Thai Airways International Public Company Ltd v KI Holdings Co Ltd & Anor [2015] EWHC 1476 (Comm)

[2015] EWHC 1476 (Comm)

Case No 2011 Folio 1503

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

COMMERCIAL COURT

Venue Royal Courts of Justice, 7 Rolls Building, Fetter Lane

Date 22 May 2015

London EC4A 1NL

Before

MR JUSTICE LEGGATT

Between

Thai Airways International Public Company LtdClaimant

Guy Morpuss QC and Patricia Edwards (instructed by Macfarlanes LLP) for Claimant

Hilary Heilbron QC and David Scannell (instructed by Wilmer Hale) for Defendant

Judgment

[1]In the light of the judgment which I handed down on 11 May 2015, the parties have made submissions in writing on four consequential issues: i) The quantum of damages payable to Thai; ii) Costs; iii) Interest on damages and costs; and iv) Permission to appeal.

[2]This judgment gives my rulings on those issues, which the parties have agreed can be decided without a further hearing.

Quantum of damages

[3]On the basis of the findings made in the judgment, the parties have agreed the amounts payable by Koito to Thai as damages, subject to one point. That point relates to the costs incurred in replacing the seats which Koito failed to supply for five A330-300 aircraft. Para 141 of the judgment records these costs as being “€7,242,110 (including installation costs)”. The figure of €7,242,110 comprised the price of €5,797,250 paid by Thai to purchase replacement seats from another supplier, ZIM, and “installation costs” of €1,444,860. Thai’s written opening submissions for the trial (at para 214) explained that the latter figure included, in addition to a sum of €1,226,484 which Thai paid to Lufthansa to install the seats, a sum of €218,376 which Thai paid for fuel to transport the aircraft back to Bangkok. It was Thai’s case that, had it not been for Koito’s breaches of contract, Airbus would (at no cost to Thai) have delivered the aircraft with sufficient fuel to fly back to Bangkok. However, in circumstances where the aircraft were delivered without seats and had to be placed in storage, that did not happen: so as well as having to buy replacement seats from ZIM and contract with Lufthansa to install them, Thai had to pay for fuel to transport the aircraft.

[4]The amounts of €5,797,250 and €1,444,860 were both presented in a table attached to Thai’s written closing submissions as sums which were not in dispute, and Koito did not in its closing submissions dispute either figure.

[5]Koito has pointed out that the judgment refers at para 185 to “the cost incurred by Thai in installing the ZIM seats” as “agreed to amount to €1,226,484” and says that the figure of €1,444,860 does not feature in the judgment and was not agreed by the experts. On this basis Koito submits that Thai is not entitled to recover the fuel costs of €218,376 which represent the difference between the amounts of €1,226,484 and €1,444,860.

[6]There is nothing in this point. Although the figure of €1,444,860 is not specifically mentioned in the judgment, it is included in the total amount of €7,242,110 recorded in para 141 of the judgment. The amount of €1,226,484 referred to in para 185 was, as I have indicated, the amount paid by Thai for the actual installation of the seats, in addition to which Thai was claiming the costs of purchasing the seats and the fuel costs which were also included in the figure of €7,242,110.

[7]The accounting experts agreed the amount claimed for fuel costs subject to the factual question of whether Airbus would ordinarily have delivered new aircraft with sufficient fuel to fly to Bangkok. To prove that factual point, Thai put in evidence a witness statement from Flight Lieutenant Yuthasit Suwanloy, which was not challenged. Nor did Koito dispute the claim for fuel costs in any submissions made at the trial. I am accordingly satisfied that Thai is entitled to include the relevant amount of €218,376 in the calculation of its damages.

[8]In consequence, the sums which Koito will be ordered to pay to Thai as damages are US$82,732,284, €19,857,165 and THB 4,640,417.

Costs

[9]It is quite clear that Thai is the successful party. The dispute in this case, as in almost all commercial cases, has been all about money and Thai has been awarded a very large amount of money as damages. The ordinary consequence of that outcome is of course that Koito must pay the costs of the successful party. Koito did nothing to protect itself against that consequence by making any admissible offer to settle the claim, whether under Part 36 or otherwise, which has been drawn to the court’s attention. Thai, on the other hand, did make an offer under Part 36 in a letter dated 24 October 2013. By that letter, Thai offered to accept payment of US$36m in settlement of its claim and Koito’s counterclaim. Koito chose not to accept the offer and in the event Thai has obtained a judgment for nearly three times the amount which it offered to accept.

[10]In these circumstances Thai relies on CPR 36.17(4), which stipulates that, where the claimant obtains a judgment against the defendant which is better in money terms than the proposals contained in a claimant’s Part 36 offer:

“the court must, unless it considers it unjust to do so, order that the claimant is entitled to – (a) interest on the whole or part of any sum of money (excluding interest) awarded, at a rate not exceeding 10% above base rate for some or all of the period starting with the date on which the relevant period expired; (b) costs … on the indemnity basis from the date on which the relevant period expired; (c) interest on those costs at a rate not exceeding 10% above base rate; and (d) … an additional amount, which shall not exceed £75,000 ...”

The relevant period for accepting Thai’s offer expired on 15 November 2013. I shall return to items (a), (c) and (d), which Thai also claims. In relation to costs, Thai relies on CPR 36.17(4)(b) pursuant to which Thai is entitled to all its costs of the proceedings, to be assessed on the indemnity basis, from 15 November 2013, unless the court considers it unjust to make such an order.

[11]Even if Thai had not made this Part 36 offer, I should have considered it appropriate in this case to apply the general rule and order Koito to pay Thai’s costs of the proceedings. Although Thai has not succeeded on every single issue, it has been overwhelmingly successful on the points which mattered most in terms of financial recovery – in particular, the entitlement to recover the costs of the Jet leases (apart from the third year) and most of the sub-issues which affected that claim. Apart from the correct legal approach to “betterment”, which did not ultimately affect the result of the Jet lease claim, the issues on which Koito succeeded were very much secondary issues both in terms of the time which they occupied at the trial and their financial consequences. The point has often been made that in any complex commercial litigation the successful party is unlikely to succeed on every issue and should not necessarily be deprived of part of its costs on that account. Moreover, even if I might otherwise have made some very modest percentage reduction in the costs awarded, I do not think it appropriate to do so in circumstances where(a) throughout the proceedings until it abandoned its defences very shortly before the trial, Koito was contesting liability as well as the quantum of damages and

(b) thereafter Koito was continuing to dispute that it was liable to pay any money at all to Thai (and was doing so against the background of Thai’s Part 36 offer).

[12]The next question is whether Thai is entitled to its costs on the indemnity basis for the period after 15 November 2013. As mentioned, the presumption embodied in CPR 36.17(4) is that such an order should be made, unless the court considers that it would be unjust to do so. In so far as Koito has submitted, therefore, that it had “sound reasons” for not accepting Thai’s offer and that it was “not unreasonable” for Koito not to accept the offer, that is not the applicable test: see Matthews v Metal Improvements Co Inc

[2007] EWCA Civ 215

, paras 32-34.

[13]In considering whether it would be it unjust to make an order under CPR 36.17(4), the court is required by CPR 36.17(5) to take into account all the circumstances of the case including certain specified matters. Those matters include the stage in the proceedings when the offer was made, the information available to the parties at the time when the offer was made, and the conduct of the parties with regard to the giving of or refusing to give information for the purpose of enabling the offer to be made or evaluated.

[14]Koito has argued that it would be unjust to make an order under CPR 36.17(4), in particular because Thai allegedly failed to disclose the evidence relied on in support of its claim in a timely way.

[15]I do not feel able to judge, nor do I think it necessary to decide, whether Thai failed to disclose evidence in a timely way. It is clearly right, however, that the information needed to establish what losses Thai had suffered as a result of Koito’s breaches of contract was in the possession of Thai. Probably the most important issue in the case in terms of its financial consequences was whether the delays in delivery of five A330-300 aircraft caused by Koito’s failure to deliver the seats was in turn the cause of Thai’s decision to lease three B777-300ER aircraft from Jet. Koito could not make an informed judgement about that question until it received Thai’s witness statements. Witness statements – including the statement of Chokchai Panyayong, which dealt with this question at length – were exchanged on 1 August 2014. They were followed on 11 September 2014 by the joint report of Thai’s aviation and accounting experts, Mr Bull and Mr Dearman, which set out in comprehensive detail the basis for Thai’s damages claims. Although the calculation of Thai’s losses continued to be refined up to and indeed during the trial, once Koito had received Thai’s joint expert report Koito in my view had ample information to enable it to take a realistic view about the quantum of the claim.

[16]The conclusion that I have reached is that it would not be just to order that Thai’s costs should be assessed on the indemnity basis for any period before 3 October 2014. That is because I consider that it would be unjust to subject Koito to the financial risks of not accepting Thai’s Part 36 offer until such time as Koito was in a position to take an informed view of the quantum of the claim. That position was reached, as I see it, by 3 October 2014, by which time Koito had had 21 days to take stock of Thai’s expert evidence.

[17]Thereafter, it was entirely Koito’s choice to continue to dispute liability until 20 January 2015, to continue until mid-way through the trial to deny that entering into the Jet leases was a step taken in reasonable mitigation of loss, and to continue until the end of the trial to deny that it was liable to pay any money to Thai.

[18]Accordingly, costs will be assessed on the indemnity basis from 3 October 2014 and on the standard basis for the period before that date.

[19]Thai also applies for an interim payment on account of its costs. It has provided a costs summary which shows costs of over £5m and invites the court to order a payment on account of some £2.9m. Koito suggests that the sums incurred by Thai are far higher than the amounts likely to be found reasonable and proportionate on a detailed assessment of its costs, or at least that there is insufficient information to conclude otherwise, and submits that any payment on account of costs should be far lower than the amount sought by Thai.

[20]Approaching the matter on the basis that it is appropriate to require Koito to pay on account a sum which the court can feel confident, despite limited information, that Thai will recover on a detailed assessment of its costs, I will set the amount of the payment at £2m.

Interest

[21]Koito does not dispute that Thai is entitled to be paid interest on the damages and costs awarded to Thai, from the date each relevant amount was incurred. There is an issue, however, as to the appropriate rate of interest.

[22]Leaving aside for the moment Thai’s claim to be awarded an enhanced rate of interest under Part 36, Thai claims interest under section 35A of the Senior Courts Act 1981 at a commercial rate. Under that statutory provision the court may only award simple interest. If a party wishes to claim interest on a compound basis, it can only do so by claiming interest as damages and proving the amount of its actual loss: see Sempra Metals Ltd v Inland Revenue Commissioners

[2008] AC 561

. Thai has not made such a claim.

[23]Thai initially proposed that simple interest at 5% is a reasonable commercial rate to take in awarding statutory interest. The reason given was that the parties had previously agreed 3.5%, compounded annually, for the Jet lease finance costs. It is not legitimate, however, to avoid the statutory limitation on the basis on which interest can be awarded under the Senior Courts Act by claiming interest at a higher rate than would otherwise be appropriate.

[24]In Vis Trading v Nazarov

[2013] EWHC 491 (QB)

, in a judgment on consequential issues dated 27 March 2013, I followed Andrew Smith J in Fiona Trust and Holding Corp v Privalov

[2011] EWHC 664 (Comm)

in concluding that 2.5% over 6 month US dollar LIBOR is an appropriate rate of interest on a claim made in US dollars by a reasonably creditworthy commercial party which operates outside the United States. As stated in a report approved by the Committee of the London Maritime Arbitrators Association, quoted in both cases, “this would be a reasonable average rate to charge a reasonably creditworthy company for an unsecured [short-term] loan”. In its reply submissions Thai did not seek to pursue a claim for any higher rate of interest than this. According to published information, during the period relevant to Thai’s claim, the 6 month US dollar LIBOR rate has at all times been less than 1% and has generally been around 0.5%. In 2014 the average rate was 0.329%.

[25]Koito pointed out that the assumption underlying the spread of 2.5% over LIBOR is that the claimant is “a reasonably creditworthy company” and argued that a downwards adjustment is appropriate to reflect the fact that Thai is not merely reasonably creditworthy but highly creditworthy. As evidence of this, Koito relied on Thai’s 2014 Annual Report, which reported revenues in that year of over US$6 billion and also states that Thai’s weighted average interest rate for its borrowings in US dollars in 2014 was 2.18%.

[26]Although Koito may well be right that Thai is a more than reasonably creditworthy company, there is insufficient evidence to enable me to find that either Thai itself or companies with its general characteristics were able to obtain short term unsecured loans during the relevant period at a lower spread than 2.5% over LIBOR. In particular, there is no evidence to support Koito’s surmise that Thai’s close connections with the government of Thailand enable it to borrow money at sovereign rates. Nor do I think it right to attach any weight to the interest rate figure in Thai’s 2014 Annual Report. It appears from that report that the vast majority of Thai’s US dollar liabilities in 2014 were loans with a term of 1 – 5 years or longer than 5 years. It cannot be assumed that the rates payable on such loans are comparable to the rate payable on short term borrowings which is the relevant benchmark in awarding interest. In addition, Thai has drawn attention to the fact that its weighted average interest rate for its liabilities in US dollars, as shown by the financial statements which were included in the trial bundles for the years 2010 to 2012, was 4.46% in 2010, 7.07% in 2011 and 7.07% again in 2012 – rates which in the latter two years were substantially higher than 2.5% above 6 month US dollar LIBOR. (Thai appears to have had no liabilities in US dollars in 2013.)

[27]In the absence of evidence which would justify a different spread, I therefore consider that an appropriate rate of interest to award is 2.5% over 6 month US dollar LIBOR. Neither party suggested that different rates of interest should be applied to the much smaller sums claimed in Euros and Thai Baht – or for that matter to the claims for costs made in sterling – and I consider that specifying different interest rates for each of these currencies would be an unnecessary refinement. Subject to Thai’s claim for an uplift under Part 36, therefore, the same rate will apply to all relevant interest calculations.

[28]Thai claims interest under CPR 36.17(4)(a) and (c) on damages and costs at the maximum rate of 10% above base rate from 15 November 2013. For the same reasons as applied in relation to the claim for indemnity costs, I consider that it would be unjust to award interest at an enhanced rate for the period before 3 October 2014, but that there is no injustice in doing so thereafter.

[29]As for what uplift should be awarded, Koito argues that the court should not start with the assumption that it should award the maximum enhanced rate of interest and that awarding interest at 10% above base rate would give Thai a windfall of many millions of dollars above the actual cost to it of not being paid its damages earlier.

[30]What Koito describes as a “windfall” is an incentive deliberately created to promote the policy underlying Part 36 of encouraging parties to make and accept sensible offers of settlement. The fact that the rate awarded is higher than the actual cost of borrowing (even allowing for the fact that interest paid on actual borrowings would be compounded) is not a valid objection. Nevertheless, I accept the point that the 10% uplift is a ceiling and not a guideline. In deciding what uplift to apply, I think it relevant to take account of the fact that interest rates are currently at what is historically a very low level so that awarding the maximum uplift would result in a significantly higher percentage uplift from an ordinary commercial rate than would at other times have been the case. That said, the judgment rate of interest still stands at 8% and I consider that this would be an appropriate rate to apply in the present case.

[31]Thai is also entitled to receive the additional amount of £75,000 specified in CPR 36.17(4)(d).

Permission to appeal

[32]Koito has applied for permission to appeal on four grounds which are, in summary, as follows: i) It was not open to the court to reject Thai’s contention, after it was conceded by Koito, that leasing the three B777-300ER aircraft from Jet Airways for the third year of the three year leases was a step reasonably taken by Thai to mitigate its loss. ii) The court in any event erred in concluding that the third year of the Jet leases should be left out of account. iii) The court erred in holding that Thai was entitled to recover costs reasonably incurred in mitigation of its loss, except to the extent that Koito could prove that the benefits which Thai derived from the steps taken in mitigation exceeded the losses which Thai would have suffered if those steps had not been taken. iv) The court was wrong to find that in calculating Thai’s net loss of profits it was not appropriate to make any adjustment for depreciation.

[33]Thai, for its part, has applied for permission to appeal on the ground that I was wrong to find that credit had to be given in the calculation of damages for the benefit of a reduction in the price of the A330-300 aircraft in the sum of US$9.44m which Thai received as a result of their late delivery.

[34]While the Court of Appeal may of course take a different view, I am not persuaded that any of these grounds of appeal would have a real prospect of success. No argument has been advanced that there is any other compelling reason for giving permission to appeal. Accordingly, I refuse permission.

[35]Although it may be said that it is not the court’s concern, I would also mention that if Koito were to succeed on either of its first two grounds of appeal, then unless Koito was also successful on its fourth ground which involves a challenge to my assessment of an aspect of the expert accounting evidence, the result would be a distinctly Pyrrhic victory.

[36]The first two of Koito’s grounds of appeal go to the question of whether the costs and benefits which accrued to Thai from the third year of the Jet leases should be taken into account in the assessment of Thai’s damages. As I commented at para 52 of the judgment, the situation which occurred in this case in which each party sought to concede in its closing submissions the other party’s case on that issue was an unusual one. I do not accept, however, that Koito was prejudiced by Thai’s late change of case. That is first of all because I cannot see that the evidence given at the trial would have been any different if Thai had advanced as its primary case at the start of the trial the contention that only the first two years of the Jet leases should be brought into account, instead of relying on it at that stage as an alternative case. Secondly, Koito was not prejudiced because the result of Thai’s change of position was on my findings to reduce the amount of damages which Thai has been awarded.

[37]As can be seen from the judgment, had the third year of the Jet leases been brought into account, then I would have found that Thai was entitled to recover costs of leasing the aircraft in the sum of US$156m rather than US$107m. As recorded in para 26 of the judgment, the total cost of leasing the aircraft from Jet for three years was just under US$162m. In assessing the amount of Thai’s net loss of profits, I found (at para 127) that the best available estimate of the lost contribution from the A330-300 aircraft was that made by Thai’s accounting expert, Mr Dearman. There was no material disagreement about the other figures needed for the calculation – only about whether lost contribution from the B777-300 aircraft and depreciation should in principle be included. As recorded in para 104 of the judgment, Mr Dearman – whose figures I had accepted as the most reliable – calculated that over the period until 31 May 2012 (the end of the second year of the Jet leases) Thai incurred a net loss of around US$185m; and that, if the third year of the Jet leases were to be included, this loss would be reduced to approximately US$156m.

[38]I held that Thai is entitled to recover the cost of the Jet leases for the relevant period to the extent, but only to the extent, that it did not exceed Thai’s net loss of profits. Accordingly, if I had concluded that the relevant period was three years, it would have followed that Thai was entitled to recover the cost of the Jet leases for that period capped at the amount of US$156m. The same result would have been reached if I had accepted Koito’s contention that Thai could not claim the cost of mitigation and could only claim its net loss of profits.

[39]I did not think it right to refuse to allow Thai to argue that the third year of the Jet leases should be left out of account when the result of preventing Thai from limiting its case in closing submissions in the way that it sought to do would have been to award additional damages to Thai of almost US$50m, and to do so on what I considered on the evidence to be a wrong basis (namely, that the third year of the Jet leases was attributable to Koito’s breaches of contract).

[40]By the same token, if Koito were to succeed on either of its first two grounds of appeal, then (unless it also succeeded on the fourth ground) the result would be an “own goal”, in that this would lead to a substantial increase in the amount of damages payable by Koito. It is only if also Koito succeeded on its fourth ground of appeal, so that a deduction of US$67m was required to be made for depreciation, that Koito would achieve a reduction (of some US$18m) in the damages awarded to Thai. If, on the other hand, Koito were to succeed on its fourth ground of appeal but not on either of its first and second grounds, the quantum of damages payable would be entirely unaffected, as it would be by success on the third ground.

[41]Although these potential consequences are implicit in my earlier judgment, I have thought it right to spell them out.

Order

[42]I will make an order to give effect to the rulings in this judgment based on the draft form of order submitted by Thai’s solicitors.