Sabena Technics SA v Singapore Airlines Ltd.

On 30 June 1998 the First Defendant (“SIA”) made delivery to Middle East Airlines Airliban SAL (“MEA”) in Singapore of an Airbus A310-200 passenger aircraft. The aircraft was owned by Singapore Aircraft Leasing Enterprise (Pte) Limited (“SALE”) and was delivered under a sub-lease contained in a Lease Agreement dated 29 July 1997. SIA was the head lessor to the Second Defendant, Singapore Airlines Mauritius Ltd (“SAML”) which sub-let the aircraft to MEA. The sub-lease was for a period of 4 years and 9 months. The aircraft can be referred to by its Singapore registration letters STK.

The aircraft had two engines, type JT9D-7R4E1. They bore the numbers P715412 and P715416. I shall refer to those engines simply as “412” and “416”.

This was the third of three similar aircraft to be delivered by SIA under a sub-lease by SAML to MEA. The first – STI – was delivered on 4 August 1997 and the second – STJ – was delivered on 30 September 1997.

Twin-engine aircraft are the subject of a special regime of configuration, maintenance and procedures designed to protect against and deal with the eventuality that one engine may fail in the course of flight. In order to minimise the risk of this happening when the aircraft is a substantial amount of flying time from the nearest airfield, such aircraft are subject to limitations on the routes they can fly. For present purposes the material regime is known as Extended Range Twin Operations (“ETOPS”). Compliance with that regime was needed if the aircraft was to fly on routes which took it more than 60 minutes and up to 120 minutes flying time from the nearest airfield.

ETOPS standards involve numerous measures, including modifications to the engines. Aircraft which fly on ETOPS routes have to be approved as fit to do so by the civil aviation supervisory body of their country of registration. In Singapore this body was the Civil Aviation Authority of Singapore (“CAAS”). In Mauritius where the aircraft were to be registered it was the Department of Civil Aviation of Mauritius (“DCAM”). And in France it was the Direction Generale de L’Aviation Civile (“DGAC”).

The manufacturers of the engines on all three aircraft were Pratt & Whitney.

The ETOPS standards relevant to the three aircraft were published by Airbus in a document know as the CMP. This stood for configuration, maintenance and procedures. Configuration refers to the structure of the aircraft, engine parts and components, whereas maintenance set out a maintenance regime and procedures relates to such matters as flight crew procedures.

This case is concerned only with the configuration regime and in particular with a provision which is known as “SB 74”. This was introduced by the 12^th edition of the CMP in 1995, Revision 12. This revision, in so far as it covered item SB 74, was repeated in Revision 13 which was issued on 15 May 1998 and took effect in the last week of June 1998. The content of the CMP was approved by the DGAC as the supervisory aviation authority for France, the country of the manufacture of the aircraft.

SB 74 also bore the reference in the CMP “SB PW7R4 72-382”. It was expressed in the following words:

“INTRODUCE PWA 1422 1^ST STAGE TURBINE BLADES.INCORPORATE AT NEXT HPT MODULE EXPOSURE, BUT NO LATER THAN 31/DEC/99”

The connotation “SB” denotes a service bulletin. This is issued by an aircraft manufacturer giving details of modifications. The modification referred to in SB 72-382 – the introduction of 1^st stage turbine blades - involved introducing turbine blades of tougher metal than those currently fitted to the type E1 engine. The precise meaning of “next HPT module exposure” was, until shortly before the trial, a matter of controversy. For reasons which I shall explain later in this judgment, this issue has fallen away. For present purposes it is sufficient to say that what is involved is that the engines should have been subjected to a workshop visit and sufficiently opened up to admit of access to the high pressure turbine (HPT) module – that separable part of the engine which has the function of extracting energy from the combustion process to drive the high pressure compressor module.

The following terms of the sub-lease are relevant.

“5.

Delivery

5.1

Lessee shall be entitled at its own expense to carry out inspection of each Aircraft during the pre-delivery checks at SIA’s facility in Singapore, provided such inspection shall not interfere with work on the Aircraft. Each Aircraft will be delivered on an “as is where is” basis, in a condition as specified in Appendix “B” to this Agreement, and subject to Article 12.

5.2

Lessor shall absorb (or procure that Head Lessor absorbs) all costs of fuel and other aircraft handling charges for Lessee acceptance flights of approximately two (2) hours for each Aircraft. Lessee, at its own expense, will be entitled to have no more than four (4) of its representatives on board each such flight as observers. In the event such inspection or Lessee acceptance flight shall disclose that the Aircraft (a) does not conform to the configuration described in Appendix “B” to this Agreement, or (b) is not in an airworthy condition with all systems in proper operating condition and meeting the CAAS or DCAM requirements as applicable, Lessor shall promptly correct such deviation or defect prior to the relevant Delivery Date.

5.4

Signature on the Certificate of Acceptance by Lessee shall constitute evidence that the relevant Aircraft was satisfactory and in accordance with the requirements of this Agreement at the time of delivery.

12.

Lessee expressly agrees and acknowledges that except as specifically provided in this agreement. Lessor makes no and disclaims any representation or warranty, express or implied, arising by law or otherwise, as to the airworthiness, value, condition, merchantability, design, operation or fitness for use for any purpose of each aircraft or any parts thereon or any other representation or warranty whatsoever express or implied, with respect to each aircraft or any parts thereof, and whereas lessor has made representation or warranty, lessee hereby waives any and all rights and remedies it may have or have had against lessor arising therefrom whether arising in contract or in tort out of any negligence or strict liability of lessor or otherwise, including but not limited to rights and remedies for loss of use, revenue and profit or other incidental or consequential damages. Delivery by lessee to lessor of the certificate of acceptance shall constitute conclusive proof as between the parties hereto that on the delivery date lessee or lessee’s duly appointed and authorised representative examined and investigated each aircraft and every part thereof corresponded to the description specified in appendices “A” and “B” and was in good working order and repair, without defect (whether or not discoverable as at the delivery date) and in every way satisfactory to lessee.

15.1

Lessee will, upon termination or expiration of the Lease Term (other than following an Event of Default or a Total Loss) at its own cost and expense redeliver each Aircraft to Lessor at Singapore International Airport, Changi or at any other location to be mutually agreed upon, at the end of the lease Term thereof or on termination, as the case may be.

Each Aircraft shall be free and clear of all Liens other than permitted Liens, with all insignia and other distinctive markings of Lessee having been removed therefrom, and restored to the original Aircraft delivery condition as shown on Appendix “B”.

When redelivered to Lessor, each Aircraft will have installed thereon the Engines installed on the Delivery Date or one of more other engines then being leased by Lessee from Lessor which are of the same type and series as the Engines (the Engines and such other engines being herein collectively called “Lessor Engines”) unless at the time of redelivery one or more Lessor Engines are not available due to maintenance or repair activity at SIA’s premises.”

Appendix B provided:

“AIRCRAFT CONDITION AT DELIVERY

…………

2.

CERTIFICATION

2.1

………….. The Aircraft shall be 120 minutes ETOPS equipped.”

Under the sub-leases as originally entered into, the period of the sub-lease of each of the three aircraft was 5 years from delivery. In circumstances which I shall describe this was subsequently agreed to be reduced.

When MEA took delivery of STI and STJ those aircraft were maintained for MEA by SIA under a “power by the hour” agreement under which SIA was paid a flat rate for maintenance calculated by reference to the number of flying hours. This agreement terminated on 31 May 1998.

It was only on 9 May 1998 that MEA began negotiations with Sabena to obtain a substitute maintenance agreement in respect of the two aircraft (STI and STJ) already delivered and the third (STK), which was about to be delivered. MEA wanted another power by the hour agreement running up to the end of the sub-leases. Such agreement would also necessarily involve the maintaining organisation taking responsibility for compliance by all the aircraft with the ETOPS CMP. Not only did MEA require to use the aircraft on ETOPS routes for which operational approval would be needed from CAAM, but the aircraft would have to be redelivered under the sub-leases in accordance with Appendix B --- “120 minutes ETOPS equipped”. It follows that under a power by the hour agreement work which, in order to achieve ETOPS compliance, had not already been carried out at the commencement of the maintenance agreement would have to be carried out by the maintaining organization at its own expense and therefore, if envisaged at the time when the maintenance agreement was entered into, ought to be allowed for in the rate charged. The cost of introducing SB72 - 382 into each engine was likely to be of the order of US$450,000. It was the most costly of all the CMP ETOPS modifications.

Negotiations between MEA and Sabena were conducted at a series of meetings in Paris between 9^th and 31^st May 1998. M. Michel de Maere was the chief negotiator for Sabena and MEA was represented by Yassine Sabbagh, Michel Tueny, Fady Mallet and Henry Page, a partner in Penningtons, the Claimant’s solicitors. In the course of those meetings M. de Maere, who was familiar with the ETOPS regime and with SB72-382 in particular, enquired of the MEA team to what extent the three aircraft were currently compliant with ETOPS and had all the SBs incorporated. The MEA representatives said that they believed that SIA must have carried out maintenance properly in accordance with the CMP and offered to obtain confirmation of this from SIA. Everything was being negotiated in something of a rush in order to have an agreement finalized by 31^st May. M. de Maere said in evidence that he was given an oral assurance that all the necessary ETOPS work had already been done. He trusted the accuracy of this assurance because MEA and SIA were reliable airlines. He was also provided with information and records by Mr. Page which showed that certain of the engines on STI and STJ had been given HPT module changes during 1997 which reinforced his belief that SIA had carried out the ETOPS modifications. Although by 31^st May 1998 no confirmation about ETOPS work had been obtained from SIA, Sabena and MEA concluded their Maintenance Agreement on that day, Mr. De Maere believing that he could rely as accurate on what MEA had told him.

Delivery of STK to MEA was scheduled for 28^th May 1998. However, the team from MEA which went to Singapore on 21^st May to inspect the aircraft and to take delivery rejected the aircraft for a number of reasons including one of the engines being said to be defective. This had nothing to do with SB 72-382. However, at the beginning of June 1998 Penningtons wrote to Clifford Chance about the ETOPS compliance of STK, stating that the Engine Vane Bleed Control did not comply with the latest ETOPS SB. They raised the question whether this might be so on the other two aircraft already delivered.

In order to try to resolve the differences over STK a meeting was convened at Clifford Chance’s offices in Paris on 11^th and 12^th June 1998. It was attended by teams from MEA, including Mr Tamim, Vice President of Quality Assurance, Mr. Sabbagh, Senior Engineer Technical Services, Mr Michael Tueny, MEA’s Legal Counsel, Mr Mallat, Head of MEA’s Legal Department and Mr. Page of Penningtons and from SIA, including Mr. Khoo Soo Hock, Mr Jason Yap and Mr. Roger Baggallay, a partner in Clifford Chance. It was also attended by representatives of SALE which on about the date of delivery of each aircraft had purchased it from SIA and had replaced SIA as lessor.

In the course of that meeting negotiations covered a number of diverse issues which had arisen between MEA and SIA, including financial disputes as to maintenance reserves under the lease following termination of the SIA Maintenance Contract and the condition of STK, in particular the engine blades, the exhaust gas temperature margin and question of ETOPS compliance. Because what passed in the course of those negotiations is highly material to an explanation of the meaning and legal effect of what was agreed I shall have to consider the evidence of those present in some detail later in this judgment.

The result of those negotiations was a document entitled Heads of Terms which was drafted by Mr. Page and Mr. Bagallay, the two solicitors present. It is at this point convenient to set out its most material terms. It was expressed to be made between SIA, SAML, SALE and MEA and by the Preamble it stated:

“After ‘without prejudice’ discussions in Paris on 11, 12 and 13 June 1998, involving representatives of the Lessee, SIA, the Lessor and SALE, the following heads of terms have been agreed as a basis for resolving certain disputes concerning the maintenance reserves required under the Lease following termination on 31 May 1998 of a Maintenance Contract dated 4 June 1997 between SIA and the Lessee and whether the Lessee should accept delivery of the third aircraft (MSN 0357) tendered for delivery under the Lease on 29 May 1998 (the “Third Aircraft”).

3.

SIA, and the Lessee agree to sign and exchange letters in the form of Appendices A and B hereto respectively relating to ETOPS issues.

4.

SIA hereby declares that Engine No. 2 on the Third Aircraft meets the requirements of the Lease. Nevertheless, as a gesture of goodwill, SIA agrees to remove and replace Engine No.2 on the Third Aircraft with another engine (Serial Number P715412). Replacement is subject to the Lessee’s acceptance, following borescope inspection and reviewing of all technical records referred to in Appendix C (and any other technical records in SIA’s possession which are required to establish airworthiness).

6.

SALE agrees that Sabena is an Approved Maintenance Provider and the Lessee agrees to provide to SALE a copy of relevant technical details of its maintenance contract with Sabena. The Lessor understands that the Approved Maintenance Provider will use the SIA Aircraft Maintenance Provider in consultation with the Lessee. The Lessor agrees that such programme constitutes an Approved Maintenance Programme for the purposes of the Lease, provided that such arrangements are, and continue to be, approved by DCAM.

7.

The parties agree that delivery shall occur as soon as reasonably possible, subject to the terms of the Lease and the terms set out herein. If delivery does not take place on or before 30 June 1998, this agreement, without prejudice to its non-binding nature, shall have no further effect.

9.

The parties agree that if and on condition that the Lessee signs a Certificate of Acceptance for the Third Aircraft, thereby taking delivery of the Third Aircraft on or before 30 June 1998:

(1)

The Lease Terms of each Aircraft under the Lease shall be reduced as follows:

- 3B – STI to 4 years, 7 months;

- 3B – STJ to 4 years, 7months;

- 3B – STK to 4 years, 9 months;

in each case from the Delivery Date of such Aircraft.

(5)

All the disputes concerning the maintenance reserves, the delivery condition of the Third Aircraft and otherwise, as set out in correspondence between the parties from 19 May 1998 to date, shall be fully and finally settled.

11.

Until delivery of the Third Aircraft, these Heads of Terms and their Appendices shall not have legal effect and they and their implementation are without prejudice to and shall not themselves amend or affect the parties’ existing rights and obligations under the Lease or otherwise, but in order to implement the spirit and intention of the Heads of Terms, the parties shall co-operate in good faith and urgently to implement its provisions. Upon delivery of the Third Aircraft to the Lessee, Articles, 2, 6, 9, 11 and 12 of this Agreement shall become legally binding and shall have effect in all respects as if they were contained in the Lease, which will be regarded as being amended by such Articles. All other terms and provisions of the Lease shall remain unamended.

12.

These Heads of Terms are governed by English law. Terms used herein shall have the same meanings as in the Lease unless the context otherwise requires.”

Appendix A set out the text of the letter referred to in Article 3. It was from SIA to MEA in this form:

“Airbus A310-200 Aircraft:

Subject ETOPS compliance Ref: A/EA 3,000 Revision 13 dated 30 July 1997

We confirm that Aircraft 9V-STK is currently in compliance with 120 mins ETOPS as per Airbus CMP Revision 13 (Revision 13).

Upon the understanding that all ETOPS-related parts and components installed on Aircraft 3B-STI and 3B-STJ during the term of the Maintenance Agreement between MEA and SIA were either supplied by SIA or, if installed by MEA, were ETOPS-compliant as at 31 May 1998, SIA confirms that Aircraft 3B-STI and 3B-STJ are 120 mins ETOPS equipped as at 31 May 1998 and in compliance with the applicable requirements of Revision 13 as at that date.

SIA agrees to provide a detailed listing of all records and service bulletins necessary to demonstrate the date and method/proof of compliance with such applicable requirements of Revision 13, by 26 June 1998, and as regards such documentation concerning the Third Aircraft, not later than its delivery.”

The letter was signed on behalf of SIA at or about the time when the Heads of Terms were signed (12^th or 13^th June 1998) but it was not handed over until about 30^th June.

A technical team from MEA, including Mr. El Khoury, arrived in Singapore on 24^th June to take delivery of STK. Their arrival was delayed by visa problems. It will be necessary to consider later in this judgment precisely what information and documents were provided to that team. In the event they accepted delivery of the third aircraft STK on 30^th June and returned with it to Beirut.

On 2^nd April 1999 Sabena discovered in the ordinary course of its maintenance of STI that engine 408 did not incorporate SB72-382. They carried out the SB work and invoiced MEA. The latter refused to pay, maintaining that this was covered by Sabena’s power by the hour maintenance agreement. In January/February 1999 Sabena encouraged MEA to claim against SALE and then SIA on the basis that the SB ought to have been incorporated prior to delivery under the sub-lease.

On 30^th July 2000 Sabena further discovered that SB-72-382 had not been incorporated into engine 442 on aircraft STJ.

It is common ground that of the six engines attached to the three aircraft on delivery only two had been modified to incorporate SB72-382. These were 424 on STJ and 412 on STK. In particular engine 416 on the third aircraft, STK, had not been modified.

In April 1999 Sabena incorporated its maintenance department which became Sabena Technics SA. By novation agreement dated 10 January 2001 between MEA, Sabena and Sabena Technics the Maintenance Agreement of 31 May 1998 was taken over by Sabena Technics. By a legal assignment dated 12 March 2001 MEA assigned to Sabena Technics all claims against SIA and/or affiliates whether in contract or tort “arising out of clause 3 of the Heads of Terms ….. dated 13 June 1998 and/or the letter from SIA to MEA dated 12 June 1998 and/or SIA’s failure to incorporate SB72/382 in respect of the 3 Airbus A310 aircraft ….”.

The claim now brought by Sabena Technics (“SNT”) is therefore as assignee of MEA’s claim against SIA. SNT confines that claim to SIA and have not relied on any independent claim against SIAM. In pursuing its claim SNT accepts that it stands precisely in the shoes of MEA. Its entitlement to sue as assignee is not challenged.

The claim is advanced on the following grounds.

There are three fundamental issues in relation to the letter of 12 June:

These issues are, however, substantially interlinked. In order to ascertain the legal effect of the letter and its meaning, it is necessary to investigate the meaning and legal effect of the Heads of Terms. For that purpose, it is necessary, in turn, to investigate the circumstances known to both parties which gave rise to the negotiation of the Heads of Terms. These background circumstances can be divided into two distinct areas:

I shall therefore first consider these two parts of the evidence.

The Preamble to the CMP provides as follows:

“Operators may develop alternate configuration items, and/or procedures in compliance with applicable operational rules. These alternate configurations and/or operational equivalents shall be approved in compliance with applicable operational rules, and are not included in this document.”

The reference to service bulletins marked with an asterisk does not apply to SB 74 set out in paragraph (9) above. There are, however, many SBs in Revisions 12 and 13 which like SB 74 introduce events and dates by which the specified modification is to be carried out. Thus SB 73 is in similar terms:

“Improved HPT lenticular seal. Incorporate at next HPT module exposure, but no later than 31/Dec/99.”

Other SBs simply provide for incorporation “no later than” a given date, usually 31 December 1999. A further variant is SB 56 which relates to New HPC 5^th Stage Blades, these to be incorporated “at next engine shop visit in which the HPC is exposed, or no later than 4000 (Cycles) since new/refurbished HPC, but no later than 30/June/2000”. This was not a CMP relating to the E1 engine, but rather to the Pratt & Whitney 4152 engine. However, the time regime for incorporation is to similar effect. It is to be observed that, when this SB was introduced by Airbus, the covering explanatory letter of 17 July 1995 stated in relation to it:

“The limit date for compliance is next shop visit in which the HPC is exposed, or no later than 4,000 cycles since new/refurbished HPC, but no later than 30/June/2000.”

It is the Claimant’s case that the effect of the Preamble is to require that the modification under the SBs must be effected no later than the happening of the next specified event or the specified end-date, whichever is the earlier. The “time limits” referred to in the Preamble are thus to be read in this sense and not as being confined to the end dates. If a specified event, such as “next HPT module exposure” is to occur before the specified end date, the aircraft, in order to remain in compliance with the ETOPS CMP, must be modified on that visit or must not subsequently to that visit be used on ETOPS routes without the prior approval of the relevant aviation authority. Thus, if in the case of SB 74, there had been an HPT module exposure after that SB had been introduced and there had neither been modification in accordance with that SB nor prior approval of postponement by the aviation authority, that aircraft would cease to be ETOPS equipped or to comply with the requirements of the CMP.

According to the expert evidence of Mr Denis Philips, who was called by SIA, the aircraft and the engine manufacturers would have arrived at the end date by a process of risk analysis. The precise methodology does not matter. The broad concept involved in such an exercise is that a point in time is identified by reference to such factors as the incidence of the development of defects and cost of advance remedial work. By attaching relative weight to the various different factors taken into account a projection can be calculated so as to indicate that latest point of time by which the modification should be completed. The concept of a “time limit” specified in this manner thus rests on obviously logical ground. Indeed, SIA submitted that the only time limit in SB 74 relevant to compliance was 31 December 1999.

SIA argued that in SB 74 the words “incorporate at next HPT Module Exposure” merely performed the function of a recommendation of a non-mandatory nature. According to the evidence adduced by SIA, it was on this assumption that they dealt with CAAS in relation to their own Airbus fleet. SIA had operated the Airbus continuously since 1985.

There has been adduced a substantial body of evidence with regard to ETOPS operation from factual and expert witnesses with experience of the maintenance of various types of twin-engine Airbus aircraft.

According to Mr de Maere of SNT, it was the practice of SNT to incorporate ETOPS SB 74 which referred to first HPT module exposure at that time and not to await the end date. SNT not only was responsible for Sabena Airbus aircraft but also for Nigerian Airways, the Belgian Air Force, China Northwest, South African Airways, Egypt Air, Quantas and three aircraft for Dubai.

According to the evidence of Mr Wong Kok Chan, in 1998 a Quality Control Superintendent in SIA’s Quality Control Division with primary responsibility for overseeing ETOPS compliance on the SIA fleet, he had been more closely involved and familiar with ETOPS issues than anybody else in SIA. He said in evidence that SIA’s normal practice would have been to incorporate SB 72-382 at the next shop visit after introduction of the SB, unless they were unable to obtain the parts, which was the case on several occasions.

There was also evidence that Air Liberte, a French airline now no longer operating, followed the practice of incorporating an SB at first HPT module exposure, for, according to Mr Philips, they always tried to do a maximum of modification on the occasion of a shop visit.

Although there is some evidence that particular SIA engines were not modified on workshop visits, this was in each case due to the fact either that parts were not available or that the intention was to dispose of the engine.

There is no evidence from any airline industry witness of any specific application for approval having been made to an aviation authority in any country in a case where SB 74 or any other SB had not been incorporated at the first module exposure as indicated in the SB.

There is, however, evidence that if an operator fails without prior consent to give effect to the CMP and this fact becomes known to the aviation authority of the country of registration, that authority is likely to withdraw from the aircraft in question authorisation for ETOPS operations. At least, that is, according to Mr Philip Seymour, an expert witness called by SNT, the effect of the supervisory system operated by the Civil Aviation Authority in the United Kingdom and by the FAA in the United States. In the United Kingdom the applicable statutory regime requires approval of the aircraft for ETOPS operations under Article 7(5)(b) of the Air Navigation (General) Regulations 1993. The effect of these Regulations is that it would be unlawful to fail to give effect to a CMP ETOPS provision without the approval of the Civil Aviation Authority and yet to continue ETOPS operations by the aircraft concerned. I infer that a regulatory regime similar, if not identical to that in the United Kingdom, operates in Singapore and Mauritius.

Accordingly, it is necessary to approach the meaning and effect of the ETOPS CMP against the background (i) that there is no evidence of any particular common practice amongst airline operators as to obtaining prior permission from national aviation authorities for deferral of incorporation of any SB at a workshop visit which takes place before the specified end date and (ii) that it is unlawful for an operator to fail to give effect to the ETOPS CMP and yet to operate an ETOPS-approved aircraft and engines on ETOPs routes.

There is some evidence of the understanding of DGAC and of Airbus as to the meaning of the CMP. However, this is not evidence which can be deployed to make good a relevant industry background because it is not established that either DGAC or Airbus had published their understanding at or before the time when the Heads of Terms were entered into. It is sufficient to say that in a letter from DGAC to MEA dated 19 December 2000 it was stated that DGAC agreed with MEA’s view that compliance with SB 72-382 required that if, prior to 31 December 1999, there was HPT exposure but the operator did not incorporate item 74 on that occasion, the deferral must be approved by the aviation authority. Otherwise the aircraft would be classified as non-compliant. However, DGAC added to their letter:

“However, the DGAC would like to point out that other airworthiness authorities may proceed in a different manner regarding compliance to the CMP.”

On 4 July 2001 DGAC sent a fax to Airbus on the subject “to avoid any misunderstanding regarding ETOPS CMP compliance time”. It stated:

“Configuration items listed in the DGAC approved CMP must be incorporated before the calendar end date specified in the text of the items. When a letter check, a shop visit or any maintenance action is indicated in the text, it corresponds to the most appropriate time to incorporate the configuration item, as determined by the manufacturer.

It is expected that the configuration item will be incorporated at the first occurrence of the associated scheduled maintenance action. If for some reasons the operator is not in the position to do so, the operator may have to schedule a dedicated maintenance action to implement the item before the calendar end date.

Pending the incorporation of a CMP configuration item, a temporary maintenance check or operational procedure may be required to maintain the level of reliability required for ETOPS. Such checks and procedures appear in the CMP with a cross-reference to the concerned configuration item. They must be adhered to until the configuration item has been effectively incorporated.”

This explanation leaves in doubt the regulatory consequences of a failure to incorporate the SB at the next shop visit.

Further, there is evidence in the form of letters from a Mr Andre Quet who was apparently the person at Airbus who had special responsibility for producing information about compliance with the ETOPS CMR. I have already quoted from his letter of 17 July 1995 at paragraph (35) above. It is further indicated in a schedule to that letter that for SB 72-382 “CMP Compliance” involves “At next HPT module exposure but no later than 31 December 1999”. However, by a letter dated 27 November 2000 Mr Quet stated as follows:

“Each ETOPS CMP item requiring the incorporation of a design change through a Service Bulletin has a compliance end date in calendar time defined by the JAA experts through a risk analysis.

ETOPS compliance is not invalidated so long as the end date for the CMP item is not exceeded.

The CMP Document also indicates what is the best opportunity for incorporating each item, considering the access requirements and the complexity of the work to be done. This information is useful for maintenance planning purposes but does not constitute a legal limit to conduct ETOPS flights for the operator. It allows the operator to decide the optimum time for accomplishing the SB without losing the remaining service life of the engine part.

The ETOPS operator is responsible to devise a retrofit schedule adapted to its maintenance methods and schedule within the limit of the specified end date.

For example, SB PW7R4 72-382 for PW engines JT9D-7R4 E1 was a requirement for A310 aircraft ETOPS after 31 Dec 1999. This constituted the end date by which the retrofit of each ETOPS engine must have been completed, prior to the end date for this item, unmodified aircraft remained compliant with ETOPS in accordance with national requirements.”

By a fax letter sent on 9 March 2000 by Mr Quet to SIA he stated:

“The ETOPS CMP Document for A310 aircraft, approved by DGAC France effectively prescribes that MODEL A310-222 with Engine PW JT9D-7R4 E1 500 must be modified to incorporate SB PW7R4 72-382 ‘At next HPT Module Exposure, but no later than 31/Dec/99’

This wording originates from a policy of the Authorities to define:

-

The best opportunity to incorporate the SB (This is usually at the occasion of a maintenance action when the parts are exposed).

and

-

An end date, that must not be exceeded without a formal prior permission obtained from the responsible Authority (Authority of the operators country).

When the SB cannot be incorporated at the occasion of the maintenance action considered as the best opportunity, we recommend to inform the national Authority and to let them know what are the reasons that make it impractical ie. Unavailability of parts or other industrial reasons. Our experience is that Authorities never object to a legitimate delay that stays within the specified end date. If the end date itself cannot be met, a formal permission from the Authority must be sought and the reasons must be very strong to obtain such permission. In such cases, Airbus and the engine manufacturer may have to provide technical data to support the operator’s demand.”

In the absence of any established airline industry practice, the issue of construction raised in relation to the CMP is indeed finely balanced. However, I have come to the firm conclusion that the correct test is to ask what is the point of time by which the document indicates that the operator should carry out the operation, as distinct from what is the latest point of time by which he should do so. The CMP in its natural meaning identifies two such points of time, the earlier of which is identified by the HPT module exposure. If there is to be such an opportunity which is not to be taken, there are good reasons why the aviation authority should at that point be involved. In particular, there is the need to monitor the deployment of the unmodified engine and aircraft prior to the end date. It is obviously more in the interests of public safety and aircraft reliability that the work should be conducted sooner rather than at the last minutes, just before the end date. No doubt the aviation authority would be prepared to take a flexible view if there were a good commercial or practical reason for not carrying out the work at the first module exposure. Nonetheless, the purpose of getting the supervisory authority involved at an earlier stage than the latest date presents itself to me as a strongly persuasive ground for construing the SB as including in the “time limits” the workshop visit.

Whereas it may be said that a provision that something should be done no later than a given date naturally lends itself to the description of a “time limit”, once it is accepted, as it must be, that an operational event such as the completion of a maximum number of cycles, as in SB 56, can be an effective anterior time limit, there is no basis in principle for excluding from that description an anterior maintenance event such as the exposure of the HPT module.

Further, it is to be noted that at the time when the SB was introduced in 1995 there was a period of four and a half years before the end date of 31 December 1999. That gave an operator a period of time during which an engine might be subjected to more than one relevant module exposure. Yet the SB refers to the “next HPT module exposure”, that is to say the first such exposure after the introduction of the SB. Thus a second such module exposure occurring before 31 December 1999 is not, on the face of it, acceptable. This suggests a more urgent requirement to complete the SB then to do so by the end date. There is thus nothing incongruous in describing this anterior maintenance event as a “time limit”.

I therefore conclude that an engine which has been subject to HPT module exposure since the coming into force of the ETOPS CMP 12^th Revision but has not been converted in accordance with SB 72-382 and has not previously been referred to the relevant aviation authority for permission to derogate from the CMP cannot subsequently be operated on ETOPS routes without the prior consent of the aviation authority. The expert evidence suggests that such consent would be readily given provided that the operator gave a good commercial excuse for failing to convert.

Events leading to the Conclusion of the Heads of Terms

Prior to the Paris meeting of 11/12 June 1998 SIA had on 6 May provided to Sogerma Maintenance Group at Penningtons’ request a substantial quantity of the maintenance records relating to Aircraft STI and STJ. These arrived on 11 May. The logs were not included. They had been requested for the purpose of MEA’s engaging a maintainer of all three aircraft in place of SIA. These documents included the summaries of work accomplished (“SWA”) and these included a section known as the Service bulletin status report. SIA maintains that if you knew where to look amongst these documents you could tell whether SB 72-382 had been incorporated. The SWAs showed the workshop visits of each engine. These documents did not include dirty finger print records. It is established that at some stage before the Paris meeting SIA provided to MEA a schedule of ETOPS modifications as at May 1998, at least to the extent of the Auxiliary Power Units. However, it is not established that those parts of the schedule relating to the HPC module were provided, since this part was not included in MEA’s files.

As regards the third aircraft – STK – no records had been provided to MEA before the arrival of MEA’s inspection and delivery team in Singapore on 22 May 1998. As already described in paragraph (17) above, the team rejected STK for a number of reasons which included non-compliance of the engines with the engine vane bleed control (“EVBC”) SB. This went to ETOPS compliance and Mr Page of Penningtons expressly raised this point in relation to all three aircraft in his 2 June 1998 letter to SIA.

On 3 June 1998 Clifford Chance replied to the effect that the engines then on STK (4l6 and 433) were ETOPS – equipped and that the EVBC “fully complied with the Airbus CMP requirements”. SIA Quality Control Division also issued a letter stating that the engines “were in compliance with the mandatory modifications and inspection standards listed” in the CMP Revision 12.

By their letter of 5 June 1998 Penningtons raised queries about the engine blades on STK, the exhaust gas temperatures and ETOPS. They stated in relation to CMP Revision 13 that MEA did not believe that the asterisked SBs had been carried out. SB 72-382 was not an asterisked item. If an asterisked SB had not been carried out, the aircraft could not be flown on ETOPS routes until it had been or until the relevant aviation authority had authorised the omission. The letter stated:

“If your clients wish to prove the contrary, they will have to provide us/our clients with details as to date, method and proof of compliance. Our clients suggest that “dirty finger print” copies are produced.”

It drew attention to the fact that the MEA team had listed over 150 defects following their inspection of the third aircraft.

On 8 June 1998 Clifford Chance replied that SIA had not yet received from Airbus the CMP Revision 13. However, the aircraft STK was in full compliance with Revision 12 and the first two aircraft had been delivered “in a state which comply with 120 minutes ETOPS” and the components that SIA supplied under the Power by Hour arrangement also fully complies with that requirement.

It is common ground that the Paris meeting on 11 and 12 June was held on a without prejudice basis. The main issues for discussion were the maintenance reserves under the SIA Maintenance Contract, an issue as to life limited parts, the condition of the engine blades on STK, the exhaust gas temperature issue on that aircraft and ETOPS.

In forming a view as to what passed in the course of that meeting, I have been much assisted particularly by the evidence of Mr Page and Mr Bagallay, both of whom were doing their best to give an accurate account of the negotiations.

According to Mr Page, he was instructed by Mr Tueny prior to the negotiations that it was essential to obtain a letter from SIA confirming the ETOPS position. Mr Page explained in his evidence that this was required because under the sub-lease MEA would have to redeliver the aircraft ETOPS equipped and there was nothing in the September 1997 Agreement with SIA which required the two aircraft to be ETOPS equipped as at 31 May 1998. Both Mr Page and Mr Bagallay referred in their evidence to the letter as an “official statement” from SIA, although Mr Page had no specific recollection of that phrase being used. Mr Khoo of SIA orally assured the MEA representatives that the aircraft did comply with ETOPS and that MEA did not need anything in writing. Mr Sabbagh then responded that MEA must either have the confirmation in writing or MEA must inspect all the dirty finger print copies, that is all the workshop engineers’ work sheets. There was then some discussion to the effect that as Mr Khoo said and as was agreed, such an inspection would take too long (in fact, as I find, it would have taken several weeks for an engineer to go through the records over 15 years of even two engines). Therefore an official written statement by SIA could be provided for STK. As for the other two aircraft, Mr Khoo was at first unwilling to provide such confirmation, because MEA had taken over certain of the line maintenance since delivery under the sub-leases and SIA were concerned that MEA might, since delivery under the lease, have installed a part that was not in accordance with the CMP. This objection was overcome by MEA offering to provide a letter which would be a similar official statement that all ETOPS related parts and components were either installed by SIA or were ETOPS-compliant as at 31 May 1998. The provision by SIA confirmation of the letter of was thus to be conditional on MEA’s confirmation to SIA. According to Mr Page, whose evidence I accept, the result of the discussions was that SIA did not wish to provide such a letter unless the third aircraft was delivered. The understanding which he formed of SIA’s position was that they wanted to keep back the letter so as to put pressure on MEA to accept delivery of STK. Hence, although this was not expressed in the Heads of Terms, the common intention was that the letter would only be handed over at the time of delivery of that aircraft.

Mr Bagallay stated that he did not recall any reference at the Paris meeting by Mr Tueny or Mr Tamim to the provision of the CMP confirmation by SIA being a condition of acceptance of the third aircraft. Nor did he recall that the MEA representatives had said that there would not be sufficient time to check the documents before 30 June, the date proposed for delivery of STK and that MEA were therefore intending to rely on the letter from SIA as to ETOPS compliance or that SIA had declined to produce dirty finger print copies of the maintenance records because they would be too time-consuming to collect and check. He referred to the comment of Mr Tueny, when first shown a draft of the 12 June letter, that he did not trust SIA and was not therefore prepared to accept the bare statement as to ETOPS without also the inclusion of the provision for SIA to provide listings of records and service bulletins necessary to demonstrate compliance.

Mr Bagallay’s understanding of the discussions was not that SIA’s letter was conditional on MEA accepting delivery of the third aircraft or vice versa. His assumption was that the letter would be exchanged with MEA’s counter-confirmation at some stage following the conclusion of the negotiations.

My impression of the witnesses was that the recollection of the events of the Paris meeting was substantially clearer in the minds of Mr Page and Mr Sabbagh than in that of Mr Bagallay. I have also considered Mr Khoo’s witness statement and Mr Yap’s evidence. I find that in the course of the meeting the MEA representatives made it clear that part of the package of benefits which they required in exchange for their agreement to accept delivery of STK on 30 June was SIA’s letter confirming ETOPS compliance of all three aircraft together with information as to where in the Log Book and other records evidence of compliance could be found. I infer that they wanted a key to the evidence that would support the letter of 12 June. I have no doubt that the MEA representatives made it abundantly clear by adopting a very tough negotiating posture that what they wanted to be included in that package was not merely an official piece of paper with SIA’s official statement on it but a true statement of the position as to ETOPS compliance. However, I have no doubt that nobody at any stage mentioned the words “warranty” or “representation”.

The Heads of Terms and the 12 June Letter: Discussion

Before considering the effect of the 12 June letter in the context of the Heads of Terms it is necessary to identify the principles applicable to analysis of the issue whether the statements in the letter had contractual effect.

Where the issue is whether a statement of existing fact gives rise to a contractually enforceable promise that the fact is true, the fundamental question to be investigated is whether it was mutually intended to do so. The identification of this kind of mutual intention is frequently required in order, not only to ascertain whether a statement has contractual effect, but the closely related question what the legal effect is, in particular whether a term of an acknowledged contract is a condition, a warranty or an innominate term. It is in essence an exercise in construction of the document in question directed to identifying the mutual intention of the parties: see J. Evans & Son (Portsmouth) Ltd v. Andrea Merzario Ltd [1976] 1 WLR 1078 per Roskill LJ. at page 1083. For the purpose of this exercise, as with any other question of construction, one is obliged to give the documentary statement that legal effect which, starting from the words actually used, in all the circumstances surrounding its creation the parties must be taken to have intended: Investors Compensation Scheme v. West Bromwich Building Society [1998] 1 WLR 896, per Lord Hoffmann at pages 912-913. For this purpose, it is necessary to confine the investigation to exclude the subjective intentions and understandings of the parties’ representatives. As it was put by Shaw LJ. in Esso Petroleum v. Mardon [1976] 1 QB 801 at 831 with reference to the decision of the Privy Council in Bisset v. Wilkinson [1927] AC 177:

“What is clear from that case is that the answer to the question warranty or no warranty cannot be given by looking simply at the words which are used. How must the respective parties have regarded the representation when it was made? How were they then related respectively to the subject matter? What was the purpose of making the representation and might it influence the outcome of what was in negotiation between the parties?

The answers to these questions will provide the touchstone for answering the ultimate and critical question, did the representation made found a warranty by the party making it?”

How the parties were respectively related to the subject matter reflects an indication in the earlier decision of the Court of Appeal in De Lasalle v. Guildford [1901] 2 KB 215 in which A L Smith MR observed, at page 221, that with regard to determining the intention of the parties as to whether a statement was to be a warranty:

“In determining whether it was so intended, a decisive test is whether the vendor assumes to assert a fact of which the buyer is ignorant, or merely states an opinion or judgment upon a matter of which the vendor has no special knowledge, and on which the buyer may be expected also to have an opinion and to exercise his judgment.”

That the words “decisive test” are putting it too high is clear from Heilbut, Symons & Co v. Buckleton [1913] AC 30 in which Lord Moulton, having cited Holt CJ. (“An affirmation at the time of the sale is a warranty, provided it appear on evidence to be so intended”), observed, at page 50:

“With all deference to the authority of the Court that decided that case, the proposition which it thus formulates cannot be supported. It is clear that the Court did not intend to depart from the law laid down by Holt CJ. And cited above, for in the same judgment that dictum is referred to and accepted as a correct statement of the law. It is, therefore, evidence that the use of the phrase ‘decisive test’ cannot be defended. Otherwise it would be the duty of a judge to direct a jury that if a vendor states a fact of which the buyer is ignorant, they must, as a matter of law, find the existence of a warranty, whether or not the totality of the evidence shows that the parties intended the affirmation to form part of the contract; and this would be inconsistent with the law as laid down by Holt CJ. It may well be that the features thus referred to in the judgment of the Court of Appeal in that case may be criteria of value in guiding a jury in coming to a decision whether or not a warranty was intended; but they cannot be said to furnish decisive tests, because it cannot be said as a matter of law that the presence or absence of those features is conclusive of the intention of the parties. The intention of the parties can only be deduced from the totality of the evidence, and no secondary principles of such a kind can be universally true.”

In ESSO Petroleum v. Mardon, supra, Ormrod LJ. having referred to Lord Moulton’s speech, expressed the test compendiously at page 826:

“…the test is whether on the totality of the evidence the parties intended or must be taken to have intended that the representation was to form part of the basis of the contractual relations between them.”

In essence the test which on the basis of these authorities will in most cases provide the required answer is whether in all the circumstances the statement by the representor would be understood by a reasonable representee in the precise position of the actual representee and with his knowledge of the negotiations as being made with the intention that its truth could be relied upon as a matter protected by contractual enforcement.

In the present case the starting point for the analysis of the effect of the 12 June letter must be the proper construction of the Heads of Terms, for SIA contends that the effect of that agreement was to deprive the letter of the attribute of contractual enforceability.

The Preamble of the Heads of Terms broadly summarises the background disputes which the parties intended that agreement to resolve. However, it is important to note that ETOPS compliance of the aircraft had become a distinct matter of dispute in the sense that, as was abundantly clear to the SIA representatives, MEA required an assurance backed by some evidence that all the aircraft were ETOPS compliant as at 31 May 1998 when SIA handed over maintenance of STI and STJ to SNT and, as regards STK, upon delivery under the lease. Indeed, the course of the negotiations was such that it was common knowledge that, unless these issues could be resolved, MEA would be likely to refuse to accept delivery of STK. The parties were therefore concerned to arrive at an agreed position both about matters which had to be effected before delivery of STK was accepted by MEA and about matters which had to be effected if it were accepted. There can be no doubt that post-acceptance matters were agreed to be legally enforceable only on condition that acceptance of that aircraft took place by 30 June 1998. This is clear from Article 7 and the opening words of Article 9. Thus, the sub-leases of the two aircraft already accepted would remain unamended by the introduction of that Article unless its enforceability were triggered by the acceptance of STK. Further amendments to the leases in Articles 2 and 6 would also only become effective if triggered by acceptance of STK. Indeed, in the event that STK were not accepted, the existing disputes about the maintenance reserves and the delivery condition of STK would remain unresolved. Those disputes included its ETOPS compliance and that of the other two aircraft. Acceptance of that aircraft was therefore pivotal to the whole bargain.

It is against that background that Article 11 (set out in paragraph ( ) above) has to be approached.

The effect of the first sentence is reasonably clear. Nothing in the agreement was to be enforceable until acceptance of delivery of STK. The crucial question is to what extent the agreement became enforceable upon that event, for, if the parties had agreed by Article 11 that only some, but not all, of the terms were to become enforceable, the acceptance of STK would only breathe contractual life into part of the Heads of Terms, leaving the remainder as no more than a framework of co-operation leading up to the trigger event. If that were so, it would be nothing to print that SIA had not done what it had agreed to do before acceptance. For example, if SIA failed to remove and replace the one engine on STK pursuant to Article 4 (see paragraph (20) above), that would not be a breach of the Heads of Terms in the unlikely event that STK had been accepted by MEA. Similarly, once delivery had been accepted, it would not be open to MEA to claim that a failure by SIA to exchange a letter in the form in Appendix A amounted to a breach of the Heads of Terms. By parity of reasoning if, as SNT submits, Article 3 imported not only a conditional obligation to exchange letters but by implication a conditional promise as to the truth of the contents of the letter, that promise would equally be unenforceable.

There is no doubt that the structure of these Heads of Terms is unusual. It would be even more unusual if the trigger event of acceptance of STK only brought part of the rest of the agreement into force, the balance remaining unenforceable. The key question on the construction of Article 11 is therefore whether the second sentence, by referring expressly to Articles 2, 6, 9, 11 and 12 as becoming legally binding on delivery of STK and by stating that those Articles were to have effect in all respects as if they were contained in the lease, when read with the first sentence, has the effect that the only Articles to be given binding effect are those listed and no others.

In view of the express statement that the five Articles are to “have effect in all respects as if they were contained in the Lease” which are to be regarded as being amended by such Articles, I have on balance came to the conclusion that the better construction of the Article as a whole is that the function of the second sentence is to identify the only terms which are to become legally binding and not merely those terms which are to be deemed incorporated into the Lease. My conclusion on this point is founded not only on the sense of the words used but on the substance of the terms not referred to as becoming binding. These are all terms which either must necessarily be accomplished before delivery is accepted or which, like Article 5, are merely agreements to co-operate or, like Article 8, an agreement to perform a provision of a pre-existing enforceable contract, namely clause 7 of the 20 December 1997 Supplemental and Amendment Agreement. This being so, there would be little or no benefit in giving contractual effect to these other terms.

The question then arises whether, if clause 3 of the Heads of Terms never became legally binding, as I have held, SIA nonetheless warranted the truth of the statements as to ETOPS compliance contained in the 12 June letter.

Clearly any such warranty could only be outside and distinct from the agreement contained in the Heads of Terms: if SIA never came under an enforceable obligation to exchange letters, they could not by that same contract have come under an enforceable obligation as to the truth of the contents of the 12 June letter. It follows that the enforceability of the statements can rest only on the consideration either of MEA entering into the Heads of Terms or alternatively of MEA accepting delivery of the third aircraft.

As to the entering into the Heads of Terms, the exchange of letters with the agreed wording was plainly and overtly a major condition of acceptance of the third aircraft but, until the third aircraft was accepted, no binding contract would come into existence. The immediate consequence of the exchange of letters would therefore be the acceptance of the aircraft which in turn would trigger the enforceability of the five Articles of the agreement. The consideration structure of the alleged warranty would therefore have to be that if and when MEA accepted the aircraft, SIA warranted the truth of its letter. By analogy with the general effect of the Heads of Terms, no binding warranty would take effect unless and until MEA accepted delivery. In my judgment, as a matter purely of contractual structure, that would be enough to support the enforceability of a warranty as to the truth of the letter.

But was the mutual intention of the parties that there should be this kind of warranty as to the truth of the letter?

The following considerations are relevant.

In my judgment, the truth of the statements in the letter was indeed mutually intended to be warranted by SIA. Although, none of the considerations taken separately points conclusively towards such mutual intention, I have come to the conclusion that, even having fully in mind the marked reluctance of the English courts to treat independent statements of fact as warranties, the material considerations pointing both ways when taken on balance are sufficiently strong for the imputation of the requisite mutual intention. The fact that, as I have held the Heads of Terms did exclude exchange of the 12 June letter from the enforceable obligations under that agreement does not present itself to me as providing a conceptually insuperable obstacle to a finding of such mutual intent. It was open to SIA to withhold such a letter, but, if they did so, it was obvious that MEA would not accept the third aircraft. However, there is no logical reason by which the voluntary nature of the exchange of the letter should prevent the existence of the requisite mutual intention for a warranty if SIA tendered the letter and MEA in reliance on it accepted delivery of the third aircraft. There is no necessary inconsistency and I have reached the conclusion that the countervailing considerations set out above carry more weight. Further, although by the terms of the sub-lease SAML was in any event obliged to deliver the aircraft ETOPS equipped, the party that had specific knowledge of any such modifications was SIA who had been maintaining the other two aircraft and operating the third aircraft. Moreover, SIA was the holding company of SAML and was much larger, and, I infer, had a much greater asset base, than SAML.

In all the circumstances, I do not consider that the parallel right to claim against SAML under the sub-lease, if SIA’s statement proved to be untrue, carries sufficient weight, even when aggregated with other countervailing considerations such as (8) above, to tip the balance against a mutual intention that the truth of the letter should be a warranty.

I have concluded at paragraphs (57) that the SB72-382 provided that the necessary modification should be carried out at the next HPC module exposure and that the effect of the Preamble to the CMP Revision 13 was that failure to incorporate the SB in accordance with the time limits specified in the CMP. Consequently, the ETOPS operation of the aircraft after failing to incorporate the SB would require the authorisation of the relevant civil aviation authority.

The letter of 12 June stated that all three aircraft were “in compliance with” 120 minutes ETOPS Revision 13. The meaning of this phrase has to be approached in the context of the background to the negotiation of the terms of the letter. Both parties were well aware of the CMP. I also find that they were aware of the various SBs and that although they may not have had in mind in particular SB 72-382, they must have been aware that some SBs specified that the modifications should take place by a given event, such as next workshop visit, but no later than an end date.

In these circumstances their use of the phrase “in compliance with” has the connotation of two of the possible meanings of “comply” to be found in the shorter Oxford Dictionary, namely to “accord with” or to “conform to”.

In my judgment, an omission to carry out the SB modifications at the next HPC module exposure was a failure to act in accordance with, and a failure to conform to the CMP. Indeed, even if consent had been obtained from the CAAS, that would not have cured the non-compliance because once the aircraft had not been modified as provided for in the CMP it could not be operated on ETOPS routes unless and until the derogation were authorised by the relevant authority. MEA was obviously not prepared to take delivery for registry in Mauritius if the engines were already overdue for modification, whatever derogation CAAS might have permitted. Accordingly, “in compliance with” means that the modifications have been timeously carried out, not that omission to complete them has been excused by CAAS.

It is common ground that each of the four engines which remained unmodified had been subject to HPT module exposure between the coming into force of Revision 12 of the CMP and 31 May 1998. It follows that those three did to that extent not accord with or conform to the CMP.

SIA was therefore in breach of the warranty contained in the 12 June letter.

It was argued by Mr Hugo Page QC on behalf of MEA in the alternative that even if there was, on the proper construction of SB 72-382 and the CMP Preamble, no need to obtain aviation authority approval before operating the aircraft on ETOPS routes, even though the modification had not been carried out at the next HPT exposure after Revision 12 came into force, there would still be a failure to comply with the SB. It was submitted that “in compliance with” was wide enough to include carrying out recommendations at the time recommended, although there would be no need to obtain aviation authority approval for failure to do so. I am not able to accept this submission. The substance of the letter is that the aircraft engines should be in such a state as to enable them to be flown on ETOPS routes without further modification or without having to justify to an aviation authority an omission to modify in accordance with the times specified in the SB. If the aircraft engines were in such a state as to be entitled to fly on ETOPS routes on delivery under the leases, they were, in my view, within the meaning of “in compliance with” in the letter of 12 June.

It was argued by Mr Ali Malek QC on behalf of SIA that the letter could not operate as a warranty because, prior to acceptance of delivery of the third aircraft, Mr El Khoury was provided with information, in the course of his visit to Singapore to take delivery, which showed that only two out of the six engines had incorporated SB 72-382 and therefore that the three aircraft were not ETOPS equipped and that the cost of modification would have to be sustained during the sub-leases all of which were due to terminate after 31 December 1999 – the end date for that SB. I shall have to consider the factual evidence relating to this point later in this judgment.

Whether a statement of fact is capable of taking effect as a collateral warranty has to be tested by reference to the mutual intention of the parties at the time when it was given. If it is, and whether or not it acquires contractual effect is dependent on the representee performing his part of the bargain, by, for example, entering into a contract or, as in this case, taking delivery of an aircraft. It is open to the representee to import to it contractual effect by performing that part of the bargain, provided that the statement has not been withdrawn in the meantime. However, if the statement is inaccurate and is not withdrawn, it remains available to take contractual effect. The representee is entitled to rely upon its truth if he performs his part of the bargain. The fact that the representee may at the time when he so performs suspect that the statement may be untrue, is, in my judgment, quite incapable of depriving it of contractual effect. What it is open to him to purchase is a promise as to the truth of the statement and, by performing the bargain, that is what he is entitled to assume and enforce. Only if his knowledge of the representor’s knowledge of the facts must have indicated to him that the statement was not intended by the representor to be relied upon as contractually enforceable would the representee’s knowledge be inconsistent with the mutual intention that it should be a warranty. I would add that it is not suggested in this case that the warranty was unenforceable on the grounds of mistake.

Mr Malek, on behalf of SIA, further relies on clauses 5.4 and 12 of the sub-lease. The former, set out at paragraph 11 above provides that signature of the certificate of acceptance of each aircraft would constitute acceptance that the aircraft was in accordance with the requirements of the sub-lease, including that the aircraft was “120 minutes ETOPS equipped.” Clause 12, also set out at paragraph 11, provides that the lessor makes no warranty express or implied as to the condition of the aircraft or its fitness for use for any purpose or that of any parts and that, if any warranty had been made, the lessee waived it, including claims in tort arising out of any negligence. Further, delivery of the certificate of acceptance to the lessor was to “constitute conclusive proof as between the parties hereto” that on the delivery date the lessee’s representative had examined each aircraft and every part of that aircraft “corresponded to the description specified in appendices A and B”. That included that the aircraft was 120 minutes ETOPS equipped.

To this submission there are, in my judgment, two answers.

As to the first two aircraft, the 12 June letter was not concerned with their condition on the date of their respective deliveries under the sub-lease – in 1997 – but with their condition at the end of the SIA maintenance agreement on 31 May 1998. That was the date at which ETOPS compliance had to be assessed, whatever might have been the position at delivery under the sub-lease.

As to the third aircraft, the acceptance of the delivery of the aircraft by means of the certificate of acceptance was one of the essential parts of the bargain to be performed by MEA in exchange for the 12 June letter and other evidence of ETOPS compliance. If the letter was to have any contractual effect, which for the purpose of testing this argument, has to be assumed, it is inconceivable that it was agreed to be deprived of all effect by the very act which imparted that effect to it. The structure of the bargain and the mutual intention which it reflected involved SIA’s contractual undertaking as to the truth of its statement and must necessarily, consistently, have involved a mutual intention that such undertaking should supersede the statement in the certificate of acceptance and the operation of clauses 5 and 12 of the lease in relation to the third aircraft being ETOPS equipped.

It is further argued, by reference to clause 9(5) of the Heads of Terms set out in paragraph (20) above that this provision, which was brought into effect upon acceptance of delivery of STK, settled the very dispute as to the CMP compliance of that aircraft which is the issue underlying this claim. That clause having taken effect upon acceptance of the third aircraft, it was not open to MEA to re-open the issue.

I am not able to accept this submission. An important part of the overall bargain by which the disputes as to the condition of the third aircraft were settled was the provision of the 12 June letter and the making of the statements contained in it as to ETOPS compliance of all three aircraft. The bargain by which it was agreed that the statement should be made settled the dispute as to whether MEA was entitled to decline to accept that aircraft, on various grounds including ETOPS compliance, but it did not render the statement itself unenforceable for, when the Heads of Terms took effect, there was no issue as to the truth of the statement or as to whether any inaccuracy in it justified MEA refusing to take delivery of STK. On the contrary it was the mutual intention that the 12 June letter should be treated as being accurate and that, in consequence, MEA should accept delivery.

It follows that SIA are liable for breach of the warranty contained in the 12 June letter as to ETOPS compliance by all three aircraft.

Section 2(1) of the 1967 Act provides as follows:

“Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result of thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect therefore had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true.”

The basis of this alternative claim is:

As to (iii) the relevant contract must clearly be the Heads of Terms. That contract was entered into on the night of 13/14 June. The fact that the contract only took effect upon acceptance of the delivery of the third aircraft does not lead to the conclusion that it was only “entered into” at that time. The words of the statute are not capable of meaning that the relevant point of time is when the previously concluded contract which has been agreed to become enforceable on the happening of a future event, subsequently becomes enforceable. The qualifying representation must therefore be that contained in the 12 June letter, the wording of which was agreed to before signature of the Heads of Terms. It is therefore the making of the relevant statement before that agreement was entered into which the Claimant must show to have caused the loss. In this case, therefore, it must be the claimant’s case that MEA would not have entered into the Heads of Terms and performed them if the statement as to ETOPS compliance had not been made.

It follows from my earlier findings that the Claimant has established a case to answer under section 2(1) of the 1967 Act and the burden of proof passes to SIA to prove that it had reasonable grounds to believe and it did believe up to the time when the Heads of Terms were entered into that the statements were true.

As to SIA’s actual belief, having heard Mr. Voon, Mr. Yap and Mr. Wong, all of SIA, give evidence, I have no doubt that they believed that the only relevant date for the purposes of compliance with SB72-382 was 31 December 1999. Whereas it was accepted by Mr. Wong that the reference to next HPT module exposure was a recommendation by Airbus as to the incorporation of that SB, his personal belief was that in order to comply with the SB it was enough to incorporate it by 31 December 1999. He gave evidence, which I accept, that in September 1995, following issue of CMP Revision 12, he discussed with CAAS when effect should be given to the SBs – including 72-382 - which referred to workshop visits and it was accepted by CAAS that the work would be done by 31 December 1999 and that the reference in SB 72-382 to next HPT module exposure was only “an opportunity basis” and not mandatory so that, for example, if they did not have the modification parts at the time or “the opportunity was not right” to do the modifications, they could be deferred, provided they had been completed by the end date. He was able to refer to a minute of a meeting with CAAS in September 1995 which was drawn up by CAAS and a schedule in which the completion date for SB72-382 was recorded by CAAS as the end date. According to Mr. Wong, the SIA team suggested to CAAS at that meeting that the reference to the next module exposure was only a recommendation and CAAS accepted that interpretation. Thus, the statement as to ETOPS compliance in the 12 June letter was one which I find that Mr. Wong, who was the SIA executive with ETOPS compliance responsibility, did indeed believe to be true.

Did SIA have reasonable grounds for this belief? I have held that on the proper construction of the CMP, it could not be said that an engine which had not been the subject of derogation consent from the relevant aviation authority complied with the CMP. However, this issue of construction is one to which the answer is not entirely obvious. The contrary view – that only the end date is mandatory is certainly arguable. That being so I have no doubt that SIA was entitled to rely on the assent to the latter view of CAAS as the relevant supervisory aviation authority. It was not for Mr. Wong or anyone else in SIA to go behind the expressed view of the relevant regulatory authority, whatever might be the strict construction as a matter of law.

SIA have therefore discharged the burden of establishing that they had reasonable grounds to believe and did believe that the statements as to ETOPS compliance in the 12 June letter were true. The alternative claim under section 2(1) of the Misrepresentation Act 1967 therefore fails.

There is no doubt that the relationship between SIA and MEA gave rise to a duty of care owed by SIA in respect of the accuracy of what was stated as to ETOPS compliance. The information was exclusively within SIA’s knowledge and MEA had no independent means of verifying it prior to the Paris meeting at which the representation was put into writing in the form of the 12 June letter. It was known to SIA at the Paris meeting that MEA had not inspected those documents from the records of the three aircraft which were relevant to whether SB72-382 had been incorporated on the next HPT module exposure on the six engines concerned.

However, I am not persuaded that SIA did act negligently in relation to the statements in the letter of 12 June. For the reasons already set out in relation to the alternative claim under section 2(i) of the Misrepresentation Act 1967, I have no doubt that SIA was entitled to rely on the assent given by CAAS in September 1995 to its own view that there would be compliance with the CMP Revision 12 even if SB72-382 was not incorporated at the next module exposure, provided that the modification was carried out by 31 December 1999. I do not consider that the omission of SIA to question the view of CAAS or to take independent legal advice before presenting the 12 June letter represented an omission to act in accordance with the standards to be expected of a reasonably careful airline in the circumstances of the negotiations for the Heads of Terms.

Accordingly, the claim in tort for negligent misrepresentation also fails.

As to both this basis of claim and that under section 2(1) of the Misrepresentation Act 1967, a point which was not expressly argued was the applicability of clause 12 of the sub-lease and the certificate of acceptance signed on behalf of MEA in relation to the third aircraft. I have already rejected the argument advanced on behalf of SIA that this presented an insuperable bar to the main basis of claim, that for breach of warranty (see paragraph (101) above). However, different considerations apply if the letter of 12 June did not give rise to a contractual warranty as to the accuracy of the statements as to ETOPS compliance. As there has been no argument specifically addressed to this issue, it would be inappropriate for me to express any concluded view on that point. However, I am bound to say that my present view is that the effect of the issue by SIA of the certificate of acceptance in respect of STK would, having regard to the terms of the last sentence of clause 12, preclude a claim in respect of that aircraft either under section 2(1) of the 1967 Act or in tort.

There having been a breach of the collateral warranty expressed in the letter of 12 June in respect of the incorporation of SB 72-382 into the engines of all three aircraft, the claimants submit that they are entitled to recover the cost of making each of the four engines concerned ETOPS compliant. Their case is simply that SIA contracted that STI and STJ were ETOPS compliant as at 31 May 1998 and they were not and that STK was ETOPS compliant at the date of delivery and it was not. Hence MEA’s loss was the cost of making them ETOPS compliant by incorporation of SB 72-382. It is conceded (subject to one qualification to which I shall refer) that, as assignees of MEA’s rights under the warranty, the Claimants, who carried out the work and provided the components at their own expense pursuant to their obligations under the maintenance agreement with MEA, cannot be in any better position than MEA as to the relevant loss caused by the breach of warranty.

There are, however, two distinct matters which have to be investigated in relation to the causation of loss. First, there is the question whether in the circumstances in which the MEA team took delivery in Singapore of the third aircraft on 30 June 1998 and in particular of their knowledge of the contents of documents provided to them, they must have known that SB72-382 had not been incorporated into one of the engines (416) on STK and three of the engines on the other two aircraft. If that were the case it might be argued that their knowledge was an intervening cause of any such loss as MEA sustained.

Second, the defendants submit that MEA suffered no loss because, under the terms of the maintenance agreement with Sabena, it was the obligation of Sabena to carry out the ETOPS modifications at its own expense. That agreement was entered into before SIA entered into the Heads of Terms and became bound by the warranty contained in the 12 June letter and the obligation to carry out the ETOPS, CMP modification was not conditional on the accuracy of the warranty.

In the course of the trial there was much investigation into the circumstances in which the MEA team came to accept delivery of STK in the course of their visit to Singapore on 23-30 January 1998. The essential issue was whether in accepting delivery they ever relied on the statements as to ETOPS compliance contained in the letter of 12 June. In particular it is alleged on behalf of SIA that Mr. El Khoury, who gave evidence, and Mr. Tamin, who did not, were given to understand that SB72-382 had not yet been incorporated into four out of six engines on STK and that there had been workshop visits including HPT module exposure for each of these four engines since the introduction of that SB.

Central to the investigation was the evidence of Mr. El Khoury who, with Mr. Tamin, was part of the MEA delivery team. He was conversant with the CMP and SBs, in particular SB72-382. He reported to Mr. Tamim, the MEA Chief Inspector of Quality Control. When they went to Singapore to take delivery of STK both of them believed that SIA was going to provide summaries in respect of each of the aircraft specifically indicating the extent of ETOPS compliance. Mr. El Khoury’s duties in Singapore included receiving the listings or summaries of the service bulletin for the six engines in accordance with the 12 June letter and reading and understanding them. On 26 June he received a document which has been referred to as the June ETOPS schedule.

That showed that STI neither on engine no. 408 nor no. 425 had SB72-382 been incorporated. On STJ the SB had been incorporated on one engine (424), but on the other engine – 442 – it had not. On STK on one engine – no. 412 – SB72-382 had been incorporated, but on the other engine, no. 416, it had not. Therefore that document showed that 4 out of 6 engines did not incorporate that SB. However, it did not show whether any of the four engines had undergone HPT module exposure since the introduction of the SB.

Mr El Khoury said that he was concentrating on whether STK should be accepted. This is not surprising. The main purpose of his visit was to ascertain whether it was appropriate to take delivery of that aircraft. In this connection he noticed that, according to the June ETOPS schedule, the SB had not been incorporated into engine 416. He therefore raised this matter with SIA. He could not remember with whom. In response to this question SIA provided him with a bundle of documents relating to each of the six engines includes schedules headed “ETOP MODIFICATION FOR JT9D – 7R4E1” with the relevant engine and manuscript note showing the relevant aircraft registration number and whether the engine referred to was no. 1 or no. 2 on that aircraft. The relevant part of the six schedules was divided into four columns, the first three being headed with SIA’s MAF no. (its work reference) relative to the particular SB, the SB no. and the words “DATE INCORP”. In each of the schedules SB 72-382 is listed alongside its relative MAF No. 11142. For engine 424 on STJ the schedule lists SB 72-382 as incorporated on 26.9.97 and states “SWA refers” – a reference to the workshop approval for the work to be carried out. Where an engine had not been modified, the schedule shows a blank under the DATE INCORP columns and under the documentation column “MAF NOT ISSUED” and then the final date for the work to be carried out under the CMP.

The schedule relating to Engine 416 on STK indicated the date 1.4.98 under the DATE INCORP column for SB72-382 and under the SWA column were the words “O/H Report 2E/PP98/295 refers”. The MAF No. 11142, the date and the reference to O/H Report had been highlighted in yellow according to Mr El Khoury, when he received the documents from SIA. He said in evidence that he accepted this as an indication in response to his question that the engine had been modified to incorporate the SB. When in the course of cross-examination it was drawn to his attention that the SIA Job Card bearing the O/H Report reference 2E/PP98/295 contained no inspector’s or engineer’s signature with reference to MAF 11142, Mr El Khoury accepted that this suggested that the SB72-382 modification had never been carried out. However, he said that he looked only at the highlighted references in the schedule while he was in Singapore and it was only after returning to Beirut, following acceptance of delivery of STK, that he noticed that the O/H Report had not been fully completed.

The only further assurance that he was given by SIA before accepting delivery that the engine was in compliance with the SB was the form of the 12 June letter itself. On the strength of the engine no. 416 Schedule and that letter he concluded that both engines on STK were in compliance with ETOPs. Having observed him in the course of cross-examination, I accept Mr El Khoury’s evidence. I am satisfied that he was giving a truthful account of the events surrounding acceptance of delivery according to the best of his recollection. He was led to believe that the June ETOPS schedule relating to engine 416 was inaccurate with regard to SB72-382 and that the engine had been modified in accordance with that SB as demonstrated by the yellow highlighting of the schedule and was in compliance with the SB as indicated by the 12 June letter. In reaching that conclusion he therefore relied both on the Engine 416 Schedule and on the 12 June letter.

Accordingly, that letter was one of two dominant causes which led to the acceptance of delivery of aircraft STK.

The fact that had he studied the Overhaul Report in Singapore he would have appreciated that it was incomplete and that the installation of SB72-382 had not been or might not have been carried out because the engineer’s and inspector’s sections had not been filled in, does not, in my judgment, break the chain of causation between reliance by the Singapore team on the contents of the 12 June letter and acceptance of delivery of STK. He had specifically raised the question of incorporation of SB72-382 with SIA personnel when he examined the June ETOPS schedule and had been expressly referred to the Engine 416 Schedule with its highlighted references indicating its installation. He was thereby deflected from the June ETOPS schedule and he was entitled to rely on the 12 June letter coupled with the 416 Schedule and its very specific statement that SB72-382 had been incorporated on 1 April 1998, which contrasted with the entry “MAF NOT ISSUED” on the schedules where work had not been carried out as already noted.

As to the other two aircraft, Mr El Khoury stated that the MEA team were concerned only with the ETOPS compliance of STK. They had no instructions to investigate the compliance of STI and STJ. However, the June ETOPS Schedule did show that SB72-382 had not been incorporated in either STI engine or in one of the STJ engines. Accordingly, if there had been module exposure since the introduction of the requirement of CMP, in 1995, the engines would be non-compliance. No document provided to the MEA team in Singapore before delivery of STK indicated whether any of the relevant engines had undergone module exposure. In the course of his cross-examination Mr El Khoury said that he appreciated from the records provided for those engines that there must have shop visits of each engine since 1995 and that during that time it was “likely” that there would have been module exposure. However, the question whether the records provided prior to delivery of STK evidenced the confirmation of ETOPS compliance in the 12 June letter was not considered by El Khoury or anyone else in the MEA team. Nor, in my judgment, was it MEA’s duty that this should be done. The team was primarily responsible for investigation of the condition of STK. It also had the duty receiving the “detailed listing of all records and service bulletins necessary to demonstrate the date and method/proof of compliance” by 26 June 1998. However, acceptance of delivery of STK was not conditional upon the adequacy of these listings in respect of STI and STJ as evidence of compliance. Provided that SIA gave MEA the formal signed text of the 12 June letter and the listings which on the face of it stated the position as to ETOPS compliance which was not inconsistent with the confirmation given by the letter, the MEA team, if satisfied that STK was fit for delivery, was entitled to rely on the letter and take delivery of STK. The omission to go behind the letter and the listings was not therefore the dominant cause of MEA taking delivery of STK and did not amount to the dominant cause of any such loss as MEA my have suffered in consequence.

Causation of Loss: the Effect of the Sabena Maintenance Agreement

By the Maintenance Agreement, Article 3.2.3 ST undertook that it would automatically apply the FAA and the relevant CAA mandatory inspections and modifications and the corresponding service bulletins. By Article 3.4.2 SNT further undertook that it would apply automatically the mandatory inspections and modifications (as required by the State of aircraft registration FAA and DGAC) as defined by the corresponding Service Bulletins and/or Airworthiness Directives. By Article 3.12 SNT undertook to “respect” the SALE Return conditions under the Sub-lease, annexed to the Maintenance Agreement. SNT thus became liable to give effect to Article 2 of the Sub-Lease, that the aircraft should be re-delivered “with all equipment necessary for 120 minutes ETOPS operation”. That had the effect that (i) if, as at 31 May 1998 as regards STI and STJ any of the engines were not ETOPS compliant because, in spite of module exposure since CMP Revision 12, an SB had not been incorporated and (ii) if, absent module exposure, an SB did not have to be incorporated until the end of 1999, SNT would be under an obligation to carry out the necessary modification and would receive no consideration in addition to that of US$592 per flight hour payable by MEA under Article 9 of the Maintenance Agreement.

On behalf of the Claimant Mr Hugo Page QC primarily submits that, as between MEA and SIA, the MEA – Sabena Maintenance Agreement is res inter alios acta. He relies by way of analogy on the position which arises under leases of realty, referring in particular to Joyner v. Weeks [1891] 2 QB 31. In that case a defendant lessee was found at the end of the lease to be in breach of the repair covenant. In the meantime, the lessor had already entered into a lease with a third party commencing from the date of termination of the defendant’s lease. Under that lease the lessee undertook to make alterations to the premises and to keep them in repair. The alterations involved demolition of parts of the premises. It was in relation to those parts that the defendant was in breach of the repair covenant. The new lessee was not entitled under the terms of the lease to any compensation for the lack of repair. Accordingly, the lessor sustained no pecuniary loss whatever. Indeed, the rent under the second lease was higher than that under the first lease.

On the lessor’s claim for an amount equivalent to what the repairs would have cost had they been effected the official referee gave judgment for nominal damages. It was held both in the Divisional Court and the Court of Appeal that the lessor was entitled to substantial damages. In the Divisional Court the judgment of Wills and Wright JJ. observed, at pages 33-34:

“Many cases may be put in which it is plainly immaterial that at the commencement of an action for a breach of contract the plaintiff is in fact no worse off than he would have been if the contract had been performed. Charity, insurance, an alteration or market values, may have recouped or nullified his loss. Or it may be proved that the plaintiff, if he acted as a prudent man in his own interest, would, at the end of the defendant’s term, have pulled down the house, even though duly repaired, and built a different kind of structure, so that the repairs if done would have been of no value; but he chooses to relet the house in its existing state. In such a case it could hardly be contended that he might not recover substantial damages. The person whose breach of contract has caused damage is not the less liable because the damage has been made good, or its effect compensated by an extraneous event of such a kind that if it had operated the other way it would not have increased his legal liability. Nor does it seem to us that the relation between the plaintiff and the defendant is directly, if at all, affected by the terms of an agreement made by the plainiff with a third person before the expiration of the defendant’s term. That agreement might be rescinded, or might never be performed. When it was made the parties to it could not foresee, and did not contract on the basis, that there would at the end of the defendant’s term be any breach of the contract to deliver up in repair. It must be not the making but the performance of the new agreement to which the supposed effect would be attributable. But if so, then at the moment of the termination of the defendant’s tenancy, and before the new agreement was performed, a cause of action vested in the plaintiff against the defendant, and this could not be taken away or affected by the subsequent res inter alios acta.”

In the Court of Appeal Lord Esher MR observed at pages 43-44:

“The rule that the measure of damages in such cases is the cost of repair, is, I think, at all events, the ordinary rule, which must apply, unless there be something which affects the condition of the property in such a manner as to affect the relation between the lessor and the lessee in respect to it. They arose from a relation, the result of a contract between the plaintiff and a third person, to which the defendant was no party, and with which he had nothing to do.

In my opinion the contract between the plaintiff and the third person cannot be taken into account; it is something to which the defendant is a stranger. So, also, anything that may happen between the plaintiff and the third person under that contract after the breach of covenant is equally matter with which the defendant has nothing to do, and which cannot be taken into account. These are matters which might or might not have happened, and, so far as the defendant is concerned, are mere accidents. The result is that there is nothing to prevent the application of the ordinary rule as to the measure of damages in such a case.”

Fry LJ. Stated at pages 47-48:

“… with regard to the covenants as to alterations, &c, contained in that lease, how can such covenants, which are unperformed at the date of the vesting of the plaintiff’s right of action, take away or modify the right of action which so vested? I will assume that there is a covenant in the second lease to put the premises into the same state of repair as was required by the first lease. But, even so, how can it affect the case any more than an agreement with a builder to do the repairs? It appears to me that it is res inter alios acta, with which the lessee has nothing t do and which he is not entitled to set up. Then, thirdly, how can subsequent performance by the second lessee of the covenants which he has entered into abridge or take away the cause of action that vested in the lessor before the second lease took effect? I can see no ground for thinking that it can do so. As a general rule, I conceive that, where a cause of action exists, the damages must be estimated with regard to the time when the cause of action comes into existence.”

Mr Page also referred to Jones v. Stroud DC [1986] 1 WLR 1141, a case of breach of duty in tort by a local authority where the plaintiff having adduced evidence of the defective condition of the premises of which he was a purchaser in reliance on the defendant authority’s surveyor’s report, could not prove that he had paid for any repairs out of his own pocket, Neill LJ. with whom the other members of the court agreed, stated at page 1150-1151:

“The second point I have found more difficult. The plaintiffs failed to provide any documents relating to the work carried out by Marlothian Ltd and there is no evidence that the plaintiffs have paid or are liable to pay any sum to Marlothian in respect of that work. It was submitted on behalf of the plaintiffs, however, that if the repairs were necessary and were carried out it was not to the point that the plaintiffs had not proved that they had paid for the repairs themselves. Our attention was drawn to The Endeavour (1890) 6 Asp MC 511, where repairs to a vessel were carried out but before paying for them the plaintiff had gone bankrupt. It was there argued that the plaintiff could not claim the cost of the repairs because the sums recovered would only go to swell the creditors’ funds. This argument was rejected and it was said, at p512:

‘If somebody out of kindness were to repair the injury and make no charge for it, the wrongdoer would not be entitled to refuse to pay as part of the damages the cost of the repairs to the owner.’

In my judgment, on the facts of this case this submission is correct.

It is true that as a general principle a plaintiff who seeks to recover damages must prove that he has suffered a loss, but if property belonging to him has been damaged to an extent which is proved and the court is satisfied that the property has been or will be repaired I do not consider that the court is further concerned with the question whether the owner has had to pay for the repairs out of his own pocket or whether the fund have come from some other source.”

I interpose that the Court of Appeal, in Burdis v. Livsey [2003] QB36, has recently re-iterated the approach to recoverability of damages, in the context in that case of the costs of damage repairs caused in motor collisions, applied in Jones v. Stroud DC, supra, to negligent representations as to the condition of property to be sold.

The claimant also relies on the reasoning of Lord Griffiths in Linden Gardens Ltd v. Lenesta Ltd [1994] 1 AC 85 at pages 96 to 98. This can be summarised thus. An employer under a building contract was entitled to recover as damages for breach the cost of remedying defective work even though it had disposed of the lease of the property before the relevant work was begun and thus had no proprietory interest in the property when the breach of contract occurred. He further held that the employer was entitled to recover as damages for breach of the building contract the cost of remedying the breach notwithstanding it had been re-imbursed the cost of repairs by the party to which it had disposed of the lease. As to the first point, Lord Griffiths distinguished The Albazero [1973] AC 774 on the grounds that in that case the cargo owners had a right of action against the ship whereas in the present case the assignee of the building contract and lease had no right of action against the building contractor, the assignment having been held to be ineffective. Mr. Page relies in particular on the following passage at page 97:

“The principal authority relied upon by McAlpine in support of the proposition that the contracting party suffers no loss if they did not have a proprietary interest in the property at the time of the breach was The Albazero [1977] AC 774. The situation in that case was however wholly different from the present. The Albazero was not concerned with money being paid to enable the bargain, ie. the contract of carriage, to be fulfilled. The damages sought in The Albazero were claimed for loss of the cargo, and as at the date of the breach the property in the cargo was vested in another with a right to sue it is readily understandable that the law should deny to the original party to the contract a right to recover damages for a loss of the cargo which had caused him no financial loss. In cases such as the present the person who places the contract has suffered financial loss because he has to spend money to give him the benefit of the bargain which the defendant had promised but failed to deliver. I therefore cannot accept that it is a condition of recovery in such cases that the plaintiff has a proprietory right in the subject matter of the contract at the date of breach.”

However, the majority of the House of Lords agreed with the speech of Lord Browne-Wilkinson in which he held that the employer was entitled to enforce the building contract for the benefit of those to whom he disposed of the property, the circumstances of the case being such that it fell outside the principal in the Albazero, supra. It is to be observed that Lord Keith, while expressing “much sympathy” with the view expressed by Lord Griffiths, expressly did not incorporate it as part of the grounds for his decision, the point not having been fully explored in argument. Lord Bridge adopted a similar approach.

Mr. Ali Malek Q.C. on behalf of the defendants submits that, on the authority of Alfred Mc Alpine Construction Ltd v. Panatown Ltd. [2001] 1 AC 518 (“the Panatown case”), even it be accepted that there is a broader ground of recovery not dependant on a proprietary interest, the court will only award damages where it would be reasonable to do so and in a case where, as here, an award of damages would give rise to an uncovenanted profit, this would not be regarded as reasonable. He further submits that, in distinction to the facts of this case,the res inter alios acta principle only applies where the breach in question has the effect of reducing the value of goods or property supplied pursuant to the contract. In other cases, if the loss has been re-imbursed by a third party, it will not be recoverable except where the claimant is under a duty to re-imburse the third party.

In the Panatown Case, supra, it was held by the House of Lords by a majority (Lord Clyde, Lord Jauncey and Lord Browne-Wilkinson) that a claim for damages for defective building work under a building contract in a case where the building was owned by a third party, who had the benefit of a duty of care deed binding on the defendant contractor, failed. The effect of the speeches of the majority is that where an employer has no proprietary interest in the property and does not bear the risk of defective work and yet where the transferee of his proprietory rights or risk of defective work has no entitlement directly to recover damages from the contractor, the employer will normally be entitled to recover damages from the contractor for breach of contract on the basis that he recovers the damages for the benefit of the third party who has suffered the loss, consistently with Lord Diplock’s exception in the Albazero [1974] AC 774 at 847. This was the solution which as a matter of law or as arising from the implied intention of the parties to the construction contract was to be applied in order to avoid the consequences of the disappearance of a substantial claim for damages into what was described by Lord Stewart in GUS Property Management Ltd v. Littlewoods Mail Order Stores Ltd (1982) SC (HL) 157 at 166 as a “legal black hole”, which would otherwise arise by reason of the rule of privity of contract.

It is to be observed that in the Panatown Case Lord Goff and Lord Millett, both of whom dissented, were prepared to adopt Lord Griffith’s wider approach in Linden Gardens, already referred to (para (137) above. Lord Goff considered (at page 551) that it should be subject to the qualification suggested by Oliver J in Radford v. DeFroberville (1997) 1 WLR 1262 at page 1270 that the claimant should be “seeking compensation for a genuine loss and not merely using a technical breach to secure an uncovenanted profit”. Lord Millett at page 592 adopted a similar approach of reasonableness in pursuing the claim, referring to Lord Scarman’s view in Woodar Investment Development Ltd v. Wimpey Construction UK Ltd [1980] 1 WLR 277 that the fact that a contracting party has required services to be supplied at his own cost to a third party is at least prima facie evidence of the value of those services to the party who placed the order.

The resolution of these differences of approach must be a matter for further consideration by the House of Lords. No doubt when it comes to consider the matter further it will have regard to one of the considerations which appears to have played a material part in Lord Diplock’s formulation of the Albazero exception, namely the desirability of certainty in English commercial law. That consideration is in my view at least arguably more effectively served by the approach of majority in the Panatown Case which simply proceeds on the basis of an entitlement to recover damages for the benefit of a third party for whom or on whose property the work was carried out and a parallel right of the third party to recover such damages from the contracting party. A proviso that the recovery of damages by the contracting party from the party in breach should be reasonable or should by seeking compensation for a genuine loss and not be merely using a technical breach to secure an uncovenanted profit presents itself to me as providing an opportunity to pursue wide-ranging arguments around relatively inexact criteria.

In my judgment, whether one applies the Lord Griffiths test subject to Lord Goff’s and Lord Millett’s proviso or the Lord Diplock test, the result is the same in this case.

Prior to the assignment by MEA of its rights against SIA to the claimants, it had the benefit of both the SIA warranty and the Maintenance Agreement. It was quite obvious to it that Sabena could not recover damages from SIA for breach of that warranty. The maintenance agreement was a continuing commitment until all three aircraft had been redelivered to SIA. In these circumstances co-operation between MEA and Sabina was important. Sabina had called for additional payouts from MEA for carrying out the work necessary to achieve ETOPS compliance. It had encouraged MEA to claim against SIA. At the time of the assignment by MEA to SNT the latter had modified one of the four non-compliant engines. It subsequently modified at its own expense at least two of the other three and may have modified the fourth. In these circumstances it is, in my judgment, quite impossible to say that, at the time when the assignment took place MEA or now, if MEA were now pursuing this claim without having assigned it, they would be seeking other than genuine compensation or pursuing a technical claim to secure an uncovenanted profit. As assignees of that claim SNT is entitled to the benefit of MEA’s satisfying that proviso and is therefore entitled to recover substantial damages from SIA for breach of warranty.

If one proceeds by the approach of Lord Diplock and of the majority in the Panatown Case, the same result is arrived out. MEA could enforce its right of action and such damages as it recovered would be held to the benefit of, and be recoverable by,SNT. If, contrary to the view of Lord Clyde, it be necessary to enquire whether the contract between MEA and SIA was entered into in contemplation that if the warranty were broken and the aircraft were not ETOPS compliant the loss would fall on a third party and damages would then be recoverable for its benefit, the position is clearly that such must be taken to have been within the mutual contemplation of the parties to the warranty. SIA was aware at the time of the Heads of Terms from its terms that MEA had engaged Sabena as a maintenance organisation to replace SIA with effect from 31^st May. Since power by the hour maintenance agreements are commonplace in the industry, it must have been at least reasonably clear to SIA that if it were in breach of warranty the loss might well fall on the replacement provider of maintenance services, particularly if the maintenance contract had already been entered into before the warranty was agreed and took effect. Accordingly, applying the narrower, Albazero approach, MEA would be entitled to recover damages for the benefit of its new maintenance service provider.

I therefore conclude that the Claimants have established that MEA, and therefore the Claimant is entitled to recover as damages for the defendants’ breach of warranty the cost of incorporation on the four engines of SB72 – 382.