The Judicial Committee of the Privy Council Decisions

Privy Council Appeal No. 33 of 1997

 

The Nippon Credit Bank Limited Appellant

v.

Air New Zealand Limited Respondents

 

FROM

 

THE COURT OF APPEAL OF NEW ZEALAND

 

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL,

Delivered the 8th December 1997

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Present at the hearing:-

Lord Browne-Wilkinson

Lord Lloyd of Berwick

Lord Hoffmann

Lord Hutton

Lord Saville

    [Majority Judgment Delivered by Lord Lloyd of Berwick]

 

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1. On 1st December 1989 the defendants, Air New Zealand Limited ("ANZ"), entered into a contract with an English merchant bank, Arbuthnot Latham Bank Limited, for the lease of a Boeing 767-209 for an initial term of 5 years.  The contract is governed by English law.  ANZ had an option to renew for further periods of up to seven years in all.  It was a term of the agreement that ANZ was obliged to carry out certain modifications so as to give the aircraft extended range ("ER modifications").  It was common ground that the ER modifications increased the value of the aircraft.  For that reason, no doubt, Arbuthnot Latham agreed, as owners of the aircraft, to contribute towards the cost of carrying out the modifications ("ER cost").  If the aircraft were to be redelivered at the expiry of the initial period of five years, the contribution was to be 50% of the ER cost.  But if ANZ were to exercise its option to extend the lease, the percentage was to reduce by stages, as one would expect.  At the end of nine  years  the  percentage  was  to  be  zero.  There was a further provision that the ER contribution was in no event to exceed USD1,000,000.

 

2. The evidence established that the ER cost was in excess of $2,000,000, so that if the aircraft were to be redelivered at the expiry of the initial period of five years, ANZ would be looking for the maximum contribution of $1,000,000 from Arbuthnot Latham.

 

3. On 15th December 1989 Arbuthnot Latham sold the aircraft, and assigned the lease, to Intercredit Corporation.  Nothing turns on that assignment.  The purchase by Intercredit was financed by a loan from the plaintiffs, Nippon Credit Bank Limited ("the bank").  The loan was secured by a mortgage on the aircraft also dated 15th December.  By way of further security, Intercredit assigned the benefit of the lease to the bank.  It was an express term of the assignment that Intercredit should remain liable for all its obligations under the lease.  On the same day, Intercredit gave notice of the assignment to ANZ.  It was agreed by ANZ that the bank was not to be under any liability in the event of Intercredit failing to perform any of its obligations under the lease, and there was an express waiver of any right of set-off "to the intent and purpose that all payments by us under the lease shall be at full face value without any deductions whatsoever".

 

4. Towards the end of the initial term of five years, it became apparent that Intercredit were in financial difficulties.  In August 1994 Intercredit defaulted under the loan agreement.  On 2nd September the bank appointed receivers under the terms of the mortgage.  ANZ also became concerned about the ability of Intercredit to pay its share of the ER cost.  By letter dated 27th May 1994 ANZ wrote to Intercredit suggesting that the sum of $1,000,000, together with other sums due from Intercredit, be set-off against rental payments over the final months of the lease.  ANZ sent a copy of the letter to the bank.  On 16th June, the bank's solicitors declined to agree.  This was not surprising in view of the terms of ANZ's consent to the assignment.  On 18th November 1994 ANZ made a formal demand on the bank and the receivers of the aircraft for the payment of $1,000,000 on redelivery.

 

5. There was some delay by ANZ in returning the aircraft to the  place  where  it was to be redelivered under the lease.  This should have been on 2nd December 1994.  In the event the aircraft was not ready to be redelivered until 15th December 1994.  Nothing turns on the period between 2nd December and 15th December 1994.  For Mr. Fardell, on behalf of ANZ, concedes that ANZ must pay rent for that period, the bank having extended the lease, as they were entitled to do, under one of the provisions in the contract.  The dispute concerns what happened on 15th December.

 

6. ANZ say that although they were ready and willing to redeliver the aircraft on that day, they were entitled to withhold redelivery until they were paid the owner's share of the ER cost, i.e. $1,000,000.  The bank said not so: they were entitled to enforce redelivery irrespective of payment.  ANZ's proper course was to seek payment from Arbuthnot Latham, or to prove in the liquidation of Intercredit.  They could not withhold redelivery once the initial period of the lease had expired.

 

7. Meanwhile the bank had commenced proceedings in New Zealand for an injunction.  When the case came on for hearing, the parties sensibly agreed, as almost always happens in these cases, that the aircraft should be redelivered without prejudice to the rights of the parties.  Pursuant to that agreement the aircraft was redelivered on 15th February 1995.  So the period in dispute is from 15th December 1994 to 15th February 1995.  There is no dispute as to any of the figures.

 

8. Anderson J. preferred the bank's argument.  But his decision was reversed by the Court of Appeal.  The bank now appeals to Her Majesty in Council.

 

9. The bank's printed case identifies three main issues, of which only the second is now in play.  As to issue 1, Mr. Fardell does not suggest that the bank itself became liable for the ER contribution.  As to issue 3, he concedes that if he is wrong on the construction of the contract, then ANZ are liable for rent at the contractual rate for the whole period from 2nd December to 15th February, amounting to $1,201,506.  As to issue 2 the bank's case is, and has always been, that on the true construction of the contract the bank was entitled to demand redelivery on the expiration of the lease without regard to payment of the ER contribution: see paragraph 9 of the appellant's printed case.

 

10. The case for ANZ is put in two ways.  They say first that they were entitled to withhold delivery under the terms of the contract.  Secondly they say that they were entitled to exercise a particular lien at common law in respect of the work which they carried out on the aircraft, since it was work which they were required to carry out for the owner's benefit, as well as their own.  However, as the argument developed, it became clear that these two ways of putting the case could not be kept separate.  Thus by the end of the hearing, both parties were agreed that the outcome depended exclusively on the true construction of the contract.

 

11. In order to understand the submissions on construction, it is now necessary to set out certain provisions of the contract in full.  The relevant provisions are contained in Article 3 and Article 16:-

"3.9BEFORE the expiry of the initial Term of the Lease in Article 2.2, Lessee shall carry out refurbishment work and modifications to the Aircraft, including but not limited to:

 

i)installation and certification of approved extended range modifications;

 

ii)certification of the increased all up operating weights for the Aircraft;

 

iii)seating throughout the Aircraft;

 

iv)New galleys and toilet refurbishment to Lessee's standards where required;

 

v)Normally renewable interior features to be similar to the Lessee's other B767 fleets;

 

vi)incorporation of Aircraft into the Approved Maintenance Program.

 

3.10Notwithstanding the foregoing provisions of this Lease, Lessee shall, before the Expiry Date (as defined in Appendix `B' hereto), complete all ER modifications to the Aircraft and the related gross weight increases to 335,000 pounds, all as approved by the Boeing Commercial Airplane Company, or its successor (collectively, the `ER Work').   Lessee  shall  pay  when due, all costs and expenses relating to the shall pay when due, all costs and expenses relating to the ER Work; provided, however, that upon re-delivery of the Aircraft to Lessor and upon Lessee providing to Lessor adequate documentation to support the direct labor and direct material and services costs incurred by Lessee in connection with performance of the ER Work (collectively, the `ER Cost'), Lessor shall pay to Lessee (so long as Lessee is not then in breach or violation of this Lease) an amount determined by multiplying the ER Cost by the Applicable Percentage.  For purposes hereof, the Applicable Percentage shall be determined as follows:

 

12. If the Aircraft is Duly Re-delivered then, the Applicable and Accepted by Lessor Percentage shall be:

 

1.Before the 5th Annual

Anniversary of the Delivery Date 0%

2.On or after the 5th Annual

13. Anniversary & before the 6th

Annual Anniversary50%

3.On or after the 6th Annual

14. Anniversary & before the

7th Annual Anniversary35%

4.On or after the 7th Annual

15. Anniversary & before the 8th

Annual Anniversary20%

5.On or after the 8th Annual

16. Anniversary & before the 9th

Annual Anniversary5%

6.On or after the 9th Annual

Anniversary0%

 

provided, further, that in no event shall Lessor's share of the ER Cost as otherwise determined above exceed USD1,000,000.  (The Lessor's share of the ER Cost is allocated 27.5% against the ER Modification and 72.5% against the gross weight increase.)

 

 

16.1On the Expiry Date or upon earlier termination of the Term Lessee shall, at its own expense, (i) re-deliver the Aircraft to Lessor at the Re-Delivery Location in a condition complying with this Agreement, including, without limitation, the provisions of Appendix `E' (ii) hereto, free and clear of all liens and encumbrances apart from liens created by the Lessor, and (ii) cause the Aircraft to be removed from the Register of Civil Aircraft in the State and (iii) return the Aircraft to Lessor together with all equipment and records supplied and/or maintained pursuant to this Agreement, and together with a full technical description of all remedial work done prior to re-delivery pursuant to Article 16.3

 

16.2Immediately prior to re-delivery of the Aircraft, Lessee, at its own expense, shall make the Aircraft and records available to Lessor or its agent for inspection (`Final Inspection') in order to verify that the condition of the Aircraft complies with the provisions hereof.  The period allowed for the Final Inspection shall have such duration as to permit the conduct by Lessor and/or its agent of the following:

 

(a)Inspection of the Aircraft Documents,

(b)Inspection of the Aircraft structure, Engines and Parts, including without limitation a boroscope inspection of the Engines,

(c)A re-delivery acceptance flight of one and a half hour's duration for Lessor to verify the condition of the Aircraft with up to three of Lessor's representatives as observers at a mutually agreed place.

 

16.3To the extent that: upon such Final Inspection, the condition of the Aircraft and Aircraft Documents does not comply with the provisions hereof or the Aircraft is not re-delivered Lessee at its own expense, shall cause such non-compliance to be immediately rectified and, to the extent such rectification or non-delivery extends beyond the applicable expiration date hereof, the term of this Lease  shall,  at Lessor's sole option, be deemed to be automatically extended and the provisions hereof shall remain in force until such rectification or delivery has been accomplished."

 

17. Taking the language of Article 3.10 first, Mr. Sumption, for the bank, makes two submissions.  The first is that the obligation to pay the ER contribution only arose after redelivery of the aircraft.  In other words the obligation to pay the contribution and the obligation to redeliver the aircraft were not intended to be simultaneous.  This submission turns on the meaning of the words "upon redelivery" in Article 3.10.

 

18. Secondly Mr. Sumption submits that even if the obligations were intended to be performed simultaneously, they were not concurrent obligations in the technical Sale of Goods Act sense, whereby the buyer must be ready and willing to pay the price in exchange for possession of the goods: see section 28 of the Sale of Goods Act 1979.  Not all simultaneous obligations are concurrent obligations in that sense.  Obligations are only concurrent if the performance of the one is dependent on the performance of the other.

 

19. That being the broad outline of Mr. Sumption's argument, it is now necessary to consider the first of his submissions in greater detail.

 

Are the obligations simultaneous?

Mr. Sumption submits that the word "upon" in the phrase "upon redelivery" can, as a matter of language, mean either before, on the occasion of or after redelivery.  He points out that where the word "upon" appears in the next line ("upon Lessee providing to Lessor adequate documentation to support ... the costs incurred by Lessee ...") it must mean after providing the documentation, since the lessor could not sensibly be expected to pay the ER contribution without having had an opportunity to inspect the documentation.  "Upon redelivery" should therefore be given the same meaning.  The sequence of events on that view would be (1) provision of the documentation (2) redelivery and (3) payment of the ER contribution, either forthwith or within a reasonable time thereafter.

 

20. Mr. Fardell argues that the natural meaning of "upon redelivery", as for example in the expression cash on delivery,  is  that  the  two  obligations  are to be performed simultaneously.  He relies strongly on the word "then" in the phrase "so long as the Lessee is not then in breach or violation of the Lease".  How could the lessee be in breach of the lease after redelivery, since the lease would by then have come to an end?  Therefore the obligation to pay must have been intended to be contemporaneous with redelivery.

 

21. As for the second "upon" Mr. Fardell pointed out that the Court of Appeal had provided the answer.  Redelivery under the contract is not an event but a process.  It starts with the return of the aircraft to the redelivery location: see Article 16.1.  Thereafter the lessor is permitted sufficient time to carry out an inspection of the aircraft, including a "redelivery acceptance flight" lasting one and a half hours, and also to inspect the aircraft's records and documents: see Article 16.2.  If the condition of the aircraft or the documents is not in accordance with the contract, then any deficiency must be rectified at the lessee's expense, and the term of the lease may be extended at the option of the lessor: see Article 16.3.  Only then is the lessor obliged to furnish a certificate of acceptance of redelivery.  It is the date of the certificate that determines the date of redelivery for the purpose of the contract.  From this it is clear, says Mr. Fardell, that redelivery is a process which may last a number of days, starting with return of the aircraft, and ending with the certificate of acceptance.  If so there is no difficulty in reading the second "upon" in Article 3.10 as providing for the documentation in support of the ER cost to be included with the other aircraft documents and records under Article 16.2.  It does not lend any support to Mr. Sumption's argument that the first "upon" means after redelivery.

 

Are the obligations concurrent?

Turning now to Mr. Sumption's second submission, and assuming against him for the moment that the obligations were intended to be performed simultaneously, he contends nevertheless that the obligations were not concurrent or inter-dependent.  His arguments may be summarised as follows:-

 

(1)Article 16.1 imposes an absolute obligation on ANZ to redeliver the aircraft at the expiry of the contract term.  There is nothing to suggest that that obligation is qualified by anything in Article 3.10.  Article 3.10 is concerned exclusively with the time of payment of the ER contribution.  It is found among provisions relating to delivery, not redelivery.  If Article  3.10  was  intended  to impose a condition relating to redelivery, one would have expected to find at least a reference to Article 3.10 in Article 16.

(2)There is no general presumption that obligations which are to be performed simultaneously are to be treated as concurrent.  Such a presumption may arise, unless otherwise agreed, where the obligations go to the whole of the consideration on either side, as in the case of section 28 of the Sale of Goods Act 1979, or are otherwise corresponding obligations in a factual sense.  Such was not the case here.  The payment of $1,000,000 was not the quid pro quo for the obligation to redeliver.  It was a collateral obligation and "relatively trivial" in amount.

(3)It was unlikely that the parties intended a valuable income-earning chattel, such as an aircraft, for which the rent was nearly half a million dollars a month to stand as security for the relatively trivial sum of $1,000,000, especially as the parties must have contemplated that Arbuthnot Latham would or might assign the lease.  To allow ANZ to withhold redelivery would interfere with the course of business under which long term aircraft leases are in most cases financing transactions designed to generate a stream of income in favour of the lender.

 

22. Mr. Fardell's reply to these arguments was as follows:-

(1)This was not a standard aircraft operating lease.  No doubt many of the provisions are standard provisions, including Article 16.  But Articles 3.9 and 3.10 are plainly not standard clauses.  They were carefully drafted for the purpose of this particular transaction.  Accordingly the arguments that the course of business generally will be affected by the decision in this case carry little if any weight.

(2)Seeing that Article 3.10 is an ad hoc provision, there was no obvious place to insert it in the contract.  It might have been inserted among the redelivery provisions in Article 16.  But it was perhaps more natural to include it among the delivery provisions in Article 3, since the ER modifications would, in normal course, be carried out soon after delivery under the contract.  There is no justification for treating Article 3.10 as being a subsidiary provision, or as being in some way subject to Article 16.  Article 3.10 does not say so, and there is no reason to make any such implication.  Article 3.10 and Article 16 must be read together like any other two provisions of the contract in the light of the contract as a whole.

 

(3)Although there is no presumption of law that all obligations which are to be performed simultaneously are concurrent obligations, nevertheless concurrent obligations are not confined to cases such as those covered by section 28 of the Sale of Goods Act 1979 where there are single obligations which go to the whole of the consideration on either side.  In more complex cases there may be a number of inter-dependent obligations on each side.  Whether obligations are inter-dependent will, in each case, depend on what "reason and good sense require": see The Queen v. Humphery (1839) 10 Ad. & E. 335 per Tindal C.J. at 370.

 

(4)In the present case reason and good sense require that the obligation to redeliver under Article 16 and the obligation to pay money under Article 3.10 should be held to be concurrent.  Under Article 3.9 ANZ was required to carry out work on the aircraft which would, and did, increase the value of the aircraft in the hands of the owners, or those claiming through the owners on redelivery.  In the ordinary way ANZ would in those circumstances be entitled to exercise a particular lien on the aircraft in respect of the work done.  The fact that the carrying out of the work was part of a larger transaction between the parties is not inconsistent with the exercise of a lien.  There is no suggestion in any of the authorities that a possessory lien can only arise where possession has been obtained under a simple bailment.  Nor is it an objection that the lienee has obtained an incidental benefit as a result of carrying out the required work.  Such technical considerations have no place in the law relating to particular liens.

 

(5)Even if, for some technical reason, ANZ were not entitled to exercise a particular lien on the facts of the present case, nevertheless the contract should still be construed so as to entitle ANZ to withhold delivery, since that is what "reason and good sense" or what Bovill C.J. in Paynter v. James (1867) L.R. 2 CP. 348 at page 355 calls "the nature of the thing", requires.

 

Conclusion.

Their Lordships have set out the submissions at some length, since it is important to bear in mind what was in issue by the end of the hearing.  Both sides accepted that the outcome must depend on the true construction of the lease.  Mr. Fardell, for his part, conceded that if he was wrong on construction,  he  could  not  succeed on lien as a separate issue. Mr. Sumption, for his part, conceded that if ANZ would have been entitled to withhold delivery against Arbuthnot Latham, they could withhold delivery against the bank.  As assignee of the benefit of the lease the bank could not be in a better position than Arbuthnot Latham.  Mr. Sumption did not suggest that the bank could exercise a proprietary claim under the mortgage so as to defeat ANZ's contractual rights.

 

23. Taking Mr. Sumption's two main arguments on construction together, their Lordships consider that the counter-arguments for ANZ are to be preferred. 

 

24. As to the first submission, they consider it most unlikely that the parties would, in a carefully drawn clause, have left the time of payment of the ER contribution at large.  As sensible businessmen they must have intended to pinpoint the time of payment of the $1,000,000, even if that sum be regarded as "relatively trivial".  This they have done by providing for the payment to be made "upon redelivery".  Their Lordships take this to mean at the time of redelivery, and not after redelivery.  Thus payment and redelivery were to be simultaneous obligations.

 

25. Turning to the second submission, the decisive consideration is the fact that Articles 3.9 and 3.10 were plainly intended to serve a specific purpose quite outside the ordinary run of operating leases.  If they had stood alone, there can be no doubt that ANZ would have been entitled to exercise a possessory lien in respect of work carried out on the aircraft.  For the common law has always favoured particular liens.  In Kirkman v. Shawcross (1794) 6 T.R. 14 Lord Kenyon said:-

"In every case that has occurred, and in which the question of liens has arisen, it has been the universal wish of the courts at all times to extend the lien as far as possible."

 

In Jacobs v. Latour (1828) 5 Bing. 132 Best C.J. said:-

"As between debtor and creditor, the doctrine of lien is so equitable that it cannot be favoured too much."

 

In Scarfe v. Morgan (1838) 4 M. & W. 270 Parke B. said at page 283:-

 

"... and all such specific liens, being consistent with the principles of natural equity, are favoured by the law, which is construed liberally in such cases."

 

26. The question is thus whether ANZ should be held to have lost the protection which a lien would have conferred by reason only that Articles 3.9 and 3.10 are part of a wider contract.

 

27. Their Lordships would answer this question in the negative.  For the wider contract itself confers the very same protection, if, as their Lordships' think, the obligation to pay the ER contribution and the obligation to redeliver the aircraft on the expiry of the lease were concurrent obligations in the sense that each was dependent on the performance of the other.  This is what "reason and good sense" require in the context of this particular contract.  The point cannot be put better than it was by Gault J. in giving the judgment of the Court of Appeal:-

"But when regard is had to the nature and substance of the deal which was concluded, it is difficult to accept that the parties could have intended that Air New Zealand would be liable to re-deliver the aeroplane before receiving payment of the agreed sum in terms of the contract.  In the nature of the transaction, where the aeroplane was to be delivered up and a sum would be due to Air New Zealand it must have been contemplated that the two obligations would arise at the same time and would be satisfied by exchange.  Just as the parties could not be taken as contemplating that the lessee should hand over the aeroplane on re-delivery without receiving the certificate acknowledging the condition of the aeroplane and the lessee's compliance with the terms of the lease, we do not consider they should be taken as contemplating that the aeroplane, of acknowledged increased value, should be handed over without receipt of payment in terms of the lease of the agreed sum reflecting that increase.

 

28. We are satisfied that the words `upon re-delivery' in Clause 3.10 mean `at the time of re-delivery'.  We are further satisfied that the provision `ER Cost' documentation was intended to form part of the re-delivery process and that Air New Zealand was entitled (so long as it was not then in breach of its obligations under   the   lease)   to  request  payment  of  the  sum

calculated under Clause 3.10.  The respective obligations were not only concurrent but were inter-dependent.  We arrive at that view not by implying a term into the contract but by construing its terms to ascertain what the parties must be taken to have intended."

 

29. Their Lordships agree.  They add only that if it be right that the obligations were concurrent and inter-dependent, it would follow that ANZ were entitled to withhold redelivery of the aircraft on the expiry of the lease until payment of the ER contribution.  It matters not whether one calls that right the exercise of a lien conferred by the contract.  There is no magic in the name.  The effect is precisely the same in both cases.  A contractual right to withhold redelivery is sufficient to enable ANZ to succeed.  For, as has already been said, it was never suggested in the course of the hearing that the bank's proprietary rights under the mortgage could be relied on so as to defeat ANZ's contractual rights under the lease.

 

30. For these reasons their Lordships will humbly advise Her Majesty that the appeal be dismissed.  The appellant must pay the respondents' costs before their Lordships' Board.

 

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Dissenting Judgment Delivered by

Lord Hoffmann and Lord Saville

 

31. We regret that we are unable to agree with the interpretation which the Court of Appeal and the majority of the Board have given to the lease and agree with the judgment of Anderson J.  Since the appeal concerns the construction of a one-off document raising no point of general principle, we state our views briefly.

 

(1)Rather than making assumptions about what the parties must have intended, we prefer to give effect to the terms of the lease.  Clause 3.10 says that payment in respect of the ER work falls due upon (a) redelivery of the aircraft and (b) provision of documentation.  Clause 16.1 says that the aircraft must be redelivered on the expiry date.  There is nothing in the latter clause to make that obligation conditional upon prior or concurrent compliance with the payment obligation in clause 3.10.

 

(2)The question of whether ANZ was entitled to a lien and whether the contractual obligation to redeliver was concurrent with payment for the ER work cannot be separated.  The lessors did not only have a contractual right to redelivery.  They owned the aircraft and so had a proprietary claim to which, absent a lien, ANZ had no answer.  So did Nippon Credit Bank as mortgagees.  Mere concurrency of contractual obligations was therefore insufficient to enable ANZ to retain the aircraft as security for payment.  They needed a lien as well.

 

(3)There is no basis for implying a lien.  The lease in several places makes it clear that the lessor is entitled to recover the aircraft free of liens.  There is no trade practice of implying liens into dry operating leases of aircraft.  The analogy with an artificer's lien implied into a contract to do work on someone else's aeroplane bailed for the purpose is remote.  The aeroplane was not bailed to ANZ to enable the work to be done but for use in its business and the work was done for its own purposes.  Nor is there any business necessity which requires such an implication in this case.  All that can be said is that ANZ would no doubt have liked to have a lien and the lessors would no doubt have liked them not to.  This was a matter for negotiation.

 

(4)In the absence of a lien, construing the contract as implying concurrency of obligation would give ANZ a broken-backed security.  There is accordingly no rational basis for giving it such a construction.

 

32. We would therefore have humbly advised Her Majesty to allow the appeal and restore the order of Anderson J.

 

© CROWN COPYRIGHT as at the date of judgment.