Background
Lease
Mitigation
Summary judgment
First instance decision
Appeal
Comment
The Court of Appeal recently handed down judgment in Credit Suisse AG v Arabian Aircraft & Equipment Leasing Co EC.(1) The case yielded a number of noteworthy findings, both at first instance and on appeal.
Claimant Credit Suisse AG leased a Canadair Challenger aircraft to defendant Arabian Aircraft & Equipment Leasing Co EC. Arabian Aircraft had previously entered into an agreement with Canadian company Bombardier Aerospace Corporation to purchase the aircraft for $13.055 million, but subsequently obtained financing from Credit Suisse, which took an assignment of the benefit of the purchase contract in order to lease the aircraft to Arabian Aircraft. The initial term of the lease was eight years from the date of delivery of the aircraft. Delivery took place in March 2004. For a substantial period, Arabian Aircraft made monthly payments due under the lease. However, in early 2009 Arabian Aircraft defaulted on these payments. This constituted an event of default under the lease and Credit Suisse terminated the contract.
The lease provided two alternative, and mutually inconsistent, methods for calculating sums due on default (under Clauses 18.3 and 18.4).
Clause 18.3 provided as follows:
"Payments on termination during the Term
On the termination during the Term of the leasing of the Aircraft Package to the Lessee as a result of an Event of Default and whether or not the Lessor shall have exercised, or shall thereafter at any time exercise, any of its rights under clause 18.2, the Lessee shall pay to the Lessor (by way of agreed compensation for loss of bargain and without prejudice to any right to damages of the Lessor) on demand of the Lessor the amount notified by the Lessor to be the aggregate of:
(A) all arrears of Rent…
(B) any loss, damage, expense, cost or liability which the Lessor may sustain or incur as a consequence of the occurrence of any Default or Event of Default and/or any such termination including:
(i) any amount of interest, fees or other sums whatsoever paid or payable on account of funds borrowed in order to carry any unpaid amount;
(ii) any loss, premium, penalty or expense incurred by the Lessor in prepaying funds raised to finance the Aircraft Package…
(iii) all costs and expenses incurred in recovering possession of the Aircraft Package and in carrying out any works required to bring the Aircraft Package up to the condition required pursuant to this agreement; and
(iv) any loss suffered by the Lessor as a result of the Lessor's inability to place the Aircraft Package on lease with another lessee on terms as favourable to the Lessor as the terms hereof."
Clause 18.4 provided as follows:
"Further Rights of the Lessor
In the alternative to the Lessor's other rights under the preceding provisions of this clause 18 and whether or not the Lessor shall have exercised, or shall thereafter at any time exercise, any of its rights under clause 18.2, but without prejudice to any right of damages that may otherwise be available to it, the Lessor may, if it considers in its absolute discretion that the other remedies herein provided do not adequately or sufficiently quickly compensate it for any loss it might suffer on, or at any time after, any termination of its obligation to lease the Aircraft Package or any termination of the leasing of the Aircraft Package… require the Lessee to pay to the Lessor on the demand of the Lessor by way of agreed further compensation and not as a penalty an amount equal to the aggregate of:
(A) all arrears of Rent and any other sums… accrued by the Lessee in favour of the Lessor up until the date of such termination…
(B) any loss, damage, expense, cost or liability which the Lessee may sustain or incur as a consequence of the occurrence of any Event of Default…
(C) all amounts of Rent which would have fallen to be paid under this Agreement from the date of such termination up until the Initial expiry Date… discounted over the notional balance of the Term at the Discount Rate applicable on the date of such termination;
(D) the Residual Book Value; and
(E) the value (as reasonably estimated by the Lessor) of all services, covenants and other obligations which would have fallen to be performed by the Lessee but for the termination of the leasing of the Aircraft Package, less the aggregate of the Fair Market Value of the Aircraft on the date of such termination."
According to the court judgment:
"'Fair Market Value' was defined as an amount equal to the average of the amounts assessed by three independent valuers of recognised international reputation and experience, as being the amount that could reasonably be expected to be received on an arm's length sale of the aircraft in the circumstances at the time of determination and under no unusual pressure for a prompt sale."(2)
Credit Suisse's notice of termination of the lease asserted a claim under Clause 18.4, but its subsequent High Court claim for damages was based solely on Clause 18.3.
At the time of termination of the lease, the aircraft was in the possession of the manufacturer, which was asserting a lien on it pending payment of $1.1 million. Credit Suisse negotiated a settlement with the manufacturer that allowed the aircraft to be sold and its value realised. In defending the claim, Arabian Aircraft alleged that the aircraft could have been put into good condition and sold before termination for a price that would have resulted in Credit Suisse being paid in full. It also claimed that Credit Suisse was responsible for the deterioration in the condition of the aircraft before it was sold, thereby increasing the cost of putting the aircraft into satisfactory condition.
Credit Suisse applied for summary judgment.
Part 24 of the Civil Procedure Rules permits summary judgment to be given if the court considers:
"(i) that claimant has no real prospect of succeeding on the claim or issue; or
(ii) that defendant has no real prospect of successfully defending the claim or issue; and
(b) there is no other compelling reason why the case or issue should be disposed of at a trial."
At the hearing of the application, Credit Suisse sought to rely on Clause 18.4 of the lease, which had not been pleaded in the claim and had not featured in the lengthy witness evidence supporting the application. However, it had been addressed in the skeleton filed at court by Credit Suisse's counsel. Oddly, Credit Suisse did not apply to amend its claim, even though it had effectively abandoned its case in relation to Clause 18.3.
The judge allowed Credit Suisse to rely on Clause 18.4 of the lease. However, it was established that the correct mechanism for ascertaining fair market value had not been used and therefore Arabian Aircraft had a possible defence to a claim based on Clause 18.4. Arabian Aircraft was ordered to pay $2.563 million into court as a condition of defending the claim.
On the issue of mitigation, the duty to mitigate was not a high one and Credit Suisse did not have to justify every step that it had taken. Rather, it merely had to take reasonable steps to mitigate and it was for Arabian Aircraft to show that it had not done so. The judge concluded that Arabian Aircraft had no real prospect of showing that Credit Suisse had a duty to protect the value of the aircraft. The court found that:
- there was no evidence that Credit Suisse had acted unreasonably, as the manufacturer was in a strong bargaining position; and
- Arabian Aircraft could have intervened at the time; the argument on mitigation was an afterthought.
On appeal by Arabian Aircraft, counsel for Credit Suisse conceded that the particulars of claim were "unsatisfactory". The Court of Appeal held that Clause 18.4 should not have been allowed to be argued on the summary judgment application without amendment to the pleadings. Lord Justice Moore-Bick stated:
"Particulars of claim are intended to define the claim being made. They are a formal document prepared for the purposes of legal proceedings and can be expected to identify with care and precision the case the claimant is putting forward."
In the circumstances, the Court of Appeal held that the judge at first instance had erred in his willingness to allow Credit Suisse to advance its claim on the basis of Clause 18.4 when that specific claim had not been pleaded. Clause 18.4 was also the sole ground for Credit Suisse's summary judgment application and, as such, the three Court of Appeal judges unanimously allowed the defendants' appeal and dismissed the application for summary judgment.
The decision highlights the principle that a creditor need only take reasonable steps to mitigate its losses, and that this duty is not a particularly onerous one to discharge. In addition, the case provides a salutary lesson to litigants that omissions in the pleadings can have serious consequences, and that the court will (or at least should) confine its consideration to the pleaded cases.
For further information on this topic please contact Adam Forster at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email ([email protected]).
Endnotes
(1) [2013] EWCA Civ 1169.
(2) Paragraphs 5 and 6 of the judgment.
