Cathay Pacific Airways Ltd v Lufthansa Technik AG
| Jurisdiction | England & Wales |
| Judge | John Kimbell |
| Judgment Date | 10 July 2020 |
| Neutral Citation | [2020] EWHC 1789 (Ch) |
| Date | 10 July 2020 |
| Docket Number | Case No: BL-2018-002348 |
| Court | Chancery Division |
[2020] EWHC 1789 (Ch)
John Kimbell QC
(sitting as a Deputy Judge of the High Court)
Case No: BL-2018-002348
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
CHANCERY DIVISION
Royal Courts of Justice, Rolls Building
Fetter Lane, London EC4A 1NL
Mr Steven Thompson QC and Ms Emma Hughes (instructed by Bird & Bird LLP) for the Claimant
Akhil Shah QC and Mr Richard Blakeley (instructed by Wilmer Cutler Pickering Hale and Dorr LLP) for the Defendant
Hearing dates: 25, 26, 27 February 2020
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
John Kimbell QC SITTING AS A DEPUTY HIGH COURT JUDGE
Introduction
In May 2007 the Claimant (‘ CX’) and the Defendant (‘ LHT’) entered into a long-term aircraft engine maintenance contract (‘ the Agreement’). Under the Agreement, LHT agreed to provide maintenance, repair and overhaul (‘ MRO’) services to CX for a period of ten years in respect of 27 new Pratt & Whitney engines (‘ the Engines’). The engines were deployed by CX on its ‘freighter’ fleet of six Boeing 747–400ER aircraft (i.e. four on each aircraft and three spares) (‘ the Fleet’).
Following the expiry of the ten-year term in May 2018, LHT sought payment of US$35,815,325.17 in End of Term Charges as defined in the Agreement. CX admits that this sum is due. However, CX says that it is entitled to claim two sums from LHT under the Agreement which leave it as the net payee. The two sums are: (1) US$42,912,534.19 due under Schedule 13 to the Agreement (‘ the Schedule 13 Reconciliation’) and (2) a Reconciliation Charge of US$4,200,210.95 due under Part 3 of Schedule 4 to the Agreement (‘ the Schedule 4 Reconciliation’).
The Option
The Schedule 13 Reconciliation arises from the exercise by CX of an option under clause 21.2 of the Agreement to remove all of the engines from the “Flight Hours Services Programme” (‘ the Option’). The relevant part of clause 21.2 relied upon by CX provides:
“ CX may at its option remove Engines from the Flight Hour Service programme prior to the completion of the Term. A financial reconciliation will be performed with respect to each engine removed from the Flight Hour Service programme in accordance with Schedule 13 …”
LHT says that no sum is due under Schedule 13 because the Option was not validly exercised by CX. LHT advances three main arguments:
a. On its true construction, alternatively by way of necessary implication, the Option only applied if CX were to remove engines for operational reasons from the Fleet. It is common ground the Engines were not removed for operational reasons from the Fleet. They continued to be operated.
b. The Option is subject to a ‘Braganza / Socimer’ type limitation (named after Braganza v BP Shipping [2015] UKSC 17 and Socimer International Bank v Standard Bank London [2008] 1 Lloyd's Rep 558) that it may not be exercised in an arbitrary and/or unreasonable manner and the Option was in fact exercised in such a manner by CX.
c. The Agreement is a relational contract and therefore the Option is subject to a more general good faith limitation. LHT says that the Option could only be exercised in a way that would be regarded as commercially acceptable by reasonable and honest people and that it was in fact not exercised in such a manner.
LHT has a fourth argument which arises out of an amendment to the Agreement in 2011. This amendment arose from an agreement to improve the efficiency of the Engines by adding advanced performed kits (‘ APU Kits’) to them. The Engines fitted with these kits were referred to as the APU Engines. As a result of the amendment, clause 21.2 was replaced with a new version which added the following words to the existing two sentences quoted above:
“ When exercising its option to remove the Engines from the Flight Service programme prior to the completion of the Term, CX will use commercially reasonable endeavors to remove the pre-APU Engines prior to the removal of the APU Engines, and will allow LHT a reasonable opportunity to present commercial proposals to prevent the removal of APU Engines and give reasonable consideration to such proposals.”
LHT alleges that CX failed to allow it a reasonable opportunity to present such commercial proposals.
CX's case is that the Option is a straightforward unilateral option which is not restricted to removal from the Fleet for operational purposes. CX denies that the that the Option is subject to a good faith restriction of any kind and says that the Option was exercised for perfectly reasonable commercial reasons. CX says it gave LHT ample opportunity to make commercial proposals to prevent the removal of APU Engines but none were forthcoming.
As to the Schedule 4 Reconciliation Charge, LHT says that the correct sum to be set off is US$2,654,968.83 not US$4,200,210.95.
The parties
CX is the flag carrier of the Hong Kong Special Administrative Region of the People's Republic of China. It was founded in 1946. It is one of the leading carriers of air freight in the world.
LHT is a subsidiary of the Lufthansa Group based at Hamburg Airport. It consists of 32 companies and employs around 25,000 employees. It provides MRO services to many international airlines.
Factual Background
The PW4000 is a range of turbofan jet engines developed by Pratt & Whitney in the 1980s for use on long haul aircraft, including the Boeing 747. Two of the engine types in the 4000 range are the PW4056-3 engine and the slightly newer and more powerful PW4062. The engines contain certain life limited parts and need a complete overhaul after a stipulated number of hours in use (flight hours). Scheduled overhauls require what is called ‘shop visits’. This is when the engine has to be removed from the aircraft and worked on by the MRO provider.
In 2005, CX was considering acquiring a fleet of six second-hand Boeing 747–400 aircraft together with 26 used PW4056-3 engines (‘ the 4056 engines’). In March 2005, CX invited expressions of interest from MRO providers for the provision of MRO services to the 4056 engines. LHT expressed an interest but was not initially selected to participate in negotiations. However, in early 2006, CX approached LHT to see if they were still interested in becoming an MRO provider for the 4056 engines. They were. Negotiations duly commenced.
By the time the negotiations with LHT got underway in respect of a potential MRO contract for the 4056 engines in March 2006, CX had decided that it wished to purchase a further five new 747–400s to use exclusively as air cargo carriers (generally known as ‘freighters’). These new aircraft would be powered by twenty PW4062A engines (‘ the 4062 engines’) and two spares. This later became six aircraft and 27 engines.
In May 2006, LHT were invited to submit a proposal to become the MRO provider for the 4062 engines. The letter made clear that the proposal was to be a stand-alone proposal for the 4062 engines. The letter stated that each 4062 engine was expected to be used in flight for 5700 hours per aircraft per year. The average duration of each flight was stipulated as being 6.9 flight hours. The corresponding figures for the 4056 engines were 4500 and 6.5 flight hours respectively.
CX stipulated that it wanted a ten-year MRO contract for both the 4056 and 4062 engines.
One of the background facts known to both CX and LHT was that some of the aircraft on which the 4056 engines were installed were on leases which would expire in the course of the ten-year term. This meant that the aircraft might be returned to the owners and the number of engines requiring MRO services would reduce. That was not the case with the 4062 engines because the freighter aircraft were being purchased by CX as new aircraft. The other difference which was clear to the parties was that the 4056 engines themselves were used and therefore would enter into any maintenance program with a variety of expired flight hours (and therefore proximity to the next scheduled shop visit). The 4062 engines by contrast were all new and therefore entered into the maintenance programme with zero flight hours on the clock.
The negotiations in respect of the two engine types proceeded in parallel for the rest of 2006. In a letter dated 19 October 2006 CX informed LHT of its updated requirements for the 4056 and 4062 engines. The letter included the following (with emphasis added):
“We specifically would like to draw your attention to the PW4056-3, 10 year request in that a total of 4 lease aircraft schedule return dates fall within the 10 year period. Whilst extension options with the lessors take the aircraft beyond the 10 years from 1/1/07, CX need to have the option to retire the aircraft from the fleet on the dates specified. Please state the impact, if any, of the lease aircraft returning to the lessor on the dates specified”.
An attachment to that letter set out CX's requirements for the 4056 and 4062 contracts. Amongst the requirements for the 4056 engine contract was an “individual early exit clause, in addition to specified lease return aircraft”.
The list of requirements for the 4062 contract was much shorter and contained only three bullet points:
• 10 Year FHA contract commences 1 st EIS aircraft
• Similar requirements as in PW4056-3 except that the engines are new and purchase so there is no half-life...
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