BAE Systems Management Service (Two) Ltd & Anor v AS Enimex

This is a renewed application for permission to appeal with appeal to follow if permission is granted. Permission to appeal was refused on paper originally by Longmore LJ. The appellant applied to renew the application at an oral hearing. When the matter came on, the appellant was without legal representation, as it had been in the court below, and therefore Waller LJ adjourned that hearing in order to give it an opportunity to obtain representation. He directed that the adjourned application be heard on notice to the respondent, with appeal to follow if permission were granted.

The appellant is a company called AS Enimex, which is incorporated in Estonia. On 1 June 2006 it entered into an operating lease agreement with the first respondent, BAE Systems Management Services (Two) Ltd (“BAE”), in respect of an ATP model aircraft registered in the UK as G-MANP. BAE had leased the aircraft from its second owner, Trident Aviation Leases and Services (Jersey) Limited (“Trident”), under a head lease dated 23 June 2006. The present application arises out of an assessment of damages carried out by the Admiralty Registrar, Master Kay, following an order by Tomlinson J giving judgment against Enimex in favour of BAE and Trident.

The background to the proceedings can be summarised quite shortly. The aircraft was delivered to Enimex on 12 July 2006. In October 2006 it suffered damage as a result of bad weather in Tallinn and was out of service for a time pending the completion of the repairs. Under the lease rent was payable at the rate of US$32,000 monthly in advance, without any deductions, set off or counterclaim, and in the event of default interest was to be paid at the default rate, which is defined in schedule 1 of the lease as 3% over the base rate of the Bank of England compounded with monthly rests.

By clause 7 of the lease the obligations of Enimex were expressed to be absolute and unconditional, regardless of any supervening events, and were to be performed irrespective of any set-off, counterclaim or other defence that might otherwise be available.

By clause 16 Enimex agreed to indemnify BAE and any “financier” (an expression which included Trident) for any losses it might suffer as a result of any breaches of the agreement.

By clause 21.14 any “indemnitee” under clause 16 was expressly entitled to enforce the benefit of the obligations extended to it in clause 16 under the Contracts (Rights of Third Parties) Act 1999.

By clause 18, in the event of a default by Enimex, BAE was entitled to terminate the lease, whereupon Enimex would become bound to pay any outstanding rent together with the cost of putting the aircraft into redelivery condition and compensation for any losses that BAE might have suffered as a result of the determination of the lease.

Enimex failed to pay the rent due in February, March, April, May or June 2007, although on 18 April it made a payment of US$30,500 in respect of rent outstanding. BAE therefore served various notices of default pursuant to the terms of the lease. Enimex also failed to pay the rent due in July 2007 and in the view of BAE had committed, and failed to rectify, a number of other breaches of the lease. Accordingly, on 9 July BAE gave notice of termination as provided for in the lease and asked Enimex to redeliver the aircraft at Tallinn International Airport. On 10 July Enimex gave up possession of the aircraft and its documents.

The obligations of Enimex under the lease had been guaranteed to the extent of US$300,000 by Dresdner Bank AG. On 16 July BAE informed the bank that Enimex was in default and made a call on the guarantee. On 26 July the bank paid BAE US$161,500 in respect of outstanding instalments of rent and on 2 October 2007 the bank paid a further sum of US$138,500 in respect of losses caused by various other breaches of the lease on part of Enimex. On 7 March 2008 BAE and Trident started proceedings against Enimex claiming damages for breach of the lease and, in the case of Trident, the costs of repossessing the aircraft, loss of rent and maintenance and storage charges.

After some interlocutory skirmishing the matter eventually came before Tomlinson J on an application by the respondent for the defence to be struck out as having no real prospect of success. The judge ordered that there should be judgment for BAE for damages for breach of the lease to be assessed with interest and costs and ordered that Enimex should indemnify both claimants pursuant to clause 16 of the lease for losses suffered as a result of its various breaches in an amount to be assessed.

On 22 March 2009 Master Fontaine ordered that the assessment be carried out by the Admiralty Registrar, and thus the matter came before him on 21 July for that purpose. BAE and Trident were represented by Mr Milner of counsel. The registrar gave permission for an employee of Enimex, Mr Sikk, to represent the company. Evidence was called and argument was addressed to the Registrar over some days. On 14 August the registrar delivered a substantial judgment ordering Enimex to pay £146,835.57, US$646,477.42 and €65,446.49 in respect of the various heads of damages claimed by BAE and Trident.

Enimex now seeks permission to appeal against the Registrar’s order on a number of grounds. As occurred in the court below, we gave permission for the company to be represented by Mr Sikk, who had provided a valuable skeleton argument and who has addressed us on the points that he regarded as of particular importance. He specifically asked that we should consider, in addition to those matters on which he addressed us, all the matters raised in his skeleton argument, and that of course we shall do.

The first ground of appeal is that the Registrar was wrong to reject a submission that the damages should be reduced because BAE had been complicit in the breach of the lease. This is the principal argument set out in the written skeleton. In its written closing submissions before the Registrar Enimex argued that the lease had been terminated largely as a result of BAE’s own acts and omissions, in particular, by failing to issue proper and timely instructions for the necessary repairs, failing to provide appropriate spare parts and by failing to deliver them on time, all of which prevented Enimex from putting the aircraft back into service and earning the funds needed to pay the rent. That was said to constitute gross negligence on the part of BAE and something to be taken into account when assessing its recoverable loss. It was also suggested that BAE had, by that means, cynically procured the termination of the lease for its own purposes.

The Registrar rejected that argument on the grounds that, if well-founded, it was really a defence to liability rather than quantum and was not open to Enimex at that stage in the proceedings. In my view, he was clearly right about that. Enimex also seeks to challenge his decision on the grounds that, by its action BAE caused the agreement to be terminated prematurely, thereby incurring losses that would not otherwise have been sustained. It is said that it thereby failed to mitigate its loss and that any award of damages must be reduced accordingly. On that basis Enimex has argued that the Registrar was wrong to say that the point was not open to it.

There are, in my view, several difficulties in the way of that argument. The first is that it does not reflect the way in which the matter was argued below or the nature of the Registrar’s decision. The argument below was not formulated in perhaps as clear a way as might have been desirable, but it is clear that it was based on the proposition that BAE had caused or contributed to the breach and should be deprived of part of its damages for that reason. It was not put on the basis that any identifiable part of BAE’s loss had been caused by its own actions. In my view, it was not open to Enimex to take that point at this stage of the proceedings, since it depends on findings of fact which the Registrar has not made and which he was not asked to make.

The second difficulty is that the argument is not, in my view, sound in law. The duty to mitigate arises only when a breach of contract has been committed, not before. It is not open to a person who has broken his contract to say that the other party should have acted before the breach in a way that would have reduced his loss when the breach eventually occurred. It might be prudent for him to do so, but there is no duty on him in law to act in that way. Quite apart from all that, however, the Registrar’s findings do not support the submission that BAE was in breach of its obligations. Having considered all the evidence, he said that Enimex had not satisfied him that the BAE company responsible for repairing the aircraft was the first respondent in this appeal. Nor did he make any finding that there had been a failure by BAE Systems Management Services (Two) Ltd to perform any obligations relating to the repair and maintenance of the aircraft. There was no appeal against the Registrar’s findings, or lack of findings, in this respect, nor can I see any basis upon which an appeal might successfully be made on those grounds. For this reason as well this ground of appeal is, in my view, bound to fail.

When he addressed us this morning Mr Sikk advanced a slightly different argument, namely, that the loss in this case was caused by BAE’s decision to terminate the lease rather than by any breach of contract on the part of Enimex. That, in effect, is an argument that the loss sustained by BAE is to be treated in law as having been caused by its own decision to terminate the contract rather than by the breach of contract by Enimex which led to the termination. If that were sound, it would mean that Enimex was not liable to BAE in respect of those particular losses. In my view, however, that is an argument which, if it was to be raised at all, should have been raised before Tomlinson J. The judge held that Enimex was liable to BAE in respect of all heads of damages claimed; all that was referred to the Registrar was the assessment of those damages. For this reason I do not think it is open to Enimex to raise the point at this stage. Moreover, as Mr Sikk accepted, BAE terminated the agreement in response to a breach of contract on the part of Enimex. A decision of that kind, under a contract worded in the way that this contract was worded, involved a repudiation of the contract by Enimex and thereby a breach of all obligations remaining unperformed. It follows that the loss is treated in law not as being caused by the decision to treat the contract as discharged but by the breach which led to that step being taken. The argument therefore is bound to fail as a matter of law.

The second ground of appeal raised in the skeleton argument is that the Registrar was wrong in attaching little weight to the statement of one of Enimex’s witnesses, Mr Andrea, whose evidence was adduced in support of the complicity argument, because it was produced very late in the proceedings. The proceedings had been disrupted to some extent by applications on the part of Enimex for adjournments and for permission to adduce additional evidence at a late stage. In that context, the amount of weight to be attached to Mr Andrea’s evidence was essentially a matter for the Registrar and this court would be very reluctant to interfere with his decision. It would only do so if it were satisfied not only that he had gone seriously wrong but that his error had made a substantial difference to the outcome of the proceedings before him.

In the present case, I can see no grounds for thinking that the Registrar did go seriously wrong in that respect, but in any event Mr Andrea’s evidence could not have made any difference to the success of the complicity argument, which was bad in law and not open to Enimex to raise for the reasons the Registrar gave. In the course of his submissions, Mr Sikk submitted that Enimex cannot be liable for losses caused by events which they could not reasonably have foreseen, but that argument is inconsistent with the terms of the lease itself. Even if it were not, it would amount to an argument that there were certain heads of loss for which Enimex could not properly be held liable and as such ought to have been advanced before Tomlinson J. It was not; and, as a result, the judge held that Enimex was liable for all the heads of damages claimed. In my view there is no substance in this argument.

The third ground of appeal raised in the skeleton argument is that the Registrar was wrong to hold that, even if Enimex did have a claim against BAE for breach of contract, it would at best give rise to a separate counterclaim rather than a defence to BAE’s claim. This related to an argument that was put forward by Enimex to the effect that BAE was itself in breach of contract and that its damages should be reduced accordingly. To that extent it was similar, though not identical, to the complicity argument, and, insofar as it involves an attack on the judge’s decision on liability, the Registrar held that it was not open to Enimex before him. In my view that is plainly correct. However, insofar as Enimex sought to argue that BAE’s damages should be reduced by reason of the loss caused by its own breach of contract, it called for separate consideration.

The Registrar pointed out that, in order to succeed on this argument, Enimex would have to counterclaim for damages for breach of contract. However, it had not attempted to do so. Moreover, having considered the evidence before him, the Registrar, as I have already observed, was not persuaded that BAE was in breach of the lease or had incurred liability of any kind to Enimex. It is said that the Registrar was wrong to reach those conclusions, but, for my own part, I can see no basis on which his decision might be successfully challenged.

The fourth ground of appeal is that the Registrar was wrong to award interest on damages at 8% instead of the rate of 3% above Bank of England base rate for which the lease provided. The lease did provide for interest at 3% over Bank of England base rate, but only in relation to rent and other sums outstanding from time to time under it. It did not make any provision, not surprisingly, for interest payable on an award of damages.

Interest is awarded in the discretion of the court to compensate the injured party for being kept out of its money. The court has a broad discretion as to the rate at which, and the period over which, interest is awarded, but it is usually awarded in respect of the period between the date of the loss and the date of the judgment at a rate which reflects the commercial cost of borrowing money over that period. There was evidence before the Registrar, to which he referred in his judgment, that the average cost to BAE of borrowing over the period in question exceeded 8%. In the light of that evidence, I can see no basis upon which it could be said that the Registrar’s decision exceeded the ambit of his discretion.

In my view, none of the grounds on which permission to appeal is sought has any prospect of success and, in those circumstances, I would refuse permission to appeal.

I agree.

I also agree.