National Private Air Transport Services Company (National Air Services) Ltd v Creditrade Llp & Anor

The claimant, National Private Air Transport Services Company (National Air Services) Limited is a company incorporated in the Kingdom of Saudi Arabia. It operates an airline known as Flynas.

The first defendant, Creditrade LLP, is a limited liability partnership incorporated in England and Wales. The second defendant, Windrose Aviation Company Limited, is a company incorporated in Ukraine which operates an airline, Windrose Airlines. For present purposes, it is unnecessary to distinguish between the defendants.

By the claim, NAS seeks to recover arrears of rent and other expenses totalling around US$2m which it says is owed by the defendants under sub-leases of two Embraer 195 AR aircraft with manufacturer's serial numbers (MSN) 157 and 169. The defendants deny that they are liable to pay the sums claimed, and assert that, if anything, a positive credit balance is owing to them.

The issues between the parties relate to MSN 169. The main question is as to the effect of an agreement entered into about 16 January 2013 by which NAS agreed to waive rent on redelivery of the aircraft. NAS says that this was conditional on the aircraft being returned by the end of January 2013, and that since it was not returned until 30 April 2013, NAS is entitled to outstanding rent in full.

The defendants' primary case is that the parties agreed that all rent would be waived until the redelivery of MSN 169, and that nothing is owing.

The defendants’ alternative case is that NAS waived its right to receive rent for November 2012 through January 2013 (regardless of the date of redelivery), and that liability for rent post-January 2013 depends on the attribution of liability for the late redelivery, which they say is the responsibility of NAS.

The other main issues concern what Windrose says is the attribution of liability. In this regard, a number of breaches are alleged, which Windrose contends go to reduce the amount of rent due to NAS, if, contrary to its primary case, any such rent is due. These issues do not arise if no rent is due.

If the court finds that no rent is due to NAS, it is common ground that a credit is due to Windrose in the sum of US$288,647 in relation to MSN 157.

This court has jurisdiction because the sub- and sub-subleases are governed by English law and subject to English jurisdiction.

These proceedings were begun in 2014. A considerable body of documents was produced in disclosure, a small part of which was adduced in support of the parties’ cases at trial.

NAS called a single factual witness, Mr Nandan Mimani, who has been NAS’s Group Chief Strategy and Planning since February 2010. He gave his evidence in a satisfactory manner and did his best to assist the court, but was only indirectly involved in the relevant events, including the negotiation of the agreement. That was negotiated on behalf of NAS by Mr Ramzi Zaroubi. Windrose criticises NAS for its failure to call him (and two other employees) and invites the court to draw adverse inferences.

There is no reason in my view to draw adverse inferences, because the facts largely appear from the documents, and because subjective opinions as to the meaning of what the parties agreed are inadmissible. But in one respect identified below, the court will not make findings of fact requested by NAS in the absence of Mr Zaroubi’s evidence.

Windrose called two factual witnesses, Ms Irina Zotova, its Fleet Development Advisor, and Mr Arthur Lesnikovsky, Head of Continuing Airworthiness at Windrose.

Though NAS criticises Ms Zotova as a witness, I consider that both she and Mr Lesnikovsky gave their evidence in a satisfactory manner and did their best to assist the court.

However, save where indicated below, the court's findings do not depend on its assessment of the witnesses for either side, who were inevitably partial, but rather on the contemporary material.

Windrose criticises NAS on the basis that it did not cross-examine Mr Serhiy Patulya, its Head of Engineering Service. This criticism is misplaced, since NAS was entitled to accept his evidence without cross-examination.

NAS called Mr Alan Moodie as its expert witness in relation to the engine issues that arise in the case. It called Mr David Louzado in relation to the redelivery issues that arise in the case.

Though Windrose criticises Mr Louzado largely on the basis that he produced further material relating to airworthiness requirements in Cayman at the beginning of his evidence, I do not accept that criticism. The material should have been produced earlier, but it was produced in an effort to elucidate why NAS required a document called an E3 certificate. The reason why it did so is not in itself central to the relevant issue, namely as to compliance with the contractual redelivery requirements.

The defendants point out that Mr Moodie was not initially provided with primary documentation, which I agree was important. However, he saw it prior to writing his supplementary report. He is criticised on the basis that as a US expert, he had not been made fully aware of his obligation as an expert under English law. However, I am satisfied that he understood that obligation, and he gave his evidence in a straightforward and independent manner.

The defendants’ expert was Mr Justin Goatcher, a former Senior Airworthiness Certification Surveyor at the CAA, among other relevant experience. His evidence is criticised by NAS on the basis that he gave the impression of acting as an advocate for Windrose's case. There is, in my view, some force in this criticism, particularly as regards redelivery. However, he is experienced in the field, and sought to assist the court, and little turns on this criticism.

Overall, the differences in the parties’ experts’ opinions are not determinative in this case.

The facts as found by the court are as follows. Some of the facts are set out under the relevant issues. Many of them are not in dispute.

The aircraft were delivered new to NAS in 2007. They were leased by NAS from a third-party lessor, GE Capital Aviation Services (GECAS), one of the world’s biggest commercial aircraft and engine lessors and lenders.

NAS intended to use the aircraft for the purposes of Flynas’s operations. However, the aircraft’s GE engines turned out to be ill-suited to the “hot and harsh” environment of Saudi Arabia. According to Mr Moodie, the problem exists with all gas turbine engines. For present purposes, it is enough to say that the problems were (as Mr Goatcher says) probably linked to sand and dust entering the engine and causing damage, in particular to the HPT (High Pressure Turbine) blades.

NAS therefore decided to sub-lease the aircraft, and on 7 May 2009, the following agreements were entered into with, and between, the defendants:

The terms of the sub-subleases are materially identical to those of the subleases. By clause 10.1 of the sub-subleases, Windrose agreed to guarantee Creditrade’s obligations to Windrose under the subleases. By clause 18.2 of the sub-subleases, NAS is entitled to enforce the terms of the sub-subleases. It is not in dispute that for practical purposes the defendants are jointly liable to NAS for the performance of the obligations contained in the subleases, and it is not necessary to distinguish between them.

It is common ground that after acquisition by Windrose the aircraft were based in Ukraine, and ceased to operate under the “hot and harsh” conditions of Saudi Arabia.

In November 2009, the agreed chronology shows that the MSN 169 engines underwent maintenance work and new HPT blades were fitted. The work on this “shop visit” was carried out in France. It is possible that the 2009 shop visit did not fully remedy the damage caused earlier in the course of “hot and harsh” operations, but Mr Goatcher accepted that there was no clear evidence on this question, and I do not make a finding.

It is not seriously in dispute that the defendants’ payment record during the lease terms was very poor. As NAS puts it, it continually had to chase for overdue payments of rent and maintenance reserves (MRs) and enter into ad hoc variations of the lease terms to accommodate the defendants’ perennial struggles with cash flow.

The defendants acknowledge that there were cash flow problems, but say that recent events in Ukraine are well-known, and the Ukrainian air industry has suffered significantly. They say that presentation of the defendants as in any way “bad” lessees is unfair, and that they have managed to maintain professional commercial operations in an extremely adverse environment, with a sustained focus on safety.

Having seen Windrose’s witnesses, the court finds that they are committed and able people, who in running a small airline have had to cope with difficult circumstances beyond their control.

The defendants say that the poor cash flow situation was in large part attributable to the engines defects and the provision of only a 45% warranty by GE in respect of the scrapped HPT blades. The court finds that though the engine problems cannot have helped, this broader proposition was not made good by the evidence presented at trial, and the cash-flow problems were largely caused by the adverse operating conditions in Ukraine at the time.

The subleases were due to expire on 7 June 2012. The parties agreed variations to their terms as follows.

As regards MSN 157, following a borescope inspection, defects had been identified with one of its engines and the APU (auxiliary power unit). On 7 June 2012, the parties entered into a Side Letter whereby they agreed that MSN 157 would be redelivered without the engine and APU, which would be sent for repair.

MSN 157 was redelivered on 13 July 2012, except for the engine and APU, which were redelivered on 18 September 2012.

It is common ground that following the redelivery of MSN 157, NAS was holding a balance of US$288,647 in surplus maintenance reserves which were held by NAS for the defendants. It was agreed on 2 October 2012 that the balance of the maintenance reserves would be transferred to MSN 169, to cover any redelivery expenses in respect of that aircraft.

There is therefore no dispute in relation to MSN 157. The only question is whether the credit of US$288,647 was subsequently eroded (or as the defendants put it defrayed) by payments falling due to NAS in respect of MSN 169.

As regards MSN 169, on 24 May 2012 the parties concluded a Side Letter in which they agreed to extend the sublease until 1 November 2012. The aircraft was therefore due for redelivery on that date. Rent was paid up to the end of October, but not thereafter.

In preparation for redelivery, on 1 September 2012 the defendants sent MSN 169 to Flybe’s facility at Exeter Airport in England, where the aircraft was grounded. (In fact, as events worked out, it remained there for eight months.) The engines were shipped to Lufthansa in Germany for repairs and subsequently to the GE repair facility in Singapore.

On 1 October 2012, Lufthansa informed the defendants that many of the HPT blades in the engines were cracked and would have to be replaced. The cracking involved about 64 of the 68 blades on one engine, and about 19 on the other.

The estimated cost was about €1.3m, which Windrose was not in a position to pay at the time. Ms Zotova considered that assistance should be provided by the manufacturer (GE), because the blades were fitted new in 2009, and had only accrued 7033 engine hours since. She took the issue up with GE on about 3 October 2012.

On 18 October 2012, GE emailed Windrose offering a 45% discount for replacement of HPT blades deemed unserviceable, on the basis that a minimum of 75% of blades per engine required replacement. This was accepted by Windrose. The discount applied to one of the engines, resulting in a discount of about US$265,000 in in the final Lufthansa invoices issued on 9 November 2012.

To meet these and other payments that would be required, the parties tried to put an arrangement in place whereby NAS would release part of the maintenance reserves to the defendants. This however required NAS to seek the agreement of the head lessor (GECAS) to the early release of part of NAS’s own maintenance reserves.

NAS made this request on 16 October 2012. On 11 November 2012, GECAS responded to the effect that the claims were “non-qualifying”, a response which counsel for NAS described as a “bombshell”.

Ms Zotova replied expressing her surprise and frustration at this response, saying that Windrose had not planned any engine shop visits considering “the relatively low utilization of the engines”. The tone of her reply was understandable in my view, because it is a fact that the aircraft and its engines were relatively new, even though ultimately it was for Windrose to put them into a state fit for redelivery.

Windrose’s case is that “extreme delay” followed, and that this was resultant from NAS’s inaction. It says that maintenance draw-downs should have been obtained earlier than January 2013, but that there was no progress for approximately two months. It says that the reason for this is that NAS determined as of October 2012 that it intended to phase out the Embraer aircraft, and it delayed negotiations vis-à-vis Windrose whilst it entered into broader negotiations with GECAS about its own position. It relies on the evidence of Mr Mimani in support.

NAS says that there is no evidence to support this submission. Lufthansa was not prepared to release the engines until it was paid (this is common ground). NAS says that it was only contractually required to release the maintenance reserves once Windrose paid Lufthansa for the work. GECAS was not prepared to do so on its part until the engines were released by Lufthansa.

On balance, I consider that more could have been done by NAS to bring the difficult situation caused by Windrose’s lack of funds to a solution. There are unexplained gaps in the communications with GECAS, though I would not characterise this as “extreme delay”. On the other hand, I do accept that GECAS was under no obligation to release the maintenance reserves, and that there must have been a limit as to what could be done to persuade them to do so voluntarily. Further, and in agreement with NAS, I am not satisfied that any overall negotiation between NAS and GECAS as to fleet replacement was a cause of delay. The question of the contractual position is considered below.

The subsequent evidence shows GECAS expressing concern that nobody had been at the Flybe facility since November, and the facility being concerned about getting paid. There were discussions over the Christmas 2012 period, and on 7 January 2013, GECAS finally agreed to release the engine maintenance reserves in the sum of US$850,000 towards the cost of the engine repairs and the cost of the “C-check” (described as a “fairly heavy” pre-delivery check conducted on the airframe).

However Windrose’s response on 9 January 2013 was that the situation had “dramatically changed” since October. It said that two partner airlines had declared bankruptcy, and that it was running out of cash. Ms Zotova proposed that NAS/GECAS release funds directly to Lufthansa to get the engines released. She sought payment of an additional sum of US$695,087 to allow for final redelivery of the aircraft by 30 January 2013.

On 16 January 2013, an agreement was reached in the course of email exchanges between Ms Zotova and Mr Zaroubi of NAS. The precise meaning and effect of this agreement is in dispute. The text of the emails is set out below.

However, it is not disputed that in broad terms the parties agreed that (1) NAS would make certain payments to Lufthansa and Flybe (in other words without waiting for GECAS to release the funds); (2) the new target redelivery date would be 31 January 2013; and (3) NAS would invoice the defendants for additional rent from November 2012 – January 2013, but that the invoices would be waived at redelivery.

On 17 January 2013, there was a telephone conversation between Mr Zaroubi and Ms Zotova (in which Mr Mimani participated) in which Mr Zaroubi said in effect that he wanted matters to be arranged pursuant to a “tripartite agreement” with Lufthansa. Ms Zotova says, and I accept, that she made clear to NAS that this would delay the process. She says that “Mr Zaroubi never made a point that he was not in agreement that their target delivery date would move from 31 January”.

A tripartite agreement between Lufthansa, NAS and the defendants was signed on 23/24 January 2013. Creditrade paid €152,473 to Lufthansa on 24 January 2013 and NAS paid US$851,644 the following day. The engines were duly released by Lufthansa and shipped to Exeter on 28 January 2013.

On 25 January 2013 NAS proposed that a similar tripartite agreement should be entered into with Flybe, it appears without objection from the defendants. (The position as regards hangar availability is described below.)

NAS provided the defendants with a draft of this agreement on 6 February 2013 and the agreement was signed on 13 February 2013. On 14 February 2013 Creditrade made its payments to Flybe, and on 19 February 2013 NAS paid US$510,119 to Flybe.

Flybe carried out the redelivery checks, and a test flight took place on 7 March 2013. However, a monitor was found not to be working and a replacement had to be ordered. The replacement was installed on 14 March 2013.

The defendants sought to tender MSN 169 for redelivery shortly after 19 March 2013, but NAS required further work to be carried out before it would accept the aircraft. The perceived need for this work arose out of an “E3 report” which NAS had commissioned and which Flybe completed on 12 March 2013.

Some time was taken to carry out this work. A number of points remained open, and on 5 April 2013, Flybe informed the parties that the next hangar slot was 18 April 2013. MSN 169 was inducted for final works on 17 April 2013.

MSN 169 was redelivered and an Acceptance Certificate signed on 30 April 2013. There were a number of discrepancies remaining which were recorded in the Acceptance Certificate and compensated for by way of a payment of US$15,000 from the defendants.

The issues for the court are essentially agreed between the parties and set out in their skeleton arguments as follows:

The parties’ contentions on these issues and the court’s conclusions are as follows.

The proper interpretation of the agreement reached on 16 January 2013

The facts as to the making of the agreement are set out above.

The relevant parts of the emails which contain the agreement are as follows:

NAS contends that this agreement amounted to a conditional waiver of rent, which was subject to the aircraft being redelivered by 31 January 2013.

The defendants’ primary case is that the parties agreed, by their agreement of 16 January 2013 that all rent would be waived until the redelivery of MSN 169. That the aircraft was not redelivered by 31 January 2013 was an irrelevance: the agreement was that rent was waived until redelivery, with 31 January 2013 only being ever a “target” date for redelivery.

In more detail, NAS submits that:

In more detail, Windrose submits that:

The court’s conclusions

It is common ground that the parties reached the agreement contained in the emails between Mr Zaroubi and Ms Zotova dated 9 and 16 January 2013, the question being as to the proper construction of the agreement.

The principles of construction have not been in dispute. Reference has been made to Lord Clarke’s judgment in Rainy Sky SA v. Kookmin Bank [2011] 1 WLR 2900 at [21]:

“[T]he exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.”

NAS placed considerable emphasis in closing submissions on clause 12.2 of the sublease, which provides that rent is payable except where the non-return of the aircraft is caused by NAS’s breach of the sublease. However, this does not take the argument any further, because it is common ground that NAS entered into a binding waiver as to the payment of rent. The question is as to the extent of the waiver.

It is convenient to begin with an important factual dispute. NAS says that there was a pressing practical need for the aircraft to be redelivered as soon as possible, and NAS’s intention in offering the waiver was to provide an incentive for Windrose to redeliver the aircraft promptly.

Windrose says that it is highly implausible that NAS had any intention of flying MSN 169 when the lease expired, because it had decided to phase Embraer aircraft out in favour of the larger Airbus A320s. Its case is that NAS was dragging out redelivery for its own ends. Windrose says that the evidence of Mr Mimani in this regard was inconsistent.

Whilst Mr Mimani was a courteous witness, I did not myself find it straightforward to fully understand the position of NAS as regards these aircraft. On balance, I find that by the end of 2012, at the latest, NAS had decided to phase out the eight Embraer aircraft in its fleet, and replace them by the A320s, which had a larger capacity, and were seemingly less prone to “hot and harsh” engine problems.

Mr Mimani, nevertheless, maintained that NAS wanted the aircraft back for the summer season, but the evidence in that regard appears to me to be equivocal. In fact, what appears to have happened is that upon redelivery the aircraft were mothballed until they were returned to GECAS at the end of 2013.

Mr Mimani explained that the reason for this was that NAS did not wish to contaminate the engines by operating them in “hot and harsh” conditions, but the distinction he drew in his oral evidence in this regard between the airframe and the engines does not clearly appear in his witness statement.

As regards the period October 2012 to January 2013, he maintained that getting answers from GECAS took a considerable time, and this explains the delay. I accept that this goes a considerable way to explain the delay. I do not accept Windrose’s case that NAS was deliberately dragging its feet so as to charge rent at the penalty rate. As explained above, no rent was paid by Windrose after the end of October 2012. Whilst NAS does not appear to have been pressing for rent at this point, as a matter of commercial common sense I find that, whether pressing or not, it would have wished to bring matters to a close, and obtain the aircraft back.

In so far as it would have been admissible, it is possible that Mr Zaroubi could have given evidence as to the intention of NAS in offering the waiver. However, he did not give evidence, and I make no findings as to the intention of NAS in this respect. In particular, I am unable to accept the submission of NAS that the waiver was intended as an incentive for Windrose to redeliver the aircraft promptly. The evidence does not support such a finding. I find that although NAS was not deliberately dragging its feet, for whatever reason, it was not in a hurry to get the aircraft back either.

An important part of the background relied upon by NAS to support its construction of the 16 January 2013 agreement does not hold good on the facts, therefore. The fact that invoices were raised is of little relevance either way, since the agreement expressly anticipates that invoices would be raised, but would be waived at redelivery.

A further significant part of the factual matrix, in my view, relates to the possibility of redelivering the aircraft by 31 January 2013, given that the agreement in the email exchange happened on 16 January 2013.

NAS submitted that albeit “tight”, delivery by the end of the month was in principle possible. It says that although in fact this could not have happened because of lack of hangar space at Flybe, this was not known to either party at the time, and should not affect the construction of the agreement.

In the light of the time it actually did take to get the aircraft into a state in which NAS would accept redelivery, there is room for scepticism as to whether delivery would really have been possible within two weeks of the agreement (even had hangar space been available).

However, this is an academic question. The fact that after the agreement was entered into, NAS required (as explained above) tripartite agreements to be entered into with Lufthansa and Flybe made redelivery by 31 January 2013 impossible. There is so far as I am aware no dispute as to this, and I agree with the defendants that the reference in Mr Zaroubi’s final email to “fine-tuning” the dates for the various payments to be made does not anticipate any such agreements.

In those circumstances, the submission of NAS that the waiver of rent was conditional on redelivery by 31 January 2013 cannot be correct. Further, it is inconsistent (in my view) with the terms of the emails. These show that 31 January was the “target redelivery date” (underlining added). As at 16 January 2013, that was the target redelivery date. It was “tight” but (so far as the parties understood the situation) doable. The fact that delivery did not in fact happen by the target date does not invalidate the waiver. In my view, NAS must be held to the waiver to which it agreed.

The question then is whether Windrose is right to submit that the effect of the agreement is that the waiver of rent would continue until the aircraft was redelivered. Its case was that this waiver would continue no matter how long redelivery took.

However, Mr Zaroubi’s email specifically referred to “additional rent from Nov till Jan of USD 729k” and stated that “this will be totally waived…” (underlining added). Likewise, in her response, Ms Zotova said that, “you may invoice as suggested… but these invoices will be outstanding and should be waived at redelivery” (underlining added). I accept the submission of NAS that these communications plainly refer to rent and invoices for the period November-January, but not to any further period. Again, the fact that invoices for the later period were not raised until after redelivery is not in any way inconsistent with this construction.

There is in my view nothing in the factual matrix that outweighs this interpretation of the emails containing the agreement. It follows that on a correct construction of the 16 January agreement, I accept the defendants’ case that rent was waived from November 2012 until January 2013, but reject the defendants’ case that NAS waived its right to receive rent thereafter until the date of redelivery whenever that might be.

That being my conclusion, it is unnecessary to express a final conclusion on the submissions made by NAS that the defendants’ case as to construction fails on uncertainty grounds. However, there is in my view force in the submission that the defendants’ fault-based case on construction is unacceptably uncertain. It would make it necessary to determine to what extent the late delivery was caused by each parties’ fault. Further, there is force in the submission that the defendants’ case does not make clear (a) what precisely is meant by “fault”, (b) how the waiver would operate where neither party is at fault, or (c) how it would operate where both parties are at fault.

In these circumstances, the other issues raised by the defendants do not strictly speaking arise. However, NAS accepted that it would not be able to charge rent for the remaining three months that elapsed until redelivery to the extent that it had wrongfully prevented redelivery taking place. I shall, therefore, deal with these issues.

The issue is whether rent should be reduced as a result of a breach of clause 6.1 of the sub-lease, by reason of NAS failing to make available to Creditrade the benefit of the manufacturer’s warranties/product support in relation to the engines.

Clause 6.1 of the sub-lease provides that:

“So long as no Event of Default had occurred which is continuing, Sublessor shall make available to Sublessee during the Term the benefit of all manufacturer’s warranties in relation to the repair or remedy of any defect in the Aircraft…and other product support to the Aircraft to the extent that it is permitted to do so…”

The defendants contend that the factual background is that the engines were indubitably “defective”. NAS accepts that the HPT blades were not as durable as would have been expected, but in my view there was no clear answer on the evidence as to why this was so. I refer above to the possible inadequacy of the work done on the shop visit of November 2009, but again this is not established. I consider that the evidence does not support any wider finding that the engines were “defective”. When this judgment was circulated in draft, counsel for the defendants drew my attention to certain passages in Mr Moodie’s evidence. I have reconsidered these, but my conclusion is unchanged.

In so far as any case is still advanced by the defendants as regards manufacturer’s warranties, it cannot be accepted. The warranties covered the engines up to 3,000 operational hours. The engines had completed more than 7,000 hours, and were well out of warranty by the material time. There is no contractual basis for the suggestion that “special warranties” should have been negotiated with the manufacturers.

The defendants contend alternatively that NAS failed to make available the benefit of “other product support” for the aircraft, which could only be provided through a “flow down” through NAS. They say that product support (resolution of unscheduled maintenance actions, product scrap approval and timely support) would have been of significant assistance to Windrose. Referring to an industry presentation, they say that the manufacturer advised that product support would be available to those affected by the engine defects. Insofar as the 2012 shop visit was necessitated by inadequacies in the 2009 shop visit, NAS was the party with responsibility for the visit, and it was for NAS to seek remedies for any inadequacies. Further, it is said, there is evidence that NAS itself procured a better outcome than Windrose was capable of doing on its own by achieving a 50% discount on all blades scrapped.

However, as NAS submits, the product support activities to which NAS was entitled under its General Terms Agreement (GTA) with the manufacturer are set out in Exhibit B to the agreement. I accept NAS’s submission that none of them obliges the manufacturer to provide any financial support towards the cost of repair work on the engines.

Further, as explained above, Windrose was in fact itself in direct contact with the manufacturer. It requested support on 3 October 2012, and on 18 October 2012, GE offered a 45% discount for replacement of HPT blades which Windrose accepted. Whether or not NAS had been able to do better does not affect the position.

Finally, I agree with NAS that the events of late 2012 are irrelevant to the question of liability for rent given the agreement that the parties reached on 16 January 2013. The agreement was intended to deal with the question of rent for the November-January period, and it is not now open to Windrose to contend that its liability should be reduced on account of events which had occurred and were fully known to the parties before the agreement was made.

I do not consider that NAS was in breach of clause 6.1 of the sublease or otherwise at fault, and find for NAS on this issue.

The issue is whether rent should be reduced as a result of any wrongful delay in releasing maintenance reserves.

I have set out my findings of fact above. So far as GECAS is concerned, it was under no obligation to release the maintenance reserves to NAS. I am not satisfied that any overall negotiation between NAS and GECAS as to fleet replacement was a cause of delay as regards the release of maintenance reserves by NAS to the defendants.

As made clear in its submissions, Windrose’s case focuses on what it considers was the “extreme delay” resultant on what it considers to be NAS’s inaction. Whilst I have accepted that more could have been done by NAS to bring the difficult situation caused by Windrose’s lack of funds to a solution, I have rejected its factual case in this regard.

Further, there was no breach of contract on the part of NAS in this respect, nor is any breach identified by the defendants. (The case was pleaded in terms of “standard industry practice”, but no such practice was properly identified such as would give rise to legal obligations.) Further, and for reasons given earlier, the events of late 2012 are irrelevant to the question of liability for rent because of the agreement that the parties reached on 16 January 2013.

I do not consider that NAS was in breach of the sublease or otherwise at fault, and find for NAS on this issue.

The issue is whether rent should be reduced as a result of any wrongful delay by NAS in making payments to Lufthansa and/or Flybe. These payments were made pursuant to the tripartite agreements described above.

The fundamental point made by the defendants in respect of these payments is that NAS’s requirement of tripartite agreements and the delay that caused in paying Lufthansa and Flybe was not envisaged in the 16 January agreement with its end-January target date for redelivery. As set out above, I accept its case in that regard.

However, no further issue of substance arises as regards these payments. The payment to Lufthansa was made by NAS on 25 January 2013 as required under the tripartite agreement. The payment to Flybe was arguably late, because whilst Creditrade paid on 14 February, NAS did not pay until 19 February 2013.

However, I am satisfied that this short delay had no effect whatever, because for reasons unconnected to the position as between the parties, there was no hangar space at Flybe available for the aircraft. Windrose had been told by Flybe in mid-January that the first available hangar slot was 12 February 2013. On 5 February, it was told that the slot had been put back two days because of delays with another operator’s aircraft. On 13 February, it was told that the slot had been put back to 28 February because of a structural finding as regards another operator’s aircraft. In the event, MSN 169 did not go into the hangar until 28 February 2013.

So far as it was raised as an issue in this context, I reiterate that the events of late 2012 are irrelevant to the question of liability for rent given the agreement that the parties reached on 16 January 2013. I do not accept the suggestion put in closing that “if progress had been made by NAS, Windrose would not have missed earlier hangar slots in January 2013 or even potentially December 2012”. I do not consider that NAS was in breach of the sublease or otherwise at fault, and find for NAS on this issue.

The issue is whether the rent should be reduced as a result of any wrongful refusal by NAS to accept redelivery of MSN 169.

The contractual provisions as regards redelivery are in clause 12.1 of the sublease, which required Creditrade to redeliver the aircraft “in compliance with the conditions set out in Schedule 6”.

Schedule 6 contains detailed provisions as to procedures for redelivery and specifies the operational condition of the aircraft at redelivery (being subject to a “normal wear and tear” proviso). Paragraph 1.1 of Schedule 6 provides that, prior to redelivery, “[Windrose] will make the Aircraft available to [NAS] for inspection (‘Final Inspection’) in order to verify that the condition of the Aircraft complies with this Agreement”.

Clause 12.2 provides that, if the aircraft does not comply with the Schedule 6 requirements, “the Term shall be extended until the time when the Aircraft has been redelivered to [NAS] in full compliance with this Agreement…”.

It is pleaded by the defendants that, “MSN 169 was ready for redelivery on 7 March 2013. In breach of the Sub-Lease and the agreement made in January 2013, [NAS] refused to accept redelivery”.

However, this case was rightly not pursued at trial. As explained above, though there was a test flight on 7 March 2013, a monitor was found not to be working and the replacement was installed on 14 March 2013. Mr Goatcher’s evidence that the monitor was not “strictly necessary for airworthiness” was not convincing, and I am satisfied that the aircraft was not in the contractual condition for redelivery without the monitor functioning.

Mr Goatcher’s evidence generally as to whether the contractual requirements for redelivery were met was to the effect that he would have expected the parties to negotiate and agree. The following exchange fairly shows his evidence on this:

Q. There was never a point, prior to 30 April, when the aircraft was in compliance with the redelivery conditions, was there? I would quite like a yes or no answer to that question.

A.

(Pause). So my opinion, my Lord, is that these events are complex situations and the interests of both parties have to be negotiated and considered and, as I have just said, there are very few occasions where exceptions are not agreed between the two parties. In fact, it's fair and reasonable for the parties to expect that level of discussion and negotiation to take place.

Whilst this may be a reasonable approach at a practical level, it does not engage with the contractual requirements for redelivery. So far as expert evidence is relevant in this connection, I prefer the evidence of Mr Louzado.

Further, it was unclear to what extent Mr Goatcher contradicted NAS’s case that as at 30 April 2013, the aircraft still did not fully comply with the Schedule 6 requirements. As NAS submitted, this seems to follow from the fact that the redelivery Acceptance Certificate contains a list of agreed “exceptions” from the contractual redelivery conditions—these were compensated for by a payment of US$15,000 to NAS by the defendants. Until those were agreed, it is hard to see that there was an obligation on NAS to accept redelivery. In closing submissions, the defendants seemed to come close to accepting this, by defining the issue in terms of whether NAS was entitled to insist on “strict literal compliance” with all redelivery terms as set out in the sublease.

I first deal with the detailed matters raised by the defendants under this heading.

Much of the dispute revolves around the fact that NAS required Flybe to provide an “E3 report” on the aircraft. Mr Goatcher explains that this is a document that was formerly used by the UK CAA (Civil Aviation Authority) for checking the airworthiness of aircraft for import/export purposes.

It is accepted by NAS that there was no contractual requirement for an E3 report. By the end of the trial, NAS also accepted that there was no regulatory requirement to obtain an E3 report either, although it appears to have had some function with the Cayman CAA, where the aircraft was to be reregistered following redelivery.

The defendants’ case is that “NAS’s subjective reasons for insisting on a wholly unnecessary certification are ultimately neither here nor there … NAS unreasonably (and in all likelihood as a factor of their inexperience [in taking redelivery of aircraft]) chose to insist on a form of certification which was not mandated by contract, or regulation, and was not necessary in any way to procure relevant paperwork”. This it is submitted caused delay for which Windrose was not responsible.

I accept the defendants’ submission that there was no agreement on the part of Windrose to the obtaining of an E3 report. Neither Mr Lesnikovsky nor Ms Zotova wanted to commission it. It was NAS which commissioned and paid for the report.

However, although no longer used by the UK CAA for large commercial aircraft, Mr Louzado’s evidence is that the E3 is commonly used as a generic conformity checklist. Though Mr Goatcher said that it would be highly unusual to add specific work scope items after the test flight (the E3 report was completed on 12 March 2013) Mr Louzado’s evidence in this respect was not challenged, and I see no reason not to accept it.

Ultimately, the dispute between the parties in this respect is fairly narrow. Windrose says that insofar as some of the items in the E3 report might need to be addressed, that could have been done quickly, if necessary by a third party agency, and would not explain a delay in redelivery until 30 April 2013. NAS, on the other hand, says that whether or not the E3 report was obtained, all the items it identified had to be fixed before NAS was obliged to accept the aircraft for redelivery. Further, the number of discrepancies as at 12 March 2013 was very large, as shown, it says, by “the huge amount of red ink in the E3 report”.

Whilst I have some sympathy with the defendants’ case in the sense that NAS might (as at the pre-January 2013 stage) have shown a greater sense of urgency in getting the aircraft back, I do not consider that NAS was seeking to protract the redelivery process to suit its own ends. It may be that (as the defendants suggest) there was a degree of inflexibility in its approach since, as a relatively new airline, and one which was not in the business of leasing aircraft, they were unfamiliar with the process.

However, on balance, I accept NAS’s case in this regard. I find that while many of the individual discrepancies identified were minor, the overall extent of the non-compliance shown by the E3 report as at 12 March 2013 was not minor. The timing of the report coming after the test flight was perhaps unfortunate, but this does not affect the fact that a considerable number of items were outstanding.

Leaving aside the E3 items, there were other “open items” which were the subject of evidence from the expert witnesses. On the basis of that evidence, my findings are as follows:

Mr Goatcher’s position is that these matters could have been negotiated and compensated for. Whilst I accept that his position is not in itself unreasonable, I am satisfied that the aircraft did not comply with Schedule 6 in the respects identified in (ii) to (iv).

Further, I do not accept that the delay subsequent to 7 March 2013 was (as the defendants submit) attributable at least in part to NAS’s failure to attend on site or to respond to enquiries from Windrose. On balance, I accept NAS’s case on timing, and find that the time taken until 30 April 2013 is attributable to the time taken to close the various items that were open, and the delay in waiting for a hangar to be provided by Flybe.

The defendants argued in closing that there was a course of practice or course of dealing between the parties, alternatively that NAS varied the terms governing the contractual relationship between the parties, and/or is estopped from arguing for literal compliance with the sublease terms.

These contentions are advanced on the basis that “NAS had been prepared not to insist on literal compliance with the contract in order to facilitate redelivery of MSN 157”.

However, the fact that NAS was prepared to take redelivery of MSN 157 in a particular condition did not tie its hands in any relevant legal sense as regards the redelivery of MSN 169. The aircraft were different, and the timing was different, and a comparison with MSN 157 provides no basis for these contentions in relation to MSN 169. I do not accept them.

Finally, the defendants raise the question of an implied duty of good faith. This is premised on expert evidence that at the termination of the lease of an aircraft, or in this case a sublease, it is expected that there will be disputed line items, whether due to disagreement as to “normal wear and tear”, or simply because the items are open, in the sense of being outstanding. It is normal industry practice, the defendants say, for parties to negotiate and agree compensation for outstanding line items so as to facilitate the redelivery of the aircraft.

Following on from this it is argued that an insistence on “full and literal compliance” with the redelivery terms in the lease is not within the bounds of normal trade practice. A term is therefore necessarily implied that the redelivery terms are to be interpreted in accordance with normal industry practice. It is “a wholly uncommercial interpretation of the terms of the lease to maintain that the lessor is able to insist on literal compliance”. Reliance is placed on the judgment of Leggatt J in Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB).

NAS submits that this argument is untenable. To the extent that Yam Seng is good law at all, NAS submits that its application is confined to so-called “relational” contracts, which description cannot be applied to the sublease. On the contrary, the sublease calls for practically no cooperation between the parties at all and simply requires Windrose to redeliver the aircraft at the end of the term in accordance with the Schedule 6 conditions. Even if there was any implied duty of good faith, it is submitted that it is impossible to see why requiring the aircraft to be redelivered in accordance with the contractual terms would amount to bad faith on the part of NAS.

I do not accept that NAS is correct to doubt the authority of the decision in Yam Seng. Although its treatment in the cases has varied, this has reflected the very different factual circumstances in which it has been raised. So far as appellate authority is concerned, it has recently been cited with approval by the Court of Appeal in Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396 at [67], and by the Singapore Court of Appeal in The One Suites Pte Ltd v Pacific Motor Credit (Pte) Ltd [2015] SGCA 21 at [44].

I do however accept NAS’s submission that an aircraft lease or sublease is not a “relational” contract in the sense that phrase is used in Yam Seng. These are conventional contracts in which the parties’ relationship is “legislated for in the express terms of the contract” (see Yam Seng at [143]). There may be an expectation of cooperation upon redelivery, but this does not give rise to an implied term redefining the redelivery obligation. The defendants’ case rests on an assertion that in the ordinary course, there will be “give and take” on the redelivery of an aircraft. That is so, but the lessor is entitled to require that the aircraft is redelivered in accordance with the contractual terms, and there is little room for a distinction between “compliance” and “literal compliance” in this context.

Accordingly, I do not consider that NAS was in breach of the sublease or otherwise at fault in this respect.

The overall outcome is that the defendants are not liable for the rent for the period November 2012 to January 2013, but are liable for the rent for the period February to April 2013 without deduction.

The parties can now calculate the state of the balance between them, and I will hear them as to any other consequential matters. I am grateful to both parties for their assistance.