Thai Airways International Public Company Ltd (Claimant/Part 20 Claimant) v KI Holdings Company Ltd (formerly known as Koito Industries Ltd) and Another (Defendant/Part 20 Claimant)
| Jurisdiction | England & Wales |
| Judge | Mr Justice Leggatt |
| Judgment Date | 11 May 2015 |
| Neutral Citation | [2015] EWHC 1250 (Comm) |
| Docket Number | Case No: 2011 Folio 1503 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 11 May 2015 |
[2015] EWHC 1250 (Comm)
Mr Justice Leggatt
Case No: 2011 Folio 1503
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Guy Morpuss QC and Patricia Edwards (instructed by Macfarlanes LLP) for the Claimant
Hilary Heilbron QC and David Scannell (instructed by Wilmer Hale) for the Defendant
Hearing dates: 28–29 January, 2–4 February and 11–12 February 2015
| Section | Para No. |
| Introduction | 1 |
| Koito's breaches of contract | 2 |
| (1) The B777 contract | 3 |
| (2) The A330 contract | 5 |
| (3) The A380 contract | 8 |
| Regulatory breaches | 11 |
| Quality breaches | 15 |
| Thai's mitigating actions | 16 |
| (1) The B777 contract | 17 |
| (2) The A330 contract | 18 |
| (3) The A380 contract | 20 |
| The Jet leases | 22 |
| The remaining issues | 26 |
| Mitigation: the law | 31 |
| The British Westinghouse case | 39 |
| Collateral benefits | 46 |
| Length of the Jet leases | 51 |
| Mitigation costs or loss of profits? | 63 |
| (1) Must Thai give credit for "betterment"? | 66 |
| (2) The burden of proof | 83 |
| (3) Estimate of Thai's net loss of profits | 93 |
| Koito's position | 95 |
| Thai's position | 100 |
| (i) Lost contribution from the A330–300 aircraft | 106 |
| The YY document | 107 |
| Mr Maher's overview | 111 |
| Mr Dearman's overview calculation | 119 |
| Mr Dearman's alternative overview calculation | 125 |
| Conclusion | 127 |
| (ii) Lost contribution from the B777–300 aircraft | 128 |
| (iii) Depreciation | 131 |
| Conclusion on the Jet lease claim | 138 |
| Other costs claimed | 140 |
| Replacement seats | 141 |
| Savings from the ZIM seats | 145 |
| Savings from the Recaro seats | 153 |
| Preservation and storage costs | 159 |
| Technician expenses | 163 |
| Legal costs | 164 |
| Compliance costs | 165 |
| Credits | 171 |
| Price d e-escalation | 172 |
| Credits received on purchase of new aircraft | 178 |
| The sums due | 192 |
Introduction
In this action Thai Airways ("Thai"), the national airline of Thailand, claims damages for breach of three contracts made with the first defendant ("Koito"), a Japanese company which manufactures aircraft seats. Under these contracts Koito agreed to supply economy class seats for three groups of aircraft. Some of the seats were delivered late and other seats were not delivered at all. Among other consequences of these defaults, Thai was prevented from using five new aircraft for around 18 months until seats were obtained from another supplier. Shortly before the start of the trial, Koito admitted liability. The significant issues which remain in dispute concern the measure of damages. Before addressing these issues, I will first identify the breaches of contract for which Thai is entitled to damages and the relevant steps which Thai took to mitigate its loss.
Koito's breaches of contract
Each of the three contracts which are the subject of this action is governed by English law and provides for disputes to be decided by "the court of competent jurisdiction in London, England". The contracts were made in 2006 and 2008 and I will mention them in chronological order.
(1) The B777 contract
Under a General Terms Agreement dated 24 February 2006, Koito agreed to sell and deliver to Thai six "shipsets" of economy class seats to be installed on six Boeing B777–300 aircraft. The B777–300 is a medium range, twin-engined aircraft, with capacity for some 370 passengers. The six aircraft were already owned by Thai and were being upgraded.
The first five shipsets were delivered on time. However, the sixth shipset was not. Under the contract Koito was obliged to deliver this shipset by, at latest, 30 September 2009. Most of the shipset was delivered by that date, but 99 seats were not delivered until 12 and 13 December 2011, more than two years later. Koito has admitted that the late delivery of these seats was a breach of contract.
(2) The A330 contract
Under a General Terms Agreement dated 20 November 2008, Koito agreed to sell and deliver to Thai eight shipsets of economy class seats to be installed on eight new A330–300 aircraft which Thai had agreed to purchase from Airbus. The A330–300 is also a medium range, twin-engined aircraft, with capacity for around 300 passengers. Koito agreed to deliver each shipset to fit in with the timetable for delivery of the aircraft agreed between Thai and Airbus.
The first two shipsets were delivered on time and the third shipset was delivered 30 days late. However, Koito failed to deliver the remaining five shipsets. It is now common ground that the dates by which Koito was contractually obliged to deliver these five shipsets were 18 May, 17 June, 30 September, 31 October and 30 November 2009. Koito was accordingly in breach of contract from those dates.
Thai terminated the contract by a notice dated 3 August 2010, and Koito no longer disputes the validity of the termination.
(3) The A380 contract
Under a further General Terms Agreement also dated 20 November 2008, Koito agreed to sell and deliver to Thai six shipsets of economy class seats to be installed on six new A380–800 aircraft which Thai had agreed to purchase from Airbus. The A380–800 is a long-range, four-engined aircraft, with two passenger decks and capacity for over 500 passengers. As with the A330–300 aircraft, Koito undertook to deliver the shipsets in time to fit in with the timetable for delivery agreed between Thai and Airbus.
In August 2009, Thai and Airbus agreed, for their own commercial reasons, to delay delivery of the A380–800 aircraft by two years, with new delivery dates between August 2012 and October 2013.
In May 2010, Koito informed Thai that it was unable to supply any of the seats ordered for these aircraft. Thai terminated the contract by a notice dated 3 August 2010, and the validity of this termination is also now admitted by Koito.
Regulatory breaches
The essential reason for Koito's failure to meet its delivery obligations under these contracts was that regulators intervened when it came to light that Koito had over a substantial period falsified results of safety tests and other data so as to make it appear that seats which it had manufactured complied with regulatory requirements. The Japanese Civil Aviation Bureau ("JCAB") first intervened in late January 2009 to prohibit the export of Koito's seats. Exports were allowed to resume in March 2009 but were suspended again in June 2009. In addition, in October 2009 the European Aviation Safety Agency ("EASA") intervened to suspend approvals with the result that Koito was prohibited from exporting seats to Airbus. These interventions led to the breaches of contract by Koito referred to above.
On 2 June 2011, the EASA and the US Federal Aviation Authority ("FAA") issued airworthiness directives requiring Koito seats that had already been delivered and installed to be re-tested. This affected the seats which Koito had delivered under the B777 and A330 contracts. It is now common ground that it was a term of each of these contracts that Koito would ensure that its process of manufacturing and testing of all seats at all times complied with applicable regulatory requirements such that its ability to manufacture, sell and deliver seats was not impaired. Koito has admitted that its breach of this term caused the adoption of the airworthiness directives and thus caused Thai to have to undertake the testing required by those directives.
The seats installed in the A330–300 aircraft passed the required "static" tests but failed "dynamic" tests, with the result that in order to comply with the airworthiness directives these seats must be replaced by July 2017.
It was also an express term of each contract that Koito would maintain a quality assurance system in compliance with the applicable regulations. Although Koito has not admitted any breach of this term, the inescapable inference from the evidence adduced by Thai – which was not positively disputed by Koito – is that Koito failed to maintain such a quality assurance system at all material times prior to 14 January 2010, when Koito's Quality Management Approval was withdrawn.
Quality breaches
Thai has further alleged that the seats delivered by Koito under the B777 and A330 contracts were in breach of the terms implied by law pursuant to section 14 of the Sale of Goods Act 1979 that the seats were of satisfactory quality and reasonably fit for their purpose. I reject as untenable Koito's pleaded defences to this allegation (i) that the inclusion in the contracts of various express warranties had the effect of excluding the implication of these terms and (ii) that the acceptance of the seats by Thai prevents Thai from claiming damages for breach of these implied terms. In circumstances where no argument was specifically addressed to the point, however, I am not satisfied that there was a breach of the implied terms merely because, at the time when seats were delivered, there had been failures in Koito's systems and processes which subsequently led regulators to require all seats manufactured by Koito to undergo further testing. On the other hand, it does seem to me that a breach of the implied terms has been demonstrated in the case of the three shipsets delivered under the A330 contract by reason of the failure of those seats to pass the "dynamic" tests which were carried out in April 2013.
Thai's mitigating actions
Thai took various actions to mitigate the effects of Koito's...
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