Celestial Aviation Trading 71 Ltd v Paramount Airways Private Ltd

This is an application for summary judgment by the Claimant on its claims for sums due under the leases of three aircraft, for the delivery up of those aircraft and for damages to be assessed.

The Claimant is an Irish company which leases aircraft. It is part of the General Electric group of companies. The Defendant is an Indian company which carries on business as an airline in South East India. It operates five aircraft of which three were leased from the Claimant for a period of eight years from July 2005. Those three aircraft are the subject of this action. They are narrow body twin engine medium range jet aircraft with a range of 1800 nm and each cost about US$36m. to purchase.

On 14 October 2009 the Claimant gave notice terminating the leases and demanded delivery up of the aircraft. The claim form was issued on 15 October 2009. The Defendant acknowledged service on 3 November 2009 and on the same day the Claimant issued its application for summary judgment. That application was heard on 24 November 2009. It is obvious that the Claimant’s action, if successful, will have a significant and damaging effect on the Defendant’s operations. The Defendant employs over 600 persons and carries over 100,000 passengers every month.

The terms of the leases between the Claimant and the Defendant are to be found in two documents. The first is an Aircraft Specific Lease Agreement (an “ASLA”) to which the Claimant and Defendant are party as lessor and lessee. The ASLA incorporates the terms of an Aircraft Lease Common Terms Agreement (a “CTA”) between GE Commercial Aviation Service Limited (“GECAS”) and the Defendant.

Pursuant to clauses 5.3 and 5.4 of the CTA the Defendant is obliged to pay rent and supplemental rent to the Claimant. Rent is self explanatory. Supplemental rent is a sum calculated by reference to use made of the aircraft in the previous month. It is calculated by reference to rates set out in the ASLA. The information as to usage, to which those rates are applied, is set out in Technical Report which the Defendant is obliged, by clause 8.2(a) of the CTA, to provide to the Claimant within 10 days after the end of each calendar month. It is payable on the fifteenth day following the end of the calendar month. A failure to pay supplemental rent two days after the due date is an Event of Default; see Schedule 9 to the CTA. Pursuant to clause 13 of the CTA an event of default is a repudiation of the lease which the Claimant may accept and thereby terminate the lease and take possession of the aircraft.

The Defendant is obliged by clause 5.1 of the CTA to pay a deposit. The ASLA provides that the deposit will be in the amount of ten months’ rent. The deposit may be applied by the Claimant towards the payment or discharge of any matured obligation; see clause 5.13(b) of the CTA. The ASLA provides the Defendant with the option of providing a letter of credit in place of a cash deposit. In this case that option was exercised. The ASLA further provides that the number of months’ rent covered by the deposit “shall reduce” to 8 and 6 months’ rent respectively if certain conditions are satisfied, one of which is that “no event of default shall have occurred and be continuing”.

The lease is described by clause 5.12 as a net lease. It was common ground that meant it was an operating lease, that is, one pursuant to which possession of the aircraft passed to the lessee who was obliged to operate and maintain the aircraft. Clause 5.12 went on to provide as follows:

“Lessee’s obligation to pay Rent and to perform all of its other obligations is absolute and unconditional no matter what happens and no matter how fundamental or unforeseen the event. Lessee shall not regard its obligations as ended, suspended or altered in nay way because of any defence, set-off, counterclaim, recoupment or other right of any kind or of any other circumstance. ”

The Claimant’s case is simple. On 15 September 2009 payments of supplemental rent fell due. Those sums were later set out in an invoice dated 25 September 2009. The sums claimed totalled US$71,698.57 in respect of one aircraft and US$65,252.70 in respect of another aircraft. (The third aircraft had been grounded because of an engine problem and so did not generate any supplemental rent.) Thereafter payments of rent fell due and by notice dated 5 October 2009 the Claimant gave notice of events of default with regard to both rent and supplemental rent. On 14 October 2009 notices of termination of the leases were served, claiming delivery up of the aircraft. The sums then outstanding totalled US$790,942.54 including interest for late payment.

The Defendant’s response is not as simple. The Defendant’s first case is that as at 25 September 2009 (when arrears of rent which had formed the subject matter of earlier demands dated 2 and 10 September 2009 were paid) there was no continuing event of default and the Defendant was entitled to a reduction in the deposit equal to US$1.27m. pursuant to the provisions of the ASLA. The Defendant said that its liability for the supplementary rent claimed in the invoice dated 25 September 2009 and its liability for the rent which fell due thereafter could be set off against its entitlement to US$1.27m. Accordingly, the Claimant was not entitled to serve notice of termination on 14 October 2009 because there was at that time no continuing event of default.

The Defendant’s case has to surmount several obstacles, the first of which is the Claimant’s contention that as from 17 September 2009 there was an act of default in respect of the supplementary rent which fell due on 15 September 2009 and which was not paid on 25 September 2009. If that contention is correct then it follows that one of the conditions for reduction in the deposit was not fulfilled. The Defendant’s answer to this contention was that it is absurd to suggest that the Defendant could be in default of an obligation to pay supplementary rent prior to the date on which it had been invoiced in respect of that rent.

At first sight this answer has some attraction. However, consideration of the terms of the CTA shows, in my judgment, that the argument is without foundation. Clause 5.4 of the CTA provides as follows:

“(a)

Amount: If, under the Lease, Lessee is required to pay Supplemental Rent, Lessee will pay that Supplemental Rent, at the rates referred to in the ASLA to Lessor in relation to each calendar month (or part of a month) of the Term, on the fifteenth day following the end of that calendar month ……..”

The ASLA provides that the lessee is required to pay Supplemental Rent. The rates are set out in the ASLA. They have to be applied to the usage of the aircraft in the previous month. The lessee has access to that information and can calculate the amount of supplemental rent which is due. The supplemental rent is due “on the fifteenth day following the end of that calendar month.” It is not stated to be due on provision of an invoice. If the calculation of the amount due could not be done by the lessee there might be room for the Defendant’s argument. But that was not suggested. It follows that on 15 September 2009 the Defendant was obliged to pay supplemental rent in respect of the previous month. There is no dispute that the amount of that rent is that set out in the invoice dated 25 September 2009. It also follows that on 17 September 2009, at which time the supplemental rent had not been paid, there was an event of default which default was continuing on and after 25 September 2009.

The Defendant is therefore unable to establish that it has a realistic prospect of establishing at trial that all of the conditions required for a return of part of the deposit were satisfied. It follows that its first case must fail. There is therefore no need for me to discuss the additional obstacles which this case faced but I will briefly mention them.

Since the deposit had been provided by means of a letter of credit the Defendant would not have been entitled to the return of a liquidated sum. Effect could only be given to the Defendant’s right to a “reduction” in the deposit by an amendment to, or cancellation and re-issue of, the letter of credit. An obligation to pay supplemental rent cannot, I think, be “set-off” against such a right either in law or in equity. It was not suggested that it could.

In fact the Claimant called upon the letter of credit at some time before 14 September 2009 and drawdown occurred on 14 October 2009. It appears that that drawdown occurred pursuant to the provisions of clause 5.14(b) of the CTA which permitted the lessor to draw on the letter of credit if it is not renewed by a certain time. Thus it was only on 14 October 2009 that the Defendant would have had the opportunity to set off its liability to pay supplemental rent against the Claimant’s obligation to repay $1.27m. That was the very day on which the notice of termination was sent. At least two questions are raised by this coincidence of dates. First, is clause 5.12 sufficiently widely expressed to bar the right to pay a debt by means of setting of a cross debt (see The Dominique [1987] 1 Lloyd’s Reports 239 at p.250) ? Second, assuming that clause 5.12 does not bar that right, was the notice of termination dated 14 October 2009 invalid ? The first question was argued before me. The second was not. As to the first I would have held, had it been necessary to do so, that the right to discharge a debt by setting of a cross debt (legal set off) is caught by the words “any … set-off” in clause 5.12. I do not consider it appropriate to express any view as to the second question since it was not argued before me.

The Defendant’s second case was that its financial problems, and hence its failure to pay sums due on time, were caused by an engine fault on one of the aircraft which caused it to be grounded and by (i) the tortious actions of the Claimant in interfering with the Defendant’s trading relations with another engine supplier and/or (ii) by the breach of an engineering and maintenance contract by GE Engine Service Distribution LLC (“GE LLC”) in failing to provide certain engine tools. It was further argued that, pursuant to the principle evidenced by Holme v Guppy (1838) 3 M&W 397 and The Cape Hatteras [1982] 1 Lloyd’s Reports 518, that the Defendant cannot be liable for breach of contract or any penalty such as forfeiture or termination of the leases where such matters are brought about by such actions.

I do not consider that this case has any realistic prospect of success. First, as to the interference with the Defendant’s trading relations the evidence is that “GE” did not allow an engine supplier to supply an engine to the Defendant. There is no evidence that “GE” was the Claimant (or GECAS). The suggestion that the Claimant (or GECAS) may have been involved in this conduct borders on speculation. But in any event it appears that the alleged interference occurred between 30 and 31 October 2009 which is after the Claimant had served notice of termination. Quite how this alleged interference can have caused the Defendant to have been unable to pay sums due between 15 September 2009 and 14 October 2009 was not explained. Similarly, the entity said to have been responsible for recalling certain engine tools was “GE Engine Services”. It was no more than speculation to suggest that this activity involved the Claimant (or GECAS). Again, the suggested recall appears to have taken place after 22 October 2009 so there is the same difficulty in seeing how this activity could have caused the Defendant to have been unable to pay sums due between 15 September 2009 and 14 October 2009. Secondly, there is no basis on which it can be said that the principle in Holme v Guppy applies where the tort or breach of contract said to have placed the Defendant in default is committed by an entity which, though legally distinct from the Claimant, is part of the same group of companies. A tort or breach of contract must be committed by the Claimant for that principle to apply. Otherwise the concept of corporate personality is simply ignored.

A similar complaint was made by the Defendant in its letter to GECAS dated 16 October 2009. That complaint was that GECAS had failed to supply a replacement engine and that such failure had caused the Defendant financial difficulties. However, there is no evidence that the Claimant or GECAS was obliged to supply a new engine. The Defendant’s maintenance contract was with GE and GE LLC. Thus the Defendant may have an indemnity or contribution claim against GE and GE LLC but a breach of contract by them would not give a defence to claims by the Claimant.

The third case advanced on behalf of the Defendant was that the letter of credit, or its proceeds now held by the Claimant, could be used to discharge the debts claimed by the Claimant. No doubt they could so be used but there is no evidence that they have been so applied rather then being held as security for the performance of other obligations owed by the Defendant, for example, as to the condition of the aircraft on redelivery. The deposit may be applied in or towards the discharge of any obligation under the lease (see clause 5.13(b) of the CTA). The Claimant is not obliged to apply the deposit to the discharge of any particular obligation.

The fourth case advanced by the Defendant was not a defence to the monetary claim but only to the claim to possession. The Defendant claimed relief against the forfeiture of the leases. Since possession of the aircraft passed to the lessees under the terms of the leases relief against forfeiture is available, “provided that the object of the transaction and of the insertion of the right to forfeit for non-payment of money is essentially to secure the payment of that money or is security for the attainment of a specific result which can be achieved through the courts;” see More Og Romsdal Fylkesbatar AS v The Demise Charterers of the Ship JUTUNHEIM [2004] EWHC 671 (Comm) at paragraphs 46-47.

An example of a right to forfeit the object of which is not to secure the payment of money is one where the event which gives rise to the exercise of the right is a repairing obligation in a lease. Such a right is concerned with the condition of the leased property and its value to the landlord. It is not concerned with securing the payment of money. By contrast, in JUTUNHEIM the charter was a demise charter coupled with a hire purchase agreement pursuant to which title would pass to the charterers at the end of the charter period. In that context the right to withdraw the vessel was to secure the payment of hire.

In the present case the right to forfeit arises on the occurrence of an event of default which may be the non-payment of money or may be a breach of other terms of the leases eg of the obligation to maintain the aircraft. However, I do not consider that the jurisdiction to give relief against forfeiture is excluded because the right to forfeit may be exercised in some cases where relief would not be available. That was not suggested. The jurisdiction is an equitable remedy and it is therefore appropriate to consider the obligation in respect of which the right in fact arises. In the present case the only breach which is established for the purposes of this application for summary judgment is a failure to pay rent. That seems to me to be the paradigm case where relief against forfeiture is available. The object of the right to forfeit for non-payment of money is essentially to secure the payment of that money.

The Defendant thus has a realistic prospect of establishing at trial that this is a case in which the court has a discretion to grant relief against forfeiture. He may of course fail to establish that for the reasons adumbrated on behalf of the Claimant, namely, that there were other breaches by the Defendant, including a breach of the obligation to maintain, and that the object of the demanding delivery up of the aircraft was to protect the value of the aircraft to the Claimant. However, such matters have not been established on this application. There is a dispute as to whether the aircraft have been kept in good operating condition. It was not suggested that the Defendant had no real prospect of making good its contention that the aircraft have been kept in good operating condition. I therefore do not consider that I can take such alleged breach into account on this application.

Whether or not the discretion to grant relief will be exercised in this case will require a careful consideration of all the circumstances on the case, including any disparity between the sums claimed by the Claimant and the damage caused to the Defendant by loss of possession of the aircraft. The question for me on this application is whether the Defendant has a realistic prospect of establishing at trial that relief should be given against forfeiture. Having regard to the size of the Defendant’s fleet, 5 aircraft, and the likely consequences which the loss of 3 aircraft will have on the Defendant’s business I am unable to regard the Defendant’s prospects at trial as fanciful notwithstanding that relief against forfeiture will only be given in limited cases and that “equity expects men to carry out their bargains and will not let them buy their way out by uncovenanted payment”; see Lord Wilberforce in Shiloh Spinners v Harding [1973] AC 691 at p.723.

For these reasons I have concluded that the Defendant has no real prospect of defending the claim for US$791,944.54 and that summary judgment should therefore be given in respect of that claim. There is no other compelling reason why that claim should be tried. However, there is a real prospect that the court will grant relief against forfeiture and therefore summary judgment should not be given in respect of the claim for delivery up of the aircraft.

The question whether relief should be given against forfeiture is one which should be speedily determined. That must be in the Claimant’s interests because it fears for the continued good order and condition of its aircraft. It must also be in the interests in the Defendant because it needs to know as soon as possible whether these aircraft will be available for use in its airline in South East India or not. Indeed, it was the Defendant who suggested a speedy trial.

I will therefore give directions for such a trial. I will ask the parties to prepare a draft order including directions for a speedy trial.