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

At the beginning of last week (on 25 January) I heard and decided an application by the claimants (“the Balli parties”) supported by PK that Mahan Air and/or Blue Sky Aviation Co FZE (“the Mahan parties”) be held in contempt of court and that the court strike out their statements of case and debar them from taking part in the trial of Phase 2 of this matter which is to start today. I now give the reasons for my decision. When giving my ruling, I also mentioned a number of matters. I refer to these at paragraph [38] below. The application was principally based on the failure of the Mahan parties to comply with an order of the court to deliver Aircraft 1 and 3 to Schiphol Airport in Amsterdam. The Balli parties also relied on the failure of the Mahan parties to comply with an order of the court to deliver up Bills of Sale concerning the aircraft.

When I handed down my judgment in Phase 1 of this matter on 21 December I ordered the Mahan parties inter alia to ground Aircraft 1 and 3 at Schiphol Airport in Amsterdam by 31 December (“the grounding order”) and to deliver up the Bills of Sale forthwith (paragraph 8 of “the judgment order”). On 30 December the Mahan parties applied to the vacation judge, Hickinbottom J, to discharge or alternatively vary the grounding order. He did not do so but extended the time for compliance until 18 January 2010 and ordered a further hearing in the week beginning 11 January. The matter came before me on 12 January 2010. I rejected the application to discharge the order and ordered the Mahan parties to deliver the aircraft by 18 January.

The grounding order of 21 December 2009 and the order as varied on 12 January 2010 were personally served on Mr Ali Razar Moghimi, the person registered at Companies House as authorised to represent Mahan or accept service of process on its behalf on 18 January. FZE, which is based in the UAE, has not been personally served because of the time it takes to effect service in the UAE. However, FZE is aware of the orders because it was party to the application to the vacation judge, Hickinbottom J, for an extension of the time for compliance with the grounding order from 31 December 2009 until 18 January 2010. At the hearing of the application Mr Hodge Malek QC who appeared on behalf of the Mahan parties took no point on service.

The evidence before me consisted of: an affidavit dated 21 January 2010 by Patrick Farrell, a partner in Norton Rose LLP, the solicitors for the Balli parties, a witness statement by Captain Maghfoori, a deputy to Mahan’s Managing Director and in charge of flight operations, dated 24 January, a statement by Mr Insley, the Mahan parties’ solicitor, dated 25 January, and a statement by Ali Moattar who is a consultant to Mahan, also dated 25 January.

Mr Malek submitted (skeleton argument paragraph 15) that while failure to comply with a court order can amount to contempt, on the present facts the defendants have done everything in their power to comply with the orders and that compliance with both the grounding order and the order to deliver the Bills of Sale is, for the time being, impossible. He submitted that the court should not find the Mahan parties in contempt but that, if it did, the sanction of striking out is not appropriate in this case.

What needs to be shown to establish that a party is in contempt in not complying with an order of the court is that the defendant’s conduct (whether by act or omission) is intentional and that it knew the facts that rendered that conduct a breach of the relevant order: see Arlidge, Eady and Smith on Contempt 3^rd edition 12-80 to 12-82 citing Warrington J in Stancombe v Trowbridge UDC [1910] 2 Ch 190 at 194, and the decisions of the House of Lords in Heaton’s Transport (St Helens) Ltd v Transport and General Workers Union [1973] AC 15 at 109 and Director General of Fair Trading v Pioneer Concrete (UK) Ltd [1995] 1 AC 456 at 479-81. The position is similar in the case of a company: deliberate conduct by a director or an employee which was not accidental and in the knowledge of the facts rendering the conduct a breach of the relevant order will suffice if it, objectively judged, constitutes a breach of the order: see Arlidge, Eady and Smith on Contempt 12-103.

I first set out the factual position. The order of Hickinbottom J postponed the time of delivery of the two aircraft to 18 January. Although there was to be a further hearing of the application to set aside the grounding order, that order was still in place albeit with a postponed compliance date. No steps were taken before to prepare the aircraft for redelivery or make arrangements for the ferry flights. No steps were taken after my decision on 12 January until 15 January, over two clear days after the order was made. At that stage, Captain Maghfoori was only asked to obtain over flight clearances and landing rights for the aircraft to fly to Schiphol airport. He was told by Mr Arabnejad that the flight had to take place on (not by) Monday 18 January. He was not told the purpose of the flight.

Mr Moattar’s statement says that, following the decision on 12 January Mahan made enquiries with its insurers to see if insurance in particular against non-delivery of the aircraft by Mahan would be available. He states that “at the same time” preparations were being made so that if such insurance could not be obtained or agreed with Balli and PK, the aircraft would be flown to Schiphol.

Captain Maghfoori’s evidence is that he was asked to take the first step on 15 January. The requests for over flight permission were sent out at 14.24 UTC on 16 January and responses were received between 18.46 and 20.01 from Hungary, Romania, Bulgaria and Turkey. Responses from other countries were received via Euro Control when the flight plan was submitted on the 18 January. It was also only on 15 January that arrangements were made for substitute aircraft to service the routes the two aircraft were to operate on after 18 January.

Mr Moattar’s evidence is that Mr Malek and Mr Insley were invited to come to Tehran to advise the board. Mr Malek informed the court they travelled on the evening of Friday 15 January. Mr Moattar states that Mahan’s board of directors was due to meet on Saturday 16 January to decide how they could best comply with the grounding order. He states (paragraph 8) that the board received advice from their English legal team and during the course of the day discussed the options open to Mahan. On the same day, at 18.05, the Dutch Civil Aviation Authority asked Mahan to specify the intention of the flight and their agent.

The discussions of Mahan’s board continued on Sunday 17 January. But even then no decision was made to fly the aircraft to Amsterdam. The board decided that Piper Smith Watton should inform Norton Rose and Clifford Chance that the insurance that Balli and PK were seeking was not available to Mahan because it would have meant Mahan insuring against its own default and asking them whether they could obtain the insurance in the market, Mahan paying for it or offering security as an alternative. That day, at 08.20 according to the document before me, the Dutch authorities requested further information because they believed the flights would be carrying passengers or cargo. Mr Arabnejad told Captain Maghfoori that the answer to the request for the intention of the flight should be “court order”. Captain Maghfoori gave the Dutch authorities this terse reply.

Mahan’s terse reply did not satisfy the Dutch authorities. On 18 January (the last day for compliance with the order) they requested further explanation of the purpose of the flight. In a communication which carries the date January 18 2010 2:54pm (possibly local time in Tehran) Captain Maghfoori referred the Dutch authorities to Mr Insley for more information. The Dutch authorities gave permission for the flights in a message received by Captain Maghfoori at 12:41 UTC on 18 January. There is an indication in an email from a Mr Neubebauer to Mr Insley dated 19 January 07:47 that the Dutch authorities expected the aircraft to arrive on 18 January.

On 18 January Piper Smith Watton sent me an email timed at 16.31 attaching a letter which stated that the Mahan parties were waiting for formal responses from Balli and PK to proposals put forward earlier that day, that there were difficulties in obtaining the confirmation from the Dutch CAA that the aircraft could land and asking for an extension of time in which Mahan had to comply with the grounding order until midnight on 19 January. I did not grant the extension sought.

On 19 January Captain Maghfoori informed the Dutch authorities that “we have technical delay to these flights” and asked the authorities to revise the landing permissions. Revised permissions were given. At 11.35 UTC on 19 January Mahan sent a request for landing slots. At 12.40 the Dutch authorities stated that the slots requested were unavailable due to night restrictions at Schiphol airport. New flight plans were authorised by the Dutch authorities on 20 January. Captain Maghfoori’s evidence is that the aircraft took off at 15.08 and 15.20 UTC on 20 January and were due to arrive at Schiphol at 20.23 and 20.35 the same day.

The remainder of Captain Maghfoori’s statement deals with the intervention of the Iranian Civil Aviation Authority. This states:

“11.

On Wednesday evening I had a call from the Deputy of Civil Aviation Organisation of Iran by which he ordered me to return the aircraft. I informed him that the aircraft had already left Iran’s FIR and we must arrange the issue with Iran ACC (Flight Control Centre). So we telephoned Iran ACC and requested them to inform the captains about the return of the aircraft. As the aircraft were in Turkey’s FIR they requested Turkey’s ACC to return the aircraft.

12.

The aircraft returned back to OIIE(IKIA) airport at 18.46 and 18.52 UTC and the pilots were ordered not to leave the planes so that the CAA inspectors can inspect the aircraft. …

13.

The two aircraft are now parked at the same airport and are awaiting clearance to make the ferry flights again to Schiphol….”

Reports from the captains of the two aircraft about the events are exhibited as Schedule 6 to Captain Maghfoori’s statement. These state that while on route to Amsterdam in Turkish airspace the Ankara Control Centre advised them that the Tehran ACC supervisor required them to turn back to Tehran and they were given instructions to do so. The second report states that no reason other than that the Tehran ACC wanted them to return was given for the requirement that they return to Tehran.

Mr Moattar’s evidence on this can be summarised as follows: (1) at about 9.30 local time on 20 January Mr Arabnejad telephoned him and informed him of the recall of the aircraft; (2) he had no expectation of such an event but called Mr Insley immediately and informed him of the situation; (3) this was a complete surprise to him and to Mr Arabnejad, as they had no idea that there was any problem concerning the aircraft flight; (4) as the call was received very late in the evening it was not possible to get any information from the CAO officers that evening.

Government offices in Iran were closed on Thursday and Friday. On the Thursday, 21 January, Mr Arabnejad wrote to the Vice Minister of Road and Transportation asking him to “advise us about the reasons for issuing the order of returning those aircraft”. He explained there would be adverse consequences for Mahan because of non-performance of this court’s order. He also requested that if the impediments which have occurred were removed permission be granted to enable the aircraft to fly to Amsterdam in order to comply with the order. The response from the Vice Minister Captain Nakhjavani states “it is now declared that the restrictions has [sic] been performed by the order of competent legal authorities”. The letter also states that any movement of the aircraft and any conveyance of the deeds and documents of the aircraft are prohibited until “the determination of the task and forthcoming order”.

Mr Moattar states that it is unacceptable to Mahan for it to be faced with such an order from the Iranian CAO which does not spell out the grounds. He states that the CAO has not provided a copy of the order from the “competent legal authority” and he does not know which authority has given it. He states that it seems likely that the CAO is acting pursuant to a court order and that he has instructed Mahan’s lawyers to advise of the legality of such an order and what steps Mahan can take to have it removed. He states that as soon as he has answers from the lawyers as to whether it is possible to challenge such an order he will inform the court and that Mahan will do whatever it can to challenge the order.

There is no suggestion in the evidence before me as to what the basis for the order might be. This is despite the fact that Mahan has a legal department which is likely to have experience of the possible legal bases for such an order by the Iranian CAO. Mr Malek in his submissions stated that Mr Arabnejad had been unable to get further information from the CAO by 25 January because its staff were distracted by the fire in a Tupolev aircraft that occurred at the beginning of last week.

Mahan has also not delivered the aircraft documents. They have argued that the documents are not within the grounding order, an argument I have previously indicated I reject. They suggest that the Iranian Civil Aviation Authorities would not allow documents relating to an Iranian registered aircraft to be removed from Iran. (See Piper Smith Watton’s letter dated 21 January 2010 to the court and Mahan/FZE’s skeleton on “Matters not related to contempt” dated 25 January 2010.) As Mr Insley has said, the aircraft are not being redelivered to the Balli parties but are being grounded pending resolution of Phase 2. Nevertheless, technical information may be needed by those responsible for maintaining the aircraft while they are grounded and, if the Civil Aviation Authorities do not permit the documentation to be transferred to the custodian of the aircraft, it is for Mahan to make proposals in relation to them.

I turn to Mahan’s conduct in relation to the Bills of Sale. There has been no compliance with the order of the court. During the Phase 1 trial the court was told that the originals were in court and that they had not been pledged (see paragraphs 187, 230 and 236 of my judgment). There was no indication in Mahan’s written closing submissions that the position of the Bills of Sale had changed. Indeed Mahan invited the court to find (see paragraph 72 of their proposed findings of fact) that “Mr Mazaheri did not in fact formally pledge the Bills of Sale to the Central Bank of Iran”. There was no indication by those representing Mahan on 21 December when the court was considering making an order that the Bills of Sale be delivered up that there was any impediment to Mahan complying with that aspect of the order. Yet in a letter to the court dated 11 January Mr Arabnejad stated that the Central Bank declined to release the Bills of Sale because the Export Development Bank of Iran to whom Mahan owes the sum US$ 150 million refuses permission. Mr Moattar’s evidence is to the same effect.

Mr Malek submits that I should not find the Mahan parties in contempt because they did not intend to act in non-compliance of the orders of the court but were thwarted in complying by the actions of third parties. He relied on the restrictions on night landings in Holland communicated to the defendants by the Dutch authorities on 19 January and the action of the Iranian Civil Aviation Organisation recalling the aircraft to Iran on the evening of 20 January. In relation to the Bills of Sale, he relied on the refusal of the Export Development Bank, most recently on 20 January to refuse to return the Bills of Sale until Mahan repays the balance of a loan which currently has some US$ 150 million outstanding.

I reject Mr Malek’s submissions. I have concluded that the Mahan parties are in contempt. My reasons are as follows. The order of Hickinbottom J postponed the time of delivery of the two aircraft to 18 January. Although there was to be a further hearing of the application to set aside the grounding order, that order was still in place albeit with a postponed compliance date. In the 11 days between Hickinbottom J’s order and the hearing before me on 12 January no steps whatsoever had been taken to prepare the aircraft for redelivery by 18 January, for example, by making arrangements with the Dutch Civil Aviation authorities. The package of protection offered to Balli and PK which was put before Hickinbottom J and was the reason he postponed the time of delivery consisted of endorsements to the aircrafts’ insurance policies which did not adequately protect Balli and PK’s property interests in the aircraft. My reasons for so concluding are contained in my ruling on 12 January when I refused to set aside the order.

It is clear from the summary of the facts I have set out, which is largely taken from the evidence submitted by the Mahan parties, that no steps were taken for two days after my order on 12 January. On 15 January, although Captain Maghfoori was asked to prepare a flight plan, Mahan’s board was still considering options open to it which did not involve flying the aircraft to Schiphol. They were doing this even though the order required the aircraft to be in Schiphol very shortly thereafter. At this stage they had not even obtained permission from the Dutch authorities for the flights.

As late as 18 January Mahan’s management were still trying to get Balli and PK to agree to an insurance package rather than concentrating on getting the aircraft to Schiphol by the deadline. As by then they knew the cover identified at the hearing on 12 January was not available it is not surprising that there was no agreement. Mahan’s initial response to the question from the Dutch authorities as to the purpose of the flight was minimal and does not display a desire to co-operate and get matters moving. No proper explanation has been given of the nature of the technical delay that stopped the aircraft leaving in accordance with the original flight plans approved. There is a reference in Captain Maghfoori’s statement (paragraph 10) to a delay “due to some customs and immigration problems” at Tehran airport. It is not clear whether these are what Captain Maghfoori referred to as a “technical delay” in his communication to the Dutch authorities.

I accept Mr Passmore’s submission that Mahan’s conduct before 20 January put them in breach of the order. They left any organisation of arrangements to ferry the aircraft to Schiphol too late. They chose to concentrate their efforts elsewhere. There is no suggestion in the evidence that any outside influences prevented their obeying the order at that stage. The nearest the evidence comes to doing so is that they had to revise the original flight plan, itself only made very late in the day, because of an unparticularised technical delay and because the revised flight plan involved an impermissible night landing in Amsterdam. In any case, those problems were problems that arose from the decision not to make the arrangements until such a short time before the deadline.

The conduct of the Mahan parties and a number of their witnesses in relation to the Bills of Sale has been most unsatisfactory. At the time of the Phase 1 trial they were not straightforward with the court and information now being put before the court is completely inconsistent with what was then said. A party which has not been straightforward and frank with the court at an earlier stage cannot be surprised if the court views with scepticism submissions at a later stage as to its difficulties in complying with the court’s orders.

I turn to the sanction for these contempts. It is common ground that the court has a discretion whether to hear a contemnor and that this discretion should be exercised by reference to the particular facts before the court: X v Morgan Grampian (Publishers) [1991] 1 AC 1 at 21. In that case Lord Bridge cited with approval the observations of Denning LJ in Hadkinson v Hadkinson [1952] P 285 at 298 that:

“It is a strong thing for a court to refuse to hear a party to a cause and it is only to be justified by grave considerations of public policy. It is a step which the court will only take when the contempt itself impedes the course of justice and there is no other effective means of securing his compliance.”

His Lordship also stated that:

“The fact that a party to a cause has disobeyed an order of the court is not of itself a bar to his being heard, but if his disobedience is such that, so long as it continues, it impedes the course of justice in the cause, by making it more difficult for the court to ascertain the truth or to enforce the orders which it may make, then the court may in its discretion refuse to hear him until the impediment is removed or good reason is shown why it should not be removed.”

More recently, in ASM Shipping Ltd v TTMI Ltd [2007] 2 Lloyds Rep 155 at [49] Christopher Clarke J, after reviewing the authorities, concluded that “the court has a wide power to do what is just”.

Mr Malek relied on the observations of Laddie J in Re Swaptronics [1998] All ER (D) 407 at [21] that:

“it is only actions of the party which impede the course of justice in the cause by making it more difficult for the court to ascertain the truth which give the court the discretion to refuse to hear him until the impediment is removed or good reason is shown why it should not be removed.”

He also relied on Arrow Nominees Inc v Blackledge and others [2000] BCLC 167 where Chadwick LJ stated:

“A party is not to be deprived of his right to a proper trial as a penalty for disobedience of [the rules as to discovery], even if such disobedience amounts to contempt for or defiance of the court, if that object is ultimately secured, by (for example) the late production of a document which has been withheld. But where a litigant’s conduct puts the fairness of the trial in jeopardy, where it is such that any judgment in favour of the litigant would have to be regarded as unsafe, or where it amounts to such an abuse of the process of the court as to render further proceedings unsatisfactory and to prevent the court from doing justice, the court is entitled, indeed … bound, to refuse to allow that litigant to take further part in the proceeds and (where appropriate) to determine the proceeds against him.” ([54])

Mr Malek submitted that these cases show that the guiding principle is whether the litigant’s conduct has put the fairness of the trial in jeopardy. He submitted that the present case differs from the case of a failure to comply with the rules of discovery, where the failure may well have a direct impact on whether the claimants can have a fair trial. He argued that the defendant’s failure to comply with the grounding order and the order to deliver up the Bills of Sale does not impact on whether the claimants can have a fair trial in relation to Phase 2. Moreover, the Mahan parties have prepared for Phase 2 and have incurred significant expense in doing so. The court, he submitted, will only be able to reach a fair and accurate assessment of the level of damages if all parties are allowed to participate in Phase 2. Mr Malek also relied on the submissions he made that there was no contempt because the Mahan parties’ failure to comply was caused by circumstances beyond the defendant’s control to which I have referred earlier in this judgment.

Mr Shepherd QC and Mr Passmore submitted that the breach of the grounding order will make it more difficult for the court to enforce the orders which it may make. Accordingly, it falls within the second limb of the analysis of Denning LJ in Hadkinson’s case and amounts to an impediment to the course of justice. They also submitted that there is no other effective means of securing Mahan’s compliance because the officers of Mahan are not within the jurisdiction and cannot be threatened with imprisonment or a fine, Mahan has no assets within the jurisdiction and although it appears that Mahan aircraft fly in and out of Birmingham it is not known who own the aircraft or indeed who own other aircraft operated by Mahan in other parts of the world.

Mr Shepherd submitted that Mahan’s explanations for their failure to comply are thin and unparticularised and that they were taking the court and the other parties for fools. Mr Passmore’s language was not as strong. He stated (skeleton argument para 30) that “the only realistic explanation of recent events is that Mahan’s breach of the grounding order is calculated and systematic. Mr Shepherd submitted that since the Mahan parties have said that they have the money to pay the Balli parties (see for example paragraph 42 of Mr Insley’s seventh witness statement) and have now had over a month since judgment was handed down to come up with an acceptable security package they should be debarred. He argued that it was wrong to look at this matter solely from the point of view of the Mahan parties and their Article 6 rights. The court should have regard to the Article 6 rights of the Balli parties and the fact that they may get a worthless judgment because of the breach of the grounding order.

As far as Article 6 is concerned, in Motorola Credit Corp v Uzan (No. 2) [2004] 1 WLR 113 the Court of Appeal stated (at [58]) that “it is clear that the right of access to the court which is implied in Article 6 is not an absolute right but one that is open to restriction provided that the restriction has a legitimate aim in the public interest and the means employed to realise that aim are proportionate”. The court also stated that the width of the discretion recognised in X v Morgan Grampian (Publishers) Ltd. allows the issue of proportionality to be properly considered and applied by the court in coming to its decision whether or not to hear a contemnor.

The purpose of the grounding order was to safeguard the Balli parties’ interests in the capital value of the aircraft pending the outcome of Phase 2 and the determination of the amount of the Balli parties’ loss. The reasons for the order (to be found in my rulings on 21 December and 12 January) reflect the unusual circumstances of the case. An order under section 3(2)(b) of the Torts (Interference with Goods) Act 1977 was made in the Phase 1 trial. This orders delivery up of the aircraft, but gives the Mahan parties the alternative of paying damages. The quantum issues which will determine whether Mahan chooses to take the alternative to delivery up are to be determined in Phase 2 and there was a period of approximately five weeks from the date judgment was given in Phase 1 and the start of the Phase 2 trial. The purpose of the grounding order was to safeguard the Balli parties’ interests during this period. One of the factors before the court when considering whether to make or to maintain the grounding order concerned the difficulty of enforcing an order against the Mahan parties. Although this is not a case in which, the non-compliance will lead to an inability to the claimants to have a fair hearing of the issues to be determined in Phase 2, it is one in which the breach of the grounding order may well make it more difficult for the court to enforce the orders which it may make.

I reject Mr Malek’s submission that because the non-compliance with the grounding order will not impact on whether the court can ascertain the truth in the Phase 2 trial, that necessarily makes barring the defendants from participating in it disproportionate. I have concluded that, in the circumstances of this case, the breach of the order falls within the second limb of the analysis of Denning LJ in Hadkinson’s case. I have also concluded that, on the material before me it does appear that Mahan’s conduct in relation to the grounding order appears to be a calculated and systematic attempt to ensure that the aircraft are not grounded but without offering or providing adequate security to meet the risks I identified when making the order.

At the conclusion of the hearing on 25 January I stated that at the start of the Phase 2 hearing I would decide whether to bar the Mahan parties after considering what the position is on that date. When giving my ruling, I mentioned a number of matters. The first is that it is important that there should be further information before the court about why the aircraft were recalled when out of Iranian airspace and the legal basis for the Iranian Civil Aviation Organisation doing so. It is important that the information should be as detailed as it is reasonably possible to be. Secondly, in the (albeit short) time between 25 January and the hearing the Mahan parties will have had an opportunity to obtain the release of the aircraft and to deliver them to KLM at Schiphol Airport and to give an explanation of what steps they have taken. Thirdly, I referred to the opportunity to provide a substantial security package as an alternative to the grounding of the aircraft. This has always been open to them. It is said that because of United States sanctions the Mahan parties are unable to get a first class bank guarantee. There are, however, other alternatives. Such a package might involve depositing a suitable sum with a reliable third party to hold on escrow terms agreeable to the court.

In conclusion, the Mahan parties’ difficulties arise because they failed to take any steps to facilitate and secure delivery before the 11^th hour, very shortly before the deadline on 18 January. I stated that I recognised that the effect of my decision is to require them both to continue to prepare for the trial while not knowing if they are to be heard and also to make strenuous efforts to meet the concerns of the court. That, however, was the position. The concerns of the court were expressed both when the grounding order was first made and when I considered the application to discharge it. Once I have the up-to-date information I will be in a better position to make a final conclusion as to whether Mahan’s conduct since 21 December means that a debarring order is a proportionate response to what has occurred.