Sunrock Aircraft Corporation Ltd v Scandinavian Airlines System Denmark-Norway-Sweden

Contractual adjustment provisions must be construed from the words used and the parties’ shared factual background. Evidence of industry practice is inadmissible where the terms have no established customary meaning.

An adjustment for an aircraft engine’s maintenance status concerns the timing and work required at the relevant scheduled overhaul. It does not, without clear words, require payment for the proportion of the life of life-limited parts used during the lease.

Where repair expenditure is unreasonable and the breach causes no diminution in value, only nominal damages are recoverable. An English-law expert determination is presumed to apply English law, so breach of a dispute-resolution agreement cannot produce damages based on an award the expert should not lawfully have made.

SAS sold two Boeing aircraft to Sunrock under a sale-and-leaseback arrangement and then leased them back. On redelivery, the parties disputed the adjustment payable for engine life-limited parts and the effect of two fuselage scab patches.

Morison J held that the maintenance-status adjustment included payment for the proportion of the life of the life-limited parts used during the leases. He also awarded Sunrock the cost of replacing the scab patches as damages for SAS’s breach of an agreement to refer the dispute to an expert, although he held that only nominal damages were recoverable for breach of the repair obligation itself.

SAS appealed from the Commercial Court decision, [2006] EWHC 2834 (Comm). The central issues were the proper construction of the redelivery clause and whether breach of the expert-determination agreement justified substantial damages.

1. Appeal allowed unanimously. Lord Justice Thomas, with whom Lord Justice Wall and Lord Justice Ward agreed, held that the judge had misconstrued the lease and had wrongly awarded substantial damages for breach of the dispute-resolution agreement.

2. The court’s task was to construe the lease text against the common factual background. The parties had used a bespoke, lawyer-drafted agreement. As the expressions used had no established customary meaning, evidence about industry practice and other leases was irrelevant.

3. Under clause 19.9, the engines’ maintenance status was determined by comparing, at delivery and redelivery, the timing of the next scheduled overhaul and the maintenance work then required. The reference to quotations for the applicable work confirmed that the adjustment concerned work that would be done at that overhaul. It did not include a notional payment for the proportion of the lifetime of life-limited parts consumed during the lease. No evidence established an adverse maintenance-status adjustment on the correct construction, so no sum was due for the parts.

4. The normal measure for redelivery in damaged condition was the reasonable cost of repair, subject to the principles in Ruxley Electronics v Forsyth [1996] AC 344. Repair was unreasonable because the scab patches did not affect the aircraft’s performance, marketability, or value. The lease breach therefore caused no loss beyond nominal damages.

5. Although damages may in principle be recovered for breach of an exclusive-jurisdiction or alternative-dispute-resolution clause, an expert acting under an agreement governed by English law was to be assumed to apply English law. Sunrock could not recover repair costs as damages for failure to refer the dispute where, on the same evidence and correct legal principles, an expert could award only nominal damages. Nominal damages were substituted for the award of US$139,800.

• Court of Appeal (Civil Division): Allowed SAS’s appeal in [2007] EWCA Civ 882, reversing the awards for life-limited parts and for the cost of repairing scab patches.

• High Court of Justice, Queen’s Bench Division, Commercial Court: Morison J held for Sunrock on both issues and awarded damages, [2006] EWHC 2834 (Comm).