England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		21st April 2010

Mr Justice Hamblen :

Introduction

1. The present proceedings arise out of a lease agreement, dated 30th May 2008 ("the lease"), whereby ACG Acquisition XX LLC ("ACG") agreed to lease to Olympic Airlines SA ("Olympic") a Boeing 737 aircraft ("the aircraft") for a term of five years. ACG, as the owner and lessor of the aircraft, undertook that it would be airworthy and in a condition suitable for immediate operation in commercial service and that it would comply with the detailed requirements specified in Schedule 2 of the lease as to the condition of the aircraft on delivery.
2. The aircraft was delivered on 19th August 2008. Olympic signed a Certificate of Acceptance, which, under the lease, was formally deemed to constitute delivery. The aircraft then went into service on 23rd August 2008. The Hellenic Civil Aviation Authority ("the CAA") duly became the competent authority for the aircraft and granted the aircraft a Certificate of Airworthiness, a document that all commercial aircraft must have to be legally allowed to fly.
3. On 6th September 2008, just 15 days after it entered into service, the aircraft was grounded when broken cables that controlled the spoilers on one wing were found. While trying to repair the broken cables, Olympic discovered 14 separate categories of defects, including defects which affected other flight control surface mechanisms such as the ailerons. The state of the aircraft was such that, on 11th September 2008, the CAA took the step of withdrawing the aircraft"s Certificate of Airworthiness. Even after the aircraft had spent months at Europe Aviation, a maintenance and repair organisation ("MRO") nominated by ACG, the CAA still refused to grant it a Certificate of Airworthiness.
4. Olympic"s evidence is that the cost of the work which would be required to render the aircraft airworthy would exceed the value of the aircraft. Olympic"s case is that the multiple defects discovered must have been present when the aircraft was delivered and ACG fundamentally failed to perform its obligations in relation to the delivery condition of the aircraft and it delivered an aircraft in a serious state of lack of airworthiness. In such circumstances, they contend that they are under no obligation to pay rent, that there has been a total failure of consideration; alternatively that they are entitled to counterclaim substantial damages, which damages would include any liability to pay rent.
5. ACG contend that the Certificate of Acceptance that the lessee was required to sign on delivery precludes Olympic from making any claim in respect of the delivery condition of the aircraft. They further contend that, in any event, there is no right to set off any counterclaim Olympic may have and that rent meanwhile remained payable in full until ACG"s recent termination of the lease on 29th March 2010. They, accordingly, apply for a summary judgment on their claim and Olympic"s counterclaim.
6. Alternatively, ACG apply for security for costs of Olympic"s counterclaim. ACG also have an application to amend their Particulars of Claim to add a claim for delivery up in the light of their recent termination of the lease. They also seek summary judgment on that amended claim. I granted ACG permission to amend, but adjourned the summary judgment application for seven days.
7. ACG has served four witness statements by Stephen Moses, a solicitor at Simmons & Simmons, two dated 26th February 2010, one dated 29th March 2010 (in support of the recent application) and one dated 6th April 2010. Olympic rely on the witness statement of John Evans, a partner in the firm of Howrey, and the documents exhibited thereto.

The Lease

8. The principal provisions of relevance are the following.

Clause 3

9. By clause 3, ACG"s obligation to lease the aircraft was subject to a series of conditions precedent, including the execution of the operative documents (clause 3.1(c)). The "operative documents" were defined as including the Certificate of Acceptance, which was in turn defined as "a certificate in the form attached as Exhibit A to be completed and executed by lessor and lessee at the time of delivery". By clause 3.4(c), Olympic"s obligation to accept the aircraft on lease was subject to, inter alia, the aircraft being in the condition set forth in schedule 1, part 1 and in the condition required by Schedule 2, except for any items set forth in Annex 2 in the Certificate of Acceptance and any other items agreed in writing. Clause 3.6 set out various conditions subsequent, which required Olympic to deliver to ACG certain documents within 10 days of the delivery date and receipt of the aircraft"s deregistration certificate from the Malaysian Aircraft Registry. These included at 3.6(d) a Certificate of Airworthiness.

Clause 4 and Schedule 2

10. Clause 4 dealt with delivery and the commencement of the lease. Clause 4.2(a) states:

'Delivery condition: Lessor shall deliver the Leased Property "as is, where is" and in the condition required in Schedule 2, except for any item set forth on Annex 2 to the Certificate of Acceptance and any other items agreed in writing by Lessor and Lessee'.

11. Schedule 2 contained detailed provisions relating to the condition of the aircraft. The most important of these are: (1) that the aircraft will be in a condition suitable for immediate operation in commercial service (paragraph 1(b)); (2) that the aircraft will be airworthy, conform to type design and be in a condition for safe operation with all equipment, components and systems operating in accordance with their intended use and within limits established by the manufacturer (paragraph 1(c)); (3) that the aircraft would have a valid export Certificate of Airworthiness (paragraph 1(d)): (4) that the aircraft would have undergone immediately prior to delivery a full C-check sufficient to clear the aircraft for 4,000 flight hours, 3,000 cycles and 15 months (paragraph 1(f)): (5) that all outstanding airworthiness directives and mandatory orders affecting the aircraft would have been accomplished (paragraph 1(g)); (6) that any damages exceeding the manufacturer"s SRM (structural repair manual) limits would have been permanently repaired (paragraph 1(s)); (7) that all structural damage within SRM limits would have been noted on a damage mapping chart (paragraph 1(t)); (8) that all life limited or hard time control parts would have not less than 4,000 flight hours, 3,000 cycles or 15 months remaining to their next scheduled removal; that all calendar limited parts would have at least 15 months remaining to their next scheduled removal or overhaul; and that all on-condition/condition monitored parts would be serviceable (paragraph 2); (9) that the fuselage would contain no dents, corrosion or abrasions in excess of the SRM limitations (paragraph 4(a)); (10) that the aircraft would be in compliance with the CPCP (paragraph 11(a)); and (11) that the aircraft documents would be in accordance with the EASA requirements (paragraph 12).
12. Clause 4.2(f) made Olympic"s obligation to lease the aircraft conditional on ACG"s delivering the aircraft in compliance with Schedule 2. Any discrepancies could be noted in the Certificate of Acceptance, in which case ACG would have 45 days in which to correct those discrepancies, failing which Olympic would be entitled to terminate the lease. Clause 4.5(c) provided that from delivery the aircraft would be at the sole risk of Olympic and that Olympic would bear all risk of loss, theft, damages or destruction to the aircraft.

Clause 5

13. Clause 5 required Olympic to pay rent of initially US$155,000 and maintenance reserves to ACG monthly in advance. The maintenance reserves were to be released by ACG on the occurrence of specified maintenance events in accordance with clause 7.2.

Clause 7

14. Clauses 7.6 (exclusions), 7.7 (waiver) and 7.9 (conclusive proof) are central to ACG"s case and are set out below.

Clause 8

15. Clause 8.11 related to Olympic"s obligations in relation to the maintenance and repair of the aircraft. In particular, Olympic was required to keep the aircraft airworthy in all respects and in good repair and condition (subclause (a)) and to maintain in good standing a Certificate of Airworthiness (subclause (i)).

Clause 12

16. Clause 12 dealt with Olympic"s obligation to redeliver the aircraft on the expiry or termination of the lease. Under clause 12.1, Olympic was required to redeliver the aircraft in the condition described in schedule 3, which was in very similar terms to Schedule 2. In the event that it failed to do so, it was required to rectify the non-compliance or indemnify ACG against the costs of doing so pursuant to clause 12.3.

Clause 13

17. Clause 13.1 set out numerous prescribed events of default, each of which was deemed to constitute a repudiation of the lease by Olympic. Clause 13.2 provided that, following an event of default, ACG would be entitled to accept Olympic"s repudiation of the lease, enforce performance of the lease, repossess the aircraft or require Olympic to redeliver the aircraft.

Clause 15

18. Clauses 15.1 and 15.2 respectively provided for English law and jurisdiction.

The Factual Background

19. Olympic"s evidence establishes an arguable factual case to the following effect.
20. Before the aircraft was delivered to Olympic in August 2008, it was on lease from ACG to Air Asia with a carrier based in Singapore. Olympic were able to carry out external inspections of the aircraft before the lease was signed in April, June, July and August 2008. The scope of these inspections was limited, however: the April 2008 inspection in particular was carried out at night between aircraft operations. Subsequent inspections took longer, but at no stage was Olympic able to open parts of the aircraft, inspect and/or test internal parts of the aircraft or run diagnostics save in relation to the engines. Olympic at one point asked ACG if they could inspect the airframe more closely, but ACG refused.
21. As is usually the case, Olympic relied heavily on the aircraft"s technical documents as accurately reflecting the maintenance status of the aircraft. In this case, it appears that the documents painted a falsely reassuring picture and recorded work which had not been carried out adequately, if at all. The aircraft was delivered to Olympic on 19th August 2008 in Singapore. It was put into commercial service as part of Olympic"s fleet on 23rd August 2008. Thereafter, the aircraft flew for the first 14 days before being taken out of service after the broken cables were discovered on its left spoiler. Olympic had actually reported to ACG in June 2008 that the spoiler cables were corroded, but by the delivery date they had been certified as having been put into proper condition, although this appears to be incorrect. While the spoiler cables were being repaired, numerous other serious defects were discovered, which led the Greek CAA to take the step of revoking the aircraft"s Certificate of Airworthiness on 11th September 2008, even though the aircraft was supposed to have just come out of a major overhaul that was to clear it for 4,000 flight hours and 15 months.
22. A Certificate of Airworthiness is a mandatory document required for international flight under Article 31 of the Chicago Convention 1944 and for all flight under Article 5 of Regulation EC No 216/2008. It is an internationally recognised document issued by the state of registration of the aircraft, certifying that it is safe and fit to fly. Without it, the aircraft cannot fly at all either domestically or internationally.
23. It is Olympic"s case, although this appears to be disputed by ACG, that many of the defects which led to the aircraft being taken out of service had actually been notified to ACG before the lease commenced and were certified prior to delivery as having been rectified, but evidently had not been. In October 2008, the aircraft was inspected at the invitation of Olympic by the manufacturer, Boeing, over a period of three days. Inspite of the fact that the aircraft was supposed to have just emerged from a C-check sufficient to fly for 15 months, Boeing recommended that the aircraft undergo another C-check, that is the second heaviest scheduled maintenance check, and a review of its compliance with applicable airworthiness directives.
24. Following lengthy discussions, the parties agreed that the inspection would be carried out by a third party maintenance organisation, Europe Aviation in France, beginning in January 2009. This revealed more problems with the aircraft and its technical documents. In particular, there were a number of airworthiness directives and CPCP corrosion prevention and control program tasks which had not been carried out either adequately or at all. After the aircraft eventually returned to Athens in July 2009 under a special permit to fly issued solely to enable it to return to base and not for public transport purposes, the CAA, after inspecting the aircraft and its records, required extensive further checks were carried out before the Certificate of Airworthiness could be revalidated. Its findings are set out in a letter from the Flight Standards Division, dated 17th August 2009, which stated as follows:

'On 11th September, 2008 our Service, examining the serious problems that were established during the initial operation of the Aircraft referred to in the subject, and granted that they were directly interwoven with the airworthiness of the said Aircraft, in implementation of Community Directive (EC) 2042/03 Annex IMA 705(a) 1 (re.v), the Airworthiness and Suitability Certificates were revoked until the required checks were concluded and the Aircraft was judged airworthy.

As the inspections by OAS were in progress there were multiple and serious technical problems established that did not justify that the Aircraft had undergone a heavy inspection (C CHECK). The main and most serious problem resulted when it was established that AD"s, CPCP Aging Tasks, routing and non routing tasks had been carried out insufficiently.

After the involvement of even "Boeing" decided was the carrying out of specific inspections and mainly the recheck of specific "AD"s/CPCP Tasks" in order to have a full picture of the general technical condition of the Aircraft at the repair centre "Europe Aviation".

Following the conclusion of the above inspection, the issue of the "CRS" and the performance of the test flight, a special "Permit to Fly" was issued, in order the Aircraft to return to its base.

By (re. a) requested from OAE was the recertification of the Aircraft, our Service implementing the procedures of Community Directive (EC) 2042/03 Annex 1 Subpart May 901(h) started the certification checks without the submission of an introductory report by the organisation.

During the checks and in particular during the check of the selected inspections that allegedly had been carried out by the previous air carrier "Air Asia" and mainly by the repair centre "ST Aerospace Engineering Ltd" the following were established:

A) Certified AD"s/CPCP Tasks that had been certified, it was established that either they have not been carried out or they have been carried out insufficiently.

B) Repairs to not have been carried out in accordance with the applicable procedures (EDC) 2042/03 Annex Part 21.

Due to the foregoing by (re. iv) our Service requested the recheck of additional "AD"s/CPCP Tasks", the carrying out of which had not been confirmed during the inspections at OAS and "EUROPE AVIATION".

By (re. v) we were informed by OAS that there were anew very serious findings in AD"s and CPCP Tasks that had been carried out at the "C CHECK" inspection, clearly showing the extremely problematic maintenance of the said Aircraft and the necessity then of detailed and full scale inspections.

Following the foregoing, in order our Service to get involved in the certification of the said Aircraft the following works must be carried out, certified by EASA 145 accredited maintenance organisation:

A. Recertification of all the AD"s and ALPs that apply to the Craft Engines, APU and the MSN 2507 systems of B737-300 Aircraft.

B. Recertification of all the CPCP/AGING Tasks that are checked on the basis of the approved maintenance program, and

C. Recheck of all the Tasks, which were carried out during the recent "C CHECK" and derive from the approved maintenance program.

NOTE: On the specific paragraph any relevant instruction/suggestion by Boeing will be taken into consideration by our Service.

Finally it is understood that upon the conclusion of the foregoing, and only then our Service shall get involved in the recertification of the SX-BLD Aircraft.'

25. It is Olympic"s unchallenged evidence that the necessary works would have cost more to perform than the aircraft was worth and these were, therefore, never carried out. The aircraft has since remained parked in Athens. ACG took the stance that the condition of the aircraft was Olympic"s problem.
26. In summary, on Olympic"s evidence, the aircraft was in such an unairworthy condition on delivery that it would cost more than the aircraft is worth to restore its airworthiness, with the consequence that they have only had 14 days" use of the aircraft under the five year lease, and that use was only possible because Olympic and the authorities were unaware of the aircraft"s seriously defective condition at that time. Indeed, if, as the evidence suggests, the aircraft is beyond economic repair, then it seems unlikely that it would ever be granted a Certificate of Airworthiness and hence it would ever be operated again.
27. On 24th September 2009, ACG issued proceedings against Olympic, claiming outstanding payment of rent and maintenance reserves under the lease and damages, but not the return of the aircraft. The following day, Olympic issued their own claim against ACG, seeking damages for breach of the lease, in particular the provisions relating to the delivery condition of the aircraft. These damages represent the cost of wet leasing replacement aircraft between September 2008 and October 2009 (around €32 million), less any sums which it would have had to pay to ACG had the lease been performed and will not now have to pay, plus further maintenance costs and related expenses. On the assumption that its Defence to ACG"s claim is valid so they do not owe ACG anything, the value of the counterclaim is around €5 million.
28. On 2nd October 2009, Olympic ceased trading and entered a creditors" special liquidation. The proceedings are being directed on behalf of Olympic by the liquidator of the company, Ethniki Kefaleou SA, a subsidiary of the National Bank of Greece.
29. On 26h February 2010, a CMC took place before David Steel J at which the parties" respective claims were formally consolidated. On the same day, ACG issued their applications for a summary judgment in relation to both claims and, in the alternative, security for costs.

The issues

30. The following issues arise for determination:

(1) Whether Olympic have a real prospect of establishing that they are entitled to make a claim founded on ACG"s failure to deliver the aircraft in the condition required under clause 4.2(a) and Schedule 2.

(2) If so, whether Olympic have a real prospect of establishing that their claim can be relied upon to defeat ACG"s claim for rent or whether there should be a stay of execution of any judgment in ACG"s favour.

(3) Whether there any other compelling reasons why the claim and/or counterclaim should not be disposed of at trial.

(4) Whether an order for security for costs is appropriate in the circumstances of the case.

Summary Judgment Principles

31. The applicable principles are not in dispute, in particular:

(1) "The criterion which a judge has to apply under CPR Part 24 is not one of probability, it is absence of reality": Three Rivers District Council v Bank of England No. 3 [2001] 2 AllER 153 per Hobhouse LJ at 158.

(2) "The proper disposal of an issue under Part 24 does not involve the judge conducting a mini trial": Swain v Hillman [2001] 1 AllER 91, per Woolf MR at 20.

32. Olympic also place reliance on what was said in Doncaster Pharmaceutical Co Ltd v Bolton Pharmaceutical Co Ltd [2006] EWCA Civ 661 per Mummery LJ at 18:

"The court should also hesitate about making a final decision without a trial where, even though there is no obvious conflict of fact at the time of the application, reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to the trial judge and so affect the outcome of the case."

(1) Whether Olympic have a real prospect of establishing that they are entitled to make a claim founded on ACG"s failure to deliver the aircraft in the condition required under clause 4.2(a) and Schedule 2.

33. It is ACG"s case that, however serious their breach of contract in failing to perform their primary obligation to deliver an airworthy aircraft in the condition required by clause 4.2(a) and Schedule 2, Olympic are precluded by their acceptance of the aircraft from maintaining any claim, whether for total failure of consideration or in damages in respect of such breach of contract. This is an extreme case which leads to unreasonable and uncommercial results. It means, for example, that ACG would have no liability to Olympic after acceptance of the aircraft, even if (i) the condition of the aircraft is such that it can never be used under the lease; (ii) there was no means by which this could have reasonably been discovered by Olympic on its pre-acceptance inspections; and (iii) the defective condition of the aircraft involved gross negligence on the part of ACG or those for whom it was responsible. Further, ACG"s case is that, if the aircraft can in fact be restored to an airworthy condition, then it is Olympic"s obligation to do so and redeliver the aircraft in that state to ACG and, moreover, to do so even if the cost of such restoration and repair exceeds the value of the aircraft. Whilst it is no doubt possible for the parties to conclude such a bargain, it would be a remarkable bargain for commercial parties to make and would require the clearest terms to relieve ACG of responsibility for breaching the contract in such a fundamental way.
34. Olympic rely, by analogy, on Tor Line AB -v- Alltrans Group of Canada (The "TFL Prosperity") [1984] 1 WLR 48, in which a vessel tendered under a charter party did not conform to the description in the contract and the owners relied on a widely drawn exclusion clause. Their argument was rejected by the House of Lords. Lord Roskill, with whom the other Lords agreed, said at page 53 that:

"Such a literal construction would mean that the owners would be under no liability if they never delivered the vessel at all for service under the charter or delivered a vessel with a totally different description from that stipulated in the preamble. My Lords I cannot think that this can be right."

35. Similarly in the present case, on ACG"s construction, they would be under no liability if they delivered an aircraft which was not capable of any service under the lease and was in a totally different condition to that stipulated and required under clause 4 and Schedule 2. ACG submit that there would be such a liability if they had been fraudulent and that, absent fraud, there was no good reason why the lessee rather than the lessor should not assume the risk of latent defects and any other defects which had been discovered pre-acceptance. However, the fact that that risk involves a breach of the lessor"s obligations is a good reason why it should not be transferred to the lessee. A fortiori, given that it may involve a breach which goes to the root of the contract and which deprives the lessee of substantially or indeed all the benefit of the contract and may, absent fraud, still involve negligence or gross negligence on ACG"s part. I turn then to consider the particular contractual clauses upon which ACG places reliance.

Clause 4.5(c)

36. Clause 4.5(c) provides that:

"On and from Delivery, the Leased Property will be in every respect at the sole risk of Lessee, which will bear all risk of loss, theft, damage or destruction to the Leased Property from any cause whatsoever."

ACG placed less reliance on this clause in its oral argument, but I agree with Olympic that this clause is concerned with the risk of loss of or damage to the aircraft occurring after delivery. Its purpose was not to make Olympic liable for the risk of a breach of contract by ACG or the consequences of such a breach. It does not place on Olympic the risk that ACG has not performed its obligations under Schedule 2 and, as such, it provides no assistance to ACG.

Clause 7.6

37. Clause 7.6 (Exclusion) provides as follows:

"THE AIRCRAFT IS ACCEPTED BY LESSEE "AS IS, WHERE IS" AND LESSEE AGREES AND ACKNOWLEDGES THAT, SAVE AS IS EXPRESSLY STATED IN THIS AGREEMENT, LESSOR WILL HAVE NO LIABILITY IN RELATION TO, AND LESSOR HAS NOT AND WILL NOT BE DEEMED TO HAVE MADE OR GIVEN, ANY CONDITIONS, WARRANTIES OR REPRESNTATIONS, EXPRESS OR IMPLIED, WITH RESPECT TO THE AIRCRAFT, INCLUDING:

(a) THE DESCRIPTION, AIRWORTHINESS, MERCHANTABILITY, FITNESS FOR ANY USE OR PURPOSE, VALUE, CONDITION, OR DESIGN, OF THE AIRCRAFT OR ANY PART; OR

(b) ANY OBLIGATION, LIABLIITY, RIGHT, CLAIM OR REMEDY IN TORT, WHETHER OR NOT ARISING FROM LESSOR"S NEGLIGENCE, ACTUAL OR IMPUTED (BUT EXCLUDING ANY SUCH OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN TORT WHICH ARISES FROM LESSOR"S GROSS NEGLIGENCE OR WILFUL MISCONDUCT); OR

(c) ANY OBLIGATION, LIABLIITY, RIGHT, CLAIM OR REMEDY FOR LOSS OF OR DAMAGE TO THE AIRCRAFT, FOR ANY LIABILITY OF LESSEE TO ANY THIRD PARTY, OR FOR ANY OTHER DIRECT, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES."

38. Olympic point out that, although they agreed to accept the aircraft "as is, where is", this must be read with clause 4.2(a), which required ACG to deliver the aircraft "as is, where is and in the condition required in Schedule 2". Clause 7.6 proceeds on the assumption of compliance with clause 4.2(a); it does not negate it. In any event, both the exclusion of liability and the negation of any conditions, warranties or representations are qualified by the words "save as is expressly stated in this agreement". The clause, therefore, does not purport to exclude liability for a breach of an express term of the lease such as clause 4.2(a). Nor does it negate the express condition whereby the aircraft must be delivered in the condition described in Schedule 2. This was accepted by ACG in oral argument.

Clause 7.7

39. Clause 7.7 (Lessee"s Waiver) is in the following terms:

"LESSEE HEREBY WAIVES, AS BETWEEN ITSELF AND LESSOR, ALL ITS RIGHTS IN RESPECT OF ANY CONDITION, WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, ON THE PART OF THE LESSOR AND ALL CLAIMS AGAINST LESSOR HOWSOEVER AND WHENEVER ARISING AT ANY TIME IN RESPECT OF OR OUT OF THE OPERATION OR PERFORMANCE OF THE AIRCRAFT OR THIS AGREEMENT EXCEPT AS IS OTHERWISE EXPRESSLY STATED IN THIS AGREEMENT."

40. The waiver of rights in this clause is again qualified by the words "except as is otherwise expressly stated in this agreement". Hence Olympic contend that they did not thereby waive their rights in respect of breaches by ACG of the express terms of the agreement. This was also accepted by ACG in oral argument. It follows that, as rightly accepted by ACG, neither clause 7.6 nor clause 7.7 excludes Olympic"s right to contend that there has been a breach of clause 4.2(a) and Schedule 2 in respect of the delivery condition of the aircraft.

Clause 7.8

41. This was the critical clause relied upon by ACG. It provides that:

"Conclusive Proof.

DELIVERY BY LESSEE TO LESSOR OF THE CERTIFICATE OF ACCEPTANCE WILL BE CONCLUSIVE PROOF AS BETWEEN LESSOR AND LESSEE THAT LESSEE HAS EXAMINED AND INVESTIGATED THE AIRCRAFT, THAT THE AIRCRAFT DOCUMENTS ARE SATISFACTORY TO LESSEE AND THAT LESSEE HAS IRREVOCABLY AND UNCONDITIONALLY ACCEPTED THE AIRCRAFT FOR LEASE HEREUNDER WITHOUT ANY RESERVATIONS WHATSOEVER (EXCEPT FOR ANY DISCREPANCIES WHICH MAY BE NOTED IN THE CERTIFICATE OF ACCEPTANCE)."

42. The lease therefore provides that the Certificate of Acceptance should constitute conclusive proof of three things:

(1) That the lessee had examined and investigated the aircraft. This was true, albeit such examination and investigation had not been and would not have been expected to be all embracing. Further, Olympic was entitled to assume that ACG was tendering the aircraft in compliance with Schedule 2.

(2) That the aircraft and its documents were satisfactory. That was also true. They were satisfactory to Olympic on the basis of its limited inspections and in so far as it has been able to form a view of the condition of the aircraft from the documents. But, again, it was entitled to assume that the aircraft was being tendered in compliance with Schedule 2 and the documents could be relied upon.

(3) That Olympic had irrevocably and unconditionally accepted the aircraft without any reservations except for the discrepancies noted in the certificate. Olympic submit that it neither needs nor seeks to contradict this fact.

43. ACG contend that Olympic"s agreement that the aircraft and its documents are satisfactory and its irrevocable and unconditional acceptance of the aircraft means that the aircraft and its documents have been so accepted for all purposes and that Olympic have contractually agreed that the aircraft and its documents are contractually compliant. They submit this is further born out by the terms of the Certificate of Acceptance itself, whereby Olympic confirmed that, at the time of delivery, "The lease property complied in all respects with the condition required at delivery under section 4.2 and Schedule 2 of the agreement, except for the items, if any, listed on the attached Annex 2." They submit that this means that Olympic are thereby precluded from contending that the lessor was in breach of its obligations to deliver the aircraft in compliance with the required condition in the lease.
44. Olympic point out that clause 4.5(b) provided that the delivery of the Certificate of Acceptance to ACG would constitute "deemed delivery of the aircraft" to Olympic. Olympic submit that the reason for the lease"s emphasis on Olympic"s unconditional and irrevocable acceptance of the aircraft is that delivery of the aircraft by ACG and acceptance by Olympic marked the commencement of the lease term, which clearly need to be ascertained for certainty. Against that background, clause 7.9 has the effect of preventing Olympic from arguing after signature of the certificate that the aircraft has not in fact been validly delivered or that its obligation to lease the aircraft had not been triggered. In that sense, Olympic did accept the aircraft irrevocably and unconditionally. However, clause 7.7 did not say, as it could have done, that the certificate would constitute conclusive proof that the aircraft complied with clause 4.2 (a) and Schedule 2. It does not, therefore, create any kind of contractual estoppel preventing Olympic from alleging and establishing a breach of clause 4.2(a) and Schedule 2.
45. Olympic further submit that the undisputed fact that Olympic accepted the aircraft does not in any way disable it from obtaining damages in respect of a breach of clause 4.2(a). There is an obvious analogy with a contract for the sale of goods, where a buyer who is not entitled to reject non-conforming goods may nevertheless claim damages as a result of the seller"s breach: see section 53(1) of the Sale of Goods Act 1979. Support for the applicability of the Sale of Goods Act analogy in the context of contractual acceptances is to be found in the decision of Hobhouse J in The Aegean Dophin [1992] 2 Lloyd"s LR 178 at page 186. Olympic therefore submit that in order to make good its claim Olympic does not need to disprove any of the matters which were deemed to have been conclusively determined by the signature on the Certificate of Acceptance. On the proper construction of clause 7.7, the certificate does not prevent Olympic from asserting a claim for damages or total failure of consideration in connection with ACG"s breaches of clause 4.2(a).
46. For the reasons given by Olympic, I accept that Olympic has at least a real prospect of succeeding in making out their case that the conclusive effect of the acceptance of the aircraft is limited to the right of rejection and does not extend to the right to claim damages, still less to claim total failure of consideration. Further, as already stated, it would be both surprising and uncommercial if ACG could rely on the certificate as a complete answer to any claim for breach of contract, no matter how serious its breaches of its fundamental obligations under clause 4.2(a), and very clear wording would be required to have this effect. I am, therefore, satisfied that Olympic have a real prospect of establishing that they are entitled to make a claim founded on ACG"s failure to deliver the aircraft in the condition required under clause 4 and Schedule 2.

(2) Whether Olympic have a real prospect of establishing that their claim can be relied upon to defeat ACG"s claim for rent and whether there should be a stay of execution of any judgment in ACG"s favour.

47. As to whether the claim can be put as one for total failure of consideration, I was referred to Chitty on Contracts, volume 1, paragraph 29-054, where it is stated as follows:

'Failure of consideration.

General principles. Where money has been paid under a transaction that is or becomes ineffective the payer may recover the value of the money provided that the consideration for the payment has totally failed. Although the principle is not confined to contracts most of the cases are concerned with failed contracts. In that context failure of consideration occurs when there has been a complete failure of the performance for which the payer had bargained. Thus, the failure is judged from the payer"s point of view and:

"… when one is considering the law of failure of consideration of the quasi contractual right to recover money on that ground, it is generally speaking, not the promise which is referred to as the consideration, but the performance of the promise."

The failure has to be total because the consideration is "whole and indivisible" and the courts will not divide or apportion it unless the parties have done so. This is partly because one cannot assume that all parts of the payee"s performance are equally valuable and the contract price is earned incrementally, but historically it is also because of the non-recognition in the English law of the principle of unjust enrichment as only performance of the actual thing promised as determined by the contract is fatal to recovery under this heading, as Lord Goff said in Stocznia Gdanska SA v Latvian Shipping Co [2002] EWCA Civ 889:

"The test is not whether the promisee has received his specific benefit but rather whether the promisor has performed any part of the contractual duties in respect of which payment is due."

48. Then, at 29-057:

"Artificiality of distinctions. The role of the contractual specification means that it is not true to say that there can be a total failure of consideration only when the payer received no benefit at all in return for the payment. The concept of total failure of consideration can ignore real benefits received by the payer if they are not the benefits bargained for and despite significant detrimental reliance by the payee."

49. Olympic emphasise that what needs to be identified is the consideration which was bargained for in the "contractual specification". In the present case, Olympic submit that the consideration bargained for was the performance of ACG"s obligations in respect of the delivery condition of the aircraft and its documents as set out in clause 4.2 (c) and Schedule 2, and in particular to deliver the aircraft in an airworthy condition and in a condition in which it was capable of operation in commercial service. That was ACG"s fundamental obligation under the lease.
50. I would not accept that a mere failure to comply with these obligations means that there has been a total failure of consideration, but this is a case of extreme facts. On Olympic"s case, ACG purported to deliver not merely an aircraft that was in unairworthy condition and not capable of operation in commercial service at the time of delivery, but one which was incapable of being put into an airworthy condition or rendered capable of operation in commercial service without repairs which would exceed the value of the aircraft. In my judgment, that is such a fundamental failure to provide what was bargained for that Olympic does have a real prospect of making out a case for total failure of consideration. ACG emphasise the two weeks" use of the aircraft at the outset of the lease, but Olympic can say that this was not the benefit bargained for. The benefit bargained for was use of an aircraft that was in fact airworthy and in fact capable of operation in commercial service. This aircraft was not in such a condition, albeit this was not appreciated for the first two weeks of the lease.
51. I, therefore, accept that Olympic have a sufficiently arguable case of total failure of consideration. In such circumstances, it is not necessary to rule on their alternative arguments under this head, which were (1) any performance was de minimis; and/or (2) the contract is divisible, in that rent is payable on a monthly basis; and/or (3) it is arguable at law that recovery is now recognised for a partial failure of consideration.
52. If that is wrong and Olympic are confined to a claim for damages, it is a claim which goes to the root of ACG"s entitlement to claim rent. The aircraft was leased by Olympic so it could be used by them. Olympic was not interested in mere possession of the aircraft; its interest was in its commercial use. That is the obvious purpose of the lease. It is the foundation of the obligation to pay rent for the aircraft, as indeed is born out by the maintenance reserves provisions. It is difficult to conceive of a clearer case of the defence of equitable set-off which impeaches the right to the legal demand. Not only that, but there is a direct correlation between ACG"s claim for rent and the owner"s counterclaim. If and to the extent that Olympic has to pay rent, its claim for damages would automatically be increased by an equivalent amount. If ever there was a case which, on Olympic"s evidence, in justice a claim for rent should be capable of being resisted, then this is that case.
53. ACG rely on the terms of clause 5.14, the no set-off provision, which is in the following terms:

"Lessee"s obligations under this Agreement are absolute and unconditional irrespective of any contingency whatever including (but not limited to):

(a) any right of offset, counterclaim, recoupment, reduction, defence or other right which either party to this Agreement may have against the other;

(b) any unavailability of the Aircraft for any reason, including a requisition of the Aircraft or any prohibition or interruption of, interference with or other restriction against Lessee"s use, operation or possession of the Aircraft;

(c) any lack or invalidity of title or any other defect in title, airworthiness, merchantability, fitness for any purpose, condition, design or operation of any kind or nature of the Aircraft for any particular use or trade, or for registration or documentation under the laws of any relevant jurisdiction, or any Total Loss in respect of or any damage to the Aircraft;

(d) any insolvency, bankruptcy, reorganisation, arrangement, readjustment of debt, dissolution, liquidation or similar proceedings by or against Lessor or Lessee;

(e) any invalidity, unenforceability or lack of due authorisation of, or other defect in, this Agreement; or

(f) any other cause which, but for this provision, would or might otherwise have the effect of terminating or in any way affecting any obligation of Lessee under this Agreement;

Provided always, however, that this Section 5.14 shall be without prejudice to Lessee"s right to claim damages and other relief from the Courts in the event of any breach by Lessor of its obligations under this Agreement, or in the event that, as a result of any lack or invalidity of title to the Aircraft on the part of Lessor, Lessee is deprived of its possession of the Aircraft."

They submitted that this excluded claims both for total failure of consideration and in respect of counterclaims for damages.

54. In relation to total failure of consideration, ACG rely in particular on the reference to "recoupment" under clause 5.14. In my judgment, if a case of total failure of consideration is made out, there is at least a real prospect of showing that there was no obligation at all to pay rent under what would then be an ineffective agreement.
55. As to the right to off-set damages, even if, notwithstanding the seriousness of the alleged breach in this case, clause 5.14 nevertheless means that rent is payable for the duration of the lease of this, in my judgment, this would be one of those exceptional cases in which, as a matter of discretion, a stay of execution should be ordered notwithstanding the existence of a no set-off clause. Aside from considerations of justice, which I set out above, in this connection it is also relevant that ACG has already had the benefit of a commitment fee of US$465,000 and a deposit of US$300,000 and that Olympic is in liquidation. As such, an enforceable judgment is unlikely to lead to an immediate money recovery. Alternatively, if it did, there is evidence that payment of any such sums would be likely to make it very difficult for Olympic to pursue their claims. I, therefore, conclude that Olympic have a real prospect of establishing that their claim can be relied upon to defeat ACG"s claim for rent. Even if they do not, in my judgment, there should be a stay of execution on any judgment in ACG"s favour.

(3) Whether there are any other compelling reasons why the claim and/or counterclaim should not be disposed of at trial.

56. Olympic contend that there are such reasons because of the lack of any explanation by ACG as to why the aircraft was not airworthy and the importance of disclosure on this issue. Olympic also rely upon the public interest in the proper investigation of what went wrong in this case. These are difficult arguments, but, in the light of my conclusions above, it is not necessary to rule upon them.

(4) Whether it is appropriate to make an order for security for costs.

57. I accept that, in the light of Olympic"s liquidation, there is sufficient evidence that Olympic would be unable to pay ACG"s costs of the counterclaim should ACG succeed. As such, there is jurisdiction to order security for costs. But I am not satisfied that this is an appropriate case to exercise my discretion so to order. The consequence of my rulings is that Olympic is entitled to rely on its counterclaim as a defence to the claims made. This is a case where the claim and counterclaim are inextricably linked and there are no clearly identified issues raised by the counterclaim which go beyond or will not be raised in relation to the defence to the claim. As such, I do not consider this is an appropriate case for security to be ordered: see the notes to CPR 25.12.4.
58. Olympic further submit that no security for costs should be ordered because the effect would be to stifle the counterclaim, but this has not been made out on the evidence presently before the Court.

Conclusion

59. For the reasons set out above, ACG"s applications dated 26th February 2010 are dismissed.
For further legal argument, please see separate transcript of proceedings after judgment
60. The Defendants ask for an order for costs and also for summary assessment of those costs. The Claimants do not oppose the principle that costs should be ordered against them in light of the fact their applications have been dismissed, but they submit that, because the Defendant is in liquidation, either assessment should be put off until trial or that costs should not be ordered to be paid until the end of litigation because, if they ultimately succeed in litigation, they will be seeking to recover against the Defendant, but the Defendant will be in liquidation and that will not be straightforward.
61. It seems to me that these costs are discrete to this particular application. It is right that costs should be dealt with now in relation to this application and whatever may happen at the end of this case will not affect the costs order that I make now. Therefore, it is right that they should be summarily assessed and payable in the ordinary way.
62. As to the amount claimed, the amount is £60,000 plus VAT of £5,000. There is an issue as to whether VAT is or is not payable, but I shall leave that to one side for the purpose of assessment. If the Defendants can satisfy the Claimants that VAT is payable, then it should be added to the costs bill in relation to disbursements.
63. So far as the fees themselves are concerned, the Claimants make a number of points. They say that the proportion of partner hours is on the high side; they say the rate at £475 per hour for a partner is also on the high side; that the number of 64 hours spent is high and it has not been clearly broken down; that Counsels" fees are also high, particularly relative to the Claimants" own Counsels" fees; and they point out that it is the Claimants who have had the main burden of preparing the application since it was their application.
64. It seems to me there is force in some of those points, but the context is an application that was very important as far as the Defendants are concerned. They had to fight off a claim for summary judgment in a significant sum of money that would, had they been unsuccessful, have had important consequences in relation to their ability to pursue their claims. It was reasonable for them to bring in Senior Counsel to assist Junior Counsel and it was right to take this application seriously. Therefore, although there is force in some of the Claimant"s points, I do not think this is a case in which the bill looked at overall can be said to be extravagant or totally out of proportion to the nature of the application. On the other hand, on any detailed assessment, no doubt these costs would be taxed down in the ordinary way. Taking into account the various points which have been made, it seems to me, in the exercise of my discretion, the appropriate sum in which to summarily assess these costs, excluding VAT, is £44,000 and I so order.
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