Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
MR JUSTICE DAVID STEEL
Between :
GAMIT LIMITED | Claimant |
- and - | |
SAUDI ARABIAN AIRLINES CORPORATION -and- MTU MAINTENANCE HANNOVER GmbH | First Defendant Second Defendant |
MR AKHIL SHAH QC AND MISS HARRIET JONES-FENLEIGH
(instructed by CLYDE & CO. LLP) for the CLAIMANT
MR PHILIP BROOK-SMITH QC AND MR GILES WHEELER
(instructed by BARGATE MURRAY SOLICITORS) for the SECOND DEFENDANT
Hearing dates: 8 - 14 MARCH 2011
Judgment
MR JUSTICE DAVID STEEL :
Introduction
The Claimant, Gamit Limited (“Gamit”) is a UK consultancy practice within the aviation industry based at Stansted Airport in the UK. The First Defendant (“SAAC”) is the national airline of Saudi Arabia and incorporates the Saudi Royal Flight (“SRF”). The Second Defendant forms part of MTU Aero Engines. MTU Maintenance Hannover (“MTU”) is responsible for the maintenance of medium and large-size commercial engines. SRF was not concerned with the issues raised in the trial and did not appear.
The dispute arises out of an agreement between Gamit and SRF dated 18 October 2007 (the “Engine Agreement”), by which SRF engaged Gamit to procure and manage the refurbishment by an agreed sub-contractor of four CF6-80C2 jet engines (“the Engines”) belonging to an aircraft of SRF. Pursuant to the Engine Agreement, by an agreement dated 29 October 2007 (the “Engine Sub-Contract”), Gamit engaged MTU as the agreed sub-contractor to carry out the repair, overhaul and maintenance of the Engines.
The Engine Agreement contained a term at clause 2.2. of appendix B which provided that:
“title to any unusable, unused and or replaced part(s) whether they are life limited components or rotables resulting from the performance of the repair/overhaul of the above listed engines shall pass to [Gamit], [Gamit] shall have the exclusive right to dispose of any of these parts at their discretion without referral to SRF”.
Although making no reference to title, a clause of the Engine Sub-Contract headed “Returned Components” provided that:
“the removed items (LRUs and LLPs) that result from this overhaul of the four engines shall be listed and repaired/overhauled where applicable and as agreed between the Parties and returned to [Gamit]’s facility...”;
Each of the Revision 3 Workscopes (“the workscopes”) required MTU to replace all of the parts which are the subject of dispute in these proceedings (“the Disputed Parts”) with new parts. MTU took receipt of the Engines and commenced the refurbishment works in November 2007. The contractual redelivery date was 12 May 2008. At a meeting on or around 5 October 2007 and on occasions during the course of the overhaul of the Engines MTU raised concerns that the lead times for ordering some of the LRUs might prove too long to meet the scheduled redelivery of the Engines.
There is a dispute between the parties as to what they agreed to do in relation to these concerns:
Gamit contends that, in or around December 2007, it agreed with MTU that those LRUs for which the lead time for new parts were of concern could be temporarily reinstalled in the Engines, so as to minimise the disruption to work on or involving the Engines, which would include reinstalling the Engines on the wing of the airframe so as to simulate proper weight distribution of the aircraft. MTU would replace the reinstalled LRUs on the Engines after the Engines had been reinstalled on the airframe but prior to the release of the aircraft to SRF.
MTU contends that, in relation to those parts for which the lead time for purchasing replacement LRUs was too long to enable MTU to complete the refurbishment of the Engines during the scheduled timeframe, MTU, with the consent of Gamit, was to refurbish those LRUs and reinstall them in the Engines permanently.
Whether or not any agreement was reached between the parties, the Disputed Parts were reinstalled on the Engines, where they remain. This is common ground in relation to all of the Disputed Parts except for one, an IDG Valve Cooler. In relation to this part, Gamit takes issue with MTU’s position that it has also been reinstalled on the Engines.
The Engine Sub-Contract obliged Gamit to make interim payments to MTU. Invoices in respect of 50% of the anticipated contractual cost were issued by MTU to Gamit in or around November 2007 (the “Partial Invoices”). Gamit did not make any payment in or towards settlement of any of the Partial Invoices. It contends that this was because SRF had failed to pay any of Gamit’s invoices, which included those sums invoiced by MTU to Gamit. As a consequence (and following various further demands for payment), on 23 April 2008, MTU terminated the Engine Sub-Contract on the ground that Gamit’s non-payment of the Partial Invoices amounted to a repudiatory breach of that agreement.
Gamit itself did not receive payment of sums due to it from SRF pursuant to the Engine Agreement. Instead, SRF purported to terminate the Engine Agreement. Gamit contends that SRF had no grounds for terminating the Engine Agreement and was in repudiatory breach of the Engine Agreement by purporting to do so. At the time that the dispute between Gamit and SRF arose, the Engines remained in the possession of MTU, as did various Surplus Engine Parts and the Disputed Parts. The Surplus Engine Parts which are not the subject of these proceedings have since been released to Gamit by MTU. As requested by Gamit, MTU gave an undertaking on 30 April 2008 that it would not dispose of the Engines, including any unusable, unused or replaced parts, without first giving 48 hours’ notice to Gamit (the “Undertaking”). Gamit obtained an interim injunction in similar terms against SRF.
Following the termination of its contract with Gamit, on 28 April 2008, MTU entered into a contract with Jet Aviation of Basel, Switzerland (“Jet”) on similar terms to the terms of the Engine Sub-Contract. By an order made by consent on 4 July 2008 (the “Consent Order”), the Court ordered that MTU be permitted to transport the Engines (on which it is common ground that the Disputed Parts were installed, save for the IDG Valve Cooler, the reinstallation of which is in issue) to Jet’s facility in Basel and that Jet be permitted to install the Engines on the aircraft for the purpose of allowing an inspection and for refurbishment work on the aircraft to be continued. The Court further ordered that the Engines should at all times remain in the possession of and held to the order of MTU.
Gamit obtained summary judgment against SRF for repudiatory breach of the Engine Agreement for failing to pay Gamit’s invoices. By a Judgment of Mr Justice David Steel given on 10 October 2008 and sealed in an Order on 23 October 2008 (the “Judgment Order”), the Court declared that
“Gamit has title to the Surplus Engine Parts identified in schedule 1 to this Order, removed from the engines pursuant to the “Agreement for CF6-082 Engine Repair”.
MTU was not a party to the application upon which the Judgment Order
was made, and was not heard in relation to it.
On 28 January 2010, MTU gave 48 hours’ notice of its termination of the Undertaking. On 22 April 2010, the Consent Order and the Injunction which Gamit had obtained against SRF were discharged by agreement between the parties.
Witnesses
A number of witnesses were called to give oral evidence at the trial. Gamit called:-
Mr. Michael Welbourne, the General Manager of Gamit since June 2007, who was the principal point of contact for both the negotiation of the contracts and their subsequent performance.
Mr Taco Sicco Smit, a consultant retained by Gamit in regard to supervision of the overhaul of the engines.
MTU called:
Mr Sami Ben-Kraiem, its Senior Director for Sales in the Middle East, who was in effect the counterparty to Mr. Welbourne.
Mr Uygar Dogru, its Customer Support Manger, Mr. Rudiger de Stefano, a Senior Manager in Purchasing and Ms. Sharon Hewett, a Procurement Manager all of whom dealt with various aspects of the steps taken to obtain and install new LRUs.
All these witnesses did their best to assist the court. But they were seeking to recall events from some 3 years ago and thus it is of particular importance to have regard to the contemporary documents and the probabilities: see Grace Shipping v. Sharp & Co [1987] 1 Lloyd's Law Rep. 207 at p. 215-6. Accordingly I turn to set out in some detail what emerges from the written contemporary record.
Detailed background
In early September 2007, SRF approached Gamit about procuring and managing the refurbishment of four CF6-80C2 jet engines by an agreed subcontractor. The Engines were ultimately to be installed on an aircraft to be used by the King of Saudi Arabia and therefore SRF wanted the overhaul carried out to an extremely high specification, referred to in the industry as a “VVIP” or platinum standard. In essence, SRF wanted the Engines to be overhauled to a standard and condition equivalent to new.
Gamit contacted MTU about overhauling the Engines as sub-contractor. On 25 September 2007 Mr Welbourne, who was at that stage Gamit’s Deputy General Manager, sent an email to Mr Ben-Kraiem with some details of the project. Mr Welbourne explained that the Engines were scheduled to be removed from the Aircraft on 1 to 5 October 2007, then shipped to the selected sub-contractor for the overhaul work and then redelivered to Jet in Basel on 12 May 2008 for reinstallation on the Aircraft. He attached a list of the main requirements for the overhaul. Paragraphs 5(e) and 5(f) of the list stated as follows:
“e. All LLPs to be replaced as required to “Zero Time” the engines. Removed LLPs will be catalogued and shipped to Gamit in a repaired or as-removed condition as will be agreed on a case by case basis.
f. All LRUs to be replaced to “Zero Time” the engines (including those making up the QEC kit). Removed LRUs will be catalogued and shipped to Gamit. Overhaul to be agreed on a case by case basis.”
An LLP is a Life Limited Part and an LRU is a Line Replaceable Unit. “Zero Time” means that the part has zero cycles and hours on its historical maintenance record, so this is another way of saying MTU is required to replace all LRUs and LLPs with new parts.
It is common ground that Gamit and SRF visited MTU’s facility in Hanover on 4-5 October 2007 so that everyone involved could introduce themselves and discuss SRF’s requirements for the refurbishment. Mr Welbourne, Mr Keith Hogan, Gamit’s outgoing General Manager, and Mr Nabil Maroun, a technical manager employed by Gamit all attended on behalf of Gamit. Mr Mohammed Bamakret and Mr Abdulkarim Tash Nyazi attended on behalf of SRF and Mr Ben-Kraiem, Mr Dogru, a Mr Holger Brunke, a Powerplant Engineer, and Mr Frank Herr, the Customer Programme Manager were present from MTU.
Gamit had not worked with MTU before, so Mr Welbourne and Mr Hogan gave an overview of Gamit’s business, which included the sourcing and selling of spare aircraft parts. They also emphasised that the overhaul was to be a VVIP project and that the Engines were scheduled to be redelivered to Jet by 12 May 2008.
It is common ground that during the visit, MTU mentioned the lead times for obtaining certain parts. However, there was a dispute about what if anything the parties agreed about this problem. This dispute somewhat evaporated during the course of the trial. In the event I think it became common ground that all parties expected that several parts would not be available for new within the scheduled timeframe for completion and that in that event the likely outcome would be for the original parts to be refurbished and reused in order to deliver the Engines in fully equipped configuration on time. Further renewals might take place thereafter but no final decisions were reached.
During the visit Gamit confirmed to MTU that the used parts removed during the overhaul were to be shipped to Gamit, as Mr Welbourne had mentioned in his email of 25 September 2007. Mr Welbourne recalled that Mr Ben-Kraiem said that before the parts were shipped to Gamit, MTU might be interested in buying some of them and indeed a week or so later, Mr Ben-Kraiem wrote to Mr Welbourne offering to purchase some parts.
Over the remainder of October 2007, Gamit and MTU negotiated the Engine Sub-Contract and developed the workscopes for the overhaul. At the beginning of October 2007 MTU had sent Gamit a draft agreement it had produced for a previous enquiry in 2006. MTU also provided Gamit with a copy of its standard workscope for SAAC, which MTU and Gamit used as a starting point. MTU and Gamit referred to this as Revision 0. (Footnote: 1) Simultaneously, Gamit drafted the Engine Agreement based on the drafts of the Engine Sub-Contract produced by MTU. Gamit wanted the terms of the Engine Agreement to mirror the terms of the Engine Sub-Contract as far as possible, to ensure that Gamit met SRF’s requirements.
MTU sent Gamit a further draft of the Engine Sub-Contract dated 15 October 2007. It stated at Clause III.4 of Appendix B:
“Title to unusable and replaced parts of the repair item shall pass to MTU-H, unless the Customer expressly objects prior to the replacement. If the Customer so objects, the Customer shall be obligated to take these parts back at the Customer’s expense (including the costs for storage and transportation)”.
In response, Gamit struck through Clause III.4 of Appendix B and added a clause entitled “RETURNED COMPONENTS” on page 5 of the revised draft stating:
“All removed items “Consumables, Rotables, and LLPs” that result from this overhaul of the four engines. Should be listed, repaired/overhauled, and certified where applicable, and returned to GAMIT’s facility using industry standard packaging.”
On 18 October 2007 SRF and Gamit signed the Engine Agreement. The most pertinent clauses were as follows:
“1. SCOPE OF AGREEMENT
SRF requires repair/overhaul and maintenance services on exclusive basis with respect to four (4) CF6-80C2 Engines in full QEC with the Engine Serial Numbers 704-589, 704-768, 706-225 and 704-875. GAMIT has the expertise and experience and is willing to procure and manage such services according to the standards, procedures, and agreed workscope provided by SRF and its nominated contractor (GAMIT-C) where (GAMIT-C) is any subcontractor that GAMIT may see fit to subcontract the work to, and any appropriate airworthiness authorities regulations.
SRF agrees to exclusively place Purchase Orders for Services required on such four (4) Engines with GAMIT for the duration of the Agreement.
VI. TURNAROUND TIME “TAT”
a. Upon Delivery of such four (4) CF6-80C2 Engines to GAMIT-C, GAMIT-C will complete the Required Services on Each Engine before the requested redelivery date of 12 May 2008, as such time may be extended in the event that circumstances occur, that are beyond GAMIT-C’s reasonable control.
b. Turnaround Time shall start the Day of induction of an Engine/Module at GAMIT-C Facilities and furthermore provided that all Engine Documents are available.
VII. DURATION AND TERMINATION
a. Contract shall become effective on date of signature and shall remain valid for the performance of such four (4) CFC-80C2 shop visits. For any Purchase orders placed prior to any date of expiration or termination this Agreement shall continue to be valid until fulfilment of all obligations of the Parties hereunder.
VIII. PAYMENT TERMS
a. An initial down payment invoice shall be issued reflecting 50% of the fixed estimated cost of the repair/overhaul which should be paid on submission.
b. A preliminary invoice shall be issued for Services forty five (45) Days prior to completion of Work. Such invoice shall cover the estimated total charges. Said invoice shall be due and paid by SRF on submission. GAMIT will use all reasonable efforts to render the final invoice not later than three (3) months after redelivery of the respective Engine. Said invoice shall be payable on submission.
c. All invoices submitted by GAMIT to SRF will be accompanied by copies of GAMIT-C invoices.
Appendix B
2.2. Title to any unusable, unused and or replaced part(s) whether they are life limited components or rotables resulting from the performance of the repair/overhaul of the above listed engines shall pass to GAMIT. GAMIT shall have the exclusive right to dispose of any of these parts at their discretion without the referral to SRF.
5.2. All invoices issued by GAMIT, shall reflect the cost of the subcontractor “GAMIT-C” plus a management fee of 12.75% plus prevailing tax, all invoices shall be accompanied by copies of the original invoices of the subcontractor “GAMIT-C.
5.4. In the event that the agreed deadlines are not met or upon expiry of the 30-day period allowed after receipt of GAMIT’s invoice at the latest, SRF shall pay interest on the outstanding amount at one percent (1) per month, plus any proven additional financing costs incurred by GAMIT; provided, however, that such interest payment shall be in addition to, and not in lieu of, any other legal remedies available to GAMIT.
9.1. Liens/Reservations Of Title
With regard to all outstanding claims of GAMIT, GAMIT shall have a right of retention and a contractual lien on SRF’s items which come into GAMIT’s possession in connection with the performance of Services. These rights may also be asserted in connection with claims arising from previously performed Services, previously effected deliveries and other claims arising from the business relationship. This shall also apply in the event that an item of SRF is brought to GAMIT at a later date and GAMIT, at this time, has claims against SRF arising from the business relationship.
11. Final Provisions
11.1. This contract shall be governed by the laws of England excluding its conflict of laws principles and excluding the U.N. Convention on Contracts for the International Sale of Goods of April 4, 1980.
11.2. Jurisdiction and venue for any and all legal action relating to current and future claims arising from the business relationship is London, England.
11.3. In the event that any of the provisions contained herein and/or any contracts concluded on the basis of these provisions prove to be invalid or unenforceable, the validity of the remaining terms and conditions of this contract shall remain unaffected.”
On 18 October 2007, MTU quoted for the work, the estimated cost per engine being in the region of $6 million together with LRU replacement estimated at $1.3million.
MTU incorporated the requirement to replace all LLPs and LRUs into a Revision 2 of the workscopes dated 22 October 2007. MTU circulated Revision 2 and SRF approved and signed it on 22 October 2007. In each of the four Revision 2 workscopes, Table 2 contained a list of the LRUs on the Engines, confirmed that MTU was required to replace each of them and set out the supplier of the part and estimated price and lead time. The lead times had been obtained from the relevant manufacturers. Some of them were not available: the others were mainly in the range between 15 and 155 days. There was only one with a lead time in excess of the period available prior to the delivery date of 12 May 2008.
Gamit and MTU were scheduled to meet on 23 October 2007 to discuss the Engine Sub-Contract but on 22 October 2007 Mr Ben-Kraiem cancelled the meeting as he was unwell. Mr Welbourne therefore sent Mr Ben-Kraiem and Mr Dogru the revised draft by email that day.
On 23 October 2007 Mr Welbourne sent Mr Ben-Kraiem and Mr Dogru an email attaching another draft with some further minor revisions to the Engine Sub- Contract. One of the revisions was to the “Returned Components” clause, which he altered slightly to provide:
“The removed items (LRUs and LLPs) that result from this overhaul of the four engines shall be listed and repaired/overhauled where applicable and returned to Gamit’s facility using industry standard packaging. The costs associated with such parts will be charged within the respective engine final invoice.” .
MTU signed the final draft of the Engine Sub-Contract on 29 October 2007. This was presented to Gamit and signed on its behalf on 31 October2007:
“SCOPE OF CONTRACT
GAMIT requires repair, overhaul, and maintenance services on exclusive basis with respect to certain four (4) SRF CF6-80C2 Engines in full QEC configuration, with the Engine Serial Numbers 704-589, 704-768,706-255 and 704-875, MTU-H has the facilities, expertise and experience and is willing to provide such services according to MTU-H standards, procedures, the agreed workscope and valid airworthiness authorities regulations.
GAMIT agrees to exclusively place Purchase Orders for Services required on such four (4) Engines with MTU-H for the duration of the Agreement.
(1) TURNAROUND TIME “TAT”: “Upon Delivery of such four (4) CF6-8-C2 Engines to MTU-H, MTU-H will complete the Required Services, as per the workscopes listed in Appendix C, on Each Engine before the requested re-delivery date of 12 May 2008, as such time maybe extended in the event that circumstances occur, that are beyond MTU-H’s reasonable control.”
(2) “DURATION AND TERMINATION: Contract shall become effective on date of signature and shall remain valid for the performance of such four (4) CF6-80C2 shop visits. For any Purchase orders placed prior to any date of expiration or termination this Agreement shall continue to be valid until fulfilment of all obligations of the Parties hereunder.”
“PAYMENT TERMS
MTU-H will, upon receipt of each Purchase Order, issue a partial invoice which shall cover fifty (50) percent of the expected cost estimate as per the agreed workscope of the respective Engine. A subsequent preliminary invoice shall be issued for Services forty five (45) Days prior to completion of Work. Such invoice shall cover the estimated total charges, taking into account the previously invoiced fifty (50) percent of the expected cost estimate. Said invoice shall be due and paid by the Customer as down payment prior to redelivery of the Engine. MTU-H will use all reasonable efforts to render the final invoice not later than three (3) months after redelivery of the respective Engine. All invoices shall be payable within thirty (30) Days after receipt of the respective invoice.”
(3) “RETURNED COMPONENTS: The removed items (LRUs and LLPs) that result from this overhaul of the four engines shall be listed and repaired/overhauled where applicable and as agreed between the Parties and returned to GAMIT’s facility using industry standard packaging...”
“SHOP VISIT RECORDS
Since required by SRF to receive the GAMIT digital records standards (DDMS), MTU-H will place a PO to GAMIT for issuing such digital engine records. Such service shall be invoiced as a subcontract charge on the final invoice under Planning & Documentation.”
(4) “Appendix B, Clause I.2: Verbal agreements, subsequent amendments and supplements to the contract as well as any guarantees of condition and durability of any sort shall be invalid unless confirmed by MTU-H in writing.”
(5) Appendix C:
(a) “The agreed workscopes shall be in accordance with the original signed copies” of four workscopes, referable to each engine and headed “Summary Initial Workscope R3 dated 29/10/2007”;
(b) “The initial workscopes are subject to possible changes if required based on the hard-ware condition and after customer approval.”
On 31 October 2007, after signing the Engine Sub-Contract, Mr Welbourne sent four Purchase Orders to Mr Ben-Kraiem, one for each of the Engines. Each Purchase Order requested MTU to perform the services set out in the Workscope for that Engine “in accordance with the time–scales and terms contained” in the Engine Sub-Contract. In response MTU issued four interim invoices to Gamit in respect of the overhaul work, each invoice referable to a specific Purchase Order. Gamit in turn issued an invoice to SRF for 50 per cent of the estimated cost of the overhaul of the Engines, being USD16,542,748. Gamit’s invoices were accompanied by those issued by MTU.
It is common ground that during November 2007 Mr Ben-Kraiem commented that he was concerned that the lead times for replacement LRUs might be too long for the timetabled redelivery date. Mr Welbourne visited MTU’s facility on 5 November 2007 and sent a “follow up” email to Mr Ben-Kraiem and Mr Dogru on 13 November 2007 attaching a list of action items, item 12 of which stated:
“MTU believe lead-times for certain LLP/LRU items may exceed the redelivery dates for the engines-MTU to supply list of effected items with relevant lead times” (“Item 12”).
The target date for MTU providing the list was 16 November 2007.
Mr Welbourne visited MTU’s facility again on 15 to 17 November 2007 to oversee the progress of the overhaul. He was accompanied this time by Mr Taco Smit, the technical consultant Gamit had engaged to provide “on-site” technical oversight of the overhaul. During the visit, Mr Welbourne and Mr Ben-Kraiem discussed the possibility of MTU reinstalling LRUs temporarily and then exchanging them with new ones (if available) when the Engines were back “on wing”. Shortly after the visit, Mr Smit produced a report of his trip, noting
“MTU promised to update the Lead Times in Table 2 of the Workscope and to consider overhaul for the LRUs with prohibitive lead times. As Mike mentioned it is always possible to replace these LRUs again at a later date, when the new component will be available” .
On 20 November 2007 Mr Welbourne circulated another Action List by email to various people involved in the project, including Mr Ben-Kraiem and Mr Dogru. As MTU had still not provided a list of LLPs and LRUs that it was concerned about obtaining, Item 12 remained on the action list. Mr Welbourne gave MTU a new target date of 23 November 2007.
Mr Smit visited MTU’s facility again on 22 to 25 November 2007 (this time without Mr Welbourne). MTU had still not provided a list of parts it was concerned about obtaining but said that the list would be ready around mid-December 2007. At Mr Welbourne’s request, Mr Smit also asked MTU to make a list of all LRUs and LLPs it had removed from the Engines, which it was to store at MTU for the time-being. Mr Smit recorded all this in another Trip Report, shortly after the visit. He noted that “Sami said that many of the LRUs and LLPs may be of interest to MTU” and told him that MTU “will present an offer for many of the parts at the due time”.
On 29 November 2007 Mr Welbourne sent a further Action List by email to Mr Ben-Kraiem, Mr Dogru and others requesting MTU to provide a list of any LLPs and LRUs it was concerned about obtaining by 4 December 2007. This was repeated on 13 December 2007 with a view to obtaining such a list by 17 December 2007 when the next visit was due to take place. Mr Smit visited MTU again on 7 to 9 January 2008 and again requested a list of affected parts. Mr Smit recorded in his Trip Report that MTU told him that it had received more data on lead times for LRUs and that it would prepare a list for MTU. Mr Smit visited MTU again on 16 to 19 January, 27-29 February and 16-21 March 2008, but there was no discussion of reinstalling the Disputed Parts.
Moreover, MTU frequently provided Weekly Status Reports explaining where MTU had reached in the overall sequence of work required on the Engines and Engineering Highlights Reports identifying key findings or developments in respect of particular elements of the Workscope for each Engine. MTU made no mention of reinstalling LRUs in its Weekly Status Reports and stated in every Engineering Highlights Report: “Per SRF request all LRU’s must be replaced with zero time parts” followed by the action item: “Install new parts”.
Despite not making any complaint about the service provided by Gamit, SRF failed to pay any of the invoices submitted by Gamit. Gamit contended that as a consequence it was unable to pay the Partial Invoices rendered by MTU. In the meantime, in order to exert pressure on SRF, Gamit and MTU agreed that MTU would assert that it would stop work on the Engines on 4 February 2008 if it did not receive payment by then. In fact, MTU continued to work on the Engines. Two of the Engines were ready for their final checks involving “test runs” prior to preparation for redelivery to Basel. Initial test runs were scheduled for 19 March 2008 and 26 March 2008. MTU agreed to go ahead with the first test run. A representative of SRF attended the first test cell run and was very happy with the outcome.
Unbeknown to Gamit, SRF was taking steps to replace it by Jet and to that end representatives from Jet visited MTU’s facility on 1 April 2008. On 10 April 2008 MTU wrote to Gamit reserving its right to terminate the Engine Sub-Contract. By a letter dated 18 April 2008 SRF purported to terminate the Engine Agreement. The letter was not sent directly to Gamit. Rather it was sent by SRF to Jet and MTU. Gamit subsequently received the letter from Jet. The letter did not provide any basis for termination and did not mention Gamit’s title to the surplus engine parts.
On 23 April 2008 MTU wrote to Gamit terminating the Engine Sub-Contract for non-payment of its invoices and giving notice that it was exercising a lien over the Engines. It is common ground that on 28 April 2008 MTU signed a contract with Jet on materially the same terms as the Engine Sub-Contract, including the requirement to replace all LRUs with new. The primary differences were a revised delivery date of 28 May 2008 and a provision whereby SRF retained title to any unused or replaced parts.
Gamit was concerned that SRF would disregard Gamit’s legal rights and in particular would deal with Disputed Parts without regard to Gamit’s title to them. Therefore on 29 April 2008, Gamit’s solicitors, Clyde & Co. LLP, wrote to MTU asking it to identify and deliver up all unusable, unused and replaced parts from the Engines and retain possession of all parts fitted to the Engines and provide an undertaking that MTU would not part with possession of all unusable, unused and replaced parts from the Engines and deliver up such parts to Gamit and that it would not part with possession of the Engines.
It is also common ground that, by a letter dated 30 April 2008, MTU, through Bargate Murray, MTU’s solicitors, gave an undertaking that the Engines and the unusable, unused and replaced parts would remain in MTU’s possession, despite the fact the Engines were installed on the Aircraft (the “Undertaking”).
In early May 2008 Gamit received an invoice issued by Jet to SRF stating that “the evaluation of replaced parts will be submitted once all 4 engines completed overhaul”. This fuelled Gamit’s concern that SRF would disregard its title to the unusable, unused and replaced parts. Accordingly, Gamit applied for and, on 20 May 2008 obtained, an injunction prohibiting SRF from, amongst other things, disposing of, selling or otherwise dealing with any parts that had been removed from the Engines or the Engines themselves (the “Injunction Order”). Paragraph 3(a) of the Injunction provided that the parts in question were identified in Appendix 1 to the Injunction Order. Appendix 1 listed the LLPs and LRUs that MTU was required to replace under the Workscopes and included the Disputed Parts. A sealed copy of the Injunction Order was served on SRF and MTU on 25 May 2008 and neither raised any issue as to the parts listed in Appendix 1.
On 5 June 2008 Gamit applied for summary judgment against SRF and served a draft summary judgment order on SRF and MTU. The draft summary judgment order identified the parts to which Gamit claimed title by reference to Appendix 1 of the Injunction Order. The hearing of Gamit’s application for summary judgment was listed for 24 June 2008. However, on 23 June 2008 Clyde & Co. received an open offer of settlement, purportedly on behalf of the Kingdom of Saudi Arabia, acting through Jet, who had instructed Baker & McKenzie LLP. The parties entered into settlement discussions and Gamit’s application for summary judgment was therefore adjourned.
By the start of July 2008 it was envisaged that the settlement would involve a payment by or on behalf of SRF to Gamit, together with the delivery up of engine parts. Gamit requested MTU’s agreement to it conducting an inspection of the parts removed from the Engines. It wanted to make a list of the parts available for delivery up under the proposed settlement agreement and to ensure that the correct release documentation was available for each of those parts as, without certification, the commercial value of the parts might be as low as scrap.
On 4 July 2008, the Court ordered, by consent, that MTU be permitted to transport the Engines (on which it is common ground that the Disputed Parts were installed, save for the IDG Valve Cooler, the reinstallation of which is in issue) to Jet’s facility in Basel and that Jet be permitted to install the Engines on the aircraft for the purpose of allowing an inspection and for refurbishment work on the aircraft to be continued (the “Consent Order”). At paragraph 1(c) of the Consent Order the Court further ordered:
“The Engines shall at all times remain in the possession of and held to the order of [MTU]”.
Paragraph 4 of the Consent Order provided:
“Subject to the variation in paragraph 1 of this Order, the undertakings given by [MTU] to [Gamit] in the letter from Bargate Murray, dated 30 April 2008 (“Second Defendant’s Undertakings”) shall continue to apply on the terms set out therein. For the avoidance of doubt the transportation of the Engines from Hannover to Basel and their installation on the Aircraft shall not be a breach of [MTU’s] Undertakings.”
On 13-17 July 2008 Mr Welbourne and Mr Smit visited MTU’s facility to inspect the parts. Mr Welbourne created a checklist of the parts to be inspected comprising all of the LRUs and LLPs which the Workscopes for each of the Engines required MTU to replace. On arrival, Mr Dogru provided him with a list that included updated details of the LLPs and LRUs and other parts that had been replaced as part of the overhaul. As the parts were scattered across various departments and storage facilities, Mr Welbourne decided to inspect the release documentation instead.
Mr Welbourne reviewed the list and the available documentation and noticed from time to time that release documentation was missing for some of the parts. Mr Welbourne asked Mr Dogru why there was no release documentation for those parts and he advised that it was because the parts had been reinstalled on the Engines. Mr Welbourne therefore annotated those parts “reused”. He marked a number of other parts “scrapped” as he agreed with MTU that it could scrap those parts on the understanding that it would not charge Gamit for doing so. Mr Welbourne confirmed this instruction to Mr Ben-Kraiem in an email on 17 July 2008.
The annotated schedule of parts signed by Mr Welbourne and Mr Dogru was attached as Annex 1 to the proposed settlement agreement between the parties. Clyde & Co. circulated the draft settlement agreement, including the schedule of parts at Appendix 1, to the parties on 6 August 2008. At no time did SRF, MTU, Jet or the Kingdom of Saudi Arabia query or object to the list of parts.
On 8 August 2008, MTU informed Jet Aviation that some of the reinstalled LRUs on Engine 706-255 could be replaced by new LRUs that MTU had received. MTU suggested that a team of its engineers would be sent to Jet in Basel to change these parts. As the parties did not agree the draft settlement agreement, Gamit’s application for summary judgment against SRF for repudiatory breach of the Engine Agreement was relisted for October 2008. The annotated list of parts was adopted as Schedule 1 to the draft summary judgment order. By an order sealed on 23 October 2008 Mr Justice David Steel declared that:
“Gamit has title to the Surplus Engine Parts identified in schedule 1 to this Order, removed from the engines pursuant to the “Agreement for CF60-082 Engine Repair”” (the “Judgment Order”).
On 21 November 2008, Clyde & Co. wrote to MTU and demanded the delivery up of the Disputed Parts. MTU has refused to deliver up those parts. On 28 January 2010, Bargate Murray wrote to Clyde & Co. stating that MTU was terminating the Undertaking as the Engines and engine parts were “no...longer in [its] physical possession or control”.
The claim
Gamit puts its claim for the value of the Disputed Parts in two ways. First, it is submitted that Gamit would have had the benefit of the value of those parts if MTU had not, in breach of the Engine Sub-Contract, failed to replace them with new ones. Second, Gamit asserts that it took title to those engine parts pursuant to the Engine Agreement and/or the Order dated 23 October 2008 but MTU has converted them.
As regards the first contention, it is necessary to focus on the impact of the termination of the Engine Sub-Contract on 23 April 2008, some three weeks before the agreed delivery date. It is Gamit’s submission that, although where a contract is brought to an end by reason of repudiatory breach, all further obligations are usually terminated, the “Duration and Termination” clause in the Engine Sub-Contract preserved all the obligations undertaken by MTU under any existing “Purchase Orders”. In short there are said to be four separate and independent contracts “contained in or evidenced by” the purchase orders which remained valid despite the termination of the Engine Sub-Contract.
This argument was developed as follows:-
The Engine Sub-Contract required the placing of Purchase Orders.
The Duration and Termination clause provided that for “any purchase orders placed prior to any date of expiration or termination the Agreement shall continue to be valid until fulfilment of all obligations of the Parties hereunder”.
It follows that although MTU might be entitled to terminate the Engine Sub-Contract and thereby prevent Gamit from issuing any further purchase orders, MTU cannot terminate its obligation under purchase orders that have already been placed.
Such was said to be a commercially sound outcome because:-
The purchase orders were back to back with purchase orders issued by SRF under the Engine Contract. Gamit was thus protected from being left in breach of its obligations to SRF.
The overhaul work required all four engines to be stripped. If the contract was terminated and all remaining obligations discharged, the disassembled parts would be left scattered across MTU’s facility thereby compromising the future airworthiness of the engines.
In the event that Gamit refused to pay for the further work, MTU was adequately protected because it had a lien on the Engines (and indeed retained title to any new parts installed).
I am unable to accept this contention:
The provision as to the placement of Purchase Orders is not optional. The scheme of the Engine Sub-Contract (as with the Engine Contract) contemplates the issuance of all four purchase orders at one and the same time with a common redelivery date of 12 May. Once issued there was no liberty to issue additional purchase orders.
In the result the purchase orders did not create any obligations separate from the Engine Sub-Contract but merely triggered the carrying out of the work under its terms, together with the premise for issuing the preliminary invoices. It cannot have been intended by the parties that purchase orders could be put in at any stage up the delivery date.
The proposition that MTU’s obligations would continue in the event of termination of the Engine Sub-Contract is commercially absurd. It would follow that even if Gamit stated that it had no intention of paying for the work, MTU would be required to complete the overhaul and could not accept that repudiatory breach and release themselves from the obligation to purchase replacement parts and install them at the cost of $20 million. By the same token if MTU simply refused to undertake any overhaul work following delivery of the Engines, Gamit would remain under an obligation to pay the preliminary invoices.
Clear language would be required to override the well-established principles reflecting the outcome of a validly terminated contract, namely that, while accrued causes of action remain in place, future obligations by way of performance are discharged.
The language of the Duration and Termination clause is not apt to impose a requirement to carry on performing notwithstanding termination. It provides for the survival of accrued rights and of ancillary or secondary obligations in the form of warranties, indemnification clauses, liens and jurisdiction clauses. It is of no consequence that such might be the state of affairs in any event and thus the provisions of the clause in this respect may have been surplusage.
It is notable that the allegation that the relevant contracts were to be found in the purchase orders was very late in emerging. Indeed it was first advanced by Gamit in January 2011 at about the same time as Gamit finally conceded that the Engine Sub-contract had been validly terminated for non-payment of the invoices. The new case was a lawyers’ construct. In any event for all the reasons outlined above I reject it.
Was MTU in breach by virtue of the reinstallation of the Disputed Parts?
Assuming I am wrong and MTU remained under an obligation to continue to perform work under the Engine Sub-Contract (or the Purchase Orders) by overhauling the Engines in accord with the workscopes, that work was to be completed by 12 May 2008, such redelivery date to be extended in the event of circumstances beyond MTU’s reasonable control. Although much attention was paid to meetings between MTU and Gamit held in October and December 2007 as to whether some agreement was reached for the re-use of parts either on a temporary or permanent basis, I was not persuaded that matters developed beyond a recognition that there might be delays in delivery of new parts which might necessitate further discussion.
The position thus remains that the overhaul (including the installation of new LLPs and LRUs) was to be completed by the re-delivery date of 12 May 2008 as extended. Importantly it was not part of Gamit’s case that MTU were in breach at any time before that date, whether in the form of delay in ordering new parts or otherwise. The allegation remained that MTU was in breach in failing to replace the Disputed Parts with new parts prior to the scheduled re-delivery date of 12 May 2008.
This complaint is developed by Gamit in the following way:-
No agreement was ever reached as to the re-use of LRUs and specific difficulties in regard to delivery of new LRUs were never, despite promises to the contrary, particularised by MTU. Indeed no notification of overhaul and re-use of existing parts was ever given let alone agreement to any steps from SRF ever sought. The only information provided was some notice of long lead times in respect of some items.
The contemporary communications within MTU demonstrate that MTU were aware that units could only be replaced on a temporary basis substituting them with new parts if necessary post the delivery date following installation of the engines on to the aircraft wings in Basel.
Orders for various parts (including T1.2 sensors, HP controllers and IDGs) were cancelled in mid-April 2008 without notification to Gamit and duly did not arrive in time for the redelivery date.
That all said, I accept MTU’s case that the position as at 12 May 2008 was as follows:
It had been recognised by MTU and Gamit from the very outset that new parts might not be available or not available in time. In such circumstances it was contemplated that the temporary re-use of existing parts would be unavoidable unless SRF were content for the redelivery date to be extended at large. As Mr Welbourne put it in oral evidence on Day 3:
“A. If there was an LRU that had a problem, we would have been -- and were informed about it prior to redelivery of the engines, then obviously there is not a problem. If that part wasn’t available at redelivery of the engine, we were looking at the facility to temporarily reinstall the old LRUs, as we discussed yesterday, to get the weight of the engine correct; and then, before redelivery of the aircraft itself into service, having the ability MTU of sending a team to change the parts for us.”
Thus the probabilities are that, where there was delay in delivery of replacement parts which threatened the existing redelivery date, the parts would be reused but on the basis that if replacement parts arrived later they would be installed before the re-delivery date (extended as appropriate) and in any event with the approval of SRF/Gamit by the time of release of the aircraft into service;
In the event that new parts remained unavailable at the time the aircraft went back into service the overwhelming probability is that SRF would have accepted the retention of original parts to avoid delay. Indeed SRF did precisely that following the transfer to Jet where the terms for renewal were exactly the same;
Cancellation of orders before 12 May 2008 was immaterial. The cancellations were provoked partly by concern as to the long delays in payment by Gamit but more importantly by the inability to extract any form of assurance from the relevant supplier as to any delivery date in the near future.
It follows that, even if I had been persuaded that despite termination MTU remained under an obligation to complete the overhaul, it is not established that MTU were in breach of that obligation.
Valve Cooler IDG
There is a further dispute about one of the Disputed Parts, namely whether Valve Cooler IDG No. 540-0712-1 was re-used or was in fact replaced. This issue arises because in the list prepared by Mr. Welbourne dated 18 July 2008, this item was not marked “re-used”. This, as Mr. Welbourne explained, was because a “release certificate” was furnished to him. Thus, the argument ran, the part must have been replaced with a new part and then overhauled. I reject this contention. I accept MTU’s case that the release certificate was sent to Mr. Welbourne in error. This is apparent from the detailed list sent to Jet when the engines were returned. The mere fact that there existed a release certificate was not to the point.
I also reject, if the point be still alive, the contention that, since further new parts were obtained by MTU, it can be inferred that they were substituted for the re-used ones at some stage. The evidence demonstrates that these new parts were subsequently delivered to and paid for by Jet in 2010 and not installed then or thereafter. In short, there is no evidence that the work would have progressed any differently if MTU had continued to work under the Engine Sub-Contract rather than under the materially identical contract with Jet.
Remoteness
Two further matters would arise as regards the claim for breach but for my earlier conclusion. First, it is MTU’s case that any loss on the part of Gamit of the benefit of the Disputed Parts was not within the reasonable contemplation of the parties when the Engine Sub-Contract was entered into and thus too remote to sound in damages.
It is common ground that the usual position upon refurbishment of an aircraft engine is that title to surplus parts remains with the owner of the engine. Such was indeed the position under the contract between SRF and Jet. Although the Engine Contract expressly accorded title to surplus parts to Gamit, the Engine Sub-Contract was entirely silent on title. It merely required any LRUs or LLPs removed during the overhaul should be “returned to Gamit’s facility”.
Gamit submitted that a number of matters sufficiently demonstrated that MTU could be taken to know that Gamit stood to sustain loss in the ordinary course of things if removed parts were not duly returned to Gamit:-
The express requirement to return removed parts to Gamit’s facility in England and not to SRF in Saudi Arabia or Jet in Switzerland.
This requirement had during the course of negotiations replaced a draft clause giving title to MTU.
Gamit’s business was known to include the sourcing and supply of used aircraft parts.
MTU had made a proposal to Gamit and not SRF to purchase some of the parts before they were returned.
In my judgment, Gamit falls well short of overcoming the hurdle issue of remoteness:-
It was common ground that MTU did not see the Engine Contract until later nor was MTU told of the title provision in any relevant discussions with Gamit.
The return of the parts to Gamit’s facility and marketing by Gamit was neutral as to whether SRF was retaining title.
MTU’s contemporary understanding is evidenced by Mr. Ben-Kraiem’s e-mail to Mr. Welbourne dated 16 October 2007 where MTU offered to purchase from “the customer” the surplus material. I accept Mr. Ben Kraiem’s evidence that “customer” here meant SRF as being the customer of both MTU and Gamit.
“A. Again, that was what I meant. It is our customer from Gamit, of Gamit and MTU. When talking to Mr Welbourne I think I would not tell him I would purchase from the customer. It would be suggested that I say from Gamit or from you, and also this email is giving a suggestion addressing the item but when it comes to materializing it there will be a clear legal purchase agreement for each part.”
Against this background, the knowledge that Gamit was to take title to surplus parts cannot be imputed to MTU in the ordinary course of things. If it be relevant I would hold that MTU had not assumed the risk that Gamit would be unable to profit from the return of the replaced parts.
Loss
The issue here arises out of the fact that, in order to obtain and install replacements for a disputed part, Gamit would have to pay the price of the part (plus MTU’s mark-up) and pay the cost of overhauling the old part for re-use. Thus it might be said that there is no potential for loss because the only credit would be the worth of the used (but overhauled) part.
The response of Gamit is to the effect that it would, in those circumstances, have been reimbursed for its outlay by SRF. But the difficulty here is that SRF were not willing to make payment to Gamit even as from the date of invoicing for part payment. Viewed in isolation, Gamit would (if Disputed Parts had in fact been replaced) have been a net payer rather than a net beneficiary.
Given my finding that MTU was relieved of any obligation to continue the overhaul work following the termination letter of 23 April 2008, this dispute is by definition artificial. But the position was that Gamit was obliged to meet MTU’s invoices even where SRF were failing or refusing to meet Gamit’s invoices. Any loss sustained by Gamit in regard to Disputed Parts that might otherwise have been replaced before redelivery (or even return to service) is a loss caused by SRF’s breach of contract.
However, were MTU’s obligation to have survived termination contrary to my earlier finding, the reality is that any subsequent replacement would have been reimbursed by SRF either direct or via Jet.
Conversion
I turn now to the alternative claim on conversion and first the issue as to whether Gamit had title to the Disputed Parts. This is said by Gamit to arise by reason of clause 2.2 of App. B of the Engine Contract since, as Gamit contend, even if not actually replaced nonetheless they constituted “unusable, unused and/or replaced parts”. In short, they were unusable because there was a contractual obligation to replace them. Accordingly, so the argument ran, title to such parts was obtained by Gamit either on the execution of the Engine Agreement, or on the agreement on the workscopes or on their removal from the Engines.
I reject this contention. In my judgment the transfer of title could only arise at the conclusion of the overhaul. Such is the natural meaning of those categories “resulting from the performance of the repair/overhaul.” In this connection it has to be borne in mind that the provision as to transfer of title applied to all parts and not just to those parts which were to be reinstalled. Furthermore it was common ground that LRUs might be reinstalled pending the arrival of new parts. It is commercially unreal to allow for initial transfer of title to Gamit, followed by transfer of title to SRF on such installation and followed by transfer back to Gamit on installation of new parts.
Accordingly, I accept MTU’s submission that the provision is only workable on the basis that:-
Unusable parts were those which could not be re-used following the overhaul because of their condition.
Unused parts were those which were in fact used at the conclusion of the work.
Replaced parts were those for which a replacement part had been obtained and installed.
In the alternative Gamit asserts that it obtained title to the Disputed Parts by virtue of the Court’s Declaration Order dated 23 October 2008 in regard to the accompanying Schedule 1. This is not arguable. No such issue arose in those proceedings. In any event it is difficult to see how it can arise in the alternative. If title had not passed the court cannot have declared it to have done so. The answer in short is that the Order related to title to “Surplus Engine Parts identified” in the schedule. It does not prescribe that all the parts listed were “Surplus Engine Parts”. Indeed, the schedule specifically identifies parts which were not “Surplus Engine Parts” and in respect of which it is common ground that Gamit did not obtain title to:
Parts described as “reused” which were always to be reused.
Parts described as “surplus”.
One part described as “missing at incoming”.
By the same token any Disputed Parts described as reused are not Surplus Engine Parts and Gamit does not have title to them. It follows from this conclusion that the conversion claim cannot arise and I say no more about it.