Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2010] CSOH 157
CA143/10	OPINION OF LORD HODGE in the cause WILMINGTON TRUST COMPANY and ORIX AVIATION SYSTEMS LIMITED Pursuers; against ROLLS ROYCE PLC and IAE INTERNATIONAL AERO ENGINES AG Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuer: Lake, Q.C., Watt; Maclay Murray & Spens LLP

Defender: Lindsay; Biggart Baillie LLP

25 November 2010

[1] The pursuers are respectively the legal and beneficial owners of certain Airbus A320-200 aircraft which they leased to Companía Mexicana de Aviación SA de CV ("Mexicana"). The aircraft comprise airframes and aero engines. The first pursuers leased two Airbus aircraft to Mexicana under leases which were extended to 31 March 2013. Mexicana got into financial difficulties and were unable to pay sums due under the leases; the first pursuers terminated the leases on 5 August 2010. On 7 September 2010 an administrator was appointed to Mexicana to allow it to restructure its debts.

[2] The pursuers aver that Mexicana had contracted with the second defenders ("IAE") for the repair and maintenance of the aero engines and IAE had subcontracted the work to the first defenders ("Rolls Royce"). On IAE's instructions, two aero engines were removed from the air frames, which remain in Mexico, and were shipped to East Kilbride where Rolls Royce repaired them. Rolls Royce has completed the work on the engines and has been paid therefor by IAE. Rolls Royce retains the engines in secure premises in East Kilbride on the instructions of IAE, who has asserted a lien over them in security for payment by Mexicana of the sums due to it for their repair. Each of the aero engines has a value of about $4 million.

[3] This action, which was raised against Rolls Royce only, was signetted on 27 October 2010. In a motion before calling on 3 November 2010 the pursuers sought an interim order under section 47 of the Court of Session Act 1988 ordering Rolls Royce to permit the first pursuers to uplift the two aero engines and related technical records. Counsel appeared on behalf of both IAE and Rolls Royce and tendered draft defences to the action and certain documents in support of their defence.

[4] Having heard counsel in a hearing which took up most of a court day, I refused the motion for the interim order in hoc statu. On 16 November 2010 the pursuers sought leave to reclaim my decision. They were not able to frame grounds of appeal until they received a written opinion but sought to renew their motion before the Inner House and intended to seek urgent disposal of the case. It seemed to me that it might be more expedient for the pursuers to renew their motion on the commercial roll once the defenders had had an opportunity to state their defence fully. But, having regard to the value of the property which is the subject matter of the action and the fact that the airframes were not capable of use without the engines, I granted leave to reclaim.

The contractual arrangements

(i) The Lease between the pursuers and Mexicana

[5] The leases between the first pursuers and Mexicana were governed by the laws of the State of New York, U.S.A. The leases provided that Mexicana was to pay the lessors regular sums as maintenance reserves to pay for the maintenance of, among other things, the aero engines. The leases named Rolls Royce as one of the approved maintenance engineers in respect of the aero engines. They contained the following provisions which were intended to restrict the right of Mexicana to allow liens to be asserted over the subjects of the leases. Clause 1.1 provided:

" 'Permitted Lien' means in respect of the Aircraft or any Engine:-

(a) the Mortgage and any other Encumbrance arising from the Head Lessor's, the Beneficiary's or the Lessor's own acts or defaults;

(b) any Encumbrance for Taxes either not yet assessed or, if assessed, not yet due and payable or being contested in good faith by appropriate proceedings (and for the payment of which adequate reserves have been set aside) so long as any such proceedings or the continued existence of such Encumbrance do not, in the Lessor's reasonable opinion, involve any likelihood of the sale, forfeiture or loss of, or of any interest in, the Aircraft or any Engine or Part;

(c) airport hangar keepers', mechanics', material men's, carriers', employees' or other similar Encumbrances arising in the ordinary course of business by statute or by operation of law in respect of obligations which are not overdue or which are being contested in good faith by appropriate proceedings (and for payment of which adequate reserves have been set aside) so long as any such proceedings or the continued existence of such Encumbrance do not, in the Lessor's reasonable opinion, involve any likelihood of the sale, forfeiture or loss of, or of any interest in, the Aircraft or any Engine;"

[6] Clause 11.3 of the leases provided:

"The Lessee further undertakes with the Lessor that it will:

(a) Disposal and Encumbrance of the Aircraft

not attempt or hold itself out as having any power to sell, charge, lease or otherwise encumber or dispose of the Aircraft (save as provided in Clause 12 (Sub-Leasing)), nor create, incur or suffer to exist any Encumbrance over the Aircraft (other than Permitted Liens which in the case of Permitted Liens of the type referred to in paragraphs (b) and (c) of the definition thereof set forth in Clause 1 which do not relate to items in respect of which maintenance reserves are applicable pursuant to Clause 13.4, do not, in aggregate, exceed at any particular time $1,000,000);

(b) Prevent of Arrest

not do, and will use its best endeavours to prevent, any act which could reasonably be expected to result in the Aircraft being arrested, confiscated, seized, taken in execution, impounded, forfeited, detained in exercise or purported exercise of any possessory lien or other claim or otherwise taken from the possession of the Lessee and, if any such arrest, confiscation, seizure, taking, impounding, forfeiture or detention occurs, the Lessee will give the Lessor immediate notice thereof and will procure the prompt release of the Aircraft; ..."

(ii) the Maintenance Agreement between Mexicana and IAE

[7] The defenders produced a redacted contract between Mexicana and IAE which was called a "Renewed Fleet Hour Agreement". The contract was governed by the laws of the State of Connecticut, U.S.A.

[8] The contract obliged IAE to maintain engineering support services for Mexicana's aero engines in conjunction with approved maintenance centres and provided that IAE would designate a "program manager" to schedule the refurbishment of the engines and manage the schedule for the removal of the engines for maintenance at designated maintenance centres.

(iii) the Repair/Testing Agreement between IAE and Rolls Royce

[9] The defenders also produced a redacted contract between Rolls Royce and IAE, which was governed by the laws of New York, U.S.A. The contract required Rolls Royce to provide services to IAE in accordance with "Workscopes" which IAE was to prepare. The contract provided in clause 6 that IAE would ship, or cause Mexicana to ship, the engines to Rolls Royce for maintenance. Clause 5.7 provided that once Rolls Royce had completed the contracted works on an engine it was to release the engine to Mexicana.

The basis of retention by Rolls Royce

[10] The defenders' position, which Mr Lindsay presented, was that IAE had instructed Rolls Royce to retain the aero engines in its premises at East Kilbride as IAE was asserting a lien against Mexicana for payment of the sums due to it under the Renewed Fleet Hour Agreement in relation to the repair of those engines. He submitted that IAE had civil possession of the engines, which Rolls Royce actually possessed, after Mexicana had removed them from the airframes and provided them to IAE to implement its obligations under the maintenance agreement. When Mexicana failed to pay for the maintenance work, IAE gave Rolls Royce the instruction to retain the engines in order to protect its interest. Rolls Royce held the engines to IAE's instruction.

The submissions of the parties

[11] Mr Lake submitted (a) that the pursuers as owners of the aero engines were entitled to possess them unless the defenders could establish a reason why they should not, (b) that the defenders were not able to establish a right of lien over the engines either (i) because IAE did not have the appropriate degree of possession of them or (ii) because IAE did not obtain possession of the engines from a person who had an entitlement to allow a lien to be created.

[12] As a preliminary matter he submitted that the Scottish courts had jurisdiction as the engines were located in Scotland and that the plea of forum non conveniens, which was stated in the draft defences, was inept. IAE was a Swiss entity with a place of business in Connecticut. As a Swiss entity it was subject to the Lugano Convention which excluded the plea of forum non conveniens: Civil Jurisdiction and Judgments Act 1982 sections 3A and 3B, Aiglon Ltd v Gau Shan Co Ltd [1993] 1 Lloyd's Law Rep 164. He also referred to Anton, "Private International Law" (2^nd ed.) p.702 on the domicile of a company. Mr Lindsay submitted that the courts of Connecticut were the appropriate forum, having regard to the principal places of business of IAE and the pursuers, the laws which governed the relevant contracts and the location of the relevant witnesses. He referred to Spiliada Maritime Corporation v Cansulex Ltd [1987] AC 460, Lord Goff of Chieveley at pp.476-478. He reserved the right to address the court on the effect of the Lugano Convention, pointing out that the pursuers relied only on one decision at first instance. The plea of forum non conveniens should, he submitted, be determined after a procedure roll debate so that the defenders had an opportunity to address the point about the Lugano Convention.

[13] Mr Lake submitted that the law to be applied in determining whether there was a lien over the aero engines was Scots law as the lex situs. He referred to Anton, "Private International Law" (2^nd ed.) pp.615-617 and the first instance decision of Lord Mayfield in Armour v Thyssen Edelstahlwerke AG 1986 SLT 452 in support of the proposition that the lex situs governed the question whether or not a security had been created over goods.

[14] Applying Scots law to the substance of that question, Mr Lake submitted that the contractual arrangements summarised above did not give IAE sufficient quality of possession to allow it to assert a lien. It did not exercise control over the engines as it was Mexicana which removed them from the airframes and a carrier which took them to Rolls Royce for maintenance and would then return them to Mexicana to be fitted to the airframes. Rolls Royce had no obligation to deliver the engines to IAE. He referred to the discussion of the possessory lien in Gloag and Irvine, "The Law of Rights in Security" pp.340-2, 349-351 and 359-360, and volume 18 of the Stair Memorial Encyclopaedia, Professor Reid at paragraphs 117-119. Separately, Mexicana's title to the engines prevented a lien from arising as it could not give IAE a better title to the engines that it had: Mitchell v Heys & Sons (1894) 21 R 600 and Lamonby v Foulds 1928 SC 89. The sums due by Mexicana to IAE were overdue and IAE was not a mechanic and thus could not benefit from the allowance in the leases of a mechanic's lien. Accordingly, a lien over the engines could not arise under Scots law.

[15] Mr Lake submitted that, as Scots law applied to the question of the validity of the lien, there was no need to determine foreign law as a question of fact. In any event, foreign law was presumed to be the same as Scots law unless the foreign law was raised in the pleadings: Bonnar v Balfour Kilpatrick Ltd 1974 SLT 187. While an interim order would determine the matter once and for all, the balance of convenience favoured the pursuers as they had a strong prima facie case, they were being deprived of their property and there was a risk that the airframes in Mexico and the aero engines in East Kilbride would deteriorate if they remained unused.

[16] Mr Lindsay invited the court to refuse to grant an interim order under section 47 at this stage. An Extra Division had set out the principles for the exercise of the power to make such orders in Scottish Power Generation Ltd v British Energy Generation (UK) Ltd 2002 SC 517. Those included (in paragraph 33) a warning against using the power to bring about a significant innovation on the parties' contractual rights. There was no reason to depart from the status quo at this stage when the defenders had not even lodged formal defences to the action. Matters would have been different if the pursuers had been prepared to consign $2,318,513.32, which was the sum due by Mexicana to IAE. See, for example, Onyvax Ltd v Endpoint Research (UK) Ltd [2007] CSOH 211.

[17] Mr Lindsay submitted that IAE had civil possession of the engines as it had instructed Rolls Royce to retain them on its behalf, because it did not have suitable premises to keep them safe. As a result, Rolls Royce refused the pursuers' request to hand over the engines but required an order of the court. IAE was responsible for organising the maintenance of the engines under its contract with Mexicana and was also responsible for the engines once the airline removed them from the airframe. The matter was not simply a question of the lex situs. He accepted that that law would govern the creation of a lien in the absence of express agreement to the contrary. In this case, the rights of the parties were governed by the law of Connecticut and the defenders had a legal opinion from a Connecticut attorney at law which supported the position that the law of Connecticut would recognise IAE's possessory lien over the aero engines to secure payment of services in respect of those engines. The defenders were also obtaining a legal opinion from a New York lawyer on the effect of the provisions in the lease between the first pursuer and Mexicana under the law of New York. He did not accept that the law of New York was the same as Scots law and submitted that the rule in Bonnar v Balfour Kilpatrick Ltd had no application at this early stage in proceedings but was an issue which might arise when the pleadings had been closed. IAE needed to obtain expert advice on the meaning of the relevant provisions of the lease and on whether its lien was a "permitted lien" under the law of New York.

[18] In relation to the balance of convenience, Mr Lindsay submitted that the court should preserve the status quo at this early stage in the proceedings and allow the defenders to obtain the further legal advice which they sought. IAE was due over $2 million for the service of the engines and would have poor prospects of recovering that sum from the administrator of Mexicana. The pursuers were protected in the meantime by the interim interdict which prevented Rolls Royce from parting with the engines without the consent of the first pursuers and they had an alternative remedy of damages against IAE.

Decision

[19] I refused the motion in hoc statu. While I accepted that the pursuers had a prima facie case, I took the view that the court required more information before it could properly make an interim decision which would determine the substance of the action. If Scots law were to be applied as the lex situs, I would still require to know the extent to which the law of New York allowed the lessee to create a lien and the meaning it gave to the relevant terms of the lease. I needed to know the lessee's rights in order to apply the principle of nemo dat quod non habet.

[20] I did not accept the pursuers' argument that the court should treat the law of New York as the same as Scots law. Mr Lake submitted that I should do so because the defenders had had an opportunity to investigate their case. He said that Rolls Royce had known of the pursuers' request for the return of the engines since August 2010; the defenders' agents had asserted the existence of a lien on 13 October and had been given sight of the provisions of the lease on 20 October. While it was incumbent on the defenders to obtain the needed legal advice with alacrity, I did not consider their behaviour to be unreasonable and, in any event, did not think that it entitled the court to deny them the right to obtain advice on the law of New York as well as that on the law of Connecticut, which they had obtained and produced. It is important to observe that the motion was heard before calling.

[21] Although I did not refer to this consideration when giving a brief oral decision, I was also concerned that I needed to know more about IAE's involvement in the performance of the maintenance agreement, including the role of IAE's program manager in organising both the carriage of the aero engines after their removal from the airframes and their return to Mexicana after their maintenance by Rolls Royce. That information would assist me to reach a firm view on the quality of the control, if any, which IAE had over the engines, which might support its claim to have possession and might give rise to a lien. I was not persuaded that IAE's assertion that it enjoyed civil possession of the engines through its contractors, Rolls Royce, was necessarily without substance. I was also faced with a plea of forum non conveniens which had not been fully argued.

[22] Turning to the balance of convenience, I gave weight to the consideration that the grant of the interim order would determine the action in substance as IAE would lose any claim to have a security for the sums due to it by Mexicana. I took account of the fact that the pursuers did not offer to consign funds or otherwise provide security in case they were wrong in their legal submissions. Having regard to the unresolved legal and factual issues and the absence of alternative security, I did not think it appropriate to innovate so radically upon the status quo. I also took into account the fact that Rolls Royce was keeping the engines in a secure place and also that the pursuers would be entitled to pursue a claim for damages against IAE if its claim to have a lien were not ultimately established in the action. In addition, the pursuers could renew their motion once the defenders had had the opportunity to investigate the legal and factual issues which arose from the pursuers' submissions and to state their defence.