Blue Sky One Ltd & Ors v Mahan Air & Anor (Rev 1)

In conversion, the ordinary measure of damages is the market value of the goods when converted. That measure is not reduced merely because the claimant’s interest is subject to a mortgage, an option, or financing arrangements, unless reduction is necessary to prevent a windfall or is supported by a connected cross-claim. A converter remains liable for reasonable rental value or user damages while retaining the goods.

For tangible moveables, the validity of a proprietary interest is governed by the lex situs at the relevant time. The reference is to the domestic law of the situs, not its conflict rules. The doctrine of renvoi does not apply. A supervening event does not frustrate a contract where the relevant kind of intervention was foreseen when the contract was reaffirmed.

The judgment determined the second phase of related commercial claims arising from transactions concerning six Boeing aircraft acquired through English special purpose companies and operated for the benefit of Mahan Air. The first phase had determined ownership, delivery-up and related issues.

The court considered damages for conversion of three aircraft, claims for user damages and consequential loss, an alleged breach of an obligation to fund repayment of PK Airfinance’s loan, frustration arising from United States sanctions measures, set-off, contempt sanctions, and PK’s direct mortgage claims.

The central private international law issues were the applicable law governing aircraft mortgages and whether a reference to the lex situs included the situs country’s conflict rules.

1. The claimants were entitled to recover the market value of the three converted aircraft as at 16 October 2008, totalling US$114.569 million, if the aircraft were not delivered up. The fact that two aircraft were mortgaged to PK did not limit the owners’ claim against the converters. The mortgagees and owners could not obtain double recovery, and section 7(3) of the Torts (Interference with Goods) Act 1977 addressed the accounting position.

2. The authorities concerning unpaid sellers, hire purchase and similar arrangements did not establish a general rule that a claimant with a limited interest could not recover market value. Those cases prevented a windfall where the defendant had a connected claim for payment or repayment. Here, any loan claim was a separate claim against a different borrower and could not be set off against the owners’ conversion claim.

3. The option agreement did not reduce the aircraft values. Mahan’s conduct amounted to an unequivocal renunciation of the option arrangements, but the question whether the agreements had thereby been discharged was unnecessary to the valuation conclusion. The claimants’ conduct in commencing proceedings and seeking recovery of the aircraft constituted acceptance of the renunciation.

4. The defendants were liable for user damages measured by reasonable rental value, including maintenance reserves. The appropriate figure was US$795,000 per aircraft per month. The claim for consequential loss was dismissed because the evidence did not establish a reliable net loss and the claimants had already had the opportunity to prove it.

5. Mahan and FZE had breached their obligation to provide funding for repayment of PK’s loan. The obligation had not been waived. The agreements were not frustrated: intervention by the United States authorities was foreseen, and the parties had reaffirmed the funding arrangements with knowledge of that risk.

6. The failure to obtain alternative financing prevented recovery of consequential loss. The evidence did not show that the relevant companies had been unable to obtain financing through their parent company or group resources.

7. The validity of the mortgages was governed by the lex situs, namely the law of the place where the aircraft were situated when the mortgages were executed. The reference was to the domestic law of that place. Renvoi was rejected because it would produce uncertainty, especially in commercial transactions. PK’s claim concerning the third aircraft therefore failed under Dutch domestic law. English law applied to the second aircraft because the defendants had not proved that it was in Iran when the mortgage was executed.

8. The defendants’ counterclaim was stayed as a sanction for contempt. The stay could be lifted if the defendants paid the relevant damages and costs, or provided an adequate evidence-based explanation for their non-compliance.

First-instance judgment determining the second phase of the claims. The judgment refers to the earlier phase decision, [2009] EWHC 3314 (Comm), and to a separate contempt decision, [2010] EWHC 128 (Comm).