Blue Sky One Ltd & Ors v Mahan Air & Anor (Rev 1)

Introduction 1

The decision on contempt 5

The evidence

Procedural issues 14

Findings of fact

Location of the second aircraft on 21 December 2006 20

The risk of intervention by the United States authorities 35

The agreement to provide funding to repay PK’s loan 37

The market value of the aircraft 43

The effect of the Option Agreement 45

Lease rates 52

Mesne profits/User damages 57

Consequential loss 60

Findings as to foreign law

Discussion

The sanction for the contempt of the Mahan parties 186

Conclusions 194

Introduction:

The background to this matter is set out in my judgment in Phase 1 of this dispute (“hereafter “PJ”), handed down on 21 December 2009: [2009] EWHC 3314 (Comm). In summary terms, the dispute arises out of transactions 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. The parties are a number of companies owned or controlled by Balli Group plc (hereafter "the Balli parties") and Mahan Air ("Mahan"), a private Iranian airline, and Blue Sky Aviation Co. FZE ("FZE"), an Ajman company owned or controlled by Mahan. The dispute concerns six Boeing 747- 422 aircraft. The aircraft were acquired by six English special purpose vehicle (“SPV”) companies. These companies are described as “Balli Companies” in the appendix to the Re-amended Reply, Defence to Counterclaim and Counterclaim by the Third Parties: see also PJ [4] and [6].

Three of the aircraft (the “Package 1 aircraft”) were leased to Blue Airways LLC ("BAW"),an Armenian company, entered on the Armenian Civil Aviation Registry, and chartered to Mahan. Two of the Package 1 aircraft (MSN 24383 and MSN 26879) were subsequently mortgaged to PK Airfinance US Inc. (hereafter "PK") as part of a transaction whereby PK lent the Balli parties US $150 million to acquire a further three Boeing 747-422 aircraft (the “Package 2 aircraft”). The Package 2 aircraft did not go into service. In February 2008 the United States Department of Commerce, Bureau of Industry and Security (hereafter "BIS") ordered Balli to redeliver them to the United States. In March the BIS issued a Temporary Denial Order ("TDO") prohibiting the Balli parties, BAW, and Mahan from participating in any transaction involving any item subject to the Export Administration Regulations. On 16 October 2008 Mahan or FZE deregistered the Package 1 aircraft from the Armenian aviation registry and registered them in Iran: PJ [234]. The trial was split for the reasons set out at PJ [16] – [19].

The Phase 1 hearing dealt with the ownership of the three Package 1 aircraft and whether Blue Sky One Ltd., Blue Sky Two Ltd., and Blue Sky Three Ltd. were entitled to an order for delivery up of the aircraft from the defendants, Mahan and FZE. There are four parts to my decision. The first is that I held (PJ [243] – [262]) that the Balli parties did not hold the three Package 1 aircraft or the shares in the claimant SPV companies on trust for Mahan or FZE. The second (PJ [268] – [283]) is that title to the Package 1 aircraft was not subsequently transferred to Mahan or FZE by the execution of Bills of Sale held by Mr Mazaheri. Thirdly (PJ [302] – [322]), I made an order under section 3(2)(b) of the Torts (Interference with Goods) Act 1977 for delivery of the aircraft, but giving Mahan and FZE the alternative of paying damages by reference to the value of the aircraft. Fourthly (PJ [284] – [295]), I held that subject to any defence of set-off, Mahan and FZE are entitled to the return of US$ 57.8 million (in round numbers) transferred to the Balli parties between September 2007 and March 2008 in relation to the Package 2 aircraft.

It was agreed that Phase 2 would deal with two broad matters. The first concerns the issues of quantum, set-off and account in relation to the claim by the Balli parties in respect of the Package 1 aircraft, and whether Mahan and FZE were in breach of an agreement to advance money for the Package 2 aircraft to enable Crypton, a Cayman Islands company, also described (see [1]) as a “Balli Company”, to discharge the debt owed to PK. The second is PK’s separate claim for possession of the two Package 1 aircraft (MSN 24383 and MSN 26879) which had been mortgaged to it by Blue Sky Two and Blue Sky Three, and for damages. This gives rise to questions of the validity of the mortgage which in turn involves determining their applicable law and whether the English choice of law rule as to the determination of title to moveables refers to the domestic law of the relevant country or also to its private international law and its choice of law rules (the “renvoi” issue). It also involves considering whether, under Iranian law, PK can succeed in a claim for “Ghasb”, that is the tort of usurpation, and issues of quantum.

The decision on contempt:

At the time I handed down my judgment in Phase 1, I ordered the Mahan parties to ground the first and the third aircraft at Schiphol airport by 31 December and to deliver up the Bills of Sale forthwith. The orders were varied by Hickinbottom J on 29 December 2009 and by me on 12 January 2010, when I ordered that the time for compliance with the grounding order be extended to 18 January. On 25 January, shortly before the commencement of the Phase 2 hearing I heard and decided an application by the Balli parties, supported by PK, that Mahan and FZE be held in contempt of court for not complying with these orders, and that their statements of case be struck out and they be debarred from taking part in the Phase 2 hearing. I found them to be in contempt ([2010] EWHC 128 (Comm)) but did not at that stage or when I revisited the matter at the commencement of the Phase 2 hearing debar them. The question of what, if any sanction, should be imposed was held over. I deal with this at [186] – [193] below.

The evidence:

Factual evidence:

On 21 December 2009 I ordered that all evidence adduced in the Phase 1 trial was to stand as evidence in the Phase 2 trial. At the Phase 2 hearing oral evidence on behalf of the Balli parties was given by Hassan Alaghband. His first statement is dated 1 June 2009 and his second statement is dated 18 January 2010. Oral evidence on behalf of Mahan and FZE was given by Mr Hamid Sadeghi, Technical Deputy to Mahan’s Managing Director, whose statement is dated 17 January 2010, and who gave his evidence via a video link, and Mr Moattar, a consultant to Mahan’s President and in charge of its legal department. His first statement is dated 31 May 2009. He swore an affidavit concerning disclosure on 24 July 2009 and he has made 5 further statements on 22 and 25 January, and 1, 3 and 4 February 2010. The more recent statements also deal with the Balli parties’ successful application that Mahan be held in contempt of court, on which see [2010] EWHC 128 (Comm). No oral evidence was adduced on behalf of PK. There are two statements by Mr Beaubron, a Senior Vice President based in Luxembourg, dated 30 May 2009 and 18 January 2010. There are also two statements by Mr Glaister, a partner at Clifford Chance, dated 2 June and 2 July 2009, a statement by Per Waldelof, then an Executive Vice President of PK’s French subsidiary, dated 31 May 2009, and one by Vahid Alaghband dated 9 June 2009.

Expert evidence:

As well as the expert evidence that was before the court in the Phase 1 hearing (see PJ [50] – [53]), there are further reports on aircraft values and lease rates, and Iranian and United States law. On United States law, Mr Michael Sherman produced a supplementary report dated 24 January 2010. There were no further reports on Armenian and Dutch law.

The further reports on aircraft values and lease rates are by: Philip Seymour, the Managing Director of the International Bureau of Aviation, dated 22 January and 8 February 2010 on behalf of the Balli parties; Roy Webber, a Director of Aircraft Leasing and Management, dated 22 January 2010, on behalf of Mahan; and Douglas Kelly, Vice President Asset Valuation and Chief Appraiser of AVITAS Inc., dated 22 January 2010, on behalf of PK. The Joint Memorandum recording the outcome of a telephone meeting of these experts on 28 January 2010 is also before the court. Mr Seymour and Mr Webber gave oral evidence. There are also reports of inspections of MSN 26879 in Bangkok on 14 November 2009 by Ian Richards and of MSN 24383 in Tehran on 3 January 2010 by Joseph Smith. Mr Seymour and Mr Webber sought to assist the court. The areas of difference between their evidence were narrow, but important. On lease rates, for the reasons at [53]-[54], I accept Mr Webber’s evidence. On the effect of the option on the market value of the aircraft, for the reasons at [49]-[51], I accept Mr Seymour’s evidence.

As to foreign law, only in relation to Iranian law is there a significant difference between the views of the experts. The views of Dr Morteza Adel, whose reports are dated 12 June 2009 and 10 January 2010, were relied on by Mahan and FZE. The views of Mr Hamid Sabi, whose report is dated 31 December 2009, were relied on by PK. Dr Adel is an Assistant Professor at the University of Tehran's Faculty of Law with a doctorate in law from Manchester University and a practising member of the Iranian bar. He gave evidence at the earlier hearing. When doing so he said (29 July 2009 pages 52-53) that he has worked as a consultant for Mahan from time to time since 2005. His second report is a response to Mr Sabi’s report.

Mr Sabi practiced law in Iran between 1974 and 1979, left at the time of the revolution, and subsequently set up a firm based in London. He advises on Iranian law and indirectly advises on litigation in Iran and preparing cases for presentation by local lawyers in Iran. He was a member of the Iranian Bar Association until he left Iran and, although he has tendered his subscriptions to the Iranian Bar Association since then, they have not been accepted. He was, together with others, disbarred by a revolutionary court which, he maintains had no competence to do so. Mr Malek criticised him for not being up to date in relation to the Civil Code, and for claiming in his report that it was last substantially amended in the 1980s when important amendments were made in 2009 to the law of inheritance.

I did not find Dr Adel and Mr Sabi entirely satisfactory witnesses. My approach to their evidence is to look at the provisions of the Iranian Civil Code and to decide what its effect is by testing their views against its language and context. I have taken into account the secondary sources which have been put before me while recognising that the decisions of Iranian courts rarely refer to secondary sources such as scholarly comment.

Mr Sabi gave his evidence clearly. But on a number of matters, for instance, in relation to whether Iranian law would apply the lex situs or the lex registri to determine the validity of the mortgage, and the applicability in a domestic Iranian Court of the 1948 Geneva Convention on the International Recognition of Rights in Aircraft (“the 1948 Geneva Convention”) which has been signed but not ratified by Iran, for the reasons I give at [76] and [82] ff), his evidence was not convincing.

Dr Adel’s academic credentials are strong. In his oral evidence he was initially reluctant to accept that the views of commentators had any relevance whatsoever in submissions before Iranian courts although he then drew back from that position. His initial reluctance did not sit comfortably with what he had said about commentaries in his first report (page 5 Answer 3) and his reliance (page 14, Answer 10) on Dr Katouzian’s views on the law of pledges. There was tension between his approach to different provisions of the Civil Code. So (see [86]), he adopted a very literal reading of Article 772’s requirements and rejected any suggestion that the word “possession” in that provision does not mean “actual physical possession” because of the literal meaning of the word. But he insisted (see [95]) that the literal words of Article 308 on the tort of Ghasb should be glossed. There was also some tension between his evidence that Article 968 did not enable an Iranian court to apply English law to the creation of the mortgage over the second aircraft and his evidence at the earlier hearing that Iranian law would permit English law (as the applicable law) to apply to the Bills of Sale: see [81].

Procedural issues:

At the beginning of the hearing I refused an application on behalf of the Mahan parties to adduce the evidence of a forensic accountant. On the second day of the hearing I ruled that paragraph 51(a) of the Mahan parties’ Amended Defence did not, even when read broadly and not over technically, raise what has been described as the “US illegality issue” and that it was too late for an application by the Mahan parties to amend their pleadings to raise it. My reasons for these decisions were given at the time I made the rulings on 1 and 2 February respectively. An application on behalf of Mahan and FZE to amend their pleadings to allege that the Package 2 agreements were frustrated by the BIS’s repatriation order and TDO was opposed on the first day of the trial. Mr Shepherd said he was unable to deal with it at that time, did not raise the matter at any further stage, and all the necessary evidence was heard without objection. I therefore allow the amendment.

Findings of fact:

Introduction:

My previous judgment dealt with the Package 2 aircraft and the mortgages at [135]-[155], [157], [167]-[168], [196] and [209]. It dealt with the interest of the US authorities and the imposition of the TDO at [190], [199], and the steps taken in the light of the TDO at [200]-[216]. All evidence adduced in the Phase 1 trial has stood as evidence in the Phase 2 trial. I summarise the history of the loan by PK and the mortgages of the second and third aircraft briefly before turning to my findings on the issues that now fall for decision.

The background:

PK approved the loan facility on 18 December 2006. The financial documents, including the mortgages of the second and third aircraft, were signed on 21 December 2006: see PJ at [144]. The terms of PK’s facility prohibited the Package 2 aircraft from landing in Iran: see PJ at [143] and [146].

On 21 December 2006 (see PJ at [6]) the second aircraft (MSN 24383) was registered in Armenia and the third aircraft (MSN 26879) in the United Kingdom. The third aircraft was still at Schiphol. The location of the second aircraft on that date is disputed. It has become an important issue in relation to PK’s direct claim. In my previous judgment (PJ [7]) I recorded that, although it is Mahan’s case that the aircraft first arrived in Iran on 17 December, Balli and PK did not accept that. No witness had independent recollection on this and there was no documentary evidence of the date on which the aircraft landed in Iran. Since then additional evidence on this matter has been served in Mr Sadeghi’s statement and Mr Moattar’s fifth statement but it is still disputed. I consider the location of the second aircraft at [20]-[34].

In April 2007 the Balli parties requested a revision of the loan facility to extend the period but on 9 May PK refused to do so: see PJ at [168]. On 22 February 2008 the BIS ordered Balli to redeliver the Package 2 aircraft to the United States. On 17 March the TDO was issued and published on the BIS’s website. The loan to PK was due to be paid on 23 June 2008. The Balli parties did not pay it and on 24 June PK issued notices of default and, after obtaining permission from the BIS to make an agreement with Balli for the repossession of the aircraft, on 3 July took possession of the fourth to sixth aircraft.

I have referred to Mahan and FZE’s de-registration of the Package 1 aircraft from the Armenian register on 16 October 2008 and re-registration in Iran thereafter. PK learned of this on about 17 November 2008. It did not find out that Mahan claimed it was the beneficial owner of the aircraft until much later. In January 2009 Mahan stated it was operating the aircraft under a lease, had no knowledge of mortgages and would not deliver the aircraft to PK. At a meeting between PK, Mahan and their legal advisors in Düsseldorf on 5 March 2009 (see PJ [13] and [154]), the Mahan parties did not claim to own the aircraft. On 6 April 2009 PK gave notice to Balli and Mahan asserting a right to the possession of the second and third aircraft. It is thus on that date that any direct cause of action by PK against Mahan accrued. The Balli parties do not deny PK’s right to delivery up of the aircraft: see paragraph 30 of Vahid Alaghband’s statement made in the PK proceedings.

Location of the second Aircraft on 21 December 2006:

The evidence as to this is crucial to the determination of the governing law of the mortgage by Blue Sky Two to PK and thus to PK’s rights qua mortgagee. Mahan and FZE’s case is that the aircraft was in Iran on 21 December 2006 and the mortgage was invalid under Iranian law. It is for them to show on the balance of probabilities that the aircraft was in Iran on that date.

In Phase 1 I found (PJ [7]) that after the D-check on the second aircraft was completed and it was released by KLM, it flew to Fujairah on 7 November under a United Kingdom registration. There is no evidence as to the whereabouts of the aircraft between 7 and 20 November when it was re-registered in Armenia, or, if it was in Fujairah, why an aircraft fresh out of a D-check should have been there for almost two weeks. It was grounded in Fujairah on 20 November because of a dispute with the Civil Aviation Authority of the United Arab Emirates about its re-registration in Armenia. Hassan Alaghband’s evidence at the Phase 1 hearing (14 July, pp 28-9; 15 July p. 19) was that the aircraft was kept at Fujairah for about a month and (statement ¶141) that “it took about a month to sort the problem out”. Mahan’s case is that it arrived in Iran on 17 December 2006.

I have referred ([17]) to the state of the evidence at the previous hearing. Additional evidence on this issue has been given by Mr Sadeghi and Mr Moattar. Neither could give direct evidence that the aircraft arrived in Iran on 17 December or that it was present in Iran on 21 December but they rely on a number of documents.

The first is a document (exhibited to Mr Moattar’s fifth statement (dated 3 February 2010) said to be an invoice issued by the authorities at Mehrabad airport stating that for “register 74783”, that is the second aircraft, “OMFJ 17/12 9:0 EK83 27/12 14:2 EK83OIKK” and showing landing and parking charges in respect of the aircraft. “OMFJ” is Fujairah; “EK” is the code which denotes Armenian registration; and “OIKK” denotes an internal flight to Kerman.

The second document is a flight log for this aircraft. Its first entry is dated 27 December 2006. This records a passenger flight from Mehrabad to Kerman and a return flight on the same day to Tehran’s main international airport, Imam Khomenei airport. Another document, the captain’s log for 27 December records the flight as from Mehrabad (acronym THR) to Kerman, but records the returning flight as from Kerman to THR, and not to IKA, the acronym of Imam Khomenei airport.

In a letter dated 31 January 2010, Captain Majfoori, Mahan’s Deputy Managing Director asked the Director of Mehrabad airport to “confirm that the B747-400 aircraft of this airline with registration no. of EK-74783 bearing MSN 24383 has entered Mehrabad international airport on 17 December 2006, if possible”. The reply, on the same day, states that the aircraft “… entered Mehrabad airport from Fujairah airport at 0.58 local time on 17.12.2006 and has left Mehrabad airport to Kerman airport at 14:58 on 27.12.2006”.

There are also email exchanges between Mr Amini of Gatewick, a firm which acted on Mahan’s behalf in Fujairah, and Mr Moattar. In an email dated 22 December Mr Amini forwarded to Mr Moattar a response to an inquiry he had made. The response is signed “flight ops/FIA”, that is Fujairah flight ops. It states:

“As per our record, flight BLM8305, B747; registration no. EK74783 Departed at time 0348z from Fujairah destination THR. This may be treated as official confirmation of the requested information.”

It does not, however, give the date of the aircraft’s departure. A further email from Mr Amini to Mr Moattar referred to a negotiation with a Mr Ashraf of Fujairah airport operation. Mr Amini stated that the airport will not issue any official letterhead type certificate of the aircraft’s departure.

There is a further email from Mr Amini to Mr Moattar dated 27 January. This does not have the form of a forwarded email from Fujairah flight ops. It states that the information regarding EK74783 is addressed to Mr Moattar, and:

“ref yr request thu fax as per our record 17 December 2006 call sign BLM 8305 reg EK74783 B747 ATD OMF JO348Z dest THR”.

Mr Moattar’s fifth statement states (¶ 6) that the emails showed that Fujairah airport has officially confirmed that the aircraft left Fujairah on 17 December 2006. But there is no direct communication from Fujairah airport; nor any explanation for the reported refusal of the airport to confirm the departure on a document containing its official letterhead. Given the importance of this issue, I do not find it credible that Mahan and FZE would have left the matter to be resolved by an exchange of emails in this way.

What Mr Sadeghi said is significant. He is Mahan’s Managing Director’s Deputy with responsibility for technical matters. His evidence was that, as soon as each aircraft arrived at Mehrabad, an OP1 technical record would be created for it: see statement, paragraph 7 and Day 4, pages 30-32. He said that whenever an aircraft is moved or something is done to it an OP1 sheet was filled in: statement, paragraph 8 and Day 4, page 33. This included a necessary weekly inspection: Day 4, page 31 lines 17-21.

Mr Sadeghi also stated that a flight log would be created as soon as each aircraft arrived in Iran and the details from the log would be entered into Mahan’s computerised “CAMMIS” system where the information would remain and from which it would be readily retrievable: statement, paragraph 11, and Day 4, page 33. However, apart from the Mehrabad invoice, there is no document recording anything about the second aircraft before the flight log on 27 December. This is six days after the mortgage to PK was executed, ten days after the alleged arrival of the aircraft, and after the first weekly inspection would have been due.

Mr Moattar suggested that the ten day period between 17 and 27 December between the aircraft’s arrival in Iran and the flight to Kerman was due to sorting out practical administrative and regulatory matters. However, he was unable to give any detailed information about these and had no personal knowledge of why the aircraft might have been parked for ten days. He said (Day 5 page, 57 line 5) “it is beyond my knowledge to know why. There must have been reasons why it has been the case.”

Mr Malek submitted that Mr Moattar’s evidence was consistent with both the technical documents and with Hassan Alaghband’s evidence at the Phase 1 hearing. Mr Moriarty did not accept the authenticity of the document said to be a Mehrabad invoice. He pointed to the absence of any evidence from a person who made the document, was responsible for it being made, or who received it or had some responsibility in relation to its receipt. He also noted that the invoice showed a fee for parking but did not give an hourly or daily rate so that it cannot be said whether the amount corresponds to the entire period between 17 and 27 December. There is additionally no evidence the invoice was paid.

Hassan Alaghband’s evidence at the Phase 1 hearing is broadly consistent with the submissions made on behalf of Mahan. But the unexplained ten day delay after 17 December for an aircraft fresh from D-check and ready to fly, together with the absence of any flight log or airframe status report before 27 December 2006, the absence of any witness with any independent recollection of the aircraft first arriving in Iran on 17 December, and the unsatisfactory aspects of the emails Mr Amini sent to Mr Moattar mean that any inference that the aircraft did arrive on that day rests on fragile foundations. Even if the documents together with Hassan Alaghband’s evidence enable me to infer that, notwithstanding these matters, the aircraft did arrive in Iran on 17 December, I cannot infer from the absence of any document until 27 December that it remained on the ground at Mehrabad airport between the two dates. Mr Sadeghi’s evidence was that a technical record of weekly inspections would be entered on an OP1 sheet. There should have been a weekly inspection in the 10 days between 17 and 27 December. Mr Sadeghi’s evidence was also that a flight log would be created as soon as each aircraft arrived in Iran and that the details and the airframe status reports would be created and entered into the CAMMIS system at that time. There were, however, no such documents or entries before 27 December.

I do not consider that Mahan has established on the balance of probabilities that the aircraft arrived in Iran on 17 December 2006, or that, if it did, it was in Iran on 21 December. Mr Malek suggested that the absence of any OP1 sheet or flight log or airframe status report before 27 December shows that was the day it entered into service. That, however, is inconsistent with Mr Sadeghi’s evidence about what documents would be created where an aircraft landed and was on the ground for this period whether or not it was in service.

The risk of intervention by the United States authorities:

The risk of intervention by the US authorities was known to both the Balli and the Mahan parties before August 2007 when Mahan and FZE agreed to provide funding for the Package 2 aircraft. The SPV companies received letters in July 2007 from Boeing withdrawing its support because it had been informed by the US government that the aircraft were being operated for Mahan’s benefit: see PJ [190] and [171] – [172]. The United States authorities were not happy with the fact that the Package 1 aircraft were flying in and out of Iran. Those letters were discussed at a meeting in Düsseldorf on 20 July 2007 attended by Vahid Alaghband and Messrs Mazaheri, Arabnejad, Mahmoudi and Moettar: see PJ [172] and paragraph 25 of Mr Moattar’s first statement. There were also discussions relating to the US interest at a meeting on 29 July 2007.

It is recorded in Mr Moattar’s note of the meeting on 18 March 2008 after the TDO was imposed that “America’s reaction was not unexpected”, but that appears to be a note of what Vahid Alaghband told those at the meeting. Both Hassan Alaghband (Day 3, page 74) and Mr Moattar (Day 4, page 25) said that they did not foresee the precise steps that the United States authorities would take, that is the repatriation order and the imposition of the TDO, until they happened. It may well be that the exact mechanism by which the United States would seek to enforce its policy of sanctions against Iranian companies was not known. However, notwithstanding any view that the Package 1 arrangements were sanctions-compliant, in the light of the United States authorities’ knowledge that the Package 1 aircraft were flying in and out of Iran and the withdrawal of support by Boeing, I find that in the summer of 2007 it was foreseeable that some action directed at Balli and Mahan would be taken by the United States authorities and that both parties in fact foresaw this.

The agreement to provide funding to repay PK’s loan:

My findings about the four party agreement signed in Dubai on 4 May 2007, which was later amended and re-signed in August 2007 in Düsseldorf are contained in PJ [163]-[167], [170] and [180]. Clauses B-5 and B-6 of the agreement provided that Mahan and FZE would provide funds to service the PK loan and to repay it at maturity. There are three loan agreements (one in respect of each of the SPV companies) between FZE and Crypton Ltd and three agreements between FZE and Balli Group plc. The loan agreements obliged FZE to provide the Balli parties with a total of US$ 162.5 million in accordance with the schedules to the agreements.

There were discussions about how the funding was to be made before the August 2007 meetings in Düsseldorf. At a meeting on 20 July 2007 (PJ [172]) Mr Arabnejad suggested that the financial resourcing should only be for the first aircraft in the second package. Mr Mazaheri stated that Mahan had US$ 100 million, US$ 50 million less than the sum owed to PK and that he had said “sort it out. Give 150 to release the 6”. Vahid Alaghband also pressed for the funds in communications to Mr Mahmoudi and Mr Mazaheri dated 29 June and 4 July. At a meeting on 19 or 21 August (see PJ [175]-[176]) Mr Alaghband suggested that one aircraft could be released on payment of US$ 100 million in 15 days. This was before the agreements were re-signed in Düsseldorf, but the agreements re-signed were, in this respect, unchanged from those signed in May in Dubai.

The date of the last payment in the schedules to the loan agreements in the core bundle is 30 September 2007. Those were in respect of the first of the Package 1 aircraft (MSN 26881). The Balli parties’ claim is on the basis that the sums were to be advanced by 10 December the date for the last payment of the second and third aircraft. Vahid Alaghband’s evidence (first statement, ¶222) was that he asked Mr Arabnejad and Mr Mahmoudi at the meetings in Düsseldorf on 30 August to confirm that Mahan and FZE “could meet their advance obligations pursuant to these loan agreements before the end of the year” and they had said that they could and that the Balli parties would shortly receive the first instalment. The payments were not made in accordance with the schedules or by the end of the year.

After the meetings in Düsseldorf on 30 and 31 August, Vahid Alaghband continued to press for the funds: see his communications to Mr Mahmoudi and Mr Mazaheri dated 5 September and 31 October 2007. There were further exchanges of emails about the funding for the Package 2 aircraft in January and February 2008. These included emails from Mr Alaghband to Mr Mazaheri and Mr Mahmoudi respectively dated 8 and 23 January and the communications referred to in PJ [194] and [198].

The figure of US$100 million referred to in the July meeting was not achieved, although (see PJ [201]) by December 2007 Mahan's application for a loan of US$150 million ostensibly for the Package 2 aircraft was accepted by the Export Development Bank (“EDB”). Mahan received this sum in January 2008. Between 17 September 2007 and 3 March 2008 (see PJ [195]) Mahan or FZE made payments of US$67,897,864 to the Balli parties. I found (PJ [295]) that of these, in round numbers, US$57.8 million was transferred in relation to Package 2 and the new facility which was to replace PK’s loan. The rest of the loan from the EDB was used on other projects, although Mr Moattar said (Day 5, page 48) that Mahan only did so “once it became clear and we were sure that there is no possibility of handing over” the Package 2 aircraft.

Effect of the TDO on the funding agreement:

The terms of the TDO (see PJ [199]) prohibited any direct or indirect participation in any transaction involving any commodity exported or to be exported from the United States, or benefiting from such transaction. The TDO expressly refers to the Package 2 aircraft. Whether the arrangement between the Balli parties and the BIS is regarded as a settlement of a dispute or as a plea bargain in criminal proceedings, it relates to breach of the terms of the TDO. The total sum paid by Balli to the BIS was US$ 17 million. This indicates the BIS considered the breach was serious and that Balli had deceived it. However, I heard no evidence from the BIS and when Hassan Alaghband gave evidence, he did not feel able to comment on this because the plea-bargain procedure had not been finalised. But in view of these circumstances and what had happened during the course of the negotiations with Air Atlanta (PJ [216]), I do not consider that it was feasible for Mahan or FZE to have funded the transaction so that the Package 2 aircraft could, in the eyes of the United States authorities, be used to provide Mahan with capacity even if the aircraft themselves remained outside Iran.

The market value of the aircraft:

The Balli parties’ claims: The material date for the claims under the Torts (Interference with Goods) Act 1977 by the three SPV companies is 16 October 2008. It is common ground (see Balli’s closing submissions ¶¶20-21 and Mahan’s closing submissions, ¶114) that, if the Option Agreement is ignored, the adjusted market values provided by Mr Webber should be accepted. They are: aircraft 1 (MSN 24363), US$ 35.542 million; aircraft 2 (MSN 24383), US$ 35.397 million; and aircraft 3 (MSN 26879), US$ 43.630 million. I therefore accept those figures and find that the total value of the three aircraft on 16 October 2008 was US$ 114.569 million.

PK’s direct claim: I accept Mr Kelly’s unchallenged evidence that in April 2009 the value of the second aircraft was US$ 30.7 million and that of the third aircraft was US$ 43.1 million. Mr Webber did not give an adjusted market value for these aircraft as at April 2009 but stated (12 September 2009, ¶10.1) that as at July 2009 their respective adjusted values were US$ 30.671 million and US$ 40.535 million. These are very much in line with Mr Kelly’s valuations. Although there was no direct evidence on this, in the light of what was said about the difference between Mr Webber and Mr Seymour’s figures this difference also appears to be within valuers’ tolerances. I find that in April 2009 the total value of these two aircraft was US$ 73.8 million. The second and third aircraft were thus worth approximately US $5 million less on 6 April 2009 than they were on 16 October 2008, the bulk of the difference in relation to the second aircraft.

The effect of the Option Agreement:

On the assumption that the Option Agreement was not discharged by the conversion of the three aircraft by Mahan and FZE, the question arises as to whether, and if so to what extent, it affects the market value of the aircraft and the damages recoverable by the Balli parties or, more precisely, by the SPV companies.

I here deal with the experts’ evidence as to the effect if any on market value. My findings as to whether there was an unequivocal renunciation by Mahan and FZE and whether any such renunciation was accepted by the Balli parties are dealt with at [120] ff. I discuss the applicability of the decision in Chinery v Viall (1860) 5 H & N 288 and the hire purchase cases relied on by Mahan at [101].

Mr Webber’s supplementary report in January 2010 states:

“In my opinion, the effect of these clauses in the Option Agreement was to render the aircraft virtually unsellable during the option validity period as Mahan has the right to purchase the aircraft for €1 and in any event has the right to prevent any sale to a third party. … In the event that a buyer was interested in the aircraft despite these restrictions, the value of the aircraft would be derived from their likely market value in 2020 discounted by (a) the cost of parking and storage maintenance until 2020, and (b) the likelihood that Mahan’s purchase option would be exercised.” (¶ 6)

Mr Malek asked Mr Seymour about the situation of companies that have title to the aircraft who try to sell them to a third party where the third party knows that there is a restriction that provides:

“The aircraft shall not be sold, leased, pledged or otherwise encumbered or transferred without the prior written consent of Mahan.”

Mr Seymour said (Day 5, pages 99-100) that he would want to take that into account as he would the fact that the aircraft had been transferred to the Iranian register and were not under a maintenance programme that he fully understood. He agreed with Mr Malek’s suggestion that “at best it would reduce the purchase price significantly”.

It is, however, important to understand precisely what the experts’ evidence was on this matter. Mr Webber did not appear to have a full understanding of the full conditions and terms of the Option Agreement. In cross-examination he stated (Day 6, page 36 lines 10-21) he understood that an option fee had been paid and that only a further €1 needed to be paid by Mahan to acquire the aircraft. He did not appear to know that the terms of the option meant that it could not be exercised unless and until sanctions against Iran were lifted. His opinion was uninformed by any assessment as to the likelihood of this occurring before 2020. Moreover, (Day 6, page 35-36) it does not appear that he was told that the owners of the aircraft considered the option was not effective. Again, it is not clear that he took into account the fact that the option was to acquire the shares in the SPV companies and not to acquire the aircraft themselves.

Mr Seymour was cross-examined on the basis that the option was an option to buy the aircraft rather than the shares of the three SPV companies. His answers were to questions put on that basis. It was only in respect of an option to acquire the aircraft that he accepted that the existence of the option would reduce the purchase price significantly: see Day 5, page 99. However, he also said (Day 5, pages 98-99) there is a distinction between the value of the aircraft and the option price; and (see Day 5, page 97) that the existence of an option in itself would not mean that there was unusual pressure on either buyer or seller which would necessitate either a discount or a premium to “the most likely trading price”; i.e. the appraised value. This evidence was given in the knowledge that the only asset of each SPV company was one of the three aircraft.

I reject Mr Webber’s evidence (see ¶6 of his January 2010 report) that the existence of the option made the aircraft unsellable until 2020, deprived them of their current market value, and that the values that ought to be considered are those at 2020. His original valuations were made without reference to the existence of the option. He was only told about the option on 14 January, shortly before the trial. He did not, when making his original valuation, appear to have asked about any options or other agreements in relation to the aircraft or indicate in any way that he considered such factors would be relevant. Mr Seymour’s evidence was (Day 5, pages 96-97) that it is not unusual for there to be trusteeships, options and other agreements about aircraft which aircraft valuers do not see and which they do not take into account in making their valuations because to do so would introduce volatility in valuation. He also addressed the specific features of the option in this case and the restrictions upon its exercise whereas Mr Webber did not take account of the conditions to which the option was subject other than the payment of €1.

Lease rates:

Mr Seymour’s June 2009 report contains (page 25) a table giving lease rentals for the period July 2008 to July 2009 for each of the three aircraft. In November 2008 the figures are respectively US$ 0.48 million, US$ 0.50 million, and US$ 0.56 million per month. He assumed a lease of five years to a creditworthy lessee who made a contribution to maintenance reserves and provided a three month security deposit: Report, paragraph 55, and 8 February, page 117. Mr Webber’s September 2009 report states (¶11.7) that he considered Mr Seymour’s table, which had a smooth decline in lease rentals in the twelve months from July 2008, to be unrealistic due to the rapidly weakening market and the number of aircraft already parked. He considered that a realistic negotiated rental for 747-400s of the age of these aircraft would have been US$ 400,000 per month. Mr Seymour in cross-examination stated that the fact these particular aircraft were in a better than half-life condition and had the modifications required to fly under EASA rules set them apart from a lot of the other equipment in the market and that they would have commanded an additional premium.

The difficulties PK had experienced in leasing the Package 2 aircraft in this period, referred to in Mr Beaubron’s statement (¶¶9-11, 17-20 and 22), were put to Mr Seymour. His response was that PK’s difficulties might have arisen because it did not want to lease in the Haj market where there had been demand at the relevant time. Mr Beaubron’s statement, however, shows that PK had attempted to lease the aircraft to a Saudi Arabian airline and to an Indonesian one which planned to operate them in Saudi Arabia.

Moreover, Mr Seymour did not refer to the maintenance status of the particular aircraft as affecting lease rates in paragraphs 54 and 55 of his report. He first made the point in his responses to Mr Malek’s cross-examination. Although the maintenance of an aircraft will be a factor in the bargaining between the prospective lessor and lessee, I accept Mr Webber’s evidence that rental values follow the half-life value of the aircraft and not the maintenance adjusted value. In the light of this, the market conditions, and the fact that the aircraft were likely to be leased in the secondary or tertiary market, I prefer Mr Webber’s evidence and accept his figure of US$ 400,000 per month. I consider the position of maintenance reserves at [59].

The US$ 400,000 per month represents gross income from the leases. The next issue is the figure to be deducted from it to produce the loss of profit. The calculations in Hassan Alaghband’s second statement and the documents exhibited to it make no deduction whatsoever for this. In cross-examination he accepted that there would be costs but said that, because the SPV companies only had two employees and no overheads, their costs were part of the general overheads of the Balli group. He stated that, when the costs were allocated to the SPV companies, they would be covered by a fee of US$ 30,000 per aircraft per year. His evidence (Day 3, pages 19-20) was that there would be no travelling costs or consultants fees, and that audit fees were included in the US$30,000 per aircraft per annum. He also stated that, although insurance features as a cost in the accounts of the three SPV companies, it would be reclaimable from a lessee.

Mr Seymour accepted in cross-examination (Day 5 page 120-122) that finance costs, depreciation, marketing costs, legal fees, brokerage fees, and the cost of storage between leases and required modifications or upgrades would have to be deducted from the gross lease income. Although Mr Shepherd submitted that the question put was whether “typically” such costs would be incurred and not whether in the circumstances of this case the costs would actually have had to have been incurred, Mr Seymour’s final answer to this line of questioning in relation to the net profit was that “it would have definitely have deductions from the lease income”. Given that Mr Alaghband’s original calculations make no allowance for any such cost and the figure of US$ 30,000 per aircraft per year only emerged in his oral evidence and, given Mr Seymour’s acceptance that typically the type of cost listed would have been a deduction from the gross income, I reject Mr Alaghband’s evidence that the cost in this case is restricted to a total of US$ 90,000 per annum for the three aircraft. Apart from these transactions, the Balli group is not in the airline business. As such it is not credible that they would not use consultants to market the aircraft. In principle, finance costs, depreciation, storage and marketing costs and legal fees are properly deductible from the gross income. I do not, however, have any evidence, as to what these costs would be save that Mr Seymour stated (Day 5 pages 120 and 122) that a brokerage fee would be between about a month’s lease rental or 1.5% of the aircraft’s value and that storage costs varied considerably. Where there was a maintenance contract for ongoing upkeep they might be absorbed through the monthly service charge but otherwise, while costs varied according to location, they could be thousands of dollars a day. I deal with the consequences of this finding in [136].

Mesne profits/User damages:

Mr Alaghband assesses the “user damages” due to the Balli parties as totalling US$ 38,270,584. He states that his calculations are as to the profit which Mahan has made and makes from these aircraft. He states the calculations are based on Mahan’s November 2005 business plan because Mahan has not disclosed what profits it earned between 16 October 2008 when the aircraft were converted and the commencement of the Phase 2 hearing. Mr Alaghband’s calculations were not challenged. But the basis upon which he proceeded shows that despite the description of “user damages” what is claimed is a disgorgement remedy of Mahan’s profits.

The difficulty with this is that disgorgement damages were not pleaded. Moreover, user damages, a more modern description of what used to be called mesne profits, differ from a disgorgement remedy focussed on profits. They are measured by reference to the reasonable rental value of the converted goods and not the profits made by using them: see the discussion at [133] – [135].

The issue under this part of the claim is thus as to the reasonable rental value for these aircraft. I have made a finding that this would be US$ 400,000 per aircraft per month. However, Mr Seymour’s evidence, consistent with the leases of the Package 1 aircraft to BAW, is that in the secondary or tertiary market a lessor would also require payment of maintenance reserves. The maintenance reserves in those leases were in part calculated by reference to the number of flight hours and a minimum utilisation rate of 250 hours per month. When the leases were converted to full repairing leases the rent was increased to US$ 895,000 per month. This was an increase of US$ 395,000 per month. There was no suggestion that this was an inappropriate average figure for maintenance reserves. It is indeed less than the sum that would be payable for the minimum of 250 hours per month under the original agreement. Adding the monthly figures for rent and maintenance reserves produces a figure for mesne profits or user damages of US $795,000 per month. The sum in respect of the period between 16 October 2008 when the aircraft were first converted and 16 March 2010 is US $13.515 million per aircraft.

Consequential loss:

PK’s claim is confined to user damages save in respect of any consequential damages resulting from a diminution in the value of the second and third aircraft should they be delivered up. The Balli parties’ pleaded claim (supported by Hassan Alaghband’s evidence) is not so confined. But, notwithstanding the way the case was pleaded and the fact that the Balli parties’ claim for consequential loss was approximately US$ 4.8 million greater than the disgorgement remedy they sought under the heading of “user damages”, during the hearing it became clear that their primary claim is for user damages: see for example Mr Shepherd’s submissions: Day 2, page 67 and Day 8, page 50. This was perhaps because of the difficulties, to which I shall refer, with the claim for consequential damages. I shall, however, deal with it because (ignoring how what is recovered would be divided between the Balli parties and PK), although Mr Shepherd eschewed any desire to obtain double recovery, the claim for consequential loss was not formally abandoned.

Evidence about the claimant SPV companies’ consequential losses was given on two alternative assumptions. The first is that Mahan and FZE do not deliver up the aircraft. The second, which seems unlikely at present, is that the aircraft are delivered up. Delivery up seems unlikely because the aircraft are grounded in Tehran as a result of a criminal claim brought by the EDB. If the aircraft are released, Mahan has said that it would pay damages and acquire title to them.

Hassan Alaghband’s evidence is that, if Mahan and FZE do not deliver up the aircraft, the SPV companies’ consequential losses are as follows. The SPV companies will have lost rental income from November 2008 until they receive the value of the aircraft, are able to procure, put into service and lease out alternative aircraft. Hassan Alaghband’s assessment of the period of the loss is made on the basis of the experience with the Package 2 aircraft: Day 2, pages 78-79. His calculations do not include the period between October and the end of December 2008, and are made on the basis that the Balli parties will start to look for a replacement aircraft after my judgment is given, which he assumed would be by April 2010. The calculations include; (a) about six months to get the aircraft records straight as in the case of the Package 2 aircraft, (b) time for a D-check which is between three to six months, and (c) time to market the aircraft which cannot commence until the aircraft and their records are ready for inspection by a potential lessee. The lease rate Mr Alaghband used in his calculations is based on that in Mr Seymour’s report but adjusted to reflect the higher aircraft values given by Mr Webber in the light of the actual condition of the aircraft as inspected by Mr Webber.

Hassan Alaghband’s evidence was that it would take a number of months to negotiate lease terms and return conditions and that the aircraft would not be leased out until May 2011; that is some twelve months after the Balli parties start to look for replacement aircraft. The claim is thus for loss of lease income from January 2009 until May 2011; two years and four months. Mr Alaghband has applied a 4% discount to this figure in order to reflect the present net value of obtaining the damages now. The result of his calculations is that, on the assumption that Mahan and FZE do not return the aircraft but pay damages, the consequential losses amount to US$ 43,117,751.

Hassan Alaghband’s estimate that it will take twelve months from the time the Balli parties start to look for replacement aircraft to get them ready for service and lease them out is based on Balli’s experience with the Package 2 aircraft and is also consistent with the position in respect of the arrangements made for the Package 1 aircraft. Mahan learned of their availability in the autumn of 2005: PJ [64]. In November 2005 Eagle, through whom Mahan was seeking to acquire the aircraft, signed a letter of intent to purchase them and a deposit was paid: PJ [66]. By January 2006 Balli was fully involved. The aircraft were purchased on 28 September 2006: PJ [7]. The first two aircraft arrived in Iran ready for service three months later in December 2006, and the third aircraft arrived eight months later in May 2007: PJ [7]. Mr Webber said (Day 6, page 4) that there are now some forty-five 747-400s available or parked and in the current market situation replacement aircraft could be “sourced” within a matter of just a few months. He did not, however, give evidence as to the time it would take to get such aircraft ready for service (which in the third aircraft was eight months) and to find lessees in the current market.

I accept Mr Alaghband’s estimate of twelve months but do not accept his other calculations for the reasons I have given at [53]-[54]. I do not consider the lease rate he used is the appropriate one. Nor, for the reasons I have given (see [55]-[56]), do I accept that only US$ 90,000 per annum would have to be deducted from the gross lease income to produce a net profit figure. Without evidence as to the figures to be deducted from the gross lease income it is not possible to produce a figure for the net loss. The Balli parties have thus not made out their claim for consequential damages.

Quantum in respect of the agreement to provide funding:

The Balli parties have claimed over US$ 467 million in respect of the failure by Mahan and FZE to provide funding to enable PK’s loan to be repaid: see Hassan Alaghband’s second statement, paragraphs 64-83. Mr Alaghband’s evidence is (op cit., ¶51) that, had the Mahan parties provided full funding, the Balli parties would have discharged the PK loan by 31 December 2007. The losses claimed are; the loss of lease income and management fees for the Package 2 aircraft, and their residual value. The calculations also include loss of lease income and management fees for the two Package 1 aircraft mortgaged to PK, their residual value, and the amounts payable to PK under the loan.

Here too (see [60]) there is an element of double counting with the claim under the 1977 Act. Moreover, the US $ 467 million claimed is based on a lease rate which I have rejected both in terms of the monthly amount and because it is a gross sum. Furthermore, insofar as it includes amounts payable to PK under the loan, in cross-examination Hassan Alaghband admitted (Day 2, page 147) that PK’s recourse under the loan was limited to the aircraft as assets. That this is so is clear from clause 6 of the Facility Agreement and from Mr Beaubron’s evidence. Mr Beaubron’s evidence (statement, ¶8) was that the loan was to be with limited recourse and that, if not repaid, PK could enforce its security over the aircraft but could not, except in particular circumstances (see PJ [145]), look to Balli for repayment. There is no evidence that any of those circumstances have arisen or might arise.

As to the steps taken by the Balli parties, these included discussions with potential lessees; Eagle Aviation SA, (Footnote: ¹) Pullmantur, a Spanish tour operator, Elite Airlines, a Greek carrier, S7, and Transaero: see Hassan Alaghband’s second statement, paragraphs 86 and 94 and Vahid Alaghband’s statement, paragraph 235. For a variety of reasons none came to fruition. Hassan Alaghband stated that S7 did not in the end wish to proceed, that Balli formed the view that Elite Airlines was unsuitable, and that Transaero did not meet conditions precedent.

Hassan Alaghband stated there were discussions with DVB Bank AG and PK to refinance the loan and (¶87) that they would only have been able to obtain refinancing if they had leased the aircraft to reputable third parties. He also stated (¶95) that when Mahan and FZE resumed funding in January 2008 these discussions were wound down and that after the TDO was imposed Balli faced difficulties in obtaining funding from elsewhere. At that time (see PJ [203], [213] – [216], and [218] there were discussions about the Package 2 aircraft with other airlines, in particular Air Atlanta, although those with Air Atlanta were on the basis that Mahan would provide the funding for the transaction.

There was no consideration given by the Balli parties to Balli Group plc itself self-financing the transaction by, for instance, obtaining a loan on the security of its own assets and making an inter-group loan to the SPV companies. The accounts of the six Blue Sky SPV companies contain many inter-group loans but the evidence is that they did not look to their parent company or other members of the group to assist in refinancing the PK loans. They also did not consider the possibility of short term financing and concentrated on a strategy of refinancing the PK bridge facility into longer term financing. I deal with the consequences of this finding at [144]-[148].

Findings as to foreign Law:

Introduction:

Foreign law is relevant to two questions. The first is the property effect of the mortgages of the second and third aircraft, i.e. the validity of the mortgages. The second is the ability of PK to bring a claim for the Iranian civil wrong of “Ghasb”, or usurpation of PK’s rights, in respect of Mahan’s refusal to hand over the second and third aircraft on and since 6 April 2009.

This section contains my findings as to the content of the relevant systems of foreign law in the light of the evidence before me. I consider the choice of law rules in English private international law that determine the applicable law at [151] – [185]. It suffices here to indicate the alternatives to English law. On the first question, the law which governs the property effects of the mortgages, for the third aircraft the alternatives are English law as the lex registri or Dutch law as the lex situs on 21 December 2006. The alternatives for the second aircraft are Armenian law as the law of the state in which the aircraft was registered, the lex registri or Iranian law as the lex situs, the law of the country in which, on Mahan’s case, the aircraft was located when the mortgage was made.In view of my finding that the Mahan parties have not established that the second aircraft was in Iran on 21 December 2006, Iranian law falls out of consideration as the applicable law, but I set out my findings on the position under Iranian law.

English, Armenian, and Dutch law:

English, Armenian, and Dutch law are only potentially relevant in relation to the first question and there is no issue as to the position under those legal systems. As a matter of English law both mortgages are valid and effective. It is common ground between the Armenian experts, Messrs Babadjanian, Khzmalyan, and Mouradin, that the mortgages are valid according to Armenian law: see Joint Memorandum of meeting held on 1 and 3 July 2009. It is also common ground between the Dutch experts, Messrs Crans Falkena and Janssen, that a Dutch court would hold that the mortgage of the third aircraft is valid because it would apply English law as the lex registri at the time of the mortgage: see paragraph 3 of their Joint Memorandum. A comment in the table setting out the different positions and the joint view of the Dutch experts states “the experts are in full agreement that a Dutch court would use the substantive law of the country where the aircraft was registered as to nationality at the time of the creation of the relevant security interest”. In the case of the third aircraft this would be English law. However, they also agree (Joint Memorandum paragraph 5) that “where Dutch domestic law would apply the mortgage as contemplated in the mortgage and security assignment dated 21 December 2006 would not create a valid mortgage (hypoteck) under Dutch law.” The issue is thus whether the English choice of law rule on this issue refers to the Dutch conflict of laws rules and permits the “renvoi” of the issue, or whether it refers to domestic Dutch law. I consider this at [157] ff.

Iranian law:

The position under Iranian law in relation to both questions was strongly contested. The differences between Dr Adel and Mr Sabi concerned the interpretation of provisions of the Iranian Civil Code, the approach of Iranian Courts to interpretation, the role of scholarly commentary, and the position of an unratified treaty. It is thus necessary to consider the basic framework of Iranian law.

It was common ground that Iran’s legal system is based on the various Codes. Article 167 of the Constitution requires judges to apply the text of the Codes although they are permitted to refer to Islamic jurists and fatwa where there is a gap. Iranian law does not have a precedent based system save in respect of decisions of the Supreme Court when sitting en banc. The Supreme Court rarely sits en banc and the experts did not refer to any decision by it (or indeed any other decision) relevant to the current case. They agreed that judgments generally refer only to the Articles of the relevant Code and do not, save exceptionally, refer to scholarly commentary. They differed as to the extent to which scholarly commentators were referred to by lawyers in their submissions. Dr Adel was initially reluctant to accept that they were. Although he drew back from that position, he regarded it as important that the views of scholars are not sources of law and thus not of relevance in relation to provisions of the Civil Code which are clear. He, however, accepted that Professor Katouzian, whose views were relied on by Mr Sabi, was an influential commentator whose work, although not binding authority, was respected.

Dr Adel and Mr Sabi also differed on the position in Iran of an international convention which has been signed but not ratified by Iran. The 1948 Geneva Convention on the International Recognition of Rights in Aircraft is such a convention. Dr Adel considered that such a convention has no direct effect and authority in Iranian courts and is not law. Mr Sabi’s report does not state that the 1948 Geneva Convention has not been ratified by Iran and treats it as taking precedence over the express provisions of the Civil Code. In cross-examination Mr Sabi considered that a signed but unratified convention might be valid if the Iranian Foreign Ministry so regarded it. This was not mentioned in his report. On this matter I prefer the evidence of Dr Adel. There was, in any event, no evidence that the Iranian Foreign Ministry had made a statement of the sort Mr Sabi considered would incorporate an unratified convention into Iranian law.

Is the mortgage of the second aircraft effective as a matter of Iranian law? I first set out the relevant provisions of the Iranian Civil Code taken from Dr M.A.R. Taleghany’s 1995 translation which was relied on at the hearing by Mr Moriarty and Mr Malek and (subject to one or two corrections) by Dr Adel and Mr Sabi.

“Article 10 – Private contracts shall be binding on the contracting parties provided they are not contrary to the express provisions of the law.

…

Article 21 – Ships, large and small, boats, mills and bathouses set up on rivers or seas which are capable of movement …. shall be considered moveable but the attachment of some of the aforesaid may, due to their importance, be made according to special arrangement.

…

Article 772 – The mortgaged property must be given to the possession of the mortgagee, or to the possession of a person appointed by the parties; but it is not a condition of the validity of the transaction that the property should continue in the possession of mortgagee.

…

Article 966 – Possession, ownership and other rights over movable or immovable properties are subject to the laws of the country in which they are situate. Nevertheless, the transfer of a movable property from one country to another may not affect the rights that persons may have acquired over that property in accordance with the laws of the country in which the property was first situated.

…

Article 968 – Obligations arising out of contracts are subject to the laws of the place where the contract was concluded, except where the contracting parties are foreign nationals and have expressly or impliedly subjected the contract to another law.

Article 973 – Where the foreign law which must be observed … in accordance with the foregoing Articles, has made reference to another law, the court is not bound to observe such reference unless the reference is made to the laws of Iran.”

Although paragraph 5 of Dr Adel’s Second Report expresses disagreement with paragraph 23 of Mr Sabi’s report, it appears to be common ground that as a result of Article 973, Iranian law would not apply the renvoi doctrine unless the applicable law refers the issue to Iranian law.

As to the position under domestic Iranian law, Mr Sabi’s evidence was that, in the light of Article 968, an Iranian court considering the effectiveness of the mortgage would apply English law because (see Report, ¶24 and Day 7, pages 2-5) England is the place where the mortgage was made and English law is the law chosen by the parties who are both foreign (i.e. non-Iranian) nationals. Mr Sabi stated that although only the contracting parties are bound by the contract:

“if the contract has the effect of creating property rights (such as sale or mortgages) the non-contracting parties who take possession of such property may also be affected by the property rights that were created. Thus, at no time would the Iranian court apply Iranian domestic law to establish the effectiveness of the deed of mortgage.” (Report, ¶24)

Dr Adel considered that Article 968 does not apply to the property effects of the transaction. Those he said (First Report, ¶¶15-17 and Second Report, ¶1.) are governed by Article 966 which states that the governing law in relation to issues of possession, ownership and other rights over movable or immovable property is the law of the country where the thing exists or is situated. Dr Adel concluded that if the second aircraft was in Iran on 21 December 2006 the mortgage and the transfer of title to PK are not valid.

The evidence on this matter by both the experts was problematic. Dr Adel’s evidence on this matter is not entirely satisfactory because of the tension, to which I have referred (see [13]), between his evidence that Article 968 did not enable an Iranian court to apply English law to the creation of the mortgage over the second aircraft and his evidence at the Phase 1 hearing that Iranian law would permit English law (as the applicable law) to apply to the Bills of Sale. He was not comfortable when the point was put to him in cross-examination and (see Day 7, page 121) sought to qualify what he had said on the earlier occasion inter alia by suggesting that Article 968 may not apply to a contract made outside Iran. But, although at the earlier hearing Dr Adel did say (29 July 2009, page 57) that Iranian law permitted English law to apply to the question of transfer of title by the Bills of Sale, the focus of the questioning and his answers at that time (29 July 2009, page 42) was on the applicable law of the contract. Dr Adel’s response to the question whether, if the Bills of Sale contained an express choice of law clause in favour of English law, that would be recognised by Iranian law was (29 July 2009, pages 42-43) that this is “not so easy”.

Mr Sabi’s report is also not satisfactory on this issue. His opinion is not in fact primarily based on Article 968. The report (¶¶14-23) gives a number of other reasons for concluding that an Iranian court would not apply domestic Iranian law to determine the enforceability of the mortgage. His principal argument is that an Iranian court would apply the lex registri. His argument is based on the special characteristics of movables such as ships and aircraft which are routinely in transit, the applicability by analogy of Article 21 of the Civil Code which applies to ships but not to aircraft, and the fact that Iran is a signatory to the 1948 Geneva Convention which he stated meant that Convention takes precedence over the provisions of the Civil Code. None of these points were put to Dr Adel and Mr Moriarty did not rely on Mr Sabi’s views about the direct applicability in Iranian courts of the 1948 Geneva Convention or that Article 21 of the Civil Code would be applied analogically to aircraft. He was right not to do so.

Only after dealing with the matters to which I refer in [82], does Mr Sabi’s report refer to Article 968. Paragraph 24, from which I quoted in [79], states that, if “an Iranian court… is persuaded to ignore the special characteristics of aircraft as a distinct class of movable asset and refuses to apply the law of registration of the aircraft” it would apply English law as the lex loci contracti and the law chosen by the parties who are not Iranian nationals. The difficulty with this is that Article 968 refers only to the validity of “obligations arising out of contracts” (emphasis added). It does not on its face refer to property rights which are explicitly addressed in Article 966. Mr Sabi provided no explanation in his Report as to how Article 968 relates to Article 966. He did not give a satisfactory explanation of the relationship in his oral evidence. But the distinction between the contractual effects of a transaction and its property effects is well known and indeed is recognised in paragraph 7 of Mr Moriarty’s closing submissions. On this issue, despite the reservation to which I have referred, I prefer the evidence of Dr Adel.

Mr Sabi also considered that the mortgage was valid according to domestic Iranian law under Article 772 of the Civil Code because the actual transfer of physical possession is not a necessary condition for its enforceability. His reasons are given in paragraph 26-41 of his report. His evidence is that it suffices if the mortgagee is given dominion and control over the mortgaged property. He stated (see ¶43) that the authority under clause 5.1.2 to take possession of the aircraft, under clause 5.1.3 to sell the aircraft, under 5.1.11 to appoint a receiver, and under clause 9 to effectively take control of the mortgaged property gives PK the requisite dominion and control for the purposes of Iranian law.

In his oral evidence Mr Sabi emphasised the practical difficulties of any other rule and the fictional nature of Iranian practice using notarised deeds which acknowledge that a transfer of possession has taken place. He said these showed that an actual transfer of physical possession was not necessary. He relied on the views of Professor Katouzian in his Commentary on the Civil Code and the definition of possession in Dr Langroudi’s Legal Terminology, (3^rd ed., 1988). Dr Langroudi states that “possession” may be “direct” or “indirect” and can include property under a person’s control which is not in his actual physical possession. Professor Katouzian relied on the practice in relation to mortgages of real estate of using a notarial document, the practical difficulties of a requirement of actual physical possession, and Article 42 of the Maritime Code which provides that a mortgage of a ship shall not be conditional upon taking over the possession of the ship. Mr Sabi (¶46) considered that an Iranian court would apply the principle in Article 42 of the Maritime Code analogically to aircraft.

Dr Adel’s view (see Second Report, ¶¶8-11, 15, and 17), is that it is clear from Article 772 that physical possession is necessary. He states that, while Professor Katouzian’s emphasis on the necessity of documents over the mortgaged property is not a deviation from Article 772 but an extension of the meaning of the word possession, it is a scholarly comment which cannot override the clear text of the law as stated in Article 772. Dr Adel recognised that the acknowledgement of a transfer of physical possession in a notarised deed will in practice suffice (Second Statement, ¶14) but said that it did so for evidential reasons. The rules of evidence in Articles 1284-1292 and 1309 show that it will in practice be almost impossible to set aside a mortgage granted by way of a notarised deed containing an acknowledgement that physical possession had been transferred. Moreover, although Dr Adel accepted Dr Langroudi’s view, the examples he gave involved items which at one stage had been, but were no longer, in the physical possession of the person.

In the light of the evidence (see Dr Adel, Day 7, pages 97-98), it is clear that Professor Katouzian does not state that the law of Iran at present is that physical possession is not necessary. His book invites either the legislature or the Iranian Supreme Court sitting en banc to deal with the point. It was common ground that it is open to the Supreme Court to do so. There is no evidence that the requirement of physical possession has caused difficulties in Iran, and Dr Adel’s evidence is that the issue has not arisen in any case.

Mr Moriarty relied on the decision of Wynn-Parry J in Re Duke of Wellington [1947] 1 Ch. 506 at 515 in submitting that the role of an English court in this situation is to ascertain the law as it would be expounded by the Supreme Court of, in this case, Iran, however difficult it is to predict what that court will do. Accepting this, it must be noted that there are particular difficulties in the present case. First, it is rare to see reference to commentators in decisions of Iranian courts, and Iranian law does not have a precedent based system save for the Supreme Court sitting en banc. Secondly, I have been referred to no decision of any court at any level that is relevant to the issue before me. I am thus left to determine the trajectory of Iranian law with the words of the Civil Code and the views of the commentators, who are rarely overtly relied upon.

Professor Katouzian and other distinguished commentators no doubt have some influence on the development of the law. But the practical disadvantages of a requirement of physical possession have been addressed in Iran by the system of notarised deeds, backed up by the rules of evidence to which I have referred. Faced with the language of Article 772, the Supreme Court may well validate that system on the ground that Iranian law has a practical way of dealing with any problems while affording the parties to a transaction the protection that a formal, if somewhat fictional, requirement can provide. In any event, on the facts of the present case, the provisions in the mortgage to PK relied on by Mr Sabi do not recite a transfer and transfer back of possession of the aircraft only a power to take possession in future. I accept Dr Adel’s evidence on this matter. I am unable to conclude that, on the facts of this case, the Supreme Court would hold that neither a transfer of physical possession nor the acknowledgement of such a transfer in a notarised deed is necessary for the creation of a valid mortgage in Iran. For these reasons, the mortgage of the second aircraft is not valid under Iranian law.

My finding on this point is strictly one of fact on the evidence in this case, although a fact of a peculiar kind: see Morgan Grenfell & Co. v. Sace [2001] EWCA Civ. 1932). Before leaving this point, however, notwithstanding the nature of my finding, I observe that the finding as to Iranian law by the Court of Appeal in The Islamic Republic of Iran v Baharat Galleries [2007] EWCA Civ 1374, albeit in a very different context, was that title could be acquired without a change in possession only by virtue of a specific statutory provision.

Can PK sue under Article 308 of the Iranian Civil Code for the wrong of “Ghasb”? The second question of Iranian law is whether PK can sue under Article 308 of the Iranian Civil Code for the wrong of “Ghasb”, that is usurpation of PK’s rights in the aircraft. Article 308 provides:

“Usurpation is the assumption of another’s right by force. Laying hands on another person’s property without authority is also considered usurpation.”

It is also relevant to set out Article 310 of the Civil Code although (see Amended Particulars of Claim, ¶16C) PK does not rely on it in its pleaded case. Article 310 provides:

“ If a person to whom some property has been lent or with whom the same is deposited or who holds a property under similar titles should deny the same, he is considered a usurper as from the date of denial.”

It was accepted by PK that the second aircraft was in Iran on 6 April 2009. It was not originally accepted that the third aircraft was, but neither Mr Sadeghi nor Mr Moattar were cross-examined on this and the matter was not referred to by Mr Moriarty in either his written or his oral closing submissions.

Dr Adel (Second Report, ¶¶21-26) stated that Article 308 does not cover the situation where a person refuses to give back property which that person once possessed lawfully. He also considered that neither Article 308 nor 310 apply to a bona fide challenge to ownership without “deceit” or “cunning” being used to deny that ownership. On the first of these points, Dr Adel considered that the words “without authority” in Article 308 show that the “laying hands” must be without authority, that is that the lack of authority must exist when possession is first taken. In his oral evidence he also stated (see Day 7, page 147 lines 12-13) that the phrase “without authority” means “you know that you don’t have authority”. Moreover his view (¶ 21) is that Article 310 also only applies where a person possessing another’s property by virtue of a contract “cunningly denies that contract (pretending the property was his own from the outset)”.

On this matter I prefer Mr Sabi’s view. Dr Adel’s approach to these articles in effect glossed the words used in them by adding a requirement of bad faith or “cunningness”. His approach to the construction of this provision of the Civil Code was fundamentally different to the literal approach he took to Article 722 (see above [85]). Mr Sabi’s view has the direct support of Dr Emami in his Civil Law, 3^rd edition vol 1 (1961) pages 362-363. Dr Emami states that the provisions of constructive usurpation in Article 308 of the Civil Code:

“apply where someone with legal permission holds a property in his possession for whatever reasons but continues his possession after the legal permission has expired.”

Dr Emami suggests that Article 310 of the Civil Code has a similar effect.

In view of my conclusion on this matter it is not necessary for me to reach a conclusion as to whether Mahan acted in bad faith or “cunningly”. However, Mahan’s conduct in relation to the de-registration and re-registration of the Package 1 aircraft was egregious. They used electronically created hotdox copies of the Bills of Sale which Mr Arabnejad and others falsely back-dated because, by the time they wished to use them, Hassan Alaghband was no longer a Director of the three SPV companies. It is difficult to regard as conduct that was done in good faith, but if it was it was certainly “cunning”. It was an example of the practice of Mahan doing whatever was necessary to ensure it obtained and retained the aircraft. This was frankly accepted by Mr Arabnejad in his evidence in the earlier hearing: see PJ at [42].

Discussion:

Quantum(1): The market value of the aircraft or nominal damages?

Mr Crane (at the Phase 1 hearing) and Mr Malek submitted that in this case damages under section 3(2)(b) of the 1977 Act are nominal and not the full market value of the converted aircraft on the relevant date. During the hearing Mr Malek stated that they did not pursue this point in respect of PK’s direct claim, so it is only of relevance in respect of the Balli parties’ claim. The nominal damages argument is put in a number of ways. The first (“the Chinery v Viall” point) is that account has to be taken of the fact that FZE provided the money for the purchase of the Package 1 aircraft. The second (see for example ¶72 of Mahan’s reply submissions in Phase 1) is that account has to be taken of the fact that the second and third aircraft were mortgaged to PK. The third is that account has to be taken of the option agreement.

The effect of the mortgages: It was submitted on behalf of the Mahan parties that a mortgagor can only claim damages to the extent of its equity of redemption and that because the loans to PK have not been repaid the two Blue Sky SPV companies were left with an equity of redemption which was worthless. They relied on Brierly v Kendall (1852) 17 QB 937, Toms v Wilson (1863) 4 B & S 455, and Moore v Shelly (1882-3) LR 8 App Cas 285. Those cases, however, are all concerned with the position of a mortgagor who owes money to the mortgagee but sues that mortgagee. In Brierly v Kendall Lord Campbell CJ made it clear (at 943) that the position would have been different had the mortgagor brought an action against a third party. In that case the measure of damages would have been the value of the goods.

Similarly, in The Winkfield [1902] P 42 and Chabbra Corp Pte v Jag Shakti (Owners) [1986] AC 337 a bailee and the pledgees of goods were held entitled to claim their full market value against the converter and not only a sum representing their interest in the goods. Save where a cross claim arising out of the same or a connected transaction (i.e. a set-off) was made by the defendant it was irrelevant that the claimant might be liable to account to a third party for part of the sum recovered. Accordingly, the fact that the aircraft were mortgaged to PK and the Blue Sky SPV companies might be liable to PK for any sums recovered from Mahan and FZE in respect of the second and third aircraft is irrelevant to the liability of the Mahan parties, save that they should not be held liable both to the two Blue Sky SPV companies and to PK.

No danger of double recovery: If Blue Sky Two and Blue Sky Three are paid the market value of the second and third aircraft as at October 2008 and, as is accepted by the Balli parties, they have to account for this to PK, to the extent that PK’s direct claim succeeds, it cannot also recover their market value as at April 2009. That this is so is seen from section 7(3) of the Torts (Interference with Goods) Act 1977 and also because both PK and the Blue Sky companies are parties to these proceedings and my Order will bind both. In principle it is for them to choose which claim to pursue. As the second aircraft was worth approximately US $5.6 million more on 16 October 2008 than it was on 6 April 2009, and the third aircraft was worth approximately US$ 0.5 million more, the Balli parties are entitled to recover a greater sum than PK would be entitled to recover in respect of any direct claim qua mortgagee of the two aircraft to the extent that its claim succeeds.

The Chinery v Viall point: In paragraph 112 of the Mahan parties’ skeleton argument for the Phase 1 trial it is stated that “it is well established that where, as here, the goods have been acquired on credit from the tortfeasor, the defendant is not required to pay the full value. The damages reflect the actual loss sustained by reason of the conversion – i.e. the value of the goods minus the price he would have had to pay for them”. In their closing submissions it is stated (¶¶329-331) “while there is a presumption that the value of the goods represents the claimant’s loss, that presumption is easily displaced”; it would be “nonsensical” to apply the principles in The Winkfield [1902] P 42 “when the claimant’s interest is limited by the rights or interests of the defendant”. They also state; “in order to determine the true loss suffered, the court will take a broad view of the commercial relationship between the parties and the economic reality of the situation”. They rely on Chinery v Viall (1860) 5 H & N 288, Wickham Holdings v Brook House Motors [1967] 1 WLR 295 and a number of other cases.

In the Mahan parties’ opening submissions for Phase 2 it is submitted that the claimant SPV companies “are entitled to no more than just compensation for losses actually suffered by them” by reason of the conversion (¶95), that (see Brandeis Goldschmidt and Co v Western Transport [1981] QB 864 at 873) it is for the claimants to prove what loss if any they suffer by reason of a tort, and when the effect of the tort is potentially adverse interference with the course of their business, it is for them to establish by evidence that there was in fact such adverse inference and that they suffered a properly quantifiable loss by reason of it.

Mahan’s case is (¶107) that the claimant SPV companies have not suffered any loss or damage by reason of the conversion, primarily because the aircraft were always intended to be operated for Mahan’s economic benefit. They rely (see ¶¶109-125) on the provisions of the Option Agreement, including the provision in clauses A4(b) and (d) that, pending the exercise of the option, Crypton is not able to encumber the shares in any way or, (clause D2) to pledge, sell or otherwise encumber the aircraft without Mahan’s written consent, and (clause D4 of the Side Letter Agreement) the restriction on the ability of the SPV companies to distribute any dividend.

Mr Malek submitted that the combined effect of these provisions is that this case falls within the line of authority commencing with Chinery v Viall which (¶126) “establishes that a claimant with only a limited interest in the converted goods cannot recover their full value”. He submitted that it is clear from the cases that a wide view is taken of the “interests” which will bring a case within the principle, which is not limited to cases where the defendant has a proprietary interest in the goods. Thus, damages have been decreased to take account of contractual rights to payment (Chinery v Viall), money payable by one party to the other under a statute (Butler v Egg and Egg Pulp Marketing Board (1966) 114 CLR 185), instalments paid under a hire purchase agreement (Wickham Holdings v Brook House Motors and Belsize Motor Supply Company v Cox [1914] 1 KB 244) and the ability of a claimant to sell all the property which had been converted (Borders (UK) v Commissioner of Police of the Metropolis [2005] EWCA Civ 197 at [7]).

He also relied on the decision of HHJ Seymour QC in VFS Financial Services (UK) Ltd v Euro Auctions Ltd and others [2007] EWHC 1492 (QB) at [101] – [103] where the claimant, which had let three trucks under a hire purchase agreement, sought the full value of the trucks from the converters. The judge considered that, as a result of the decisions in Wickham Holding v Brook House Motors as approved by the House of Lords in Kuwait Airways Corporation v Iraqi Airways Co (Nos 4 and 5) [2002] 2 AC 883, the damages under a hire purchase agreement fall to be assessed having regard to the true economic purpose of the agreement rather than on the basis that the legal property in the goods let remains in the supplier.

While it is accepted on behalf of Mahan (¶142) that none of these cases covers the situation of a lender with an option to purchase who converts goods to which the borrower has title, it is stated (¶143) that it is “not clear why the approach taken to hire purchase borrowers with an option to purchase who convert the goods in their possession should not apply mutatis mutandis to a converting lender with an option to purchase”.

Mr Malek also submitted that the fact that the money was borrowed by Crypton, the holding company of the claimant SPV companies, should not make a difference. On the evidence Crypton has no real existence, no employees, no bank account and no accounts recording any assets. To take account of the separate companies was said by Mr Crane in his Phase 1 reply submissions (¶¶88-91) to be to permit legal form to triumph over commercial substance and to disregard the commercial and economic realities.

The authorities relied on by the Mahan parties do not support the wide propositions for which they are cited; that is, where goods have been acquired on credit from the tortfeasor, the defendant is not required to pay the full value, and a claimant with only a limited interest in converted goods cannot recover their full value. Except for Borders (UK)vCommissioner of Police of the Metropolis they are cases in which if the ordinary market value measure of damages was awarded, the claimant would have ended up with a windfall as a result of his property right being infringed and that windfall would have been at the expense of the defendant.

Borders (UK) is in a different category but it does not assist the Mahan parties. The compensatory sum claimed by the retail booksellers against the market trader who converted their books did (see [2005] EWCA Civ 197 at [7]) take some account of the books which, had they not been stolen, would have remained unsold. However, the focus of the Court of Appeal’s decision concerned whether, as well as compensation for loss, the booksellers were entitled to an additional sum which the Master had described as exemplary damages. Rix LJ stated (at [39]) that the additional sum had been calculated with regard to considerations which might have been equally at home “in the compensatory sphere, at any rate as extended in the context of the tort of conversion by restitutionary concepts” considered by Lord Nicholls in Kuwait Airways Corpn v. Iraqi Airways Co (Nos 4 and 5)http://www.bailii.org/uk/cases/UKHL/2002/19.html[2002] 2 AC 883.

I turn to the other authorities relied on by the Mahan parties. In Chinery v Viall the unpaid seller of sheep who wrongfully sold them and was sued by the purchaser for conversion had no claim for the price of the sheep against the purchaser because he was in breach of contract. Had the purchaser been awarded the market value of the sheep he would have got the value of the sheep without ever having paid for them. Bramwell LJmade it clear ((1860) 5 H & N 288, at 294) that it was because the seller could not sue for the price because he was in breach that the purchaser could only recover the value of the sheep less the unpaid price.

In Mulliner v Florence (1878) 3 QBD 484 at 490 Bramwell LJ held that an inn keeper who had wrongfully sold goods over which he had a lien was liable in conversion for the full value of the goods without being able to set off the debt secured by the lien. Bramwell LJ said that the ground of the decision in Chinery v Viall was that because the seller could not recover the price in any form of action “it would be singular if the same act which saved the [purchaser] the price of the sheep should vest in him a right of action for the full value without deducting the price”.

In the hire purchase cases, exemplified by Wickham Holdings Ltd v Brook House Motors Ltd, had the finance company recovered the full market value of a car which had been converted by the hire-purchaser without giving credit for the instalments of hire paid to it, the finance company would both get the full value of the car and keep all the instalments already paid to it by the hirer to acquire the car. The position was similar in VFS Financial Services (UK) Ltd v Euro Auctions Ltd, albeit in a factually more complex scenario, and in the decision of the High Court of Australia in Butler v Egg and Egg Pulp Marketing Board. The cases are explained in this way in McGregor on Damages 18th. ed. ¶¶33-059 – 33-060. I accept Mr Moriarty’s submission that the amount of the damages in these cases has to be internalised because otherwise there is no basis upon which the party who is sued in conversion could claim or reclaim money owed or paid. It is only in very limited circumstances that a contract breaker is entitled to recover money paid: see Dies v British and International Mining and Finance Corporation Ltd [1939] 1 KB 724 and Rover International Ltd v Cannon Film Sales Ltd (No 3) [1989] 1 WLR 912.

As far as Brandeis Goldschmidt and Co v Western Transport is concerned, it is important to note that the claimants in that case had recovered the converted goods and the claim was one for wrongful detention and temporary deprivation of possession and use of property. In those circumstances it is clear that the market value measure of damages is not appropriate: see BBMM Finance (Hong Kong) v Eda Holdings [1990] 1 WLR 409 at 413 per Lord Templeman. Different considerations apply when the property is irreversibly converted and the claimant loses the property. In effect the distinction is that between conversion where the claimant sues for the value of the goods and detinue where he claims and obtains their return and which under the 1977 Act can now be claimed in proceedings for wrongful interference with goods: see McGregor on Damages 33-004 and 33-017. In the present case the aircraft remain under the control of Mahan, albeit now subject to the grounding direction of the Iranian Civil Aviation Authority.

In my previous judgment I set out (at [308]) the statement of Lord Nicholls in Kuwait Airways Corpn v Iraqi Airways Co (Nos. 4 and 5) [2002] 2 AC 883 at [67] about the aim of the law in respect of wrongful interference with goods. He stated that normally and prima facie the measure of damages is the market value of the goods at the time the defendant expropriated them. This paragraph is shortly after his approval of the results in Wickham Holdings, Brandeis Goldschmidt and Butler v Egg and Egg Pulp Marketing Board. Lord Nicholls gave no indication that the general rule in, for example, The Winkfield, that a party with a limited interest may sue in conversion for the full value of the converted goods was qualified by those cases. Lord Nicholls’ examples of the circumstances in which the prima facie measure is displaced are: where additional damage consequential on the loss of the goods is suffered or where (as is Brandeis Goldschmidt) the goods have been returned. He made it clear at [77] that the plaintiff is being compensated for the whole of his interest in the goods since payment of the damages extinguishes his title.

It is thus seen that the cases upon which the Mahan parties have relied are not cases where damages were restricted because the claimants had a limited interest in the converted goods. The fundamental difference between them and the present case is that in the present case the Mahan parties are not precluded from claiming the repayment of sums outstanding under the loan agreements. They did not do so in the Phase 1 trial because at that stage they were contending that Mahan or FZE were the beneficial owners of the aircraft. Although in the course of the trial they also sought to argue that the loans were shams, they had not pleaded this point: see (PJ [30] – [32]).

A claim for repayment of the loans would be a freestanding claim under the loan agreement, a separate agreement. It was contemplated that, in the light of my judgment, the Mahan parties would make this claim. At that stage, their position was that, if the loans were not shams, they would terminate them under clause 6.9 or 6.10.1 and claim repayment: see for example paragraph 30 of their skeleton for the hearing on 21 December 2009. To date they have not terminated the loan agreements or claimed repayment. Indeed, the focus of the submissions made on their behalf at the Phase 2 hearing was less on the position of the loan and more on the encumbrances created by the provisions of the Option Agreement. This change of focus, however, takes the present case further away from Chinery v Viall and the line of cases based on it.

A number of other differences between the present case and the cases relied on by the Mahan parties make it difficult to have regard to the loans for the Package 2 aircraft in assessing the damages payable by the Mahan parties for the conversion. The first is any claim in respect of the loans would not be a counterclaim by the Mahan parties against the aircraft owning SPVs who own the aircraft but a claim against Crypton which is the borrower under the loan agreements. This has a number of consequences. The reality is that the Mahan parties are seeking to set-off against their liability to the SPV companies which owned the Package 1 aircraft for the conversion of those aircraft, a monetary claim which they assert against Balli, Crypton and possibly Blue Sky Six (in relation to the money lent in connection with the proposed acquisition of the Package 2 aircraft). There can (see BCCI v Habib Bank Ltd [1999] 1 WLR 42) be no set off where the cross claims are between different parties. The strength of this principle is shown from the facts of BCCI v Habib Bank where the case for allowing such a cross claim was stronger because it was not clear in some of the cases before the court which company had incurred a particular debt. This case is similar to Mulliner v Florence (1878) 3 QBD 484 in which the owner of the goods converted by an inn keeper who held a lien over the goods was entitled to recover the full value of the goods without any reduction by way of set off in respect of the debt secured by the lien.

Secondly, even disregarding the fact that Mahan’s submissions seek to set-off a claim against different parties, the SPV companies’ damages claim for conversion is an unliquidated claim but the claim under the loan agreements is liquidated and thus cannot be set off against the unliquidated claim at law. A set off in equity requires the cross claim to arise out of the same or a closely related transaction to the claim itself but here, to the extent that the claim the Mahan parties wish to set-off arises out of the financing arrangements made for the Package 2 aircraft, it arises out of an entirely different transaction. Moreover, it is also an attempt to set off a monetary claim by the Mahan parties against the property claim brought by the claimant SPV companies. Again, Mulliner v Florence is of relevance and shows this is not possible: see (1878) 3 QBD 484, 490.

Thirdly, taking a broad brush approach and looking at what Mr Malek described as the “economic reality” ignores the fact that it was contemplated that if and when Mahan acquired the aircraft the Balli parties, i.e. Crypton, would be relieved of the loans. The attempt to reduce the damages for conversion by reference to the outstanding loan repayments, however, would enable Mahan to acquire the aircraft by paying damages but without taking over the loans.

The effect of the option agreement: I have found (see [51]) that the option did not in this case affect the market value of the three aircraft. Accordingly, the question whether the option agreement was discharged by the conversion of the aircraft does not strictly arise but, since it was fully argued, I deal with it.

Mahan’s conduct since October 2008 in wrongfully using copies of the Bills of Sale to de-register the aircraft from the Armenian register and to re-register them on the Iranian register and its assertion of legal and beneficial title was a clear and unequivocal renunciation of the Option and Side Letter Agreements. The premise of those agreements was that the SPV companies were the legal and beneficial owners of the aircraft. Mahan’s assertion of legal and beneficial title that, under the option, it could only acquire if the conditions were satisfied, is clearly conduct repudiating or renouncing the agreements between the parties concerning the aircraft, in particular the option agreement and the Side Letter Agreement.

It is significant that during the Phase 1 hearing Mr Mazaheri said (30 July 2009 page 37) that the “option had died” once the Bills of Sale were handed over. The Balli parties and Mahan gave Mr Mazaheri a central role in the operation of the option by virtue of the powers of attorney he was given in respect of it and the Side Letter Agreement. His position cannot be characterised, as Mr Malek suggested it should be, as simply the view of a witness giving evidence.

The next question is whether, if there was an unequivocal renunciation, the Balli parties, or more precisely Crypton, the other party to the Option Agreement, accepted it. Hassan Alaghband’s evidence was (second statement, ¶44.5) that “… as soon as Mahan/FZE stole the aircraft in October 2008 the option and in particular the restrictions in the option were no longer relevant for these purposes”. Mr Shepherd invited me to find that this was clear evidence that the Balli parties subjectively believed that the words and conduct of Mahan and FZE demonstrated an intention not to perform the agreements and that what the Balli parties did and said objectively demonstrated the same intention.

Apart from this, the submissions made on behalf of the Balli parties to some extent played down the requirement that a repudiation must be accepted. It is, however, clear that notwithstanding other differences between renunciation and repudiatory breach, all that an absolute refusal by one party to perform its side of the contract does (see Chitty on Contracts ¶24-018) is to “entitle the other party to treat himself as discharged”. If that other party does not treat itself as discharged but affirms the contract it may be possible for the renouncing party to revert to the contract. The need for acceptance is seen in, for example, Chitty on Contracts ¶¶24-021-023 and the decision of Flaux J in SK Shipping v Petra Export [2009] EWHC 2974 (Comm) at [95], [98] and [121].

It was contended on behalf of the Mahan parties that Balli did not accept any repudiation as bringing the Option Agreement to an end, but indeed relied on its existence during the Phase 1 proceedings and until the service of Hassan Alaghband’s second witness statement on 27 January 2010. In their closing submissions (¶13) it is stated that until then, “there had not been the slightest hint that Balli regarded the Option Agreement as having been repudiated, still less any suggestion that Balli had sent a communication purporting to accept that repudiation”. The submission relies on the fact that the Option Agreement was pleaded by the Balli parties and referred to in their written and oral submissions in Phase 1. I reject it. The Balli parties commenced proceedings for the recovery of the three aircraft soon after Mahan and FZE converted them. Balli’s conduct since then is not consistent with a continuation of the contract.

As to the pleadings and the submissions made in the two phases of these proceedings, I do not consider the contents of, for instance, paragraphs 7.4.31-7.4.33 of Balli’s written closing submissions in the Phase 1 hearing affirm the contract or are in any other way inconsistent with an acceptance of Mahan’s renunciation. The statement in paragraph 7.4.33 that to impose a condition on an order for the delivery up of the aircraft that the full sums outstanding under the loan agreements should be tendered would mean that “other aspects of the deal between the parties would also have to be considered e.g. whether the Option Agreements and the SLA should be discharged as well” can hardly be seen as an affirmation of the contract. The references to the option fees that were due are made in the context of what losses resulted from the breach. In the context of claims for damages, the effect of discharge is not retrospective: see Heyman v Darwins Ltd [1942] AC 356 at 399 and McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457, at 476.

It was also submitted on behalf of Mahan that the option is an irrevocable offer. If that is correct, it would mean that whatever the option holder does by way of throwing up the contract, the party which granted the option, is stuck with it. Mr Malek relied on UDT (Commercial) v Eagle Aircraft Services [1968] 1 WLR 74 for the proposition that an option to sell is a unilateral contract and as such any analysis based on repudiation is inappropriate. He referred to Lord Denning’s statement that:

“in point of legal analysis, the grant of an option… is an irrevocable offer (being supported by consideration so that it cannot be revoked). In order to be turned into a binding contract, the offer must be accepted in exact compliance with its terms.” (at 80-81)

Mr Malek also relied on the analysis in Anson’s Law of Contract (28^th ed)at 137 that there is “an immediate unilateral obligation” and thus “a contract from the start imposing a unilateral obligation from which one party cannot withdraw; but no binding contract… binding on both parties, comes into existence until the condition is fulfilled.”

I reject Mr Malek’s submissions. It is important to understand the context in which the statements on which he relied were made. In UDT (Commercial)v Eagle Aircraft Services case the Court of Appeal held that even a non-repudiatory or trivial non-compliance with an option condition precludes the exercise of the option. It was in that context that the Court stated that analysis based on repudiatory breach was inappropriate. Moreover, while an option may be an immediate unilateral obligation from which the offeror cannot withdraw, it does not follow that where the offeree renounces the whole transaction that the option remains alive however serious the offeree’s breach and whatever the offeror’s reaction to it. The submissions made on behalf of Mahan envisage a species of compulsory contractual relationship from which there is no escape whatever the grantee of the option does before the conditions for its exercise are fulfilled.

Conclusion the quantum of the Blue Sky SPV companies’ claims: For the reasons I have given, I reject the submission that the Blue Sky SPV companies are only entitled to nominal damages. If the three Package 1 aircraft are not delivered up, the Blue Sky SPV companies are entitled to their market value on 16 October 2006, which (see [43]) I have found to be US$ 114.569 million. The values of the individual aircraft are: aircraft 1, US$ 35.542 million; aircraft 2, US$ 35.397 million; and aircraft 3, US$ 43.630 million.

Conclusion on the quantum of PK’s direct claim: The position in respect of PK’s direct claim is that I have found that the Mahan parties have not established that the second aircraft was in Iran on 21 December 2006, the date the mortgage was executed. Accordingly, in the absence of proof of any other law, English law applies to the validity of the mortgage. The value of the second aircraft on 6 April 2009 was US$ 30.7 million and, subject to the position (see [100]) in relation to double recovery, if it is not delivered up PK is entitled to judgment in that sum.

PK’s direct claim in respect of the third aircraft depends upon my conclusions on the conflict of laws issues. For the reasons I give at [154] – [156], I have concluded that the applicable law is the lex situs, the law of the place in which the aircraft was situated when the mortgage was executed, and that the doctrine of renvoi does not apply so the reference is to the domestic law of the Netherlands. Accordingly, the mortgage is not valid and PK is not able to claim on it. Had I concluded either that the applicable law was the lex registri or that the reference to Netherlands law was a reference to its entire law, including its rules of private international law, English law would have applied (in the latter case by the operation of renvoi) and PK would have been entitled to the value of the third aircraft on 6 April 2009, which I have found to be US$ 43.1 million.

In the event, which seems unlikely, the aircraft are delivered up, any diminution in their value since 16 October 2008 (in the case of the Balli parties’ claim) and 6 April 2009 (in the case of PK’s claim) will be recoverable as consequential damages. It is, however, not possible to assess this at present. Only Mr Webber has been able fully to assess their condition. His September 2009 report (¶10.1) is now over six months old. The first and third aircraft have been grounded since 20 January. Their condition is likely to deteriorate if they are not maintained appropriately. Moreover, the second aircraft has been undergoing a C check for some considerable time and Mr Smith’s inspection report suggests that parts have been taken from it to be used on another aircraft. If the aircraft are delivered up, the matter can be dealt with at that stage, either by a judge or by being remitted to be dealt with by a Queen’s Bench Master.

Quantum (2): Mesne profits/User damages

The Mahan parties are liable to pay a reasonable rental value or mesne profits in respect of the converted aircraft. Strand Electric and Engineering Co. Ltd. v. Brisford Entertainments Ltd [1952] QB 246, 254-5 and Penarth Dock Engineering Co. Ltd. v Pounds [1963] 1 Lloyd’s Rep. 359, 361-2 are early examples of the modern approach. In Kuwait Airways Corporation v Iraqi Airways Co (Nos 4 and 5) [2002] 2 AC 883 at [87] (in a passage set out in PJ [317] Lord Nicholls (referring to his speech in Attorney General v Blake[2001] 1 AC 268, at 278-280) stated that in a situation in which a wrongdoer has benefited from use of goods owned by another, “[i]t 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”. This was said in the context of temporary use of goods which are returned. The position is a fortiori where they are not returned.

The effect of the TDO on the Balli parties’ ability to lease the aircraft is irrelevant because the award is restitutionary and not compensatory. The reasonable rental value is calculated by reference to the sum that the Mahan parties have saved as a result of their tort: see Strand Electric and Engineering Co. Ltd. v. Brisford Entertainments Ltd [1952] QB 246, 252, 255 per Somervell and Denning LJJ; Ministry of Defence v Ashman (1993) 25 HLR 513, 519 per Hoffmann LJ. I have found ([59]) that the reasonable rental value including the maintenance reserves for these aircraft which a lessor in the relevant market would require) is US $795,000 per aircraft per month. This sum represents a monthly sum of US$ 400,000 in respect of the rent and US$ 395,000 as maintenance reserves.

The Balli parties have accepted that they will, pursuant to section 7(3) of the Torts (Interference with Goods) Act 1977, be liable to account to PK in respect of damages for the market value of the two mortgaged aircraft. The position as between the Balli parties and PK in relation to mesne profits/user damages is not as clear. However, vis a vis the Mahan parties they are entitled to payment at this rate from the respective dates of conversion until the aircraft are delivered up or damages are paid in lieu of delivery up. The sum in respect of the period between 16 October 2008 when the aircraft were first converted and 16 March 2010 is US $13.515 million per aircraft. In principle the position is that the SPV companies are entitled to the appropriate sum in respect of the three aircraft from 16 October 2008 and (subject to the private international law issues) PK is entitled to the appropriate sum in respect of the second and third aircraft from 6 April 29 until the aircraft are delivered up or damages are paid in lieu of delivery up. I have rejected PK’s direct claim in respect of the third aircraft (see [185]). In respect of the second aircraft there can be no double recovery and the Balli parties will be liable to account to PK. They may also be liable to account to PK for user damages recovered in respect of the third aircraft for the period after 6 April 2009 when it asserted the right to possession of the aircraft, which right the Balli parties accept.

Quantum (3) Consequential loss in respect of the Package 1 aircraft:

I have found (see [65]) that the Balli parties have not made out their claim for consequential damages. The alternatives are either a third phase of this dispute or to dismiss this part of the claim. The purpose of the Phase 2 hearing was the determination of quantum including consequential loss. It is the responsibility of a party to make out its claim. The Balli parties have thus had the opportunity of showing their consequential losses. They have not done so. In these circumstances I do not consider a third phase in which they are given a second opportunity to prove their consequential losses appropriate. In relation to the Package 1 aircraft, this may not be of practical importance since Mr Shepherd stated that (notwithstanding the claimants’ pleading and Mr Alaghband’s evidence) they are not seeking both damages for consequential losses and for mesne profits or user damages, and that their primary claim was for mesne profits, and I have held (see [132] above) that the SPV companies are entitled to mesne profits. This may also not be of practical importance in relation to the Package 2 aircraft in view of my conclusion on causation: see [144]-[148].

The obligation to provide funds to pay off PK’s loan:

I reject the submission that there was no breach of the obligation by Mahan and FZE to provide funding to repay the PK loan. I also reject the submission that the Balli parties waived the obligation because by late 2007 and early 2008 they were only seeking a sum to enable the release of the fourth aircraft. The Balli parties had been pressing for the funding that was due under the agreement although the scheduled timing was not kept. The idea of releasing one aircraft once US $100 million was provided had been floated before the August agreements but it is not reflected in their terms. My findings set out the many examples of Vahid Alaghband chasing Mr Mahmoudi or Mr Mazaheri for the funding: see [38]-[40].

Frustration:

This was an issue in both phases of this litigation. At a late stage in the Phase 1 hearing, the Mahan parties unsuccessfully applied to amend their pleadings to allege that the Repatriation Order or the Temporary Denial Order frustrated the agreement for the fourth aircraft to be delivered to Mahan: see PJ [33]. I stated (PJ [299]) that there were a number of difficulties with such a plea. The most important were that the parties were fully aware of United States sanctions, and all parties accepted that Boeings flying in and out of Tehran were highly visible and might attract the attention of the US authorities. On the evidence at that stage, it was at least foreseeable that the United States authorities might take a step such as imposing a TDO. There was, however, no direct evidence as to the degree of foresight of such intervention by the US authorities.

In this Phase I granted (see [14]) the application by the Mahan parties to amend their pleadings. They submit that the Repatriation Order and the TDO frustrated the agreements containing the Package 2 agreements and thus their obligations to provide funding for the Package 2 aircraft were discharged. I have found (see [42]) that after the TDO it was not feasible for the Mahan parties to have funded the transaction so that, in the eyes of the United States authorities, the Package 2 aircraft could be used to provide Mahan with capacity outside Iran. However, I reject the submission that the agreements and the obligation to provide funding were frustrated. I do not do so because it was contemplated that the aircraft would be leased to third parties because the ultimate purpose of the agreements was directly or indirectly to provide additional capacity for Mahan. I do so because intervention by the United States authorities was foreseen before the agreements were re-confirmed at the August meetings in Düsseldorf.

In National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, in a classic modern statement of the test for frustration, Lord Simon stated:

“Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties can reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such a case the law declares both parties to be discharged from further performance.”

Although the precise mechanisms taken by the United States authorities to enforce their sanctions laws may not have been foreseen by the parties, that there would be a reaction by the United States authorities was foreseeable. Boeing withdrew its support because the US government informed it that the aircraft were being operated for Mahan’s benefit. Given the US Government’s letters to Boeing there was a high degree of foreseeability that the government would take steps to enforce its sanctions laws. Moreover, see [35] – [36], that there would be a reaction by the United States authorities was in fact foreseen by both parties in the summer of 2007. They discussed the letters from Boeing at the meeting in Düsseldorf on 20 July 2007 and the interest of the US authorities was also discussed at a meeting on 29 July. This was before the August meetings in Düsseldorf when the parties affirmed the Mahan parties’ obligation to finance the transaction and the agreements were re-signed.

The scenario in this case is thus that contemplated in Edwington Commercial Co v Tsavliris [2007] EWCA Civ 547 by Rix LJ (with whom Wall and Hooper LJJ agreed). Rix LJ referred to Professor Sir Guenter Treitel’s Frustration and Force Majeure, 2nd. ed 2004 and to Chitty on Contracts. Hestated (at [103]):

“The significance of foreseen or of unforeseen but foreseeable events is in my judgment well, if briefly, summarised in Chitty on Contracts, 29^th ed, 2004 at paras 23-057/8. Paragraph 23-057 which deals with foreseen events can be seen to make the point that there is no rule of exclusion, at best some prima facie indications. Thus –

"While an unforeseen event will not necessarily lead to the frustration of a contract, a foreseen event will generally exclude the operation of the doctrine. The inference that a foreseen event is not a frustrating event is only a prima facie one and so can be excluded by evidence of contrary intention.”

Rix LJ referred to something which is foreseeable as a “risk of the industry”. Sir Guenter and Chitty on Contracts suggest that foreseeability of “a risk of the industry” is unlikely to suffice to exclude the doctrine of frustration unless the degree of foreseeability is a high one. Sir Guenter stated (at ¶13-012) that foreseeability:

“will support the inference of risk-assumption only where the supervening event is one which any person of ordinary intelligence would regard as likely to occur, or…the contingency must be 'one which the parties could reasonably be thought to have foreseen as a real possibility”.

In this case the kind of event was not only foreseeable but foreseen, and to the extent that the precise mechanism was not foreseen, it was highly foreseeable that the United States authorities would take steps to interfere with or prevent the operation of the aircraft by Mahan or for its benefit.

The August loan agreement was signed by the parties in the knowledge of the United States government interest in the matter and that the United States authorities took the view that the Package 1 aircraft were being operated in breach of the sanctions requirements. The interest of the United States authorities was also discussed at a meeting on 18 October 2007 after the agreements were re-signed. I accept Mr Shepherd’s submission that in relation to the obligation to provide funding to enable PK’s loan to be repaid, the parties took a risk on not falling foul of US sanctions and that the Mahan parties were willing to enter into that risk.

The Balli parties’ failure to obtain a loan from another lender:

I turn to the submission that, if the Mahan parties were in breach of their obligation to provide funding to enable the Balli parties to repay PK, the breach was not causative of the losses because Crypton ought to have gone into the market to obtain alternative funding to service the PK loans and thus to prevent the seizure of the aircraft by PK. If so, any damages should be nominal. My findings of fact on this issue are set out at [66] – [70].

The Mahan parties relied on Manchester and Oldham Bank v Cook (1883) LT 674. In that case Day J stated that “nominal damages… are usually given in the case of breach of contract to lend money, for the reason that usually if a man cannot get money in one court he can in another”. The position is different where the intended borrower is of good credit but cannot obtain the money except at a higher rate of interest, or for a shorter term of years, or upon other more onerous terms: see The South African Territories Ltd. v Wallington [1897] 1 QB 692, 696 per Chitty LJ. In such a case the damages would be greater and might be very substantial. However, this depends on the intending borrower being of good credit. McGregor on Damages 18th. ed. 2009 ¶25-28, citing Bahamas Plantation v Griffin (1897) 14 TLR 139, states:

“in measuring the damages it must be assumed that when the company applied elsewhere for an advance it still remained a company with ordinary credit. If by reason of circumstances, the company had fallen into disrepute and bad financial odour, the defendant was not responsible for that.”

Moreover, it is clear from The South African Territories Ltd. v Wallington that the burden of proving the amount of the loss sustained rests on the intended borrower. In that case it was not discharged because the intended borrower adduced no such evidence.

In the present case, the contrast between paragraphs 140.1 and 140.3 of the Balli parties Re-amended Reply, Defence to Counterclaim and Counterclaim and paragraph 22 of their response to the Mahan parties’ Part 18 request is significant. In paragraphs 140.1 and 140.3 it is pleaded that Balli Group plc “has been unable to pay off the PK bridge finance and … unable to pay for the completion of the refurbishment of aircraft 4-6”. But in paragraph 22 of the response to the Part 18 request it is stated that Balli eschews impecuniosity as a reason for this. That response together with the evidence of the healthy financial state of the Balli Group with a group turnover of over US$ 1.4 billion and net assets of US$ 60 million in 2008 is inconsistent with the plea that they were unable to pay off the PK loan.

The evidence, in particular Hassan Alaghband’s second witness statement does not make a distinction between the different corporate entities in the Balli group. Thus, see for example, in paragraph 86 the reference to “we”, the absence of a reference to a specific corporate recipient of money received from Mahan and FZE, and the fact that the discussions about PK are said to have been with Mr Thoroddsen “of Balli”.

While Balli Group plc, the company at the apex of the group may not have been able to pay the loan by an outright cash payment there is no evidence that it was not able to obtain a loan itself on its own assets and then to make an inter-group loan to the Blue Sky SPV companies. Strictly the obligation to mitigate lay on those Blue Sky SPV companies but (see [70]) their failure to look for refinancing to their own parent company controlled by the Alaghbands, particularly in the light of the fact that the accounts of the six Blue Sky companies contain many inter-group loans, mean that there is no reason for departing in this case from the normal rule about the effect of a failure to go into to the market to obtain alternative funding. With the exception of the reference to DVB Bank and PK (see [69]) Hassan Alaghband’s evidence concerns discussions with potential lessees for the lease of the aircraft. The aim was said to be to refinance the PK bridge facility into longer term financing and it is not said that the possibility of short term financing was explored.

Set-off against the Mahan parties’ counterclaim:

This issue concerns whether the Balli parties are entitled to any defence of set-off in respect of the (in round numbers) US$ 57.8 million transferred to them which I held (PJ [295]) the Mahan parties are entitled to recover. Subject to one qualification, I accept Mr Shepherd’s submissions on this. The Balli parties are entitled to set-off the agreed costs set out in the schedule to the July MOU (on which see PJ [217]-[218]) and Crypton’s claim against FZE under the Letter Agreement of 3 August 2007. They are entitled to do so either as a contractual set-off under the July MOU, or by virtue of common law or equitable principles of set-off. The July MOU was (see PJ [293]) a settlement of accounts between the parties which set out (paragraph 2) forecasted expenditure “for Mahan”. The non-contractual bases for set-off are founded on the claim Crypton would have had against FZE under the Letter Agreement. The parties intended that the proceeds of the loans were to cover the procurement and heavy maintenance of the Package 2 aircraft, including interest on the PK loan and the fees due to the Balli parties. Crypton’s claim “flows out of and is connected with the dealings and transactions” which gave rise to the Mahan parties’ claim: see Bim Kemi AV v Blackburn Chemicals Ltd [2001] 2 Lloyds Rep 93 at [29].

As to the amount of the set-off the Mahan parties submitted that legal fees included do not flow from the Mahan parties not providing the loan. The only fees that are subject to the set-off are those acknowledged in the July MOU, i.e. those owing to Akin Gump and the fees anticipated for the third and fourth quarter of 2008. The qualification concerns sums in respect of interest under the loan to PK. Mr Malek also submitted that these sums should not be set-off because PK’s recourse under the various mortgage agreements is limited to the assets held by the Blue Sky SPV companies. There was no evidence of what assets other than the mortgaged aircraft those companies had and Mr Alaghband (Day 3, pages 38-39) tellingly stated “technically” those companies have exposure to PK. Accordingly, the amount to be set-off should not include PK interest save sums referred to in the July MOU which have in fact been paid.

PK’s direct claim ― The private international law issues:

The applicable law of the contracts by which the claimant SPV companies mortgaged aircraft two and three to PK is English law. It is common ground that, as a matter of English law, the mortgages are valid and effective in transferring legal title to the aircraft to PK as mortgagee. The Armenian experts agreed that the mortgages are also valid according to Armenian law: see their Joint Memorandum and [73].

It is, however, submitted on behalf of Mahan that neither mortgage is effective because their validity is to be determined by the lex situs, the law of the place where the aircraft were situated at the time the mortgages were created. In the case of the second aircraft, that reference is to the domestic law of Iran and in the case of the third aircraft it is to the domestic law of the Netherlands. This is because the English choice of law rule as to the determination of title to movables does not include reference to the choice of law or private international law rules of the applicable law.

PK’s position is that this is not so for two reasons. The first is that, although the lex situs is the law which an English court will generally apply to determine whether a property interest has been created in movable property, it is not in this case. Mr Moriarty submitted that the special position of aircraft as a means of transport which move regularly from situs to situs mean that the applicable law is the law of the place where the aircraft is registered; the lex registri. Even recognising that, as Mance LJ stated in Raiffeisen Zentralbank Osterreich AG v Five Star Trading LLC [2001] QB 825 at [27] and [29], the aim of our private international law is to identify “the most appropriate law” and “appropriate principles to meet particular situations”, this is a bold submission. It finds virtually no support in English cases or commentaries.

In Air Foyle Ltd v Center Capital Ltd [2002] EWHC 2535 (Comm), 2 Lloyds Rep 753, in the context of a dispute as to title to aircraft, Gross J stated at [42] that the lex situs rule as stated in Rule 124 of Dicey, Morris and Collins, The Conflict of Laws, 14^th ed (2006) (hereafter “Dicey, Morris and Collins”) is “long established beyond challenge”. Rule 120 states that “a chattel is situated in the country where it is at any given time”. In Dornoch Ltd v Boskalis, The “WD Fairway” [2009] EWHC 889 2 Lloyds Rep 191 at [93] and [103], Tomlinson J rejected the submission that he regard the place of registration of a ship as its situs. The exception to Dicey, Morris and Collins’s Rule 120 is stated (¶¶22E-060 and 22-061) only to apply to an aircraft in flight over the high seas or a territoriun nullius. The editors state that “the reasons for the ascription of an artificial situs are not compelling when the aircraft is either on or over the territory of a country”.

Mr Moriarty submitted (closing submissions, ¶5(v)(b)) the adoption of the lex registri would have the merit of mirroring the position recognised at the international level by Article 1 of the Geneva Convention on the International Recognition of Rights in Aircraft 1948. If the perceived advantage is to endeavour that like cases be decided alike wherever they are litigated, as Millett J stated in Macmillan Inc v Bishopsgate Investment Trust plc (No. 3) [1995] 1 WLR 978 at 1008 (albeit in the context of his discussion of renvoi) that task is one for international conventions and not by changing common law rules. That this is so also gains support from the fact that achieving uniformity of decision can in practice be unattainable. Cheshire, North and Fawcett’s Private International Law,14th ed., 58, states that the existence of different systems of private international law in different countries militates against this ideal solution and Fentiman’s International Commercial Litigation (2010) ¶5.46 states that “strict compliance with the governing law is a chimera”. Ehrenzweig states that “even where purportedly uniformity is achieved through renvoi or otherwise, it is more often than not, fictitious”: Private International Law (1972) 145.

As to other alternatives to the lex situs, in Glencore International AG v Metrotrading International Inc [2001] 1 Lloyds Rep 284 Moore-Bick J rejected a submission that in the context of a dispute about the passing of property between two contracting parties effect should be given to the proper law of the contract rather than to the lex situs. He did so in part (see [31]-[32]) because of the practical considerations of control over movables which can ultimately only be regulated and protected by the state in which they are situated and practical considerations of trade and commerce. Accordingly, I accept Mr Malek’s submission that the validity of the mortgages is to be determined by the law of the place they were situated on 21 December 2006.

The second limb of PK’s submissions is that the reference to the lex situs is a reference to the entire law of that country, including its choice of law rules, and not just to its domestic rules; that is the doctrine of renvoi applies to the transfer of title to tangible moveables such as the aircraft in this case. Mr Moriarty recognised that renvoi has never been applied in this context by an English court and that its application was rejected by Millett J in Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1995] 1 WLR 978 and by Eady J in Islamic Republic of Iran v Berend [2007] 2 All ER (Comm) 132. He, however, relied on what was said by Slade J in Winkworth v Christie Manson and Woods Ltd [1980] 1 Ch 498 at 514, by Moore-Bick J in Glencore International AG v Metro Trading International Inc [2001] 1 Lloyds Rep 284 at [38], by Tomlinson J in Dornoch Ltd v Boskalis, The “WD Fairway” [2009] 2 Lloyds Rep 191 at [80]-[89], and the approach of the High Court of Australia in Neilson v Overseas Projects Corporation of Victoria Ltd (2005) 223 CLR 331. Mr Moriarty also relied on Professor Lalive’s The Transfer of Chattels in the Conflict of Laws (1977) and the work of Professor Briggs who advocate the adoption of renvoi, although Mr Moriarty eschewed the possibly overstated language used by Professor Briggs.

Before turning to the material on which Mr Moriarty relied I summarise what was said by Millett and Eady JJ. In Macmillan Inc v Bishopsgate Investment Trust plc the issue arose in the context of priority between competing claims to shares in Berlitz International Inc. Millett J observed ([1995] 1 WLR 978 at 1008) that the doctrine of renvoi has only been applied in the field of succession and to legitimation by subsequent marriage. He stated:

“It has not been applied in contract or other commercial situations. It has often been criticised, and it is probably right to describe it as largely discredited. It owes its origin to a laudable endeavour to ensure that like cases should be decided alike wherever they are decided, but it should now be recognised that this cannot be achieved by judicial mental gymnastics but only by international conventions.” (at 1008)

After stating that the determination of priority between competing claims to property is based on considerations of domestic legal policy, he stated:

“A decision by an English court, based on English principles of the conflict of laws, that a question should be determined by the application of the rules of a foreign law is also based on considerations of legal policy, albeit at a higher level of abstraction. It involves a policy decision, at the higher level, that the policy which has been adopted, at the lower level, by English law should not be applied because the considerations which led to its adoption in the domestic law are not relevant in the particular circumstances of the case; and to a policy decision … that the policy which has been adopted … by the foreign law should be applied in its stead.”

He concluded that there is or ought to be no scope for applying the doctrine of renvoi in determining priority between the competing claims in that case to the shares. An appeal against his conclusion on this point was abandoned: see [1996] 1 WLR 387, at 405.

In Islamic Republic of Iran v Berend [2007] 2 All ER (Comm) 132 at [24] counsel suggested that Millett J’s reasoning in the passage set out at [159] “begs the question”. It is also criticised by Knight [2007] Conv at 568. Eady J, however, described (at [22]) Millett J’s reasoning as “compelling”, and applied it. The issue was whether the claimant’s property interest had been defeated by the claim of a person who had purchased it for value and in good faith. The property in question was an ancient limestone relief from Persepolis which the defendant bought at auction and took delivery of in France, where it was situated. Eady J stated (at [20]) that “the modern approach to renvoi is that there is no over-arching doctrine to be applied but it will be seen as a useful tool to be applied where appropriate”. By “appropriate” he meant appropriate in achieving the policy objectives of the particular choice of law rule. This involved asking whether renvoi should apply in cases of a particular class, in the case before him the transfer of title to tangible movables. This is also the approach of the Institut de Droit International (1999) Vol 68-II, 371: see Barros Mattos Junior v McDaniels Ltd [2005] EWHC 1323 (Ch) at [108] per Lawrence Collins J, as he then was.

Eady J considered what was said in Glencore v Metro Trading (see [163] below) and by commentators. This included (see [25]) the acknowledgement by the editors of Dicey, Morris and Collins that the considerations based on “practical control” by the state in which property is situated are weaker in the case of movables than in the case of land, their view (at ¶4-034) that “as a purely practical matter… a court should not undertake the onerous task of trying to ascertain how a foreign court would decide the question, unless the advantages of doing so clearly outweigh the disadvantages”, and their view that “in most situations, the balance of convenience surely lies in interpreting the reference to foreign law to mean its domestic rules”. Having referred (at [23]) to the need “to achieve consistency and certainty” and to this being part of the purpose of the adoption of the lex situs rule, the difficulty of ascertaining how a foreign court would decide the question, and the fact that considerations based on practical control are weaker in the case of moveables than they are in the case of immoveables, he concluded that renvoi should not apply to the transfer of title to tangible movables.

I turn to the material on which Mr Moriarty relied. In Winkworth v Christie Manson and Woods Ltd Slade J, determining a preliminary question, held that title to certain works of art fell to be determined in accordance with Italian law as the lex situs. He had heard no evidence as to the content of Italian law. All he said on this issue was that “it is theoretically possible” that the evidence as to Italian law would show that the Italian court would apply English law and, if so, “I suppose it would be open to the plaintiff to argue that English law should be applied by virtue of the doctrine of renvoi”: [1980] 1 Ch. 498, at 514. He thus stated no more than that he did not intend to deprive the claimant of the right to argue these points at the trial.

Glencore v Metro Trading concerned title to parcels of oil stored in tanks together with and not segregated from other parcels of oil. Moore-Bick J considered that, if, as he considered to be the case, the lex situs rule in relation to movables rests in part on a recognition of the practical control exercised by the state in which the property is situated, “there is something to be said for applying whatever rules of law the courts of that state would actually apply in determining such questions”. Again, the question did not in fact fall for decision.

The “WD Fairway” [2009] 2 Lloyds Rep 191 is the third of the cases on which Mr Moriarty relied. The owner of an insured dredger transferred it to an associated company after the insurers made a payment for its constructive total loss. It was common ground that Thai law, as the lex situs, was the applicable law to determine the incidence of proprietary interests in the dredger before, at the time of, and after the transfer. The question was whether the reference was only to Thai domestic law or included Thai rules of private international law. Tomlinson J considered the decision of the High Court of Australia in Neilson v Overseas Projects Corporation of Victoria Ltd (2005) 223 CLR 331 in which a majority applied the doctrine of renvoi. The issue in Neilson’s case was the liability in tort of an Australian company for injuries sustained in China in premises provided by the company. The injuries were sustained by an Australian woman domiciled in Western Australia and married to one of the company’s employees. The Chinese but not the Western Australian limitation period had expired. Under Australian law the applicable law of a tort, the lex loci delicti, is not qualified in any way, for example by a proper law doctrine, enabling a court to apply any other law with which the tort might have a stronger connection.Gummow and Hayne JJ (at [91]) stated the courts of the forum needed to ensure that a person who has chosen to sue in that forum does not gain an advantage from doing so and that “adopting a rule that seeks to provide identical outcomes is neither more nor less than an inevitable consequence of adopting a choice of law rule to which there is no exception”.

In The “WD Fairway” Tomlinson J stated that there was great force in the observation of Heydon J at [271] that it would be absurd that the regime which the applicable law enacted for the case should be set at nought by reason of the lex fori, as it would be if the renvoi principle did not apply. But, while attracted by what Heydon J said, he resisted the temptation to apply the renvoi doctrine. He concluded ([2009] 2 Lloyds Rep 191 at [87]-[88]) that to decide that as a matter of English common law reference to the lex situs as the governing law in relation to proprietary rights in moveable property includes reference to the choice of law or private international law rules of the situs “would be rowing against a strong tide” and that, in a commercial context, he would be loath to assimilate the law to that hitherto applicable only in fields such as the validity of wills, intestate succession and legitimation by subsequent marriage. He also considered that not to follow the decisions of Millett and Eady JJ “would introduce uncertainty into our law for no very good reason”.

Tomlinson J stated that the situation in Neilson’s case was different from that in the case before him because the High Court of Australia was in a position to weigh the advantages and disadvantages which the adoption of renvoi would yield in that case. The High Court was able to do so because the applicable law made special legislative provision for the case under consideration. Tomlinson J did not consider he was in a position to weigh the advantages and disadvantages of the adoption of renvoi, or that he should fashion in the abstract a rule of general application. Nevertheless, in the light of the decision in Neilson’s case he drew back from rejecting renvoi. He stated:

“If the rationale of the English lex situs rule is a policy decision by English law that the policy adopted by the foreign law should prevail, so then in any given case it would in my judgment be unwise to describe in advance that part of the foreign law which is to be applied, because in so doing the English court may adopt distinctions or characterisations unknown to the relevant foreign law. Put differently, one should not answer the question in advance in such a manner as may, inadvertently, preclude application of the policy adopted by the foreign law.” ([2009] 2 Lloyds Rep 191 at [89])

Tomlinson J returned to this issue in a later phase of the Dornoch Ltd v Boskalis litigation. In The “WD Fairway” No. 3 [2009] EWHC 1782 (Admlty) he concluded, in the light of evidence as to the content of the law of the situs, in that case Thailand, there is no principle in Thai private international law the application of which would better serve the object of the English conflict rule than the application of Thai domestic law. He also concluded that, in any event, the Thai rule of private international law would have led a Thai court to apply Thai domestic law.

In the present case the position as to Dutch law is agreed. On the relevant date (21 December 2006), Dutch law would regard the mortgage as valid because, although not complying with its domestic rules for creating mortgages, a Dutch court would apply English law to the question because the allocable law under Dutch rules of private international law is the lex registri. Since 21 December the reference by Dutch law to the lex registri has been embodied in statute. In the light of the agreed position, Mr Moriarty submitted that the object of the English conflict rule in referring to Dutch law as the lex situs in relation to the mortgage of the third aircraft is better served by construing the reference to it as including its conflict rules. In effect Mr Moriarty, suggested that there is no real conflict between the English and the Dutch rules. His analysis is undoubtedly attractive if one has regard only to the outcome of the evidence in relation to Dutch law. But it has similarities to the “false conflict” approach which at one time was advocated by a number of United States judges and scholars (Boys v Chaplin [1971] AC 356 may be an English version), but has also been severely criticised, notably by Brilmayer, “Interest Analysis and the Myth of Legislative Intent” (1980) 78 Mich LR 392.

The position in relation to the second aircraft on the assumption (contrary to my finding) that it was in Iran on 21 December 2006 is different. The evidence as to Iranian law was hotly contested. I have found that an Iranian court would apply domestic Iranian law as the lex situs. But as far as policy is concerned, the approaches of both the experts, the language of the relevant provisions of the Code, and the discussion in the commentaries do not enable me to form a clear view of the principles or policy underlying the Iranian rules.

I have referred (see [160]) to the approach of Eady J and the Institut de Droit International that the court should ask whether renvoi should apply in cases of a particular class, here the transfer of title to tangible movables, to achieve the policy objectives of the relevant English choice of law rule, here the lex situs. The approach contemplated by Tomlinson J in The “WD Fairway” [2009] 2 Lloyds Rep 191 at [89] would involve either moving from this approach to a more fact-specific approach in which the applicability of renvoi would depend on the “specific content of whatever system or systems of law may prove to be applicable” or combining the two so that it would depend on the policy objectives of both the English choice of law rule and the relevant foreign law.

In the present case the policy objectives of the English choice of the law of the situs are the same in respect of both mortgages. But there is a difference in the position in relation to Dutch and to Iranian law. For the reasons I have given, had I found the second aircraft to have been located in Iran on the date of the mortgage to PK, I would not, on the evidence before me, have been able to form a clear view of the policy underlying the Iranian rules. The position is different in the case of the third aircraft and Dutch law. The consequence would seem to be that, on Eady J’s approach, the question is whether renvoi applies to the determination of the validity of mortgages of tangible moveables, and it either applies to both mortgages or to neither. His answer would, it seems, be that it applies to neither. On Tomlinson J’s approach the answer would appear to be that renvoi would apply to the determination of the validity of the mortgage of the third aircraft but not to that of the second aircraft. The factual scenario of this case thus highlights both the differences between the two approaches and the problems of a fact-specific approach.

The main problem is that, notwithstanding the attractiveness of Mr Moriarty’s submissions if taken in isolation, to leave the applicability of the renvoi doctrine to a case by case analysis depending on the identification of the policy behind the private international law of the particular country under consideration is likely to lead to a very uncertain legal regime. Indeed it could lead to a Tennysonian wilderness of single instances. Moreover, as Fentiman states (International Commercial Litigation (2010) ¶5.57), it would mean “that the identity of the applicable law cannot be known without a judicial determination, even in a case where the location of the property is known to the parties”. This is because the applicability of renvoi in a given case would depend on the policy objectives of both the English choice of law rule and the relevant foreign law. I do not consider that Mance LJ’s reference in Raiffeisen Zentralbank Osterreich AG v Five Star Trading LLC (at [29]) to identifying “appropriate principles to meet particular situations” is a reference to the circumstances of particular cases but to classes of case. That paragraph must be seen in context. Earlier, Mance LJ referred (at [26]) to characterisation of the “relevant issue”, selection of the conflict of laws rule laying down a connecting factor for “that issue” and identification of the system of law which is tied by that connecting factor to “that issue”, and (at [27]) to “classes or categories of issue”.

I share Tomlinson J’s view that not to follow the decisions of Millett and Eady JJ would be to introduce uncertainty into the law, and that such uncertainty is particularly undesirable in a commercial context. In the circumstances of the case before him, he was able to draw back from rejecting the applicability of renvoi. But in the light of the evidence as to what a Dutch court would do in relation to the mortgage of the third aircraft, I am not able to decide the question before me without reaching a conclusion about its applicability and whether the answer depends on the class of case or upon the circumstances of the particular case.

I have referred ([161]) to the view of Dicey, Morris and Collins that in most situations a reference in a choice of law rule should be to the domestic rules of the foreign law. The reason Millett J stated (see [159]) it was probably right to describe the doctrine of renvoi as largely discredited is that, while it has its supporters who consider it promotes uniformity of result and discourages forum shopping, it has undoubtedly been subjected to widespread criticism by many distinguished scholars. The critics include Dr Morris ((1937) BYBIL 37; (1940) 56 LQR 144), the editors of Cheshire, North and Fawcett’s Private International Law 14th. ed., Professor Falconbridge (Selected Essays on the Conflict of Laws 2nd. ed., 1954 137 ff) and Professor Ehrenzweig, op cit 141-148. Recent contributions which reject the application of the doctrine to the transfer of title to tangible moveables include Knight, [2007] Conv. 564 and Fentiman, International Commercial Litigation (2010) ¶5.40 ff.

The criticisms and difficulties in applying the doctrine are summarised in Dicey, Morris and Collins, ¶¶4-029 – 4-034 and Cheshire, North and Fawcett, 61-66. Some of the criticisms concern principle and policy. In particular it is said that by deferring to the choice of law rule of another country the English court undermines its own choice of law rule, and the policy it represents – see Cheshire, North and Fawcett,pp 63-64, and the extract from Millett J’s judgment quoted at [159]. It is also suggested that it can operate as a result-seeking rather than a rule-seeking process. This may be particularly so if its application depends upon the policy objectives of the relevant foreign system under consideration in a particular case.

Other criticisms are of a more practical nature. The first (see [155] above) is that the doctrine does not in fact ensure uniformity and will only do so if renvoi is recognised in one of the countries concerned but either rejected in the other or foresworn by the lex fori (Footnote: ²), or where the issue is one the lex fori characterises as procedural and thus for it to determine even where the foreign applicable law characterises it as substantive.

Secondly, the doctrine is undoubtedly difficult to apply in many cases. Dicey, Morris and Collins’s description of the task of ascertaining how a foreign court would decide an issue as “onerous” and only exceptionally to be undertaken by a court is quoted earlier in this judgment: see [161]. Perhaps not surprisingly, Lawrence Collins J, as he then was, referred to it in Barros Mattos Junior v McDaniels Ltd [2005] EWHC 1323 (Ch) at [108]. The difficulties are seen from the decisions of Eady and Tomlinson JJ in Islamic Republic of Iran v Berend and The “WD Fairway” in relation to French and Thai law, and Neilson’s case in relation to Chinese law.

One reason the doctrine is difficult to apply is that it makes everything turn, in the words of Maugham J in Re Askew [1930] 2 Ch 259, 278, on “the doubtful and conflicting evidence of foreign experts” about the private international law rules of the foreign system under consideration. In Islamic Republic of Iran v Berend none of the international conventions or French legislative instruments applied to the fragment and there was no evidence of how renvoi might apply in France. In The “WD Fairway” (No 3) there was evidence that a Thai court would have applied Thai domestic law, but in his earlier judgment (see [166] above), Tomlinson J stated that he was not in a position to weigh the advantages and disadvantages of the adoption of renvoi.

Where there is insufficient or unsatisfactory evidence as to the position under a foreign applicable law, the Court may have to rely on the presumption that the applicable law and the law of the forum are the same. Moreover, the choice of law rule of the foreign applicable law may refer a matter to the national law of one of the parties, where that person is a national of a state (such as the United Kingdom or Australia) containing more than one legal system. Unless the rule identifies which system of internal law should apply the reference is meaningless and may not prove easy to elucidate.

The facts of Neilson’s case (see [164]) illustrate the first and possibly also the second of these difficulties. A majority of the High Court held there was insufficient evidence as to the circumstances in which a Chinese court would exercise its discretion to disapply Chinese law in the case of a tort involving foreign nationals or domiciliaries and applied the presumption that foreign law is the same as the law of the forum. The second difficulty was potentially present because the Chinese statute referred to the law of the country of nationality rather than to the law of a particular state or territory. It did not arise on the facts because at trial no separate consideration had been given to what consequences, if any, followed from it.

Both Eady and Tomlinson JJ observed that the approach taken by Millett J in the Bishopsgate case is not referred to in the section of Dicey Morris and Collins dealing with renvoi. Despite their observations it is not referred to in the relevant part of the supplements to the 14th edition of that book. Tomlinson J suggested that the omission may reflect the view of Professor Briggs, who is the editor of that section of the book, that (see [2007] BYBIL at 628) because the appeal against Millett J’s conclusion on renvoi was abandoned (see [159]), the authority of the case “is of a rather weak and remote kind”. Is this justified? The issue was squarely before Millett J so that, as Eady J observed ([2007] 2 All ER (Comm) 132 at [28]), his observations were not obiter. Professor Briggs, in (2000) 71 BYIL 465-468 (commenting on Glencore’s case), states of Millett J’s statement that it is “probably right to describe” the doctrine of renvoi “as largely discredited” that, “only if one considers that the noise of ignorance can discredit the wisdom of principle can this be so”. It should be noted that what is described as the “noise of ignorance” includes the views of many leading scholars in common law jurisdictions (see [174] for some of them) including Dr Morris who Professor Briggs considers gave the doctrine a “baleful glare”: (1998) 47 ICLQ at 878. As to Islamic Republic of Iran v Berend, although Eady J’s decision is noted in Dicey, Morris and Collins without comment, Professor Briggs criticises it in the British Yearbook of International Law: [2007] BYBIL 626.

Proponents of renvoi can now point to the decision of the High Court of Australia in Neilson’s case. I have referred to the inflexible nature of the Australian choice of law rule for torts, the lex loci delicti. That inflexibility can produce unsatisfactory results. The effect of Neilson’s case is to permit an escape from those, albeit in that case the escape was not ultimately by the application of renvoi but by the use of the presumption that the applicable law and the law of the forum are the same.

Notwithstanding what has been said (see [160] above), about Millett J’s reasoning, the position in relation to his conclusion on renvoi is different. Even if it is not correct to say, as Millett J did, that the renvoi doctrine is “largely discredited”, it has been subject to serious criticism on both principled and practical grounds. The criticisms based on difficulty of application and the unattainability of uniformity mean that, as well as the need for certainty in commercial contexts, there are positive reasons for not departing from the conclusions reached in Macmillan v Bishopsgate and Islamic Republic of Iran v Berend. In the Court of Appeal in Macmillan v Bishopsgate [1996] 1 WLR 387, 392 Staughton LJ observed that “if at all possible the rules of conflict should be simple and easy to apply”. He had in mind not only the need for the rules to be easy for a court to apply ex post facto but also to the need for it to be possible to obtain clear advice in advance of a transaction. Certainty should be considered not only from a litigation perspective but also from a transactional perspective.

Mr Moriarty suggested (closing submissions, ¶14 note 16) that Macmillan v Bishopsgate and Islamic Republic of Iran v Berend are different because they concerned whether a property interest was defeated as a result of another’s claim taking priority over it whereas I am concerned “purely and simply” with whether a property interest was validly created. I do not consider this to be a significant distinction in relation to the applicability of the renvoi doctrine. The distinction Mr Moriarty suggested does not remove the unpredictability as to whether renvoi will operate in a given case and thus what law will ultimately govern the issue. In both situations the issue is whether a party has a proprietary interest in an item. In both situations, because title to property is at issue, certainty is particularly important. The desire of some (see Knight [2007] Conv. 564 at 569) for “absolute certainty” as to which law is to govern the transaction when trying to determine whether title can validly pass under any particular transaction may well be unattainable. That, however, is not a reason for choosing the less certain of two possibilities.

Mr Moriarty’s submissions focus on the evidence as to the position of Dutch law in this case. But his advocacy of what he described as Tomlinson J’s nuanced approach would lead to a difference in the rule to be applied in such a case and that to be applied in one of the significant number of cases where (see [166], [178] and [180]), no view can be formed, or where it can only be formed after intensive examination in adversarial litigation. To leave the applicability of the renvoi doctrine to a case by case analysis depending on the identification of the policy behind the private international law of another country will produce a very uncertain legal regime. I consider that it is undesirable to adopt such a rule. Accordingly, PK’s direct claim in respect of the third aircraft is dismissed.

The sanction for the contempt of the Mahan parties:

It remains to consider the sanction for the contempt of Mahan and FZE in not complying with my orders to ground the first and the third aircraft at Schiphol airport and to deliver up the Bills of Sale. My reasons for finding they are in contempt are in the judgment I handed down on 1 February: [2010] EWHC 128 (Comm). I do not repeat them. The position of Mahan and FZE is that both at the hearing of the application on 25 January and on 1 February when the Phase 2 hearing started it was not known on whose instigation and on what basis on 20 January 2010 the Iranian Civil Aviation Authority ordered the aircraft, then in Turkish airspace, to return to Tehran and grounded them.

Mr Malek submitted that during the course of the Phase 2 hearing it became clear that a number of the matters upon which my decision was based are due to events beyond the control of the Mahan parties. He included in particular the refusal of the Export Development Bank to hand over the Bills of Sale, the decision of the Bank to complain that Mahan fraudulently and criminally obtained funds from it in connection with the three aircraft has gained funds, and the Order under Article 74 of the General and Revolutionary Courts Regulations by the Attorney-General’s Prosecutors’ Office obtained to secure the Bank’s loss which grounded the aircraft. He submitted that it was not possible for the Mahan parties to challenge the order until they obtained a copy which they only did on 3 February. He also submitted that, while Mahan can protest to the issuing body, it has not done so because, once it does, any decision by that body will be final until the matter is transferred to the trial court.

Mr Shepherd, with the support of Mr Moriarty, submitted that, since the Mahan parties were not debarred from taking part in the Phase 2 hearing the appropriate sanction for what I described (contempt judgment [37]) as “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” is to stay the counterclaim with a view to striking it out if Mahan does not pay the damages awarded in this judgment.

Mr Malek submitted that this sanction is disproportionate. Mr Arabnejad has apologised. The Mahan parties have been unable to provide security in respect of the two aircraft because of their financial position and the difficulty of an Iranian company obtaining a first class bank guarantee. Staying and striking out Mahan’s counterclaim of US$ 57.8 million because in effect they are impecunious and face particular difficulties is, submitted Mr Malek, disproportionate.

I have concluded that while there may have been some difficulty in clarifying the situation, the Mahan parties did so in a dilatory way. Additionally, even by the end of the Phase 2 hearing on 12 February there was little evidence before the court. While some of the information as to what actually happened and what Mahan did was supported in the form of Mr Moattar’s evidence, significant parts of it were presented to the court only in the form of Mr Malek’s submissions.

The difficulties since the intervention of the Iranian Civil Aviation Authority on 20 January would not have arisen but for the Mahan parties’ conduct between 21 December when the order was made and 20 January. It was only on 14 January that they started to make any arrangements to deliver the aircraft to Schiphol. At the time I was considering making the grounding order and throughout the period since (including at the time of the applications to discharge or vary my grounding order considered by Hickinbottom J and me) the Mahan parties contended that they were able to furnish the Balli parties the security I indicated was the reason for the grounding order. However, after the intervention of the Iranian authorities, their stance changed. They relied on their impecuniosity and inability to furnish the security.

The explanations for the failure to deliver the aircraft by 18 January, two days before the intervention of the Iranian authorities are inadequate. There is no explanation at all for the failure to take any steps at all in the eleven days between Hickinbottom J’s order and the hearing before me on 12 January or for over two clear days after the hearing before me. No steps were taken until 15 January to make arrangements for substitute aircraft to service the routes on which the two Boeing 747-400s operated after 18 January. Moreover, there has been no explanation of the nature of the technical delay that is said (see contempt judgment at [14] and [26]) to have impeded the departure of the aircraft before the intervention of the Iranian Civil Aviation Authority. I am prepared to accept that, once the Civil Aviation Authorities of the country in which the aircraft are now registered ordered that they be returned to Tehran, in reality Mahan and FZE had no choice but to comply. But even at this stage part of the problem has been that after the order of this court Mahan and FZE were not frank with those they dealt with in Iran in explaining the nature of the order.

In these circumstances, I accept Mr Shepherd’s submission that Mahan and FZE’s counterclaim of US$ 57.8 million in round terms be stayed. If Mahan and FZE meet the claim apart from the amount of the counterclaim less the sum I have found (see [149] – [150]) can be set off against it, it will be open to them to apply for this stay to be lifted. It will also be open to them to apply for it to be lifted if they provide an adequate and evidence based explanation of why they did not comply with the grounding order before the intervention of the Iranian Civil Aviation Authorities and why they have not since then been able to obtain the release of the aircraft. As to the point that this will involve the Mahan parties paying a higher sum that would otherwise be due, there has been no suggestion that the Balli parties will be unable to repay the difference between the amount due to them if the counterclaim is disregarded and the amount due to them if it is taken into account. I reject Mr Malek’s submission that this course of action would be to impose a disproportionate penalty and a fine. It is not a fine. It is a stay pending the payment of damages and costs or an adequate and evidence based explanation for what has happened.

Conclusions:

This is a summary of my conclusions on the main issues. As far as quantum is concerned, it is subject to the principle that there cannot be double recovery in respect of any of the heads of damage on which the Balli parties and PK have succeeded: see [100] and [135].

If the three Package 1 aircraft are not delivered up, the Blue Sky SPV companies are entitled to their market value on 16 October 2008. The values of the individual aircraft are: aircraft 1, US$ 35.542 million; aircraft 2, US$ 35.397 million; and aircraft 3, US$ 43.630 million: see [43] and [129] and if they are not delivered up the Blue Sky SPV companies are entitled to judgment in those sums.

If the aircraft are delivered up within the time specified in the order, as to which I will hear submissions, the Blue Sky SPV companies are also entitled to any diminution in their value since 16 October 2008 as consequential damages. Since it is not possible to assess the amount of such damages, if the aircraft are delivered up, that is to be dealt with by being remitted either to a judge or to a Queen’s Bench Master: see [132].

Mahan and FZE are liable to pay a reasonable rental value or mesne profits to the Blue Sky SPV companies in respect of the converted aircraft from the 16 October 2008 when the aircraft were converted until they are delivered up or damages are paid in lieu of delivery up. The reasonable rental value (including the maintenance reserves for these aircraft which a lessor in the relevant market would require) is US $795,000 per aircraft per month. This sum represents a monthly sum of US$ 400,000 in respect of the rent and US$ 395,000 as maintenance reserves: see [134].

The Blue Sky SPV companies’ claims for consequential damages in respect of the Package 1 aircraft and in respect of the breaches by the Mahan parties of their obligation to provide funding to enable the Balli parties to repay PK are dismissed: see [136] and [144] – [148].

The Balli parties are entitled to set-off the agreed costs set out in the schedule to the July MOU (including the sums in respect of interest under the PK loan specified in the July MOU which have been paid) and Crypton’s claim under the Letter Agreement against the payments of US$ 57.8 million (in round terms) which in the Phase 1 trial I held Mahan and FZE are entitled to recover: see [150] – [151]. However, for the reasons given in [190] – [192] Mahan and FZE’s counterclaim for this sum is stayed. It will be open to them to apply for the stay to be lifted inter alia in the circumstances set out in [193].

The applicable law of the mortgages: The validity of the mortgages of the second and third aircraft is to be determined by the lex situs, the law of the place where the aircraft were situated on 21 December 2006, the date the mortgages were executed: see [156].

In the case of a transfer of title to tangible moveables, such as the aircraft in this case, the reference to the lex situs is to the domestic law of the place where the aircraft are situated on the relevant date, and not to its entire law including its choice of law rules; that is the doctrine of renvoi does not apply: see [156] – [185].

The second aircraft: The Mahan parties have not (see [34]) established that the second aircraft was in Iran on 21 December 2006, the date the mortgage was executed. Accordingly:-

The third aircraft: On 21 December 2006 the third aircraft was at Schiphol Airport in Holland: see [17]. Under Dutch domestic law the mortgage of the third aircraft is not valid: see [73]. Accordingly, PK’s direct claim in respect of the third aircraft is dismissed: see [185].