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
		27 July 2016

Mr Justice Leggatt :

1. This judgment gives the reasons for my decisions, after considering the written submissions and evidence lodged by the parties, on issues consequential to the judgment dated 30 June 2016.

Quantum of damages

2. In that judgment I held that Novus is entitled to damages for management fees lost as a result of Alubaf's repudiatory breach of contract (discounted by 15% for the chance that such fees would not have been earned) plus certain wasted expenses. Some of the management fees would have become payable on dates which still lie in the future. These comprise:

i) An annual management fee for each of the years 2017 to 2022; and

ii) A fee payable on disposal of the aircraft in 2022.

3. The amounts of the future annual management fees (discounted by 15%) have been agreed as follows:

1 July 2017	US$363,589
1 July 2018	US$336,214
1 July 2019	US$310,840
1 July 2020	US$287,318
1 July 2021	US$265,498
1 July 2022	US$245,279

4. The amount of the disposal fee which on the basis of my findings would have been payable on 1 July 2022 (again discounted by 15%) is US$624,750.
5. The one outstanding point on quantum, which the parties have been unable to agree, is the discount rate to be applied to calculate the present value of these sums.

Discount rate

6. Novus has proposed a discount rate of 1.1% per annum, based on the current 6 year US dollar swap rate. Alternatively and at most, Novus has invited the court to apply a rate of 2.5%, which is the rate currently set by statute for personal injury cases (although it has been argued that this rate is too high in current economic conditions^[1]).
7. Alubaf has proposed a discount rate of 11.8%. This is supported by a letter from PwC dated 14 July 2016. As explained in the letter, PwC's figure is intended to encapsulate two elements: (i) the time value of money; and (ii) the "risk or uncertainty relating to the generation of future cash flows and the opportunity cost of investing in a business." Combining these elements, PwC has sought to estimate the cost of capital that a company such as Novus would calculate when considering an investment in a business based in Bahrain to manage and administer the lease of the aircraft.
8. Following this approach, PwC has first estimated a "risk free" rate for Bahrain of 5.6%. This has been arrived at by taking the current yield on a 20 year US government bond (2.2%) and adding to it a "country risk premium" of 3.3% to reflect the risk of sovereign default by the government of Bahrain and "the risk associated with the political and economic environment". To this (misnamed) "risk free" rate, a substantial further premium has then been added by PwC to reflect the additional expected return which an investor in an asset management business would be likely to require.
9. I consider PwC's approach to be fundamentally flawed. Novus was not investing in a business that was being established in Bahrain to manage the aircraft. It was itself the management company which was agreeing to manage the aircraft on behalf of Alubaf. The exercise undertaken by PwC of attempting to estimate the return that Novus would expect from investing in such a business therefore bears no relation to the facts of the case.
10. It is true that under the terms of the management agreement between Novus and Alubaf the management fees were to be paid to Novus by the "Lease SPC", which was defined as "an entity incorporated in a tax efficient jurisdiction owned by the Bank or one of its affiliates". The "Lease SPC" was not itself a party to the management agreement, although the agreement was stated (in clause 11) to be binding on the Lease SPC. There might have been room for legal arguments about whether the payment obligation expressed in the management agreement was enforceable against the Lease SPC and whether Alubaf would be liable in damages in the event of a default in payment of the management fees. If any such points were to be taken, however, the time to take them was at the trial. As it was, no argument was advanced by Alubaf that it would or might not have been liable to pay management fees which fell due under the terms of the management agreement. The sole basis on which Alubaf argued that, in calculating damages, fees payable in the future should be discounted to net present values was in order to reflect the time value of money (see Judgment, para 128).
11. I do nevertheless think it right to take into account the identity of the party from whom Novus is entitled to receive immediate payment pursuant to the court's judgment of sums which would otherwise have become payable over the six year period between now and 2022, and to make an allowance for the credit risk that future payment would have involved. Thus, in my view, an appropriate way in principle to arrive at a suitable discount rate would be to ascertain or estimate the yield on a bond issued by Alubaf denominated in US dollars which will mature in, say, five years' time. That yield would include a credit spread over and above the "risk free" rate represented by the interest rate on an equivalent US government bond.
12. I can see no justification for PwC's approach of taking as the starting point in estimating the "risk free" rate the yield on a 20 year US government bond (currently around 2.2%). That is because the return that an investor will demand for a right to receive repayment in 20 years' time will almost inevitably be greater than the yield on an investment of six years' duration or less. A suitable base rate, in my view, would be the yield on a 5 year US government bond, which is currently around 1%, or the similar US dollar swap rate proposed by Novus.
13. There is no evidence of the interest rates which Alubaf pays on US dollar liabilities with terms of between one and six years nor any other direct evidence of Alubaf's credit rating from which an appropriate credit spread can be derived. I see no reason to treat PwC's "country risk premium" of 3.3% as a suitable spread, as I see nothing in the very unclear explanation given by PwC of what precisely this premium is supposed to reflect to suggest that it reflects the default risk on securities issued by Alubaf or a similar private investment bank established in Bahrain. Such evidence as there was at trial about Alubaf's financial position indicated that at the time of the intended investment in 2013 the bank was very well capitalised and had a history of profitability. There was no suggestion that this has since changed. In the absence of any more specific evidence, I think it appropriate to use a spread of 1-2% above the "risk free" or base rate, as is typically used in this court when assessing a commercial rate of interest.
14. Other things being equal, there also seems to me to be equity in using the same interest rate to determine both the value of money payable early and of money paid late by Alubaf. In the circumstances I have concluded that a fair discount rate to apply in this case is 2.5%.

Interest rate

15. I consider that in current economic conditions the rate of 2.5% which both parties have indicated willingness to accept is an appropriate commercial rate of interest to award on sums denominated in US dollars.
16. As the underlying purpose of interest payable on a judgment debt is to compensate the judgment creditor for being kept out of money which it is entitled to be paid, it is appropriate to make an order under section 44A of the Administration of Justice Act 1970 that this interest rate should apply to the judgment debt as well as before judgment: see Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908; [2015] QB 499, paras 128-138.

Costs

17. It is plain that Novus has been the successful party in this case. Although it has not succeeded on every issue or recovered the full amount claimed, I do not consider that any of the issues on which Novus did not succeed was of sufficient significance to justify departure from the general rule that the unsuccessful party will be ordered to pay the costs of the successful party. Nor do I consider that the criticisms made by Alubaf of the late disclosure of certain documents and the way in which the trial bundle was prepared demonstrate unreasonable conduct of the kind which merits a sanction in costs. Accordingly, before any account is taken of the Part 36 offer made by Novus which I will come to next, I think it right to order Alubaf to pay Novus' costs of the action.

The claimant's Part 36 offer

18. On 30 April 2014 Novus (through its solicitors) made a Part 36 offer to Alubaf as follows:

"That your client pay our client an amount of £3,775,272. This amount is a significant 25% discount on our client's claim."

The letter went on to make it clear that the offer included interest.

19. The version of Part 36 applicable to this claim is that issued in October 2013. The key provision for present purposes is CPR 36x.14, which states:

"(1) … this rule applies where upon judgment being entered –

…

(b) judgment against the defendant is at least as advantageous to the claimant as the proposals contained in a claimant's Part 36 offer.

(1A) For the purposes of paragraph (1), in relation to any money claim or money element of a claim, "more advantageous" means better in money terms by any amount, however small, and "at least as advantageous" shall be construed accordingly.

…

(3) … where rule 36.14(1)(b) applies, the court will, unless it considers it unjust to do so, order that the claimant is entitled to –

(a) interest on the whole or part of any sum of money (excluding interest) awarded at a rate not exceeding 10% above base rate for some or all of the period starting with the date on which the relevant period expired;

(b) costs on the indemnity basis from the date on which the relevant period expired;

(c) interest on those costs at a rate not exceeding 10% above base rate; and

(d) an additional amount, which shall not exceed £75,000, calculated by applying the prescribed percentage set out below to … the sum awarded to the claimant by the court in respect of costs …

(4) In considering whether it would be unjust to make the orders referred to in paragraphs (2) and (3) above, the court will take into account all the circumstances of the case including –

(a) the terms of any Part 36 offer;

(b) the stage in the proceedings when any Part 36 offer was made, including in particular how long before the trial started the offer was made;

(c) the information available to the parties at the time when the Part 36 offer was made; and

(d) the conduct of the parties with regard to the giving or refusing to give information for the purposes of enabling the offer to be made or evaluated."

20. Applying my decisions on the appropriate discount rate and rate of interest, the amount for which judgment is today being entered in favour of Novus is US$5,430,924 (including interest of US$160,438). At the current exchange rate this is equivalent to a sterling figure of £4,117,114. Novus submits that it has accordingly obtained a judgment which is more advantageous than its Part 36 offer and that it should in these circumstances be awarded interest at the rate of 10% above base rate, costs on the indemnity basis and an additional payment of £75,000 pursuant to CPR 36x.14(3).
21. Of the three arguments made by Alubaf in response to this application, I see no merit in its submission that Novus has failed to beat the Part 36 offer because the offer was for Alubaf to pay 75% of the amount claimed in damages and 75% of that amount is US$6,089,148. On its plain wording the Part 36 offer was an offer to accept a specified amount of money. The statement that "this amount is a significant 25% discount on our client's claim" was obviously only intended as an advertisement for the offer and an explanation of how the amount of the offer had been arrived at.
22. There is more substance at least at first sight in Alubaf's second submission that the judgment obtained by Novus is not in fact as advantageous to Novus as the proposal made in its Part 36 offer. The basis for this submission is that the currency in which Novus conducts its business and suffered loss is US dollars, and that the value in US dollars of the offer when it was made was US$6,342,457, substantially more than the amount of the judgment that Novus has obtained. This argument assumes, however, that the relevant time at which to make the comparison required by CPR 36.14 is the time when the offer was made (or perhaps the end of "the relevant period", as defined in CPR 36x.3(1)(c) and now 36.3(1)(g)). That assumption cannot be supported. It is clear from the terms of the rule that the time at which the comparison in money terms between the judgment and the Part 36 offer is to be made is "upon judgment being entered". I respectfully agree with the decision of David Richards J in Barnett v Creggy [2015] EWHC 1316 (Ch) at paras 26-30 that this means the date when the order containing the court's judgment is made.
23. This conclusion is also logical because, as Novus points out, its Part 36 offer was never withdrawn and remained open for acceptance at any time (subject to the requirement to obtain the court's permission after the trial had begun). Thus, Alubaf could in principle have accepted the offer at any stage, if it came to the view that the offer had become sufficiently attractive – for example, because of the interest which would by then have accrued on the amount claimed or because of movements in exchange rates, or for any other reason.
24. It does not follow that comparison of the amount of money recovered by Novus with the value of its Part 36 offer at the time when the offer was made is irrelevant. Its relevance is in considering whether it would be unjust to make orders for interest at an enhanced rate and indemnity costs or to do so for the full period. In making that assessment, the court is required by CPR 36x.14(5) to take into account all the circumstances of the case; and it is, in my view, a highly material circumstance that the only reason why Novus has beaten its Part 36 offer is not that it has recovered more than 75% of its claim but that sterling has recently fallen against the dollar.
25. At the time when the Part 36 offer was made the sterling/dollar exchange rate stood at around £1=$1.68. Today it is around £1=$1.31. Ignoring the complicating factor that a judgment obtained at an earlier date would have included less interest, it was only when the value of sterling fell to around £1=$1.43 that the judgment sum of US$5,430,923 became as advantageous to Novus in money terms as the amount of its Part 36 offer. That did not happen until February of this year. Thereafter the exchange rate fluctuated either side of that level. At the start of the trial the exchange rate was around £1=$1.46. It was only after the UK's referendum on 23 June 2016 that sterling fell sharply thus significantly reducing the dollar value of the Part 36 offer. If judgment had been entered at any time between the start of the trial on 26 April and 23 June 2016, Novus would not have beaten its Part 36 offer and orders for interest at an enhanced rate and indemnity costs could not have been made. It is only through the happenstance that the judgment was not handed down until 30 June 2016 that the possibility of making such orders exists.
26. I consider that it would in these circumstances be unjust to make orders under CPR 36x.14(3) for any part of the period between the date on which "the relevant period" expired and today's date. The reality is that if at almost any time between the date when the offer was made and the end of the trial Alubaf had accepted the offer, the sum received by Novus would have been worth more than the judgment which it has ultimately obtained (even ignoring the time value of money). It would in these circumstances be adventitious and inconsistent with the principle of risk allocation which underlies Part 36 to penalise Alubaf for not accepting the offer.

Assessment of costs

27. It follows that the costs payable to Novus should be assessed on the standard basis, if not agreed. Novus has prepared a schedule of its costs of the action which amount to £511,798. Alubaf accepts that an order should in principle be made for a payment on account of costs and I consider that an appropriate amount to order by way of such an interim payment is £250,000.

Permission to appeal

28. Alubaf has applied for permission to appeal on four grounds. I have refused the application for the following brief reasons:

i) I reached a clear conclusion about the meaning of the commitment letter and Alubaf has not developed any argument which suggests at this stage that there is a real prospect of establishing that this conclusion is wrong.

ii) The (unpleaded) contention that any breach of contract by Alubaf has not been the effective cause of any loss is also dependent, as it seems to me, on Alubaf's case on the interpretation of the commitment letter.

iii) The contention that Novus believed that the approval of Alubaf's board was still required and therefore could not have believed that Alubaf intended the commitment letter to be a contractually binding document is contrary to the findings of fact made at paragraphs 58 and 86 of the judgment dated 30 June 2016, and on present information I see no real prospect of these findings being disturbed.

iv) Courts frequently have to make estimates of future values and chances in order to quantify damages and there was nothing unusually difficult or problematic about the exercise performed in this case.

Stay of execution

29. Finally, Alubaf has applied for a stay of execution of the judgment pending the disposal of its intended appeal. The stay is sought on the ground that there is said to be a significant risk that Alubaf would not be able to recover the money from Novus if the judgment debt is paid and the appeal subsequently succeeds.
30. The principles to be applied when deciding whether to grant a stay of execution pending an appeal are conveniently summarised in Otkritie International Investment Ltd v Urumov [2014] EWHC 755 (Comm), para 22. The normal rule is that a successful claimant is not to be prevented from enforcing its judgment. But the court has a discretion to grant a stay of execution and will do so where solid grounds are shown and it is thought just in all the circumstances. In exercising this discretion, it is necessary to weigh the risk of injustice to either side if a stay is or is not granted.
31. Novus is incorporated in the Bahamas. This is said to be principally for tax reasons, as its business has no commercial connection with the Bahamas. Although the impression was given in Mr Hani Kuzbari's witness statement for the trial that Novus is the only company through which the aviation finance and leasing business founded by his father is conducted, this turns out not to be the case. The position is more complicated. In a witness statement dated 20 July 2016 in response to Alubaf's application for a stay of execution, Mr Kuzbari has explained that Novus is a wholly owned subsidiary of Novus Aviation Capital LLC ("Novus Capital"), a company registered in Dubai which is itself a wholly owned subsidiary of Novus Aviation Capital Holdings Limited, a company incorporated in the Cayman Islands. Novus Capital has a number of subsidiaries, including Novus. The group structure is said by Mr Kuzbari to reflect "the international nature of Novus' business and the tax efficient structures which underlie most if not all of the corporate transactions with which Novus deals."
32. There is no legal requirement to file accounts in the Bahamas and there are no separate audited accounts for Novus. Its financial statements are included in consolidated financial statements of the group which are audited by Deloitte and Touche (ME) (Dubai, United Arab Emirates). Mr Kuzbari has provided single page balance sheets for Novus as at 30 June 2016 and for each of the years ended 31 December 2012 to 2015, though he has not has provided any profit and loss accounts for the company. The latest (unaudited) balance sheet shows net assets of US$21.4m (compared to US$16.2m as at 31 December 2015 and US$5m as at 31 December 2014). The main assets shown are investments valued at US$10.5m (which are said to be equity investments in various SPVs which own aircraft) and inter-company debts of US$7.7m owed to Novus by other companies in the group (though no details are given). There are also cash and bank balances of US$2.7m and receivables of US$1.1m but there is no information about where these are located.
33. I conclude from the financial information provided that attempting to enforce a court order for repayment of money paid to Novus would be extremely difficult and that, because of the way in which the business has deliberately been structured, repayment would in practice be likely to depend on the voluntary choice of those who control Novus. While it may well be true that, as Mr Kuzbari asserts, the reputational consequences for the Novus group of defaulting on an English judgment would be "cataclysmic", I have no sure way of evaluating that assertion and its seems to me an insecure basis for Alubaf to rely upon.
34. On the other hand, in circumstances where I have refused permission to appeal, I think it would be wrong to put Alubaf in a position where it stands to gain from pursuing an appeal by keeping hold of the money owed to Novus for longer. It is also relevant that enforcing the judgment against Alubaf would not obviously be straightforward.
35. In the circumstances of this case I consider that a just balance will be struck by granting a stay of execution on condition that Alubaf pays the full amount of the judgment debt (together with the sum payable on account of costs) into an escrow account where it will be immediately available to Novus if the Court of Appeal refuses Alubaf's application for permission to appeal or grants permission but ultimately dismisses the appeal. I invite Alubaf to put forward a proposal for the precise mechanics of this arrangement, with liberty to the parties to apply if the need arises. I will direct that Alubaf's costs of its application for a stay are to be treated as costs of the appeal.

Note 1    See eg McGregor on Damages (19th Edn, 2014), paras 38-122 – 38-125.     [Back]