Celestial Aviation Trading 71 Ltd v Paramount Airways Private Ltd

The general background to these proceedings is set out in the judgment of Teare J of 4 December 2009 whereby he gave judgment for the Claimant (“Celestial”), the owner of three Embraer 175 aircraft (“the Aircraft”) leased to the Defendant (“Paramount”) under three aircraft specific lease agreements each dated 29 July 2005 (“the ASLAs”), against Paramount on its application for summary judgment in respect of Celestial’s claim for monies due under the ASLAs. He gave judgment in the sum of US$791,944.54. Further, he ordered, without prejudice to Paramount’s contention that the ASLAs had been validly terminated on 14 October 2009, that various payments be made to Celestial by Paramount on an ongoing basis on various dates each month. He also ordered Paramount to permit Celestial to inspect the Aircraft (including records) by 18 December 2009; this was on account of, amongst other things, Celestial’s concerns over the maintenance of the Aircraft.

On its application for summary judgment Celestial had also sought delivery up of the Aircraft leased under the ASLAs (and various declarations including a declaration that the ASLAs had been validly terminated). However, shortly before the hearing of Celestial’s application on 24 November 2009 Paramount contended that it should have relief from forfeiture. Teare J decided that this question was arguable and gave directions for an expedited trial. At a further hearing before me on 19 January 2010 I gave further directions including an order, in light of the fact that disputes had arisen about whether Celestial had been given a proper opportunity to inspect the Aircraft, that issues relating to the maintenance and operation of the Aircraft be left to be determined, if necessary, at a further trial (to commence on 19 April 2010). The present trial concerns whether Paramount is entitled to relief against forfeiture on the basis that the only breach giving rise to the right to terminate is the failure to pay monies due as held by Teare J.

There are essentially two issues for determination, namely:

At the trial I heard oral evidence from four witnesses of fact, namely:

Celestial also served a statement from Mr Kuber Dewan – a lawyer in India who was involved in the application for deregistration lodged with the DGCA in November 2009 by GECAS, who was not required to be called.

Both sides also served expert reports on the effect of the Foreign Exchange Management Act 1999 in the context of the operating leases of commercial aircraft from Indian lawyers, Ms Fereshte Sethna for Celestial and Mr Rahul Balaji for Paramount. There was a large measure of agreement between the experts and it was considered unnecessary that they be called, although both sides reserved the right to comment on the other’s expert evidence.

On 29 July 2005 GECAS concluded an Aircraft Lease Common Terms Agreement with Paramount (“the CTA”). The CTA was concluded in anticipation of Paramount concluding a number of leases with GECAS or one or more of its subsidiaries which were to be concluded on the terms of an Aircraft Specific Lease Agreement.

On the same day Celestial concluded the ASLAs with Paramount. The ASLAs are all, save for the scheduled delivery dates, in materially identical terms and each one expressly incorporates the terms of the CTA. The term of each of the ASLAs is 8 years from the date of delivery of each of the Aircraft.

Clause 5 of the CTA which was incorporated into each of the ASLAs defines the payment obligations of Paramount. There are essentially 3 types of payment that are required to be made by Paramount, namely (1) rent, being the monies paid to lease the aircraft, (2) supplemental rent, being monies to be paid by Paramount on account of the maintenance costs associated with the aircraft and (3) deposit, being monies paid as security for all of Paramount’s obligations under each of the ASLAs. (There is also an obligation to indemnify Celestial in respect of any expenses incurred by it in and about enforcing or preserving its rights under the particular ASLA or in respect of repossession of the aircraft).

As regards (1), rent, by clause 5.3 Paramount is required to pay “Rent” (being the amount agreed in each ASLA) in advance on each “Rent Date” (which is the first day of each “Rental Period”. Each Rental Period is of one calendar month duration; the first such period starts on the date that the relevant aircraft is offered for delivery to Paramount. By sub-clause (a), “Lessor must receive value for the payment on the Rent Date.” In essence, by this clause Paramount is required to ensure that Celestial receives rent in advance on a monthly basis on the same date each month for each aircraft. Rent is due to Celestial pursuant to the terms of the CTA as incorporated into the ASLAs as follows:

As regards (2), supplemental rent, by clause 5.4 Paramount is required to pay “Supplemental Rent” by the 15^th day of each calendar month on account of the usage of the particular aircraft in the preceding calendar month.

In relation to (3), deposits, by clause 5.1 Paramount is required to pay Celestial any deposit specified in each ASLA. Further,

Common to all of the types of payment that are to be made by Paramount to Celestial (viz. (1), (2) and (3)) are:

Clause 5.12 states as follows:

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

In addition, clause 15.6 provides as follows:

“The time stipulated in the Lease for all payments payable by [Paramount] and the prompt, punctual performance of [Paramount’s] obligations under the Lease are of the essence of the Lease.”

By clause 7 of the CTA Celestial makes two covenants with Paramount which are both expressly conditional on the fact that “no Event of Default has occurred and is continuing.”

Paramount gives a number of undertakings or covenants to Celestial under clause 8 of the CTA. In particular:

By clause 8.2 it agrees to provide certain information to Celestial including, amongst other things:

By clause 8.5 Paramount agrees to permit Celestial’s representatives access to the aircraft (including the documentary records) at any reasonable time.

By clause 8.10 Paramount agrees to maintain, overhaul and repair the aircraft so as, amongst other things, to ensure that it is kept in as good operating condition and repair as on delivery (subject to fair wear and tear).

By clause 8.11 Paramount agrees, amongst other things

Clause 13.1 provides as follows:

“The occurrence of any of the Events of Default will constitute a repudiation (but not a termination) of the Lease by [Paramount] (whether the occurrence of any such Event of Default is voluntary or involuntary or occurs by operation of Law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any Government Entity.”

The Events of Default themselves are set out in Schedule 9 to the CTA and include:

Upon the occurrence of an Event of Default, clause 13.2 provides:

“[Celestial] may at its option (and without prejudice to any of its other rights under the Lease and/or otherwise), at any time thereafter (without notice to [Paramount] except as required under applicable Law):

(a)

accept such repudiation and by notice to [Paramount] and with immediate effect terminate the leasing of the Aircraft (but without prejudice to the continuing obligations of [Paramount] under the Lease), whereupon all rights of [Paramount] under the Lease shall cease; and/or

(b)

proceed by appropriate court action or actions to enforce performance of the Lease or to recover damages for the breach of the Lease; and/or

(c)

either:

(i)

take possession of the Aircraft…

(ii)

by serving notice require [Paramount] to redeliver the Aircraft to Celestial at the Redelivery Location (or such other location as [Celestial] may require.”

The Aircraft were delivered to Paramount by Celestial as follows:

Celestial contended that from soon after delivery of each of the Aircraft Paramount became late in its payments of Rent and Supplemental Rent. This led Celestial to send to Paramount a number of Notices of Default on account of its payment defaults. The history of defaults/Notices of Default will be addressed further below. For the present I shall focus on the immediate history leading up to the defaults giving rise to the exercise of the right to terminate in October 2009.

On 10 July 2009 Celestial sent Paramount a Default Notice by reason of the fact that as at that date a total of US$821,213.42 was due and owing. This non-payment was not remedied and, accordingly, on 20 July 2009 Celestial sent a Grounding Notice to Paramount.

These monies were finally paid late and in breach of contract. However, Paramount then failed to pay rent due on 27 July 2009 (for Aircraft 147) and 4 August, 2009 (for Aircraft 137) in addition to supplemental rent which should have been paid on 15 July 2009. Accordingly, on 5 August 2009 Celestial sent Paramount a further Default Notice, there being due and owing a total of US$624,995.65 at that time (as set out in the Appendix to the Notice).

Paramount eventually paid this sum (with late payment interest), but then failed to pay rent due for Aircraft 147 when due on 27 August 2009 in the sum of US$219,670.65.

On 2 September 2009 Celestial sent another Default Notice. This was not paid and the debt due to Celestial increased to US$653,681.91 by 9 September 2009.

Thereafter Celestial sent:

Finally, on 14 October 2009 Celestial served a Termination Notice on Paramount.

In the period running up to the 14 October 2009 Termination Notice Paramount was also in default in relation to the letters of credit required to be provided.

Celestial had agreed that Paramount could provide it with confirmed letters of credit on account of its deposit obligations under each of the ASLAs. The relevant letters of credit (issued respectively on 24 September 2008 and 17 December 2008) were all confirmed by Deutsche Bank in March 2009; one was due to expire on 24 September 2009 and the others on 17 December 2009.

On 5 August 2009 Ms Leona Drennan of GECAS advised Paramount that it needed to renew the letter of credit it had provided in respect of Aircraft 126, such being due to expire on 24 September 2009.

This request was then repeated on 10 August and 12 August with no response from Paramount; on 13 August Mr Aashish Sonawala of GECAS sought clarification from Paramount of, amongst other things, the renewal of the letter of credit and was advised the same day that “It will be renewed as per agreement”. Thereafter, Paramount was reminded of its obligation to renew on a number of further occasions; it advised that it was under renewal, but a renewed letter of credit was not received.

On 11 September 2009 Celestial again asked for an update on the extension, advising that it would have to place the drawdown documentation with Deutsche Bank.

On 16 September 2009 Leona Drennan received by email from Paramount a swift message from Andhra Bank to Deutsche Bank (dated 15 September 2009) in which it was stated that it had been approached by Paramount to extend the validity period of the existing letter of credit and that it intended to do so on 20 September 2009. Nothing was received from Paramount on 20 September and accordingly, Ms Drennan again asked for advice as to the status of the renewal.

In the absence of any response from Paramount and as the security was due, imminently, to lapse, Celestial drew down on the letter of credit as it was entitled to under the ASLA for Aircraft 126. By this time, Paramount had been in breach of contract for almost 6 months.

On the evening of 24 September 2009 a further swift message was sent to Deutsche Bank by Andhra Bank advising that the letter of credit had been renewed to 22 September 2010, but for a lesser amount, as Paramount claimed the right to reduce the amount. The audited accounts required to justify such a reduction had not been provided and so, as the reduction had not been agreed, there was no entitlement so to do. In addition, this letter of credit was not, in any event, confirmed by Deutsche Bank as was required by Celestial.

There was a major issue between the parties as to whether the Court has jurisdiction to grant relief against forfeiture (“the relief jurisdiction”) in relation to aircraft leases such as those in the present case. Celestial submitted that this equitable jurisdiction had never previously been held to be exercisable in relation to such leases, or any like agreements. Paramount submitted that the jurisdiction should be held to be exercisable in relation to possessory leases such as these, and relied in particular on the decision in The Jotunheim [2005] 1 Lloyd’s Rep 181 in which it was held to be exercisable in relation to a bareboat charter.

The authorities indicate that in order to determine whether there is jurisdiction to grant relief against forfeiture the following considerations are of particular relevance:

Before considering each of these matters it is important to analyse the nature of the ASLAs and to identify their most relevant features. In relation to whether the relief jurisdiction exists I consider that the following features of particular relevance:

The consideration provided for use of the aircraft was monthly Rent. This was payable in advance (cl.5.3).

The Supplemental Rent was payable in order to build up a fund to be used to cover major maintenance events for the aircraft such as an Airframe Structural Check or Engine Refurbishment (cl.5.4; 7.2). This was payable on the basis of past use according to rates based on the number of flight hours actually used. When the qualifying maintenance work was carried out, Paramount was entitled to be paid the costs of the work out of the accrued Supplemental Rent.

The required deposit was to be in a substantial amount (10 months Rent reducing in certain circumstances to a minimum of 6 months Rent) (cl. 5.1). This was meant to provide security for performance of Paramount’s obligations, including its redelivery obligation. The evidence was that the cost of putting the Aircraft into its required redelivery condition can be very substantial.

Paramount submitted that if one takes into account both Rent and Supplemental Rent, over the 8 year term of the ASLAs they would be paying Celestial more than the cost of the aircraft of about US$26 million. However, I do not accept that it is appropriate to take Supplemental Rent into account. As explained above, that was a fund to be used for major aircraft maintenance. It was not directed at the cost of purchase of the Aircraft, nor did it include any profit. If Rent alone is taken into account then the full term payments would be in the region of US$21 million. In any event the US$26 figure million takes no account of finance costs and the evidence was that about 84% of the cost of the Aircraft would have been borrowed at commercial rates of interest. Nor does it include any element of profit. In any event, I accept Mr Manifold’s evidence that, in common with most aircraft operating leases, the Rent payable depended on the prevailing supply and demand for aircraft of this type.

The Scaptrade makes it clear that relief against forfeiture is generally limited to contracts which involve the transfer of proprietary or possessory rights – see the judgment Lord Diplock at p702C. That was a major reason why the House of Lords held that the jurisdiction did not arise in respect of a contract of services such as a time charter.

In the present case the leases do not involve the transfer of any proprietary rights. However, they do involve the transfer of possessory rights during their term. In that regard the leases are analogous to bareboat charters and in The Scaptrade the House of Lords expressly left open the question of the applicability of relief against forfeiture to bareboat charters (p704G).

Celestial submitted that the right to bare possession of a chattel for a term was insufficient to attract the relief jurisdiction. They stressed that the moveable property cases in which the jurisdiction has been held to exist have involved not merely a possessory right but also a proprietary or expectant proprietary right. For example:

Paramount placed particular reliance upon the judgment of Robert Walker LJ in the Court of Appeal judgment in On Demand Information plc v Michael Gerson (Finance) plc [2001] 1 WLR 155. In his judgment at p170-171 it was stated as follows:

I accept that the On Demand case provides support for the proposition that the relief jurisdiction may apply to contracts which transfer possessory rights only. However, it is to be noted that both On Demand and Whiteley Ltd v Hilt were treated as cases involving a right to “indefinite” possession of the chattels.

A contract which allows the hirer or lessee to keep possession of the chattel indefinitely is analogous to one in which he ultimately acquires ownership. In both cases the expectation is that the lessor will not get the chattel back and the consideration payable will reflect that expectation. In the On Demand case, for example, rent was payable for a primary period of 36 months at a rate designed to recoup the lessor by the end of that period for the cost of the equipment with interest together with other costs and profit. Thereafter the lessee was entitled to indefinite possession for a nominal annual rent. In such circumstances the lessor’s continuing interest in the chattel is essentially an economic one. Its interest is in payment of the rent rather than the return of the chattel. In substance it is more of a security interest than an ownership interest.

In the present case, by contrast, Paramount only has a right to possess the Aircraft for a proportion of its economic life. As such Celestial retains a very real interest in the Aircraft themselves, including their proper maintenance, the extent of their use, their condition, and their rental and resale value. Possession of the Aircraft will revert to it at a time when the bulk of their economic life is still to run, and there are detailed terms addressing the return of the Aircraft and their required redelivery condition. Celestial therefore retains many of the risks and rewards of ownership. Moreover, Rent was not calculated on the basis of recouping the cost of the Aircraft together with interest and profit. In such circumstances Celestial’s general property in the Aircraft was not qualified or limited in the way in which it was in the On Demand case.

In this connection I was referred to the distinction between finance and operating leases, which is also addressed in the On Demand case at p158 of Robert Walker LJ’s judgment as follows:

“The deputy judge quoted a passage from a statement published by the Institute of Chartered Accountants, SSAP 21, which provides a convenient explanation of how a finance lease differs from an operating lease:

“Background Leases and hire-purchase contracts are means by which companies obtain the right to use or purchase assets. In the UK there is normally no provision in a lease contract for legal title to the leased asset to pass to the lessee. A hire-purchase contract has similar features to a lease except that under a hire-purchase contract the hirer may acquire legal title by exercising an option to purchase the asset upon fulfilment of certain conditions (normally the payment of an agreed number of instalments). Current tax legislation provides that in the normal situation capital allowances can be claimed by the lessor under a lease contract but by the hirer under a hire-purchase contract.

“Forms of lease Leases can appropriately be classified into finance leases and operating leases. The distinction between a finance lease and an operating lease will usually be evident from the terms of the contract between the lessor and the lessee. An operating lease involves the lessee paying a rental for the hire of an asset for a period of time which is normally substantially less than its useful economic life. The lessor retains most of the risks and rewards of ownership of an asset in the case of an operating lease. A finance lease usually involves payment by a lessee to a lessor of the full cost of the asset together with a return on the finance provided by the lessor. The lessee has substantially all the risks and rewards associated with the ownership of the asset, other than the legal title. In practice all leases transfer some of the risks and rewards of ownership to the lessee, and the distinction between a finance lease and an operating lease is essentially one of degree”

On the basis of these definitions, the leases in the On Demand case were finance leases, whilst the leases in the present case are operating leases. In particular the ASLAs involved rental for a period of time which was substantially less than the aircraft’s useful economic life and thereby the retention by Celestial of most of the risks and rewards of ownership.

In summary, whilst I accept that the ASLAs transfer possessory rights to Paramount, for the relief jurisdiction to apply to contracts transferring a bare possessory right for only a proportion of the economic life of the chattel would represent a major extension of existing authority.

Paramount submitted that the insertion of the right to terminate in respect of defaults in payment was essentially to secure the payment of money.

In this connection reliance was placed in particular on the decision of Cooke J in The Jotunheim.

That case concerned a bareboat charter on an amended Barecon 89 Form by which the vessel Jotunheim was chartered for a period of 48 months. Part IV of the charter provided for a Hire/Purchase Agreement under which the vessel would, on expiry of the charter and provided that the charterers had fulfilled their obligations under the charter, belong to the charterers. Hire was to be paid monthly in advance at the rate of U.S.$15,104.17 discountless, and there was provision for payment of a U.S.$25,000 deposit on signing the charter and for lump sum deposits of U.S.$50,000 or U.S.$75,000 to be paid with the 6 months, 12 months and 16 months hire payments. Clause 32 of the charter provided a right of withdrawal “in case of buyers' default for non-payment of hire monies due to owner”. The owners withdrew the vessel for non-payment of hire. Each party then applied for summary judgment. Cooke J held that the owners were entitled to withdraw the vessel; that the court had jurisdiction to grant relief against forfeiture, but that on the facts relief would not be granted.

In his judgment Cooke J stated as follows at p188-189:

“47.

It is accepted by the owners that the Court is, in principle, entitled to grant relief from forfeiture of a contract such as this, provided that the object of the transaction and of the insertion of the right to forfeit for non-payment of money is essentially to secure the payment of that money or is security for the attainment of a specific result which can be achieved through the Courts. If the contract provides for a right to retain possession of a chattel so long as the conditions of the agreement are performed, together with the right to purchase the chattel by payment of the instalments provided for by the contract, relief from forfeiture is available provided that the right of forfeiture is for either of these purposes.

….

50.

Mr. Collett for the owners argued that there was no difference in principle between the position under a time charter and a demise charter for material purposes, since, as Lord Diplock said in The Scraptrade at p. 257, it was not possible to say that the insertion of the withdrawal clause, let alone the transaction itself, was to secure the payment of money. Hire was payable in advance to provide a fund to which owners could have access to provide the services they had contracted to provide to the charterers. Here, under this demise charter, Mr. Collett argued, hire was payable in advance to provide a fund for the owners to pay their mortgage. The key here, however, in my judgment, is the provision of services in a time charter, whereas in a bareboat charter which is also a hire/purchase agreement, the owners provide the ship in anticipation that they will do nothing further after delivery. They receive the charterers' payments and, if all goes well, transfer the vessel to the charterers on receipt of the final instalment.

51.

So, although the parties differed as to whether or not the insertion of cl. 32 in the charter was essentially to secure the payment of money or the production of a stated result which could effectively be obtained when the matter came before the Court, in my judgment the demise charterers are right on this point. The demise charterers are given contractual and possessory rights in relation to the vessel during the four years of the charter, as is plain from cll. 9(a) and (b). Whilst the agreement functions both as a demise charter and as a sale agreement (see the heading to Part IV which refers to this as a hire/purchase agreement) the demise charterers do have the right to have ownership transferred to them at the end of the charter period, if there has been compliance with the conditions of the charter.

52.

The essential purpose, therefore, of the right to withdraw the vessel under cl. 32 is to secure the payment of the hire for which the agreement provides and also payment of the deposits; default in the latter respect is non-performance of other agreed terms, which is covered by cl. 32. There is both a requirement for an initial deposit payable at the outset, which is part of the purchase price and security for the fulfilment of the contract (which has nothing whatever to do with hire payments as such) and, as the contract goes on further, deposits are payable at 6 months, 12 months and 16 months, which will equally be lost to the demise charterers if the right of withdrawal is exercised. Clause 32, therefore, acts in terrorem to ensure that payments are properly made.

53.

The need for availability of relief of the kind suggested here appears to be stronger in the present case then in a hire purchase or financing purchase agreement of the kind found in Gerson , relating to chattels, or even in leases of land where there is, of course, a statutory regime. It is of little consequence that the owners need a fund from the hire payments to discharge their mortgage. They can always sue for hire due and recover it, whilst the right to withdraw is there as a form of security to ensure performance.”

Paramount submitted the aircraft leases share many of the characteristics of bareboat charters and that a similar analysis applies to the termination provisions in this case. However, the “key” according to Cooke J was that:

“…in a bareboat charter which is also a hire/purchase agreement, the owners provide the ship in anticipation that they will do nothing further after delivery. They receive the charterers' payments and, if all goes well, transfer the vessel to the charterers on receipt of the final instalment.”

Cooke J. therefore identified the fact that the charter was also a hire/purchase agreement as a central consideration. As such, the anticipation was that the owners would do nothing after delivery apart from receive payments and transfer ownership of the vessel at the end of the charter. Their interest was therefore essentially an economic one. However, in the present case Celestial have a very real continuing interest in the Aircraft themselves, not just in the payment of rent. Their anticipation was that they would receive the Aircraft back so as to be able to relet them or resell them and one of Paramount’s primary obligations under the ASLAs was to redeliver the Aircraft in the appropriate condition upon termination.

In such circumstances I do not consider that it can be said that the or the essential purpose of the termination provisions in the ASLAs was as “security” for the payment of rent. An essential purpose of the termination provisions was to secure Celestial’s ability to be released from the ASLAs and to have the Aircraft returned in circumstances where Paramount was in default. Moreover, security under the ASLAs was provided by the requirement that a deposit be provided (in cash or by letter of credit).

In contrast to The Jotenheim I therefore do not accept that this is a case where the termination provision was inserted “essentially to secure the payment of money” or that this was the “primary object of the bargain” with the termination provision being inserted as “security for the production of that result”. If that is correct then the authoritative guidance provided in the Shiloh Spinners case strongly indicates that this is not a case in which the court has relief jurisdiction.

Whether reasons of legal policy support the existence of such a jurisdiction.

It is clear in particular from the case of Sport International Bussum B.V. v Inter-Footwear Ltd [1984] 1 WLR 776 that even if a case can be shown to come within the principles set out in the Shiloh Spinners case it does not follow that the relief jurisdiction is exercisable. As stated by Oliver LJ at p785:

“…Lord Wilberforce was contemplating that the jurisdiction exists in some cases where the primary object of the forfeiture is to secure a stated result, but he cannot, we think, have had it in mind that the jurisdiction was exercisable wherever the stated condition existed. It is inherent in his statement of principle that it applies only in “appropriate and limited cases” and, while it is true that he went on to consider the conduct of the applicant for relief in order to determine whether the case was an “appropriate” one, we cannot find in his speech any suggestion that he was treating “appropriate” and “limited” as synonyms…

Thus Shiloh Spinners Ltd. v. Harding [1973] A.C. 691, in our judgment, establishes as a matter of decision no more than this: that one essential hall-mark of the limited cases in which the equitable jurisdiction to relieve will be exercisable is that the forfeiture clause has been inserted with the object mentioned.”

As was made clear in the House of Lords decision in The Scaptrade, it is necessary to consider whether “practical considerations of legal policy” support the existence of the relief jurisdiction.

This point was reinforced by Oliver LJ in the Sport International case at p783-789B and especially at 788C-F:

“The fact remains that the jurisdiction never was, and never has been up to now, extended to ordinary commercial contracts unconnected with interests in land and, though it may be that there is no logical reason why, by analogy with contracts creating interests in land, the jurisdiction should not be extended to contracts creating interests in other property, corporeal or incorporeal, there is, at the same time, no compelling reason of policy that we can see why it should be. And the fact is that the defendant in this case is seeking an extension by analogy, and an extension not based on any pressing consideration of legal policy but simply on an appeal to sympathy for what is considered to be a hardship arising from strict adherence to a bargain which is concluded with its eyes open. To quote again from Robert Goff L.J. in Scandinavian Trading Tanker Co. A.B. v. Flota Petrolera Ecuatoriana [1983] Q.B. 529, 539:

"The question whether it should be so extended must be considered on its merits, as a matter of policy, taking into account the relatively slight assistance available to us from the authorities, though the fact that the jurisdiction has never before been extended to purely commercial transactions must surely cause us to regard the extension, which we are now invited to make, with a considerable degree of caution."

In his judgment in The Scaptrade at p703G Lord Diplock approved and incorporated the practical and policy objections identified by Robert Goff LJ in his judgment in that case.

In The “Scaptrade” [1983] QB 529 Robert Goff LJ stated as follows at 540:

“It is of the utmost importance in commercial transactions that, if any particular event occurs which may affect the parties' respective rights under a commercial contract, they should know where they stand. The court should so far as possible desist from placing obstacles in the way of either party ascertaining his legal position, if necessary with the aid of advice from a qualified lawyer, because it may be commercially desirable for action to be taken without delay, action which may be irrevocable and which may have far-reaching consequences. It is for this reason, of course, that the English courts have time and again asserted the need for certainty in commercial transactions - for the simple reason that the parties to such transactions are entitled to know where they stand, and to act accordingly.”

A more recent authoritative statement to similar effect in the context of the relief jurisdiction can be found in Lord Hoffman’s judgment in Union Eagle Ltd v Golden Achievement Ltd [1997] AC 514 at 518H-519E and at 519F:

“The principle that equity will restrain the enforcement of legal rights when it would be unconscionable to insist upon them has an attractive breadth. But the reasons why the courts have rejected such generalisations are founded not merely upon authority (see per Lord Radcliffe in Campbell Discount Co. Ltd. v. Bridge [1962] A.C. 600, 626) but also upon practical considerations of business. These are, in summary, that in many forms of transaction it is of great importance that if something happens for which the contract has made express provision, the parties should know with certainty that the terms of the contract will be enforced. The existence of an undefined discretion to refuse to enforce the contract on the ground that this would be "unconscionable" is sufficient to create uncertainty. Even if it is most unlikely that a discretion to grant relief will be exercised, its mere existence enables litigation to be employed as a negotiating tactic. The realities of commercial life are that this may cause injustice which cannot be fully compensated by the ultimate decision in the case.

The considerations of this nature, which led the House of Lords in The Scaptrade [1983] 2 A.C. 694 to reject the existence of an equitable jurisdiction to relieve against the withdrawal of a ship for late payment of hire under a charterparty, are described in a passage from the judgment of Robert Goff L.J. in the Court of Appeal [1983] Q.B. 529, 540-541, which was cited with approval by the House [1983] 2 A.C. 694, 703-704. Of course the same need for certainty is not present in all transactions and the difficult cases have involved attempts to define the jurisdiction in a way which will enable justice to be done in appropriate cases without destabilising normal commercial relationships.”

I consider that the ASLAs are transactions in respect of which the need for certainty is very much present. As Celestial submitted, commercial certainty is an important consideration in respect of an operating lease of an aircraft in which the lessor maintains a valuable reversionary interest. An aircraft is a valuable asset, with high value components, which is of its very nature “moveable” and depreciating, which is left in the hands of the other party in a foreign country where it will be registered for the purpose of the lease (and need to be deregistered to be operated elsewhere). The lessor, having a reversionary right to the asset, needs to know and agree with precision with the lessee: (a) the obligations of each party, (b) the events that will entitle to lessor to terminate the contract and recover its asset and (c) provisions which will show how, as a matter of business practicality, the contract will be terminated, the asset recovered and possession returned by the lessee to the lessor.

The consequence of the relief jurisdiction being exercisable in cases such as the present is likely to be to make it open to any lessee of a commercial aircraft under an English law operating lease such as the ASLAs to contend that relief from forfeiture can be granted. As was borne out by Celestial’s evidence, there are many such leases and this is likely to cause significant uncertainty in the aviation sector: the lessor will not know when (or indeed whether) it can terminate a lease and will be prevented from being able to rely timeously or at all on the clear and detailed default and termination provisions of its leases.

In my judgment these constitute powerful practical and policy reasons why there should be no relief jurisdiction in relation to leases such as the ASLAs.

Celestial stressed two further reasons why this was not one of those “appropriate” and “limited” cases in which the relief jurisdiction should be available. These were reasons of a juristic rather than a practical nature, namely: the fact that the parties made time of the essence and the fact that the termination provision is not penal.

Celestial submitted that equity does not intervene to relieve a party from the termination of a contract for a failure by that party to perform an obligation by a fixed date where the parties have made time of the essence expressly or by necessary implication.

In this connection reliance was placed on a number of cases concerning contracts for the sale of land and in particular:

These authorities were affirmed in the Union Eagle case in which Lord Hoffman, giving the judgment of the Privy Council, reaffirmed the “principle that in cases of rescission of an ordinary contract of sale for land for failure to comply with an essential condition as to time, equity will not intervene” (at p523).

I accept that these cases make it clear that the relief jurisdiction is not available in relation to contracts for the sale of land where time is made of the essence. I also accept that the fact that the ASLAs made time of the essence of payment supports the conclusion that there is no relief jurisdiction. However, I do not accept that the mere inclusion of a time of the essence provision necessarily excludes the relief jurisdiction.

As Lord Hoffman stated at p722F of the Union Eagle case in relation to mortgages “relief against forfeiture of the estate would ordinarily be granted as of course despite an express term that time was of the essence”. Further, the Goker v NWS Bank case involved a time of the essence provision and in The Jotunheim Cooke J took the view that time had been made of the essence – see paragraph 33 of the judgment. In both those cases a jurisdiction to grant relief was recognised.

Celestial submitted that clause 13.2 should not be regarded as a forfeiture clause as it is not penal in nature and confers no windfall on them. In particular:

I accept that the fact that no significant advance payments, and in particular advance payments for the purchase of the aircraft, are forfeited on termination is a further reason for there being no relief jurisdiction. However, I do not accept that in itself it means that there is no jurisdiction. The loss of the right to continued possession of the aircraft for the substantial remaining term of the leases on a single default in payment can be regarded as involving forfeiture. This is borne out by the authorities which recognise that loss of a right of possession may be sufficient to engage the forfeiture jurisdiction.

For all these reasons, even if this was a case which could be shown to come within the principles set out in the Shiloh Spinners case, I am satisfied that reasons of legal policy, and in particular the need for certainty, lead to the conclusion that there is no relief jurisdiction in respect of aircraft leases such as the ASLAs.

For the reasons outlined above I am not satisfied that this is one of those “appropriate” and “limited” cases in which the Court should hold that there is a jurisdiction to grant relief against forfeiture.

If I am wrong in my conclusion on jurisdiction, the question which then arises is whether as a matter of discretion relief against forfeiture should be granted.

In the Shiloh Spinners case at p723 Lord Wilberforce stated that whether it was appropriate to grant relief involves:

“a consideration of the conduct of the applicant for relief, in particular whether his default was wilful, of the gravity of the breaches and of the disparity between the value of the property of which forfeiture is claimed as compared with the damage caused by the breach.”

By way of examples of the manner in which the Courts have exercised their jurisdiction in the context of commercial transactions involving moveable property, I was referred in particular to The Jotunheim and the Transag cases, and the first instance decisions of Lloyd J. in The “Scaptrade” [1981] 2 Lloyd’s Rep 425 at 430-431 and The “Afovos” [1980] 2 Lloyd’s Rep 469 at 480).

An essential matter to be considered is the conduct of the applicant in relation to the breaches which have given rise to the right of forfeiture and the gravity of those breaches.

The financial defaults in respect of which the Termination Notices were served and which Teare J held to be established were as follows:

There were therefore significant sums due in respect of each Aircraft. In respect of Aircraft 126 and Aircraft 127 there were outstanding sums due in respect of both Rent and Supplemental Rent. By the time of the Termination Notices the Rent for Aircraft 137 and Aircraft 147 had been due for about two weeks, and the Supplemental Rent in respect of Aircraft 126 and Aircraft 147 had been due for nearly a month. All these outstanding sums had been the subject of a Notice of Continuing Event of Default and Warning on 5 October 2009. This Notice included a warning in bold, large type as follows:

“HOWEVER, your continued and persistent defaults regarding payments and the matters set out below are very alarming and we cannot continue to tolerate this sort of delinquency and we hereby warn you that if they are not rectified in full and as a matter of utmost urgency as soon as possible, we will be forced to take further action which may include, without limitation, termination of your right to lease the aircraft and/or court action.”

No proper explanation was given by Paramount as to how and why these defaults occurred, notwithstanding the length of time that the sums had been outstanding and the warnings which had been given. In his witness statement, Mr Thiagarajan said that Paramount was trying its best to comply with the payment terms of the lease but that Celestial was making it difficult. He referred to the fact that on 24 September 2009 Celestial drew down on one of the letters of credit, but, as set out earlier in the judgment, Paramount had ample warning of the need to provide an appropriate replacement letter of credit. He also referred in his statement and oral evidence to financial difficulties resulting from the fact that one of the Aircraft had been grounded for a number of months due to engine problems, Paramount’s lack of a spare engine and its inability to secure a replacement. Paramount’s attempts to blame Celestial for these difficulties was considered and dismissed by Teare J in his judgment at paragraphs 16 to 18.

This is not therefore a case where the default in question arose by surprise, accident or ignorance. Paramount knew what its obligations were and knew that it was going to default on those obligations.

In both The Afovos and The Scaptrade Lloyd J. regarded the fact that the breach involved the fault of the applicant as being a telling factor against the grant of relief. It is clear that wilful breaches will only exceptionally be relieved against.

As Lord Wilberforce stated in the Shiloh Spinners case at p725:

“Established and, in my opinion sound principle requires that wilful breaches should not, or at least should only in exceptional cases, be relieved against, if only for the reason that the assignor should not be compelled to remain in a relation of neighbourhood with a person in deliberate breach of his obligations.”

Celestial submitted that “wilful breaches” are all those breaches which occur not by surprise, accident or ignorance (see the recitation of the judgment of Lord Erskine LC in Sanders v Pope (1806) 12 Ves.Jun. 282 per Lord Wilberforce at 722-723 in Shiloh Spinners discussing the effect of Hill v Barclay (1811) 18 Ves.Jun. 56).

The findings I have made as to the circumstances giving rise to the defaults and the knowledge with which they were made are therefore powerful grounds for denying relief.

Moreover, Paramount’s conduct in relation to the defaults giving rise to the Notice of Termination needs to be considered in context. That context includes a long history of defaults. The immediate history of Default Notices has been set out earlier in my judgment. However, there was also a prior history of such defaults and Notices. In particular:

Further, as set out in the Schedules attached to Celestial’s Statement of Case, since August 2008:

The defaults giving rise to the Termination Notice have to be viewed against this background of persistent default. Paramount stressed that all these historic defaults were cured and that interest was paid on late payments, but that does not explain or excuse the breaches. Paramount’s attitude, as borne out by this history and by Mr Thiagarajan’s oral evidence, appears to have been that it does not much matter if they are in default of their obligations, provided that they put that right within a reasonable time. This involves a “cavalier disregard” of their contractual obligations, and moreover of obligations which are stated to be of the essence (cl.15.6) and to involve a repudiation if breached (cl.13.1).

Further, Paramount was given ample warning of the consequences of continuing default. Aside from the warnings given in Celestial’s various Notices, including in particular the Notice of 5 October 2009, in a letter from Mr Sonawala of GECAS on 13 August 2009 had set out the various points that needed to be addressed by Paramount (including the need for prompt payment going forward and the renewal of the letter of credit) and concluded,

“Mr Thiagarajan, as you can see we are at a very important juncture here and we need your focus and commitment behind the Airline. The continuous late payments to us and several of your vendors is concerning and we need to be assured that in order to support [to] you there is adequate commitment and equity being deployed to the Airline by its promoters. There are many ways we can support you and help you to grow. However, Paramount needs to ensure that fulfilment of its obligations to GECAS in whatever respect are fulfilled on a timely basis and within the timeframes set out in the Lease Agreements.”

This background of persistent default despite warnings makes the defaults which led to Celestial’s Notice of Termination on 14 October 2009 all the more difficult to justify and excuse and is a further compelling reason for refusing relief.

In considering Paramount’s conduct it is also important to have regard to what has happened since the operative defaults and whether they have been, can be or will be cured. The fact of the matter is that those sums have still not been paid, nor have any further sums due been paid, even though Paramount has had continuing use of the Aircraft pursuant to the Order of Teare J and despite the Court Order that further sums be paid.

Paramount contended that were it not for the draw down under the two letters of credit issued by State Bank of India (confirmed Deutsche Bank AG) on the 15 of December 2009, Paramount would have paid the sums due. They said that this drawdown resulted in Paramount’s bankers refusing to make payment of the sums due on that date and thereafter payment cannot be made because of the bank’s view of its obligations under the Foreign Exchange Management Act 1999. This requires the bank to be satisfied that the payments can be made. The bank, which is the certifying authority for exchange control purposes, is treating the demand on the letter of credit as a discharge of the sums that would otherwise be paid, and in any event refusing to make further lease payments as Celestial asserts the leases have been terminated.

Further, the bank has confirmed that it would make the payments, and reconstitute the letter of credits, if the drawdown sums were returned, but Celestial has indicated that it would not return the drawdown sums. They submitted that the evidence therefore demonstrates that Paramount had sufficient funds, notwithstanding the drawdown of the letters of credit, to make the payments and that it is prevented from doing so by virtue of the position taken by the bank and Celestial’s unwillingness to help break the logjam.

I accept that the evidence shows that Paramount did have sufficient funds to make the payments and that, since the drawdown sums exceed the sums outstanding, if Celestial co-operated a means could be found whereby those payments are made. However, Celestial is under no obligation so to do. It is standing on its strict contractual rights, as it is entitled to do, and might reasonably be expected to do in the adversarial situation which now exists between the parties.

Moreover, the difficulty in which Paramount now finds itself could have been avoided had it not left arrangements for making the payments until the very end, the evidence of Mr Thiagarajan being that it was left to 15 December 2009. Further, the risk of being unable to make payment due to lack of bank authorisaton is not only a risk which Paramount assumed under the ASLAs but the failure to obtain the requisite authorisation is itself an Event of Default (Schedule 9 (f)(i)).

Although this further breach was not intentional it does therefore involve both fault on the part of Paramount and an inability to perform for reasons for which they are contractually responsible. This further breach, and the fact that it involves a breach of the Court Order, is a further reason for refusing relief.

Paramount’s essential point in relation to the exercise of discretion is the disparity between the damage caused by their breach and the damage which termination will cause.

Lord Wilberforce’s description of the relevant disparity to be considered focuses on the value of the proprietary and/or possessory rights which will be lost, rather than the factual consequences of their loss. However, I am prepared to have regard to these wider considerations, as Knox J did in the Transag case (p102 at (g)).

Paramount’s evidence was that the loss of the Aircraft would be catastrophic for them. The Aircraft comprise 3/5 of its fleet. There are no replacements available in the market. It would lose its DGCA licence as its number of aircraft would fall below the minimum number required. This would result in the aircraft being grounded, significant inconvenience to thousands of passengers who have bookings with Paramount and the crippling of the air transportation system in Southern India in which Paramount is a market leader. Paramount itself would be unlikely to survive and may well go into liquidation. That would mean the jobs of 2,200 direct and indirect employees being threatened.

This evidence was not sought to be challenged and I accept that there is a real risk of very serious consequences for Paramount, its employees and its customers if they lose the Aircraft. There was an issue as to how long it would take to find replacements but it would appear that these specialised aircraft cannot be easily or speedily replaced.

Paramount submitted that that is to be contrasted with the lack of prejudice which will be suffered by Celestial if relief is given. Celestial will get paid the outstanding amounts due and Paramount is willing and able to perform the ASLAs going forwards. Further, on Celestial’s own evidence the replacement leases that it has conditionally arranged are on less favourable Rent terms.

Paramount further submitted that Celestial would receive a windfall unless relief was given as they would keep all the Rent and Supplemental Rent so far paid under the ASLAs, which amounts to about US$9 million and US$4.5 million respectively which is close to 50% of the capital cost of the Aircraft.

As already explained, I do not accept that any windfall is involved. The Rent was agreed based on market considerations and reflects the agreed consideration for Paramount’s use to date of the Aircraft. The Supplemental Rent is to a fund to cover major maintenance costs and does not involve a profit or windfall.

Nor do I accept that the prejudice to Celestial in being held bound to continue with the ALSAs is negligible, as Paramount submitted. The background of persistent default by Paramount suggests that the claim made of compliant performance hereafter should be approached with some scepticism. Whilst Paramount says it presently has the financial resources to perform, past history indicates that that is no guarantee of performance. Further, the financial difficulties which it claims it suffered through loss of the use of one Aircraft suggests shallow financial foundations which could again be shaken if anything similar recurs.

It is clear that Celestial has run out of patience with Paramount’s persistent defaults and is determined, if it can, to recover its Aircraft and let them out to more reliable contractual partners. This is borne out by the fact that it would prefer to let the Aircraft out to another party at an appreciably lower Rent than continue with the ASLAs.

Given that this is Celestial’s preferred course of action, and given Paramount’s history of default, I consider that the most likely outcome if relief is granted is that the parties will be back in Court in a few months time arguing about relief again in the context of different defaults. Indeed such a hearing is already scheduled to take place in April at which Paramount’s alleged defaults in relation to the operation and maintenance of the Aircraft will be addressed.

This is not one of those cases where performance of the contract is essentially complete and all that is required is an identified further payment or payments. The ASLAs have four more years to run and I consider that there is a very real prejudice to Celestial in granting relief which obliges them to carry on in a long term contract with a contractual partner who they do not, with good reason, trust to perform and with whom they wish to sever relations, in accordance with the agreed contract terms.

As stated in the Goker case in which Lloyd LJ approved the following passage from the first instance judgment as follows (at p3):

“Indeed, even if as at today the Plaintiff's past failures to make the payments due under his agreement could be compensated sufficiently as a condition of obtaining relief by the payment now of principal, interest and costs, that fails to take into account the full extent of any future risk -- a risk which has been demonstrated already by the Plaintiff's unreliability and poor financial circumstances, and which depends for security upon such a chattel as a car which, as contrasted with land, is easily moved, easily concealed and easily sold, is liable to rapid depreciation and may require considerable expenditure to maintain. Thus, as it was put by Sir Godfray, when a hirer has shown himself to be a defaulter, to oblige the owner of goods to forego his contractual rights and to return the goods to the hirer, would be to oblige the owner to accept a risk far greater than that contemplated when the contract was made.”

Many of those comments are at least as applicable here, and an aircraft is a chattel of much greater sophistication and value than a car, and one in respect of which continual maintenance of a high standard is required.

I have reached the clear conclusion that, notwithstanding the serious consequences which Paramount may suffer if the Aircraft are redelivered to Celestial, this is not an appropriate case for relief. In particular, the operative defaults were knowingly committed and there is no excuse or even explanation for them. They were committed against a background of persistent defaults evidencing a cavalier disregard by Paramount for its contractual obligations and despite clear warnings of the consequences of continuing default. The defaults have still not been cured and Paramount has been in further default as well as in breach of a Court Order. There is real prejudice to Celestial if relief is given and they are compelled to carry on with the ASLAs.

Even if the exercise of discretion was finely balanced, which it is not, it is well established that considerations of commercial certainty are relevant to the exercise of the Court’s discretion and those considerations would lead me to the conclusion that relief should not be granted.

I refuse the equitable relief sought by Paramount on both jurisdictional and discretionary grounds. I shall hear the parties as to the terms of the relief to which Celestial is entitled in the light of that conclusion.