interests. Mr. Milligan submitted that unless RAC had reached an agreement with Protea that would enable it to return the aircraft without being liable for the termination value or the cost of putting them into return condition it made better financial sense to keep them even at the price of carrying out the 8-year checks.

[188]It is true that if the aircraft were returned to Protea in the absence of any agreement of the kind just mentioned, RAC would become liable for the cost of putting them into return condition and would become liable to pay the termination value, thereby accelerating its liability under the leases. On the other hand, the reduction in rental payments would alleviate the immediate pressure on RAC's resources and there would be an opportunity in the meantime to pursue negotiations with Protea. The alternative was to pay for the 8-year checks out of the cash reserves, but since he did not think that RAC could make good commercial use of the two ATRs, Mr. Sen did not think it sensible to spend US$3.5 million in that way. At the time these decisions were being made the primary concern of the management from Mr. Pan Chantra downwards was the survival of RAC. It is difficult to determine what the cost of the 8-year checks on these aircraft would actually have been - various figures ranging from US$100,000 to US$400,000 for each aircraft were mentioned in the course of evidence – but there would undoubtedly have been a fair amount of deferred maintenance to be done at the same time. I doubt whether the cost for both aircraft would have been less than US$1 million and perhaps more.

[189]In the event negotiations between RAC and Protea for the return of the aircraft were interrupted by the intervention of the Cambodian government and they were repossessed in the circumstances described earlier. Insofar as it was suggested that that resulted from a failure to manage the business in the best interests of RAC it adds little, if anything, to Protea's case. The problems facing RAC all stemmed from its chronic lack of funds. Given RAC's financial difficulties and the overriding desire on the part of the shareholders to keep it afloat, I am not persuaded that it was contrary to their interests and that of the company to manage the problem in that way. However, insofar as Mr. Stickney and Mr. Sen were responsible for the way in which RAC attempted to deal with the problem, I am satisfied that they acted in good faith in what they believed to be the best interests of the company and the shareholders.

(v) Route selection

[190]It was originally part of Protea's case that MAS also failed to manage the business of RAC in its best interests in deciding what use to make of the aircraft it had at its disposal. In summary, its complaint was that the Boeing had been employed on routes that could have been served more profitably by the ATRs. At one stage this issue seemed likely to give rise to a number of rather complicated questions relating to the commercial and financial implications of programming flights using the different types of aircraft, but by the end of the trial it had largely ceased to be of significance. The one remaining question in issue concerned the use of the Boeing on the route between Phnom Penh and Bangkok.

[191]During the last three quarters of 1998 the number of flights performed by the Boeing roughly doubled and the number performed by the ATRs halved. Mr. Milligan submitted that it was inefficient to use the aircraft in that way and that the only reason for performing so many flights with the Boeing was to enable RAC to demonstrate that it was making a greater contribution to its fixed costs. He submitted that it was not in the best interests of RAC to use the aircraft in that way because it increased RAC's operating costs. If RAC's operating costs had been lower, or the ATRs had been seen to be contributing more to their own fixed costs, it is probable that RAC would have paid Protea more in respect of its debt or that more money would have been spent on the maintenance of the ATRs. To that extent, therefore, he submitted, Protea suffered loss.

[192]In my view this argument fails at various points. In the first place, although it is true that the ATRs were cheaper to run than the Boeing, the conditions under which RAC was operating required it to pay particular attention to meeting the competition from other airlines and building up its business. Rightly or wrongly, Mr. Sen considered that the use of the Boeing enabled RAC to offer a product that was more competitive and more likely to promote the development of its business in the long term. A decision of this kind, especially under the conditions which then confronted RAC, involves a large measure of commercial judgment. It may be that with the benefit of hindsight it can be argued that the increased use of the Boeing was not in RAC's best interests, at least in the short term, but even if that was the case, I am far from persuaded that Mr. Sen realised that at the time. Nor am I persuaded that a reduction in the level of operating costs would be likely to have led to an increase in the amounts paid to Protea or the amount spent on maintenance. It is impossible at this stage to determine how passenger numbers, and therefore revenue, would have developed if the schedules had offered more flights using the ATRs and fewer with the Boeing, nor is it possible to say with any confidence how the additional resources would have been used. At this point the argument becomes little more than speculative and I am not satisfied on the balance of probabilities that any loss was suffered Protea as a result of RAC's decision to deploy the aircraft as it did.

(e) Conclusion

[193]In these circumstances I do not think that MAS acted in such a way as to incur liability to Protea under Article 121 of Decree No. 38. There are several reasons for that. In the first place, I am not persuaded that in relation to the use of its funds or the deployment of its aircraft MAS through Mr. Stickney or Mr. Sen failed in any significant respect to manage the business of RAC in the best interests of the company or its shareholders, or that, insofar as it did, Protea suffered any loss as a result. Nor am I satisfied that deficiencies in maintenance can be attributed to them. It follows that Protea has failed to establish the breaches of the Management Agreement and consequent loss on which its case depends. However, even if it had succeeded in doing so, I do not think that that would have carried it far enough. For reasons given earlier I do not think that a breach of the Management Agreement without more would be regarded as sufficient to constitute fault in relation to Protea under Article 121. Something more would be required in order to justify treating MAS's conduct as an actionable wrong towards Protea. I am satisfied that both Mr. Stickney and Mr. Sen were motivated by a desire to act reasonably in the best interests of RAC as they saw them. Neither was motivated simply by a desire to benefit RAC or MAS at the expense of Protea, much less by any malicious intent towards Protea. It is true that they must have realised that insofar as RAC did not pay amounts it owed under the leases Protea would suffer loss, but that was simply a consequence of RAC's shortage of funds and their judgment of how the limited funds available should be used in the best interests of the company and its shareholders. Insofar as their judgment was correct there was no breach of the Management Agreement which could constitute a fault, but even if they were wrong, they acted in good faith. I do not think that under Cambodian law their behaviour would be regarded as commercially unacceptable or such as to amount to a fault. Much the same can be said in relation to the other breaches of the Management Agreement on which the claimant relies. Even if shortcomings in maintenance and the deployment of aircraft involved a failure to manage the business in the best interests of RAC, there are no grounds for thinking that any of the decisions taken by Mr. Stickney or Mr. Sen that had a bearing on such matters were taken otherwise than in good faith. A breach of the Management Agreement committed under these circumstances is not in my view to be regarded as involving fault in relation to Protea within the meaning of Article 121. It follows that Protea's claim against MAS must fail.

[194]In these circumstances it is unnecessary in order to determine the claim against MAS to reach a decision on either of the other two issues raised in its defence. However, both were fully argued and one of them, which concerns the effect of a deed of assignment executed by Protea as part of the financing arrangements, is also relevant to Protea's claim by against RAC. Accordingly, I propose to express my views on each of them.

(f) The assignment

[195]In December 1996 as part of the financing arrangements Protea executed a deed of assignment of its interest in the three ATR leases in favour of Newcourt. Protea gave notice of assignment to RAC by a letter of the same date together with a request to send an acknowledgment to Newcourt in the form of a letter enclosed with the notice. RAC eventually sent the acknowledgment to Newcourt in June 1997. MAS contended that the assignment, coupled with the subsequent giving of notice to RAC, had the effect of transferring the whole of Protea's interest in the three leases to Newcourt and that as a result Protea could not recover damages for interference with contracts in which it no longer retained an interest. If MAS right is about that, the assignment also deprived Protea of any right to recover from RAC sums due under the three leases.

[196]RAC did not rely on the assignment in its defence to Protea's claim, either in its original defence served in February 2000, or in the amended defence which it served in June that year. That may have been due in part to the fact that the form of acknowledgment suggested that the assignment had not yet been perfected and that Newcourt had not become entitled to exercise its rights as assignee. MAS served its defence in April 2001 but it was not until May 2002 that it amended its pleading to allege that the deed took effect as a legal assignment under section 136 of the Law of Property Act 1925. By that time RAC had ceased to take an active part in the proceedings.

[197]RAC was not represented at the hearing, but insofar as its case coincided with that of MAS it was argued by Mr. Wood and Mr. Reed and Mr. Milligan accepted, quite properly, that Protea also had to deal with any other issues raised by RAC. The issue as to the effect of the assignment was fully argued between MAS and Protea and in those circumstances although it was not formally raised between Protea and RAC I do not think it would be right to determine Protea's claim against RAC without taking account of it. There are no grounds for concluding that RAC consciously chose not to take the point and to ignore it would be to risk giving judgment on a false basis. It is therefore an issue that calls for determination, if only for that reason.

[198]The tort of inducing breach of contract is based on the wrongful interference with contractual rights. It must follow, therefore, that a person who has effected a legal assignment of his rights under a contract to a third party cannot maintain an action for interference with those rights any more than he can himself bring an action to enforce them. The issue dividing the parties in this case is whether the deed of assignment had the effect for which MAS contended.

[199]The assignment was one of a group of instruments that together made up the financing arrangements between Newcourt as lender, Protea as borrower and ATR as guarantor. The Credit Agreement lay at the heart of the arrangements, the assignment simply forming part of the security for the loan. The whole group of documents constituting the financing arrangements therefore forms part of the context in which the deed of assignment falls to be construed. By clause 6 of the deed Protea undertook to give notice of the assignment to the lessee as soon as practicable after the execution of the deed in the form set out in Appendix A. That notice in turn contained a request to the lessee to send an acknowledgment of its receipt direct to Newcourt in the form attached and authorised the lessee to assume the obligations contained in it.

[200]The operative part of the assignment is to be found in clause 5 of the deed which provides as follows:

"5. ASSIGNMENT 5.1 Assignment The Assignor, by way of security for the performance of the Assignor's obligations under the Credit Agreement and the due and punctual payment, performance and discharge by the Assignor of the Secured Obligations, hereby assigns and agrees to assign to the Assignee (to hold the same in accordance with Clause 4) all of the Assignor's right, title, benefit and interest to, in and under the Leases, including without limitation all moneys whatsoever payable to or on account of the Assignor under the Leases and all other rights and benefits whatsoever thereby accruing to the Assignor; provided that subject only to the express provisions hereof and of the Credit Agreement, until a notice pursuant to clause 11.1 of the Credit Agreement is served on the Assignor by the Assignee, the Assignor (and not the Assignee) shall be entitled to exercise all rights, powers, and discretions of the Lessor under the Leases. 5.2 Reassignment If the Assignor shall have repaid, performed and discharged in full the Secured Obligations, the Assignee shall, at the request and cost of the Assignor, reassign to the Assignor the rights, title, benefit and interest in and to the Assigned Property . . . . . . . . . . . "

[201]Although the assignment is expressed to be by way of security, it is clear from the language of clause 5 as a whole that it was intended to operate as an outright assignment in favour of Protea subject to a provision for reassignment if certain conditions were met. It was common ground that an assignment in this form is capable of constituting an absolute assignment within the meaning of section 136 of the Law of Property Act 1925 so as to vest the legal title to the chose in action in the assignee.

[202]The dispute between the parties turns on the effect of the proviso. Mr. Reed submitted that the assignment was effective to transfer the whole of the benefit of the three leases, including the right to receive rent, to Newcourt immediately, while giving Protea the right to continue exercising the powers of management under the leases until service of a notice of default under the Credit Agreement.

(e) which provides as follows:

"except as permitted by the terms of the Credit Agreement, following the occurrence of an Event of Default (under the Credit Agreement), the Assignor will not exercise any rights or powers conferred on it by the Leases (including any right of termination thereunder) unless and until requested to do so by the Assignee . . . "

(emphasis added). Accordingly, he submitted that as from the moment the assignment was perfected by giving notice to RAC the whole of the contractual benefit represented by the three leases vested in Newcourt alone.

[203]Mr. Milligan submitted that the purpose and effect of the proviso was to defer the transfer of any rights under the leases from Protea to Newcourt until a notice of default had been served. He submitted that the words "all rights, powers, and discretions" were wide enough to encompass rights of every kind and that no useful distinction could be drawn between the two parts of clause 5.1. However, even if that were not right, the expression used in the proviso was clearly wide enough to encompass the right to receive rental and other payments due under the leases which was sufficient for the purposes of the present claim.

[204]It was clearly the intention of the parties to the deed that the assignor should continue to exercise some rights under the leases pending the service of a notice of default and there are really only two ways in which that could have been achieved: by deferring the time at which the rights in question vested in the assignee, or by allowing the assignor to exercise them on behalf of the assignee. There was no evidence before me of the commercial background to the financing transaction of a kind that sheds any light on what the parties were seeking to achieve by structuring the assignment in this way. Mr. Abraham, who was called to explain how the financing arrangements had been unwound following the repossession of the aircraft, had not been involved in the original transaction and could only speculate about what the parties may have had in mind. Nor could he give me any real insight into the practical commercial considerations that may have motivated them. I am therefore left with the language of clause 5.1 itself set in the context of the remainder of the deed and the transaction as a whole as it appears from the documents.

[205]The notice of assignment prescribed by Appendix A took the following form:

"We hereby give you notice that by a Lease Assignment dated December __ , 1996 between the undersigned and Newcourt Capital Inc. (the "

Assignee") we have assigned to the Assignee all our right, title benefit and interest in and to the Aircraft Lease Agreement(s) dated [ ] among Protea Leasing Limited, as Lessor, and you (the "Lease Agreement"). The notice herein contained is irrevocable. You are hereby authorized to assume the obligations expressed to be assumed by you under the attached acknowledgment and, to the extent (if any) that the same would otherwise be incompatible with the Lease Agreement, your obligation to us thereunder shall be deemed modified accordingly . . . . . . . . "

[206]The form of acknowledgment attached to it read as follows:

"We acknowledge receipt of a Notice of Assignment dated December __, 1996 (the "

Assignment Notice") relating to an assignment (the "Assignment") between Protea Leasing Limited (the Assignor") and you. We acknowledge the Notice of Assignment as adequate notice of the Assignment of all the rights, title and interest of the Assignor under the Aircraft Lease Agreements dated [ ] among Protea Leasing Limited, as lessor ("PROTEA"), this Company, as lessee, (the "Lease") relating to [one] ATR 72 aircraft with manufacturer's serial number . In consideration of payment to us of one Dollar (US$1), receipt of which we hereby acknowledge, we hereby agree as follows: If you issue to us a notice (a "Borrower Default Notice") that your rights as assignees have become exercisable, we agree that we shall after issue of such notice not recognise the exercise by the Assignor of any of its rights and powers under the Lease unless and until requested to do so by you and we shall: (a) to the exclusion of the Assignor, perform, observe and comply with all our other undertakings and obligations under the Lease in your favour and for your benefit as if you were named as lessor therein; and (b) . . . . . . . . . . and (c) make payment of all moneys that may be payable by us pursuant to the Lease to such bank or account as you may notify to us in writing from time to time and at any time."

[207]The main force of Mr. Reed's argument lies in the unqualified terms of the first part of clause 5.1 and in the distinction that can be drawn between the wide language used in that part and the narrower expression used in the proviso. A distinction of language within the same clause normally indicates a distinction of meaning, especially in a case where the document bears all the hallmarks of having been constructed by an experienced draftsman. However, there is no express indication that the parties intended the assignor to exercise any of the rights under the lease as agent of the assignee, so it is necessary to look at the other documents forming part of the transaction to see whether they shed any more light on what they had in mind.

[208]Mr. Reed placed some reliance on clause 7(e) of the deed of assignment, but I do not think that his argument gains much support from that quarter. Clause 7 as a whole is equally consistent with the construction for which Mr. Milligan contended. Indeed, it might be said that clauses 7(b), (d) and (e) proceed on the assumption that there will or may be a period following the giving of notice during which rights under the lease are not vested in the assignee and may still be exercised by the assignor. To that extent those provisions are more consistent with Mr. Milligan's argument than with that of Mr. Reed.

[209]The expression used to define the subject matter of the proviso ("all rights, powers, and discretions of the Lessor") is broad and is certainly capable of extending to the right to receive rent and other sums payable under the leases. However, if Mr. Milligan is right, the effect of the proviso is to defer the operation of the assignment to a date in the future, contrary to the unqualified terms of the opening section ("The Assignor . . . . . hereby assigns . . . . ."). Moreover, it can be argued that, in providing for reassignment of the rights, title, benefit and interest in and to the assigned property following the performance by the assignor of its obligations, clause 5.2 contemplates that there will have been an effective assignment in even if no event of default has occurred under the Credit Agreement.

[210]In resolving this difficulty some assistance can be gained from the prescribed forms of notice of assignment and letter of acknowledgment. The opening paragraph of the notice of assignment suggests that there has been an immediate outright assignment in favour of Newcourt, but the second is more qualified and expressly authorises RAC to assume the obligations provided for in the letter of acknowledgment which was clearly intended to read in conjunction with it. That letter not only acknowledges receipt of the notice of assignment but contains an undertaking by RAC to Newcourt that on receipt of a notice that its rights as assignee have become exercisable it will not recognise the exercise by Protea of its rights under the lease and will, among other things, make payments under the lease to Newcourt. There is no suggestion in either of these documents that until the occurrence of an event of default Protea would be acting simply as an agent for Newcourt. On the contrary, the assumption is that Newcourt's rights will not become exercisable until a notice of default has been served.

[211]Here, I think, one finds a reasonably clear indication of how the parties to the deed of assignment intended it to operate. They did not intend the assignment to have any practical effect until a notice of default had been served under the Credit Agreement. At that point, but not before, Newcourt would become entitled to receive any payments due under the leases and would have an independent right to recover such amounts from RAC under the separate contract contained in the acknowledgment letter. By the terms of the notice of assignment and acknowledgment letter that was made clear to the obligor, RAC. It is interesting to note, though I do not think that this can affect the construction of the deed, that throughout the life of the leases Protea, RAC and Newcourt all acted in a manner consistent with that view of the matter and that when the financing arrangements were renegotiated following the termination of the leases Newcourt executed a deed of release by which it purported to "release" the assigned property from the security created by the original deed of assignment instead of re-assigning it to Protea.

[212]In The 'Halcyon the Great' [1984] 1 Lloyd's Rep. 283 Staughton J. had to consider an assignment expressed to be by way of security which contained a proviso under which the assignor was entitled to exercise all its right over the property in question until there was a default under the loan agreement. In that case there was no provision for reassignment of the kind that one finds here in clause 5.2 and to that extent the case differs from the present. Nonetheless, it is interesting inasmuch as it provides another example of an assignment subject to a proviso under which the assignor retained the right to exercise its rights under the contract. Staughton J. held that the parties must have intended the assignor to exercise its rights as owner of the property and that the assignment was not absolute but by way of charge only.

[213]For the reasons given above I am satisfied that it was not the parties' intention in the present case to effect an immediate outright transfer of the right to receive rent and other payments under the leases to Newcourt but for Protea to retain those rights until notice of default was given under the Credit Agreement. I am also satisfied that the language of clause 5.1, including the proviso, is capable of being construed so as to give effect to their intentions. In the absence of any notice of default, therefore, the right to recover rent and other payments due under the lease remained vested in Protea.

(g) The Limited Recourse and Indemnity Agreement

[214]Unlike aircraft Nos 204 and 207, aircraft No. 108 was not owned by ATR but was leased to it by Gie. Néfaero for a term expiring on 31 st December 2004. That lease, which had been entered into on 20 th March 1992, was also a finance lease in that it provided for the purchase of the aircraft by the ATR at the end of the term. On 18 th September ATR leased the aircraft to Protea (the "Head Lease") and Protea in turn leased the aircraft to RAC ("the Sub-Lease"). On the same date as they entered into the Head Lease ATR and Protea also entered into an agreement described as a Limited Recourse and Indemnity Agreement under which ATR agreed to look only to RAC's performance under the Sub-Lease for the performance of Protea's obligations under the Head Lease. ATR also agreed to indemnify Protea against all losses and liabilities arising under the Sub-Lease. Mr. Reed sought to persuade me that similar agreements must have been made in respect of the leases relating to aircraft Nos 204 and 207, but there is no direct evidence to that effect and I am unable to draw that inference simply from the existence of the agreement relating to aircraft No. 108.

[215]In the light of this agreement Mr. Reed submitted that Protea had suffered no loss as a result of RAC's failure to perform its obligations under the Sub-Lease. Mr. Milligan submitted, however, that the agreement was collateral to the Sub-Lease, or res inter alios acta, and therefore irrelevant to the assessment of Protea's loss. This issue it does not affect the outcome of these proceedings, either in relation to MAS or RAC, but since it was fully argued I think it right to express my view on it briefly.

[216]Clause 2.1 of the agreement provided as follows:

". . . ATR irrevocably agrees, notwithstanding anything in the Head Lease and this Agreement to the contrary (except clause 2.3), to limit its recourse against Protea under the Head Lease : (a) in respect of the monetary obligations of PROTEA under the Head Lease, to the receipt of all net payments actually received by PROTEA, or any person acting on behalf of PROTEA, pursuant to or in relation to the Sub-Lease . . . . . . .; and (b) in respect of the non-monetary obligations of PROTEA under the Head Lease . . . . (i) to the performance by RAC of its obligations pursuant to or in relation to the Sub-Lease; and (ii) to request the exercise by PROTEA of its recourse as lessor under the Sub-Lease as against RAC; and in consequence ATR agrees that it will look solely to such performance by RAC or exercise by PROTEA of its recourse as lessor in respect of or in connection with the Sub-lease for the discharge by PROTEA of its obligations under the Head Lease . . . ."

[217]Clause 3.3 of the agreement provided as follows:

"PROTEA shall take such action to enforce or preserve its rights against RAC under or with respect to the Sub-Lease as ATR shall reasonably request from time to time . . . . ."

[218]It is apparent from clause 2.1 that the parties to the agreement understood and intended that Protea would retain its rights against RAC under the Sub-Lease and would exercise those rights for the benefit of ATR. Consistently with that, I think it is clear from clause 2 generally that ATR agreed to forego its rights against Protea only to the extent that Protea might be unable in practice to recover against RAC. Insofar as it succeeded in enforcing its rights against RAC, ATR was to have the benefit of any recoveries. This in my view is the short answer to Mr. Reed's argument. As soon as a payment of rent or any other sum became overdue under the lease Protea became entitled to sue for its recovery and would be bound to take such action. The pursuit by Protea of a claim against RAC would satisfy the requirements of clause 2.1 and would itself be sufficient to constitute performance under the Head Lease pending the final determination of the claim. However, once the claim had been determined ATR's rights against Protea would be limited by the agreement to the net amount actually received from RAC. The most that can be said is that Protea would not suffer any loss if and insofar as RAC were unable to satisfy a judgment. That does not mean, however, that Protea does not suffer any loss by reason of RAC's breach of contract.

[219]Quite apart from that, however, I think that Mr. Milligan was right in saying that the Limited Recourse and Indemnity Agreement is collateral to the Sub-Lease between Protea and RAC and is therefore not to be taken into account when considering whether Protea has suffered loss by reason of a breach of contract on the part of RAC. As far as monetary obligations are concerned, Protea's claim sounds in debt. No question of loss as such arises; Protea can simply sue for the debt and it is of no concern to RAC what it may be obliged to do with the money once it has been recovered. In the case of non-monetary obligations, the claim sounds in damages, but the use to which the monetary compensation will be put is of no legal significance to RAC since it cannot be said that Protea has suffered no loss simply because it has contracted to pay any sum recovered over to ATR. Mr. Reed referred me to The Yasin [1979] 2 Lloyd's Rep. 45 and Parry v Cleaver [1970] 1 A.C. 1, but those cases are concerned with indemnification from an outside source and are not directly relevant to the present question. I therefore reject the submission that Protea is precluded by the Limited Recourse and Indemnity Agreement from pursuing a claim against RAC in the present case. 6. Conclusion

[220]For these reasons I have reached the conclusion that Protea is entitled to judgment on its claim against RAC but that its claim against MAS fails.