BAE Systems Management Service (Two) Ltd & Anor v AS Enimex

Contractual damages are assessed by reference to the breach that caused the loss. The duty to mitigate arises only after breach; a party in breach cannot argue that the innocent party should have acted earlier to reduce its loss. Where a contract is terminated in response to repudiatory breach, resulting losses are treated as caused by the breach, rather than by the termination decision. Issues challenging liability or causation cannot generally be introduced for the first time at a damages assessment. An alleged cross-breach relied on to reduce damages must be pursued by counterclaim. Interest on damages is discretionary and may reflect commercial borrowing costs; a contractual interest clause for rent does not govern damages unless its wording extends that far.

The claim arose from the termination of an operating aircraft lease after Enimex failed to pay rent and committed other alleged breaches. Tomlinson J entered judgment for the respondents, with damages and indemnity losses to be assessed. The Admiralty Registrar subsequently assessed damages and awarded interest.

Enimex sought permission to appeal against the assessment. It argued that the respondents had contributed to the breach, had failed to mitigate their losses, and had caused the losses by terminating the lease. It also challenged the treatment of late evidence, argued that the respondents’ alleged breach should reduce the damages, and disputed the interest rate. The central issues were whether those arguments were open at the assessment stage and whether the Registrar had erred in law or discretion.

Permission to appeal refused. Lord Justice Moore-Bick gave the judgment, with Lord Justice Etherton and Sir Scott Baker agreeing.

1. The alleged complicity argument was in substance a defence to liability, not a matter of quantum. It was not open at the assessment stage, particularly because it depended on factual findings which the Registrar had not made and had not been asked to make.
2. The duty to mitigate arises only after a breach has occurred. A contract-breaker cannot contend that the other party should have acted before the breach in order to reduce the loss which would later result. In any event, the Registrar had made no finding that the relevant BAE company was responsible for the repairs or that the first respondent had breached its obligations.
3. The argument that the losses were caused by termination rather than by Enimex’s breach was likewise an attack on liability which should have been raised before Tomlinson J. In substance, termination in response to the contractual repudiatory breach constituted acceptance of that breach; the resulting loss was treated as caused by the breach which led to termination.
4. A claim that the respondents’ own breach caused loss to Enimex would have required a counterclaim for damages. No counterclaim had been brought, and the Registrar’s findings did not establish any breach by the respondents.
5. The weight given to late evidence was primarily a matter for the Registrar. Appellate interference required a serious error which made a substantial difference to the outcome. Neither condition was established.
6. The contractual rate of 3 per cent over Bank of England base rate applied to rent and other sums outstanding under the lease, not to damages. Interest on damages was discretionary. The Registrar was entitled to award 8 per cent, supported by evidence that the respondents’ average borrowing cost exceeded that rate.

None of the proposed grounds had a realistic prospect of success. The renewed application for permission to appeal was refused.

• Court of Appeal (Civil Division): renewed application for permission to appeal, with appeal to follow if permission were granted, refused: [2010] EWCA Civ 107.
• Queen’s Bench Division (Tomlinson J): judgment entered for the respondents for damages for breach of the lease, with damages and indemnity losses to be assessed.
• Admiralty Registrar: damages assessed following the judgment on liability, with interest awarded at 8 per cent.