Thai Airways International Public Company Ltd v KI Holdings Co Ltd & Anor

In this action Thai Airways (“Thai”), the national airline of Thailand, claims damages for breach of three contracts made with the first defendant (“Koito”), a Japanese company which manufactures aircraft seats. Under these contracts Koito agreed to supply economy class seats for three groups of aircraft. Some of the seats were delivered late and other seats were not delivered at all. Among other consequences of these defaults, Thai was prevented from using five new aircraft for around 18 months until seats were obtained from another supplier. Shortly before the start of the trial, Koito admitted liability. The significant issues which remain in dispute concern the measure of damages. Before addressing these issues, I will first identify the breaches of contract for which Thai is entitled to damages and the relevant steps which Thai took to mitigate its loss.

Each of the three contracts which are the subject of this action is governed by English law and provides for disputes to be decided by “the court of competent jurisdiction in London, England”. The contracts were made in 2006 and 2008 and I will mention them in chronological order.

The B777 contract

Under a General Terms Agreement dated 24 February 2006, Koito agreed to sell and deliver to Thai six “shipsets” of economy class seats to be installed on six Boeing B777-300 aircraft. The B777-300 is a medium range, twin-engined aircraft, with capacity for some 370 passengers. The six aircraft were already owned by Thai and were being upgraded.

The first five shipsets were delivered on time. However, the sixth shipset was not. Under the contract Koito was obliged to deliver this shipset by, at latest, 30 September 2009. Most of the shipset was delivered by that date, but 99 seats were not delivered until 12 and 13 December 2011, more than two years later. Koito has admitted that the late delivery of these seats was a breach of contract.

The A330 contract

Under a General Terms Agreement dated 20 November 2008, Koito agreed to sell and deliver to Thai eight shipsets of economy class seats to be installed on eight new A330-300 aircraft which Thai had agreed to purchase from Airbus. The A330-300 is also a medium range, twin-engined aircraft, with capacity for around 300 passengers. Koito agreed to deliver each shipset to fit in with the timetable for delivery of the aircraft agreed between Thai and Airbus.

The first two shipsets were delivered on time and the third shipset was delivered 30 days late. However, Koito failed to deliver the remaining five shipsets. It is now common ground that the dates by which Koito was contractually obliged to deliver these five shipsets were 18 May, 17 June, 30 September, 31 October and 30 November 2009. Koito was accordingly in breach of contract from those dates.

Thai terminated the contract by a notice dated 3 August 2010, and Koito no longer disputes the validity of the termination.

The A380 contract

Under a further General Terms Agreement also dated 20 November 2008, Koito agreed to sell and deliver to Thai six shipsets of economy class seats to be installed on six new A380-800 aircraft which Thai had agreed to purchase from Airbus. The A380-800 is a long-range, four-engined aircraft, with two passenger decks and capacity for over 500 passengers. As with the A330-300 aircraft, Koito undertook to deliver the shipsets in time to fit in with the timetable for delivery agreed between Thai and Airbus.

In August 2009, Thai and Airbus agreed, for their own commercial reasons, to delay delivery of the A380-800 aircraft by two years, with new delivery dates between August 2012 and October 2013.

In May 2010, Koito informed Thai that it was unable to supply any of the seats ordered for these aircraft. Thai terminated the contract by a notice dated 3 August 2010, and the validity of this termination is also now admitted by Koito.

The essential reason for Koito’s failure to meet its delivery obligations under these contracts was that regulators intervened when it came to light that Koito had over a substantial period falsified results of safety tests and other data so as to make it appear that seats which it had manufactured complied with regulatory requirements. The Japanese Civil Aviation Bureau (“JCAB”) first intervened in late January 2009 to prohibit the export of Koito’s seats. Exports were allowed to resume in March 2009 but were suspended again in June 2009. In addition, in October 2009 the European Aviation Safety Agency (“EASA”) intervened to suspend approvals with the result that Koito was prohibited from exporting seats to Airbus. These interventions led to the breaches of contract by Koito referred to above.

On 2 June 2011, the EASA and the US Federal Aviation Authority (“FAA”) issued airworthiness directives requiring Koito seats that had already been delivered and installed to be re-tested. This affected the seats which Koito had delivered under the B777 and A330 contracts. It is now common ground that it was a term of each of these contracts that Koito would ensure that its process of manufacturing and testing of all seats at all times complied with applicable regulatory requirements such that its ability to manufacture, sell and deliver seats was not impaired. Koito has admitted that its breach of this term caused the adoption of the airworthiness directives and thus caused Thai to have to undertake the testing required by those directives.

The seats installed in the A330-300 aircraft passed the required “static” tests but failed “dynamic” tests, with the result that in order to comply with the airworthiness directives these seats must be replaced by July 2017.

It was also an express term of each contract that Koito would maintain a quality assurance system in compliance with the applicable regulations. Although Koito has not admitted any breach of this term, the inescapable inference from the evidence adduced by Thai – which was not positively disputed by Koito – is that Koito failed to maintain such a quality assurance system at all material times prior to 14 January 2010, when Koito’s Quality Management Approval was withdrawn.

Thai has further alleged that the seats delivered by Koito under the B777 and A330 contracts were in breach of the terms implied by law pursuant to section 14 of the Sale of Goods Act 1979 that the seats were of satisfactory quality and reasonably fit for their purpose. I reject as untenable Koito’s pleaded defences to this allegation (i) that the inclusion in the contracts of various express warranties had the effect of excluding the implication of these terms and (ii) that the acceptance of the seats by Thai prevents Thai from claiming damages for breach of these implied terms. In circumstances where no argument was specifically addressed to the point, however, I am not satisfied that there was a breach of the implied terms merely because, at the time when seats were delivered, there had been failures in Koito’s systems and processes which subsequently led regulators to require all seats manufactured by Koito to undergo further testing. On the other hand, it does seem to me that a breach of the implied terms has been demonstrated in the case of the three shipsets delivered under the A330 contract by reason of the failure of those seats to pass the “dynamic” tests which were carried out in April 2013.

Thai took various actions to mitigate the effects of Koito’s breaches of contract.

The B777 contract

As mentioned, the shipset for the final B777-300 aircraft (which had the registration number HS-TKE) was delivered by Koito with 99 seats missing. The partial shipset was installed between 21 September and 8 December 2009, but the aircraft then remained grounded awaiting delivery of the missing seats. Thai ultimately took the decision to re-install old economy class seats in place of the missing seats as a temporary expedient so as to enable the aircraft to fly. However, because of their inferior quality, Thai was unable to sell these seats to passengers. For a period of some 18 months from 29 May 2010 until the missing seats were finally delivered and installed in December 2011, aircraft HS-TKE was therefore operating with a reduced seat capacity.

The A330 contract

The failure of Koito to deliver the shipsets when required for five of the A330-300 aircraft resulted in Thai having to take delivery of those aircraft from Airbus without any economy class seats fitted. The five aircraft were due to be delivered to Thai in, respectively, August, October and December 2009 and January and February 2010. Thai tried to persuade Airbus to delay delivery but had limited room for negotiation. The first three aircraft were delivered by Airbus to Thai on 23 December 2009 and the last two aircraft were delivered on 29 March 2010. Upon delivery, all the aircraft were flown to Bordeaux where they were placed in storage until seats could be installed.

Thai ultimately purchased replacement seats from another supplier, ZIM Flugsitz GmbH (“ZIM”) at additional cost. The five A330-300 aircraft eventually went into commercial use around 1½ years late on average, on various dates between March and June 2011.

The A380 contract

In May 2010, when Koito made it clear that it was not going to deliver the seats ordered for the six A380-800 aircraft, Thai began the process of procuring replacement seats. The seats were purchased from a different supplier, Recaro Aircraft Seating GmbH (“Recaro”), and cost more than Thai had agreed to pay for the Koito seats.

The need to find another supplier did not result in any delay in the delivery of the A380-800 aircraft (which, as mentioned earlier, was postponed in any event for commercial reasons).

As a result of the delay in delivery of (at that stage) three A330-300 aircraft and the grounding of the B777-300 aircraft HS-TKE, Thai found itself in the later part of 2009 with fewer aircraft than expected. As a short term response, Thai brought back into service three old A300-600 aircraft. Thai also investigated the possibility of leasing some newer aircraft.

On 26 February 2010 Thai’s Board of Directors approved a proposal to lease three B777-300ER aircraft from Jet Airways for a term of three years. The minutes of the meeting (as translated) record:

“The Meeting Resolved to approve procurement of aircraft by way of short-term operating lease as a result of the delayed delivery of the three A330-300 aircraft and one [B777-300] aircraft due to the inability of the manufacturer to install economy class seats which reduced the number of usable aircraft, causing aircraft rotation problems and therefore, the Company was in need of short-term operating lease of the three aircraft to solve such problems …”

At a further meeting on 12 March 2010 the Board approved the execution of the Jet leases. The aircraft were delivered on 26 and 31 May 2010 and the three year term of the leases commenced on those dates. The leases included an option for Thai to extend the term for a further two years.

The B777-300ER is a long-range, twin-engined aircraft. It is therefore not directly comparable to the A330-300, which is a medium-range aircraft, but gave Thai flexibility in managing its fleet. The three aircraft leased from Jet each had 300 seats.

The remaining issues in this case all concern the measure of damages recoverable by Thai for the breaches of contract by Koito which I have outlined above. By far the largest item of damages claimed is the cost of leasing the three B777-300ER aircraft from Jet Airways. The total cost of leasing the aircraft for three years (including the lost use of capital) was just under US$162m. In the particulars of claim Thai has claimed the whole, or alternatively part, of this amount as costs incurred in mitigation of losses which Thai would otherwise have suffered as a result of Koito’s breaches of contract.

At the start of the trial, Koito was maintaining that Thai’s decision to enter into the Jet leases was not a step reasonably taken by Thai to mitigate its loss and was not caused by Koito’s breaches of contract. In the course of the trial, however, Koito conceded this point for the purpose of these proceedings. Despite this concession, the point did not become entirely common ground because Thai’s own position also changed during the trial. In closing submissions Thai elected to limit its claim to the cost of leasing the aircraft for two years and to concede that the decision to lease the aircraft for a third year was a choice made by Thai for its own commercial reasons, the consequences of which are for Thai’s own account. The cost of leasing the aircraft for two years was some US$107m.

Thai also claims as damages various other sums, including the extra costs incurred in buying and installing replacement seats for the A330-300 and A380-800 aircraft. These sums are claimed in three different currencies but the total amount claimed is approximately equivalent to US$21m, of which some US$5.5m is agreed by Koito and the rest is disputed. There are also certain payments totalling c.US$1.3m which Thai accepts must be set off against the sums owing to it.

A central plank of Koito’s defence is that, even where costs were incurred by Thai as a result of Koito’s breaches of contract, Thai also gained certain benefits from the mitigating actions taken which must as a matter of law be brought into account in calculating damages. Thus, Koito contends that Thai cannot recover the cost of the Jet leases because the benefits gained from leasing those aircraft and other mitigating steps taken by Thai not only eliminated the losses which would otherwise have resulted from the loss of aircraft capacity caused by Koito’s breaches of contract but covered the cost of the leases as well. Similarly, Koito argues that the replacement seats purchased by Thai were lighter than the seats ordered from Koito and that the installation of lighter seats has generated and will continue to generate savings in the cost of fuel for which Thai must give credit. Koito also contends that certain credits granted to Thai by Airbus when Thai purchased further aircraft from Airbus in 2011 were attributable to the delays in delivery of aircraft caused by Koito’s breaches and must therefore be brought into account.

These arguments raise questions of law about the mitigation of loss and I will start by identifying the general principles of law which are applicable to Thai’s claims.

The basic principle governing the award of damages for breach of contract is of course that the claimant is entitled to be compensated so far as money can do it for losses caused by the defendant’s breach. In identifying such losses, it is necessary to take account of how the claimant has acted in response to the defendant’s breach of contract. Action or inaction by the claimant may have the effect of preventing or failing to prevent loss. Legal rules are required to distinguish between effects on the claimant’s financial position which are to be regarded as caused by the defendant’s breach of contract and for which damages can therefore be recovered and effects which are attributed to the claimant’s own action or inaction in response to the breach and for which the defendant is not liable. Drawing this distinction is the function of the doctrine of mitigation.

In an analysis first expounded by Harvey McGregor in his treatise on damages, the concept of mitigation is often said to comprise three distinct rules. As stated in the current edition of McGregor on Damages (19^th Edn, 2014) at paras 9-004 to 9-006, (Footnote: ¹) the three rules are these:

“(1)

The first and most important rule is that the claimant must take all reasonable steps to mitigate the loss to him consequent upon the defendant’s wrong and cannot recover damages for any such loss which he could thus have avoided but has failed, through unreasonable action or inaction, to avoid. Put shortly, the claimant cannot recover for avoidable loss.

(2)

The second rule is the corollary of the first and is that, where the claimant does take reasonable steps to mitigate the loss to him consequent upon the defendant’s wrong, he can recover for loss incurred in so doing; this is so even though the resulting damage is in the event greater than it would have been had the mitigating steps not been taken. Put shortly, the claimant can recover for loss incurred in reasonable attempts to avoid loss.

(3)

The third rule is that, where the claimant does take steps to mitigate the loss to him consequent upon the defendant’s wrong and these steps are successful, the defendant is entitled to the benefit accruing from the claimant’s action and is liable only for the loss as lessened; this is so even though the claimant would not have been debarred under the first rule from recovering the whole loss, which would have accrued in the absence of his successful mitigating steps, by reason of these steps not being ones which were required of him under the first rule. ... Put shortly, the claimant cannot recover for avoided loss.”

Whilst distinguishing these rules may sometimes be useful, it is important not to lose sight of their underlying unity. As Robert Goff J observed in Koch Marine Inc v D’ Amica Societa di Navigazione ARL (The “Elena D’ Amico”) [1980] 1 Lloyd’s Rep 75 at 88, the three rules are all aspects of the principle of causation. Thus, as I have indicated, the essential purpose of the mitigation rules is to identify, in the light of what the claimant has done or not done to avoid loss resulting from the defendant’s breach of contract or other legal wrong, which costs and benefits accruing to the claimant are to be treated as consequences of the defendant’s wrong and which are to be treated as caused by the claimant’s own action or inaction. The basic test which the doctrine of mitigation involves is whether the claimant has acted reasonably in response to the defendant’s wrong. Insofar as the claimant has acted reasonably, costs and benefits accruing to the claimant are included in the calculation of damages. Insofar as the claimant has not acted reasonably, the claimant’s damages are assessed as if it had. In the words of Scrutton LJ in Payzu Ltd v Saunders [1919] 2 KB 581, 589:

“[the claimant] can recover no more than he would have suffered if he had acted reasonably, because any further damages do not reasonably follow from the defendant’s breach.”

It is this point on which Andrew Dyson and Adam Kramer focus when they say in an illuminating recent discussion of the subject:

“Mitigation is often said to comprise three rules, but it is better expressed using just one: damages are assessed as if the claimant acted reasonably, if in fact it did not act reasonably.”

See A Dyson and A Kramer, “There is No ‘Breach Date Rule’” (2014) 130 LQR 259, 263. As Mr Kramer notes in his book on “The Law of Contract Damages” (2014) p.348, fn 47, McGregor’s second and third rules are simply the non-application of any rule, i.e. the claimant’s actual loss is recoverable where the claimant has acted reasonably.

It is commonly said that the claimant has a “duty” to take reasonable steps to mitigate its loss. This formulation is, however, potentially misleading in at least two ways. First, it is well established that (in the absence of a contrary agreement) a claimant is free to act as it wishes following a breach of contract by the defendant and does not owe any duty in law to the defendant or anyone else to mitigate its loss: see e.g. Darbishire v Warran [1963] 1 WLR 1067, 1075; Sotiros Shipping Inc v Samiet Solholt (The “Solholt”) [1983] 1 Lloyd's Rep 605, 608. Mitigation is not in truth a duty but an assumption: damages are calculated on the assumption that the claimant has taken reasonable steps in mitigation whether it has in fact done so or not: see Golden Strait Corp v Nippon Yusen Kubishika Kaisha (The “Golden Victory”) [2007] 2 AC 353, 370, para 10. Second, the test of what is “reasonable” in this context is not simply one of general rationality but is governed by legal rules.

Various norms of reasonable conduct have become settled. Foremost of these is the expectation implicit in the market measure of damages that, where there is an available market, the claimant will go into the market as soon as possible and obtain a substitute for the defendant’s performance: see e.g. Golden Strait Corp v Nippon Yusen Kubishika Kaisha (The “Golden Victory”) [2007] 2 AC 353, 396-7, para 79. If the claimant fails to do this, the omission will accordingly be treated as a voluntary choice, the consequences of which are for the claimant’s own account; and damages will be assessed as if the claimant had taken advantage of the available market (see the discussion in the article by Dyson and Kramer mentioned above and the cases there cited).

Where no such established norm applies, there is a general expectation that, where more than one option is reasonably available, the claimant will adopt the one which is or is likely to be the least expensive. If the claimant in fact chooses a different option, the additional cost (or benefit) of doing so will again be treated as a consequence of the claimant’s choice and not of the defendant’s wrong.

One result of these rules is that the claimant may have acted in a way which was reasonable from the point of view of its own business interests or personal objectives and yet not have adopted what the law regards as a “reasonable” response to the defendant’s breach of contract or other wrong for the purpose of assessing damages. That was the position, for example, in The “Elena D’ Amico”, supra, where the claimant’s decision not to charter a substitute vessel when the defendant shipowner wrongfully terminated a time charter was found by the arbitrator to be reasonable from the point of the view of the claimant’s own business interests but was not in accordance with the expectation of the law that the claimant would take advantage of an available market. Likewise, in Darbishire v Warran [1963] 1 WLR 1067 the judge had found that the plaintiff acted reasonably in having his damaged motor car repaired rather than buying a similar second-hand vehicle even though the cost of repairs was more than twice the market value of the car before the accident. The Court of Appeal nevertheless held that, while the decision to repair the car may well have been reasonable so far as the plaintiff himself was concerned, he had failed to mitigate his loss because there was a cheaper option reasonably available of replacing the car. Damages were therefore limited to the replacement cost.

The standard of “reasonableness” is, however, applied with some tenderness towards the claimant having regard to the fact that the claimant’s predicament has been caused by the defendant’s wrongdoing: see Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452, 506; Britvic Soft Drinks Ltd v Messer UK Ltd [2002] 1 Lloyd’s Rep 20, para 114 (affirmed [2002] 2 Lloyd’s Rep 368, CA). Thus, the claimant is not expected to take steps which would involve unreasonable expense, risk or inconvenience: see Chitty on Contracts (31^st Edn, 2012), Vol I, para 26-080. In addition, the burden of proof is on the defendant to show that there was a course of action which it was reasonable to expect the claimant to adopt that would have avoided all or an identifiable part of the claimant’s loss: see e.g. Roper v Johnson (1873) LR 8 CP 167; Standard Chartered Bank v Pakistan National Shipping Corp [2001] 1 All ER (Comm) 822 at para 38. Furthermore, there is often a range of responses available to the claimant which will be regarded as reasonable. As stated by Potter LJ in Wilding v British Telecommunications Plc [2002] EWCA Civ 349; [2002] ICR 1079 at para 55:

“If there is more than one reasonable response open to the wronged party, the wrongdoer has no right to determine his choice. It is where, and only where, the wrongdoer can show affirmatively that the other party has acted unreasonably in relation to his duty to mitigate that the defence will succeed.”

The main focus of argument in the present case has been the third aspect of mitigation distinguished by McGregor – i.e. the rule that benefits gained by the claimant from steps taken to mitigate loss are to be taken into account in assessing damages. The leading case on this point is the decision of the House of Lords in British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673. In that case the company which ran the London underground railway (“London Underground”) purchased steam turbines from British Westinghouse to generate electricity. The turbines were defective and, after using them for a time, London Underground replaced them with new machines purchased from another supplier (Parsons). London Underground claimed as damages the cost of the extra fuel consumed while the British Westinghouse turbines were in use and the cost of buying the replacement turbines. The arbitrator found that purchasing the Parsons turbines was a reasonable and prudent action which avoided losses that London Underground would have suffered if it had continued to use the British Westinghouse turbines. But he also found that the Parsons machines were so much more efficient that it would have been to the financial advantage of London Underground to replace the British Westinghouse turbines when it did even if the British Westinghouse turbines had complied in every respect with the contract.

On these facts the House of Lords held that the financial benefit obtained from the Parsons machines had to be brought into account by the arbitrator in assessing damages. Viscount Haldane LC, with whom the rest of the House agreed, stated the principle (at p. 691) as follows:

“I think the principle which applies here is that which makes it right for the jury or the arbitrator to look at what actually happened, and to balance loss and gain. The transaction was not res inter alios acta, but one in which the person whose contract was broken took a reasonable and prudent course quite naturally arising out of the circumstances in which he was placed by the breach.”

The British Westinghouse case is sometimes said to be authority for the proposition that benefits arising from mitigating action taken by the claimant are to be brought into account in assessing damages even if the action was not one which the claimant was reasonably expected to take to mitigate its loss. That, for example, is the view of McGregor on Damages (para 9-103), as reflected in the “avoided loss” rule stated in the passage quoted earlier. Andrew Dyson has recently argued that it makes better sense to interpret the decision in the British Westinghouse case as depending on the view that London Underground would have been acting unreasonably if it had not replaced the British Westinghouse turbines with new and more efficient machines: see A Dyson, “British Westinghouse Revisited” [2012] LMCLQ 412; and “Recovery for Avoided Loss: Towards a New Account of Mitigation” (Oxford Student Legal Research Paper No 07/2012). Mr Dyson is concerned that the orthodox interpretation of the British Westinghouse case creates an asymmetry in the applicable principles by requiring the claimant to give credit for benefits obtained from doing more than was reasonably expected while preventing the claimant from recovering losses which result from doing less than was reasonably expected to mitigate the consequences of the defendant’s breach of contract.

It is clear that in the British Westinghouse case the House of Lords considered that London Underground would have been acting unreasonably if they had continued to use the British Westinghouse turbines and had not replaced them with new machines which were at least as efficient as the British Westinghouse turbines had been warranted to be. What is less clear is whether the House of Lords considered that London Underground would have failed to act reasonably to mitigate their loss if they had not gone further and bought replacement turbines which were more efficient than the British Westinghouse machines had been warranted to be. The latter interpretation may find some support in Viscount Haldane’s observation (at p.691):

“Apart from the breach of contract, the lapse of time had rendered the [British Westinghouse] machines obsolete, and men of business would be doing the only thing they could properly do in replacing them with new and up to date machines.”

On the other hand, he also said (at p.688):

“[London Underground] were doubtless not bound to purchase machines of a greater kilowatt power than those originally contracted for, but they in fact took the wise course in the circumstances of doing so, with pecuniary advantage to themselves.”

This indicates that London Underground would not have been acting unreasonably if they had replaced the British Westinghouse turbines with new machines of equivalent performance to that which British Westinghouse had warranted that their turbines would achieve. (Footnote: ²)

In terms of the principle established by the case, however, I do not think it matters which of these views of the facts is correct. It is important to recall that, as mentioned earlier, there is often a range of responses reasonably available to the claimant. In such a case, in order to displace the balance of actual loss and gain as the applicable measure of damages, it is necessary for the defendant to show that the action taken by the claimant was outside the reasonable range. The possibility that there may be more than one reasonable response to the breach open to the innocent party is reflected in Viscount Haldane’s statements of principle – both in the passage I have quoted at paragraph 40 above and where he identified (at p.690) “a principle which has been recognised in other cases” that:

“provided the course taken to protect himself by the plaintiff in such an action was one which a reasonable and prudent person might in the ordinary conduct of business properly have taken, and in fact did take whether bound to or not, a jury or an arbitrator may properly look at the whole of the facts and ascertain the result in estimating the quantum of damage.”

To require all the gains made from buying the Parsons turbines to be brought into account in the British Westinghouse case, it was thus sufficient that the purchase of the Parsons turbines was a reasonable action taken to mitigate the losses which London Underground would otherwise have suffered. It made no difference to the result whether replacing the British Westinghouse turbines with ones of the same rather than greater efficiency than those which London Underground had previously contracted to purchase would, or would not, also have been a reasonable mitigating action.

There is thus no need to invoke McGregor’s “avoided loss” rule in order to explain the decision. Nor is there any asymmetry in the principle of mitigation. The British Westinghouse case simply demonstrates that, provided the claimant’s response to the breach is one which a reasonable person could be expected to adopt, the measure of damages is the loss which the claimant has actually suffered taking account of both costs and benefits resulting from the defendant’s breach of contract.

Considering whether a step taken by the claimant in response to the defendant’s breach of contract was taken in reasonable mitigation of loss does not exhaust the question of causation. It is still necessary to determine whether a benefit (or cost) which would not have accrued to the claimant but for taking that step is to be regarded as a consequence of the mitigating step and hence of the defendant’s breach. Thus, Viscount Haldane in the British Westinghouse case distinguished between cases where benefits arise out of the breach and the action reasonably taken to mitigate it so that they must be brought into account in the assessment of damages and cases where benefits are seen as the result of an independent transaction. Two shipping cases illustrate the distinction.

In Famosa Shipping Co Ltd v Armada Bulk Carriers Ltd (The Fanis) [1994] 1 Lloyd’s Rep 633, shipowners failed to provide their vessel for a time charter trip. In mitigation of their loss the charterers hired a substitute vessel and claimed damages measured as the additional hire which they paid under the replacement charter. Although the charterers were only required to redeliver the substitute vessel with about the same quantities of bunkers on board as on delivery, they in fact redelivered the vessel with more bunkers on board and received credit for these bunkers from the owners at higher prices than they had paid to stem the bunkers. In arbitration proceedings the owners argued that this profit should be deducted from the charterers’ damages. Mance J upheld the tribunal’s decision that the profit should not be deducted because it arose out of the charterers redelivering the vessel with more bunkers on board than they were bound to do, and the owners could have declined to pay the charterers for the excess at the charter rates. He said (at pp.636-7):

“Here, if the profit was an element or consequence of the substitute charter (which itself arose naturally out of the situation in which the charterers were placed by the breach), it was appropriate to speak of the profit itself as arising out of, or as a consequence of, the breach. If on the other hand the profit was not an element or consequence of the substitute charter, then the profit did not arise out of or as a consequence of the breach. It was for the arbitrators to form a judgment one way or the other.”

The recent case of Fulton Shipping Inc of Panama v Globalia Business Travel SAU (The “New Flamenco”) [2014] EWHC 1547 (Comm), [2014] 2 Lloyd’s Rep 230 also involved a claim under a time charter. In repudiatory breach of the charter the charterers re-delivered the vessel two years early in October 2007. The owners accepted the repudiation and, in circumstances where there was no suitable alternative employment, sold the vessel for US$23,765,000. In arbitration proceedings the owners claimed as damages the net loss of profits which they would allegedly have made during the remaining period of the charter. The charterers argued that the owners were bound to give credit for the difference between the amount for which the vessel was sold and the value of the vessel at the end of the charter period in November 2009 – by which time the market had collapsed and the vessel could only have been sold for US$7 million. The arbitrator found that the sale of the vessel was caused by the charterers’ breach and was in reasonable mitigation of damage, and that the benefit which accrued to the owners from selling the vessel in October 2007 rather than at the end of the charter period in November 2009 should be brought into account in the assessment of damages.

Popplewell J allowed the owners’ appeal from this decision. He said (at para 68):

“The causation question is not concluded by the tribunal’s finding that the sale was in reasonable mitigation of loss. The loss in question which was mitigated was the owners’ net loss of income from the charterparty. The sale of the vessel mitigated this loss because it reduced the continuing costs of operating or laying up the vessel. To the extent that the benefits flowing from the sale comprised such cost savings, there is no difficulty in treating the causal nexus between breach and benefit as established through the mitigating step of selling the vessel. But insofar as the sale gave rise to a capital benefit, it was not caused by the breach, but by the independent decision of the owners to realise the capital value of their asset. Although that was a benefit which flowed from the mitigating step of selling the vessel, it does not satisfy the principle that benefits are only to be taken into account to the extent that they are caused by the breach.”

Popplewell J carefully analysed the separate elements and consequences of an action (selling the vessel) triggered by the defendant’s breach of contract. He distinguished between the owners’ right to earn income from the vessel (with the associated liability to pay the operating costs) during the period of the charter and the right to do so after that time. In principle, as the judge pointed out, the owners could have sold one right without the other. In selling the vessel when they did, the owners sold all their rights in the vessel. In so far as the owners thereby relieved themselves of the costs which they would have incurred in operating or laying up the vessel during the remainder of the charter period, their action was a step reasonably taken in mitigation of loss, the benefits of which had to be brought into account. However, in so far as the sale comprised all the owners’ residual rights in the vessel, the benefit which they obtained from the sale could not properly be regarded as the result of an action reasonably taken in mitigation of loss. Rather, it represented the result of an independent decision based on the owners’ commercial judgment, the risk and benefit of which were for their own account.

A similar distinction needs to be drawn in the present case between the costs and benefits which accrued to Thai as a result of leasing aircraft from Jet (a) for the first two years of the three year term of the leases and (b) for the third year.

As mentioned earlier, by the end of the trial it was no longer in dispute that Thai’s decision to lease three B777-300ER aircraft from Jet Airways was a step reasonably taken to mitigate the losses caused by Koito’s breaches of contract in failing to deliver seats for five of the A330-300 aircraft and the B777-300 aircraft HS-TKE. However, there remained an issue about the length of the Jet leases. This remained in issue because, unusually, each side conceded the other’s case on this point and argued in closing submissions the opposite of its case at the start of the trial. Thus, having previously contended otherwise, Koito ultimately accepted that leasing the aircraft for three years amounted to reasonable mitigation. Thai, for its part, having previously claimed the cost of leasing the aircraft for three years as damages, ultimately accepted that its decision to lease the aircraft for a third year should be regarded as an independent business decision rather than a step taken in reasonable mitigation of loss.

These changes of position are less paradoxical than they may at first sight seem when it is noted that the five delayed A330-300 aircraft were all brought into service and the missing seats for the B777-300 aircraft were installed during the first two years of the Jet leases. During the third year of the leases, therefore, Thai was no longer suffering any lack of capacity as a result of Koito’s breaches of contract but had additional capacity from the aircraft leased from Jet. Since it is common ground that the leased aircraft made a positive contribution to Thai’s profits after deduction of their rental and running costs, the effect of including the third year of the leases in the calculation is potentially to reduce Thai’s claim. It is therefore understandable why Thai should ultimately have taken the position that the third year should be left out of account.

Since no consensus has been reached on the question whether the third year of the Jet leases should be taken into account, I must decide that question.

Thai was initially offered the option of a two to three year lease by Jet Airways, and the aviation experts agreed that two years was the minimum reasonable commercial lease term which Thai could have entered into. In deciding whether it was a reasonable response to the delays in delivery caused by Koito’s breaches of contract for Thai to lease the aircraft for three rather than two years, the critical consideration seems to me to be the length of time which it was likely to take before seats could be installed on the five A330-300 aircraft so that those aircraft could be brought into service.

In March 2010, when the decision was made to enter into the Jet leases, Thai was still hoping that Koito would deliver the missing seats. However, in late 2009 Thai had decided to embark on a procurement process to find another seat supplier, which was being undertaken at the same time as Thai was continuing to press Koito for delivery. It was the evidence of Suwedh Sundarakul, the Program Manager responsible for procuring replacement seats for the A330-300 aircraft, that a new seat program could take 18 months. In a letter which he wrote to Koito on 28 April 2010 pointing out what the damaging consequences for Thai would be if Koito stopped their seat delivery program, Khun Suwedh had said that “sourcing a new supplier will result in another 12-15 months delay in the program”. On the basis of this evidence, it seems to me that in March 2010 when Thai entered into the Jet leases Thai could reasonably expect, even on the most pessimistic assumptions, to obtain replacement seats for the five A330-300 aircraft and bring them into service well within two years of May 2010 when the term of leases commenced. In the event, as mentioned earlier, replacement seats were procured and the five A330-300 aircraft were brought into commercial use on various dates between March and June 2011 – that is, 12 to 16 months after the Jet leases were executed and 9 to 13 months after the term of the leases commenced at the end of May 2010.

I cannot see that in these circumstances leasing the aircraft from Jet for a term of three years rather than two years could be justified by the need to cover the gap in capacity caused by Koito’s failure to perform its contractual obligations.

Chokchai Panyayong, the former President of Thai who was involved in the decision to enter into the leases, said in his evidence that three year leases were the most reasonable option at the time, for three reasons. His first reason was that Thai was able to negotiate down the monthly rental from the original figure of US$1.3m per aircraft offered by Jet to US$1.1m, and Khun Chokchai did not believe that this would have been possible if the term of the leases had been less than three years. However, there is no evidence that Thai made any attempt to find out whether Jet would have been willing to accept the same rent for a two year lease term or, if not, what rate Jet would have required. Moreover, the minutes of Thai’s internal committee meetings indicate that Thai already considered the rate of US$1.3m per aircraft offered by Jet to be attractive, as being lower than the market rate, before this was successfully negotiated down. In these circumstances I am not persuaded that a belief that the rent would be higher if the aircraft were leased for only two years played any part in Thai’s decision-making at the time nor that the rate charged by Jet for two year leases would in fact have been higher. In any event, even if the monthly rental would have been slightly higher, I do not see that this could possibly by itself have made it reasonable for Thai to lease the aircraft for a third year by way of action to mitigate the consequences of Koito’s breaches of contract if those breaches of contract did not give rise to any need for substitute aircraft in the third year. At most the price difference would have made it more attractive for Thai to lease the aircraft for a third year for its own commercial reasons.

Khun Chokchai’s second justification for the choice of three year leases was that detailed maintenance checks known as C-Checks have to be carried out at the beginning and end of a lease which are expensive, and it therefore makes sense to get as much use of the aircraft as possible to defray these costs. However, there is again no evidence that this played any actual part in Thai’s decision at the time to opt for three year rather than two year leases. Moreover, Thai’s aviation expert, Mr Bull, noted that the period between C-Checks on the existing Jet Airways maintenance programme was two years so that, in his opinion, a two year lease term would have optimised the C-Check maintenance intervals. In any event, I again do not see that this consideration could possibly by itself have made it a reasonable mitigating step for Thai to lease the aircraft for a third year if there was no reasonably anticipated need for aircraft to replace the delayed A330-300s for that year – as I have found that there was not.

Khun Chokchai’s third reason for maintaining that three year leases were the most reasonable option was that at the time when Thai entered into the Jet leases there was still great uncertainty as to whether Koito could deliver the seats in the near future or at all. Equally, although Thai had commenced its procurement process to find an alternative seat supplier, this process was in its very early stages and initial enquiries of the market had suggested that the preferred suppliers would not be able to meet Thai’s timetable or have any capacity at all. There was therefore great uncertainty as to when Thai might either get Koito’s seats or seats from an alternative supplier. I accept that in March 2010 when the leases were executed there was indeed uncertainty not only about whether Koito would deliver the seats it had contracted to supply but also about how soon replacement seats could be obtained. However, as already discussed, the expectation was that the delay could be up to 18 months. I do not accept that the uncertainty was such as to provide a reason to lease replacement aircraft beyond May 2012.

Thai’s internal documents indicate that procuring aircraft on short term leases was seen as having other advantages for Thai in addition to addressing the problem caused by the delay in delivery of the five A330-300 aircraft and the delay in completing the refurbishment of the B777-300 aircraft HS-TKE. There were old aircraft in Thai’s fleet which had frequent technical problems and required a lot of maintenance and some of which Thai was hoping to sell. It is clear that leasing the three B777-300ERs from Jet for three years (with an option to extend the leases for a further two years) was seen by Thai as helping to address those problems – although the extent of Thai’s perceived need was such that at a meeting on 12 March 2010 Thai’s Board also approved the lease of three more B777-300ER aircraft from Air India for a term of five years. In explaining to the Board at that meeting the decision to lease the aircraft from Jet, Khun Chokchai is recorded as giving, as an additional reason for the decision, the fact that the delay in delivery of the A380-800 aircraft to 2012 and 2013 “forced the Company to extend the use of the B747-400 aircraft which led to a number of problems such as the repair of old aircraft, aircraft rotation problems and flight delays”. Later in the minutes the view of the Executive Management of Thai as to the benefits of leasing all six B777-300ER aircraft (three from Jet and three from Air India) is recorded as follows:

“In summary, the use of the short-term leased aircraft would reduce the average age of the fleet, stabilise the aircraft availability, increase the product effectiveness, and create better aircraft rotation for appropriate production. Furthermore, it also reduced fuel consumption, CO₂ emissions, fuel costs and maintenance costs and enhanced in-flight products while reducing the cost of product improvement of the two B747-400 aircraft.”

The conclusion I draw is that, while the main reason for leasing the three B777-300ER aircraft from Jet was to mitigate the consequences of Koito’s breaches of contract, that reason would not have justified leasing the aircraft for three years rather than two. The choice of a three rather than a two year lease term (with an option to extend for a further two years) was driven by other commercial considerations. I accordingly find that the decision to lease the aircraft for a third year was not a step which was taken nor which it would have been reasonable for Thai to take in mitigation of loss, and is therefore not attributable to Koito’s breaches of contract.

Koito argued that Thai is not entitled to claim the costs of leasing the three aircraft from Jet without at the same time giving credit for the revenue earned from operating the aircraft. On behalf of Koito, Ms Heilbron QC submitted that the appropriate way to measure Thai’s loss is to compare the profits actually made by Thai during the period of the Jet leases with the profits which Thai would have made if Koito had performed its contractual obligations. I will refer to the difference between these amounts as Thai’s “net loss of profits”.

To this Mr Morpuss QC on behalf of Thai gave three answers:

I will consider these three points in turn.

Must Thai give credit for “betterment”?

Thai’s primary position is that as a matter of law it is not obliged to give credit for any element of “betterment” which resulted from the Jet leases. In advancing this argument, Mr Morpuss QC recognised the general principle established by the British Westinghouse case that benefits obtained from steps reasonably taken in mitigation of loss must be brought into account. However, he sought to distinguish the British Westinghouse case on the ground that London Underground made a choice in that case to purchase more powerful turbines. Mr Morpuss submitted that the principle that benefits must be brought into account does not apply if the only action which the claimant could reasonably take to mitigate its loss results in an incidental and additional benefit which the claimant did not seek: no credit need be given for such a benefit. He argued that any benefits obtained from the Jet leases fall into this category.

In support of this argument, Mr Morpuss relied on two authorities. The first was Harbutt’s ‘Plasticine’ Ltd v Wayne Tank & Pump Co Ltd [1970] 1 QB 477. In that case the defendants in breach of contract installed faulty equipment in the plaintiffs’ factory which caused a fire. The factory burnt down and the plaintiffs had to build a new one. The defendants argued that in calculating damages a deduction should be made from the rebuilding cost to reflect the benefit to the plaintiffs of having a new factory in place of the old one. The Court of Appeal rejected that argument. Lord Denning MR said (at p.468):

“I think they should be allowed the cost of replacement. True it is that they got new for old; but I do not think the wrongdoer can diminish the claim on that account. If they had added extra accommodation or made extra improvements, they would have to give credit. But that is not this case.”

The other members of the Court of Appeal agreed. Widgery LJ said (at p.473) that to require credit to be given for betterment would be “the equivalent of forcing the plaintiffs to invest their money in the modernising of their plant which might be highly inconvenient for them”.

The second and principal authority on which Mr Morpuss relied was the speech of Lord Hope in Lagden v O’ Connor [2004] 1 AC 1067. That case followed on from the earlier decision of the House of Lords in Dimond v Lovell [2002] 1 AC 384. In each case the claimant acquired a car through a credit hire company to replace his or her own car while it was being repaired following a collision caused by the defendant’s negligence. In Dimond v Lovell the House of Lords held that the agreement with the credit hire company was unenforceable but Lord Hoffmann (with whose speech Lord Browne-Wilkinson agreed) and Lord Hobhouse went on to express the view that, had the agreement been enforceable, the claimant could have recovered the amount charged by the credit hire company only insofar as it did not exceed the cost of hiring a car through a traditional car hire company. Lord Hoffmann accepted the judge’s finding that the claimant had not acted unreasonably in using the services of a credit hire company. However, he noted that those services included other benefits in addition to the hire of a replacement car (including credit and relief from the inconvenience and risks of pursuing a claim to recover the company’s charges from the defendant). He considered that, had the cost of these additional services been separately incurred, it would not have been recoverable and that the decision in the British Westinghouse case required the additional benefits obtained as a result of taking reasonable steps to mitigate loss to be brought into account in the calculation of damages. That was achieved by awarding as damages what it would cost the claimant to hire a car through a traditional car hire company – an amount which has since become known as the “basic hire rate”. (Footnote: ³)

Lord Hobhouse reached the same result but preferred to do so by the simpler means of apportioning the sum paid to the credit hire company between the cost of hiring a car and the cost of the other benefits included in the scheme and holding that only the former amount was recoverable by the claimant as damages for the loss of use of her car.

In Lagden v O’ Connor [2004] 1 AC 1067 the claimant was impecunious and could not afford to hire a car without the loan and other services provided by a credit hire company. The House of Lords (by a majority of three to two) distinguished Dimond v Lovell and held that in these circumstances the full amount charged by the credit hire company was recoverable as damages from the defendant. Of the majority, Lord Nicholls (with whom Lord Slynn agreed) decided the case on the basis that the claimant was entitled to recover as damages the cost of the additional services provided by a credit hire company. He therefore did not need to consider the question of betterment. The only member of the majority who discussed that question was Lord Hope. Lord Hope explained the British Westinghouse case on the basis that London Underground in that case obtained benefits as a result of making a choice to buy new turbines (see para 29). He then referred to the Harbutt’s Plasticine case, before deriving the following principles of general application (at para 34):

“It is for the defendant who seeks a deduction from expenditure in mitigation on the ground of betterment to make out his case for doing so. It is not enough that an element of betterment can be identified. It has to be shown that the claimant had a choice, and that he would have been able to mitigate his loss at less cost. ... [I]f the evidence shows that the claimant had a choice, and that the route to mitigation which he chose was more costly than an alternative that was open to him, then a case will have been made out for a deduction. But if it shows that the claimant had no other choice available to him, the betterment must be seen as incidental to the step which he was entitled to take in the mitigation of his loss and there will be no ground for it to be deducted.”

Applying these principles, Lord Hope concluded (at para 35) that, because he lacked the money to pay for a hire car, the claimant in that case had no choice but to use the services of the credit hire company to obtain the use of a replacement car, and therefore had no way of avoiding the additional benefits provided by the company. In these circumstances the case for deducting those benefits had not been made out.

The test stated by Lord Hope needs to be seen in context, because ordinarily where the claimant had a choice and the evidence shows that “the route to mitigation which he chose was more costly than an alternative that was open to him”, the conclusion drawn will be that the claimant did not act reasonably to mitigate his loss. The additional expense will therefore not be recoverable and no question of a deduction for betterment will arise. Lord Hope’s statement has, however, to be seen against the background of Dimond v Lovell where Lord Hoffmann had proceeded on the basis that the claimant was acting in reasonable mitigation of loss in using the services of a credit hire company even though to do so cost more than hiring a replacement car from a traditional hire company. Lord Hope was seeking to distinguish Dimond v Lovell on the ground that the claimant in that case had a choice of reasonable mitigating actions such that the betterment received could be regarded as freely chosen. By contrast, where a claimant receives a benefit as an unavoidable consequence of acting reasonably to mitigate loss, then on the test formulated by Lord Hope the benefit should not be included in the calculation of loss.

As well as the Lagden case, the Harbutt’s Plasticine case satisfies this test. In replacing their factory which had been destroyed, the plaintiffs could not avoid getting the benefit of a brand new factory in place of the old one. The test would not, on the other hand, have been satisfied if the plaintiffs had chosen to add extra accommodation or make extra improvements, for which they would have had to give credit. Another example of a situation in which Lord Hope’s test would be met was given in the British Westinghouse case in the Court of Appeal by Buckley LJ:

“If a man who has taken a third class ticket from London to the north by one of the great companies is by the negligence of that company damaged by their breach of contract to convey him, and he, to reduce the damages, goes to another of the great companies and takes a ticket by the next train on that line, and is thus enabled to reach his destination by the contract time, but cannot travel by that train unless he takes a first class ticket, his damages may well be the whole of the sum he has to pay for that ticket, although the result is that he has enjoyed a greater luxury of travel.”

See British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] 3 KB 128, 147. On the facts postulated in this example the only way in which the injured party can reach his destination by the required time is by incurring the cost and obtaining the benefit of a first class ticket.

A similar example was suggested by Mr Morpuss QC in the course of argument of a claimant whose car is damaged as a result of the defendant’s negligence and who hires a replacement car while repairs are carried out which is much more expensive and luxurious than her own car (say, a Rolls Royce instead of a Mini). In general, the claimant would only be entitled to recover as damages the cost of hiring a Mini (or similar vehicle) and the additional cost would not be recoverable – either on the basis that it was not reasonably incurred or on the basis that the claimant must give credit for the additional benefit. If, however, the only car available is a Rolls Royce, the claimant may be entitled to recover the full cost incurred from the defendant. Mr Morpuss argued that this is explained by the fact that, on the facts assumed, there is no viable alternative open to the claimant in mitigating her loss.

This test does not, however, as it seems to me, explain the result of the British Westinghouse case itself. The financial benefits which London Underground obtained from buying replacement turbines were an unavoidable consequence of the action which they reasonably took to mitigate their loss; and yet the House of Lords held, reversing the decision of the Court of Appeal, that credit had to be given for those benefits in the calculation of damages.

As discussed earlier, the only choice which London Underground arguably had in acting reasonably to mitigate their loss was between buying new turbines with the same efficiency as the British Westinghouse turbines had been warranted to achieve or buying more efficient turbines. It would, however, be illogical if the fact that there was more than one option reasonably open to the injured party to mitigate its loss meant that the benefits of the chosen option must be taken into account, and yet where only one option is available they must be ignored. Nor is this consistent with what the House of Lords decided. There was no consideration in the British Westinghouse case of whether there were other new turbines which London Underground could have bought which were cheaper than the Parsons turbines. Such consideration would only have been relevant to whether purchasing the Parsons turbines was an action reasonably taken to mitigate loss – which the arbitrator had found that it was. As discussed earlier, under the principle stated by Viscount Haldane, it was sufficient to require the gains made from buying the Parsons turbines to be brought into account that the purchase of the Parsons turbines was a reasonable action taken in mitigation of loss.

As I see it, what distinguishes the British Westinghouse case from the Harbutt’s Plasticine case and Lagden v O’ Connor is not that London Underground had a relevant choice but that the benefit which they obtained was pecuniary. Where a claimant as a result of a step reasonably taken to mitigate its loss receives money which it would not have received if the defendant had performed the contract, justice requires the sum received to be brought into account in the calculation of damages whether its receipt was an unavoidable consequence of mitigation or not. That is because money is entirely fungible. Thus, there is generally no material difference between incurring a cost which results in the receipt of money back and simply incurring a lower cost.

Confirmation that credit must be given for monetary betterment even if it is an unavoidable consequence of a reasonable mitigating act is provided by the decision of the Court of Appeal in Voaden v Champion (The “Baltic Surveyor”) [2002] EWCA Civ 89, [2002] 1 Lloyd’s Rep 623 – a case not cited in Lagden v O’ Connor. In The “Baltic Surveyor” the claimant’s pontoon was lost as a result of the defendant’s negligence. In assessing damages, the judge found that the pontoon had eight years of life left, that no suitable second-hand pontoon was available as a replacement and that a new pontoon would have a life of 30 years and would cost £60,000. The judge awarded damages of £16,000 calculated as 8/30 of the cost of replacing the pontoon. The Court of Appeal upheld this approach. Rix LJ (with whom the other members of the Court of Appeal agreed) considered the true principle to be that, where the claimant has received a benefit which is “of real pecuniary advantage”, the benefit must be taken into account (see para 85). Although the claim in The “Baltic Surveyor” was in tort, Rix LJ did not consider that it should make any difference whether the loss is caused by breach of contract or of a tortious duty. I respectfully agree.

In both the British Westinghouse case and in The “Baltic Surveyor” the monetary benefits to the claimant resulting from its mitigating action lay (at least partly) in the future. In the British Westinghouse case London Underground stood to make savings from the greater efficiency of the Parsons turbines over their future life. In The “Baltic Surveyor” the claimant benefited from next having to pay for a new pontoon in 30 years rather than in eight years time. Generally, the timing of payments and receipts is a matter which can itself be allowed for in the calculation of loss and gain, by applying an interest rate or discount rate where appropriate. Lagden v O’ Connor shows, however, that timing may have greater significance where the claimant’s cash flow is constrained. Thus, for Mr Lagden the difference between having to pay the cost of hiring a replacement car in advance or only out of any damages recovered was not simply a matter of money: it was the difference between having or not being able to have the use of a replacement car.

As Rix LJ indicated in The “Baltic Surveyor” (at para 85), cases such as the Harbutt’s Plasticine case in which no credit was given for any betterment in receiving new for old are best explained on the basis that the claimant did not obtain any proven pecuniary advantage. As a result of their mitigating action, the plaintiffs in the Harbutt’s Plasticine case acquired a new factory which may have had a higher market value than the old factory which it replaced. But in circumstances where the plaintiffs had not wanted a new factory and had no known plans to sell it, this did not give them any more money. The position would have been different if it had been shown, for example, that the new factory would cost less to run. In such circumstances, in so far as it could be demonstrated that this benefit had been or was going to be realised in cash, credit would have to be given for it – as it had to be given in the British Westinghouse case.

The hypothetical examples of the man who has to buy a first class ticket to reach his destination when his train is cancelled and the claimant who hires a Rolls Royce when it is the only car available are explicable in the same way. The additional amenity of first class travel, although resulting from a step reasonably taken in mitigation of loss, does not confer any pecuniary advantage. Likewise, in so far as the claimant enjoys the benefit of a better car, it is not a benefit which either takes the form of money or which she could readily realise or be expected to realise in terms of money. The case where an impecunious claimant uses the services of a credit hire company to obtain a replacement vehicle is again similar in nature.

I conclude that, in assessing damages for breach of contract, credit must be given for any monetary benefit, whether chosen or not, which the claimant has received or will receive as a result of an action reasonably taken to mitigate its loss. By a “monetary benefit”, I mean a benefit which either takes the form of money or which the claimant could reasonably be expected to realise in terms of money.

Applying this principle to the present case, I have found that leasing the three B777-300ER aircraft from Jet for two years – although not for the third year – was a step reasonably taken by Thai to mitigate the consequences of Koito’s breaches of contract. The benefits of having the use of these aircraft were realised by Thai through the contribution to the company’s profits made from operating the aircraft. To the extent that such contribution is shown to have been earned, it therefore constitutes a monetary benefit to Thai which it is right in principle to take into account.

The burden of proof

Thai’s alternative case is that, if – as I have found – profits earned by the aircraft leased from Jet are as a matter of law to be taken into account in calculating Thai’s damages, it is nevertheless open to Thai simply to claim the cost of leasing the aircraft without having to show what losses would have been suffered if those costs had not been incurred. On behalf of Thai, Mr Morpuss QC accepted that it would have been open to Thai, in principle, to advance a further claim for loss of profits, in which case the burden would have been on Thai to prove that the use of the aircraft leased from Jet did not fully avoid the loss of profits caused by Koito’s breaches of contract. He made it clear, however, that Thai does not pursue such a claim and claims only the costs incurred in mitigation. Mr Morpuss submitted that in these circumstances the burden is on Koito to prove that Thai’s mitigating act in leasing the aircraft from Jet not only avoided the entire loss of profits which Thai would otherwise have suffered as a result of Koito’s breaches of contract but generated additional profits which off-set, in whole or in part, the cost of the leases.

The reason why the burden of proof may matter in this case is that it was common ground that attempting to estimate with any precision what Thai’s financial position would have been if Koito had performed its contractual obligations in order to compare this with Thai’s actual financial position would be an extremely complicated task. Furthermore, it is a task which neither party has tried to undertake. The reason why it would be so complicated is that a sophisticated commercial airline such as Thai manages its entire fleet of aircraft in a way which is constantly adjusted to maximise efficiency. To reconstruct what would have happened if the five A330-300 aircraft which were delayed as a result of Koito’s breaches of contract had been delivered on time, it would first of all be necessary to identify what routes they would have flown and to estimate the gross profits which would have been earned on those routes. If those routes were in fact flown by other aircraft, it would then be necessary to determine not only what profits were in fact earned on those routes but on what routes, if any, those other aircraft would have been deployed if the A330-300 aircraft had been available. Then a similar enquiry would need to be made for the routes which the other aircraft would have flown; and so on. Furthermore, in order to construct the relevant counterfactual scenario it would be necessary to remove from what actually happened the consequences of leasing the three B777-300ER aircraft from Jet – with all the knock-on consequences of their deployment across Thai’s flight schedules.

Given the extreme difficulty of this exercise, if Thai was required to prove the amount by which it was worse off financially as a result of Koito’s breaches of contract despite its mitigating action in leasing the B777 aircraft, it might be unable to do so. I accept Thai’s contention that it would be unjust if such difficulty of proving Thai’s overall net financial position were to prevent Thai from recovering expenditure which it has reasonably incurred in seeking to avoid or reduce the damaging consequences of Koito’s wrongdoing.

Where a claimant has incurred expenditure in the expectation that the defendant will perform its contract such expenditure is recoverable as damages unless the defendant proves that the claimant would not have recouped its expenditure if the contract had been performed: see Omak Maritime Ltd v Mamola Challenger Shipping Co [2010] EWHC 2026 (Comm), [2011] 1 Lloyd’s Rep 47; Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB), [2013] 1 Lloyd’s Rep 526, para 187. In this regard the English courts have adopted the approach stated by Learned Hand CJ in L Albert & Son v Armstrong Rubber Co 178 F 2d 182 (1949):

“It is often very hard to learn what the value of the performance would have been; and it is a common expedient, and a just one, in such situations to put the peril of the answer upon that party who by his wrong has made the issue relevant to the rights of the other.”

In my view, the same expedient must in principle apply where the claimant has reasonably incurred expenditure as a result of the defendant’s breach of contract to avoid loss which the breach would otherwise have caused.

McGregor on Damages states (at para 9-110) that, where it appears that steps have been taken by the claimant to avoid loss which are to be taken into account in assessing the damages, the onus is on the defendant to prove that, and also how far, loss has thereby been avoided. As authority for this proposition, McGregor cites The “World Beauty” [1970] P 144, a decision of the Court of Appeal. In that case damage caused through the fault of the defendants to the plaintiffs’ vessel “Andros Springs” required the Andros Springs to be withdrawn from the service of its charterer to undergo repairs. To mitigate their loss, the plaintiffs chartered another vessel to perform the remaining period of the charter. The Andros Springs was already fixed for further employment when the charter ended. When the repairs were completed, there were still three months of the charter left but, because another vessel had been substituted for her, the Andros Springs was free for alternative use. The owners were able to bring forward the next fixture so that it started (and ended) three months earlier.

In assessing damages, the Court of Appeal held that it was necessary to take into account the gains as well as the losses resulting from the steps taken by the plaintiffs in mitigation. This was a straightforward application of the principle in the British Westinghouse case. The difficulty arose in calculating the benefit to the plaintiffs of bringing forward the vessel’s next charter. Lord Denning MR (at p.154) approached this question on the basis that:

“It is for the defendant to prove the value of the advancement. It is he who prays it in aid in mitigation of damage. He must prove, therefore, the value of it.”

Fenton-Atkinson LJ (at p.158) agreed with this approach.

The credit hire cases provide further authority for this approach. In Pattni v First Leicester Buses Ltd [2011] EWCA Civ 1384, [2012] RTR 17, the Court of Appeal held that in a case where the claimant has hired a replacement car through a credit hire company it is for a defendant to demonstrate, by evidence, that there is a difference between the credit hire charge agreed between the claimant and the credit hire company and the basic hire rate. As authority for this proposition, Aikens LJ (with whose judgment Moore-Bick and Pill LJJ agreed) referred to the speech of Lord Hope in Lagden v O’Connor at para 34 (quoted at paragraph 70 above). He noted that the other law lords did not specifically endorse this proposition but regarded it as well established on earlier authority that it is for a defendant to prove that a claimant has benefitted from “betterment” in mitigating his loss by an action, albeit a reasonable one, so that the damages recovered must be reduced to take account of the “betterment”: see Pattni, para 35, fn 27. The only earlier authority which Aikens LJ mentioned is the decision of the House of Lords in the British Westinghouse case which, so far as I can see, does not actually address the burden of proof. However, the fact that a very experienced Court of Appeal in Pattni endorsed the principle and regarded the law as clear is itself authority for it.

At times in the course of argument counsel for Koito appeared to accept that the burden was on Koito to prove that the gains made by Thai from leasing the B777-300ER aircraft exceeded the losses which would otherwise have arisen. Koito’s ultimate position was, however, that the burden of proof differs according to the period for which the calculation is being performed. Thus Ms Heilbron QC submitted that, for the period until the five A330-300 aircraft were in fact delivered, the burden is on Thai to establish its net loss of profits. On the other hand, for the period after the A330-300s were delivered, Ms Heilbron accepted that the burden is on Koito to prove the value to Thai of the Jet leases.

I do not consider this to be a tenable distinction. Koito itself argued that, in balancing the losses and gains resulting from Thai’s mitigating acts, the relevant gains include gains which accrued both before and after the time when the harmful effect of Koito’s breaches of contract (in delaying delivery of the A330-300 aircraft) came to an end. This, in my view, is plainly correct. What matters is the existence of the necessary causal connection, not the timing of when losses and gains arose. In these circumstances I am unable to see any principled basis on which the timing of receipts could be held to affect the burden of proof.

I conclude that the burden is on Koito to prove that Thai derived a benefit from the first two years of the Jet leases which needs to be set off against the cost of leasing the three B777-300ER aircraft for that period. To discharge this burden, Koito would need to prove the fact that, and the amount by which, the profits in fact made by Thai with the benefit of the aircraft leased from Jet (ignoring the lease costs for this purpose) exceeded the profits which Thai would have made if (i) the entry into service of the five A330-300 aircraft and completion of the refurbishment of the B777-300 aircraft HS-TKE had not been delayed by Koito’s breaches of contract and (ii) Thai had not leased the three B777-300ER aircraft for two years to mitigate the consequences of those delays.

Estimates of Thai’s net loss of profits

Although, as mentioned, neither of the expert accountants attempted to make a detailed forensic assessment of Thai’s loss of profits, they each made calculations which sought to give a broad overview of the quantum of that loss. The fact that a more accurate estimate of loss could in principle be made does not preclude reliance on a less accurate estimate if it is the best available evidence.

The estimates made by the experts focussed on the “contribution” lost as a result of the delayed entry into service of the five A330-300 aircraft and the B777-300 aircraft HS-TKE and the “contribution” gained as a result of leasing the three B777-300ER aircraft from Jet and the temporary use of three A300-600 aircraft. In general terms, the “contribution” of an aircraft is the value of revenue it generates minus certain of the costs incurred in order to generate the revenue. This amount is said to “contribute” towards the remaining costs of the company’s operations and the generation of profits. In Thai’s accounting data there are a number of different “contribution” levels. For the purposes of their analyses, the accounting experts used a measure of contribution calculated on the basis of revenue less direct variable costs, i.e. those costs which vary directly in accordance with the level of activity generating the revenue.

Koito argued that, although the net loss of profits caused to Thai by Koito’s breaches of contract cannot be calculated with precision, the best available evidence of it is a document prepared internally by Thai in mid-2012 entitled “PG A330 Flight cancellation analysis”. This document is based on information provided by “YY”, an internal designation for Thai’s scheduling department, and has been referred to in argument as the “YY document”. It is common ground that the YY document contains an estimate of the contribution lost by Thai during the three years 2009-2011 as a result of flight cancellations caused by the delay in bringing the five new A330 aircraft for which Koito had failed to deliver seats into operation. The document indicates that this delay resulted in the cancellation of a total of 5,023 flights (1,711 in 2009, 2,534 in 2010 and 778 in 2011). The total lost contribution from these flights is estimated at THB2,698m or approximately US$84m.

In addition to the YY document, Koito also relied on an “overview” calculation prepared by its accounting expert, Mr Maher, and intended by him to give a rough estimate of Thai’s net loss of profits. For the period from 2009 to the end of May 2011, Mr Maher estimated the contribution lost from the delay in bringing the five new A330-300 aircraft into service at US$160m. Deducting contribution in the sum of US$79m gained from the aircraft leased from Jet and the A300-600s which would not otherwise have been in service produced a figure of US$81m. This is close to the figure of US$84m shown in the YY document and, in Koito’s submission, provides a useful cross-check.

It is necessary to add to this loss the fixed costs incurred in leasing the B777-300ER aircraft, which in the period to the end of May 2011 were US$40m. Koito further argues that the calculation should take account of the depreciation which would have been charged in Thai’s profit and loss accounts if the A330-300 aircraft had been brought into service when scheduled. The total amount of such depreciation is some US$67m. If this is added back, the net result for the period to the end of May 2011 is a loss of approximately US$57m.

Koito then seeks to bring into account the net contribution generated by the three B777-300ER aircraft leased from Jet Airways during the remaining period of the leases. I have found that only the first two years of the leases are relevant as the decision to lease the aircraft for a third year was not attributable to Koito’s breaches of contract. Mr Maher has not separately itemised the net contribution generated by the leased aircraft in the year from the end of May 2011 to the end of May 2012. However, using his figures I calculate this sum to be US$38m. This produces an overall loss of around US$19m. If (contrary to my view) the third year of the Jet leases ought to be included, the result on Maher’s calculations would be a net gain to Thai of some US$19m.

Koito’s calculation does not include the contribution lost as a result of the B777-300 aircraft being grounded for six months and then flying with reduced capacity until the final 99 seats were delivered and installed. The accounting experts have agreed a figure for this lost contribution of US$24m but Koito has argued that Thai’s particulars of claim do not encompass this head of claim.

Thai’s position differs from that of Koito in three material respects.

First, Thai and its accounting expert, Mr Dearman, criticise Koito’s reliance on the YY document and Mr Maher’s overview calculation. Mr Dearman has made his own estimate of the contribution lost as a result of the delay in commissioning the five A330-300 aircraft (before taking account of the contribution gained from the leased aircraft and old A300-600 aircraft) based on different assumptions from Mr Maher. In comparison with Mr Maher’s figure of US$160m, Mr Dearman’s estimate of the lost contribution is US$264m – a difference of US$104m.

Second, Thai contends that it is entitled to include in the calculation the lost contribution of US$24m attributable to the B777-300 aircraft HS-TKE.

Third, Thai maintains that no adjustment should be made for depreciation which would have been charged if the five A330-300 aircraft had been brought into service when scheduled.

The result of Mr Dearman’s calculation is that over the period until 31 May 2012 (the end of the second year of Jet leases) Thai incurred a net loss of around US$185m. If the third year of the Jet leases were to be included, this loss would be reduced to approximately US$156m.

I will consider each of the three significant differences between the experts’ calculations in turn, starting with the estimate of lost contribution from the five delayed A330-300 aircraft.

Lost contribution from the A330-300 aircraft

As mentioned, in order to estimate this lost contribution, Koito relies on the YY document and on an “overview” calculation prepared by its accounting expert, Mr Maher.

On behalf of Thai, Mr Morpuss QC submitted that Koito’s reliance on the YY document is flawed for two reasons. The first is that the YY document is based on budgeted rather than actual figures. Thai adduced evidence that early 2009 marked the low point of a major recession for the airline industry, after which there was a strong recovery in late 2009 and 2010. Mr Morpuss contended that in these circumstances loss calculations based on budgeted figures created before the start of the year will necessarily understate Thai’s loss.

I accept that the use of budgeted rather than actual figures introduces significant potential inaccuracy to the calculation. I do not think it can simply be assumed that, because the economy grew, actual results must have exceeded budgeted results. Mr Dearman did, however, carry out some analysis for 2010 and found that the actual contribution per round trip achieved by the A330-300 aircraft in the fleet as a whole was THB982,600, compared to a budgeted contribution of THB806,700. He also found that the actual contribution of the B747-400s in the fleet as a whole was THB2.88m per round trip compared to a budgeted contribution of THB2.62m, and the actual contribution of the three A330-300 aircraft which had entered service on time was THB2.06m per round trip compared to a budgeted contribution of THB1.764m. These findings provide some support for the suggestion that calculations based on budgeted figures are likely to understate Thai’s loss but do not allow any firm conclusion to be drawn.

Secondly and more fundamentally, Mr Morpuss QC submitted that, in looking only at cancelled flights, the YY document omits an important element of lost contribution. Because the A330-300 aircraft were unavailable, Thai not only had to cancel flights altogether but also had to use older, lower specification, less efficient aircraft to fly routes which would have been flown by the new A330-300s (with similar knock-on effects). The YY document does not include any estimate of the amount of this second element of lost contribution.

Koito’s expert, Mr Maher, accepted that, in looking only at cancelled flights, the YY document shows only part of the picture. I accept Thai’s contention that, for this reason, the calculation contained in the YY document necessarily understates Thai’s loss. Moreover, there is no way of telling, in circumstances where no separate estimate of the missing element has been made, the amount of the understatement.

The other exercise on which Koito relied was Mr Maher’s “overview” calculation. As described earlier, Koito’s breaches of contract resulted in the delayed entry into service of five of the eight new A330-300 aircraft which Thai had purchased from Airbus. The three new A330-300s which were in service during the relevant period generated high levels of contribution. Indeed, Mr Maher’s analysis indicated that in 2010 these aircraft generated the highest average monthly contribution per aircraft of any class of aircraft in Thai’s fleet (both in absolute terms and as a proportion of revenue). The average monthly contribution of these aircraft in 2010 was THB102.6m.

Thai’s fleet also contained 12 A330-300S aircraft which were, on average, some 13½ years old. In 2010 the average contribution per month of these aircraft was THB48.8m. For the purpose of his overview calculation, Mr Maher assumed that each of the five new A330-300s which were unavailable because of Koito’s breaches of contract would, had it been in service, have generated additional contribution equivalent to the average monthly contribution of all 15 A330-300 aircraft which were operating – that is, the three new A330-300s and the 12 old A330-300S aircraft. For 2010, this average figure was THB59.6m per month.

Thai and its accounting expert criticised this assumption. They pointed out that, mathematically, Mr Maher’s calculation is heavily skewed by the fact that there were 12 ageing A330-300S aircraft in the fleet, but only three new A330-300s. Mr Morpuss submitted that the fact that there were so few new A330-300s, and so many old A330-300 aircraft, in fact meant that there was an ideal opportunity for the new aircraft significantly to increase contribution, and that Mr Maher’s approach was therefore back to front. Thai further argued that it makes no sense to compare 13 or 14 year old aircraft with new aircraft merely because they are of the same type. Different generations of aircraft are not comparable in technology, fuel efficiency or passenger comfort and facilities. There is therefore no coherent rationale for Mr Maher’s methodology.

In his oral evidence Mr Maher acknowledged that his overview calculation was “an incredibly crude measure for a very, very complex exercise”. When asked to explain the rationale for his method, Mr Maher’s response was that, when he made the calculation, he did not have much time and thought that the A330-300s were at least the right class of aircraft to try to work with.

Mr Maher also suggested that it was appropriate to use such a low figure for the assumed contribution of the delayed A330-300 aircraft because it was necessary to estimate the “incremental” contribution – meaning the additional contribution which these aircraft would have made over and above that made by the aircraft which in fact flew the routes they would have flown – and not the absolute contribution that the new aircraft would have made. However, this ignored two facts: (i) that insofar as the delayed A330-300s were in fact replaced by the aircraft leased from Jet and old A300-600 aircraft which would not otherwise have been in service, Mr Maher has included contribution generated by the replacement aircraft in his calculation; and (ii) that insofar as the delayed A330-300s were not replaced, flights which would otherwise have been made were cancelled. In these circumstances, the focus on “incremental” contribution seems to me to be misplaced.

Neither in his expert reports nor in his oral evidence did Mr Maher give any defensible rationale for the key assumption underpinning his overview calculation. I accept the point made by Thai – which indeed I did not understand to be in dispute – that it is wrong to treat the contribution generated by a 13 or 14 year old aircraft as providing any guide to the contribution that would be generated by a brand new aircraft just because it is of the same basic type. Indeed, the one thing that seems certain is that the new aircraft would generate a significantly higher contribution than an old aircraft in the same class.

The illogicality of Mr Maher’s approach is in my view further illustrated by the fact that he did not include in his overview calculation the actual contribution generated by the three aircraft leased from Jet Airways (which in 2010 was THB94.7m per aircraft per month) but instead “capped” the contribution of these aircraft at the figure assumed for the delayed A330-300 aircraft (i.e. THB59.6m in 2010). Mr Maher recognised that it was unreasonable to assume that the new A330-300 aircraft would have generated a lower rate of contribution than the B777-300ER aircraft which were leased from Jet because they were unavailable. However, instead of responding to this perceived mismatch by altering his assumed figure for the amount of contribution which the new A330-300 aircraft would have generated, Mr Maher adjusted his calculation by pretending that the three aircraft leased from Jet generated less contribution than they in fact did. I cannot accept that this is a reasonable way of proceeding.

In view of its manifold flaws, I do not consider that any weight at all can be placed on Mr Maher’s overview calculation. To be fair to Mr Maher, he himself was emphatic in his supplemental report that relying on his overview calculation would not be appropriate for the purpose of assessing the loss actually suffered by Thai for the purpose of its claim.

As mentioned, Thai’s accounting expert, Mr Dearman, performed his own “overview” calculation in response to the calculation made by Mr Maher. The basic assumption made by Mr Dearman was that each new A330-300 aircraft, had it been in service during the relevant period, would have generated the same contribution per month as the average monthly contribution in fact made by the three new A330-300 aircraft which were in service (i.e. THB102.6m in 2010)

Clearly, the calculation made using this assumption is highly simplified. In reality – as Mr Maher stressed and Mr Dearman acknowledged – the delayed A330-300s would have flown routes which in the event were flown by other aircraft, and would presumably have generated a higher contribution on those routes. Those other aircraft would then themselves have been allocated to other routes, again presumably improving their profitability; and so on. In addition to such reallocation of aircraft, routes would have been flown which in the event were cancelled because Thai did not have suitable aircraft to fly them or to fly them profitably. Mr Dearman’s overview calculation, like that of Mr Maher, did not attempt to model these complexities.

It was Mr Maher’s assumption that, in the complex process of rescheduling which took place when the five A330-300 aircraft were delayed in entering service, there was scope for mitigating Thai’s overall loss – so that not all the contribution which those aircraft would have generated was lost. Without performing a more detailed assessment of the kind which no one has attempted, there is no way of knowing whether he is right about this. In the absence of any concrete information, it does however seem to me plausible to think that the first new A330-300s to enter service would have had the greatest opportunity to increase the overall profitability of the fleet, and that it would have been harder for each new A330-300 which entered service to achieve the same contribution as those already flying. Accordingly, it may be unduly optimistic to assume that, if another five A330-300s had been in service during the relevant period, they would have generated the same contribution per aircraft as the three which were actually in service.

Two criticisms of Mr Dearman’s calculation made by Koito are in my view misconceived. First, Koito pointed out that in 2010 Thai’s fleet of 84 aircraft generated net profit (before tax) of US$529m or US$6.3m per aircraft. Mr Dearman’s figures imply that each delayed A330-300 aircraft would have generated contribution in that year of US$36m. Mr Maher suggested that it was unrealistic to suppose that the contribution generated by the delayed A330-300 aircraft would have been so much greater than the average net profit per aircraft in the fleet.

For the reasons pointed out by Thai, however, this comparison is flawed. In the first place, the figure of US$36m is a figure for contribution – i.e. before taking account of fixed costs. The calculation of net profit per aircraft inevitably produces a much lower figure, because it takes account of fixed costs – which in 2010 were over US$1.5bn. It is therefore not comparing like with like. Secondly, it would in any event be uninstructive to compare the contribution assumed by Mr Dearman for the new A330-300 aircraft with the average contribution of all aircraft in the fleet. Contribution rates in 2010 ranged from THB12.5m per month for the B737-400s to THB102.6m for the three new A330-300 aircraft which were in service. The very fact that the three new A330-300s which were in service did generate this level of contribution shows that it is not unrealistic to assume that a new A330-300 aircraft could generate contribution in this amount. Another relevant comparison is the contribution generated by the three B777-300ER aircraft leased from Jet, which was THB94.7m per aircraft per month (or US$33m for the year) in 2010. I can see no reason to suppose that the new A330-300 aircraft which the B777-300ERs were leased to replace would have earned a lower rate of contribution.

The second point made by Koito is that, at the contribution rate assumed by Mr Dearman, the lost contribution from the five A330-300 aircraft would have been some US$16.8m per month, equivalent to US$200m a year, had it not been for the Jet leases. This was said to provide a “reality check” on Mr Dearman’s calculation, again by comparison with Thai’s net profits. However, the comparison of contribution with net profit is again fallacious. Moreover, even on Mr Maher’s calculations, in the period to 31 May 2010 (when the Jet leases commenced) Thai’s lost contribution from the A330-300s was around US$10m per month (or US$120m per year). Although lower than Mr Dearman’s figure, this is still a significant sum and shows that, even making what I have found to be an unreasonably pessimistic assumption about how much contribution the five delayed A330-300s would have earned, the absence of those aircraft, if left unmitigated, would have had a material effect on Thai’s profits for 2009 to 2011. There is nothing inherently improbable or absurd about the supposition that, until it took those steps, the amount which Thai was losing was over US$16m as opposed to US$10m per month.

Mr Dearman performed a further overview calculation. He compared the budgeted round trips with the actual round trips undertaken in 2010 and found that the actual number of round trips was 9% lower than budgeted. Mr Dearman recognised that there would have been reasons other than the delayed entry into service of the five A330-300 and one B777-300 aircraft which caused the actual number of round trips to differ from the budgeted number. When he made the same comparison for each of the years 2011 to 2013, he found that in each of those years the actual number of round trips was consistently around 4.5% less than the budgeted number. This suggested that around half of the shortfall in 2010 can be attributed to the delayed entry into service of the five A330-300 and one B777-300 aircraft.

Mr Dearman then multiplied the number of round trips assumed to have been lost because of the absence of these aircraft by the average contribution per round trip generated by the A330-300 aircraft which were flying in 2010. This produced an estimated loss of contribution of US$134m – which closely matches the figure of US$135m produced by Mr Dearman’s main overview calculation for 2010. This exercise accordingly provides a form of cross-check.

I conclude that Mr Dearman’s figure of US$135m is the best available estimate of the contribution lost by Thai as a result of the delayed entry into service of the five A330-300 aircraft. Although I consider that Mr Dearman’s calculation is very unlikely to overstate and may well understate the lost contribution from these aircraft, Koito has not shown that the true figure is lower nor put forward any reliable evidence which would enable the lost contribution to be assessed in any different amount.

Lost contribution from the B777-300 aircraft

The second point in issue is whether Thai can bring into account the lost contribution from the B777-300 aircraft HS-TKE which was grounded for around six months and then flew with reduced seat capacity for another 18 months until the 99 missing seats were finally delivered and installed. As mentioned earlier, the accounting experts have agreed a figure for this lost contribution of US$24m. The only question is whether it is open to Thai to include this sum in the calculation of its loss given the way that Thai has pleaded its case. I can deal with this point shortly because the reason put forward by Koito for excluding this amount is in my view a bad one.

Koito relied on the fact that, when Thai amended its particulars of claim to make it clear that its damages claim for losses caused by Koito’s breaches of contract is limited to the cost of the Jet leases (and other expenses incurred) and does not include a claim for lost profits, Thai deleted a statement that this part of its claim was made under “all three contracts”. Counsel for Koito submitted that Thai thereby abandoned any claim relating to the B777 contract. That contention is untenable, however, since in the pleaded particulars of the losses said to have been incurred as a result of Koito’s breaches Thai specifically claims damages for Koito’s breaches of both the A330 contract and the B777 contract in the amount of US$161,252,000, being the cost of the Jet leases. It is obvious that the deletion of the reference to “all three contracts” merely reflected the fact that no claim was made under this head in relation to the third, A380 contract.

There is accordingly no relevant difference in the pleaded claims for losses caused by Koito’s breaches of contract as between the A330-300 and the B777-300 aircraft. It follows that, in just the same way and to the same extent as the lost contribution from the five A330-300 aircraft is relevant to the calculation of Thai’s loss, so is the lost contribution from the B777-300 aircraft HS-TKE.

Depreciation

The last major point of contention with regard to the calculation of Thai’s net loss of profits is whether credit should be given for depreciation which would have been charged if the five delayed A330-300 aircraft had been brought into service on time. Thai’s accounting policy is to depreciate the cost of aircraft purchased since 2007 on a straight line basis over a period of 15 years, with a 10% residual value at the end of that period. Accordingly, if the five A330-300 aircraft had entered service when planned, Thai would immediately have started to include depreciation charges for these aircraft in its profit and loss accounts. In fact, there was on average a month or so’s delay in delivery of these aircraft, followed by a period of around 16 months during which the aircraft were kept in storage before they could be brought into service. There is no direct evidence of whether depreciation was charged in Thai’s accounts for the period while the aircraft were in storage. The likelihood is, however, that it was not, as to do so would not have been consistent with IAS 16, the International Accounting Standard which governs the depreciation of property, plant and equipment. Paragraph 55 of IAS 16 states:

“Depreciation of an asset begins when it is available for use, ie when it is in the location and condition necessary for it to be capable of operating in the manner intended by management.”

The five delayed A330-300 aircraft were not available for use until replacement seats were installed.

In these circumstances Koito’s accounting expert, Mr Maher, was of the opinion that depreciation needs to be included in the calculation of Thai’s net loss of profits in order to reflect the cost of using the A330-300 aircraft in the counterfactual situation in which they were delivered on time with the seats installed. Thai’s expert, Mr Dearman, on the other hand, took the view that there was no real cost saving while the aircraft were grounded. He pointed out that depreciation is simply an accounting treatment for spreading the cost of an asset across its useful life and maintained that no money was actually saved by Thai whilst the aircraft were being kept in storage.

Koito’s aviation expert, Mr Seymour, estimated that during the time when the aircraft were in storage their value would have diminished at roughly half the rate that it would have diminished if the aircraft had been flying. He agreed, however, that as time went on the difference in value between aircraft which had been in storage and aircraft which had been flying during the relevant period would narrow, such that by the time the aircraft were 15 years old the difference would be trivial. Mr Seymour also agreed that the aircraft would become obsolete in the same way and that by the time they were 15 years old a fleet owner would be likely to treat them in the same way.

If the relevant comparison had been between a situation in which the aircraft were in service for some 16 months and a situation in which the aircraft were acquired brand new at the end of that period, then I would have thought it appropriate to make an allowance for depreciation in the calculation of loss. I do not accept Mr Dearman’s assertion that depreciation is not a real cost. The use of a large aeroplane capable of carrying some 300 passengers does not come free. One way to acquire the use of such an asset is to lease it – in which case the cost of use is an ongoing rental charge. The alternative is to buy the asset and consequent right to use it. In that event, however, it makes good sense to treat the cost as incurred over the useful life of the asset, irrespective of when the cash is paid out. That accounting treatment reflects the economic reality that the ability to use the asset over the period of its useful life has been paid for in advance.

In the present case, however, the comparison is between two aircraft which were acquired at more or less the same time, one of which (in the hypothetical situation) would actually have been in use for the first 16 months of its life, or thereabouts, and the other of which (in the actual situation) was kept in storage during that time. On the evidence of Mr Seymour, which I accept, while both assets would have diminished in value, the aircraft kept in storage would be more valuable at the end of this period, having suffered less wear and tear. If Thai had sold the aircraft, or if it was Thai’s current intention to sell the aircraft in the near future, that element of betterment would – on the principles discussed earlier – be something for which credit should be given. However, there is no suggestion that Thai has any intention of selling in the foreseeable future any of the five A330-300 aircraft which came into service late. The expectation is that they will be kept and continued to be used until they come to the end of their useful life. As confirmed by Mr Seymour, there is no material difference in the expected life of the aircraft as a result of the fact that they were kept in storage rather than being flown for 16 months. Exactly when the aircraft will be taken out of service cannot of course be known. But what can be said, and what matters, is that the decision as to exactly when to sell the aircraft and the price obtained from their disposal are unlikely to be materially affected by the fact that they were stored rather than being flown for the first 16 months of their life.

In these circumstances, it seems to me that there is no saving which Thai has made or can be expected to make (other than the savings in running costs which are reflected in contribution) as a result of the fact that the five A330-300 aircraft were stored for 16 months instead of being flown during that time. The future useful life and future economic benefits likely to be obtained from the aircraft are in practice the same.

I see force in Mr Dearman’s suggestion that there is an anomaly in IAS 16, at least when applied to the present situation, insofar as it calls for depreciation to begin when the asset is available for use, rather than when ownership of the asset is acquired. Supposing in the present case that the five A330-300s had been delivered on time with the seats installed but Thai had chosen for commercial reasons to leave the aircraft grounded for 16 months, I cannot see how the fact that the aircraft would have been available for use could rationally have justified a different treatment regarding depreciation. Be that as it may, I do not consider that in measuring loss for the purpose of assessing damages it is necessarily appropriate to follow the accounting standards which apply to the preparation of a company’s financial statements. Often no doubt the principles applicable for the preparation of financial statements will also provide appropriate methods for measuring damages. But there is no necessary coincidence of the two. In this case it cannot in my view reasonably be said that Thai has gained or will gain any monetary benefit from the fact that the A330-300 aircraft could not be brought into service until some 16 months after they were delivered by Airbus. I therefore conclude that it is not appropriate to make any adjustment for depreciation in calculating Thai’s overall net loss.

It follows from my conclusions on the three points in dispute that Koito has failed to prove that the net benefits which Thai obtained from having the three B777-300ER aircraft in its fleet during the first two years of the Jet leases were sufficient to off-set all the losses resulting from the delayed entry into service of the five A330-300 aircraft and restricted use of the B777-300 aircraft HS-TKE caused by Koito’s breaches of contract. Still less, therefore, has Koito succeeded in showing that Thai recouped any of the costs of leasing the aircraft from Jet for two years. Indeed, Mr Dearman’s figures, which I regard as the most reliable (or least unreliable) rough estimate, indicate that there were substantial further losses, estimated by him at nearly US$80m, which Thai was unable to avoid over and above the leasing costs of around US$107m which Thai incurred. Even using Mr Maher’s estimates of the lost contribution from the five A330-300 aircraft – which I have found to understate the position by an indeterminate amount – produces a figure for Thai’s net loss of profits of around US$110m. (Footnote: ⁴)

I conclude that Thai is entitled to recover the lease costs claimed of c.US$107m.

In addition to the cost of the Jet leases, Thai claims various other costs, some of which are disputed by Koito.

As mentioned earlier, replacement seats for the five A330-300 aircraft were purchased from another supplier, ZIM. The ZIM seats cost €7,242,110 (including installation costs) whereas the price of the Koito seats was US$3,433,556. For the A380-800 aircraft, replacement seats were purchased from Recaro at a cost of €12,281,484. The original price of the Koito seats was US$11,750,000. However, the contract between Thai and Koito provided for a 3% annual escalation in the price to be applied in the event of delivery after January 2011. The delivery dates for the aircraft ultimately agreed between Thai and Airbus would have triggered a price escalation of US$755,148 under this clause. The additional cost of the Recaro seats was therefore the difference between €12,281,484 and US$12,505,148.

Koito accepts that it is liable to compensate Thai for the additional costs of the ZIM seats and Recaro seats, but contends that it is entitled to be credited with savings which Thai has allegedly made and will in future make in the cost of fuel because the seats supplied by ZIM and Recaro are lighter than the seats which had been ordered from Koito.

It is not in dispute that, as a general proposition, installing lighter seats will save fuel. The issues are whether the amounts of money saved can be quantified and whether Koito is entitled to claim the benefit of such savings as a matter of law.

In my view, the answer to the second question depends upon the answer to the first. Applying the principles identified earlier in this judgment, if as a result of purchasing replacement seats in mitigation of its loss Thai has saved or will save money, then the amount of money saved must be brought into account in the assessment of damages. However, the burden of proof is on Koito to establish the fact and amount of any such financial saving.

In the case of the ZIM seats, the accounting experts have been able to agree calculations of the savings resulting from the lower weight of the seats on a range of assumptions based on technical inputs provided by the aviation experts. The aviation experts have agreed the following:

The aviation experts did not know when Thai would ordinarily replace the ZIM seats but agreed that it is reasonable to consider alternative scenarios in which the seats are replaced after five, 10 and 15 years. They also agreed that another uncertainty in the calculation is the future cost of aviation fuel.

Using the technical inputs agreed by the aviation experts, the accounting experts have agreed calculations for each of the three suggested periods using two different assumptions for the future cost of fuel. These two assumptions are that the future price of fuel will be equal to (a) the current fuel price and (b) the average fuel price during the period from June 2011 to date. The calculations allow for the timing of when the estimated savings have been or will be received by discounting all the relevant amounts at an agreed discount rate to June 2011, being the date when the cost of the ZIM seats was incurred.

On behalf of Thai, Mr Morpuss submitted that the figures agreed by the aviation experts for the weight of the Koito seats and the effect of weight difference on fuel burn were both subject to significant uncertainties. Koito’s expert, Mr Seymour, accepted in cross-examination that there are a number of uncertainties in those figures. However, in circumstances where the expert witnesses instructed by each party have agreed estimates which they both consider to be appropriate estimates to use for the purpose of calculating the relevant savings, I think it right to rely on them.

As for the period over which the savings will continue to be made, there was no evidence about Thai’s general practice with regard to seat replacement. However, one of Thai’s witnesses, Surakit Rattanachan, who was involved in the seat procurement process, gave evidence that, if the Koito seats installed in the first three A330-300 aircraft to be delivered had not failed the dynamic tests, those seats would have been kept in service until the aircraft were eventually phased out. There is no reason to suppose that the ZIM seats installed in the five delayed A330-300 aircraft would have been treated any differently. Accordingly, if the evidence of Khun Surakit were to be accepted, it would be appropriate to assume that the ZIM seats will remain in use throughout the time that the aircraft remain in service. As reflected in Thai’s depreciation policy, the expected life of aircraft in Thai’s fleet is at least 15 years.

For reasons which I give below, however, when I discuss Thai’s claim for compliance costs, I have concluded that Thai is more likely than not to replace the seats in the A330-300 aircraft at some point during their life whether or not it is obliged to do so. Certainly, I do not think it safe to assume otherwise when estimating the benefit which Thai will gain in fuel savings from installing the ZIM seats in place of the Koito seats. I consider that a reasonable assumption to make for this purpose is that the ZIM seats will have life of 7 ½ years.

Over half of that time has already elapsed and the actual fuel price during the period from June 2011 to date is incorporated in the experts’ calculations. Fuel prices are currently at what is historically a very low level. In these circumstances the average fuel price during the period from June 2011 to date cannot, as it seems to me, reasonably be relied on as a guide to the future price between now and 2018/19. In my view, a reasonably conservative and appropriate assumption to make is that between now and then the price of fuel will on average stay at its current level.

Based on these assumptions, the estimate which I adopt for the financial saving to Thai resulting from the lower weight of the ZIM seats is the mid-point between the agreed figures for 5 years and 10 years on the footing that the price of fuel will remain at its current level. Calculated on this basis, the value of the saving to Thai is US$1,893,418.

In the case of the Recaro seats, the aviation experts agreed that, based on the scores for dry weight given by Thai when assessing the Recaro seats as part of the procurement process, it is likely that the weight of the Recaro seats was less than that of the Koito seats originally ordered. However, they have not been able to agree a figure for the weight difference as no data are available for the weight of the relevant Koito shipset. The aviation experts agreed that, other than the weight of the seats, the Recaro seats and the Koito seats were comparable and any differences were not material. There was no dispute about the other relevant inputs needed to perform similar calculations to those made to estimate the savings obtained from installing the ZIM seats.

Each shipset of ZIM seats weighed around 16% less than the Koito seats ordered for the A330-300 aircraft. Bearing this differential in mind, Koito’s aviation expert, Mr Seymour, asked himself what sort of difference in weight he would expect to see before advising an airline that one shipset had an advantage in weight compared to another, and formed the opinion that it was 10%. On this basis he thought it reasonable to infer from the fact that Thai had assessed the Recaro seats as having an advantage in weight over the Koito seats that each shipset of Recaro seats weighed at least 10% less than the equivalent shipset of Koito seats ordered for the A380-800 aircraft. Using this 10% figure, Koito’s accounting expert, Mr Maher, has produced calculations of the fuel saving resulting from the purchase of the Recaro seats on the same range of assumptions regarding seat life and future fuel costs as were made in the case of the ZIM seats.

Thai’s aviation expert, Mr Bull, was not prepared to accept that, in the absence of knowing the actual weight of the Koito seats, Mr Seymour’s assumption of a 10% difference was a fair estimate to use for the purpose of calculating fuel savings. He considered that the 10% figure was essentially just a guess and that it is not justifiable to base calculations in which the assumed difference in weight is multiplied tens of thousands of times on a figure which is no more than a guess. To do so, in his opinion, would imply a spurious accuracy in the estimates of financial savings produced by the calculations.

In cross-examination, Mr Seymour was reluctant to accept that his 10% figure was simply a guess, maintaining that it was informed by his experience; but he accepted that the actual weight difference might be his estimate of 10%, or it could be 5%, or 15%, and he did not know.

The line between an estimate which, even if approximate, can fairly be used to assess damages and a figure which is too speculative reasonably to be relied on can be a fine one, and I have not found it easy to decide on which side of the line Koito’s claim for a deduction falls. On the one hand, the better score in terms of dry weight given to the Recaro seats in Thai’s tests is, as Mr Bull agreed, objective evidence that the Recaro seats were lighter than the Koito seats. It follows that there must be some material monetary benefit gained by Thai through the consumption of less fuel. As counsel for Koito pointed out, the fact that damages cannot be assessed with certainty should not generally deter the court from making the best estimate that it can. On the other hand, in accordance with the principles discussed earlier, the burden is on Koito to prove the value of any benefit for which it seeks credit. In the end I am swayed by the fact that it must have been within Koito’s capacity to adduce evidence of what the weight of the shipsets which it contracted to supply for the A380-800 aircraft would have been. Yet it failed to adduce any such evidence (or to explain in evidence why the relevant data were not produced). In these circumstances I consider that it would not be right to allow Koito a substantial credit on the basis of what is – as I accept – no more than an intelligent guess about what the weight might have been. That is particularly so when the calculation is already one which involves significant uncertainties. Using an intelligent guess rather than a reliable figure as the starting-point for the calculation – when no excuse has been given for the failure to provide the actual figure – in my view renders an already imprecise calculation one on which it would not be reasonable to rely.

I therefore find that Koito has failed to prove the value of such savings as have been or will be made by Thai as a result of replacing the Koito seats with the Recaro seats.

Thai claims US$3,291,381 as costs of storing and preserving the five A330-300 aircraft in Bordeaux whilst awaiting delivery of replacement seats. Of this amount, the accounting experts have agreed that there is evidence to support costs of US$3,185,980.

Koito’s aviation expert, Mr Seymour, suggested that Thai could have saved 10-20% of the storage costs incurred by storing the aircraft at a facility at Tarbes instead of contracting with Airbus to store the aircraft at Bordeaux. There is, however, no evidence that there was in fact space available at Tarbes to store the aircraft nor as to what the actual cost of storage would have been if space was available. There were in any event good reasons for keeping the aircraft within the Airbus system so that Airbus retained responsibility for fitting the replacement seats. I find that Koito has failed to show that lower storage costs could or should reasonably have been incurred.

Whilst the aircraft were in storage at Bordeaux, a C1 maintenance check was performed on each aircraft. The aviation experts have agreed that, as the aircraft were not in operation at the time, much of the maintenance performed was unnecessary and only 20% of the cost of these C-checks can be considered reasonable. I cannot regard the fact that the checks were carried out in accordance with Thai’s internal policies as a reason not to be guided by the joint opinion of the experts on this point. I therefore disallow 80% of these costs in the sum of US$720,000.

Accordingly, the amount recoverable under this head of claim is US$2,465,980.

There is a minor issue as to the extent to which costs incurred by Thai in sending technicians to Bordeaux to carry out maintenance are recoverable. The aviation experts appear to be agreed that some reduction should be made to reflect the fact that in their opinion much of the maintenance carried out was unnecessary. I consider that these costs should be reduced by the same factor as the experts agreed for the C-checks themselves, i.e. 80%. On this basis the expenses recoverable are THB1,120,484 and €18,715.

Thai’s opening skeleton argument for the trial referred to a pleaded claim for legal costs of THB2,852,879 and €45,110, said to have been incurred “as a result of the delays to the A330-300s, and all of Koito’s breaches”. Apart from some more or less unintelligible invoices, however, which have no obvious correlation with the sums claimed, Thai adduced no evidence in relation to this claim. In particular, no explanation was provided of what the legal services were to which these costs related and how they were connected with Koito’s breaches of contract. The claim for these costs was not mentioned in Thai’s closing submissions, and I find that Thai has failed to prove that Koito is liable to pay these sums.

As mentioned earlier, in order to comply with airworthiness directives issued by the European and US regulatory authorities, seat tests had to be carried out. The costs of these tests were €132,000 and US$198,360. The results of the tests were relevant both to the seats installed in the A330-300 and B777-300 aircraft which are the subject of this claim and also to seats installed in other aircraft which are not the subject of these proceedings. Koito has argued that in these circumstances the cost of carrying out the tests should be apportioned between the various aircraft for which the test results were relevant. Thai points out that it would have had to carry out the testing in relation to the A330-300 and B777-300 aircraft which are the subject of this claim at the same cost even if the testing had not been required for any other aircraft. However, the converse point can equally be made that Thai would have incurred the cost of the testing in any event even if the tests had not been required for the aircraft which are the subject of this claim. In these circumstances it seems to me fair to attribute the cost of the testing to the aircraft to which the tests related in the way the experts have done. The accounting experts have agreed that the effect of such an apportionment is to reduce the amounts recoverable to €39,337 and US$31,320.

Because the Koito seats installed in the first three A330-300 aircraft to be delivered under the A330 contract with Airbus failed the dynamic testing, those seats must be replaced by July 2017. Thai has estimated, and Koito does not dispute, that the cost of replacing the seats in these aircraft will be at least US$4,541,580. As already mentioned, Surakit Rattanacham, a Chief Engineer in Thai’s Aircraft Maintenance Engineer Group who was involved in the seat procurement process, gave evidence that, if the seats had not failed the dynamic tests, the seats would have been kept in service until the aircraft were eventually phased out. Thai accordingly claims as damages for Koito’s breaches of contract the sum of US$4,541,580.

Khun Surakit did not give any reasons to support his assertion that, if it was not necessary to replace the seats in order to comply with the airworthiness directives, the seats would not be replaced for as long as the aircraft remain in service. No evidence was adduced, for example, of what Thai’s practice has generally been in the case of other aircraft. We know that the seats supplied by Koito for the eight B777-300 aircraft were installed as part of a refurbishment of those aircraft during their working lives. Khun Surakit said that there is no fixed policy which would bind Thai’s Board of Directors to have to replace seats at a certain time, and the decision to do so is the responsibility of the Planning Department. No one from Thai’s Planning Department was, however, called as a witness.

It was the evidence of Koito’s aviation expert, Mr Seymour, based on his experience of other airlines, that most expect to upgrade seats after five to ten years as part of their typical cabin improvement. On this basis it is reasonable to expect that the seats in the three A330-300 aircraft would be replaced in any event at some point between 2016 and 2021. Thai’s aviation expect, Mr Bull, did not disagree with this, commenting only that different airlines have different policies with regard to when they will replace seats.

Given Thai’s expressed objective of becoming one of the top five airlines in the world, I think it a fair inference that Thai would replace seats in the three A330-300s at some point during the life of these aircraft even if this was not required by the airworthiness directives. In these circumstances I am not persuaded that the effect of Koito’s breaches of contract will be to cause Thai to incur seat replacement costs which would not otherwise had been incurred. It may be that the seats will be replaced sooner than would otherwise have been the case, but that is a matter of speculation and no attempt has been made to formulate a claim on that basis.

I therefore reject Thai’s claim for these future seat replacement costs.

Koito contends that account should be taken in assessing damages of certain credits which Thai received from Airbus. These fall into two categories.

As mentioned earlier, when Koito failed to deliver the seats for five of the A330-300 aircraft, Thai sought to delay accepting delivery of the aircraft from Airbus. Following negotiation, Thai agreed to accept delivery of the first three aircraft on 23 December 2009 and Airbus agreed that the delay in delivery until that date of the two aircraft which had been scheduled for delivery in August and October 2009 was an “excusable delay” under the contract. That seems clearly to have been the case since the definition of excusable delay for which neither party was to be held responsible included delay caused by the failure of a sub-contractor or vendor to furnish equipment due to any cause which was beyond the control of either Thai or Airbus. The contract provided for the purchase price of an aircraft which was the subject of an excusable delay to be adjusted at the date of actual delivery in accordance with a formula, and for the amount of the adjustment to be split between Thai and Airbus in the ratio of 75:25. Because the value of certain indices used in the price adjustment formula had fallen since the scheduled delivery dates of the two aircraft, this resulted in a “de-escalation” (i.e. reduction) in the price. The upshot was that the price paid by Thai for the aircraft was US$9.44m less than it would have been if the aircraft had been delivered on the scheduled delivery dates.

Koito contends that this monetary benefit to Thai arose directly out of Koito’s failure to perform its contractual obligations, and must therefore be brought into account in the overall calculation of loss.

In response, Mr Morpuss QC on behalf of Thai submitted that Koito’s breach of contract did no more than create the opportunity for Thai to obtain the price reduction. He argued that, even if Thai would not have obtained the price reduction but for Koito’s failure to deliver the seats on time, the effective cause of the benefit was Thai’s successful negotiation with Airbus, no doubt assisted by its historic and anticipated future relationship with Airbus. Mr Morpuss also emphasised that this claim was first raised by Koito in its skeleton argument for the trial and that, had it been raised sooner, Thai might have wished to adduce evidence as to how the agreement which resulted in the price adjustment was reached. He submitted that in these circumstances Thai has been prejudiced by the late stage at which the point has been raised so that either factual inferences favourable to Thai should be drawn or Koito should not be allowed to make this claim.

It is clear that as a matter of fact Thai would not have obtained the price reduction if it had not been for the delay in delivery of the aircraft caused by Koito’s breach of contract. So far as I can see, the reduction in price was a consequence which followed automatically under the terms of the contract between Thai and Airbus from the fact that delivery of the aircraft was delayed by a cause for which neither party was responsible. The question whether Airbus would have been entitled to insist on delivering the aircraft without seats on the scheduled delivery dates is not one which has been explored. In circumstances where Thai might have adduced evidence if the point had been raised earlier, however, I am prepared to assume in Thai’s favour that such evidence would have shown that, in persuading Airbus to delay delivery of two aircraft until December 2009, with the reduction in price which this entailed under the price adjustment formula in the contract, Thai was able to take advantage of its good commercial relationship with Airbus. In particular, I will assume that another airline with less bargaining power than Thai would not have succeeded in negotiating such an arrangement.

The ability of Thai, however, to take advantage of its commercial relationship with Airbus in the arrangements which it made with Airbus to mitigate the consequences of Koito’s breach of contract was not something abnormal or unexpected which might therefore be seen as an independent cause. If Thai had been a small airline with no previous or anticipated future relationship with Airbus and consequently little bargaining power, it could not seriously have been argued that its inability to negotiate a more favourable arrangement with Airbus should be regarded as the effective cause of part of Thai’s loss. The same must apply in reverse. At the very best for Thai, the situation might be characterised as one in which there were two effective causes of the price reduction: Koito’s breach of contract and the bargaining power which Thai was able to exploit through being a good customer of Airbus. When the defendant’s breach of contract combines with another effective cause to result in loss to the claimant, the loss is recoverable: see e.g. Heskell v Continental Express Ltd [1950] 1 All ER 1033, 1047-8; Borealis AB v Geogas Trading SA [2010] EWHC 2789 (Comm), [2011] 1 Lloyd’s Rep 482, para 44. Again, the same principle must apply to gains.

I conclude that credit must be given in the calculation of damages for the benefit to Thai of the price reduction of US$9.44m.

On 7 January 2011 Thai entered into a new contract with Airbus to acquire seven more A330-300 aircraft. In connection with this Acquisition Agreement, Thai also signed a Letter Agreement and a Confidential Side Letter with Airbus – both of which were agreed to constitute “an integral non-severable part” of the Acquisition Agreement. These agreements provided for Thai to receive various credits which could be off-set against the price of the seven new aircraft. The credits given included four which have been referred to for convenience as Credits A to D.

Credit A is no longer in issue. Credits B to D were as follows:

Thai duly completed the purchase and took delivery of the seven new aircraft and has confirmed that it received the full benefit of the credits.

Koito contends that it is apparent from the express terms of the contractual provisions under which these credits were paid that the payments resulted from the delays in delivery of the five A330-300 aircraft flowing from Koito’s breaches of contract. Counsel for Koito submitted that, as with the price de-escalation, the sums in question must therefore be brought into account in the calculation of damages as part of the balance of loss and gain.

Thai argued that the effective cause of these credits was not Koito’s breaches of contract but Thai’s agreement to purchase new aircraft from Airbus. Mr Morpuss also again argued that Thai has been prejudiced by the late stage at which Koito sought to claim the benefit of these credits and submitted that any relevant point of fact on which evidence might have been adduced should be assumed in Thai’s favour or, alternatively, that permission to advance this claim should be refused.

Unlike the price de-escalation, which arose under the contract for the purchase of the aircraft on which the seats supplied by Koito were to be installed, these further credits were granted under a separate contract subsequently entered into by Thai with Airbus for the acquisition of different aircraft. Under the terms of the later contract, receipt of the credits was expressly dependent on Thai taking delivery of the new aircraft. Koito asserted that this arrangement was “no more than a mechanism” for payment of a benefit to which Airbus recognised that Thai was entitled. In support of this assertion, Koito relied on evidence given by its aviation expert, Mr Seymour, that in his experience it is common when delivery is delayed or other changes made to the arrangements for the supply of aircraft for the airline and the manufacturer to negotiate future credits to off-set unexpected costs incurred by the airline or savings made by the manufacturer. Whether this is common practice or not, however, there is nothing to suggest that Airbus recognised any legal or commercial obligation to compensate Thai for the loss and inconvenience caused to Thai by the late delivery of the five A330-300 aircraft in circumstances where this was caused by the default of Koito for which Airbus was not responsible under an independent contract between Thai and Koito.

Koito also suggested that Airbus must have felt some embarrassment at Koito’s default as Koito was on its approved list of seat suppliers. This is pure speculation, however, which there is no evidence to support.

It is notable that, in the case of Credits B and C, there is no relationship between the amount of the credit and the quantum of any identifiable loss suffered by Thai as a result of Koito’s breaches of contract. Koito contended that Credit B falls to be set off against Thai’s claim for the cost of installing ZIM seats in the five delayed A330-300 aircraft. However, there is nothing in the wording of the Credit B which links it to the cost of installing replacement seats, and the value of the credit (US$5.25m in total) far exceeds the cost incurred by Thai in installing the ZIM seats – which is agreed to amount to €1,226,484 or US$1,581,805. Similarly, Koito has contended that Credit C falls to be set off against Thai’s claim for costs incurred in storing the aircraft. However, while the terms of the credit do refer to the financial burden to Thai of storing the aircraft, there is a substantial disparity between Thai’s claim for storage costs (in the amount of US$3,185,980) and the amount of the credit (US$6m). Credit D differs in this respect as the total amount of the credit directly corresponds to the amount of a particular invoice which Airbus had submitted for “disruption costs”. However, whereas Credits B and C are said to be granted to Thai in consideration of consequences of the non-delivery of the seats, Credit D is expressly stated to be given in recognition of Thai purchasing and taking delivery of the new aircraft.

My findings on this issue are as follows. First, there is nothing to suggest that Airbus would have been willing to provide any of the three credits to Thai, if Thai had not agreed to buy seven new aircraft from Airbus. To the contrary, I think it clear from the fact that receipt of the relevant amounts was conditional on delivery of the aircraft that Airbus would not have done so.

Second, in the case of Credits B and C, I think it reasonable to infer that Airbus would have been willing to make similar credits available to Thai as an incentive to Thai to buy seven new aircraft from Airbus irrespective of the problems caused by Koito’s breaches of contract. Thai’s aviation expert, Mr Bull, confirmed that aircraft manufacturers are often willing to negotiate discounts from the list price in the form of credits to good customers; and it is easy to understand why the manufacturer might prefer to link the discounts to some specific occurrence rather than presenting them as a simple reduction from the list price. The fact that there is no correlation between the amounts of these credits and any costs incurred by Thai is a positive reason to infer that the problems arising from Koito’s failure to deliver seats for the earlier aircraft were essentially a pretext for agreeing a discount from the list price which Airbus was prepared to grant in order to win the new order from Thai. The fact that Koito had been chosen by Thai and that Airbus was not in any way responsible for Koito’s default further supports this. How the value of these credits was arrived at in the negotiations between Thai and Airbus is, however, a question which could have been illuminated by evidence if this issue had been raised by Koito in proper time. In circumstances where Thai has been deprived of that opportunity, I also think it right that in so far as there is uncertainty on this point it should be resolved in Thai’s favour.

It follows from these findings that the receipt by Thai of Credits B and C was not caused by Koito’s breaches of contract.

The position in relation to Credit D is less clear cut as that credit involved, in effect, the cancellation of an existing invoice and I cannot infer that Airbus would have been willing to grant a credit in the relevant amount if there had not been an outstanding invoice for charges for disruption caused by Koito’s breaches of contract. I therefore approach Credit D on the basis that there were two ‘but for’ causes of the benefit which Thai received: Koito’s breaches of contract and Thai’s agreement to purchase seven new aircraft from Airbus. Of those two matters, however, I consider that the latter was the effective cause of the credit. Thai’s agreement to purchase new aircraft in January 2011 went beyond the fact that Thai had a good relationship with Airbus. It was a specific decision, completely unconnected to Koito’s breaches of contract and their consequences, and which there was no reason to expect when the breaches occurred. I would regard Thai’s subsequent agreement to buy new aircraft from Airbus as essentially a coincidence so far as Koito was concerned, the benefit of which should not fall for Koito’s account.

That said, I am not satisfied on the evidence that Thai was liable to pay the sums claimed by Airbus as “disruption costs”. The sums in question were claimed by Airbus in a letter dated 16 March 2010, addressed to Thai’s Director of Quality Assurance. As set out in that letter, the claim had two elements. The first was described in the letter as “FAL disruption costs or additional engineering costs”. These were calculated on the basis of a number of working days (generally five) for each aircraft at US$14,500 per day. The second element of the claim was described as “additional maintenance on account to maintain in FRC”. These costs were calculated on the basis of a number of hours for each aircraft at US$145 per hour. No further explanation of the sums claimed in the letter was given in the letter itself nor in any evidence adduced by Thai. Although I could hazard a guess, I do not know what the abbreviations “FAL” and “FRC” stand for. More importantly, it is not apparent whether the sums were claimed under any provision of the contract between Thai and Airbus for the acquisition of the aircraft. There is nothing to indicate that they were, nor on what legal basis Airbus claimed to be entitled to payment if they were not. None of Thai’s witnesses referred to these charges. Thai’s Director of Quality Assurance, Porrerk Komolvanij, to whom the letter dated 16 March 2010 was addressed, made two witness statements which dealt (amongst other things) with various costs claimed by Airbus but said nothing about the “disruption costs” claimed in this letter. Nor did Thai’s expert accountant, Mr Dearman, consider in his report, as he did with other liabilities allegedly incurred by Thai, whether there was evidence to support the charges claimed in the letter.

In these circumstances I find that Thai has failed to prove that it was liable to pay to Airbus the sum which was off-set by Credit D, and for this reason is not entitled to recover this sum from Koito.

In the light of the findings made in this judgment, I invite the parties to agree the net sums payable by Koito to Thai as damages in each of the three currencies in which claims are made.