Blue Sky One Ltd & Ors v Blue Airways Llc & Ors

This dispute concerns the ownership and right to possession of three Boeing 747- 422 aircraft (“the Package 1 aircraft”), previously operated by United Airlines but sold during its Chapter 11 bankruptcy proceedings. The main protagonists are Balli Group plc, a company founded by an Iranian family, the Alaghbands, after they left Iran in 1978, and other companies owned or controlled by it (“the Balli parties”); Mahan Air (“Mahan”), a private Iranian airline, which began operations in 1992, and Blue Sky Aviation Co. FZE (“FZE”), an Ajman company owned or controlled by Mahan. Balli Group plc is at the apex of a substantial international commodity trading group. The group’s turnover in 2008 was over US$ 1 billion. Prior to the transactions which are the subject of these proceedings, the Balli group was not involved in the aviation industry. Mahan, Iran’s first private airline, is owned by the Mol-Al-Movahedin Credit Union. It has grown significantly since 1992, and now carries some 3 million passengers a year. Its turnover at the material times was approximately US$ 125 million.

The dispute arises as a result of a complicated series of transactions which were entered into in 2006 against the background of sanctions imposed by the United States which prevent the sale or lease of United States aircraft and aircraft containing significant components (for example engines) manufactured in the United States to Iranian individuals or companies. Two of the Package 1 aircraft were made available to Mahan during 2006. There is, however, no documentary evidence which shows the second aircraft arriving in Iran on any date. The third aircraft was made available to Mahan in May 2007.

On 21 December 2006 two of the Package 1 aircraft were mortgaged to PK Airfinance US Inc. (hereafter “PK”), a company which is part of the General Electric group to finance the acquisition of three other Boeing 747s (“the Package 2 aircraft”). The breakdown in the relationship between Balli and Mahan occurred after the United States Department of Commerce issued a Temporary Denial Order on the Balli parties and Mahan for what it said were violations of the United States Export Administration Regulations by exporting the Package 1 aircraft to Iran. In October 2008 title to all three aircraft was purportedly transferred to FZE byway of three Bills of Sale.

There are two claims before me which Flaux J ordered to be expedited and to be heard together but not to be joined. The claimants in the first claim (the main action) are Blue Sky One Ltd., Blue Sky Two Ltd., and Blue Sky Three Ltd., three English special purchase vehicle companies owned or controlled by Balli Group plc (“the SPV companies”). The claimants and Balli (hereafter “the Balli parties”) seek delivery up of the three Package 1 aircraft (MSN 24363, 24383, and 26879 and original registration N172UA, N176UA and N190UA) and damages for breach of contract, conversion and unlawful interference with property from Mahan (the second defendant), and FZE (the third defendant). They say that, while the purpose of the transaction was to enable the Package 1 aircraft to be deployed for Mahan’s use and benefit on its chosen routes in and out of Iran, it was carefully structured not to violate United States sanctions and that Mahan and FZE acquired no beneficial interest in the aircraft either initially or on the execution of the Bills of Sale.

Blue Airways LLC (“BAW”), an Armenian company formed in 2005, to whom the Balli parties leased the aircraft, is named as the first defendant in the first claim. BAW was, however, wound up and ceased to exist on or about 23 March 2009, about two months after these proceedings were launched, but before service of the Amended Defence and Counterclaim. The Balli parties were not informed of the winding up until 1 July, only five days before the start of the trial. At the beginning of the trial I indicated that the claim against Blue Airways would be struck out and made the order on 31 July. I adjourned any consequential applications until after this judgment.

The claimant in the second claim is PK. It agreed to lend Balli US$ 150 million to finance the acquisition of the Package 2 aircraft if it was granted security over two of the three Package 1 aircraft which it was told were owned by SPV companies within the Balli group. On 21 December 2006 Blue Sky Two and Blue Sky Three mortgaged two of the aircraft (MSN 24383 and 26879) to PK. In January 2007 the mortgages were registered at Companies House and with the UK Civil Aviation Authority pursuant to the relevant legislation. On 6 April 2009 PK served notice on Blue Sky Two and Blue Sky Three, Balli Group plc, Mahan, and FZE demanding possession of the mortgaged aircraft. The Balli parties do not dispute PK’s right to possession but Mahan and FZE do.

The Package 1 aircraft were respectively 17, 16 and 13 years old in 2006. The Balli parties and PK claim that each of the claimants acquired one of the aircraft on 28 September 2006, and on 12 October 2006 leased that aircraft to BAW which registered the aircraft in Armenia and chartered it to Mahan. The first two aircraft were registered in Armenia on 20 November 2006. The first aircraft arrived in Iran in December 2006. The second aircraft was made available to Mahan in 2006. Its ferry flight from Holland to Fujairah in the UAE was on 10 November 2006. Mahan’s case is that it first arrived in Iran on 17 December 2006 but Balli and PK do not accept this. No witness had independent recollection of this and there is no documentary evidence of the date on which it first landed in Iran. The third aircraft was registered in Armenia on 26 April 2007 and arrived in Iran on 12 May 2007.

The case of the Balli parties and PK is that the leases and charters were made pursuant to a series of agreements by Balli and Mahan in Düsseldorf on 25 February 2006. They say that it was originally envisaged that the aircraft would be owned by three Cayman Islands SPVs (“the Cayman SPVs”) companies originally incorporated by Mr Insley, Mahan’s solicitor, and the shares in the Cayman SPVs would be owned by Blue Sky Aviation Ltd (“BSA”), a Cayman company affiliated to Balli.

The Düsseldorf agreements included agreements by FZE to lend some US$ 138.5 million to Balli and BSA to be used to acquire the aircraft and pay for the heavy maintenance work (D-checks) needed to put them into operational order. There was also an agreement, described as a “Letter Agreement”, between Balli, BSA, and FZE providing that repayments of the loans were to be made from the proceeds the Cayman SPVs received from leasing the aircraft, and an option, valid until 31 March 2020, granted to Mahan to buy the shares in the Cayman SPVs. The option was only exercisable by Mahan if “at the time of its exercise in the opinion of Clifford Chance transfer of the Option Shares will not be in violation of any applicable laws or administrative proceedings”. It is common ground that this includes the United States sanctions. The Option Agreement also provided that “the airplanes could not be sold, leased, pledged or otherwise encumbered or transferred without the prior written consent of Mahan”.

Subsequently it was decided that the aircraft should be owned by the claimant SPV companies. On 2 October 2006, before their entry on the Armenian register, they were registered in the UK with the Civil Aviation Authority. In May 2007 the agreements were novated so that Crypton Limited was substituted for BSA under the loan agreements and the shares of the claimants became subject to the option. In a further agreement, Mahan agreed to provide funding in respect of the PK loan and consented to the second and third aircraft in Package 1 being used as security for PK’s loan. There is a dispute as to the terms of this agreement and whether Balli satisfied the conditions laid down by Mahan.

On 4 September 2007 Hassan Alaghband, then a director of the claimant SPV companies, signed three blank Bills of Sale, one for each aircraft. The Bills of Sale were given to Mr Tahmaseb Mazaheri, at that time Governor of the Central Bank of Iran, for safekeeping pursuant to the terms of an agreement dated 31 August 2007 (hereafter “the Side Letter Agreement” or “SLA”). Subsequently Mr Mazaheri handed the Bills of Sale to Mahan which filled in the blanks and purported to transfer title in the aircraft to FZE. The aircraft were deregistered from the Armenian aviation registry on 16 October 2008 and registered by Mahan on the Iranian register.

The Balli parties and PK submit that the two aircraft which are the subject of PK’s claim were validly mortgaged to PK, and that Mahan consented to the mortgages, at first orally and subsequently in writing. They also submit that title to the aircraft was not transferred under the Bills of Sale because (a) the conditions in the 31 August 2007 Side Letter Agreement for the execution of the Bills of Sale were not satisfied, and (b) the documents used were not authentic documents capable of transferring title.

The case of Mahan and FZE is that the Balli parties acted as a “front” for Mahan and FZE, that the three aircraft were acquired with money provided by Mahan or FZE pursuant to an oral agreement (referred to in the written and oral submissions as “the B-M agreement”) under which the aircraft were held by the Balli parties on trust for Mahan or FZE; or a resulting or constructive trust that arose because Mahan provided the money for the purchase of the aircraft or as a result of the accounting relationship between the parties and the arrangements for the deployment of the aircraft. Their case is that the parties deliberately decided not to record the agreement because of US sanctions against Iranian entities and that much of the documentation was generated to create a false impression. They submit the leases to BAW and the loan agreements with the Balli parties were shams. They apply for permission to amend their pleadings to allege that the loans to the Balli parties were shams. The terms “superficial” and “window dressing” were used. They submit legal title to the aircraft was later validly transferred to FZE by the Bills of Sale. They say it was the parties’ intention that the aircraft would be deployed for Mahan’s use and benefit and managed and maintained entirely at Mahan’s expense. Balli assumed no financial risk under the arrangements and was to be rewarded for acting on Mahan/FZE’s behalf by payment of a management fee of some US$1 million per annum along with option fees totalling US$3.075 million.

Mahan and FZE also claim some US$ 67.8 million on the ground of total failure of consideration. They say they advanced this sum to the Balli parties for a fourth aircraft which was not delivered. Alternatively they maintain that in July 2007 Balli agreed to pay US$ 53 million and they claim this sum. They also claim the return of all monies advanced to the Balli parties by FZE for the acquisition of the aircraft after 8 May 2008 or an account of all sums so advanced.

As far as the mortgages are concerned, Mahan and FZE’s case is that when the mortgages were granted they were the beneficial owners of the two aircraft, and that they were subsequently granted legal title by way of Bills of Sale. They submit that the Balli parties mortgaged the two aircraft in breach of the Option Agreement which required Mahan’s prior consent in writing. They also submit that any ratification of what had occurred was conditional on PK being prepared to offer a three year loan facility on terms approved by Mahan and providedto Mr Mazaheri, which facility was not obtained. PK had actual or constructive knowledge of Mahan and FZE’s interests and either no title was transferred to PK, or such title as was transferred was subject to Mahan and FZE’s subsisting rights in the aircraft.

On 3 December 2008 the claimants issued an application without notice on notice against BAW for interim delivery up of the aircraft. On 9 December 2008 the matter was adjourned by Flaux J. Proceedings were issued on 12 January 2009 against BAW, Mahan, and FZE. It was subsequently agreed by the parties that there be an expedited trial of all the issues and, on 27 February 2009, Flaux J made an order to this effect with consequential directions for such expedition. At that time the estimated length of the trial was 8-10 days.

On 24 April Flaux J ruled that PK’s claim should be not be joined with that of the Balli parties. On 15 May he ordered expedition of PK’s claim, that there be a single set of trial bundles in the two cases and that the trial of PK’s claim be heard at the same time as the trial of the Balli parties’ claim. By then the provisional estimated length of the trial had risen to 12 -15 days.

Balli’s claim was also for the delivery up of an engine leased by Pratt & Whitney Engine Leasing (“PWEL”) to Blue Sky Three and then to BAW. Mahan’s defence pleaded that it was seeking to regularise the position with PWEL. On 15 May Flaux J stated that he expected the position in relation to the PWEL engine to be sorted out in short order.

On 19 June, at a pre-trial review, I ordered that by 26 June Mahan deliver up the PWEL engine to the Balli parties or their nominated agents and pay US $ 2.25 million into an escrow account held jointly by Balli’s solicitors, Mahan’s solicitors, and PWEL or its solicitors in respect of inter alia rent due on the engine, usage fees, and the deposit. Those orders were not complied with until after the start of the trial on 6 July. I also ordered that evidence adduced at the trial of each claim should stand as evidence in the other claim, and made consequential directions, including, as a result of concern about the estimated length of the trial, the preparation of a draft timetable. It soon became clear that the estimate of 12-15 days was wholly unrealistic because of the number of issues and the impact on the timetable of the fact that most of Mahan’s witnesses would be giving their evidence in Farsi. The difficulties could only be addressed by an adjournment, which, in the light of the Commercial Court’s list, would have had to be until February 2010, or by seeking to identify the issues that need to be determined in order to decide the “delivery up” issue in the main action.

As a result of a letter dated 25 June sent on behalf of PK and after a further hearing on 29 June, I ordered that the trial be split. The first stage (“Phase 1”) would deal with the issues which affect whether the Balli parties are entitled to an order for delivery up of the three aircraft. These are: the scheme for purchasing the three aircraft, the alleged oral “B-M” agreement that the Balli parties would hold the aircraft on trust for Mahan or FZE, the acquisition and ownership of the three aircraft, whether the leases to BAW were genuine or shams, whether Mahan consented to the mortgaging of the two aircraft (MSN 24383 and 26879) by Blue Sky Two and Blue Sky Three, the execution of the Bills of Sale, and whether the Balli parties were entitled to redelivery of the aircraft. I also ordered that the issue of liability in principle for the counterclaim for US $67 million would be dealt with in the first phase.

The issues initially left for the second stage (“Phase 2”) were whether PK is entitled to enforce the mortgages against Mahan and FZE, whether the Mahan parties were in breach of an agreement to advance money for the Package 2 aircraft, whether the Balli parties agreed that Mahan was entitled to its money back, and issues of quantum, set-off, and account. My ruling recognised that Mahan’s claim to recover the money paid for the Package 2 aircraft was a discrete issue. In the second week of the trial I acceded to Mahan’s renewal of its application for this to be considered in Phase 1. I ruled that the issue of the Balli parties’ liability in principle to repay Mahan would be dealt with, but that if this was intermingled with a set off claim by Balli or with a defence of change of position which Mr Shepherd submitted had been pleaded but which I concluded they had not done clearly, I would defer making a ruling until after the Phase 2 trial.

My concerns at the pre-trial review about the timetable were borne out. The trial of the first stage commenced on 6 July and the evidence concluded on 31 July. Written closing submissions were provided on 15 September, reply written closing submissions on 22 September and oral closing submissions were on 8 and 9 October.

I have referred to the fact that BAW was wound up on or about 23 March 2009. The first steps to wind the company up were taken in late November 2008, at about the time of the Balli parties’ without notice application, but it was still in existence on 12 January when these proceedings were issued.

The amended defence and counterclaim, dated 21 May 2009, was served on behalf of inter alia BAW and accompanied by a statement of truth signed by Mr Fard, on behalf of BAW. BAW had, however, ceased to exist by then. Notwithstanding this, Mr Fard’s witness statement dated 27 May 2009 makes no reference to the liquidation of the company and states “I am the commercial director of Blue Airways”. There has been no satisfactory explanation of how a pleading on behalf of BAW with a statement of truth signed by Mr Fard, was served towards the end of May or why Balli was only informed that the company no longer existed at the beginning of July. Mr Fard’s evidence was that he did not read the pleading or check his witness statement carefully enough before signing. He said he did not inform the Balli parties or Norton Rose of the liquidation of BAW because he did not see the Balli parties as potential creditors.

During the course of the trial both Mahan and PK gave notice that they would be applying to amend their pleadings. PK has applied to amend its reply to Mahan’s Amended Defence in the PK action. PK wishes to plead that if there was an oral B-M agreement under which the Package 1 aircraft were held by the Balli parties on trust for Mahan or FZE, it was an illegal contract on which Mahan and FZE are not entitled to rely. PK served a draft amendment to this effect on 27 July, four days before the conclusion of evidence.

The Balli parties seek to amend their Reply to plead formally that they reject the set off defence raised by Mahan and FZE in paragraph 112 of their Amended Defence and Counterclaim and to plead a change of position defence to the restitutionary claim for the return of the US$ 67.8 million or US$ 53 million. The second of these amendments is to clarify a position that the Balli parties thought they had pleaded but which I concluded they had not done clearly. Both of these amendments go to issues relevant to the monetary claims that have been postponed to the Phase 2 trial.

On 31 July, the last day that evidence was heard, Mahan gave informal notice that it would be applying to amend its Defence to allege that the loan agreements made between it and the Balli parties were shams. The issue of the “superficiality” of the loans was first squarely raised on 21 July in re-examination of Mr Mahmoudi by Mr Crane. At that time Balli objected to this as relating to an unpleaded matter.

On 7 September, Mahan served a draft Re-amended Defence and Counterclaim pleading that the loans were shams. The draft also contains a number of amendments on other matters which Mahan describes as in the nature of tidying up amendments in the light of additional documentation and oral evidence on points of detail. One example is in relation to a document called the Executive Instruction/Procedural Order prepared by Mr Mazaheri setting out arrangements for the acquisition of the aircraft. The other proposed amendments of significance are: (a) paragraph 53A pleading Mr Mazaheri’s note of the 13 April 2007 meeting in support of its case that Balli was Mahan’s trustee and as the basis for the documents signed in Dubai in May that year (paragraph 53A), (b) that either the 22 February 2008 repatriation order by BIS or the 21 March TDO frustrated the agreement for the fourth aircraft to be delivered to Mahan (paragraphs 76A and 78), (c) an agreement taking an account made on 25 July 2008 which provided for the repayment by Balli of the sum found due in the event that the Air Atlanta scheme did not proceed (paragraph 85A), and (d) in paragraph 100, that the Bills of Sale remained in a safe deposit box at Bank Sadarat in Tehran between 4 September 2007 and 16 October 2008 when Mr Mazaheri handed them to Mr Arabnejad.

The principles governing applications to amend pleadings at the end of a trial were discussed in Ketteman v Hansel Properties [1987] AC 189. In that case, as in this, the application to amend was made after the completion of evidence and in closing submissions. Lord Griffiths stated (at 220) that it is not the practice invariably to allow a defence which is wholly different from that pleaded to be raised by amendment at the end of a trial even on terms that an adjournment is granted and that the defendant pays the costs. He stated “there is a clear difference between allowing amendments to clarify the issues in dispute and those that permit a distinct defence to be raised for the first time”.

I first consider the extensive applications to amend by Mahan. I have concluded that the application to amend the pleadings to allege that the loan agreements were shams cannot be made at this stage without injustice to the Balli parties and PK and should not be made. It is wholly inconsistent with the way the case was pleaded and put until 21 July. Indeed positive reliance was placed by the Mahan parties on the loans in their original Defence and the Amended Defence: see paragraphs 29-30. Disclosure was sought and made, witnesses evidence prepared, and witnesses were cross-examined on the basis that it was not in issue that the loans were shams. There were many matters that would properly have been the subject of cross-examination had that been in issue. These included the need for parallel agreements between FZE and Balli as well as between FZE and BSA, the assignment by Balli to BSA, the reason that promissory notes were required and given, and the impact on the Letter Agreement made in February 2006.

The issue is not one which has arisen because of some new factor appearing from late disclosure. It is one which Mahan has had many months to consider. In Worldwide Corporation Limited v GPD Limited 2 December 1998, Waller LJ stated that this is a factor which points against allowing an amendment. He stated “the court is concerned with doing justice, but justice to all litigants, and thus where a last minute amendment is sought with the consequences indicated [a delayed trial and inconvenience to other litigants], the onus will be a heavy one on the amending party to show the strength of the new case and why justice both to him, his opponent and other litigants requires him to be able to pursue it”.

As far as the strength of the case is concerned, in the light of Mahan’s positive reliance on the loan agreements and the possible inconsistency between the allegation that they are shams and other parts of Mahan’s case, this cannot be seen as an appropriate case for an amendment at such a late stage on a fundamental matter.

I turn to the other amendments sought by Mahan and FZE. The first is that the Repatriation Order or the TDO frustrated the agreement for the fourth aircraft to be delivered to Mahan. There was no cross-examination directed to them and in particular, to the important question of the degree of foresight of an intervention by the United States authorities at the time the contracts concerning the Package 2 aircraft were made. There was also little evidence before me as to the quality of the expenditure made by Balli as a result of the contract. That is an issue which concerns whether it would be “just” pursuant to the proviso to section 1(2) of the Law Reform (Frustrated Contracts) Act 1943 to allow Balli to retain some or all of the sums paid to it, a matter reserved for Phase 2. There was, however, no cross-examination squarely directed to it. To allow this amendment would also be to permit a distinct defence to be raised for the first time at the end of the trial. Accordingly, I reject Mahan’s application to include paragraph 76a and to amend paragraph 78 in the way sought.

The status of the Executive Instruction/Procedural Order and the agreement in July 2008 to repay money if the Air Atlanta project did not proceed are in a different category. The latter was fully explored in the evidence given by Vahid Alaghband and Mahan’s witnesses. I consider the amendment concerning the Executive Instruction/Procedural Order can be made without injustice to the Balli parties. I also consider that the amendment concerning the deposit of the Bills of Sale at the Bank Sadarat can be made without such injustice. The state of the evidence is as it is and there is no documentary evidence to support Mr Mazaheri’s statement. That leaves the status of his note of the meeting on 13 April 2007. Mr Mazaheri refers to the note in paragraph 20 of his witness statement and to the fact that it contains crossings out and additions as a result of comments made by Vahid Alaghband and Mr Arabnejad. The note was only produced during the hearing after Mr Mazaheri referred to it and Mr Insley made a further search of the documents. It has been scrutinised. It has been subjected to forensic examination by an expert. Vahid Alaghband gave evidence on this matter on 31 July before the amendment was filed. There was no application by Balli to re-call Hassan Alaghband or Mr Arabnejad. Since closing submissions were not until 8 and 9 October, there would have been ample time to do so either before or after the application to amend was filed.

The two amendments sought by Balli also fall into this category. They primarily relate to matters that will be dealt with in the Phase 2 trial. I consider that they can be made without injustice to Mahan and FZE.

That leaves PK’s application to plead that the B-M agreement was an illegal contract on which Mahan and FZE are not entitled to rely. In view of my findings of fact, the circumstances in which this plea would be relevant do not arise. Mr Moriarty submitted that the amendment should be allowed, although it was made at a very late stage, because it only raises two points of law. Those points, he stated, arise out of the evidence that was given at the trial and were amply explored with witnesses. However, the factual and expert evidence was served without knowledge that this application would be made. This amendment would also permit a distinct defence to be raised for the first time at the end of the trial, in the way which Lord Griffiths deprecated in Kettman v Hansel Properties. I have concluded that it should not be allowed at this stage.

Factual evidence:

Factual evidence on behalf of the Balli parties was given by Vahid Alaghband and his brother Hassan. Their statements are dated 1 June 2009. Both are directors of Balli Group plc. Hassan was the sole director of the claimant companies between 19 September 2006 and 27 March 2008 when, as a result of the TDO, he resigned and was replaced by his brother Vahid.

Vahid Alaghband conducted the initial discussions with Mahan, was involved in all major decisions about the transactions, and attended many meetings. Hassan became involved at Vahid’s request after Balli had decided in principle that it wished to enter into an agreement with Mahan. He has accountancy and legal qualifications obtained in the United States. Vahid asked him to take the lead in negotiating and preparing the contracts. His main contact in Mahan was Mr Mahmoudi, a director and Mahan’s Vice President for Business Development. Hassan Alaghband subsequently oversaw the detailed arrangements of the transactions with Mahan and with BAW.

Factual evidence on behalf of Mahan and FZE was given by Mr Arabnejad, Mahan’s Managing Director (statements dated 31 May and 14 July 2009), Mr Mahmoudi (statement dated 31 May 2009), and Mr Moattar, a consultant to Mahan’s President and (although not a lawyer) in charge of its legal department who made a statement dated 31 May 2009 and an affidavit concerning disclosure dated 24 July pursuant to an order by me. Factual evidence was also given by Mr Mazaheri, a prominent Iranian who held a number of positions including being Minister of Finance and, between 2007 and October 2008, the Governor of the Central Bank of Iran (statements dated 31 May and 6 July 2009), Mr Eslamian, a Director of SkyCo UK Ltd, a company controlled by Mahan (statement dated 2 June 2009), Ms Hosseini, Mr Arabnejad’s personal assistant (statement dated 31 May 2009), Mr Bahrami, the Director of FZE (statement dated 31 May 2009), and Mr Fard, who was BAW’s Commercial Director (statements dated 27 May and 28 July 2009). All save Mr Bahrami gave oral evidence. Ms Hosseini did so via a video link.

On a number of matters, there is a sharp conflict between the evidence of the Alaghband brothers and that of Messrs Arabnejad, Mahmoudi and Mazaheri. Before commenting on them and other witnesses, I observe that the approach of the parties and their witnesses differs sharply. Vahid and Hassan Alaghband are sophisticated businessmen whose interests and activities cover many areas. Their bearing and the way they gave their evidence showed they operate comfortably within a culture of paper driven transactions. Mahan’s witnesses, in particular Mr Arabnejad and Mr Mahmoudi, appear to operate in a culture in which complex dealings are conducted at meetings and with little documentation other than emails and handwritten notes of the meetings. Although there was some suggestion in the early part of the trial by the Balli parties that this may have been in part a reflection of Mahan’s approach to discovery, this was not pursued in their closing submissions.

Ms Hosseini and Mr Eslamian were trying to assist the court to the best of their abilities and I have no doubt as to the reliability of their evidence. Subject to the comments below, Mr Moattar was also trying to assist the court. Mr Moattar sought to downgrade the significance of a document, the Executive Instruction/Procedural Order, drawn up by Mr Mazaheri. His evidence was also not satisfactory in a number of other respects. These include the way documentation was kept within Mahan and its legal department and whose responsibility it was, and whether he objected to the reduction in Balli’s obligation to try and extend the terms of the PK bridge facility from 3 years to 18 months: see [181].

Mr Arabnejad’s evidence showed that he was not in command of the details of the transaction which he left to his subordinates in particular Mr Mahmoudi and Mr Moattar who briefed him. The documentary and other evidence shows that he was prepared to lie to third parties in the interests of the company. Thus, he told the Export Development Bank in January 2009 that the Package 2 aircraft were going to enter Iran for service and he sought a loan from Bank Melli in response to a court order to pay $2.25 million as security for the PWEL claim and stated that the money was to be borrowed for “leasing an engine from PWEL”. Asked in cross-examination what he would say to questions about the ownership of the aircraft, he replied that it depended on who was asking. Although this was said to show he would say whatever was necessary to protect Mahan, it was a frank response to the court for him to say that in other contexts he would act in this way. Notwithstanding this, I did not find his evidence satisfactory as to whether it had been agreed that the Balli parties would hold the aircraft on trust for Mahan. While his evidence may have been based on Mahan’s witnesses’ views of the effect of the Option Agreement (see [108] and [250]-[251]) it may also reflect the fact that he relied on others including Mr Mahmoudi and Mr Moattar explaining matters to him. His background as a military man and Iran’s chargé des affaires in Bosnia before becoming Managing Director of Mahan was not such as to equip him with an understanding of the details of business life and the aviation industry.

Mr Mahmoudi’s evidence was also unsatisfactory. It contained contradictions. He responded to difficult questions by saying that the matter asked about, whether documentation about the agreements, maintenance, or finance, was not his responsibility. Although he was a lead negotiator for Mahan in relation to these transactions and expressed views on some of them (see e.g. [103]) he said he left legal issues to Mr Moattar. His evidence as to whether he had studied the draft agreements before the February meetings, and what he had been told about the Package 2 aircraft in the autumn of 2006 was not satisfactory. He had a tendency to maintain that he did not know about certain matters, including the reasons for the problems with the Blue Wings transaction, and the transfer of the Package 1 aircraft from the Cayman SPVs to the claimant SPV companies. As to the latter, he had been sent copies of Bills of Sale showing the names of the transferee and copies of the leases.

I did not find Mr Fard a satisfactory witness. Apart from the pleading matter to which I have referred in [24], he signed his statement of truth in the Defence and Counterclaim even though he had not read them and he did not really search for relevant BAW documents. His dismissal of the email communications between him and Hassan Alaghband as not reflecting the reality of the relationship between them and between Balli and Mahan was not satisfactory. I also found his explanation of the maintenance arrangements for the aircraft evasive.

Mr Mazaheri’s evidence was reasonably balanced as to the early stages of the transaction although it was coloured by his view that the Option Agreement created a trust of the aircraft by Balli for the benefit of Mahan. His evidence as to the later stages was unsatisfactory. In particular the evidence about the letters written in his capacity as Governor of the Central Bank in relation to the Bills of Sale (see [185]-[188]), whether he believed there was no PK mortgage, and that the Bills of Sale had not been pledged to the Export Development Bank, was not credible.

I turn to the Alaghband brothers. Their credibility was challenged. The fact that a judge found them both guilty of a criminal charge arising out of their financial dealings in Germany for which an 18 month suspended sentence of imprisonment and a fine of €4 million was imposed was relied on to show their attitude to observing the law.

In the case of Vahid Alaghband there were a number of matters on which I did not find his evidence satisfactory or altogether satisfactory. These included the evidence that he always intended to reveal that Mahan’s money was behind the acquisition of the stake in Air Atlanta and the reasons for the Balli email addresses and business cards given to Mr Mahmoudi and Mr Moattar. While there was always sensitivity to publicity about transactions involving Iranian entities, after the TDO it does appear that in trying to retrieve the situation the Balli parties were trying to conceal what was going on. I also found his evidence as to what had been agreed in relation to Balli paying US$ 50 million to Mahan in the spring and summer of 2008 (see [220]-[222]) unsatisfactory. His explanation as to why he told Mr Waldelof of PK that the “habitual home” of the Package 1 aircraft was Armenia was also unsatisfactory and he gave no explanation for not telling Mahan that PK would not extend the 18 month facility for some time after he knew this: see [168]. However, I accept his explanation of the dealings between the parties in the early stages; what had gone wrong with the Blue Wings transaction, the agreements reached in Düsseldorf in February 2006, and what Balli was being paid for under the Option Agreement and the other agreements then negotiated.

Although Hassan Alaghband is an intelligent man and shrewd operator, he took an approach to the content of some of the emails and other documents (particularly those after the TDO) that was at times strained and unrealistic. His explanation of the communications with BDO about the preparation of a letter to Akin Gump to be used in their negotiations with the United States authorities about the TDO was not satisfactory. However, I accept the overall tenure of his evidence as to the nature of the relationship between Balli, Mahan and BAW, the reasons for him contacting BAW and Mr Fard through Mr Mahmoudi, and other matters in the period before the relationship started to break down towards the middle of 2008.

Mr Crane submitted that the documentation including the agreements and the emails about the draft leases were setting up a paper trail to conceal the true nature of the transactions which included exchanges about the deposit to be paid under the contract and the production of draft documents for BAW. He submitted that because of the way the Balli parties concealed information from so many people including Norton Rose and Akin Gump the court should not take the contemporary documents at face value in assessing the oral evidence in line with the guidance given by Robert Goff LJ in The Ocean Frost [1985] 1 Lloyds Rep 1 at 57, and applied in many cases since, including cases not involving fraud: see Grace Shipping Inc v CF Sharp and Co (Malaysia) Pte Ltd [1987] 1 Lloyds Rep 207 at 215. I have taken this submission into account in assessing the oral evidence. But in the light of my findings about the reliability of the witnesses, there is no reason for me to depart from the guidance in The Ocean Frost.

Expert witnesses:

The material before the court consisted of expert reports on US, Armenian, Dutch and Iranian law. In the event only Dr Morteza Adel, an Assistant Professor at the University of Tehran’s Faculty of Law, Mahan’s expert on Iranian law, gave oral evidence via a video link. Reports on the applicability and operation of the United States sanctions laws were prepared by three Washington DC legal practitioners with significant experience in the area of export controls. They are; William Clements, on behalf of the Balli parties, Michael Sherman, on behalf of Mahan, and Christopher Wall, on behalf of PK.

The reports on Armenian law are by Norair Babadjanian, on behalf of the Balli parties, Ara Khzmalyan, on behalf of Mahan, and Edward Mouradin, on behalf of PK. The reports on Dutch law are by Berend Crans and a joint report by Baulke Falkena and Marcel Janssen, of CMS Derks Star Busmann.

The court also has reports from Liam Bateman, of Evidence Talks Ltd, a computer forensic expert, who examined the electronic Bills of Sale emailed to Balli, and from Dr Audrey Giles, a handwriting expert, who examined a note made by Mr Mazaheri of meetings on 12 and 13 April 2007.

There are also reports concerning aircraft values and lease rates from Philip Seymour, the Managing Director of the International Bureau of Aviation, on behalf of the Balli parties, and Gary Crichlow, an analyst with Ascend Aviation Insight and Roy Webber on behalf of Mahan and aircraft survey reports dated 14 September 2009 by Jon Bragason and Roy Webber on behalf of Mahan. They were instructed on 27 July 2007. These reports concerned quantum and are not relevant to the issues that fall for decision in this phase of these proceedings although Mahan relied on them to some extent in its closing submissions.

The Background to the Transactions:

Mahan’s growth since its establishment has meant that it has consistently sought to enlarge its capacity by acquiring modern aircraft to service its routes. The United States sanctions were a significant impediment to it. Even where a transaction would not be a breach of those sanctions, the background of sanctions and the difficulties of dealing with Iranian entities about items which were subject to sanctions may have meant that entities such as Mahan which sought to acquire such items had to pay over the odds. This background also led to sensitivity by all involved about confidentiality and any publicity which might come to the notice of the United States authorities even when those involved were not breaking sanctions or did not believe they were.

Mahan sought to address the difficulties caused by United States sanctions in a number of ways. One was by the use of non-Iranian entities through which it would seek to acquire aircraft. Eagle Aviation SA (“Eagle”), a French company was one of these entities. Another was SkyCo UK Ltd, an English company owned by Comet GmbH, a German company whose sole director is Mr Mahmoudi. Blue Wings GmbH, a German company, was another of these entities.

Seventy five per cent of the shares in Blue Wings GmbH were held on trust for Mahan by Dr Stahl, a German lawyer. The trust document, headed “Escrow Agreement” refers to Mahan as the “trustor” and Dr Stahl as the “trustee”. It obliged Dr Stahl to deal with the shares according to Mahan’s instructions and to transfer them to Mahan or any third party nominated by Mahan at any time upon Mahan’s request. It also obliged Dr Stahl to follow Mahan’s instructions in exercising shareholder’s rights. Mahan thus indirectly controlled Blue Wings. The difficulties encountered in a transaction in which Blue Wings sought to purchase three Airbus A330-200 aircraft led to Mahan’s introduction to the Balli group and to Vahid and Hassan Alaghband. They are relevant as background to the agreements Balli and Mahan made about the Package 1 aircraft.

On 3 December 2004 Blue Wings agreed to buy the three Airbus aircraft from Kayo Ltd, an Anglo-French-German consortium, and a syndicate of banks supported by the Export Credit Agencies of the three countries. The agreement contained a representation by Blue Wings that the aircraft would not be sold or leased to anyone in a “prohibited country”, which included any country subject to United States sanctions. A commitment fee of US $10 million and a second instalment of US $20 million were paid towards the purchase. Further instalments became due but were not paid and the transaction did not proceed.

On 3 April 2005 Mr Mazaheri introduced Vahid Alaghband to Mr Arabnejad at Balli’s offices in Tehran. He did so because Mr Alaghband is a well-known member of the Iranian diaspora in England with experience of doing business in England and Iran, and with contacts with officials in this country. He thought Mr Alaghband could assist Mahan in resolving matters.

Mr Arabnejad’s evidence was that the problem with the Blue Wings transaction was not financial. He said Mahan thought the real cause of the difficulty came from Britain and was political. Vahid Alaghband’s evidence (see paragraph 32 of his statement) was that the problem was a combination of Blue Wings’ failure to pay the instalments on time and a suspicion that the Airbus aircraft were to be sold or leased to Mahan, an Iranian entity. This was confirmed in documents disclosed by Mahan during the trial, in particular the pleadings in proceedings in the Commercial Court brought by Kayo and ABN-Amro Bank NV against Blue Wings in August 2005. As far as Mahan’s ability to fund the acquisition of the Airbus aircraft, it was only on 3 September 2005, long after the instalments became due and after Kayo and ABN-Amro Bank NV had commenced proceedings against Blue Wings, that the Iranian Foreign Exchange Fund (hereafter “FERF”) agreed to make US$ 167 million available to Mahan for this purpose.

In June 2005 Kayo and ABN-Amro served notice terminating the agreement on the ground that Blue Wings had failed to pay the instalments on time. On 11 July 2005 Mr Alaghband met Mr Arabnejad, Mr Mahmoudi, Dr Stahl, and a colleague of Dr Stahl’s in Düsseldorf to discuss the dispute and go through the transaction documents. Mr Alaghband subsequently introduced Mahan to an English Queen’s Counsel who, in August 2005, informally advised that on the basis of what he had been told Mahan was unlikely to succeed in obtaining delivery of the aircraft.

During this period advice was also obtained by Blue Wings about United States sanctions from Mr Kashdan, a partner at Hughes Hubbard and Reed LLP, a Washington firm of attorneys. Mr Kashdan did not review any documents relating to the transaction between Kayo, ABN-Amro and Blue Wings. His opinion, dated 31 August 2005, was based on a series of facts listed in the instructions which had been communicated to him about the transaction by Field Fisher Waterhouse. These facts do not include who owned Blue Wings. Mr Kashdan’s opinion does not refer to this or to the fact that seventy five per cent of the company’s shares were held on trust for Mahan. Mr Kashdan was told that the US $30 million paid under the agreement was provided by Mahan. His opinion suggests that the purchase of aircraft by non-Iranian entities using funding obtained from Iranian sources did not contravene United States sanctions.

Mr Kashdan concluded that the sale of the Airbus aircraft to Blue Wings would not violate United States sanctions. He considered that the key matter is whether the sale is an export or re-export to Iran or the government of Iran. His conclusion was that, as Blue Wings is a German company operating out of Germany, the transfer of the aircraft to it could not be considered an export or re-export to Iran. Blue Wings was also advised by Field Fisher Waterhouse. Their advice is said to be based wholly upon Mr Kashdan’s conclusions although it also refers to the fact that Dr Stahl held his shares in Blue Wings as trustee for Mahan which thus ultimately indirectly owned or controlled Blue Wings.

At some stage Mr Alaghband told Mahan that the trust agreement and thus the fact that Mahan controlled Blue Wings would have to be disclosed in the English proceedings and advised Mahan to settle the dispute. This was done on 29 September 2005. Kayo and ABN-Amro returned US$ 26 million to Blue Wings. Together with legal fees and financing expenses Mahan’s loss was in the region of US$ 5 million.

During the autumn of 2005 Mahan learned that the three ex-United Airlines 747-422 aircraft which became the Package 1 aircraft were for sale. Mr Arabnejad, Mr Mahmoudi and Mr Garbaccio, of Eagle Aviation, discussed the acquisition. Mr Mahmoudi’s note of a meeting with Mr Garbaccio in London on 3 November 2005 records that agreement was reached about signing the letter of intent for the transaction, that they wanted to conclude it as soon as possible, and that the matter was to be kept confidential to himself and Messrs Arabnejad and Garbaccio. Balli did not know about these aircraft at that stage although, at the meeting between Mr Arabnejad and Vahid Alaghband in Tehran on 12 October Mr Arabnejad had given Mr Alaghband an indication that there was a possibility of another acquisition and asked him to be available to help.

In November 2005 Mahan’s marketing manager produced a feasibility study for the acquisition of the aircraft, called a “business plan”. This states that Mahan has “decided to purchase three recently built… B-747 to be utilised on the route network” and “to be based in Tehran”. The document sets out the business case for the acquisition of the aircraft. In his statement Mr Mahmoudi says he provided Vahid Alaghband with a copy of the feasibility study at their meeting in London on 17 January 2006 but in his oral evidence he did not mention the study when asked which documents he provided to Mr Alaghband. I accept Mr Alaghband’s evidence that he did not see the study until it was disclosed in these proceedings. In any event, the study does not refer to the structure to be used in the acquisition of the aircraft or, save for the reference to Mahan’s decision “to purchase” the aircraft, their ownership.

On 18 November 2005 Eagle and Bristol Associates (the sellers’ agents) signed a letter of intent for the purchase of the three Boeing 747s. On 7 December a deposit of US$ 10.5 million was paid. Eagle was presented as the source of the deposit (see for example a letter dated 27 January 2006 from Mr Garbaccio to the Board of Directors of the three Cayman SPVs) but the deposit was in fact paid by FZE and funded by Mahan.

Mahan’s approach to Mr Alaghband was about the Blue Wings dispute but their discussions about it led to a wider discussion about sanctions-compliant business models. Although Mahan denied (see skeleton argument paragraph 18) that Balli acted as “expert advisers to Mahan on sanctions-compliant aircraft acquisition”, an email from Mr Mazaheri dated 11 April 2005, very soon after Mr Arabnejad and Mr Alaghband’s initial meeting, thanked Mr Alaghband for his “constructive comments… to enable [Mr Arabnejad] to boost the airline”. Mr Mazaheri’s evidence was that he did not know the content of the discussions but did know that they were not confined to the Blue Wings dispute. Mr Arabnejad did not recollect the discussions in detail but accepted that, if Mr Alaghband said (as he did) that he had told him Mahan’s business model was wrong and would lead to more trouble, that was so.

There is other evidence that the discussions between the parties involved general discussions about sanctions-compliant business models. Vahid Alaghband was given a copy of Mr Kashdan’s August 2005 opinion which, although concerning Blue Wings, did give advice as to what was possible. It was relied on by Mr Alaghband in his later discussions with Mr Mazaheri and with Mahan about the acquisition of the Package 1 Boeing 747 aircraft.

I accept Vahid Alaghband’s evidence that he met Mr Arabnejad in Tehran on 12 October 2005 shortly after the Blue Wings dispute was settled. At that meeting Mr Arabnejad told him Mahan had other options available to them to acquire better aircraft than the Airbus aircraft and asked him to be available to support and advise Mahan and assist it in raising finance, particularly from European lenders. At that stage Balli did not specifically know about the Package 1 aircraft. Mr Alaghband’s discussions about sanctions-compliant models by which aircraft could be acquired were mainly with Mr Mazaheri, but in a conversation with Mr Mahmoudi he referred to Lufthansa and ILFC as examples of a foreign airline and an aircraft lessor. Mr Mahmoudi said he did not take him seriously and did not think Lufthansa could be used as a model.

The Executive Instruction and the FERF Resolution:

Mr Mazaheri also consulted Mr Alaghband and Mr Arabnejad about the drafting of a document headed “Executive Instruction” or “Procedural Order”. This document or a draft of it was prepared by Mr Mazaheri in early December 2005, about three weeks before FERF resolved on 3 January 2006 to approve a US$ 140 million facility to Mahan for the purpose of acquiring the three Boeing 747s and an Airbus A320. Mr Alaghband’s involvement in the formulation of the Executive Instruction, in particular, suggests that Balli’s advice was being taken about sanctions-compliant business models. The business models envisaged are reflected in the terms of the Executive Instruction which are set out below. In summary, in the case of the Boeings, they involved the aircraft being owned and operated by non-Iranian entities but under arrangements with Iranian entities to enable the Iranian entities to obtain capacity, and when “legal obstacles arising from sanctions have been removed” the shares of the entities which owned the aircraft to be transferred to Mahan.

I have referred to the agreement by FERF to make US $167 million available for the purchase of the three Airbus A330 aircraft. Once Mahan decided to acquire the Boeing 747 aircraft it sought funding for the new transaction from or through FERF. It appears from clause B.7 of the “Executive Instruction” or “Procedural Order” (see [73] below) that Mahan’s application had been discussed by FERF at preliminary review and discussion meetings before the decision to approve a loan facility was made on 3 January 2006. FERF approved a US$ 140 million loan facility to Mahan “for the purpose of acquisition of four aircrafts approved by Civil Aviation Organisation”. The implementing bank was to be Bank Melli Iran. The minutes of the meeting of FERF also state:

“[T]he implementing bank is bound to make the corresponding facilities available to the beneficiary in a way agree[d] upon by both parties in observance of other regulation and after being ensured of title possession of aircrafts and receiving sufficient securities from the foregoing company. Mahan Airline’s contribution for the above acquisition will be at least ten per cent of facilities received.”

This and other passages set out are from the official translation which the parties used at the hearing. Mr Vahid Alaghband also translated this and other documents. His translation of the passage officially translated as “observance of other regulation and after being ensured of title possession of aircrafts and receiving sufficient securities from the foregoing company…” is “while observing all other relevant regulations and once assurances have been received about the ownership of aircrafts and after taking sufficient guarantees from the aforementioned company…”. Another translation, described as a “free translation” states that the implementing bank must be “assured of the ownership structure of the aircraft”. Where the official translation of the Executive Instruction uses the term Mahan’s “title right” (e.g. B.3.2, B.7, B.9, C.6.4) Mr Alaghband’s translation uses the term “ownership prerogatives”.

The heading of the document Mr Mazaheri drafted in consultation with Messrs Vahid Alaghband and Arabnejad in the official translation is “Executive Instruction of the resolution of the Trustees Board of Foreign Currency for acquisition of four aircrafts”. In Vahid Alaghband’s translation it is “Procedural Order for implementing the resolution of the trustees of FERF in connection with purchasing of four aircraft”. The document sets out the conditions that had to be met if the loan was to be made. Mr Mazaheri’s evidence was that the FERF resolution “was extracted out of” or a summary of this more detailed document, and did not contradict it. The material parts of the Executive Instruction/Procedural Order are:-

“A)

Subject-Matter and Objectives of the Resolution:

1.

Provision of foreign currency facilities for acquisition of four aircrafts from the credits of foreign currency account;

2.

Facilities pertaining to the acquisition of air fleet for Mahan Airlines; and

3.

The possibility of using the aircrafts by Mahan Airlines for flying in various lines.

B)

Assumptions:

1.

$140 million was proved and allocated for the foregoing subject-matter.

2.

Four aircrafts with suitable prices and technical conditions acceptable to the Civil Aviation [Authority] were selected by Mahan Airlines.

3.

The foreign currency reserve account imposed two conditions for the execution of this resolution:

3.1

establishment of the existence of technical conditions acceptable to the Civil Aviation [Authority]; and

3.2

establishment of the existence of Mahan Airline’s title right on the four aircrafts.

4.

The title of the first aircraft (A320) was transferred to Mahan Airlines through a company (SPV1), whose shares are owned by Mahan Airlines’ appointed trustees; and the existence of both conditions were established.

5.

Three B747 aircrafts are ready for transfer and pricing was made on the basis of the international fair prices.

6.

Current legal conditions and prevailing law do not allow direct control by Mahan Airlines of the shares of the companies/buyer companies of the aircraft (SPV). [Mr Vahid Alaghband’s translation refers to “control” and not to “direct control”.]

7.

Legal solution to execute the resolution of Trustees Board of Foreign Currency as well as to observe law and to optimise executive interests, includes to use for each aircraft a SPV company with shares owned by other natural and/or legal entities and entering into agreements required for declaration and establishment of title rights in the name of Mahan Airlines. The issue was reviewed and discussed during preliminary review and discussion meetings of the Trustees Board of Foreign Exchange and briefing reports pertaining to the approval of the credit was reflected and discussed at the Trustees Board of Foreign Currency and relevant committees.

8.

Shareholders of SPV companies shall be natural and/or legal persons who are acceptable to the aircraft seller considering bank and trade credits for making such a deal as with an amount of $100 million and who deemed such deal in direction of their current activities or as an action for diversification of their commercial and economic activities. [Mr Alaghband’s translation refers to the shareholders being individuals or entities with “the creditworthiness and commercial and banking lines that would be commensurate with entering into a transaction in the range of $100 million vis a vis the sellers of the aircraft…”]

9.

The required actions were made for the first aircraft [A320] and Mahan’s title right has been provided for Mahan in the context of a trustee agreement, and the evidence may be introduced.

10.

In connection with three other aircrafts [B474], actions should be taken in such a way that the following are ensured, with the due consideration of types and brands of aircrafts: [Mr Alaghband’s translation states “in view of the type and brand of the aircraft, operative steps should be taken in a manner which assures compliance with the following principles”.]

10.1

Technical criteria of USA sanctions are observed in view of form and law and this act is not deemed a violation of such sanctions.

10.2

As soon as appropriate conditions have been reached and legal obstacles arising from sanctions have been removed, the title of shares of SPV companies which are owner of the aircrafts are also officially transferred to Mahan Airlines with no need to the approval of the initial shareholders.

10.3

Title deeds of aircrafts are to be avoided to be mortgaged against the loan received from foreign currency account for Bank Melli Iran or Central Bank or Iranian government companies. This condition is to be evaluated in accordance with legal views received. [Mr Alaghband’s translation states “this condition is applicable in view of the legal opinions received”.]

10.4

SPV companies’ title rights, such as management, decision making, and spending of moneys resulted from operation of the aircrafts, are allocated and controlled for credit provision for refunding the facilities of this resolution, in observance of all legal considerations.

10.5

The communication with manufacturers of the pertaining aircrafts may continue to receive after sales services, such as spare parts, engineering services, issuance of technical documents for flight… in this respect, using the existing experience, the acquired aircrafts are registered in European companies and repaired and maintained under supervision of the aviation organisation of such countries for as long as needed.”

Section C of the Executive Instruction is headed “Operational Solutions”. It states that the two conditions of the Trustees Board of Foreign Currency shall be communicated to the implementing bank, Bank Melli, Dubai. It also provides:-

“5.

Airbus planes shall be paid for and foreign currency facilities for the aircraft shall be used in accordance with stages as follows:

5.1

Mahan Airlines shall draw up and enter into agreement(s) required for the acquisition of A320 planes and for title transfer of the same to SPV1 company.

5.2

An official agreement shall be prepared, drawn up and exchanged between and by Mahan Airlines and the shareholder of SPV1 providing the acknowledgement of the corresponding shareholder and his/her confirmation about the fact that the shareholder is not personally the possessor of the shares of the company he/she is the trustee of such shares and the shares are given in trust.

5.3

Mahan Airlines shall produce to Bank Melli-Dubai the agreement subject matter of clause 5.2 above as well as a declaration by Civil Aviation Organisation certifying technical specifications of A320 plane to be purchased, along with payment instructions for the corresponding money, as per specified prices, to beneficiary companies.

…

6.

B747 planes shall be paid for in foreign currency facilities for the aircraft shall be used in accordance with stages as follows:

6.1

Mahan Airlines shall draw up and enter into agreement(s) required for the acquisition of three B747 planes and for title transfer of the same to SPV2, SPV3 and SPV4 companies.

6.2

An official agreement shall be prepared, drawn up and exchanged between and by Mahan Airlines and the shareholder of SPV2, SPV3 and SPV4 companies providing points as follows:

6.2.1

The shareholder of the three companies of SPV2, SPV3 and SPV4 gives Mahan Airlines the right of share option and empowers Mahan Airlines, with the right of substitution, to buy for a price of €1 the shares of any of the companies once legal conditions permit to do so and obstacles arising from US sanctions are removed.

6.2.2

On the strength of the share option contract aforesaid and provision of Mahan Airline’s right to buy the shares, naturally SPV companies undertake to avoid selling or assigning shares of the abovementioned companies as well as selling aircrafts possessed by each of SPV companies until Mahan Airlines uses the share option or during the time when share option contract is valid. …

6.2.3

The SPV companies’ directors enter into and exchange separate agreements with Mahan Airlines on arrangements for management of the company and good performance of the company’s affairs and fulfilment of obligations subject matter of this instruction.

6.2.4

Under lease contracts and for the purpose of operation, the SPV companies make available the acquired aircrafts to certified companies approved by Mahan Airlines.

6.2.5

Incomes gained from lease contracts of each one of the three companies shall be allocated for the payment of the company and current and legal costs of the company. Possible surplus of the incomes gained by each company shall be kept in the companies’ account, until the acquisition contract is valid, and distribution of profits among shareholders shall be avoided until the shares are possessed by Mahan Airlines or the share option agreement expires, whichever earlier.

…

6.3

Mahan Airlines shall produce to Bank Melli-Dubai the documentation referred to in clause 6.2 (6.2.1 to 6.2.6), along with written confirmation of the managing director and the board of Mahan Airlines certifying the conformity of such documents and papers with a nature considered for these clauses and acknowledging the receipt of powers and title rights through such documents and papers as well as a declaration by Civil Aviation Organisation certifying technical specifications of the three considered planes, along with payment instructions for the corresponding money of the abovementioned aircrafts in full for all three aircrafts. …

6.4

Upon receipt of the documents and papers referred to in clause 6.3 and written notification by Mahan Airlines board of directors certifying the provision of title right for that company through corresponding agreement and documentation, Bank Melli-Dubai branch shall remit the price of deal to related beneficiary in accordance with findings and introduction by Mahan Airlines. …”

In their pleadings, neither party distinguished the minutes of the meeting of the FERF Trustees from the Executive Instruction/Procedural Order. There was no distinction made in the witness statements. However, when giving evidence, Mr Moattar said that the Executive Instruction was not an official document and Mr Mazaheri that it was only a private document in which he recorded what Mr Vahid Alaghband and Mr Arabnejad had agreed on behalf of Balli and Mahan. Even if that was the genesis of the document, it cannot be regarded as solely recording a bilateral agreement. First, notwithstanding its terms, Mr Mazaheri stated that it was prepared before the FERF resolution although possibly after the preliminary review and discussion meetings referred to in clause B.7. He accepted that it became the basis of FERF’s resolution and the conditions upon which funding was approved for the transaction. Secondly, it contains provisions concerning the funding bank, Bank Melli, in particular conditions about the release of money (clauses C6.3 and C6.4) and provisions concerning Bank Melli’s dealing with FERF. Thirdly, section C of the document dealing with operational solutions sets out those for the Airbus A320 aircraft (C5) as well as those for the Boeing 747s (C6) but Balli was not concerned with the Airbus aircraft.

Mr Mazaheri was initially unwilling to concede that, under the provisions of the Executive Instruction/Procedural Order (for example, clauses B.6 and B.10.2) Mahan could not own the shares of non-Iranian companies which had title to the aircraft. However, when pressed he in substance did so: see 30 July, p 47, lines 19-24 and p 48, lines 1-20. Mr Mahmoudi also accepted that the FERF resolution made it clear that United States sanctions laws had to be obeyed in form and substance: 16 July, pp 17-18. Both he and Mr Arabnejad understood that, under the conditions in the Executive Instruction, Mahan’s option to purchase the shares of the SPV companies could only be exercised if this could be done without breaching United States sanction laws.

The initial meeting about the Package 1 aircraft:

It is common ground that Balli did not specifically know about the Package 1 aircraft until an important meeting in London in January 2006, about two and a half weeks after FERF approved the facility. The meeting was attended by Vahid Alaghband, and Messrs Mahmoudi and Eslamian. It is also common ground that at this meeting Mr Mahmoudi showed Mr Alaghband the Executive Instruction and possibly the Letter of Intent, and that Mahan was concerned about going ahead with Eagle. At issue are the date of that meeting, who initiated it, and, fundamentally, whether at the meeting, Mr Alaghband, on behalf of Balli, offered to act as a “front” for Mahan and to appear as a credible source of money for the acquisition of the aircraft.

Mr Mahmoudi’s note of the meeting records it as being on 17 January but Mr Alaghband’s diary calendar records there being meetings on 18 and 19 January. Balli also relies on the fact that the handwriting at the beginning and the end of Mr Mahmoudi’s note appears different from that in the rest of the document. Mr Mahmoudi was not cross-examined about the date but it is not necessary to resolve this dispute.

As to who initiated the meeting, by that time Balli had seen an opportunity to get into a new area of business and Mahan knew that, in view of the size of the transaction, there would be concerns about Eagle’s credibility as a purchaser. I have concluded that, since Balli did not know about the Package 1 aircraft and that a Letter of Intent had been signed in respect of the aircraft, it was Mahan which wanted a meeting. This was because, in the light of clause B7 of the Executive Instruction, and what Mahan knew about Eagle, they considered a seller might not regard Eagle as a credible party to a US$100 million transaction and thought Balli might be able to help.

The importance of this meeting lies in what Mr Alaghband said about the ways in which Balli could assist Mahan, and whether he suggested that Balli could act as a “front” for Mahan. It is common ground that Mr Alaghband said Balli could assist Mahan with the transaction in three ways. It is also common ground that Mahan rejected two of these; continuing to advise Mahan as before with no remuneration, and acquiring the Boeing 747s as a joint venture.

The dispute concerns the remaining, second, way Balli said it could co-operate with Mahan. Mr Mahmoudi, who was at the meeting, said the English word “front” was used and that Balli offered to act as “a ‘clean’ source of funds and charge Mahan only any taxes payable as a result”. Mr Arabnejad, who was not at the meeting, said he was told that what Balli suggested was that it could act “as a source for the money” and a “front” for Mahan.

Mr Alaghband’s evidence is that he said the second way was that Balli should either lend the money to Eagle and have collateral, or replace Eagle as the purchaser of the aircraft. He said, absent a joint venture, the funding would have to come from Mahan, but if it did, Balli would find a way of working with Mahan and charge its costs. The material parts of Mr Mahmoudi’s note states that Mahan “requested to cooperate in introducing a source and to declare the rate and related expenses”. His note records the second way Balli said it would co-operate in these words:

“You bring the entire money and we’ll enter the scene as a source and in this case we’ll ask you for our tax expenses.”

Mr Alaghband denied he said Balli would act as a “source” of the money. He said in the original Farsi the first reference to “source” was to being a “source of co-operation” but accepted that the word “co-operation” is not mentioned in the context of the second way Balli could cooperate.

It is not now submitted on behalf of Mahan that, at that meeting, Balli offered to act as a “front” for Mahan in the way Eagle was acting. Rather it is said that Balli’s agreement to act as a front (or, in Farsi, a “pushesh”) “evolved over the course of a series of meetings” commencing with that meeting and ending with the meetings in Düsseldorf on 24 and 25 February. I find that there was no such offer by Balli at the meeting on 17 or 18 January. First, Mr Mahmoudi’s note of the meeting does not use the term, and in his witness statement he does not say Balli agreed to act as a “front”. Secondly, Mr Eslamian’s evidence (30 July, p 147) was that the word “front” was not used at the meeting. His evidence was that there was no detailed discussion at that meeting. This is consistent with Mr Alaghband’s evidence and inconsistent with Mr Mahmoudi’s evidence (21 July, pp 89-90) that at that meeting it was agreed that Balli would “be substituted for Eagle” and would act as trustee for Mahan. There is also no broadly contemporaneous document, email or meeting note in which the word “front” or “pushesh” is used and Vahid Alaghband’s evidence that the Farsi word “pushesh” is derogatory or impolite was not challenged.

As to the phrase “baraye Mahan”, also not recorded in Mr Mahmoudi’s note, Mr Alaghband said he did not recall the phrase being used at the January meeting but Mr Mahmoudi said it was. He said the phrase means “on behalf of Mahan” but Mr Alaghband’s evidence that it also means “for Mahan” was not challenged.

Developments between 18 January and the signing of the contracts:

After the initial meeting Vahid Alaghband asked his brother Hassan to help put together the documentation. Hassan Alaghband’s principal contact was Mr Mahmoudi and he primarily dealt with Mr Mahmoudi on the telephone, although he also communicated with him at his SkyCo email address. It was Hassan Alaghband who asked for the Cayman SPV companies to be transferred to Balli.

After the initial meeting there were a number of other meetings between representatives of Balli and Mahan about the transaction, Eagle’s role in it, and the terms upon which Balli would act. There is little documentary evidence of these meetings. Vahid Alaghband’s statement refers to meetings in Dubai on 23 January when he met Mr Arabnejad and Mr Mazaheri, with Mr Mahmoudi in Düsseldorf on 26 and 27 January and in London on 27 January with Mr Mahmoudi, his brother Hassan, and Mr Garbaccio. There is a handwritten note on Balli Group note paper by Mr Mahmoudi of a meeting on 26 and 27 January which does not mention the place of the meeting or who was in attendance. There is also an email dated 24 January from Mr Eslamian to Hassan Alaghband stating he was pleased to hear the meeting in Dubai went well. Mr Mahmoudi and the other Mahan witnesses were vague about such meetings. In his statement Mr Mahmoudi said he did not recall meetings between the initial one and those in Düsseldorf on 24 and 25 February when the agreements were signed but accepted that the note of the meeting on 26/27 January was his. Mr Arabnejad said (22 July p56) that decisions were not made before the meetings on 24 and 25 February.

At the meetings on 26 and 27 January it was agreed that the final contracts would be signed on 31 January; the aircraft would be delivered between 20 February and 20 April; the Cayman SPV companies would be sold to the Balli Group; and that Balli would provide a number of bank account numbers in Dubai, Holland and England to enable the money to be deposited. Mr Mahmoudi’s note states “preferably, not all amounts should be paid into one account and should vary in terms of the sum and the currency”. At that stage it was contemplated that the aircraft were to be registered in France by Eagle. As far as Eagle’s fees are concerned, Mr Garbaccio requested finance for the package, a commission, thirty per cent of which was to be paid at the time of delivery and the rest after the registration of the aircraft in France, from the Balli Group.

In a letter dated 27 January Mr Garbaccio “confirmed” to the Cayman SPV companies that Eagle had entered into a Letter of Intent with Bristol for the purchase of the three Boeings, had “caused the transfer of” US$10.5 million as down payment in December 2005, and stated that the Cayman SPV companies “are” beneficially owned by Balli. The letter also states that the SPVs would finance the purchase and overhaul of the aircraft by a loan to Eagle, and that Eagle would be their beneficial owner until the SPV companies became their ultimate owners. Balli’s ownership of the SPVs was confirmed in a letter dated 10 February to Balli from Maples and Calder, a Cayman Islands law firm.

Under the FERF Resolution and the Executive Instruction Bank Melli had to approve the terms of the transaction. To this end, Mahan put Hassan Alaghband in touch with Dr Mohebi, a lawyer who was acting for the bank. On 10 February Hassan Alaghband sent Dr Mohebi the Maples and Calder opinion. Dr Mohebi replied stating that, “as a matter of principle, the opinion must be addressed to a third person to whose benefit it is rendered such as Bank Melli or at least Mahan, not you or Balli Group”. Mr Alaghband replied by email on 12 February stating he was not sure how the opinion could be addressed to either Mahan or the bank when neither was registered as the beneficiary/owner” of the SPV companies. I do not accept the submission on behalf of Balli that this email was an example of Balli making it very clear from the outset that it would not act in violation of US sanctions: it may be that the problem was that Maple and Calder’s letter stated “the opinion may be relied upon by the addressees only” and not by any other person.

Although Dr Mohebi was acting for the bank, he replied saying the opinion could be addressed to him “as the attorney of Blue Sky” (FZE), and he would add his opinion to that of Maples and Calder “for the benefit of the bank”. He also asked for a draft opinion by a qualified European law firm acceptable to Bank Melli, which apparently preferred Norton Rose, to be sent to him prior to signature for review and confirmation. He listed the matters that had to be confirmed in the opinion, including that the legal formalities “will ultimately result in the ownership of the planes by Cayman Islands and then by Blue Sky upon transfer of their shares to Blue Sky”. Hassan Alaghband replied on 15 February. This reply made it clear that Balli would not act in violation of sanctions. Mr Alaghband stated that the structure Dr Mohebi was proposing “will not work and we are not in a position to obtain Norton Rose’s opinion on this transaction in the way you suggest”. He also stated:

“You may recall that in our meeting in Tehran we discussed a different structure. Based on that we have delivered the opinion of Cayman counsel. As you appreciate, we cannot entertain a structure which violates applicable laws.”

A draft opinion by Norton Rose was sent to Dr Mohebi and in an email dated 14 February Dr Mohebi stated he was happy with it as far as it explained the steps and stages of the transaction. He, however, asked for further details about the transaction documents to be included and stated “the opinion must add some words that upon completion of the transactions in three stages, and based on certain assumptions… the airplanes will be owned wholly by Blue Sky and Blue Sky will become the sole owner of the three Cayman companies”. On this last point, Mr Alaghband’s reply said he thought he could get something extra for Dr Mohebi to satisfy him.

There was also an exchange of emails between Vahid Alaghband and Mr Mazaheri about Dr Mohebi’s emails. Mr Alaghband sent the first one to Mr Mazaheri saying that the process requested by Dr Mohebi, getting an English law firm to give an opinion to cover Bank Melli would not work. He said that while it was understandable that Bank Melli wanted itself completely covered “by ascertaining the ownership”, “that is in conflict with the law and it will not work”. Mr Mazaheri responded on 13 February. He said that the only:

“delicate point is that the bank should be convinced about the last step. It can be done in two different ways; (first) issuing an authority to transfer the ownership to a non-Iranian company subject to this condition that it should not violate the embargo… (second) a trustee agreement to be signed. I believe that the first solution can be easier and doable”.

Vahid Alaghband’s response to this is important because it makes it clear that Balli would not act in violation of United States sanctions. It states:

“Although the first option that you mention looks superficially easier, I find it far more risky from a compliance point of view. We cannot act as a pure intermediary in transferring title to Mahan or to its nominees because we are advised that that could put us in breach of the law. We will not be part to a transaction which could break the law. This deal has to be structured correctly and with full regard to the legal restrictions. We should have no doubt that the deal will be examined in detail in the future and we have to be able to prove that our involvement has a sound commercial basis and was structured not to violate any applicable laws”.

The next day Mr Alaghband met Messrs Arabnejad and Mahmoudi. After that meeting he sent an email to Mr Mazaheri saying the meeting had been productive, that they had spoken at length with Mr Mohebi, and they thought they had found a solution “that would resolve everyone’s issues”. I accept Vahid and Hassan Alaghband’s evidence that the solution they found was the Option Agreement.

Messrs Arabnejad and Mahmoudi accepted in their evidence that Hassan and Vahid Alaghband’s position did not change from that expressed in these emails and that nothing happened between then and the meetings that would have led them to change their mind. They also said that both sides wanted a structure in their transaction with Balli which would comply with US sanctions.

Norton Rose’s opinion was finalised in a letter dated 16 February 2006 addressed to BSA, the Cayman company affiliated to Balli, which held the shares in the Cayman SPVs. The letter set out the stages of the transaction. It explained that the US Bank National Association, acting as trustee for the owners, would transfer legal title to Wells Fargo Bank Northwest as trustee for Eagle, and that upon completion Eagle would hold beneficial title to the aircraft. At that stage each of the Cayman SPV companies would make a loan to Eagle to fund the purchase of the aircraft and Wells Fargo and Eagle would mortgage each aircraft to one of the SPV companies. After completion of D-checks on the three aircraft, Wells Fargo would transfer legal title to Eagle. Eagle would then sell each of the aircraft to one of the Cayman SPVs. Norton Rose’s letter states:

“The purchase price will be settled by the loan amount due and owing under the applicable loan agreement being reduced to zero and the applicable mortgage being released.”

The letter also states that“at this point the Cayman Companies will hold the legal and beneficial title to an Aircraft”, that when they had legal and beneficial title they would lease the aircraft to Eagle, and that, at the end of this stage, “the aircraft would be owned by the Cayman Companies and the Cayman companies should be owned by [BSA]”.

BSA was incorporated in the Cayman Islands on 15 February 2006. That day Mr Alaghband emailed Mr Mahmoudi requesting €1.5 million to be transferred to Balli’s account at a Belgian bank “for the deposit on KLM and other incidentals that are occurring before closing”. This sum was transferred in three tranches between 20 and 22 February.

On 15 February Hassan Alaghband also emailed copies of a draft loan agreement and share option agreement to Mr Mahmoudi, and sent a draft D-check maintenance agreement to be made by Eagle and KLM. The last of these was on KLM’s standard form. The first two were drafted by him. Norton Rose was not involved. Balli did not tell Norton Rose of its relationship with Mahan until the beginning of the dispute, in the last quarter of 2008. It was suggested on behalf of Mahan that Norton Rose were kept in the dark about Balli’s dealings with Mahan and systematically misled by Balli. But although Norton Rose was not involved in the negotiations with Mahan (largely conducted in Farsi), the evidence does not support this suggestion. In any event, a week before the meetings in Düsseldorf, Mahan was sent drafts of two of the agreements for its consideration.

The meetings in Düsseldorf on 24 and 25 February 2006:

At the end of two days of negotiations in Düsseldorf, eight agreements were signed. There were two loan agreements per aircraft, a letter agreement and an option agreement. Loan agreements were made with both Balli and BSA so that FZE would have immediate recourse against Balli, a substantial company. This was because, at that stage, BSA’s only assets were the three Cayman SPV companies and the ownership of the aircraft themselves would not be transferred to those companies until much later when the D-checks were completed. The provisions in the agreements are conveniently summarised in paragraph 6 of PK’s closing submissions. This states:

“(i)

Under the loan agreements, FZE lent money for the purchase of, and maintenance work on, the first aircraft (24363), the second aircraft (24383) and the third aircraft (26879), repayable in equal instalments in accordance with a repayment plan specified in those agreements. In each case, security for the repayment of the loans was given in the form of twenty-four promissory notes.

(ii)

Under the Letter Agreement, it was agreed inter alia that all payment obligations to FZE under the loans were to be made solely from the net proceeds of leasing the Package 1 aircraft, and to the extent that there was a shortfall at any stage, the borrowers’ payment obligations were to be suspended until such time as there were adequate net proceeds under those leases.

(iii)

Under the Option Agreement, BSA granted Mahan an option, valid until 31 March 2020 to acquire the shares in the Cayman SPV companies which, at that stage, it was envisaged would be purchasing the Package 1 aircraft. However, that option was subject to an important proviso, in as much as it could not be exercised for as long as the transfer of those shares to Mahan would be a violation of applicable laws, regulations, or administrative proceedings (which it is common ground included US sanctions against Iran).

(iv)

By a letter of the same day, BSA also formally authorised Mr Mazaheri to execute its obligations under the Option Agreement subject to a number of conditions, including receipt of a legal opinion from Clifford Chance on the question of whether the exercise of the option complied with the requirements of the option agreement.”

The total amount of the loans was US $138.5 million. They were to be made in stages and bearing 10% interest per annum and, in case of delay in repaying, 12% delayed payment interest. Vahid Alaghband said this was higher than usual. The Option Agreement required the payment of an option fee of €1.25 million per SPV, and a final fee of €1 per SPV on the exercise of the option. The Letter Agreement provided for an annual payment to Balli of 1% of the purchase price as a management fee. The management fee was about US $1 million a year. It was to be paid for Balli’s services in maintaining and administering the arrangements under the transaction.

On the first day of the negotiations Mr Mahmoudi suggested the shares of the SPVs which would own the aircraft should be given to a neutral third party to hold on some sort of escrow agreement. The Alaghbands rejected this. They said that without legal and beneficial ownership of the aircraft they were not prepared to proceed because they were not prepared to risk breaking United States law. On the second day of the negotiations Mr Arabnejad accepted that Mahan would proceed with Balli having both legal and beneficial ownership of the aircraft, although, in his evidence, Mr Mahmoudi said that it was also agreed that Balli would hold the ownership of the documents of the aircraft as trustees. It is, however, difficult to understand why if, as Mr Arabnejad accepted, Mahan agreed to proceed with Balli having beneficial ownership of the aircraft, at the same time the parties agreed that Balli held their ownership documents as a trustee for Mahan. This is particularly so given the exchanges of emails between Vahid Alaghband and Mr Mazaheri (see [93]-[94]) and Hassan Alaghband and Dr Mohebi (see [91]) on 13 and 15 February. There is no written record of or reference in the meeting notes to such an agreement. Although Mr Mahmoudi made notes of many meetings with Balli, he said he made no notes of these meetings because they negotiated hard and, in the evening in the hotel, he was too tired.

As to whether there was an oral agreement, Mr Mahmoudi and Mr Arabnejad were aware that an oral agreement whereby Mahan would have the beneficial interest in the aircraft or the shares in the SPV companies would contravene United States sanctions. Mr Arabnejad accepted (27 July p 47) that the reason it could not have been put in writing that the Balli parties acquired the aircraft on trust for Mahan/FZE was because that would contravene the sanctions. Mr Mahmoudi in effect said (21 July pp 74-75) the agreement had to be kept hidden because the US sellers would be in trouble for breaching sanctions if the US authorities knew what was going on.

Notwithstanding this, Messrs Arabnejad, Mahmoudi and Mazaheri accepted that the Balli parties insisted on written agreements, that Mahan accepted this and that the intention was to document the agreements that had been reached. Mr Mazaheri said that on a number of other occasions he and Mr Alaghband had made oral agreements in the form of gentlemen’s agreements which were not put in writing. He said that in this case they put the agreements in writing “so that there would be no suspicion”, “so that we could be accountable to our colleagues in the future”, and because of the governmental post he held so that it would not be suspected that he was doing the business himself.

There is a discrepancy between Mahan’s witnesses as to whether the word “front” or “pushesh” was used at the meetings. The Farsi “pushesh” is not one that would have been used in formal negotiations between parties who were on good terms at that stage. If the English word “front” was used, that begs the question of its meaning. It has a number of meanings and, as Mr Moriarty submitted, is consistent with Balli’s acquisition of the aircraft with money borrowed from Mahan/FZE and making sure the aircraft were operated for the benefit of Mahan through leases and charters with a third party.

The provisions of the Option Agreement are central to what the witnesses on both sides said about the nature of the relationship and the beneficial ownership of the aircraft. The Option Agreement did not give Mahan a contractual right to operate the aircraft or a right that they be operated on Mahan’s routes. Nor did Mahan have the right to select the entity that would lease the aircraft from the SPV companies, although in effect it did so by introducing Balli to BAW.

Mr Mahmoudi and Mr Arabnejad both referred to the clauses that prevented Balli from selling, pledging or leasing the aircraft or the shares in the SPVs without the prior written consent of Mahan or distributing any dividend to shareholders. Mr Arabnejad (22 July p 81) said that everything had to be done with Mahan’s consent and although “its title, its name, would be under somebody else’s name, otherwise the aircraft is in the control of Mahan”. It was this (and the cash in/cash out analyses by Balli, to which I will come) that led them to say there was a trust. Mr Mazaheri’s evidence (30 July pp 21-22) was to the same effect, and in a note of a meeting held on 13 April 2007 (see [155] – [158]]) he refers to a document which is clearly the Option Agreement as the “trustee” contract and to Balli as a “trustee”.

As to what was to be put into writing, Mahan’s skeleton argument (paragraph 51) states that the “unproblematic” (i.e. in terms of sanctions) terms were reduced to writing, but the pleaded oral agreement contains some inconsistencies with the written agreements on some of the “unproblematic” matters. For instance, it is pleaded that Balli was to receive a management fee of US$ 1 million per annum (Amended Defence and Counterclaim, paragraphs 28(h) and (m) but the Letter Agreement and Option Agreement provided for fees in percentage terms, 1% (see clauses E and E2).

Mr Mazaheri said (30 July p 62) that the only thing they did not write was what would happen if the option was not exercised by 2020. He said “we did not write this because our assumption was that our issue with America would be resolved by the year 2020, that is that sanctions against Iran would be lifted before then. Vahid Alaghband said Mr Arabnejad had expressed the view at the Düsseldorf meetings that sanctions would be lifted in a matter of months. Mr Mahmoudi (statement paragraph 42) denied that anyone on the Mahan side had said this at the Düsseldorf meetings. Mr Mahmoudi’s evidence does not, however, address the longer time span. Mr Arabnejad said that there would be no dispute if the option expired without its being exercised because the aircraft would be over 30 years old and Mr Mahmoudi said that, in that event, Mahan would engage a law firm to assist with the problem. Mr Mazaheri’s evidence, however, is consistent with Vahid Alaghband’s evidence (statement paragraph 106) that Mahan were of the view that sanctions would be lifted before 2020 and they would be allowed to purchase the shares of the aircraft owning companies outright.

I accept Vahid and Hassan Alaghband’s evidence that they considered that the terms of the Option Agreement showed that until the exercise of the option the SPVs were the beneficial owners of the aircraft, and that the only way Mahan or FZE could acquire beneficial ownership was by validly exercising the option. For all these reasons, I find there was no oral agreement that the Balli parties were to hold the aircraft or the shares in the SPV companies on trust for Mahan.

As far as Mr Mazaheri’s role is concerned, it is submitted on behalf of Mahan that the parties asked him to act as an Amin, a person in a position of trust who could act as an arbiter of disagreements. The documentary evidence relied on in support of this proposition is Mr Mazaheri’s note of the meeting on 13 April 2007, a Memorandum of Understanding (“MOU”) dated 31 July 2008, and notes of a meeting in Düsseldorf on 31 October 2008 made by Mr Mahmoudi and Mr Moattar. The 2007 and 2008 documents do not assist in establishing that Mr Mazaheri was asked to act as an Amin at the meetings in February 2006. While Messrs Arabnejad, Mahmoudi and Moettar used the terms “trustee” and “Amin” in their statements, Mr Mahmoudi accepted that Mr Mazaheri only had the powers given in the Option Agreement and attachments, that is the power of attorney. He also accepted that Mr Mazaheri was not a trustee figure (Amin) in relation to the whole transaction but only in relation to the Option Agreement. Mr Mazaheri also accepted that he accepted to act as, what he referred to as “a unique body” based on the total terms and conditions of the Option Agreement.

Developments after the Düsseldorf meetings:

After the Düsseldorf meetings on 24 and 25 February, on 27 February the first of the “cash in/cash out” analyses prepared by Balli was sent to Mr Mahmoudi. These were regularly updated. The final one for the Package 1 aircraft covers the period to 18 February 2008. There are references to “trustee fees” in some of these analyses (e.g. the document at D9/155). Norton Rose’s invoices are included as is at least one payment to SJ Berwin, and the analyses charged interest where money was spent by Balli in advance of matching funds arriving.

Eagle and the Cayman Island SPVs entered into loan agreements in respect of the first and third aircraft on 7 March and sale and purchase agreements on 7 March and 7 May. The funding under the loan agreements was paid to Balli by FZE by transfers to different Balli accounts and then paid to the US vendors.

The D-check on the first aircraft was contracted to Korean Airlines and those on the other two aircraft to KLM. Eagle supervised this work for Balli. Balli paid for the maintenance from sums received from FZE. On 4 August 2006 Eagle asked Hassan Alaghband to approve the purchase of a thrust reverser synch lock at a given price. Mr Alaghband asked Mr Mahmoudi to let him know “if the price is OK”. It was suggested that this was an example of how all decisions about the planes were referred to Mahan because they were to be the beneficial owners of the aircraft. Hassan Alaghband said that at that stage of the transaction Balli was new to the aircraft business and he was simply getting Mr Mahmoudi’s opinion because of his experience in the business. He continued to ask for comments and feedback. In February 2007 he asked Mr Mahmoudi about the lease of a Pratt & Whitney engine, whether Mahan was happy about an engine change in Bangkok, and an update of sums due to KLM for the D-check and when it would be completed. In January 2008 he asked for feedback on seat types and numbers. But there are many examples in the documents of Hassan Alaghband dealing with matters without first referring them to Mr Mahmoudi, for example, with Eagle and with BAW about an APU (D6/23, 59, 234, 277). Moreover, some of Mr Alaghband’s communications with Mr Mahmoudi occurred because Mr Fard was not responding to emails from Mr Alaghband. Again, for example, in relation to arrangements made by Mr Mahmoudi for a C-check, Mr Alaghband reminded Mr Fard that the lessor’s permission was required (D8/216).

The leases with BAW:

By May 2006 the relationship between Eagle and Balli was difficult. It was decided that the aircraft should be leased to another airline although Eagle would continue to supervise the D-checks. In July Mr Fard, BAW’s Commercial Director, was introduced to Hassan Alaghband in Tehran by Mr Arabnejad.

On 13 July, after this meeting, Mr Fard sent Hassan Alaghband an email stating “we have learned that you are in [possession] of B747-400 PAX version and therefore we would like to know if you have already any engagements for the said aircrafts or not as we are interested to negotiate the sale of aircrafts for long term dry lease”. Mr Alaghband responded that Balli was in negotiation with several carriers for the planes but would be happy to start negotiations with BAW subject to further information about the company’s operations and financial strength. Mr Alaghband said the reference to several carriers was marketing talk and that the only other airline in contention was Eagle. Despite the difficulties, they were not sure that they would be able to extricate themselves from Eagle. It was submitted that, in the light of the meeting between Mr Fard and Mr Alaghband, the terms of Mr Alaghband’s email were disingenuous and designed to conceal the way they met and that the aircraft would be used by Mahan.

This may be so but there were then extensive email exchanges between Hassan Alaghband and Mr Fard. Mr Fard said that it was planned to fly the aircraft “from and to Africa, CIS, Europe and the Middle East” mostly on ad hoc and short term contracts such as Haj Operations. One of the matters raised by Mr Fard was that BAW wanted a lease for two consecutive years which was extendable but Balli did not agree to this and the lease it entered was for one year: see clause 3.8 of the Lease Agreement. There was also a discussion about limitations on the livery of the aircraft. Mr Alaghband said that Balli’s right to vet the livery was non-negotiable, and that it did not intend to have its own livery on the plane but wanted to have the right to approve BAW’s livery. Mr Fard and Mr Alaghband agreed to meet at BAW’s office in Dubai on Thursday 20 July, and did so. In the event the aircraft used the Claimants’ livery and carried the Balli logo and plates identifying the relevant Claimant as the owner-lessor.

Drafts of the lease agreement between the Balli parties and BAW were also sent at around this time and comments exchanged. In emails dated 10 August 2006 Mr Alaghband sent copies of revised draft leases both to Mr Mahmoudi’s SkyCo email address (asking him to forward it to the potential lessee as he did not have access to his email address) and (curiously given the first email) to Mr Fard’s email address. He asked Mr Fard for feedback at his earliest convenience. Mr Fard forwarded that email to Mr Arabnejad on 12 August and responded to Mr Alaghband on 5 September, thanking him for his patience enabling them to closely review the lease agreement, and attaching a revised version with comments.

Mr Fard sent Mr Alaghband further revisions to the draft lease contract for his consideration on 30 September. During this period Mr Fard also sent Mr Alaghband several emails telling him what documents the Armenian Civil Aviation Authorities would require to register the aircraft. On 2 October Mr Alaghband emailed Mr Fard about the provision in the lease dealing with the agent for service of process. He noted that the section was blank and asked whether SJ Berwin was acceptable to BAW, and if so, to obtain written confirmation from them. The email states that if BAW have another alternative acceptable to Balli, Mr Fard should let him know urgently. Mr Fard responded that SJ Berwin was acceptable to BAW but shortly afterwards also saying they were comfortable if the firm “IBM” would be appointed as their agent since that firm was already aware of the documentation.

By September 2006 Balli had decided the aircraft were to be registered in the UK and owned by UK companies. On 28 September Bills of Sale transferring the aircraft from the Wells Fargo Bank to Eagle and from Eagle to the claimant companies were executed. The next day Mr Alaghband sent Mr Mahmoudi a copy of the Bills of Sale attached to an email. Balli also gave FZE notice that it wished to draw US$ 15 million, the final tranche of the funds under the loan agreement and asked FZE to transfer the funds to a specified bank account in Dubai. On 30 September BSA asked for the transfer of US$ 562,500 under the terms of the Option Agreement to be transferred to the same bank account. The three aircraft were entered on the UK’s Civil Aviation Authority’s register on 2 October. On 10 October the Armenian Civil Aviation Authority said it had no objection to registration in Armenia and on 17 October provided registration numbers for the three aircraft.

The leases between BAW and the claimants for the aircraft were signed on 12 October 2006 but Norton Rose picked up a number of points that required them to be re-executed. Amended versions were sent to Mr Fard on 12 October. The leases were used to obtain the valid registration of the first two aircraft in Armenia on 20 November. The third aircraft was not entered on the Armenian register until 26 April 2007. The Armenian registration was used to show the aircraft were airworthy and enabled BAW to operate them. A list of the pilots and crew records 9 non-Iranian nationals and 8 Iranians. The Armenian Civil Aviation Authority validated the pilots and crew and specified and approved the aircraft maintenance regime. It was accepted by Mahan’s witnesses that BAW was the operator of the aircraft.

BAW chartered the first aircraft to Mahan on 20 November 2006 and the second and third aircraft on 1 July 2007. On 24 November BAW entered into a contract with PT GMF AeroAsia, part of Garuda, for engineering and heavy maintenance for the aircraft. This contract, signed by Mr Fard, is a long term “total aircraft maintenance agreement”.

Although the purpose of the transaction was that the aircraft would be used for Mahan’s benefit, there were discussions between February and November 2007 and approaches to Balli about leases or sub-leases to other carriers. For example, towards the end of January 2007 BAW sought the Balli parties’ permission to enter into a sub-lease with Gatewick Aviation LLC but Balli did not give its permission for this.

After the leases were signed there were also email exchanges about the lease deposit. An email dated 5 October 2006 from Hassan Alaghband to his brothers refers to the lease payments all being due from 1 October and this internal email is some indication that, within Balli, payment was expected. On 7 October Mr Alaghband emailed Mr Fard, referring to the advance lease deposit of US$ 1 million per aircraft due upon signature of the leases, and stating that payments of the deposit should be made to a specified Balli bank account in Dubai (the same one as in the 30 September request to FZE for the first payment under the Option Agreement) within two days. On 8 October Mr Fard stated that BAW would arrange the first down payment by the end of the week. No payment had been made by 12 October when Mr Alaghband asked whether Mr Fard realised that without meeting all the contract provisions the leases would not come into force. Mr Fard responded suggesting that they “confirmed the issue” when they met in Dubai on 17 October.

On 18 October Mr Alaghband emailed Mr Fard saying that he had tried to reach him unsuccessfully by telephone, that payment of the deposits on the three aircraft was due the next day and “if we do not get the funds in place we will start re-marketing the planes to other interested parties”. The email states that as a result of delays in the delivery of Airbus A380s there was a significant increase in the market value of the lease of a 747 and that while Balli wished to honour its commitment it wanted to make sure “that the start of our leasing activities with you will not result in us chasing you on a daily basis for your payment obligations”.

On 19 October Hassan Alaghband sent Mr Fard a list of the documents still pending from BAW on the leases. On 22 October he sent Mr Fard a copy of an amended lease for one of the aircraft, and lease certificates and confirmation to act as agent for service of process, and drafts of a power of attorney to be executed by BAW empowering Mr Fard to execute all documents in connection with BAW entering into the lease agreements with the claimants and a minute for BAW’s Board of Directors approving the lease agreements, the power of attorney, and the company’s obligations for bringing the leases into force including payment of the deposit. These documents were all drafted by Mr Alaghband or someone within Balli.

In February and March 2007 Hassan and Vahid Alaghband chased Mr Fard for monthly utilisation reports due from BAW under the leases but not provided or incompletely provided. Hassan Alaghband complained to Mr Fard about his unresponsiveness when what he was trying to do was to “make sure the airplanes leased to you are properly operated”. He also complained to Mr Mahmoudi.

It was submitted on behalf of Mahan that the emails about the draft lease were setting up a paper trail to conceal the true nature of the transactions and that the exchanges about the deposit and the production of draft documents for BAW were also part of the charade. Mahan’s case is there was a sham negotiation leading to sham leases. The leases were shams created principally in order to be shown to third parties, in particular the Armenian registration authorities and it was never intended that money would be paid under them. Mr Arabnejad said he was not going to pay rent for his own aircraft. Mr Fard said that he agreed to whatever was proposed by Balli because he knew he would not have to pay anything. He said that the leases were operationally valid but were commercially superficial in that no rent was paid.

The Balli parties rely on a note by Mr Glaister of Clifford Chance of a meeting between Mahan and PK and their respective lawyers on 9 March 2009, after service of Mahan’s Amended Defence and Counterclaim which pleaded that the leases were shams. It was not suggested that the note was incomplete or inaccurate. Mr Insley, Mahan’s solicitor, is recorded as saying that the aircraft were leased to BAW and then chartered to Mahan, that no payments were made under the leases because of an understanding that the lease payments effectively set off and netted Balli’s repayment obligations to FZE under the loan, and that (as Balli and Norton Rose knew) the lease with BAW was effectively negotiated by Mahan. This meeting occurred before service of Balli’s reply which pleaded that the sums due had been offset in this way. The set off arrangements were also referred to in clauses D and E of the 5 party agreement entered into in Dubai on 4 May, which provide that the net proceeds of the leases were to be used to service the loan obligations and acknowledge this in respect of US $ 15,526,000.

Although Mr Fard may not have acted save in consultation with Mahan, and although he may have done whatever Mahan told him to, I reject the submission that the leases were shams. I do not consider that Mahan has established that the real agreement is other than that set down in the written documents as is required, for example, by Diplock LJ in Snook v London West Riding Investments Ltd. [1967] 2 QB 786 and the other cases I discuss in Part VII(b).

The negotiations as to terms, including the length of the lease and the question of livery, the emails chasing BAW (not Mahan) for the deposit due under the lease, and the utilisation reports, and the complaints by the Alaghband brothers to and about Mr Fard are inconsistent with Mahan’s case. Moreover, contrary to the statements by Mr Mahmoudi (paragraph 51) and other Mahan witnesses, the aircraft were not maintained at all times by Mahan. The maintenance agreement was between BAW and PT GMF AeroAsia, a Garuda entity and Article 2.1.1 includes “line maintenance”.

The leases were necessary to enable the aircraft to be entered and maintained on the Armenian register and for the aircraft to be able to operate. Mahan’s witnesses accepted that BAW was their operator. Even after Mahan had pleaded that the leases were shams, it explained the transaction to PK as involving leases by the claimants to BAW and charters by BAW to Mahan.

I also accept Vahid Alaghband’s evidence that shortly before delivery Balli and Mahan agreed that payments due under the lease should be set off against the loan repayments. Hassan’s 5 October email to his two brothers suggests that internally Balli was expecting payment. This, together with the chasing emails to Mr Fard, is inconsistent with it being intended and understood from the outset that no payments would be made under the leases. When on 5 March 2009 Mahan explained the transaction to PK and Clifford Chance it also said that the parties had made an off-set arrangement. At that time Balli had not pleaded the off-set arrangement and when it did plead that arrangement it did not know of the meeting between PK and Mahan and their legal advisors. I find there was no agreement at the outset that nothing would be paid under the leases and that Balli and Mahan later made off-setting arrangements to deal with the situation that arose. I consider the implications of the cash in/cash out analyses prepared by Balli in Part VII(a)(iii). I do not consider they support the submission that the leases were shams.

The Package 2 Aircraft and the Mortgages:

On 25 October 2006 Vahid Alaghband met Ari Throroddsson of Montrose Global Capital (“Montrose”) about the Package 2 aircraft. He was shown the term sheet of a lease by Montrose to World Airways. Mr Alaghband said in evidence that he met Mr Mahmoudi on 31 October at Balli’s offices and provided Mr Mahmoudi with the technical specifications for the Package 2 aircraft. I reject Mr Mahmoudi’s evidence that he did not take this seriously because he had been told the aircraft had already been sold. It was common ground that Mahan was always seeking extra capacity and at that stage the relationship between the parties was good.

On 1 November BAW and the claimants amended the leases making provision for them to be full repairing leases. Vahid Alaghband’s evidence was that on that day (the day after he showed Mr Mahmoudi the specifications for the Package 2 aircraft), he telephoned Mr Arabnejad and told him about the aircraft. He stated that Mr Arabnejad agreed in that conversation that by March 2007 Mahan would provide finance for the acquisition of the Package 2 aircraft and gave his consent to the mortgaging of the Package 1 aircraft. Mr Arabnejad and Mahan strongly deny that any such promise or consent was given. Mr Arabnejad said he would not have agreed on the telephone and would have asked for a meeting. There were in fact meetings in Düsseldorf on 23 and 24 November but those who gave evidence on behalf of Mahan deny they consented to a mortgage or to take over the PK financing.

I incline to the view that Vahid Alaghband did telephone Mr Arabnejad on 1 November and discuss the financing of the aircraft. That was the day after he provided Mr Mahmoudi with the technical specifications. Although, given Balli’s capacity and tendency to produce documentation it is odd this was not done, there is a note of a telephone call in Mr Alaghband’s diary. As to whether Mr Arabnejad consented to the mortgaging of the aircraft, I also incline to the view that he did. It is common ground that Mahan was always interested in extra capacity. Moreover, on 7 June 2006 Mr Arabnejad had signed a letter waiving the restriction on Balli pledging the Package 1 aircraft without Mahan’s written consent. Some reliance was placed on this by Mr Shepherd as authorising the mortgage of two of the aircraft as collateral for PK’s finance for the Package 2 aircraft. I do not consider it does. The letter predates any contemplation of the Package 2 transaction (which was not raised with Mahan until the end of October) and is concerned with a request by Mahan to explore the possibility of raising additional financing for the Package 1 aircraft. However, it shows Mr Arabnejad’s attitude to mortgaging the aircraft. It is not, however, necessary for me to make a firm finding on this because Mahan did consent to the mortgaging of the aircraft by 12-13 April 2007 and again at the meetings in Dubai that May when agreements were made which were re-signed with amendments at the meeting in Düsseldorf on 30-31 August: see [161], [167], and [181].

The second aircraft arrived at Fujairah on 7 November 2006, was de-registered from the UK Civil Aviation Authority on 14 November and registered on the Armenian register on 20 November together with the first aircraft, which had its D-check in Korea.

Negotiations between Balli and Montrose for the Package 2 aircraft proceeded. On 21 November Balli and Montrose agreed Heads of Terms for a partnership agreement in respect of these aircraft under which Balli agreed to provide such funding as was required in excess of the US$ 50 million per aircraft which Montrose had obtained from PK. The aircraft were to be leased to Air India and later to World Airways. Mr Alaghband’s evidence was that the Air India/World Airways deal was less attractive to Balli than one on similar terms to the agreement about the Package 1 aircraft. He said that on 23 November, two days after Heads of Terms were agreed, at a meeting in Düsseldorf, Mr Mazaheri stated that Mahan would have finance in place by the Iranian New Year to replace the PK facility and that the following day, 24 November, there was a meeting between Vahid and Hassan Alaghband and Messrs Arabnejad and Mazaheri. Those who gave evidence on behalf of Mahan deny Mahan agreed to take over the financing.

On 27 November Mr Waldelof of PK sent Balli “a first outline of a term sheet for discussion purposes” reflecting the discussion at a meeting that day. That term sheet refers to a mortgage of the “financed and the collateral aircraft”, the collateral aircraft being two of the three Package 1 aircraft. It states that leases may be entered into provided the lessee is not incorporated in or as a habitual base in any jurisdiction subject to EU or US sanctions which would prohibit the lease or export of the aircraft to such jurisdiction and is not a person listed on any prescribed list maintained by any applicable US government agency.

At the beginning of December BAW emailed Hassan Alaghband asking for a number of documents to be sent to them about one of the Package 1 aircraft, N176 (MSN 24383). Mr Alaghband in turn requested Mr Fard to send him BAW’s corporate documents which he needed for the legal opinion and for BAW’s technical report on N176 identifying shortcomings in the aircraft. He said that without the report he would be forced to settle KLM’s invoice about the aircraft without any possible claims in the future.

On 11 December, soon after the arrival of the first of the Package 1 aircraft in Iran, Mr Thoroddsson of Montrose emailed Vahid Alaghband stating that the seller’s agent had concerns about talk in the market on the basis of reports on the internet that the aircraft were destined for Mahan in Iran. Mr Alaghband replied that day. He said:

“[O]n the basis of advice received we will categorically not sell any aircraft to Iran, nor will we lease them to Iranian carriers, for as long as OFAC or EU rules prohibit such sale or leasing operation. This policy absolutely and categorically applies to the three aircrafts we own and it will absolutely and categorically apply to the three aircrafts on which we are working with you. We intend to keep ownership of all six aircrafts within UK entities of our group.”

This email was followed by a letter dated 14 December from David Spriddell at Balli stating that some of the business options with respect to the collateral (i.e. Package 1) aircraft may, “subject to OFAC and EU rules” involve landing in Iran and stating that Balli was willing to assure PK that as far as the Package 2 aircraft are concerned “they would not land in Iran during the security period”. The letter states that Balli intended to lease one or both of the collateral aircraft to BAW and that it was expected that the aircraft will be used in and out of Iran in the current Haj season. In fact the leases by Balli to BAW had been entered some two months earlier. On 19 December Hassan Alaghband filled in a form PK required. His answer to the question where the aircraft would be maintained was that they would be maintained in France.

On 21 December the shares in Blue Sky Two and Blue Sky Three were charged to PK and Balli entered into a Letter of Undertaking with PK about the financing of the Package 2 aircraft. The transaction consisted of a facility agreement. Under this PK agreed to make available up to US$ 150 million to Wells Fargo Bank for the acquisition of the aircraft, mortgage and security assignments in respect of the two Package 1 aircraft to be used as collateral, and mortgage and security agreements in respect of the three Package 2 aircraft. There were also share charge agreements granting PK charges over the shares of the second and third claimants, and a letter of undertaking by Balli under which it gave a number of undertakings to PK in consideration of the loan under the facility agreement.

The loan under the facility agreement was made with only limited recourse. Vahid Alaghband (13 July, p 45) described PK as an “asset lender”. PK was able to enforce its security over the aircraft in the event of default but recourse to the borrower was limited to circumstances set out in the agreement, including gross negligence or fraudulent or wilful misconduct: see clauses 6.1 and 6.2. The money was to be repaid at the end of 18 months. The agreement authorised the leasing of the financed aircraft provided that the borrower procured that any lease and the use of the aircraft under it would not cause the borrower or any finance party to violate United States or EU sanctions or other laws: clause 19.10.

The mortgage agreements for the Package 1 aircraft contained warranties that the security interests constituted a first priority security interest (clause 2.7.1) and that Blue Sky Two and Blue Sky Three had not assigned, charged or otherwise encumbered the aircraft (clause 2.7.2) and were and would continue to be their sole legal and beneficial owners (clause 2.7.3). The mortgages of the Package 1 aircraft also provided that the mortgagors agreed to procure that the entry into any lease of the aircraft and their use would not cause them or PK to be in violation of any United States or EU sanctions. Under the terms of the Letter of Undertaking, Balli undertook that none of the Blue Sky companies, including the owners of the mortgaged aircraft, would enter into or permit any arrangements to be entered into in respect of the aircraft which would cause them or PK to be in violation of any United States or EU sanctions.

On 22 December Hassan Alaghband sent an email to Mr Mahmoudi stating “our deal closed this afternoon” and there was no need for Mr Mahmoudi to come to London. I reject Mr Mahmoudi’s evidence that he did not know what deal Hassan Alaghband was referring to and that he did not take this email seriously.

Vahid Alaghband stated he reported the successful closing of the Package 2 transaction and the arrangements for overhauling the aircraft at a meeting in Düsseldorf on 2 February 2007. This was denied by Mahan’s witnesses but Hassan Alaghband forwarded a number of emails dated between 7 and 11 February concerning the Package 2 aircraft to Mr Mahmoudi.

Whatever the position in mid-February, a note by Mr Mahmoudi of a meeting attended by Messrs Arabnejad, Mazaheri and Vahid and Hassan Alaghband, and Captain Garbaccio in Düsseldorf, dated 9 March 2007, records a discussion of the deployment of the Package 2 aircraft. This included a Greek option and routes from North America via France and making the aircraft available to the Saudi Arabians. The note also records that Hassan Alaghband would go to Holland for the third of the Package 1 aircraft the following Wednesday. Mr Mahmoudi (statement paragraph 54) said the main purpose of the meeting on 9 March was to discuss the delivery of the third Package 1 aircraft. He also said that it was never said that the Package 2 aircraft were for Mahan, that Mahan had committed itself to taking over the financing, or that two of the Package 1 aircraft had been mortgaged. On the basis of the reference in the note to the next meeting being on 1 February in Düsseldorf, Mr Shepherd submitted that the note was in fact written before 1 February and the parties were discussing deployment of the Package 2 aircraft in January 2007. However, both Mr Vahid Alaghband and Mr Mahmoudi refer to a meeting on 9 March in their witness statements.

The mortgaging of the Package 1 aircraft was discussed at a meeting on 23 March. Mr Mahmoudi’s note records “signing the contract for the second three aircrafts. Changing the previous contract for reaching agreement and permission for putting the first three aircrafts in mortgage as permission was not given in the previous contract”. Mr Mahmoudi said this was in relation to a future mortgage not a past mortgage. An email dated 23 March from Vahid Alaghband to his two brothers brought them up to date with developments at the meeting. It states “FZE confirmed the use of the six A/C collateral base as collateral for the PK facilities”, and that Mr Mazaheri said that the Export Development Bank of Iran was prepared to provide FZE with US$102 million.

Mr Mahmoudi’s meeting note also refers to trying to lease the Package 1 aircraft to Saudia, registering the Package 2 aircraft in Greece, and the routes from North America. Mr Garbaccio had raised the possibility of sub-leasing two of the Package 1 aircraft on routes to the USA and Canada from Paris in an email dated 14 February.

There was a further meeting in Düsseldorf on 12 and 13 April. In their statements Mr Arabnejad and Mr Mahmoudi said that, although they had suspicions about the position of the two aircraft before this, it was at this meeting that they were first told the aircraft had been mortgaged. In his evidence, however, Mr Mahmoudi (21 July p 7) accepted that it was possible he had heard that the aircraft had been mortgaged before this “but it was not documented”.

It is possible that because of the reference to a future meeting on 1 February, the meeting note dated 9 March 2007 in fact concerns a meeting in January. Even if it does not, the evidence is that Mahan was involved in the Package 2 transaction from an early stage. Mahan originally said it was first told about the mortgages on 4 May 2007 but later that it was on 12 April 2007. I do not consider that the evidence given on behalf of Mahan was reliable on this matter. I find that Mahan knew that the Package 2 aircraft might be available for them at about the end of 2006 or very early in 2007. Mr Mahmoudi had been shown the broker’s specification on 31 October. He was informed on 22 December that the deal had closed. Balli and Mahan discussed the deployment of the Package 2 aircraft at meetings at the latest in early March but probably earlier.

As far as knowledge of the mortgage of the two aircraft is concerned I have also concluded that Mahan knew about this well before April 2007. Mr Glaister’s note of his meeting with Mr Mahmoudi and Mr Insley on 5 March 2009 records “in early 2007 (at some point prior to April) Mahan discovered the title to the two collateral aircraft had been transferred to the UK companies and mortgaged to PK. The thing that prompted this discovery was that Balli offered the three financed aircraft to Mahan… and during the course of those discussions it became clear that Balli had already acquired title to the financed aircraft with debt from PK”. In the light of all this evidence I have concluded that at the very latest, by 23 March, Mahan knew that two of the Package 1 aircraft had been mortgaged.

The evidence of Mahan’s witnesses was that the mortgaging of the first two aircraft without consent was a betrayal about which they felt very deeply. The notes of the meetings on 12 and 13 April made by them do not, however, bear this out. Neither Mr Mahmoudi’s, Mr Moattar’s nor Mr Mazaheri’s notes contain any reference to the mortgaging of the aircraft at all. Mr Mazaheri’s note states that the contract between Mahan and Balli for the Package 2 aircraft “will be similar to the contracts” of the Package 1 aircraft in all aspects other than the fee relating to Balli. It is not until the notes of meetings in October 2008 that Mr Arabnejad is recorded as complaining that the aircraft had been “pledged”.

The notes of the April meetings deal with the position in relation to the Package 1 aircraft, the maintenance position, the previous accounts, and the position with Saudia. Mr Mazaheri’s note of the meetings on 12-13 April is the most detailed of the notes. It states in relation to the Package 1 aircraft “previous agreement regarding Balli’s position as trustee on that plane will be saved with the previous structure and only the location of registration of the related SPC companies from the previous location will be transferred to England” (emphasis added). The section of the note concerned with the Package 1 aircraft states that “the trustee contract relating to this change will be reformed and replaced” (emphasis added). This is a reference to the need to amend the Option Agreement because title to the aircraft was held by the claimants and not the Cayman Islands SPV companies. I deal with the significance of his use of the word “trustee” at [108] and in Part VII(a).

The section of Mr Mazaheri’s note concerned with the Package 2 aircraft refers to “supplying the credit through using the capacity and credit of Balli and with reception of the documents of six planes through the bank” and that “the period of the loan will increase to three years”. It also states “from the point of view of the trustworthiness of the trustee the contract between Mahan Air and Balli will be similar to the contracts of the three previous planes, in all aspects other than the fee relating to Balli”. In relation to the proposed transaction with Saudia, it states that “Balli company, representing Mahan Air, will sign a contract with Saudi airline”.

Mr Mazaheri referred to his note of these meetings in paragraph 20 of his statement but the document itself was only produced during the course of the trial. The explanation was that the document was mislaid among other Mahan documents by Mr Insley, and that, after Mr Mazaheri had referred to the note when giving evidence, Mr Insley searched the documents he had and found it. There are two colours of ink and crossings out in the note. Mr Mazaheri said he wrote the note by himself, then went through it with Vahid Alaghband and Mr Arabnejad, and that all the amendments but one were made by him at their request, using his second pen with a different colour ink. At Balli’s request the note was examined by Dr Audrey Giles, a handwriting expert, to consider whether it had been tampered with or fabricated. Dr Giles states that it is not possible to date ink and so she cannot say when the amendments were made. She also states that the fact the notes were written in Farsi limited what she was able to say about the handwriting. She could not say whether the handwriting is consistent with the writings of a single individual. Her report does not suggest that the document is not genuine.

The May 2007 Dubai meeting and the agreements:

The agreements contemplated at the April meetings were signed at a meeting in Dubai on 4 May 2007. Mr Mazaheri was present. The agreements signed contained manuscript alterations and were later amended and re-signed in August 2007 but the dates on the amended documents were recorded as 4 and 5 May 2007. (Footnote: ¹)

The five party agreement: The first agreement is a five party agreement between Balli, BSA, Crypton, Mahan, and FZE (the “4 May agreement”) substituting Crypton for BSA under the loan agreements and the Option Agreement for the Package 1 aircraft, and making the shares of the claimant companies subject to the Option Agreement. Section 1 of the agreement deals with amendments to the loan agreements. In clause E of that section the lender, that is Mahan or FZE, “acknowledges receipt of $20,796,000 under the revised loan agreement until April 30 2007… this amount is comprised of two months advance deposit collected under the leases ($5,370,000) plus $15,426,000”.

Part 2 of this agreement deals with amendments to the Option Agreement. Clause B provides:

“In order to finance the purchase of three additional 747-400 aircraft (the “additional aircraft”), the parties have agreed that Balli and its affiliates shall be allowed to provide the airplanes as collateral for the purchase of the additional aircraft.”

The aircraft are clearly the Package 1 aircraft. Clause C provides that Mr Mazaheri’s power of attorney issued in connection with the Option Agreement “shall be extended to Crypton”.

The four party agreement: The second of the agreements, the four party (“5 May”) agreement, was between Balli, Crypton, Mahan and FZE. Under this, Mahan agreed to provide funding to replace the PK loan and consented to the two Package 1 aircraft being used as security for that loan. Part A of the agreement deals with the reconciliation of the accounts for the purchase of the Package 1 aircraft. Clause 2 states “it is expected that after final payments of monies due in connection with the airplanes, Balli and its affiliates will be owed approximately $3.5 million (the “Balli capital cost loan”) which amount shall be paid back to Balli as per the amortisation table set forth in Appendix 2.” Clause 3 provides:

“On or before December 15 2007, Balli shall present a final accounting of the amounts received in US$ from the proceeds of the Mahan checks as well as a final account of the costs actually incurred in connection with the airplanes by Balli. Balli shall be entitled to charge interest on the Balli capital cost loan at the rate of 1% over its cost of borrowing which is currently at 8.5% per annum.”

Clause 4 obliged Balli to provide FZE and Mr Mazaheri with copies of the annual accounts of the SPV companies, their articles and memorandums of association, a list of directors, and any future changes.

Section B of the agreement deals with the purchase of the Package 2 aircraft. It states that:

“In consultation with Mahan, Balli has caused the purchase of additional aircraft in December 2006 pursuant to the terms of a short term bridge finance facility provided by [PK]. The parties have reached the following agreements in connection with the additional aircraft:

1.

Balli shall try to extend the terms of the bridge facility to 18 months (Footnote: ²) at terms set forth herein and accepted by Mahan (the “new facility”). Balli shall provide a copy of the new facility to HE Mr T Mazaheri. Balli may provide the original aircraft and additional aircraft as collateral for the new facility. Balli hereby reconfirms that other than in connection with a new facility it has not pledged or otherwise encumbered the airplanes directly or indirectly for its benefit.

…

4.

For as long as the new facility is in place, the additional aircraft will not be allowed to fly into or land in certain restricted territory set out in the new facility including Iran.

5.

The new facility is expected to require principal repayments of $22 million per year plus annual interest costs of $12 million. The parties shall use their best efforts to maximise the utilisation of the additional aircraft… in order to generate adequate funds for the proper service of principal and interest in the new facility. In case of any shortfall, Mahan shall provide on a timely basis adequate funds to service the new facility during its term.

6.

Lender shall provide the funds for timely repayment of the new facility at its maturity. … Lender shall … have the right to partial prepayment of the new facility in $50 million increments as a result of which an airplane and additional aircraft mortgage shall be released.”

Clause 7 of Section B of this agreement provides that Balli shall charge a 0.5% one time transaction arrangement fee or $750,000, and a financing fee of 1% on the new facility due quarterly in arrears. Clause 8 provides that Balli “shall be paid a $5 million fee during 2008 on a quarterly basis for the purchase of the additional aircraft”.

It was contemplated that a further mortgage of the Package 1 aircraft might take place if the PK facility was extended. It was submitted on behalf of Mahan that the consent to the mortgaging of the aircraft was a prospective and conditional “in principle” consent only, and that the conditions included that Balli obtain a three year facility and that the finance documents be provided to Mr Mazaheri for his approval. That is, however, not what clause B.1 states. It was argued that the use of the word “shall” in clause B of the five party agreement dated 4 May (see [161]) showed that the permission was to mortgage in the future and was contingent on the extension of the facility. The word “shall” is, however, used throughout the agreement, for example, in relation to Crypton being deemed as the borrower (clause I.B) and replacing BSA as the grantor of the option (clause II.A) and not only in relation to the future. The need to amend the contracts to reflect the approval of the mortgages is recorded in Mr Mahmoudi’s note of the meeting on 23 March. The evidence given by Mahan’s witnesses was that they decided not to mount a legal challenge to PK’s mortgages because they did not wish to get into a legal dispute with Balli at that stage in particular because Balli had been paid for the third Package 1 aircraft which had still not been delivered. There is, however, no suggestion that this meant the agreements were not binding.

Balli had been seeking to extend the period of the loan facility but on 9 May 2007 Mr Waldelof emailed Mr Thoroddsson, now working for Balli, stating that PK “cannot, based on the current utilisation of the aircraft, propose any increase/extension of the current facility”. Mr Thoroddsson told Vahid Alaghband this was due to the contractual arrangement with Mahan and the percentage of passengers picked up in Tehran. PK had been asking Balli for information about BAW, its business and in particular its relationship with Mahan. A letter, drafted by Balli for BAW to send to PK, was emailed to Mr Fard on 4 May and sent by Mr Fard to Mr Waldelof with the deletion of a reference to code-sharing arrangements. The letter stated that “Blue Airways provides charters to Mahan under an arms length signed charter agreement and has commercial arrangements with Mahan in the Düsseldorf, Tehran, Bangkok route”. It states that the typical passenger load is; 50% originating in Germany, 40% originating in Tehran, and 10% originating in Bangkok. The letter also states that tickets in Iran are sold through the Mahan network. Mahan was not told that PK had refused to extend the facility to three years until 29 July 2007.

The technical troubles which were delaying the delivery of the third aircraft continued. A first flight had been contemplated at the beginning of May but there were still problems on 7 May in relation to cabin pressure and the rudder. Hassan Alaghband assisted in obtaining the release of the third aircraft to BAW’s team and was a passenger when the aircraft was flown from Amsterdam to Tehran where it arrived on 12 May.

The background to meetings in Düsseldorf on 30 and 31 August:

Clauses B-5 and B-6 of the four party agreement ([165]) agreed in May provided that Mahan and FZE would provide funds to service the PK loan and to repay it at maturity. The email exchanges and meeting notes are consistent with Mahan’s acceptance that it was under an obligation to provide funding to pay PK.

By July 2007 there were problems between Boeing and BAW about the Package 1 aircraft and Balli was pressing to be put in funds by Mahan for the funding for the Package 2 aircraft. In an email to Mr Mazaheri dated 26 June Vahid Alaghband stated that Balli expected to receive US$ 40 million from the proceeds of the bank’s advance before the end of June, that he could not reach Mr Arabnejad and wanted to know where they stood. On 29 June he emailed Mr Mahmoudi asking for the funds to be transferred to two specified banks. Mr Mahmoudi responded saying “we will transfer the funds in two part[s] as per your request”. Mr Alaghband also emailed Mr Mazaheri again asking for confirmation that Balli could plan on receiving the money. Mr Mazaheri said he copied this email to Messrs Arabnejad and Mahmoudi. On 2 July Mr Mazaheri responded to another chasing email stating that “everything is in order… transaction will take a few days, less than one week. You can manage it”. This pattern continued with further emails on 4 and 6 July.

The problems were discussed at a meeting on 20 July 2007 in Düsseldorf attended by Vahid Alaghband, and Messrs Arabnejad, Mazaheri, Mahmoudi and Moattar. Mr Moettar’s note records that “it seems that the one year bridge loan has not yet converted into a three year one”. Mr Arabnejad proposed that the financial arrangements for the first of the Package 2 aircrafts should be made in the first week of August. This meeting also discussed the funding by Mahan to enable release of the PK facility. Mr Mazaheri is recorded by Mr Moattar as suggesting that Mahan had $100 million, that is $50 million less than the sum owed to PK. The note states “sort it out. Give 150 to release the 6. The best way that has been emphasised by Mazaheri.” Mr Arabnejad had suggested that the financial resourcing should only be for the first aircraft in the second package. The suggestion that Balli provide Mahan with Bills of Sale arose as a result of the difficulties between the parties at this time although there is no reference to Bills of Sale in the notes of that meeting or the next one on 9 August.

Funds were not forthcoming after the 20 July meeting. On 7 August Mr Alaghband sent a further email expressing his dissatisfaction with Mahan’s failure to provide the funding. He stated he was beginning to wonder whether it was all an excuse and that Mahan were “having an issue of trust working with the structures that we have agreed to in the past”. The email says that “stopping work with [Mahan] will require that they return the first three aircraft to us and that we will refund the balance of their loan to them. We will then get rid of all six a/c by selling them with whatever profit or loss it brings and will close this file.” Mr Mazaheri replied saying he was in America and did not know what to do. He asked whether he could forward Mr Alaghband’s email to Mahan.

Following Mr Mazaheri’s intervention, there was a further meeting on 9 August. At this meeting (in Brussels) Mr Arabnejad and Mr Moattar said they had not seen the original document for the Package 2 transaction and asked whether Balli were the beneficial owners of the Package 2 aircraft. Mr Moattar saw the documents after the meeting and Mr Alaghband emailed Mr Mazaheri stating that the loan and technical documentation issues had been finalised to the satisfaction of Mr Moattar and Mr Mahmoudi.

In this email Mr Alaghband also said he had met Mr Arabnejad and Mr Mahmoudi in Dubai. His note of this meeting is dated 21 August but his email to Mr Mazaheri appears to have been sent on or before 20 August. Whether the meeting was on 19 or 21 August, Mr Alaghband’s email records his dissatisfaction, his impression that Mahan had no funds left from the finance which had been provided to them, and that he had no grounds for remaining confident about Mahan’s intention to perform its obligations.

Mr Alaghband’s note also records his response to Mr Arabnejad’s proposal of getting another bank involved in the refinancing of the deal. The note states that he suggested (a) the Mahan side should perform the existing agreements, (b) the deal should be liquidated, or (c) one aircraft should be released on payment of $100 million in 15 days and that Mr Mazaheri’s instructions about the blank Bills of Sale should be adjusted. By then it had been agreed that the Balli parties would provide Mr Mazaheri with blank Bills of Sale. There had been at least discussion of the terms upon which Mr Mazaheri was to hold them, and Hassan Alaghband had met Mr Moattar in Tehran to discuss the draft documentation he had sent on 30 July.

There is a dispute about the reason given for Mahan asking for the Bills of Sale. Vahid Alaghband’s evidence was that they were given because, after FZE agreed to fund the acquisition of the Package 2 aircraft, its exposure to the Balli parties was almost $300 million and it had no security. Mahan’s witnesses said that the Bills of Sale were requested and given because of Balli’s alleged breaches in mortgaging two of the Package 1 aircraft and that when the blank Bills of Sale were given to Mr Mazaheri on 7 September, they were given to him as an Amin trustee under Iranian law.

Notwithstanding my findings that Mahan knew and consented to the mortgaging of the two aircraft before the meetings on 12 and 13 April, by the July meetings relations were less good. The terms of the Side Letter Agreement that was made in Düsseldorf at the end of August (see [182]) show that Mahan’s concern was that the Balli parties would breach their obligations. It was for this reason it was requested that Bills of Sale be delivered “in trust” to Mr Mazaheri.

The draft agreements Hassan Alaghband sent Mr Mahmoudi on 30 July included a marked up draft of the four party agreement clearly showing the deletion of the three year loan facility and its replacement by one of 18 months. In an email dated 3 August Mr Moattar indicated the changes to which Mahan did not agree. No disagreement was indicated to the change in the period of the facility. On 12 August Mr Moattar met Hassan Alaghband in Tehran and they discussed the changes to the agreements.

The Meetings in Düsseldorf on 30-31 August 2007:

The agreements made at the August 2007 meetings in Düsseldorf were substantially the same as those entered into in February 2006 about the Package 1 aircraft. There were three loan agreements between Balli and FZE, three loan agreements between Crypton and FZE, a letter agreement and an option agreement between Mahan and Crypton. A power of attorney was granted to Mr Mazaheri by Crypton to exercise its powers under the Option Agreement provided he received an opinion from Clifford Chance that this would not violate sanctions. The loan agreements obliged FZE to provide Balli with a total of US $162.5 million in accordance with a schedule.

The provision in the May agreement for a three year facility was changed to 18 months because Balli had been unable to extend the facility. Mr Moattar said he objected to the change to 18 months but that due to what he assumed was an oversight by Hassan Alaghband it was not changed back. Mr Arabnejad said that Mahan had missed this change but accepted the agreement because they signed it at the meetings at the end of August. He agreed that at the August agreements Mahan agreed to the mortgaging of the Package 1 aircraft in order to support the PK facility. However, by this time, on Mahan’s case it knew that PK had declined to provide a 3 year facility. In those circumstances (and although there were subsequently further negotiations between Balli and PK) I find there was no agreement to reinstate the reference in the draft to a 3 year facility. In September 2007 BAW pre-registered two of the Package 2 aircraft in Armenia.

At the Düsseldorf meetings, a further agreement, the “Side Letter Agreement” (“SLA”), was made. The parties to this agreement were Balli, Crypton, Mahan, FZE and Mr Mazaheri. The SLA provided that blank Bills of Sale relating to the Package 1 aircraft were to be provided to Mr Mazaheri and stored in a safe deposit box in Mr Mazaheri’s name with a reputable international bank acceptable to all parties, and that, if certain conditions were satisfied, Mr Mazaheri was given power to execute the Bills of Sale. The material parts of the agreement are:

“In the event that Mr Tahmasb Mazaheri (“TM”) comes to the conclusion that:

(a)

the Lender has performed all its obligations under the Loan Agreements as per the terms and conditions of such agreement; and

(b)

Mahan and Lender have performed their respective obligations under the Loan Agreements, the Option Agreements and the Letter Agreements;

And that:

(a)

Crypton has breached its obligations under [Specified Loan Agreements and or Option Agreements and or Letter Agreements]; or

(b)

Balli has breached its obligations under [Specified Loan Agreements and the Letter Agreements];

TM may execute each signed Bill of Sale with respect of each aircraft and additional aircraft (individually a “Bill of Sale” or collectively the “Bills of Sale”) (sample form attached hereto) which shall be delivered in trust to TM for the due execution of this Side Agreement, provided that:

(a)

execution of the Bill of Sale will not be in violation of any applicable laws and regulations including the pertinent provisions of any sanction laws;

(b)

the proceeds from the execution of the Bill of Sale will be applied against the obligations of Crypton and Balli under the loan agreement; and

(c)

TM procures a release on behalf of the Lender in favour of Crypton upon execution of the Bill of Sale including return to Crypton and Balli of any valid and outstanding bills of exchange issued in favour of the Lender as security under the terms of the Loan Agreements (the “Bills of Exchange”). …

The parties further agree that:

(a)

the Bills of Sale and all the Bills of Exchange shall be stored in the safe deposit box with a reputable international bank acceptable to all parties (the “safe deposit box”). The safe deposit box shall be opened in the name of TM and shall be accessible to duly appointed representatives of Mahan and Balli only in the event that TM cannot access the safe deposit box due to incapacity or other unforeseen events.

(b)

In the event the Lender provides readily available funds to Crypton or Balli in increments aggregating to $50 million (according to schedule acceptable to Crypton) per Additional Aircraft, and Crypton and or Balli cannot procure the release of each additional aircraft within 30 days of such funding, Balli and Crypton undertake to return such funding forthwith.

…

(d)

Balli and Crypton shall provide the relevant information requested by TM from time to time.

(e)

Lender hereby acknowledges that it has received $31,080,000 at this date from Crypton under the Loan Agreements and Letter Agreements.”

In view of the duplication of the letters identifying the clauses, I shall refer to the last five clauses as contained in the “further agreement” in the SLA.

Provision and use of the Bills of Sale:

A handwritten letter by Vahid Alaghband dated 31 August refers to Mr Mazaheri as “the mutually agreed trustee of both sides” and confirms that the Balli Group would refrain from mortgaging or selling the aircraft. On 4 September 2007 Hassan Alaghband provided Mr Mazaheri with three blank Bills of Sale for safekeeping, one for each of the Package 1 aircraft. He signed the blank bills on behalf of each of the claimant companies but the documents were not dated and did not name a transferee. Hassan Alaghband said he gave Mr Mazaheri the blank Bills of Sale in accordance with the SLA.

Mr Arabnejad and Mr Mahmoudi said in their statements that they wanted blank Bills of Sale because of the sums they had advanced to Balli without real security. In their evidence they also said it was because of the breakdown of trust as a result of Balli mortgaging two of the Package 1 aircraft. Vahid Alaghband said Balli agreed to provide blank Bills of Sale to give Mahan comfort by enabling it to sell the aircraft if Balli defaulted on repaying the loan.

Whatever the reason Mahan wanted the Bills of Sale to be given to Mr Mazaheri, soon after they were given to him it decided to offer them as security for a loan from FERF. A letter dated 2 October from Mr Arabnejad to the Deputy Minister of Roads enclosed invoices for the Package 2 aircraft and a letter dated 3 December from Mr Arabnejad to Mr Mazaheri at the Central Bank requested that the Bills of Sale be used as security for the advances in respect of the Package 2 aircraft and for the Bills of Sale to be kept at the Export Development Bank [of Iran] as “surety”.

In a letter dated 12 December Mr Mazaheri stated to Dr Raei, a colleague in the Central Bank that $150 million was allocated to Mahan for the purchase of three 747/400 aircraft and that “the surety for this finance would be the ownership documents of six 747/400 aircraft which would be submitted to the Central Bank as nameless (blank) sale certificates by 15 December”. A further letter to Mr Raei dated 16 December and copied to Dr Parvizian, the Managing Director of the Export Development Bank of Iran, stated that all the documents of the three Boeing 747 aircraft and the blank sale certificates “were presented and submitted to this bank”. The letter to Dr Raei used the Persian word “vasigheh” which it is agreed means pledge. The official translation of the letter was that the documents were provided as “surety for the bank”. Both this letter and Mr Mazaheri’s previous letter were written from the Central Bank on notepaper headed “Governor’s Office”. The copy to Dr Parvizian stated that the blank Bills of Sale “have been distributed in the Central Bank”. It is not clear whether that means “submitted to” or “deposited in”.

In fact, Mr Mazaheri’s evidence was that the blank Bills of Sale were placed by him in a specified safe at Bank Sadarat and that they were not removed until he handed them to Mr Arabnejad in September 2008. Notwithstanding the contents of his letters to Dr Raei and what had been said to Dr Parvizian, the Bills of Sale were not pledged to the Central Bank. Mr Mazaheri’s evidence that he was merely confirming to Dr Raei and Dr Parvizian that he had the Bills of Sale and was not stating that they had actually been delivered to the Central Bank, is inconsistent with the terms of the letters to them. These and the later letters do not state that Mr Mazaheri is holding the Bills of Sale. In particular a letter dated 15 January 2008 from him undertaking to the Export Development Bank to deliver the original copy of the Bills of Sale to the Central Bank as soon as possible and at most within two months, is inconsistent with his evidence. Moreover, Mr Arabnejad’s evidence was that he understood that the blank Bills of Sale were being held by the Central Bank and by Mr Mazaheri in his capacity as Governor of that bank.

I do not accept Mr Mazaheri’s evidence (28 July, p 108) that at the May meetings in Dubai Vahid Alaghband agreed that both Balli and Mahan would seek funding to repay the PK loan and that whoever found funding first could use “that credit”. He was thus saying that the pledge to the Central Bank and the Export Development Bank was done with Balli’s knowledge and permission. There is no documentary support for this. It is inconsistent with his evidence that, at that stage, Mahan and he did not believe the Package 1 aircraft had been mortgaged to PK. Mr Arabnejad did not mention this in his statements or oral evidence.

I also do not accept Mr Arabnejad and Mr Mazaheri’s evidence that at this time they had doubts the two Package 1 aircraft had been mortgaged because (in Mr Arabnejad’s case) there was no mortgage on the Armenian aircraft registry or on the register maintained under the Cape Town Convention.

The interest of the US authorities:

By the autumn of 2007 the US Department of Commerce, Bureau of Industry and Security (hereafter “BIS”) was making enquiries about the aircraft leased to BAW. It had contacted Boeing alleging that control of the aircraft had been transferred to Mahan and that the aircraft were being operated by Mahan under Mahan livery. Boeing had, on the basis of that information, withdrawn its support for the aircraft.

On 14 October Mr Alaghband sent an email to Mr Mahmoudi stating that Balli needed “the following letter on the official letterhead of Blue Airways” (a draft was provided) to be sent to Norton Rose confirming that the leased aircraft remain under BAW’s control and have not been re-exported to Iran. He told Mr Mahmoudi the letter should say that BAW is an Armenian airline operating under an AOC issued by the Armenian Civil Aviation Authority and that the three leased aircraft were operated under Armenian registration numbers. The draft states:

“Neither Mahan Airways, nor any other Iranian entity has ever had control of these three aircraft, nor are they shareholders in Blue Airways or have control of Blue Airways. Our only connection with Mahan Airways is through an industry standard agreement under which Mahan provides our leased fleet with ground and passenger handling services” and “… under the lease agreement with the owners we are specifically prohibited from sub-leasing or re-exporting in any form the leased aircraft… without written consent of the owners. We confirm that we have never applied for such authorisation, nor have we sub-leased or re-exported any of the above referred leased aircraft to Iran.”

Norton Rose wrote to BAW on 1 November stating that the BIS and US counsel claimed that a charter to an Iranian entity where the Iranian entity has authority to select routes would violate US sanctions. Norton Rose asked BAW to provide a letter stating that the aircraft had not been sub-leased to any Iranian entity, painted in the livery of any Iranian entity, or otherwise engaged in activity which would constitute a re-export to Iran under the regulations. Vahid Alaghband said (10 July p114) that the letter reflected Balli’s understanding of the situation; that the aircraft were under the control of BAW and Balli expected BAW, the lessee, to respond to these matters.

A week later, on 6 November 2007, Hassan Alaghband sent Mr Fard a copy of draft lease extension agreements for the three aircraft, containing a new provision (clause 5.18) under which the lessee agreed not to use or to allow the aircraft to be used in any way contrary to US sanctions. The signed lease agreement, however, referred to “UN” and not to “US” sanctions. This was discovered by the Balli parties and their legal advisers when reviewing the documentation to prepare a response to the TDO issued by the US authorities. Norton Rose asked about the alteration and, on 15 May 2008 Mr Insley sent Mr Fard a draft of a letter. This states that Mr Insley’s instructions were that the extension documents were sent to them already executed on behalf of Balli in that form, they merely signed and returned them and they deny that they amended the documents without Balli’s knowledge or consent. I find that this alteration was made without Balli’s knowledge.

Exchanges in February – March 2008:

The PK facility was due to expire in June 2008. Towards the end of February 2008 there were exchanges of emails between Vahid Alaghband and Mr Mazaheri about funding for the Package 2 aircraft. On 20 February Mr Mazaheri told Mr Alaghband that Mr Arabnejad said he had the finance available but that the maintenance and D-checks on the aircraft had not been finished. Mr Mazaheri was supposed to get a power of attorney empowering him to execute a Bill of Sale of the fourth aircraft if it was confirmed that Blue Sky Six had received US$ 78.5 million, the balance then outstanding under the 30 August 2007 agreements. He also said this document had not yet reached him and suggested a meeting. Vahid Alaghband responded that, from Balli’s point of view, the only problem was that Mahan had not fulfilled its agreement to provide funding for the Package 2 aircraft so the PK loan would be repaid and Balli was under pressure to repay PK. The loan was payable on 22 June. Mr Alaghband also stated that Mahan had been making weekly payments since the beginning of 2008 and he did not understand why they were doing this in drips and drops of a few million dollars per week and were still (he said) $30 million from the $100 million mark which had been agreed had to be paid before the first aircraft would be delivered. This appears to be a reference to Vahid Alaghband’s proposal at the meeting on about 20 August (see [176]) but that proposal was not reflected in the four party agreement amended and re-signed at the meetings on 30-31 August or in the SLA.

As to the payments made by Mahan, there had been a number in this period, including payments on 24 January and 6, 13, and 23 February 2008. These are recorded on a spreadsheet disclosed by Mahan as relating to the purchase of B747 MSN 26881, the fourth aircraft. It endorsed cheques totalling about US $19 million with this number, including one for $4.5 million paid on 23 February. The spreadsheet also lists payments on 17 September 2007, 13, 18 and 19 February 2008 and 3 March 2008. Mahan claims a swift bank transfer of $7.6 million on 3 March (after the BIS ordered Balli to repatriate the Package 2 aircraft) was also for the fourth aircraft. The total amount recorded on the spreadsheet is US$ 67,897,864, the amount of Mahan’s counterclaim.

On 22 February the BIS ordered Balli to redeliver the Package 2 aircraft to the United States. On 24 February representatives of Balli, Mahan and BAW met in Dubai. An email from Vahid Alaghband to Mr Mazaheri following that meeting states that the accounts were agreed, that Mahan had asked Balli to defer two “line items” (i.e. aircraft), that Balli agreed, and they agreed the routes to be used. Mr Mazaheri replied stating that he had heard a different account of the meeting and that the document (the power of attorney) had not yet reached him. Mr Alaghband responded stating that he found it extremely disturbing that Mr Mazaheri’s understanding was in any respect different from what he said. He said Mr Mazaheri had a scanned version of the power of attorney which had the same effect as the original. There is a certain irony in this in the light of the submissions on behalf of the Balli parties about the use by Mahan of a scanned version of the Bills of Sale for the Package 1 aircraft.

In February Hassan Alaghband and BAW were in communication about the lease for the first of the Package 2 aircraft, the fourth aircraft. A term sheet dated 16 February contemplated that it would be delivered on 15 March. Mr Fard signed a Letter of Intent and returned it to Mr Alaghband on 25 February. On that date PK issued a draft term sheet to Balli for a 72 month facility of US$ 95 million. On 7 March Hassan Alaghband emailed Mr Fard about arrangements for the ferry flight for the fourth aircraft. Despite the complaints about the provision of funding by Mahan and the order on 22 February by the US authorities to repatriate the Package 2 aircraft, the parties continued to make arrangements concerning the lease of the fourth aircraft to BAW.

On 20 March 2008 the Alaghband brothers and Messrs Mazaheri, Arabnejad and Mahmoudi met in Dubai to discuss a schedule setting out the costs of the aircraft to date and the funding Balli stated it needed from FZE to bring the balance to the US$ 100 million before the fourth aircraft could be released into service. Messrs Arabnejad and Mahmoudi stated that it was at this meeting that they were told about the investigation by the BIS and the threat of a Temporary Denial Order (“TDO”) and said that if the fourth aircraft could not be delivered they wanted their money back.

The imposition of the TDO:

The TDO was issued on 17 March and published on the BIS’s website on Friday 21 March. It prohibited the Balli parties, Vahid and Hassan Alaghband, BAW and Mahan (“the respondents”) from participating in any transaction involving any item exported or to be exported from the United States that is subject to the Export Administration Regulations and prohibited any person from taking any action which facilitated the acquisition of any such item by the respondents for a period of 180 days. It was subsequently renewed. It remains in force in respect of Mahan but, in September 2009 was lifted in respect of the Balli parties.

Steps taken in the light of the TDO:

On 27 March there was another meeting between the Alaghband brothers and Messrs Arabnejad, Mazaheri and Mahmoudi in Dubai. Sadegh Kharazi, an Iranian diplomat, also attended. The notes of this meeting made by Messrs Mazaheri and Mahmoudi show that the TDO was discussed and that Balli stated it had activated lawyers and a lobbying group in America. The notes record that there was a discussion about revealing the lease agreements but that Balli’s lawyer had said “because there are no payments made they are not reliable and sufficient”. Vahid Alaghband denied that Balli had been so advised. Mr Mahmoudi’s note, however, states “our biggest weak point is the lack of strong and complete documents including the non-payment of the lease rents and the painting of the 747-300 aircraft”.

The 747-300 aircraft referred to in the note were acquired in another transaction from another vendor or lessor. That transaction may have been financed by a loan from the Export Development Bank made on the security of the Bills of Sale of the Package 1 aircraft given to Mr Mazaheri. By December 2007 Mahan’s application for a loan of US $150 million ostensibly for the Package 2 aircraft appeared to have been accepted: see [186] – [187]. On 27 March Hassan Alaghband resigned as Managing Director of the three claimant SPV companies. Mahan was not told of this until a meeting on 12 October 2008 when its representatives saw that Vahid Alaghband had signed the extensions of the leases until 12 November: see [232]. Mr Mazaheri had given the Bills of Sale to Mr Arabnejad on 19 September, almost a month before 12 October.

On 25 March, shortly before the meeting on 27 March which discussed the TDO, Norton Rose wrote to BAW stating that it was in default of its obligations under clause 5.18 of the lease extension. The letter stated that, if BAW did not provide a copy of legal advice stating its actions complied with US law, cooperate with Norton Rose and US counsel, and provide any other information proving that the allegations in the TDO were not correct, Balli expected the immediate return of the aircraft. BAW replied on 1 April denying that it had passed control of the leased aircraft to Mahan and stating that under the rules of its Armenian AOC it was required to control all the aircraft in their fleet. They asked for additional time to provide the information required by the US authorities. In the following week Mr Fard sent Mr Alaghband the monthly activity reports for two of the Package 1 aircraft. Mahan’s case is that it was told the letters from Norton Rose were to satisfy the US authorities. Balli’s is that it was pursuing a two-track approach, attempting with Mahan and BAW to resolve the situation, but safeguarding its legal position.

At around this time Eagle passed Balli an expression of interest from Air Atlanta for a lease of two of the aircraft. On 9 April Mr Thoroddosson wrote to Vahid Alaghband about this saying that, as Air Atlanta was a legitimate potential lessee, it was important to meet them but asking how this would be viewed under the TDO. He also prepared a memo on Air Atlanta which concluded that Air Atlanta was technically bankrupt but had a very good reputation as an ACMI operator and trouble-shooter.

At meetings on 18 April (in Dubai), and 15 and 24 May (in Düsseldorf and Dubai) the need to collect documents to show BAW was independent and their activities were legal, the need for information from Mahan and BAW and to give Mr Insley (who was acting for BAW as well as Mahan) ‘leads’ or ‘directions’ as to how to answer the questions were discussed. A note of the meeting on 18 April records Vahid Alaghband stating to Mahan’s representatives, “…if it is your decision to sell…”. Mahan relied on this as showing he accepted the aircraft belonged to Mahan.

At the meeting on 24 May Mr Alaghband stated Norton Rose had not received any information from Mahan or BAW and that if BAW did not act it would not be possible to renew the leases. Options about the Package 2 aircraft were discussed at the first meeting and, at the third (on the basis of a report by a Ms Ali Reza Kharazi) it was said that documents showing that the aircraft had nothing to do with Iran had been sent to the BIS and Balli’s lawyers were optimistic that the problem in relation to those aircraft would be solved. Mr Mahmoudi’s note of the first meeting records Mr Alaghband saying “you have given me your money based on trust and there is nothing [no proof/receipt] in your hand”. The notes of the second and the third meetings record Mr Arabnejad asking Balli to pay Mahan $50 million and Mr Moettar’s note of the second meeting (but not Mr Mahmoudi’s) records that Mr Alaghband agreed to make this payment.

By this time Norton Rose had written chasing letters to Mr Insley about the information requested from BAW as well as about the alteration to clause 5.18 of the lease extension agreement to which I have referred (see [193]). On 15 May Mr Insley sent Mr Fard a draft of a letter with the information Norton Rose had asked for in March which he asked him to check carefully.

The next meeting between Balli and Mahan was on 5 June. Mr Alaghband reported that there was to be a meeting with BIS and said that the contact with the Americans raised the question about the relationship between Mahan and BAW and the financial relationships. It was agreed that Mr Moettar should go to London to settle the accounts between the parties. There was also discussion of the $50 million which Mr Arabnejad had raised at previous meetings. Mr Arabnejad is recorded as asking what Mr Alaghband would do to help them settle their account with the bank in June and July and that they needed a $50 million loan for a year. Mr Alaghband is recorded as saying “I should act from my own resources. I would let you know the outcome by the end of June. The only remaining question is that how I should pay it, maybe it is better we pay via Iran in Rials.”

The Alaghband brothers met Mr Moattar in London on 20 June. Balli again said that it would be obliged to terminate the lease if it did not have documents from Mahan and BAW to present to the BIS. Mr Moettar’s note and his evidence was that Balli proposed that BAW should give it some cheques in respect of the lease. His note states this was so that it could be said that Balli have taken cheques for the lease and keep payments with a difficult source at a distance. His statement (and he was not cross-examined on this) states that it was said that BAW should give Balli cheques and Balli would receive a copy and settle the account. Hassan Alaghband denied asking for cheques and Vahid Alaghband said uncleared cheques being dealt with through the offset arrangements did not make sense. I have concluded that at the meeting on 27 March there was discussion of the fact that payments had not been made by BAW under the leases and the impact of this on the submissions to be made to BIS but I am not able to conclude on the evidence before me that Hassan Alaghband proposed that some cheques should be forged for this purpose.

On 24 June PK served a notice on the Wells Fargo Bank and Balli of failure to pay the loan. The notice stated that unless PK was paid within 5 days an event of default would occur, triggering the remedies set out in the facility agreement including the right to enforce over the collateral aircraft. On the following day Mr Glaister of Clifford Chance sought information from Norton Rose about the financed and collateral aircraft. He asked for the habitual base of the collateral aircraft, copies of current leases with BAW, and a summary of their maintenance status.

The Alaghband brothers met Messrs Mazaheri, Arabnejad, Mahmoudi and Moattar in Frankfurt on 27 June. At this meeting one of the Alaghband brothers presented a letter from BIS stating that the Package 1 aircraft were under Mahan’s management. They also discussed the accounts of the first Package. It was agreed that Mr Moattar would go to London to investigate the position in relation to certain missing documents and other matters were resolved. Relations between the parties were poor by this time. Mr Mazaheri’s note records that Vahid Alaghband and Mr Arabnejad quarrelled with each other.

On 27 June Norton Rose served termination notices on BAW in respect of the three lease agreements and on 30 June CameronMcKenna wrote on behalf of BAW rejecting the notices. That day Balli provided draft answers to PK’s 24 June request. With regard to the two mortgaged Package 1 aircraft the draft answer states “as per the lease terms, the habitual base of the aircraft is in Armenia. … The current flight routes to our knowledge are within the Middle East, Thailand and Malaysia”. There is no reference to Iran.

On 3 July the BIS gave PK permission to enter into an agreement with Balli for the repossession of the Package 2 aircraft which were then in Korea. The letter states that three of the six 747s identified in the TDO (the Package 1 aircraft) “are controlled or operated by Mahan Airways and based in Iran”.

On 11 July there was a meeting in Istanbul. The suggestion that Mahan take a 60% stake in Air Atlanta by paying US$ 40 million and that Air Atlanta should acquire the Package 2 aircraft was discussed. On 14 July Mr Moettar asked for financial information about Air Atlanta. He was given an internal Balli email account and asked not to use a dot com email server for correspondence about Air Atlanta. Vahid Alaghband said it was standard practice in merger and acquisition deals to keep matters as confidential as possible and confidentiality was particularly important in this case because there were even more sensitivities.

Shortly afterwards Mr Moettar asked for a Balli business card. He and Mr Mahmoudi were given such cards describing them respectively as “Finance Consultant” and “Commercial Advisor”. Vahid Alaghband said the cards were issued because Balli wanted Mahan’s input into the due diligence and wanted Air Atlanta to assume that they were dealing with Balli and the due diligence was being conducted on behalf of Balli. Mr Alaghband said he would not have given Mr Mahmoudi the title “Commercial Advisor” but disagreed that the title was a misrepresentation because Balli had solicited his advice on many transactions as a person well-versed in commercial aviation. The cards and Balli email addresses were given to Messers Mahmoudi and Moattar because all concerned were trying to conceal what was going on from third parties, in particular the United States authorities.

In the last week of July Hassan Alaghband and Mr Moattar travelled to Iceland to conduct the due diligence. Messrs Vahid Alaghband, Mazaheri, Arabnejad and Mahmoudi met in Dubai on 25 July to discuss the potential sale of the Package 2 aircraft and payment of the $50 million by Balli to Mahan. Mr Mahmoudi’s note suggests it was a difficult meeting at which Mr Arabnejad complained the bank which had loaned the $150 million on the security of the Package 1 aircraft was asking where the Package 2 aircraft were and Vahid Alaghband said it was clear Mahan had doubts about Balli’s statements. The parties agreed that Mr Moattar would investigate the accounts between the parties in London and specify the amount due to Mahan, that the negotiations with Air Atlanta would continue, and that the acquisition of Air Atlanta by the grant of a loan to Air Atlanta in exchange for shares which would be transferred to “an entity”. If the Air Atlanta transaction was not concluded by 5 August, Balli would pay US$ 50 million on account to Mahan. One of the notes of this meeting (said to be by Mr Alaghband and Mr Mazaheri) records that “any claims by Mahan would be deducted from this account as settlement, and the difference would be calculated towards Balli Group’s finance to Mahan Air. The terms and conditions of finance would be agreed between both parties”.

The negotiations with Air Atlanta continued while discussions continued between Balli and Mahan on the state of the accounts between them and the cost that Mahan would incur if the Air Atlanta transaction went ahead. In connection with the Air Atlanta transaction, at a meeting between PK and Balli, PK warned Balli that, since the TDO forbad re-marketing efforts by Balli, a party could be polluted in the eyes of the BIS by discussing a transaction with Balli.

The July 2008 Memorandum of Understanding:

Mr Arabnejad, Vahid Alaghband and Mr Moattar met in London on 31 July where an agreement was reached about the accounts. The parties signed a Memorandum of Understanding (“MOU”) which provided (clause 2) that “applicable funds by Mahan Air with Balli Group as per the attached schedule amount to $53,661,000 and the outstanding debt to PK amounts to $150,000,000”, “forecasted expenditures for Mahan Air during the 3^rd quarter 2008 is $14,900,000 as per the attached schedule and as for the 4^th quarter 2008 is $11,158,000 (including Balli’s fees) and amount in aggregate to a forecasted total of $26,058,000”. The forecasted expenditure related to the Package 1 and Package 2 aircraft. The $53,661,000 consisted of $47,876,000 funds in Balli’s hands and the $5.8 million maintenance reserve which had been paid to PK although the schedule to the MOU states it was “with BS”.

The MOU also stated (clause 3-1) that the parties should cooperate as a first priority to purchase the shares of Air Atlanta and forecast funding for a 75% stake would amount to approximately $45 to $50 million and (clause 3-1-1) that “Balli shall as a first step release the maintenance reserves amounting to $5.8 million towards a partial reduction of the PK loan”. As far as funding for the Package 2 aircraft was concerned the MOU states (clause 3-1-2) that refinancing PK’s debt was to be funded by Mahan at $100 million and the balance up to a ceiling of $144.2 million to be provided (clause 3-2-1(2)) from the remaining balances of the Mahan account with Balli. On the same day, Norton Rose served a notice on CameronMcKenna demanding delivery up of the Package 1 aircraft.

August – November 2008:

By 8 August PK had decided not to pursue the Air Atlanta option. Balli and Mahan met in Istanbul on 14 August to decide what to do in the light of this. It was decided to try to find a new purchaser from PK. An auction process was considered involving purchasers found by Balli and Mahan. The source of the funds was to be Mahan. After the 14 August meeting there were email exchanges about possible purchasers and Vahid Alaghband (in an email dated 23 August) referred to “bids” and “the auction process”. Nothing came of this.

Mahan’s case is that at the meeting on 8 August Mr Alaghband promised to pay the US $53,661,000 and at a number of other meetings he promised to pay $50 million. Mr Alaghband denied that he had undertaken that Balli would pay in any event but accepted that, if there was a credible bidder to pay PK, Balli would have topped up the payment to make sure PK was repaid in full. He said that if this happened Mahan would have to repay Balli.

On 28 August Mr Mazaheri asked for payment through the European Iranian Handelsbank in Hamburg. There was a meeting in Frankfurt on 12 September. Mr Moattar’s note records that 50 Million Tomans “be settled into Mahan’s account gradually and in Rials in Saman Bank in 10 days”. Mr Mahmoudi’s note refers to the process as being “little by little” and Mr Moattar records that the permission to withdraw from that account would be with Mr Mazaheri’s approval. The possible bidders for the Package 2 aircraft were also discussed at this meeting. The following day Mr Alaghband emailed Mr Mazaheri saying they needed to make arrangements to “kick-start” the “Saman process” and there would be a concrete programme in place before the end of the week. There is no reference to the payments being conditional on PK being paid.

On 24 September Mr Mazaheri asked for an update on the “Saman process”. On 19 October Vahid Alaghband said Balli had established a new route for payments which “should be in place very early this week and enable us to restart the process”. Mr Mazaheri’s response (dated 22 October) said Balli had changed the procedure in the past and had again. He also said that Mahan and he believed that, despite saying payment would be made, Balli had not yet decided to pay or could not pay. In the light of all the evidence, I have concluded that Balli’s agreement to pay Mahan $50 million was not conditional on there being a credible bidder to pay PK. What the accounts showed was due to Mahan at that stage was to be repaid, the remainder was to be a loan to Mahan.

At this time consideration was still being given to the response to the BIS about the Package 1 aircraft. On 3 September Hassan Alaghband sent Vahid a draft of a letter prepared for BDO to inform Akin Gump that BAW “performed its lease payment obligations under the lease” which Akin Gump wished to file with the BIS. On 18 September BDO sent Balli a draft listing amounts said to be due to Balli companies by BAW under the leases and stating that “the loan account with Balli Holdings Ltd… was reduced by amounts totalling [US$69,257,673]. These amounts have been applied to extinguish the balances, to the extent detailed… below, due from Blue Airways”. The letter also lists cash remittances received by Balli Steel. These did not have anything to do with the transactions I am considering in these proceedings. The draft letter does not reflect Hassan Alaghband’s draft which did not contain the lists and it was never sent. Reliance, is, however, placed on it by Mahan as showing how Balli was seeking to present the situation to the BIS at the time they were considering whether to renew the TDO and how they were instructing their advisers.

The TDO was renewed on 17 September 2008. The renewal order recites the procedural history of the matter. It states that Balli did not contest that the BIS had grounds to renew the order against Mahan and BAW and that Balli described themselves in relation to the Package 1 aircraft as “passive investors” with no operational role or interest but focussed on cash flow and opportunities to sell the aircraft. The document also states that, only in September 2008, did the Balli parties disclose Mahan’s involvement to the BIS.

The document states that, although in a letter dated 16 November 2007 Balli’s lawyers stated they had tightened the contract with BAW to make it more explicit that a breach of US sanctions laws would constitute a breach of the leases, the extension of the lease agreements signed shortly after that contained no such provision. The unsigned copy of the lease extension agreement before the court does contain this in clause 5.18. The BIS stated that Balli knew the aircraft were regularly being operated in and out of Iran and maintained that the clause had been covertly removed from the draft lease agreements by BAW. It was also stated that the failure to produce documents regarding lease payments requested by the Bureau raised a significant concern. Balli (see Norton Rose’s letter to BAW dated 25 September 2008) maintain that the amendment to the lease was only discovered in 2008, that it then wrote to BAW’s it would not have agreed to extend the lease had it known that the additional clause had been amended by BAW.

On 17 September BAW applied for an extension of the leases of the Package 1 aircraft. Hassan Alaghband forwarded this request to his brothers with the comment “is he mad?” and the application was refused on 25 September.

Execution of the Bills of Sale & registration of aircraft in Iran:

The next developments concern the blank Bills of Sale for the Package 1 aircraft given to Mr Mazaheri, the deregistration of the aircraft from the Armenian Civil Aviation Register, and then re-registration in Iran.

Mr Mazaheri was dismissed as Governor of the Central Bank of Iran on about 22 September. However, before leaving office he was to attend a meeting at the World Bank in Washington. He did so and travelled back to Iran on or about 16 October. On 18 September 2008, shortly before Mr Mazaheri’s dismissal and after BAW’s application to extend the leases had been made but before it was refused, Mr Arabnejad wrote to Mr Mazaheri in his capacity as the Governor of the Central Bank asking for the Bills of Sale of the Package 1 aircraft. The letter states:

“[The Bills of Sale] are at the disposal of your esteemed bank. Since it is required to present the above mentioned Bills of Sale to competent international legal authorities and insurance companies, so I would like to ask you to order for above mentioned documents to be at the disposal of this company, so that by providing some copies and presenting them to Civil Aviation Authority and certifying of its copies, firstly one copy of the documents which has been certified by the mentioned organisation, should be returned to your respected bank. Secondly, this company would waive itself from the right for sale, mortgage and pledge over the above mentioned aircraft without authorisation by that esteemed bank.”

In their statements Mr Mazaheri and Mr Arabnejad said that the main reason for the transfer by Mr Mazaheri of the Bills of Sale was that Balli had not extended the leases and had not paid Mahan or FZE the $50 million or $53 million they had agreed to pay.

Mr Mazaheri at that time had an inkling he was to be removed as Governor of the Bank because of his difficulties with the government. He sent Mr Arabnejad the original Bill of Sale documents. In a note dated 19 September at the bottom of the letter containing Mr Arabnejad’s request, he stated the reason he was giving the Bills to Mr Arabnejad. He stated it was “for performing the registration tasks and the actions required in Civil Aviation Organisation and [delivering] them to legal and lawful authorities and insurers”. He also stated that one copy can be taken from the originals to be certified with the Civil Aviation Authority and then returned to the bank and that these documents “should only be used for delivery to legal authorities and refrain from selling or transferring or collateralising them”.

Mr Mazaheri instructed that the original of his letter together with the certified copy of the documents should be returned to him and a copy of the letter and the original of the documents were to be delivered to Mr Arabnejad.

On 8 October 2008 BAW asked Balli for an extension of the re-delivery dates to January 2009 to enable it to complete the re-delivery C-checks. On 11 October a without prejudice extension until 12 November was given. The parties met in Dubai on 12 October. Copies of the letters extending the leases signed by Vahid Alaghband were shown to Messrs Arabnejad and Moattar, and they were informed Hassan Alaghband had resigned as a director of the lessor companies. Mr Mazaheri asked Vahid for replacement bills and Vahid agreed to provide them but did not.

By 12 October the aircraft were in Iran and BAW ceased to operate them. Notwithstanding this, on 13 and 14 October BAW chased Balli for the documents extending the lease. The documents were sent on 21 October, by which time the aircraft had been de-registered from the Armenian register.

On 13 October Ms Hosseini, Mr Arabnejad’s assistant, acting on his instructions, scanned copies of the blank Bills of Sale. Using Microsoft Word and Paint, she inserted the date 25 February 2008 (when Hassan Alaghband was still a director of the lessor companies) and Blue Sky Aviation Co FZE as transferee on the documents. An application to de-register the aircraft from the Armenian Register was made by Mr Mahmoudi on 15 October using the documents prepared from the scanned Bills of Sale. The certificate of de-registration was issued on 16 October. I accept Miss Hosseini’s evidence that she used her printer to insert the date and the transferee’s name onto the original Bills of Sale a week or two after this.

On 15 October Vahid Alaghband met Mr Mazaheri in Düsseldorf. Mr Mazaheri was on his way back to Iran from the meeting of the World Bank. His evidence that he said he would hand the Bills of Sale to Mahan unless Balli complied with its obligations was not challenged. He emailed Vahid Alaghband on 22 October complaining that Balli had not paid the US $50 million (see [231]-[232]). He said it was not a hard task for Balli to provide the finance, and that he thought they had spent it, or did not have enough cash. Mr Mazaheri’s evidence was that he believed Balli was simply refusing to pay.

Mr Mazaheri’s evidence about the Bills of Sale was unsatisfactory. He said that he told Mahan to insert the name of a non-Iranian entity not owned by the government of Iran. He also said that he did not release the blank Bills to Mahan until after his return from the World Bank Conference on about 16 October. By that date, however, he had already handed over the Bills of Sale, Ms Hosseini had produced the copies of them, and Mr Mahmoudi had used them to de-register the aircraft.

On 25 October the aircraft were still grounded. Re-insurance for the aircraft in Mahan’s name only incepted on 27 October. Before then insurance for the aircraft was handled by Balli. On 28 October Vahid Alaghband emailed Mr Kharazi suggesting a meeting in Düsseldorf and that “in the mean-time [Mahan] should resume their operations on the basis of the documents they already have”. He said Balli would not cause “any problems or disruptions for them.” This indicates that Balli knew the aircraft were grounded. Since Balli had agreed to extend the leases until 12 November to enable the C-checks to be completed the reference to not causing any problems or disruptions to Mahan is also some indication that Balli knew about the de-registration. I do not, however, accept that Vahid Alaghband knew at that time that the Bills of Sale had been transferred to Mahan and the aircraft had been registered in Iran. They were monitoring the aircraft which still had Armenian registration marks at that time.

On 30 and 31 October there was an important meeting in Düsseldorf. Mr Alaghband’s evidence (13 July pp 106 and 149) was that Messrs Arabnejad and Mahmoudi were threatening to execute the Bills of Sale and to deregister the aircraft and that at the end of the meeting Mr Arabnejad said they had re-registered the three aircraft in Iran. He said Mr Mazaheri had said he had or would release the Bills of Sale to Mahan. Mr Alaghband said he thought all this was posturing and that because the registration marks on the aircraft had not been changed they had not been re-registered in Iran. Messrs Mazaheri and Moattar’s notes of these meetings refer to Mr Mazaheri giving Mahan the Bills of Sale. Mr Mahmoudi’s note refers to Mr Arabnejad saying ownership had been transferred to FZE and that the aircraft had been registered in Iran. Notwithstanding any doubts Mr Alaghband may have had because the aircraft still had Armenian registration marks, by this stage he was aware of what Mahan had in mind.

Vahid Alaghband emailed Mr Mazaheri on 2 November 2008 saying Balli had a proposal to resolve the situation. This email also refers to the Bills of Sale. It states Balli understood the Bills of Sale may be in circulation and says Balli needed them to be re-collected from Mahan and returned to Mr Mazaheri. On 3 November Mr Alaghband sent BAW notices extending the leases until 12 January 2009. Mahan relied on the email dated 2 November as showing Balli knew the Bills of Sale had been executed before 14 November when BIS told Akin Gump that the aircraft were on the Iranian Civil Aviation Register. Vahid Alaghband states (statement paragraph 289) that he was informed of the re-registration on 14 November and that an email from Mr Insley referring to the Bills of Sale and stating that BAW presumed the changes to the registration occurred at the behest of “Blue Sky Aviation” which had financed Balli’s purchase was “a complete surprise”.

The aircraft were not re-delivered on 12 November. On 14 November there was a meeting in Düsseldorf attended by Hassan and Vahid Alaghband, and Messrs Mazaheri, Mahmoudi and Kharazi. The meeting discussed proposals for resolving the problem but no agreement was reached.

On 19 November Norton Rose threatened to seek injunctive relief and did so on 20 November. That application was withdrawn. A further without notice on notice application was made on 3 December and was heard by Flaux J: see [16]. Mahan submit that the Balli parties and Norton Rose misled Flaux J in that without notice application, for example in saying they did not know who Blue Sky Aviation was. It is clear from the transcript of the proceedings on the return date that Flaux J did not consider he had been misled, although in the light of what had transpired at the meetings on 30 and 31 October, he might have been informed more fully of what had occurred at that stage.

The issues for determination in this phase of the case are: (a) did the Balli parties hold the Package 1 aircraft on trust for Mahan or FZE; (b) was title to the aircraft transferred to FZE by the execution of the Bills of Sale; (c) are Mahan and FZE in principle entitled to recover either $67.8 million, $53.6 million or $50 million paid to Balli on either a contractual or restitutionary basis, and (d) if Mahan or FZE have wrongfully interfered with the aircraft so that a remedy arises under the Torts (Interference with Property) Act 1977, should that remedy be an order of delivery up or an award of damages.

Trust:

Mahan’s case that there is a trust of the aircraft or of the shares in the SPV companies is put in a number of ways (see [13]). First it is said there was an express agreement, “the B-M” agreement, made either at the February 2006 Düsseldorf meetings or around that time. Secondly, it is said that the provision by Mahan of the money used for the purchase of the aircraft gave rise to a resulting or a constructive trust. Thirdly, it is said that a trust arises from the arrangements between the parties, in particular the accounting arrangements, but also the other arrangements for the acquisition and deployment of the aircraft.

Express trust:

Mahan’s case is that the eight written agreements signed at the Düsseldorf meetings are “window dressing” and or shams designed to conceal the true nature of its relation with Balli. Mahan bears the burden of showing that the common intention was that Balli was to hold the aircraft or the shares in the SPV companies on trust for it or for FZE: see e.g. Spectra International plc v Tiscali [2002] EWHC 2084 at [101]. It is presumed that a document which looks like a contract contains all the terms of the bargain: see e.g. Gillespie Bros. & Co v Cheney Eggor & Co [1896] 2 QB 59 at 62, per Lord Russell CJ. In Inntreprener Pub Co v East Crown Ltd [2000] 3 EGLR 31, at [33] Lightman J indicated (without deciding) that this is particularly so where any statement made by one party to the other is “followed by further negotiations and a written contract not containing any terms corresponding to the statement”. In that case the decision turned on the fact that the contract contained an entire agreement clause but Lightman J also considered whether a collateral warranty had been given. In Britoil plc v Hunt Overease [1994] CLC 561, at 573 Hobhouse Jstated of a detailed agreement prepared after negotiation by the parties and their advisors, that:

“The process of negotiation and progressing towards a complete and formalised agreement is one which may contain many ambiguities. The purpose of the final document is to remove these ambiguities and to define authoritatively and clearly what the parties’ respective rights and obligations are to be.”

See also Shogun Finance Ltd v Hudson [2004] 1 AC 910, at [49] per Lord Hobhouse for the importance of the written contractual document to the certainty of the contract in English Law.

My findings of fact are set out at [91] – [94], [103] – [111]. I have concluded that the background circumstances, the nature of the transactions, the negotiations before the Düsseldorf meetings including Hassan and Vahid Alaghband’s emails dated 13 and 15 February 2006, those at the Düsseldorf meetings and the agreements at those meetings do not manifest a common intent and agreement by Balli and Mahan that the Balli parties are to hold the aircraft or the SPV shares on trust for Mahan or an agreement by the Balli parties to do so. Neither do the May 2007 agreements which effectively novated the agreements made at the Düsseldorf meetings and which were re-signed in August 2007.

My conclusions about the implications of the cash in/cash out account analyses and the nature of the leases Balli made with BAW are consistent with this. The case for an oral agreement is also weakened by some inconsistency between the terms of the written agreement and the oral agreement alleged in the pleading on matters which it was not necessary to keep secret because of US sanctions. For example, it is pleaded that a management fee of $1 million (para 28(h) and (m) of Amended Defence) was agreed but the loan and option agreements provide for other fees – on a percentage basis.

Whether the Executive Instruction/Procedural Order was a FERF document or a record of Mr Mazaheri’s understanding of Balli and Mahan’s agreement as to the basis for acquiring the Package 1 aircraft, that document is inconsistent with Mahan having the beneficial ownership of the aircraft or of the shares in the SPVs under a trust. This is so notwithstanding the references to establishing the existence of Mahan’s “title rights” and the restrictions on selling, pledging, leasing, or distributing income without Mahan’s consent.

The inconsistency is seen from what the Executive Instruction/Procedural Order states about the Boeing 747s. It is also seen from the contrast with the provisions in the document for the Airbus A320. In the case of the Airbus a trust for Mahan’s benefit of the shares of the SPV company was to be used.

The inconsistency is also seen from the accepted need to comply with United States sanctions laws, which could not be done if Mahan was the beneficial owner of the aircraft or the shares of the SPV companies. It was agreed by Mahan’s witnesses that the February agreements sought to implement the FERF Resolution and the Executive Instruction, although during the hearing they sought to downplay the significance of the latter document. The Executive Instruction/Procedural Order is also inconsistent with there being an oral agreement because clause 6 in section C [see [74]) required an official agreement to be drawn up and exchanged between Mahan and the SPV companies, i.e. a written agreement.

I have referred [108] to the centrality of the provisions of the Option Agreement to what the witnesses on both sides said about the nature of the relationship and the beneficial ownership of the aircraft. Mahan’s witnesses and Mr Mazaheri considered that it was largely the Option Agreement which created a trust in Mahan’s favour: See Mr Mazaheri, 30 July pp 21-22, Mr Mahmoudi, 20 July p 31, and Mr Arabnejad, 22 July p 81. However, the terms of the Option Agreement do not assist Mahan. The agreement provides that the aircraft were legally and beneficially owned by the SPVs whose shares were legally and beneficially owned by Balli and that the option could only be validly exercised if Clifford Chance confirmed that to do so would not violate United States sanctions. These provisions are not consistent with an immediate trust for the benefit of Mahan. They are premised on beneficial ownership remaining in the SPV companies, i.e. the Balli parties, until the option is exercised. Until the exercise of the option the SPV companies were to be the beneficial owners of the aircraft, and under the Option Agreement the only way Mahan or FZE could acquire beneficial ownership was by validly exercising the option. On Mahan’s case it would have been entitled to call for the legal interest in the aircraft or in the shares of the SPV companies to be transferred to it at any time. Mahan’s submissions seek to put it in the position it would be in once the conditions for the exercise of the option have been met and it exercised the option. But those conditions have not been met and it did not exercise the option.

Mr Mazaheri’s note of the meetings on 12 – 13 April 2007 and his use of the English word “trust” was relied on by Mr Crane as a recognition of the intention that governed the transactions agreed at the Dusseldorf meetings but his note must be seen in the light of Mr Mazaheri’s view that the Option Agreement created a trust. The approach of Mr Mahmoudi and Mr Arabnejad to the Option Agreement may have reflected an understanding on their part that a trust is a situation where one person trusts another to perform his obligations: see e.g. 20 July p 13 (Mr Mahmoudi) and 24 July p 6, and 25 July p 7 (Mr Arabnejad). If that was their understanding, it was mistaken and does not, for example, reflect the difference in the Executive Instruction/Procedural Order between the structures to be used for the Airbus and the Boeing aircraft.

The prohibition on selling, pledging, leasing or mortgaging the aircraft without Mahan’s consent did not make the Balli parties Mahan’s trustee or give Mahan an equitable proprietary interest in either the aircraft of the shares in the SPV companies. In Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 at 706-7 Lord Browne-Wilkinson said that “there are many cases where [a person] B enjoys rights which in equity, are enforceable against the legal owner, A, without [the legal owner] being a trustee”. His Lordship was referring to the situation where there is a separation of title, for example, between mortgagor and mortgagee. The position is a fortiori where there is no separation of title. Moreover, the fact that a legal owner is restricted in his ability to use the property as he wishes does not give rise to a trust particularly where the restrictions are found in contract. The option gave Mahan a contractual entitlement in due course if the conditions for its exercise were satisfied. Although the SPV companies and Balli were prohibited from distributing income, there was no obligation to keep the income separate from the Balli parties’ other funds.

Mr Mazaheri’s evidence (see [110]) that it was assumed that sanctions would be lifted before 2020 and that everything agreed at the February meetings was reduced to writing except what would happen if sanctions were not lifted before then in substance confirms that the written agreements including the Option Agreement represent what was agreed by the parties.

I also observe, although my conclusion was reached without reference to this, that neither when Balli first challenged Mahan’s entitlement to the aircraft nor at the meeting in March 2009 between Mahan and PK did Mahan say that it or FZE beneficially owned them (and had always done so) because of a trust. Mahan did not allege the loans were shams until a late stage of the trial.

Purchase money resulting trust:

Mahan’s case on this largely depends on showing that the loan agreements were shams. The mere fact that a transaction is one of loan does not exclude the implication of a trust enforceable in equity (see e.g. Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, at 581 (Lord Wilberforce). However, the resulting trust which arises where property is purchased with A’s money (whether by A or B to whom the money has been given to purchase the property) but title in the property is vested in B is a presumed resulting trust. The presumption of resulting trust has been said to be “easily” rebutted by evidence of any intention inconsistent with such a trust: Westdeutche Landesbank Girozentrale v Islington LBC [1996] AC 669 at 708. Evidence that a transaction is a loan repayable with interest will often be inconsistent with a purchase money resulting trust because the natural implication is that the transaction is one of debt not trust.

In the present case there are a number of factors which cumulatively mean that it is clear that there is no purchase money resulting trust. The factors to which I have referred when discussing the submission that there was an express oral trust are also relevant in this context. I have regard in particular to the terms of the Option Agreement that BSA was the legal and beneficial owner of the shares in the SPV companies, and the decision reflected in that agreement to protect Mahan’s interests by a contractual right exercisable in the future and only once sanctions had been lifted. If the agreement was that the Balli parties held the aircraft or the shares in the SPV companies on trust for Mahan, Mahan would not need an option of this sort. These are all factors that point away from a purchase money resulting trust whether of the aircraft or the shares in the SPV companies.

Moreover, until a late stage of the trial it was not suggested that the loan agreements were shams. I dealt with Mahan’s application served on 7 September to amend its pleadings to make this allegation at [32] – [33]. The allegation that the loan agreements were shams is inconsistent with other evidence. For example, it is inconsistent with acknowledgment, by Mahan in the 5 May 2007 agreement, of reductions in the balance outstanding, the security in the form of promissory notes required and retained by Mahan, and Mahan’s statement at its meeting with PK on 5 March 2009 that the money advanced for the acquisition of the aircraft was a loan secured only by Balli’s promissory notes. It is also inconsistent with Mr Mazaheri’s evidence that he handed the blank Bills of Sale to Mr Arabnejad because the Balli parties were in breach of the loan agreements and with Mr Mahmoudi’s evidence that the Option Agreement was the only way that Mahan was entitled to require that the aircraft be transferred to it (16 July p18). It does also not fit easily with some of the communications between Mahan and Balli, for example, Vahid Alaghband’s email dated 7 August 2007 (see [173]).

Trust arising from the other arrangements:

Mr Crane submitted that the position in relation to the leases with BAW and the “cash in/cash out” analyses prepared by Balli shed light on the parties’ relationship and their intentions regarding the beneficial ownership of the aircraft. I deal with his submissions on the leases at [263] - [268]. As to the cash analyses, he argued they are consistent with Balli acting as Mahan’s agent and accounting for the expenditure of the monies advanced by Mahan, and that this evidenced, or gave rise to a trust. He relied on the references to “trustee” and “trustee fees” in some of these analyses, the fact Norton Rose’s invoices were included in the analyses and this was charged to Mahan, and charged interest where money was spent by Balli in advance of matching funds arriving. I do not accept this submission.

The relevant documents were the Loan, Letter, and Option Agreements. These did not create an agency or an obligation to account. Under the Loan Agreements, the borrower, BSA, was required (see clause 5.4) to permit the lender and its representatives to inspect its books. The analyses provided by Hassan Alaghband related to this obligation under the Loan Agreements, reporting on past expenditures to show how money that had been drawn down on the loan was only used for the agreed purposes. The fact that payments were sometimes made by Mahan to Balli after Balli had incurred expenditure did not change the nature of the transaction or the relationship.

Balli’s fee was the annual payment of 1% of the purchase price under the letter agreement described in that agreement as a management fee. Its fees relates to Balli’s services in maintaining and administering the arrangements under the transactions including the accounts of the SPV companies. The references in the cash in/cash out analysis to “trustee fees” and “trustee payments” are references to quarterly payments of this fee. The use of the word “trustee” potentially has significance but neither Vahid nor Hassan Alaghband was cross-examined on its use in the analyses. In another context Vahid Alaghband said (9 July, p 104) that the fee was referred to by various names. Moreover, in the context of the terms of the written agreements entered into in Düsseldorf the word does not bear the weight Mr Crane sought to put on it.

As to the inclusion in the schedules of fees paid to Norton Rose, the way Mr Crane put this begged the question. These fees were an item of expenditure related to the transactions concerning the Package 1 aircraft, financed by the loan. As such, they were properly included in the schedules which showed how the money which had been drawn down (or would be drawn down) had been (or would be) used. The fees were entered as costs of the claimant companies in the accounts of these companies. Had the option over the SPV companies’ shares been validly exercised the cash in/cash out schedules would have enabled Mahan to know the financial position of these companies.

Finally, the moneys Mahan paid to Balli were paid into a number of Balli’s ordinary business bank accounts. Balli was to use the money to acquire the Package 1 aircraft. But there was (see e.g. Mr Mahmoudi 21 July pp.69-70) no requirement that the money be separated from Balli’s general funds in a special account. Balli’s freedom to mix the funds with its own money is a factor pointing to the relationship being one of debtor and creditor rather than trustee and beneficiary: see Re Andrabell Ltd [1984] 3 All ER 407, at 413-416 per Peter Gibson J, citing Henry v Hammond [1913] 2 KB 515, at 521. In the latter case Channell J stated that if a person who receives money “is not bound to keep the money separate, but is entitled to mix it with his own money and deal with it as he pleases, and when called upon to hand over an equivalent sum of money, then… he is not a trustee of the money, but merely a debtor”.

Were the leases to BAW shams?

The argument that the leases to BAW were shams was made (see Mahan’s closing submissions, paragraph 76) to shed light on the parties’ relationship and their intentions regarding the beneficial ownership of the aircraft. I have rejected the evidence of Mahan’s witnesses that from the outset it was not intended that any payments would be made under the leases (see [134]) and given my reasons for concluding that Mahan has not established that the real agreement between the parties was other than that contained in the written documents. I can deal briefly with the submissions as to the relevant legal principles.

In determining whether a document amounts to a sham it is necessary to consider both the circumstances of the creation of the document and also the parties’ conduct under it: Neufeld v Secretary of State for Business, Enterprise and Regulatory Reform [2009] 3 All ER 790 at [82]. The fact that the parties have departed from the agreement, for example in the set-off arrangements in the present case, does not, however, justify a conclusion that the agreement is a sham or the term that has been departed from is not part of the contract: see Express and Echo Publications Ltd v Tanton [1999] IRLR 367 at [25] per Peter Gibson LJ and Lloyds and Scottish Finance Ltd v Cyril Lord Carpets Sales [1992] BCLC 609 at 620, per Lord Scarman. In Autoclenz Ltd v Belcher [2009] EWCA Civ 1046 at [53] it was stated that the mere fact that parties conduct themselves in a particular way does not of itself mean that the conduct accurately reflects their legal rights and obligations.

A number of the decisions, including the Autoclenz and Neufeld cases, concern employment law where a court will be alive to the inequality of bargaining power and will take care that workers are not deprived of their rights by one party offering terms on a “take it or leave it” basis which describe the other party as an “independent contractor”. In such cases conduct may be particularly important in showing the true bargain. However, even in that context it has been said that “if the term solemnly agreed in writing is to be rejected in favour of a different one, that can only be done by a clear finding that the real agreement was to that different effect”: Consistent Group Ltd v Kalwak [2008] EWCA 430 at [40] per Rimer LJ.

The departures from the terms of the leases, for example, that payments due under them were set-off against sums due by the Balli parties under the loan agreements, are, for the reasons set out at [125] – [128] and [134], explicable without pointing to the leases being shams. There must be a common intention that the documents are not to create the legal rights and obligations which they give the appearance of creating: per Diplock LJ (as he then was) in Snook v London and West Riding Investments Ltd [1967] 2 QB 786 at 802. The factors which have led me to conclude that there was no intention to create an express trust, in particular the emails from the Alaghband brothers dated 13 and 15 February 2006 (see [91] – [95]) and the acceptance by Mahan’s witnesses that the leases were necessary to enable the aircraft to be entered and maintained on the Armenian Register and that BAW was their operator are inconsistent with the common intention that is required.

Smith LJ in Autoclenz’s case (at [43]) stated that although Snook’s case provides a definition of a sham, the case is not of uniform assistance in determining whether an agreement is in fact a sham. While, particularly in the employment context, see Autoclenz’s case at [49] per Smith LJ, there is no need “to show that there had been a common intention to mislead”, what is necessary is the common intention that the document is not to create the legal rights and obligations which it gives the appearance of creating. In Snook’s case Diplock LJ stated immediately after the passage which I have quoted that the unexpressed intentions of a “shammer” do not affect the rights of the other party and, in Autoclenz’s case Aikens LJ warned about concentrating too much on the private intentions or expectations of the parties. He stated:

“What the parties privately intended or expected (either before or after the contract was agreed) may be evidence of what, objectively discerned, was actually agreed between the parties: see Lord Hoffmann’s speech in the Chartbrook case at [64] to [65]. But ultimately what matters is only what was agreed, either as set out in the written terms or, if it is alleged those terms are not accurate, what is proved to be their actual agreement at the time the contract was concluded.” (at [91])

Was title to the aircraft transferred by the execution of the Bills of Sale?

On 2 October 2007 Mr Arabnejad purported to use the Bills of Sale as security for a loan from FERF and the Export Development Bank of Iran in respect of the Package 2 aircraft. I have found (see [228] – [229]) that on 18 September 2008 Mr Arabnejad wrote to Mr Mazaheri asking for the Bills of Sale stating he wished to present them to competent international legal authorities and insurance companies and that Mr Mazaheri sent Mr Arabnejad the original Bills of Sale on or about 19 September. On 13 October Miss Hosseini scanned copies of the blank Bills of Sale and created electronic hotdox copies which were used in Armenia to de-register the aircraft on 16 October 2008. Miss Hosseini used her printer to insert the date and the transferees name onto the original Bills of Sale a week or two after this. By this time the aircraft were in Iran and at some point were re-registered on the Iranian register.

Three issues arise. The first is what law governs whether title to the aircraft was transferred. The second is, if that law is English law, whether title was transferred under it. If Iranian law governed and Mr Mazaheri was an Amin, what was the position under Iranian law?

I have concluded that English law applies and that, under English law, for a number of reasons, title was not transferred in the circumstances in which these Bills of Sale were executed. I have, however, also concluded that if I am wrong on this and Iranian law, and in particular the provisions of Article 603 to 631 of the Iranian Civil Code apply, the position is the same.

The Bills of Sale were provided to Mr Mazaheri pursuant to the terms of the SLA made at the meeting in Dusseldorf on 30 and 31 August 2007. That agreement expressly referred to 18 written agreements made by the Balli parties and Mahan. All but one of those agreements contained an express choice of English law. The SLA is concerned with the same subject matter as those agreements, that is the Package 1 and Package 2 aircraft. The Bill of Sale annexed to it expressly provided that it was governed by internal English law. The signed blank Bills of Sale deposited with Mr Mazaheri also provided this. The express provisions in the Bill of Sale and in the written agreements referred to which were part of the same series of transactions, together with the parties previous course of dealings shows clearly that they intended to choose English law as the governing law: see Dicey Morris and Collins The Conflict of Laws Vol 2 paragraphs 32-091 to 32-093.

Moreover, the evidence of Dr Adel, Mahan’s expert on Iranian law, is that Iranian law would recognise and enforce the English choice of law provision included in the Bills of Sale themselves. He agreed that Iranian law permitted English law to apply to the issue of whether a transfer of the Bill of Sale is valid: 29 July p 57 and see also pp 42-43.

On the second question, Mr Crane made three submissions. First, the provision in the SLA prohibiting the execution of the Bills of Sale if that execution will “be in violation of any applicable laws and regulations including the pertinent provisions of any sanction laws” did not extend to an administrative order such as the TDO. Secondly, that Mr Mazaheri’s conclusions that Balli was in breach of its contract in refusing to pay Mahan the US$ 50 or 53 million back and in not supplying Mr Mazaheri with the documents specified in clause A4 of the four party agreement (see [164]) were reached in good faith and were not Wednesbury unreasonable. He also submitted that Mr Mazaheri’s conclusion that the execution of the Bills of Sale was justified because, by 16 October 2008 Mahan had made US$ 50 million available to Balli, but Balli could not get the release of the fourth aircraft.

Mr Crane argued that where parties have entrusted an independent third party to come to a conclusion on a mixed matter of fact and law such as breach of a commercial agreement the court is not entitled to investigate the merits of the decision and substitute its own view of the matter unless there is fraud, bad faith or a complete departure by the independent person from his instructions. He relied on Hamishmar Insurance v First City [2009] EWHC 256 (Comm); Homepace Limited v Sita South East Limited [2008] EWCA Civ 1; and Bernahard Schulte v Nile Holdings [2004] 2 Lloyds Rep 352.

The difficulty with the submission that Mahan had complied with the terms of the SLA by making US$ 50 million available by 16 October 2008 is that three of the four reasons given by Mr Mazaheri in paragraph 36 of his first witness statement for agreeing to the transfer of the Bills are not reasons he was permitted to take into account under the SLA. The failure to repay US$ 53 million or some other sum, moreover, was not a breach of any term of the agreements specifically referred to in the SLA. Neither was Hassan Alaghband’s resignation as a director of the SPV companies nor the failure to extend the leases of the aircraft to BAW. However, setting these points aside, it is common ground between the experts on United States law, Messrs Sherman, Clements, and Wall that the execution and transfer of the Bills of Sale naming FZE as transferee violated the TDO and thus violated paragraph 764.2(k) of the US Export Administration Regulations. I reject the submission that the prohibition in the SLA did not extend to an administrative order such as the TDO. In any event, the effect of the TDO was that paragraph 764.2(k) of the Regulations was violated by the execution and transfer of the Bills of Sale in this way.

Mr Crane did not press the argument that the “non-violation of sanctions” proviso to the authority to execute the Bills of Sale was also subject to Mr Mazaheri’s opinion that there would be such a breach and that he did not consider there would be a breach if the transfer was to a non-Iranian entity such as FZE. He was right not to do so. It is inconsistent with the structure and the clear distinction between the conditions of the SLA that operate where Mr Mazaheri “comes to the conclusion” that they apply and the three provisos set out afterwards, the first of which is that the execution of the Bills of Sale will not be in violation of sanctions laws. It is in any event difficult to see how Mr Mazaheri could be of the opinion that a transfer to FZE would not offend US sanctions. FZE is completely owned and controlled by Mahan and at all times acted on the instructions of Mahan’s senior management. The FERF conditions which Mr Mazaheri personally drew up in the light of what had been agreed between Balli and Mahan expressly acknowledged that the applicable sanctions law did not, in the case of the Boeing aircraft, permit Mahan to control the shares of an SPV company which owned such an aircraft. That was why Mahan was given an option to acquire those shares when sanctions were lifted and such acquisition was legally possible.

Apart from the proviso prohibiting the execution of the Bills of Sale if to do so would violate sanctions law, and notwithstanding any restraint that a court ought to show in investigating the merits of the decision which has been entrusted to an independent third party, it appears that Mr Mazaheri acted wholly outside the discretion given to him. He was given a limited discretion by the SLA for the specific purposes set out in that document. First, he handed the blank Bills of Sale to Mr Arabnejad to complete. Even if this was not an improper delegation of the power given to him because he did not delegate the power to decide whether the conditions for the execution of the Bills of Sale had been met, there are other difficulties. He participated in the use of the Bills of Sale to provide security to the Central Bank, or the Export Development Bank for a loan to Mahan. This was not something he was authorised to do under the SLA. I have rejected Mr Mazaheri’s evidence that at the May Dubai meeting Vahid Alaghband authorised the use of the Bills of Sale as collateral for a loan in respect of the Package 2 aircraft: see [188]. I have referred to the fact that three of the four reasons Mr Mazaheri gave for consenting were not reasons he was permitted to take into account.

Neither Mr Mazaheri’s statement nor his evidence shows that he took the decision to give the Bills of Sale to Mr Arabnejad and to authorise their execution by reference to the considerations he was required to take into account under the SLA and disregarding irrelevant considerations. Moreover, he does not appear to have taken any account of the requirements in the second proviso, that the proceeds from the execution of the Bills of Sale will be applied against the obligations of Crypton and Balli under the loan agreement. It appears that the only condition imposed when handing the Bills over to Mr Arabnejad was that the transferee should be a non-Iranian company. For these reasons I do not consider that, on the basis that English law governs this matter, the execution of the Bills of Sale transferred title in the aircraft to FZE.

Mr Moriarty and Mr Shepherd also submitted that the evidence showed that the Bills of Sale relied on by Mahan to transfer the title in the aircraft to FZE were not authentic documents capable of having that effect. They pointed to the fact that the first document shown to them by Mahan’s solicitors in response to their request to see the Bills of Sale was a Word Hotdox file which had been electronically scanned. They also relied on Mr Mahmoudi’s evidence (21 July pp 57-63) that the documents brought to court as the originals signed by Hassan Alaghband were in fact preliminary versions on which Miss Hosseini had practiced in order to get things right. While Mr Crane is correct in saying that Balli did not suggest that the documents in court were forgeries, in view of Mr Mahmoudi’s evidence it is clear that there is confusion as to which document was intended to be the final product transferring title.

Mr Moriarty submitted that the burden of proving that the versions of the Bills of Sale relied on by Mahan as the authentic and original documents of title deposited with Mr Mazaheri and completed by Mahan with the intention of transferring title to FZE lay on Mahan and it had not done so. While there are doubts about the position in particular because of the evidence of Mr Mahmoudi, I do not base my decision on this ground.

Even if the document relied on by Mahan was the piece of paper signed by Hassan Alaghband, it was deliberately executed with a false date because Hassan Alaghband was no longer a director of the SPV companies by the time the Bills of Sale were purportedly executed. Accordingly, as a result of section 9(1)(g) of the Forgery and Counterfeiting Act 1981, the documents are to be treated as false instruments. As such, they cannot have effect in transferring title. Hassan Alaghband no longer had authority to transfer the aircraft when the Bills of Sale were completed and authority was not given to Mr Mazaheri to fill them in with a false date. The Bills were deliberately executed with a false date to conceal the fact that Hassan Alaghband no longer had authority. Section 9(1)(g) of the 1981 Act provides that an instrument is false for the purposes of the Act “if it purports to have been made or altered on a date on which… it was not in fact made or altered”. An instrument is also to be treated as false if it purports to have been altered in any respect on the authority of a person who did not in fact authorise the alteration: section 9(1)(f) of the 1981 Act.

If contrary to my conclusion above, Mr Mazaheri’s position and powers are governed by Iranian law because he is an “Amin trustee”, the purported execution of the Bills of Sale was not, in my judgment, effective to transfer title to the aircraft to FZE. First, as I have noted, Dr Adel’s evidence is that even if Iranian law applies, in the light of the English choice of law clause in the Bills of Sale which would be accepted under Iranian law, the applicable law would be English law. Secondly, Dr Adel’s evidence is that Articles 613-614 of the Iranian Civil Code did not permit Mr Mazaheri to authorise the execution of the Bills of Sale in the manner he did. His evidence was that an Amin trustee is obliged to follow the instructions given to him and that if, to the knowledge of the trustee and the transferee, those instructions are not properly followed, the transfer would not be valid. His report and his oral evidence, moreover, provides no support for the contention that a failure to comply with the conditions imposed by the SLA does not affect the validity of the transfer and sounds in damages only: see Amended Defence and Counterclaim, paragraph 105(g).

As far as the conditions in the SLA are concerned, Dr Adel’s evidence was that the primary duty of a custodian under Iranian law is to preserve the property and the property cannot be transferred save in an exceptional case, for example, necessity in order to preserve the property. It is clear that both Mr Mazaheri and Mahan knew of the conditions in the SLA. For the reasons I have given I do not accept that Mr Mazaheri, Mahan, and (through Mahan) FZE genuinely believed that a transfer of the aircraft to FZE did not offend US sanctions. Finally, they were aware that Mr Mazaheri had left it to Mahan to complete the Bills of Sale rather than executing them himself with a view to applying the proceeds towards paying off the Balli/Crypton loan.

The Counterclaim:

Mahan and FZE counterclaim for sums advanced by Mahan directly or through FZE to Balli and/or Crypton. They have framed this counterclaim in a number of ways. The first is a contractual claim for US$ 67,897,674 based on clause B6 of the Four Party Letter Agreement (see [165]) and clause (b) of the “further agreement” in the SLA (see [182]). Clause B6 provided that Mahan and/or FZE shall provide the funds for the timely repayment of the PK loan and that they shall “have the right to partial pre-payment of the new facility in $50 million increments as a result of which an airplane and additional aircraft mortgage shall be released”. Clause (b) of the “further agreement” in the SLA provides that in the event that Mahan and/or FZE “provide readily available funds to Crypton or Balli in increments aggregating to $50 million… per additional aircraft, and Crypton and/or Balli cannot procure the release of each additional aircraft within 30 days of such funding, Balli and Crypton undertake to return such funding forthwith”. Mahan and FZE made payments of over $67.8 million to Balli and/or Crypton between September 2007 and March 2008 but the fourth aircraft was not released.

Mahan and FZE’s second and alternative contractual claim for repayment is for US$ 53.661 million, the total sum of Mahan/FZE’s funds held by Balli according to an agreement reached on 31 July 2008 and recorded in the MOU (see [217]), or for US$ 50 million which Balli agreed to pay (see [215], [220] and [222]).

Mahan and FZE also claim that since the Repatriation Order and/or the TDO made delivery of any of the Package 2 aircraft impossible the contractual arrangements concerning the Package 2 aircraft were frustrated. Accordingly they are entitled to a statutory claim to recovery of sums paid under the Law Reform (Frustrated Contracts) Act 1943. The combined effect of sections 1(2) and 2 of the 1943 Act is that the payer of money paid or payable before a frustrating event is able to recover subject to a defence where the payee has incurred expenses before discharge in or for the purpose of the performance of the contract and the court considers it just to allow him to retain the whole or any part of such sums.

As an alternative to its claim under the 1943 Act, Mahan and FZE seek recovery of the sums paid on the ground that the Repatriation Order and/or the TDO caused a total failure of consideration giving rise to a common law claim for unjust enrichment. Mahan’s case is that the consideration for the payment of the $67.8 million was Mahan’s use of the fourth aircraft through BAW and this totally failed because Mahan has not had any use of that aircraft.

If the contract was discharged by the TDO on 21 March 2008 the entire $67,897,864 was paid before the discharging event. If it was discharged by the Repatriation Order, the $7.6 million paid on 3 March 2008 was paid after the discharging event.

The first contractual claim for repayment:

By the end of 2007 the only payment made by Mahan/FZE pursuant to clause B6 of the Four Party Agreement (see [165]) was the US$ 19,705,340 transferred on 17 September 2007: (see [195]). The parties were in dispute as to the obligation and the fact that Balli had not been put in funds by Mahan for the funding of the Package 2 aircraft. The dispute was whether Mahan had to provide $100 million before the first aircraft would be released. Despite the dispute, it was not suggested that the contract was at an end. Until at least a meeting on 20 March 2008, when Mahan was told of the threat of the TDO, the parties were treating the contract as alive. For example, see the communications between Hassan Alaghband and Mr Fard about the fourth aircraft during February and early March: see [197].

It is clear from the exchanges between Mahan and Mr Mazaheri and Balli that what Balli was pressing for throughout the autumn of 2007 and in the early months of 2008 was the provision by Mahan or FZE of funds for the Package 2 aircraft: see [194]-[198]. This became pressing as the time for the expiry of the PK facility in June 2008 approached. The endorsement of the MSN number of the fourth aircraft on a number of the cheques (totalling some US$ 19 million) is not conclusive in establishing that Mahan and FZE paid that sum for that purpose but it is an indication of Mahan’s intent. Of more importance is that what was central to the thinking of Balli was that it received funds to enable it to repay PK. The fact that the cash in/cash out accounts may have included these payments as well as items related to the Package 1 aircraft (see for example, D9/153) does not show the purpose for which these payments were made.

Balli’s primary submission is that the monies were not paid in relation to the Package 2 agreements or the fourth aircraft, but for both Package 1 and Package 2. Hassan Alaghband stated (14 July, p 62, 15 July, p 72) that not all the US$ 67.8 million related to Package 2. His evidence was that between US$ 8 and 10 million related to Package 1 items such as engine repairs, seat procurement, and insurance. Taking the higher of these figures, however, that leaves payments of some US$ 57.8 million which it is not disputed related to Package 2. Prima facie, therefore, paragraph B of the “further agreement” in the SLA entitled Mahan/FZE to the return of those payments.

If, contrary to Balli’s primary submission, the money was paid for the new facility for the Package 2 aircraft, it submits that it is not repayable for a number of reasons. The first is that there was a later agreement providing that one plane would be released if US$ 100 million were paid to Balli. If this is a reference to what Vahid Alaghband had proposed at a meeting on or about 20 August (see [175]), it does not take account of the fact that the May agreements were amended and re-signed at the meetings in Düsseldorf on 30 and 31 August 2007 when the SLA was entered into. The references to the US$ 100 million in Vahid Alaghband’s email of 20 February (see [194]) and what he said on 20 March 2008 at a meeting in Dubai (see [198]) must also be seen in the light of this. There were discussions in February and March when Balli was pressing for this, but the agreements made in Düsseldorf on 30 and 31 August 2007 were not varied. The four party agreement does not state that it is only if Balli’s exposure to PK is reduced to $100 million that the fourth plane would be released. Neither does paragraph B of the “further agreement” in the SLA. That refers only to the provision of readily available funds to Crypton or Balli aggregating to $50 million. There is no reference to the reduction of the PK loan. Similarly, there is no reference to the $100 million in clause B6 of the Four Party Agreement.

Secondly, Mr Shepherd submitted that the MOU, which he described as a settlement of accounts, was a compromise of any earlier agreement in the SLA to repay the US$ 67.8 million. Balli’s position on the MOU is not altogether consistent. Mr Shepherd also submitted that the MOU is purely a settlement of accounts and does not contain any obligation to pay. In the light of this submission, which I accept, it is difficult to see the MOU as a compromise of an earlier agreement to which it does not refer. Thirdly, it was submitted that any arrangement in the agreements made in May and August was overtaken by the agreement that a power of attorney was to be given to Mr Mazaheri empowering him to execute a Bill of Sale concerning the fourth aircraft if the fourth aircraft was not released when Blue Sky 6 had received US$ 78.5 million, the balance then outstanding under the August agreements. The evidence before me, however, does not justify a conclusion that any agreement about a power of attorney and Bill of Sale concerning the fourth aircraft varied the agreements made at the end of August 2007. In any event, it appears that towards the end of February 2008, Mr Mazaheri did not have the power of attorney because he was told by Vahid Alaghband that a scanned version of it had the same effect as the original.

It was also submitted on behalf of Balli that clause (b) of the “Further Agreement” in the SLA only triggered an obligation to release or repay funds if the funds provided by the lender to Crypton or Balli are “readily available funds” and that Balli did not have such funds readily available because the schedule to the MOU shows the account in July 2008 of funds held by Balli was under $50 million, and was only brought above this figure by inclusion of the maintenance reserves which were not readily available funds. I do not accept this submission. Clause (b) states that the lender must provide readily available funds to Crypton or Balli. I have found that most of the transfers made between September 2007 and March 2008 were in respect of the fourth aircraft or the Package 2 aircraft in general. At the time of those transfers and at the moment of their receipt by Balli those funds were readily available. If they ceased to be readily available thereafter, for whatever reason, that does not mean that the lender did not provide “readily available funds”.

For these reasons I consider that subject to any defence of set off, Mahan and FZE are entitled to the return of the US$ 57.8 million (in round numbers) transferred between September 2007 and March 2008 in relation to Package 2 and the new facility which was to replace PK’s loan. The question of set-off is, however, a matter that has been deferred for the Phase 2 trial.

My conclusion on the primary contractual claim means that neither the alternative contractual claim nor the statutory and common law restitutionary claims for repayment fall for decision. I shall, however, briefly indicate the difficulties I consider Mahan faces in pursuing them.

The alternative contractual claim for repayment:

The alternative contractual basis is that there was an agreement by Balli to pay, in round terms, either US$ 53 million or US$ 50 million. I have found that Vahid Alaghband agreed to pay US$ 50 million to Mahan/FZE on the basis that such sum as was owed to Mahan would be a repayment and the remainder would be a loan by Balli to Mahan.

The MOU signed on 31 July is a settlement of accounts. It does not contain an agreement or an obligation to repay. It cannot be said implicitly to contain such an obligation since it also set out forecast expenditure by Balli in the immediate future (the next five months) totalling some US$ 26 million. What the MOU does record is that US$ 47.8 million, excluding the maintenance reserve, stood as held by Balli to Mahan’s account. Had it been necessary to decide the case on this point I would have concluded that Vahid Alaghband had agreed to repay that sum and that the remaining US$ 2.2 million was to be a loan to Mahan. I do not include the maintenance reserve because the MOU does not provide that Balli is to pay that to Mahan but is to release it “towards a partial reduction of the PK loan”.

The restitutionary claims for repayment:

The first is frustration. This was not pleaded. It was the subject of an application by Mahan to amend its pleadings which I have rejected. There are, in any event, a number of difficulties with a plea of frustration. The most important of them is that the parties were fully aware of US sanctions. Their evidence was that they tried to structure the transaction so as not to violate the sanctions. I have found, however, that Mahan’s witnesses knew that the oral agreement they relied on whereby the aircraft or the shares in the SPV companies would be held on trust for Mahan violated US sanctions. Putting that aside, Mahan’s witnesses’ evidence was that, because of sanctions, it was difficult to use US aircraft in Iran. All parties accepted that Boeings flying in and out of Tehran were highly visible and might attract the attention of the US authorities. That the authorities might take a step such as imposing a Temporary Denial Order was thus at least foreseeable. A foreseeable event does not necessarily preclude a contract being frustrated if that event occurs. But, if the event was one which any person of ordinary intelligence would regard as likely to occur or to be a real possibility it is likely that the party affected will be held to have assumed the risk of its occurrence: see Edington Commercial Co v Tsavlaris [2007] EWCA Civ 547 at [103] citing Chitty on Contracts 29^th ed., 2004 at 23-057 and 23-058, which in turn cites Treitel, Frustration and Force Majeure (1994) 13-09. The difficulty with a frustration plea in this case is that there is no evidence before the court as to the degree of foresight of an intervention by the US authorities.

There is also no evidence as to the quality of the expenditure by Balli. That would be relevant in determining whether, if the contract was frustrated, it would be “just” to allow Balli to retain some or all of the sums paid to it. Balli’s case is that it only went ahead with the purchase of the Package 2 aircraft and the mortgage from PK because Mr Arabnejad and Mr Mazaheri confirmed to Vahid Alaghband that Mahan would provide the funding to repay PK’s loan by March 2007. After the purchase Balli incurred expenditure in order to prepare the fourth aircraft for delivery. Its case is that it would not have done so but for Mahan’s promises to provide funding for the Package 2 aircraft. It also relies on the many meetings between January and April 2007 about those aircraft including when and where they would go into D-checks, the progress of those checks, how the aircraft were to be utilised in the period leading up to the August 2007 agreements in Düsseldorf, and the terms of those agreements. Mr Shepherd submitted that it would be unjust to require repayment without taking account of Balli’s expenditure. In the absence of evidence on these matters I am, however, unable to reach any conclusions on these matters. Had I allowed the amendment to the pleading, and had it been necessary to decide the case on this point, these matters would have had to have been dealt with in the Phase 2 trial.

The last of the grounds upon which Mahan and FZE seek recovery of sums paid is a total failure of consideration for the payments produced by the TDO. Mr Crane submitted that the consideration for the payment of US$ 67.8 million was Mahan’s use of the fourth aircraft through BAW and Mahan did not receive any part of this benefit for which it had bargained. Accordingly, the payments are recoverable: see Rover International Limited v Cannon Film Sales Limited [1989] 1 WLR 912. The difficulties with this submission are that the money was paid to Balli pursuant to the loan agreement and the SLA, the fact that the Package 2 aircraft could not be used in Iran, and that the contemplated deal was for a lease to BAW and a sublease to a third party, probably Saudia: see [151], 156], and [157]. While Mahan hoped that in the future the Package 2 aircraft could be utilised for its benefit, at the time the payments were made this was clearly not possible. These factors pose a significant, and possibly insuperable, difficulty in maintaining that there had been a total failure of consideration. This is because they tend to indicate that the bargained for benefit in the relevant contracts was not the use by Mahan of the aircraft on its routes and in Iran.

Remedies:

Delivery up or damages?

In view of my conclusions on the trust and Bills of Sale issues, the appropriation and continued use of the aircraft by Mahan was clearly wrongful. It was deliberate conduct inconsistent with the rights of the SPV companies which owned the aircraft and it excluded them from possessing and using them: see Kuwait Airways Corporation v Iraq Airways Co. (Nos 4 and 5) [2002] UKHL 19, [2002] 2 AC 883 at [39], [40] and [42]. The issue is whether the appropriate remedy in this case is to order Mahan and FZE to deliver up the aircraft or whether it is to give them the option of paying damages.

The starting point is the Torts (Interference with Goods) Act 1977. By section 1, “wrongful interference” with goods means conversion and (subject to section 2) any other tort so far as it results in damage to goods or to an interest in goods. Section 3 provides as follows:

“3 Form of judgment when goods are detained

(1)

In proceedings for wrongful interference against a person who is in possession or in control of the goods relief may be given in accordance with this section, so far as appropriate.

(2)

The relief is –

(a)

An order for delivery of the goods, and for payment of any consequential damages, or

(b)

An order for delivery of the goods, but giving the defendant the alternative of paying damages by reference to the value of the goods, together in either alternative with payment of any consequential damages, or

(c)

Damages.

(3)

Subject to rules of court –

(a)

Relief shall be given under only one of paragraphs (a), (b), and (c) of subsection (2),

(b)

Relief under paragraph (a) of subsection (2) is at the discretion of the court, and the claimant may choose between the others.

…

(5)

Where an order is made under subsection (2)(b) the defendant may satisfy the order by returning the goods at any time before execution of judgment, but without prejudice to liability to pay any consequential damages.

(6)

An order for delivery of the goods under subsection (2)(a) or (b) may impose such conditions as may be determined by the court, or pursuant to rules of court, and in particular, where damages by reference to the value of the goods would not be the whole of the value of the goods, may require an allowance to be made by the claimant to reflect the difference.”

By section 5(1) where damages are assessed on the footing that the claimant is being compensated for the whole of his interest in the goods or for the whole of his interests subject to a reduction for contributory negligence, payment of the assessed damages extinguishes the claimant’s title to that interest. In this case an award of damages would extinguish the Balli parties’ title to their interest in the aircraft.

The Balli parties, supported by PK, submit that the appropriate order is one pursuant to section 3(2)(a) of the 1977 Act, for delivery up of the aircraft and payment of any consequential damages. They submit that this is appropriate because Mahan and FZE have no right to retain the aircraft and have wrongfully interfered with the ownership of the SPV companies in circumstances in which they agreed with the Balli parties in the Option Agreement that Mahan and/or FZE would only acquire beneficial title pursuant to that agreement and when sanctions were lifted. Mahan’s case is that the aircraft are ordinary items of commerce and that there are no circumstances in this case which make it appropriate to require delivery up. Moreover, Mahan argues that an order of delivery up under section 3(2)(a) would be unjust because it effectively paid in full the purchase price and the cost of the aircraft’s maintenance and management.

The parties placed a considerable number of authorities and scholarly commentary before me. The leading authorities were considered by the House of Lords in Kuwait Airways Corporation v Iraqi Airways Co (Nos 4 and 5) [2002] UKHL 19, [2002] 2 AC 883. In his speech, Lord Nicholls of Birkenhead considered the purpose of the tort of conversion and the interests it protects. He stated:

“Conversion is the principal means whereby English law protects the ownership of goods. Misappropriation of another’s goods constitutes conversion. Committing this tort gives rise to an obligation to pay damages. Payment of damages may have proprietary consequences. Payment of damages assessed on the footing that the plaintiff is being compensated for the whole of his interest in the goods extinguishes his title…. Further, when the defendant is in possession of the plaintiff’s goods remedies available to the plaintiff include a court order that the goods be delivered up…” ([77])

Lord Nicholls referred to aspects of the rules governing conversion that have been criticised and to the view that:

“Vindication of the plaintiff’s proprietary interests requires that, in general, all those who convert his goods should be accountable for benefits they receive. They must make restitution to the extent they are unjustly enriched. The goods are his, and he is entitled to reclaim them and any benefits others have derived from them. Liability in this regard should be strict subject to defences available to restitutionary claims such as change of position…. Additionally, those who act dishonestly should be liable to make good any losses caused by their wrongful conduct. Whether those who act innocently should also be liable to make good the plaintiff’s losses is a different matter.” ([79])

He, however, described that view as a radical reappraisal of the tort of conversion. He stated that a reappraisal along those lines was not pursued in that case and he said nothing more about it. As far as the present state of the law is concerned, he adopted the view of the High Court of Australia in Butler v Egg and Egg Pulp Marketing Board (1966) 114 CLR 185. He stated:

“The aim of the law, in respect of the wrongful interference with goods, is to provide a just remedy. Despite its proprietary base, this tort does not stand apart and command award of damages measured by some special and artificial standard of its own. The fundamental object of an award of damages in respect of this tort, as with all wrongs, is to award just compensation for loss suffered. Normally (“prima facie”) the measure of damages is the market value of the goods at the time the defendant expropriated them. This is the general rule, because generally this measure represents the amount of the basic loss suffered by the plaintiff owner. He has been dispossessed of his goods by the defendant. Depending on circumstances some other measure, yielding a higher or lower amount, may be appropriate. The plaintiff may have suffered additional damage consequential on the loss of his goods. Or the goods may have been returned.” ([67])

The primary principle is thus that delivery up under section 3(2)(a) of the 1977 Act will not be ordered if damages are adequate. A recent example of the operation of this principle is provided by Tanks and Vessels Industries Limited v Devon Cider Company Limited [2009] EWHC 1360 (Ch). In that case the claimant sought delivery from the defendant of a robotic palletiser and six vertical stainless steel fermenting vessels used in the production of cider. The defendant had gone into administration as a result of its financial difficulties, with (see [8]) an estimated deficit of some £8.8 million. Where, as a result of insolvency, the defendant is unable to pay, delivery up may be ordered even of non-unique goods: see Burrows, Remedies for Torts and Breach of Contract, 3^rd ed., p580. In Tanks and Vessels Industries Limited v Devon Cider Company, however,the administrators sold the business and assets for £3.3 million and were to be paid a further £349,000 by instalments. Despite the defendant’s financial difficulties, the sale of the business meant it was able to pay damages. The Deputy Judge stated (see [56]) that the palletiser and the vessels were ordinary articles of commerce and the court should not exercise its discretion to order delivery up under section 3(2)(a) of the 1977 Act. It is clear that she did so because the goods were not alleged to be of any special value to the claimant who would be fully compensated by damages.

In the light of these principles, the first question is whether the Package 1 aircraft are ordinary articles of commerce. They clearly do not fall into the category of uniqueness recognised in the old cases dealing with the Pusey horn (Pusey v Pusey (1684) 1 Vern 273) or a painting by Titian (Lowther v Lowther (1806) 13 Ves 95).

The Balli parties and PK relied on the specific enforceability of contracts concerning aircraft and ships. Mr Shepherd and Mr Moriarty pointed to the statement of Sir Nicholas Browne-Wilkinson VC in Bristol Airport plc v Powdrill [1991] Ch 744 at 759 that he had “no doubt that a court will order specific performance of a contract to lease an aircraft, since each aircraft has unique features peculiar to itself”. Mr Shepherd submitted that, because an individual aircraft has a particular operation and maintenance history, engine type, seating configuration etc., a contract concerning aircraft would be specifically enforceable. Mr Moriarty relied on the analogy of sales of houses, which, even if the house is one of many built to exactly the same design, are specifically enforceable. But, with regard to Mr Shepherd’s submission, the same can be said about any second-hand car, but it is not suggested that a contract for the sale of a second hand car will be specifically enforceable save in very special circumstances. Mr Moriarty’s analogy is not complete because, however many identical houses there are, each will be on a different piece of land and to that extent is unique.

As for Bristol Airport v Powdrill, it is important to remember the context in which the Vice-Chancellor made the statement quoted. He was considering whether an aircraft which had been leased to an insolvent charter airline was the “property of the airline” within the meaning of section 436 of the Insolvency Act 1986. The statement was made in the context of deciding whether a lessee had rights, i.e. an equitable interest, over the leased property as against the legal owner. The Vice-Chancellor concluded that it did. The focus of the decision was on whether the interest was within the statutory definition of “property” and he did not refer to any of the authorities on the specific enforceability of contracts for aircraft or ships.

While in some circumstances a contract concerning a ship or an aircraft will be specifically enforceable, it is clear that this is not the invariable position. The court must still ask whether damages would be an adequate remedy: see e.g. CN Marine Inc v Stena Line A/B and Regie Voor Maritiem Transport (The “Stena Nautica”) (No 2) [1982] 2 Lloyds Rep 336 at 347-8 per Lord Denning MR and May LJ. That case concerned owners who chartered a ship to the plaintiff for the 1982 summer season and then chartered it to a Belgian company for a period including the 1982 summer season. The court held that, whilst specific performance could be ordered in respect of a contract for the sale or charter of a vessel, it in no way followed that such an order should be made in respect of every contract. The question was whether damages would be an adequate remedy. The court held that in that case, in the light of contingency plans the plaintiff Canadians had made to use other vessels, damages would be an adequate remedy.

The position in respect of ordinary articles of commerce, even complex machinery, ships and aircraft, is that they may be ordered to be delivered up even if they are not physically unique where they are in a sense “commercially unique” (see Burrows, op. cit.p.579) in the sense that buying or otherwise obtaining substitutes would be difficult or would be so delayed that the claimant’s business would be seriously interrupted. The situations in which such circumstances will justify ordering delivery up are shown in three decisions. The best known of them is Howard Perry and Co v British Railways Board [1981] WLR 1375. In that case an order of interim delivery up was made of steel which, as a result of a national steel strike, could not be obtained by the claimants from an alternative source in the short term. There was a risk that the steel in question could not be kept for any long period without the risk of it becoming impossible to work through becoming too hard and unmalleable: see [1981] 1 WLR at 1377 E and 1382 C-E. The court also referred to the inadequacy of damages if the failure of supply forced the claimant to lay off staff and disappoint its customers. In North v Great Northern Railway Co (1860) 2 Giff. 64 delivery up was ordered of 54 coal wagons which could not be readily and promptly replaced, and, in Pendragon plc and others v Walon Limited [2005] EWHC 1082 (QB), delivery up was ordered of 114 Rover cars, because (see [24]) the sudden appointment of receivers by MG Rover meant there was “an immediate and uncertain future in relation to the dealing of Rover cars”.

In the present case, in the period when the TDO was in force against Balli and US sanctions were thus directed against it, the Balli parties could not acquire, or at any rate could not easily acquire, Boeing 747-400 aircraft. That would have been a circumstance prima facie putting them into a similar position to that of the parties who obtained delivery up in North v Great Northern Railway and the Howard Perry and Pendragon cases. But the TDO was lifted against the Balli parties in September 2009 and they are no longer in that position. There is, moreover, no evidence that their need for the aircraft is pressing or that the time it would take to secure substitute aircraft would cause prejudice of the sort that the court considered sufficed to justify an order for delivery up in those cases.

Mr Shepherd also submitted that delivery up should be ordered because the SPV companies were incorporated to own and lease these particular aircraft and have no purpose apart from operating and managing them. He submitted that they needed the aircraft to generate income to repay the loans to Mahan and FZE and he drew on the analogy of the “tools of the trade” cases such as Steel Linings Limited, Harvey v Bibby and Co [1993] WL 964 281 (CA 26 March 1993). The ability of Balli to replace the aircraft from another source, however, and the absence of evidence that aircraft are required for a particular deal or that getting them from an alternative source would cause the sort of injury and prejudice that the court considered was present in North v Great Northern Railway and the Howard Perry and Pendragon cases is relevant here too. Although the Balli parties remain under an obligation to repay the loans, the agreements provide that if there is no income from the aircraft there is no obligation to repay although interest continues to accrue. Where, however, such interest accrues because of the breach by Mahan and/or FZE, in principle that should be recovered as consequential damages.

The Balli parties and PK submit that Lord Nicholls also recognised in the Kuwait Airways case that one aim of remedies for wrongful interference of property is to prevent a defendant from being unjustly enriched. While Lord Nicholls did address the position of a wrongdoer who benefited from his wrongful interference, he was only considering damages awarded for benefits to a wrongdoer from his temporary use of the owner’s goods; “user damages”. Under that heading, after referring to his statement in the passage I have set out at [309] that the fundamental object of an award of damages for conversion is the award of compensation for loss suffered, he stated:

“Sometimes, when the goods or their equivalent are returned, the owner suffers no financial loss. But the wrongdoer may well have benefited from his temporary use of the owner's goods. It would not be right that he should be able to keep this benefit. The court may order him to pay damages assessed by reference to the value of the benefit he derived from his wrongdoing. I considered this principle in Attorney General v Blake [2001] 1 AC 268, 278-280. In an appropriate case the court may award damages on this 'user principle' in addition to compensation for loss suffered. For instance, if the goods are returned damaged, the court may award damages assessed by reference to the benefit obtained by the wrongdoer as well as the cost of repair.” ([87])

An order under section 3(2)(b), including consequential damages could include “user damages” for Mahan’s use from the date of the wrongful interference, either 16 October 2008, the date of the application to deregister the aircraft from the Armenian register, or 12 November 2008, the date on which the extension to BAW’s lease expired: see Hillsdon Securities Limited v Ryjack [1983] 1 WLR 959. The unjust enrichment or benefit to Mahan upon which the Balli parties and PK rely is to justify an order of delivery up, however, not the sort of benefit for which “user damages” have been awarded. The benefit is said to be that the aircraft are worth more to Mahan than can be measured in financial terms because of Mahan’s inability to acquire Boeing 747s as a result of the US sanctions. The unjust enrichment is said to be Mahan’s obtaining title to aircraft which it could not have obtained in the market and which it had agreed it was not to obtain from the Balli parties save by the exercise of the option once sanctions were lifted. It is difficult to see how this sort of benefit falls within the category of benefit discussed by Lord Nicholls in the Kuwait Airways case.

In paragraph [88] of the section of his speech on “user damages”, and immediately following the paragraph I have quoted, Lord Nicholls considered Solloway v McLaughlin [1938] AC 247 and BBMB Finance (Hong Kong) Ltd v Eda Holdings Limited [1991] WLR 409. He said that the preferable basis for the award in those cases is “user damages”. I respectfully agree that those cases can legitimately be seen as cases of user damages. In both cases the defendant wrongfully sold shares belonging to the plaintiff and later bought shares in the same company at a lower price to replace what he had sold. In the second case the starting point was the value of the shares at the date of the conversion, the date the claimant lost the value of the property. Since the defendant had provided substitute shares to the plaintiff the award was of the difference between the value of the shares at the date of conversion and of the replacement shares at the date of replacement. This, in a sense, is to make the defendant who has “used” the plaintiff’s property, pay for that use. Solloway v McLaughlin is also capable of analysis in this way, although the reasoning in the case turned on the principle that a principal who has been defrauded by his agent is entitled to recover back the money paid as if it had been an honest transaction while giving credit for what he recovered.

It is, moreover, difficult to analyse the gain to Mahan identified by the Balli parties and PK as giving rise to anything more than such “user damages”. In effect delivery up is being sought as a means of achieving disgorgement. But neither the Balli parties nor PK have sought disgorgement damages. There is, moreover, no evidence as to the monetary worth of the Boeing aircraft to Mahan and the extent of any enhanced value to Mahan. It is suggested in the submissions made on Mahan’s behalf that, while the aircraft may be valuable to Mahan because of the high transaction costs in acquiring Boeing aircraft, by virtue of being in Mahan’s possession they are in a sense “tainted” while sanctions remain and would thus attract a lower price. There is, however, also no evidence about this.

Mr Moriarty and Mr Shepherd also submitted that account should be taken of Mahan’s consent to the mortgage of two of the aircraft to PK in deciding whether to order delivery up. They suggested this is a relevant factor whether or not PK’s mortgages created a valid property interest which PK could assert directly against Mahan. It is said that the Balli parties are under a contractual obligation to allow PK possession of the aircraft and the facilities are not completely without recourse: see clauses 6.1 and 6.2 of the facility agreement, [144] above. These set out Balli’s “limited recourse obligations” and “full recourse liability”. This is a factor which may well be relevant in the exercise of the court’s discretion in deciding whether to make an order for delivery up under section 3(2)(a). The other factors I have discussed, in particular the absence of commercial necessity of the sort found in North v Great Northern Railway and the Howard Perry and Pendragon cases do not, however, suggest that delivery up is the appropriate order. Accordingly, this factor is of relatively little weight in the circumstances of this case.

What of the argument put on behalf of the Balli parties and PK that there should be delivery up because the parties agreed that Mahan was only to acquire the aircraft by the exercise of the option and that was only to be possible once sanctions were lifted? In my judgment this is not consistent with the primary principle of an award of damages for conversion identified by Lord Nicholls. In particular, the acceptance of this argument would mean that delivery up should be ordered at least against any knowing wrongdoer. It is, however, clear that such an outcome could only result from a radical reappraisal of the law of wrongful interference with property which the House of Lords did not undertake in the Kuwait Airways case. It is simply not the position in English law at present.

Finally, it was submitted by Mr Shepherd that delivery up should be ordered because Mahan does not have the ability to pay substantial damages. He referred to the difficulties before and during the trial of obtaining the $2.5 million which the court ordered Mahan to pay into court in respect of the Pratt and Whitney engine. An order under section 3(2)(b) is, however, an order for delivery up giving the defendant the alternative of paying damages. Mr Shepherd’s point is met by ordering delivery up of the aircraft by a specific date, but giving Mahan the alternative of paying damages by that date with the appropriate interest on those damages.

Assessment of damages:

The parties have made submissions as to the measure of damages. On behalf of Mahan it is submitted that damages should be nominal because FZE provided the purchase money for the three aircraft and damages should be assessed with regard to the economic realities. Mahan and FZE rely on a line of cases including Chinery v Viall (1860) 5 H & N 288 and Wickham Holdings Limited v Brook House Motors Limited [1967] 1 WLR 295. They also submit that they are entitled to set off the monetary claim arising out of the funding of the Package 2 aircraft against their liability to pay damages for wrongful interference with the Package 1 aircraft.

As is shown from paragraphs 99-106 of PK’s closing submissions, Mahan’s position that damages should be nominal and that they are entitled to set off their own monetary claim against any liability to pay damages is strongly contested. There is no valuation evidence before the court. It was agreed that valuation evidence would be left to the Phase 2 trial. It follows that the assessment of damages under section 3(2)(b) of the 1977 Act should take place then.

It was submitted by Mr Crane that the court should reach an “in principle” decision as to whether damages are nominal or substantive. Although I see considerable difficulties in the argument that damages are nominal in the circumstances before me, I do not consider it right to reach even an “in principle” decision before the valuation evidence and any other evidence as to quantum is before the court. Moreover, the implication of the fact that the Balli parties have mortgaged aircraft two and three to PK on their right to damages has not been the subject of submissions. This is not surprising since the understanding was that quantum issues would be left to Phase 2. Whether the Balli parties have a set off in respect of the right in principle I have found on the part of Mahan to recover the $57.8 million also has to be dealt with in Phase 2. It will be convenient for all issues of quantum to be considered at that stage if the parties are unable to resolve their differences.

I have concluded: