Mr Justice Davis :
Introduction
- This case involves the interpretation of two written Agreements, one ("the Base Agreement") dated 23 April 2003 and the other ("the Novation and Variation Agreement") dated 23 December 2005.
- In a nutshell the dispute comes to this. The claimant is the owner of Durham Tees Valley Airport ("DTVA") sited near Darlington. The first defendant ("bmibaby") is an airline company specialising in providing low cost carrier services. The second defendant is the parent company of bmibaby and guarantor of its obligations under the Novation and Variation Agreement. The claimant says that under the terms of the written Agreements bmibaby was legally obliged to base and fly two aircraft from DTVA for a period of 10 years on the terms of the Agreements. Bmibaby on the other hand says that it was under no legal obligation to base and fly two (or indeed any) aircraft at DTVA for a period of ten years; rather it had a permissive right to do so and was free at any time to withdraw from DTVA.
- No commercial agreement can be interpreted in a vacuum. The context in which such agreement is made can be of considerable importance in assessing what the agreement means. In the present case, however, the amount of documentation put in (exceeding 15 folders) and the number of witnesses three called on the part of the claimant and four on the part of the defendants, together with one aviation industry expert on each side might have presaged proceedings involving claims of rectification or estoppel. But such claims are not pursued on the statements of case and were disclaimed in argument before me. Both sides also disclaimed any alternative argument of termination by reasonable notice. So the issue remains one of interpretation of the words used in the Agreements, set in context. I emphasise this because I formed the view at trial that, if it can be said that limited companies have feelings, then feelings have been running quite high here. But the legal approach is necessarily objective.
- At trial the claimant was represented by Mr Mark Brealey QC and Mr Andrew Thomas. The defendants were represented by Mr Akhil Shah (it is accepted, I might add, that the second defendant as guarantor has no defence different from that of bmibaby). The presentation of the respective cases, both in written argument and in oral argument, was of a very high standard.
- By agreement, the trial before me was confined to the issue of liability and to one limited factual issue of whether there was foreseeability of certain indirect losses sufficient to render them claimable as damages. It was agreed that an assessment of damages should follow at a later date, depending on my conclusion on liability.
The factual background leading up to the Base Agreement
- The factual background is this.
- An airport has been on the site in question for many years. It changed its name to Durham Tees Valley Airport in September 2004 (indeed that change of name was in consequence of the Base Agreement): immediately before then it was known as Teesside International Airport. It was and is licensed by the Civil Aviation Authority.
- British Midland Airways is, of course, a well known and well established airline, with national and international operations. It had in fact operated flights from the airport to London Heathrow for many years. In early 2002 it was announced that it was setting up a low cost subsidiary, which came to be called bmibaby. It is not necessary to set out the features of such an operation. Putting it shortly, it was designed to be a "no frills" operation, broadly following albeit of course with variations and with its own individual features the successful methods of airlines such as easyJet and Ryanair.
- There is no dispute but that, at least by 2000, the airport was in need of redevelopment and was ripe for expansion. I was told that it was at that time carrying some 700,000 passengers annually when it had capacity for at least 1.2 million passengers. Further the terminal, and other facilities, needed renovation. Local authorities, moreover, were keen to assist in the regeneration of the airport with a view to boosting the local economy.
- The airport attracted the attention of a company called Peel Airports Limited ("Peel"), part of the Peel Holdings Group. By 2002 Peel had become owner and operator of two regional airports, Liverpool Airport and Robin Hood Airport, near Sheffield. The evidence shows that Peel had considerable success in turning round the fortunes of those airports. Thus, as explained by Mr Pakey, now Deputy Chief Executive of Peel, passenger volumes at Liverpool Airport were substantially built up, against a background of very significant investment by Peel, in particular by attracting low cost carriers such as easyJet, which entered into a long term contractual relationship with Peel for Liverpool Airport in 1998. Corresponding success, by broadly similar means, was achieved at Robin Hood Airport. As explained by Mr Pakey and by Mr Hough, the Chairman of Peel, the approach of Peel to its airport operations is long-term in nature: and it also involves maintaining a close relationship with airlines operating out of its airports.
- As Mr Pakey also put it, the airport and airlines would seek to operate on a reciprocal basis: the airport would provide the facilities to enable the airlines to fly to and from the airport; in return the airlines would provide "the critical mass of passengers" to provide, as Mr Pakey put it, both "aeronautical and non-aeronautical income streams". Those connote income both in the form of rates payable by the airline to the airport for each individual passenger and also in the form of expenditure by passengers whilst at the airport: for example, by way of car-parking charges and expenditure at retail and catering operations in respect of the latter of which an airport would conventionally charge the concessionaire a percentage of turnover. (In this regard, I was also told in evidence that longer flights to international destinations potentially could generate more commercial income to the airport than shorter internal flights, in the form of greater customer spend at the terminal on parking facilities, restaurants and so on.) In addition, it was assessed that there were potential commercial property and hotel development possibilities for Peel arising from an acquisition of DTVA.
- By 2002, therefore, Peel had had experience and success in operating regional airports. At that time DTVA was owned, through a limited liability company, then called Teesside International Airport Limited ("TIAL"), by local authority shareholders. Because of financial constraints on local authorities, and difficulties they had in accessing commercial loans needed to help develop the airport, they resolved to seek new investment by selling a 75% shareholding in the company. Offers were invited. The ultimately successful bidder was Peel, the negotiations being protracted.
- The purchase was effected by a Subscription and Shareholders' Agreement dated 1 April 2003. That involved Peel acquiring from local authority shareholders 7.425 million A ordinary shares of £1 each and 4.950 million B ordinary shares of £1 each. In addition, however, the Agreement required Peel to subscribe for 7.5 million new A ordinary shares of £1 each: and it was an expressly stated intention of the Agreement, by clause 9, that the additional sum of £7.5 million so subscribed should be applied towards development of the terminal and airport facilities in the way illustrated in Schedule 2 to the Agreement. This is an indication of the amount of investment Peel was proposing to put into DTVA (along with further investment it has in fact since made) and, really, operates to confirm the long-term nature of its investment.
- However, the negotiations between Peel and the local authority shareholders were not going on in isolation: because at the same time negotiations were already going on between TIAL and the British Midland Group with a view to bmibaby, its new low cost carrier operation, operating from DTVA.
- The practical reality was that, although Peel had not yet formally concluded an agreement with the local authority shareholders, there were firm expectations all round many months before the Subscription and Shareholders' Agreement of 1 April 2003 was formally signed off that the deal would go through. Peel itself was accordingly interested in discussions with airlines with a view to enhancing the prospects for DTVA prior to the Agreement being signed. As explained by Mr Pakey, it was noted that DTVA had no long term agreements in place with any airlines: which did not accord with Peel's preferred approach, as illustrated by its operations at Liverpool and Sheffield. Moreover, Peel (as had previously TIAL) had identified low cost carriers as now a key sector in the aviation industry and was keen to attract such carriers. What Peel, and TIAL, were in particular looking for was a low cost carrier which would have a based operation at DTVA. A based operation was particularly attractive because that connoted that the airline in question would park its aircraft, after operational use in the day time, overnight at the airport: this would not only provide presentational advantages, in connoting the equivalent of an "anchor tenant", but also have operational and financial advantages. A based aircraft would not only prospectively fly out in the morning, it would return in the evening, thereby increasing passenger throughput (and thereby again potentially, passenger expenditure) at the terminal. Further, of course, that aircraft might undertake further flights (or "rotations") during the day. Moreover, since a based aircraft would be parked over night at the airport, that would mean that the crew could then return to their homes, saving airlines accommodation costs. Such a factor also would potentially help to generate local employment, and thence prospective Local Authority grants, since aircrew would be recruited locally; and, further, extra jobs would be generated in the terminal operation and related operations and services, because of the extra flights prospectively generated.
- Bmibaby had first established a base at East Midlands Airport in February 2002 and was looking to establish further bases: as Mr Turner, Chief Executive of British Midland plc, said in his witness statement "the bmibaby brand
needed to grow quickly to survive". In July 2002 Cardiff was added as a second base. In the meantime the airport, via Mr Lang, then a director of TIAL and subsequently a director of Peel, had been invited to make a presentation on 1 May 2002 with a view to its becoming a base airport for bmibaby. The case to be presented by TIAL was to be upon the assumptions, as stated by bmibaby, among other things of "up to 2 units for winter 2002" and "a minimum of 3 units for summer 2003". Under the heading "Commercial Deal" a number of points were set out, including "Term 7 years". Newcastle Airport was another so invited (as it happened, that airport became a further base for easyJet) Newcastle was by then an established airport and, by reason of its location, was potentially a competitor to DTVA. In commercial terms, therefore, the overall position at this time was that DTVA was looking to expand; that it had spare capacity; and that it was not a base for a low cost carrier but was very anxious (and particularly so after Peel become involved) to attract one: bmibaby being a particularly attractive and prestigious proposition. So far as bmibaby was concerned, that was a new operation as a low cost carrier and one looking to expand the number of its bases. Looking at the evidence overall, I think it incorrect to state (as bmibaby at times since has sought to do) that, then and thereafter, bmibaby in negotiating terms held all the cards: although there is no doubt that bmibaby was a very attractive proposition for DTVA as a based airline, if suitable terms could be agreed, and had a strong negotiating position. DTVA nevertheless itself had benefits to offer a low cost carrier operation.
- There was extensive communication between TIAL and bmibaby throughout 2002. The airport was invited to make a further presentation on 9 September 2002, against an indication that bmibaby was focusing on selecting a Northern base for its operations. Discussions continued. In the event, bmibaby shortly thereafter decided to select Manchester Airport as its third base: nevertheless, it remained interested in DTVA as a potential base in the North-East. By this time, Peel had come on the scene as a potential substantial investor in DTVA and this fact was being promoted by the airport in the course of its negotiations with bmibaby. The evidence was that by this stage DTVA was in negotiation with no other prospective base airline operator apart from bmibaby.
- Bmibaby had prepared a detailed internal financial evaluation for a third base in the North dated 23 October 2002. That had recommended DTVA (called MME, the international airport suffix) as the third base. It stated a preference for DTVA over Newcastle assessing it as "considerably more profitable", and among other things said "if bmibaby does not start up at MME some other low cost operator will". On the assumptions there made, including as to flight routes and assuming two aircraft operating out of DTVA, a net operating profit for bmibaby operating from DTVA, on a prudent basis, was projected by bmibaby as £378,000 for 2003, £2.145 million for 2004 and £1.792 million for 2005.
- At a meeting on 29 October 2002, a representative of the local authority shareholders was present (with one other) as was Mr Lang, on behalf of TIAL. Mr Turner, Mr Davis and Mrs Irving attended on behalf of bmibaby. Detailed notes were made. They show that bmibaby was requiring a commitment to rebrand the airport. They also show that bmibaby was requiring a commitment of additional funding for the development of the terminal if it was to proceed. For its part, TIAL was stating that it was looking for a long-term deal with bmibaby. There was a discussion about a pricing structure (for passenger charges) ranging from £1 in year 1 rising to £3 in year 7 and thereafter to year 10 with Retail Price Index increases. Mr Lang mentioned that local government funding had been provided for new roads in the vicinity of the airport and for drainage costs, said to involve expenditure of £8 million. Numerous other points were discussed. Mr Turner indicated that bmibaby was looking for £750,000 in marketing support from local government funding (via a body called One North East), together with sums put at £5,000 per job created in training support funding.
- After the meeting Mr Lang wrote to Mr Turner on 31 October 2002 a lengthy subject to contract letter. In the course of it he amongst other things stated: "TIAL has constructed a funding package of around £1.5 million to support the establishment of a bmibaby base operation at the airport. TIAL believes it has presented a competitive pricing structure to bmibaby on the basis of a 10 year deal."
- In the course of November 2002 Mr Pakey, on behalf of Peel, was introduced into the discussions with bmibaby. By letter to it of 15 November 2002 he indicated, among other things, that Peel was envisaging a financial commitment over five years of £20 million for DTVA. For his part, Mr Lang on 15 November 2002 wrote to Mr Turner saying that he had considered further the "risk sharing element of our offer in the early years of a bmibaby base operation" and proposed further improved charges over each of the 10 years. Negotiations continued. It seems reasonably clear that by then all concerned were proceeding on the footing that Peel would indeed take control of TIAL (as it duly did) and that TIAL itself would indeed conclude a deal with bmibaby.
- On 28 March 2003 Peel sent to British Midland Regional Limited, trading as bmibaby, a formal letter, clearly intended to be an agreement collateral to the agreement whereby Peel acquired a majority stake in TIAL. By paragraph 1 of that letter this was said:-
"In the event that Peel Airports Limited ("Peel") acquires a shareholding in Teesside International Airport Limited ("TIAL") or otherwise acquires operational control of Teesside International Airport ("the Airport"), then in consideration of British Midland Regional Limited trading as bmibaby ("bmibaby") entering into an agreement with TIAL for the operation of services by bmibaby from the Airport no later than 31 October 2003 in the form annexed to this letter (or with such further amendments as are agreed by us), Peel agrees and undertakes as follows:-
1. Peel will pay to bmibaby the sum of £500,000 in the form of 9 monthly instalments to commence on or before 7 April 2003, or if later, within 7 days of acquisition of such shareholding or control as a contribution to route support and costs associated with bmibaby setting up its operation at the Airport. The first instalment will be £100,000 followed by 8 monthly payments of £50,000 over the period from May to December 2003.
In the event, however, that bmibaby fails to commence based operations in accordance with the contract with TIAL or alternatively, withdraws services from the Airport within twelve months of the date of commencement of services, then in either scenario, Peel shall be entitled to recover such monies paid to bmibaby under this letter (as shall not have been spent on marketing and launch costs by bmibaby) should bmibaby fail to prove the use of reasonable commercial endeavours in the development of the base operation at the Airport. Additionally, if such withdrawal occurs prior to all payments having been made, then for the avoidance of doubt, no further payments remain due and owing from Peel to bmibaby."
The letter also stated that Peel would undertake an investment programme in the airport with an initial investment of not less than £7.5 million and, subject to growth, further investment in excess of £10 million over the next five years. In addition, commitments were given to try to ensure external funding (including from One North East) for an access road to the terminal; modern car park facilities; and transport links to the airport. An assurance as to pursuing rebranding was also given. The letter concluded:-
"We trust this letter emphasises the commitment Peel is willing to make to Teesside International Airport and bmibaby in respect of its consideration (sic) to commence services from the airport."
- Very shortly thereafter, on 1 April 2003 as I have said, the Subscription and Shareholders' Agreement was signed. Shortly after that again, the Base Agreement was signed on 23 April 2003.
The Base Agreement
- The Base Agreement, self-evidently, is not what one might style a lawyers' agreement (I was told that it was drafted by the business people concerned, albeit reviewed by in-house legal departments). It is nevertheless detailed and, on its face, a formal contract. The named parties are TIAL and British Midland Regional Limited. Somewhat inconveniently it has no numbered clauses.
- The opening provisions are these:-
"Date: 23 April 2003
Airline: British Midland Regional Limited trading as bmibaby
Operation: Initial 'lead-in' flying programme (to an agreed number of destinations) to commence no later than 31 October 2003 to support the establishment of a minimum x 2 based aircraft operation (initially B737) operating exclusively from TIAL by Summer 2004.
Capacity: Capacity will be determined by the relevant route network delivered in consultation with TIAL.
Duration: 10 years from the establishment of the based aircraft operation as defined above.
"
- There are then further provisions, including some quite technical details on charging structure. The charging structure, geared to load factor, involved low passenger charges in the early years, rising thereafter steadily up to year 7, with increases thereafter to year 10 to reflect the Retail Price Index. Under the heading "Marketing: Base Establishment Initial 2 based aircraft operation" this was provided:-
"TIAL will pay to bmibaby the sum of £850k in the form of marketing support on the condition that bmibaby establish a 2 based aircraft operation at TIAL by Summer 2004. Delivery of this funding will be made via the Airport as a payment to bmibaby in the form of a contribution towards an approved Marketing Plan supplied by the airline, designed to promote the region. For a winter 2003 launch of services by bmibaby, this funding will be delivered 50% by 14 May 2003 and 50% by 31 July 2003.
In the event that bmibaby fail to commence operations or withdraw from TIAL within 12 months of launch, then TIAL reserves the right to clawback all such funding as shall not have been spent on marketing and launch costs by bmibaby should bmibaby fail to prove the use of best endeavours in the development of the base operation
In addition to the above sum in the event that Peel Airports Limited or another investor acquire a shareholding in TIAL or control of the airport, £500k will be paid to bmibaby by Peel (as a contribution towards route support and costs associated with bmibaby setting up its operations at the airport) or such other investor in the form of 9 monthly instalments from, on or before 30 April 2003 to 1 December 2003 inclusive.
In the event, however, that bmibaby fails to commence based operations in accordance with the contract with TIAL or alternatively, withdraws services from the Airport within twelve months of the date of commencement of services, then in either scenario, Peel shall be entitled to recover such monies paid to bmibaby (as shall not have been spent on marketing and launch costs by bmibaby) should bmibaby fail to prove the use of reasonable commercial endeavours in the development of the base operation at the Airport. Additionally, if such withdrawal occurs prior to all payments having been made, then for the avoidance of doubt, no further payments remain due and owing from Peel to bmibaby.
"
It is not disputed that the sums payable by TIAL would primarily derive from external local government funding.
- There were then various other provisions. By way of Tourist Board Funding, TIAL agreed to pay to bmibaby the sum of £100,000 on the terms specified, including payment in two tranches for "a winter 2003 launch of services". Route Development support was agreed to be provided in the form of a cash payment by TIAL per destination as follows:- Year 1 £50,000, Year 2 £25,000, on certain expressed assumptions, including an assured minimum of five frequencies a week to any destination and full consultation with TIAL on the route planning process. It was also provided that "this structure of route development support will be paid to bmibaby for each and every new destination that the airline introduces from TIAL during the term of the deal."
- Under the heading "Training" it was provided that TIAL would pay to bmibaby the sum of £5,000 at the commencement of each bmibaby job created; and, prior to commencement of a base operation, a further £200,000 of training funds. Other provisions related to payment for aircraft parking; a fuel rebate "during the term of this deal"; a provision whereby TIAL would provide bmibaby with a package of advertising sites at the airport to a current market value of "no less that £100,000 in year 1" with contributions to advertising requirements "from year 2 onwards at a rate to be agreed"; free staff car parking and security passes (to a maximum number) for bmibaby staff "for a period of two years from the establishment of a base operation".
- After various other provisions, this was provided under the heading "Development":-
"bmibaby has identified to TIAL certain potential destinations and cities it may wish to serve during the term of this agreement (see list attached at Schedule 1). TIAL confirms that it will not actively pursue further development of any specific scheduled destination, (as defined in Schedule 1), currently being operated, to any bmibaby base during the term of this deal.
From time to time, should TIAL be approached by another airline to operate to any destination within the existing bmibaby network at that time, then TIAL will discuss with bmibaby whether it has any plans to operate the route from TIAL within a 12 month period from that date. If declined then TIAL may proceed with negotiations outwith the terms of this agreement, but not on more favourable terms than those offered to bmibaby.
Similarly, (but save where TIAL is already bound by existing agreements with incumbent operators), TIAL will not offer more favourable discounts or incentives to another carrier on those routes operated by bmibaby from TIAL, nor offer a more favourable charging structure to any other carrier at the Airport.
For the avoidance of doubt, all existing route networks with incumbent operators at TIAL at the date of this agreement are specifically excluded and TIAL reserves the right to agree any such future terms as deemed appropriate with these operators on such existing routes from time to time."
The appended schedule contained a lengthy list of destinations: it was common ground before me that, by aviation industry standards, it was an unusually lengthy list for such a purpose and whereby DTVA was (if the routes were operated by bmibaby) restricted in its dealings with other airlines.
- I should say something about the word "exclusively" as used in the "Operation" designation in the Base Agreement (and, subsequently in Clause 2 of the Novation and Variation Agreement). This, as the expert witnesses agreed, was a well understood meaning in the aviation industry. It connotes that a based aircraft will always fly from and return to its base. It is possible and quite common (in the absence of agreement to the contrary) for an aircraft, for example, to fly, taking the airport base as A, a route pattern of A → B → C → B → A (called a "W" pattern in the industry). But an exclusive pattern generally is A → B → A → B → A: all flights are thus either into or out of the airport. That of course increases the number of flights ("rotations") into and out of the base airport: and so has attractions for an airport. In addition, as I was told, it has also efficiency and financial advantages for the airline, if volume is there, because it exposes the airport to more passengers.
- A different concept is "exclusivity". Under aviation law, putting it very generally, an airport cannot grant a monopoly on any route to an airline: another licensed airline cannot, generally speaking, be prevented, assuming slots are available, from operating such a route from that airport. Exclusivity, which commonly includes an agreement by an airport not to solicit other airlines thus connotes that a particular airline has a favoured deal in terms of passenger rates charged: another airline seeking to fly that route may be charged the full published rates by the airport. That concept is reflected in the terms of the "Development" clause in the Base Agreement and, in due course, in Clause 5, headed "Development and Exclusivity", of the Novation and Variation Agreement.
- A complete copy of the Base Agreement is appended to this judgment as Appendix 1.
- Quite what is the correct legal interpretation and effect of the Base Agreement is a matter hotly disputed between the parties in these proceedings.
Events following the Base Agreement
- Whether or not there was a contractually binding obligation on bmibaby to base and operate two aircraft at DTVA by the summer of 2004 is one principal matter of dispute. What cannot be disputed is that there was at the time at least a mutual expectation that this would happen.
- But it did not happen.
- In accordance with the Base Agreement, marketing was put in place to publicise the new bmibaby operation and routes from DTVA; and tranches of the £750,000 agreed to be provided by TIAL and the £500,000 agreed to be provided by Peel were paid. There were also extensive discussions as to flying programmes. Progress towards rebranding the airport under its current name was made: and in due course the name of the airport was duly changed to its present name and the name of TIAL was changed to the present name of the claimant company. Bmibaby for its part commenced a "lead-in" operation at DTVA from October 2003, using an aircraft based at a different base. In October 2003, however, Mr Lang was informed by Mr Davis (then Managing Director of bmibaby) that there were difficulties and that potentially only one aircraft could be based at DTVA by March 2004. Reference was made to crewing difficulties and other problems. This was discussed by the Board of the claimant in November 2003. There were thereafter protracted discussions between DTVA and bmibaby. On 7 January 2004, Mr Lang sent an e-mail to Mr Davis pointing out that, by the summer of 2004, phase 1 of the investment programme at the airport would have been completed, that rebranding had been approved and that financial support from DTVA and Peel in the sum of £925,000 had been provided to bmibaby. Mr Lang stated that he was "stunned and confused" to learn that only one aircraft was to be based at DTVA, saying among other things that "the whole financial viability of the deal for TIAL was dependent on offsetting the financial support/pax [passenger charge] discounts against forecast volumes from the x2 aircraft". In an internal note to Mr Hough, sent at around this time, Mr Lang complained that on a contractual basis bmibaby had "blatantly breached the terms
put more bluntly, it looks like the airport has been shafted by the airline".
- Proposals were made to resolve the position. Mr Lang for example, proposed that the second based aircraft operation be extended to summer 2005. In the result, from around April 2004 bmibaby commenced a based operation at DTVA with just one Boeing 737 aircraft, flying a variety of routes. Throughout the year there was discussion as to the performance on these routes for example, the performance on the Belfast route gave rise to considerable concern in terms of passenger volumes. At all events, in November 2004 bmibaby decided that it would not base a second aircraft at DTVA in 2005. It had in fact in the meantime decided to establish a base operation at Birmingham Airport. With regard to DTVA, bmibaby was concerned that even with one based aircraft the numbers were not encouraging and a significant loss was being made in 2004 and was projected for 2005. Winter performance was also assessed as "way behind the other bases". At all events by November 2004 the Board of bmibaby had decided to increase its operations at other bases, including Manchester and Birmingham, but not to allocate a second aircraft to DTVA. An internal e-mail of 11 November 2004 records Mrs Irving of bmibaby saying: "With [DTVA] budget 2005 now 1 aircraft only rather than 2 aircraft required per contract by summer 2005, I have assumed that there will be no liability to repay the support delivered for aircraft 1 of £875k from MME, Tourist Board and Peel
." DTVA only learned about this decision indirectly (Mr Turner had some difficulty in the witness box in explaining why DTVA was not openly told at the time) and immediately remonstrated. As it happens, Mr Bryon, then managing director of bmibaby, albeit writing in a somewhat separate context, by e-mail of 9 December 2004 to DTVA had said: "
one aircraft isn't enough to do anything properly
."
- On 30 November 2004 Mr Lang, on behalf of DTVA, sent Mr Turner a lengthy e-mail complaining about the situation, saying that bmibaby was "reneging on a contractual commitment for the second time" and querying bmibaby's commitment to DTVA. On 7 December 2004 Mr Turner wrote a letter in response, the first paragraph of which said:-
"For the avoidance of doubt I confirm the roll out of additional unit into [DTVA] is delayed not cancelled. [DTVA] will be the recipient of our next aircraft and we take our contractual commitments to you very seriously."
- He asked for patience. Quite what were those "contractual commitments", as acknowledged in the letter, is unclear in the light of bmibaby's present contentions and Mr Turner had difficulty in clarifying the matter in his evidence. Mr Lang's response, at all events, was to repeat that bmibaby was not complying with the contract and to refer to a need for DTVA to consider "legal remedies open to us for redress". Correspondence continued. Bmibaby's internal projections in the meantime continued to show a loss for its operations from DTVA in 2005. An internal e-mail of 14 December 2004 from Mr Bryon to Mr Turner referred to potential losses at DTVA of £2.8 million for 2005 with two aircraft. He said: "Ironically withdrawing from [DTVA] would kill two birds with one stone! Just a thought!". On 1 March 2005 Mr Lang wrote to Mr Turner a long letter proposing certain terms and among other things stating:-
"We do however have a 10 year contract with bmibaby and expect the airline to deliver against this. At the same time it is essential that DTVA is able to achieve forecast growth projections to support its own capital investment programme
."
A proposal was then made by Mr Lang in this letter that the contract be varied with bmibaby committed to deliver a second based aircraft by March 2006 at the latest, with other proposed variations: it also being said that the proposed variations did not address the "financial losses DTVA would endure until March 2006 when the second aircraft arrives".
- The response of Mr Turner of 24 March 2005 started in this way:-
"Thank you for your letter. I am afraid we have some very difficult issues here. The largest and most insurmountable rests with the overall poor performance of baby at DTVA. Despite high hopes and a substantial amount of money input from many sources, the financials and prospects are far and away the worst of our 5 bases. This is a huge disappointment to both ourselves and yourselves, however, we are prepared to persevere with DTVA at least over the summer and we will commit another unit for the season summer 06. If however, there is a further deterioration in the financial results, then we reserve the right to place the appropriate capacity into the airport as we feel necessary."
Mr Lang regarded that as a further negotiating ploy on the part of Mr Turner; at the same time DTVA, however, was acknowledging to itself the importance of bmibaby's business to DTVA. After a subsequent meeting Mr Bryon wrote to Mr Lang on 3 May 2005 stating, among other things:-
"bmibaby is committed to meeting its contractual obligation to base and operate a second aircraft at [DTVA] and recognises that the current delay has a commercial impact to both bmibaby and DTVA."
Various proposals were then made, including that bmibaby commit to allocating a second based aircraft (Boeing 737 300) at DTVA and that significant budget support for that second aircraft be provided by DTVA in a sum of £800,000. A further letter, to broadly similar effect, was sent by Mr Bryon on 11 July 2005 in which he confirmed that "bmibaby will base a second aircraft at DTVA from Spring 2006 onwards based on your confirmation of delivery of these monies
." One of the proposals also made in discussions was that bmibaby would now seek exclusivity on significantly fewer routes than those listed in the Base Agreement.
- There were further negotiations: and eventually the Novation and Variation Agreement was signed on 23 December 2005.
The Novation and Variation Agreement
- The Novation and Variation Agreement had two principal purposes. First, to give effect to the parties' agreement as to the variation of the terms of the Base Agreement. Second, to provide for bmibaby (now a limited liability company in its own right) to take over the contractual commitments of British Midland Regional Limited, with its ultimate parent, the second defendant, acting as guarantor. The parties were the claimant, British Midland Regional Limited, bmibaby and British Midland Airways Limited.
- In point of form, the Novation and Variation Agreement is drafted in a rather more legalistic way than the Base Agreement.
- The relevant clauses of this Agreement provide as follows (after recitals which, among other things, state that it is supplemental to the Base Agreement).
"1. Novation
1.1 In consideration of the covenants and conditions contained in this Novation and Variation Agreement and with effect from the date of this Novation and Variation Agreement ("the Novation Date"):
(a) bmibaby agrees with DTVAL to assume all the obligations of BMRL to DTVAL under or arising from the original Agreement from the Novation Date except to the extent that such obligations have been fully and properly discharged prior to the Novation Date;
(b) DTVAL releases and discharges BMRL from all its obligations and liability to DTVAL under the original Agreement and from all (if any) liability to DTVAL (whether in contract or in tort or otherwise) arising from any act or omission of BMRL in the discharge or purported discharge of all or any of BMRL's obligations to DTVAL under the original Agreement; and
(c) DTVAL agrees with bmibaby to be bound by its obligations under the original Agreement (to the extent that they have not been fully and properly discharged prior to the Novation Date) in every way as if bmibaby had been a party to the original Agreement in place of BMRL and agrees that bmibaby shall enjoy the rights of BMRL in respect of the original Agreement in every way as if bmibaby had been a party to the original Agreement in place of BMRL.
1.2 The parties acknowledge and agree that:
(a) any obligations of BMRL owed to DTVAL pursuant to the terms of the original Agreement which remain undischarged at the Novation Date shall not be deemed to be waived by DTVAL by virtue of the novation of the original Agreement pursuant to the terms of this Novation and Variation Agreement, but shall be performed by bmibaby in accordance with clause 1.1(a);
(b) any obligations of DTVAL pursuant to the terms of the original Agreement which remains undischarged at the Novation Date shall not be deemed to be waived by bmibaby by virtue of the novation of the original Agreement pursuant to the terms of this Novation and Variation Agreement, but shall be performed by DTVAL in accordance with clause 1.1(c); and
(c) the novation of the original Agreement pursuant to the terms of this Novation and Variation Agreement shall be without prejudice to any rights accrued prior to the date of this Novation and Variation Agreement with the intent that such rights shall be enforceable by or against (as the case may be) bmibaby in place of BMRL.
(d) each party shall (at its own cost) execute such further deeds and documents and do all such things as the other parties reasonably require to give effect to the novation contained in this Novation and Variation Agreement.
2. Operation
bmibaby agrees to the establishment of a second based aircraft operation (initially B737) operating exclusively from Durham Tees Valley Airport ("DTVA") by Spring 2006 (to commence no later than 30 April 2006). For the avoidance of doubt, therefore, from Spring 2006 bmibaby will support a x2 based aircraft operation operating exclusively from DTVA.
3. Commercial
For the avoidance of doubt:
(a) the terms and charging structure will remain as set out in the original Agreement; and
(b) the term of the original Agreement shall expire on 30 April 2014.
4. Marketing
4.1 Base establishment/Tourist Board funding of £475,000 will be delivered from DTVAL to bmibaby within 7 days following the launch of the second based aircraft. Delivery of this funding will be made as a payment to bmibaby in the form of a contribution towards an approved Marketing Plan supplied by bmibaby, designed to promote the region. The clawback provision referred to in the original Agreement will continue to apply in relation to this funding (but for avoidance of doubt clawback does not apply to any funding paid in relation to the first based aircraft).
4.2 DTVAL will procure that Peel Airports Limited will contribute the sum of £100,000 to bmibaby's development funding such payment to be made within 7 days following the establishment of the second based aircraft. Again, the clawback provision will continue to apply in relation to this funding provision in respect of the second based aircraft only.
4.3 Route Development Support being £50,000 in year 1 and £25,000 in year 2 for each new destination shall continue to apply as set out in the original Agreement.
4.4 DTVAL will pay to bmibaby the sum of £5,000 at commencement of each bmibaby direct job created and the parties will continue to co-operate on facilitating any application by DTVAL to recover some or all of such payments from third party sources of funding.
4.5 DTVAL will use all reasonable endeavours to obtain and pay to bmibaby a further £100,000 for training funds from the Learning and Skills Council or such other organisation as may provide such funding on behalf of bmibaby such provision to replace the existing provision in the original agreement. However the parties acknowledge that they must liaise closely to ensure that any application criteria are strictly adhered to in order to seek to obtain such funding.
5. Development and Exclusivity
5.1 In relation to the destinations referred to at Schedule 1 of the original Agreement bmibaby only now accepts exclusivity in relation to those destination airports operated by it as specified below and not any of the other destinations referred to in that schedule.
Malaga, Alicante, Palma, London Gatwick, Paris-Charles de Gaulle, Jersey, Cork, Newquay, Knock, Bordeaux
For the avoidance of doubt such route exclusivity is agreed based on a minimum of 3 rotations per week to such defined destination airports.
5.2 The parties agree to liaise and consult diligently in order for them to agree the summer 2006 flying programmes to be operated by bmibaby from DTVA to reach agreement on the extent of destinations to be served by bmibaby for this period by the end of November 2005.
5.3 Excluding the destinations as defined in 4.1 [sic] DTVAL is entitled to pursue all other route development opportunities with other carriers as it considers appropriate.
5.4 For the avoidance of doubt the parties confirm that all terms of the original Agreement remain in full force and effect save as varied by the terms set out in this Novation and Variation Agreement."
Clause 6 contains the guarantor obligations of the second defendant and Clause 7 sets out the operative law and jurisdiction provisions.
Events following the Novation and Variation Agreement
- It is of note that at the time the Novation and Variation Agreement was made bmibaby's own budget projections (assuming two based aircraft) were that the operation at DTVA in 2006 would make a significant net operating loss, in excess of £2 million.
- Two events did occur after this agreement, as contemplated by its terms. First, bmibaby did base an additional (Boeing 737) aircraft at DTVA, which was launched on 26 April 2006. Second, the sums payable under Clause 4 were duly paid by DTVA and Peel.
- The launch of the second aircraft did not have any immediate effect on improving the financial performance of bmibaby at DTVA: on the contrary, the losses continued and were not alleviated. But even before a fully informed assessment of the actual impact of basing a second aircraft at DTVA could be made there were developments within bmibaby.
- Mr Crawford Rix took over as effective Managing Director of bmibaby from Mr Bryon (who had himself replaced Mr Davis) in May 2006, his appointment being confirmed in July 2006. Mr Rix immediately undertook a review of bmibaby's operations. He formed the view that a different strategy was called for. He did not share the broadly positive strategic views of Mr Davis and Mr Byron before him with regard to DTVA as a base. In a note prepared by him in June 2006 he recorded his initial observation that bmibaby had "spread itself too thin in terms of UK bases". He considered "base scale" was of fundamental importance. He commented favourably on Cardiff and Manchester airports and recommended a "scale based" operation in the Midlands heartland, with economies of scale achievable at East Midlands and Birmingham airports. But his assessment of DTVA was unfavourable; his initial view was that it should be closed down as a base in the winter, thereby reducing winter season losses, deploying the two aircraft to provide winter maintenance cover elsewhere and then to redeploy them in 2007 potentially to take advantages of perceived opportunities at Birmingham. His analysis was that to close DTVA would result in a projected saving of some £2.6 million. At this time, bmibaby was projecting that its overall business would lose some £2 million in 2006 against a budgeted profit of some £3 million.
- Further investigation thereafter by Mr Rix confirmed him in his view that it was necessary to close the DTVA base. He saw no signs of improvement. Bmibaby now assessed losses (at gross operating profit level) of £3.2 million for 2006 for DTVA and over £2.5 million for 2007. Mrs Bell told me in evidence that by then it was identified that operating two aircraft was in fact worsening the losses at DTVA, and that it was not viable for bmibaby to stay on at DTVA. The proposal of Mr Rix was raised and discussed at Board level. The performance of DTVA was compared very unfavourably with other bases. Alternatives were discussed; but the decision to close it as a base was made by bmibaby in August 2006. The decision was communicated to Mr Lang on 23 August 2006.
- Mr Lang did not take at all kindly to this indication. He queried the past performance and future prospects suggested by bmibaby. He emphasised the financial and other support given to bmibaby and the investment of Peel (then amounting to some £10 million) in the airport. In a letter dated 8 September 2006 he said, among other things:-
"DTVA is quite clear that there exists a 10 year signed contract with bmibaby to base a minimum of x2 based aircraft operation (initially B737) operating exclusively from [DTVA] by summer 2004. Should bmibaby decide to carry out its threat to withdraw from DTVA then this will be viewed as a breach of contract and full compensation will be pursued by the airport
."
- The response of Mr Turner was by e-mail of 11 September 2006. It stated: "Once I got the threat letter all bets are off." It is a little unclear what was meant by that the impression I got from Mr Turner is that he regarded all this as yet another negotiating position. At all events his e-mail went on later to say: "basically the business case has not delivered from your airport". He also vouchsafed: "there will be no public criticism of your company whatsoever". That is a puzzling remark: at all events there has been no suggestion in the statements of case that DTVA or Peel had in any way defaulted in their obligations or that standards at the airport were not acceptable.
- Be that as it may, bmibaby did close down its base at DTVA, publicly announcing its decision to do so on 14 September 2006. All operations had ceased by 6 November 2006 and the two aircraft were removed, never to be returned as based aircraft. Calculations of bmibaby contained in the papers indicate that, after giving credit for total funding received from DTVA and Peel of £2.177 million, the total loss for its operation at DTVA between 2003 and 2006 was in the order of £7.2 million.
- A claim form, alleging breach of contract and claiming very substantial damages, was issued on 18 March 2008. As part of its initial claim the claimant (and Peel) also sought to recover monies under the clawback provisions of Clause 4.1 and 4.2 of the Novation and Variation Agreement. However, in the light of evidence filed, those claims were withdrawn, by amendment, and Peel itself ceased to be a party to this claim.
The evidence
- It seemed to me that the respective witnesses called by the claimant and the defendants had very firm and decided views as to what the Agreements were intended to mean and did mean and most did not hesitate to say so in their witness statements. It is, of course, a feature of this case that these views are diametrically opposed. In such circumstances, it is necessary to emphasise what is legally elementary: that the meaning of a contract is to be established objectively by reference to the words used in the contract, set in the factual context in which it was made. Evidence of the subjective intentions of the parties or of their negotiations or of previous drafts of the written agreements are, as the law currently stands, ordinarily inadmissible for this purpose.
- Various authorities were cited to me as to the legal approach to be adopted. It is unnecessary to refer to them all, as they are so familiar. As good a starting-point as any remains the observations of Lord Wilberforce in Reardon Smith Line Limited v Hanssen-Tangen [1976] 1 WLR 989. In Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896, Lord Hoffmann at pages 912-913, in another very familiar passage, restated that approach identified by Lord Wilberforce, saying that the relevant background could include "absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man". In BCCI v Ali [2002] 1 AC 251 Lord Bingham summarised at p.259 the general approach to be adopted in this way:-
"To ascertain the intention of the parties the court reads the terms of the contract as a whole, giving the words used their natural and ordinary meaning in the context of the agreement, the parties' relationship and all the relevant facts surrounding the transaction so far as known to the parties. To ascertain the parties' intentions the court does not, of course, inquire into the parties' subjective states of mind but makes an objective judgment based on the materials already identified."
- Consequently, with all respect to the various factual witnesses, I discount views expressed by them as to the intended meaning, or their understanding, of the contracts. To the extent that these factual witnesses also offered views as to how a reasonable person in the aviation industry would interpret the contracts, then since those witnesses (not unnaturally) in effect self-appointed themselves as representatives of the reasonable person in the aviation industry I discount those too.
- All the witnesses were cross-examined on their witness statements. All struck me, I should record, as experienced, honest and straightforward. My distinct impression was that those called on behalf of DTVA were very indignant at the way bmibaby had behaved, the more so given the amounts of money applied, directly and indirectly, to assist it in establishing its operation at DTVA. Those on behalf of bmibaby, on the other hand, conveyed a sense of exasperation that DTVA could have claimed to expect that bmibaby should be obliged to commit itself to the risk of a 10 year commitment to the airport (in an industry where fluctuations are notorious) and to be required to be exposed potentially to the racking up of continuing losses over an extended period.
- A significant amount of cross-examination was directed at bmibaby's witnesses as to its reasons for closing down its operations at DTVA; as to whether (by comparison with its other bases) DTVA was indeed so poorly performing; as to whether bmibaby had given DTVA a sufficient chance by failing to base two aircraft there until April 2006 (or thereafter, when it did do so in 2006, in giving matters a further proper chance with two aircraft); and so on. I do not regard that of assistance in interpreting the contracts. If bmibaby is right in its construction of the contracts, it had no contractual obligation to continue to operate aircraft from DTVA at all. In such circumstances, if that is right, any decision to cease operations assuming good faith, and no one alleges bad faith here is not legally challengeable. Indeed, although bmibaby was at pains to justify its decision to cease operations at DTVA on the ground of the losses made there (which I accept was the principal reason, coupled also with Mr Rix's new strategic approach with regard to the number of bases), it could lawfully, on its interpretation of the contracts, have ceased operations at DTVA even if it had been making a profit for example, if it assessed that even more profit could be made if it relocated its aircraft to other bases. However, I should record my finding on the evidence that, having regard solely to its own interests, the decision of bmibaby in 2006 to withdraw all operations and fly no flights from DTVA was a proper and justifiable decision, properly and reasonably open to it in commercial terms. But that does not, I repeat, of itself answer the question of interpretation as to whether it was contractually free not to operate from DTVA.
- One important element, all the same, in assessing the meaning of a commercial contract is to assess the commercial sense (or lack of it) of the competing interpretations.
- Although each side chose with varying degrees of rhetoric to describe the other's interpretation as "ludicrous", "unthinkable" and so on, the fact is, as it seems to me, that those emotive words are only appropriate (it at all) if one looks at the position solely from the perspective of the individual party concerned making such accusation.
- Thus bmibaby (and its expert, Mr Price) regarded it as "unthinkable" that any sensible airline would, in a new venture, lock itself into a commitment to base and operate aircraft from a particular airport for a 10 year period. The well-known fluctuations in economic circumstances and airline traffic so indicated, they said. I can, of course see why an airline like bmibaby should want to maintain as much flexibility as possible. Moreover, there was something in Mr Shah's observation that if the anticipated operations failed there was a shared loss between the parties and if it succeeded there was a shared gain. Even so it must be remembered that there are other parties to a contract; and only a moment's reflection indicates that bmibaby's standpoint is very one-sided.
i) A 10 year deal would bind bmibaby. But it would also bind DTVA. Thus, by such a deal, bmibaby would achieve, as it were, a degree of security of tenure: in the sense that no other airline could be proffered the favourable exclusivity rates for the specified routes, and thus competition would be potentially deterred.
ii) In many business contexts long term deals are struck even though risk is involved. That is ordinary business risk.
- Bmibaby sought at one stage to construct an argument that, by reference to aviation industry practice, a long (10 year) deal of this kind in relation to a regional airport simply did not happen indeed it was bmibaby's expert Mr Price who in this context used the word "unthinkable", although he later modified that in evidence to "unwise". Mr Stephenson, the expert called by the claimant, took a wholly different view. This approach as advanced by bmibaby completely fizzled out.
i) First, it was established that other airlines and airports did on occasion enter into long term deals easyJet at Liverpool with a 20 year term was one public example noted in its 2000 prospectus. Ryanair at Liverpool was another example. (It is true that in each case that was done after an initial successful period at the airport but the point is they still did so.) There are other examples which I need not go into. Peel itself had done so not only at Liverpool but also at Sheffield.
ii) Second, that long-term deals whether or not including break clauses were known to exist or were considered within the industry to be mutually advantageous in some circumstances was made clear in, for example, a report of the Competition Commission in the BAA Airports Market Investigation. At paragraph 10 this was said:-
"10. Where airports compete for airline business, it is common for airports and airlines to agree multi-year contracts under which the airline pays airport charges varying with volume of business. In general, longer-term contracts can reduce uncertainties to both buyers and sellers, encourage investment and reduce costs and prices. In the context of airports, such contracts are likely to provide airports with a degree of assurance over volume and airlines over charges. Longer-term contracts between airports and airlines make it more expensive for airlines to switch airport during the contract term, but not at contract expiry. Since contract length is negotiated and such costs do not arise at contract expiry, they do not meet the definition of switching costs in paragraph 7 and we do not consider them further."
And in the course of a 2008 Discussion Paper on "The Airport Industry in a Competitive Environment", Mr David Starkie says this:-
"But liberalisation of aviation has increased the risk of airport assets being stranded by the opportunistic behaviour of airlines that are now free to change routes and switch airports at will. Consequently there is now an incentive for the airport to establish with its downstream airline customers negotiated long term contracts for supply that achieve a better balance of risks."
Mr Starkie noted that "some have been written with 20 year terms".
- At all events, the evidence before me showed that there was no aviation industry custom and practice which would indicate that a long-term deal of the kind said by DTVA to have been concluded here was "unthinkable". Indeed, the evidence was to the contrary: and in reply Mr Shah in the event disclaimed reliance on any aviation practice to this effect.
- Ultimately, as it seemed to me, this point led nowhere. Mr Lang, Mr Pakey and Mr Turner, as did the two experts, Mr Stephenson and Mr Price, agreed in the course of their evidence that there was no set form of contract or deal in this context. They all agreed that all depended on the individual terms negotiated between airline and airport in each individual case. Thus not only is it contrary to ordinary principle, in interpreting a contract, to make enquiry as to what terms others were negotiating in other deals: but also there is no value in doing so in this case, given the agreed evidence in this case.
- I was rather more impressed by DTVA's arguments on the underpinning commercial purpose and factual matrix as (objectively) supporting its interpretation.
i) There was potential advantage (as well as risk) both to airport and airline in a long-term arrangement: see above.
ii) In the present case, DTVA (both by itself and through external finance from local authorities) and Peel had put in a very great deal of money in establishing the airport and assisting bmibaby's operation. It can be accepted, and I do accept, that much of this investment of the airport terminal and facilities, and, indeed, rebranding, would have occurred anyway, irrespective of bmibaby's involvement. But, as the evidence shows and as the contractual terms also indicate, very substantial sums running into seven figures were invested specifically to assist bmibaby itself to establish an operation at DTVA. There is force in Mr Brealey's submission that one would not, looking at the matter objectively, expect such expenditure to be paid and received had there been a mutual expectation that bmibaby was not required to base any aircraft or (if it did) that it legally could leave the airport at any time: although I will have to come on to deal with the claw-back provisions contained in the Agreements.
- Against all that, one might query the commercial sense of an Agreement whereby DTVA and Peel are contractually required to put in very substantial sums of money to assist in establishing bmibaby's operation at DTVA; but, as is bmibaby's case, bmibaby itself was under no obligation at all to operate aircraft from DTVA (and, if it did not, would thus generate no passengers from which DTVA and Peel could recoup their investment). In effect, bmibaby's interpretation is that the Agreements, whilst imposing positive obligations on DTVA, were essentially only permissive so far as bmibaby itself was concerned.
- Thus, as it seems to me, bmibaby's interpretation of the agreements seems to me to connote a rather one-sided deal in its favour. Indeed, Mr Turner really accepted as much in his evidence. His point was that bmibaby had the dominant bargaining position and was seeking to protect its own interests and would be looking to achieve as favourable, and as flexible, a deal to itself as it could. Accordingly, he said, it made commercial sense for bmibaby to arrange the contracts so as to give it this flexibility in enabling it not to fly from DTVA (as, he and Mrs Irving said, in fact was justified and borne out by events, given the losses incurred). Moreover, his perception was that DTVA was very anxious to secure bmibaby to DTVA as a low cost carrier, and so could be reckoned to be prepared to take its chance that things went well. Further, as Mr Shah submitted, that did not leave DTVA wholly without remedy if bmibaby withdrew or did not operate flights from DTVA because DTVA could then, he asserted, offer the routes to any other airlines which it could attract, freed of its exclusivity obligations to bmibaby.
- Taken overall, in my view the factual matrix and commercial purpose considerations (objectively viewed) are consistent with DTVA's case. But at the same time it cannot be said they are altogether inconsistent with bmibaby's case nor can it be said that bmibaby's interpretation leads to a result which is commercially without any sense.
The express terms of the contracts
- I revert then to the terms of the Agreements which have to be construed.
- Mr Shah's primary submission was that the Base Agreement did not contractually oblige bmibaby either to establish or to operate any aircraft from the airport; and the Novation and Variation Agreement only obliged bmibaby to establish a two aircraft based operation by Spring 2006, but not thereafter to continue to do so, or to fly any aircraft, from the airport.
- Mr Shah argued the point at great length. It seems to me, however, that such a construction is wholly contrary to the wording of the Agreements, ordinarily read.
- The duration of the Base Agreement is, without any qualification, defined as "10 years from the establishment of the based aircraft operation". It is very difficult to extract from such definition justification for Mr Shah's assertion that this was "mere projection". "Operation" was so defined as to extend to an initial lead-in flying programme to commence "no later than" 31 October 2003 "to support the establishment of a minimum x2 based aircraft operation (initially B737) operating exclusively from [DTVA] by Summer 2004".
- This is not the language of permission (as is Mr Shah's contention): it is the language of obligation. It is clear that the "Operation" term is a key to the whole contract. Further, as Mr Brealey pointed out, the phrases "to commence no later than", "a minimum x2 based aircraft" and "operating exclusively" and "by Summer 2004" all connote obligation. Moreover, Mr Brealey pointed out that if this agreement was permissive only so far as concerned bmibaby (as bmibaby contends) it leaves unexplained what the obligations on DTVA were. If, for example, bmibaby flew only one or two flights a year or if it sought to suspend operations for a while and then sought to return, claiming exclusivity rights under the Agreement, would DTVA still have obligations under the Agreements? And would it have been precluded from soliciting other airlines?
- Of course, an agreement must be read as a whole. Doing that, it seems to me other provisions support the contentions of DTVA. Thus the terms provide that passenger charge fees rise progressively from modest amounts (agreed by Mr Turner in evidence to be very favourable) to significantly higher amounts by years 7 to 10. It is clear, and the evidence confirmed it, that the structure of those charges was to enable bmibaby, at the commencement of its operation, to have favourable rates and to enable DTVA to recoup by the higher charges in the later years. It is very unattractive, and not, objectively, commercially very plausible, that bmibaby could as Mr Shah's arguments would connote have been expected to be free to walk away once the early years of favourable passenger charge rates had elapsed. Mr Price, in evidence, suggested that if bmibaby was still there after a few years that would suggest a profitable operation with good volumes and hence, especially given the expense of switching, a disinclination in practice on the part of the airline to leave. That may be so: but it still seems to me that these provisions tell strongly in favour of a contractual obligation to establish a base and then to continue to operate from it for a period of 10 years. That is also supported by the terms relating to advertising, route support and so on: all consistent with a continuing obligation on the part of bmibaby to operate.
- Mr Shah, however, relied strongly on the clawback provisions contained in the Base Agreement (and reflected also in the side letter of 28 March 2003). He says that the implication of such provisions and the express language used ("in the event that bmibaby fail to commence operations or withdraw from [DTVA] within 12 months from launch", repeated elsewhere in slightly different words) indicate that this was indeed a permissive agreement, and connotes that bmibaby was indeed free not to commence operations or was free to withdraw.
- I can see that these provisions lend some support to Mr Shah's argument. But they are not of themselves by any means conclusive and, in any event, set in the context of the rest of the Base Agreement, they cannot in my view have the weight Mr Shah would give them. On the contrary, as Mr Brealey pointed out, there was commercial reason for including these provisions: for the £850,000 payable by DTVA was (as was known) in reality mostly coming from local government funding: the external funders and DTVA would thus want some expressed protection for their funding. In addition, an express clawback in favour of Peel was understandable, given that Peel was not a party as such to the contract. It may also be noted that the clawback in favour of Peel arises, on one stated scenario, in the event that bmibaby "fails to commence based operations in accordance with the contract with TIAL" (emphasis added). In my view the existence of these clawback provisions do not operate to displace the otherwise clear meaning of the other provisions and overall effect of the contract. (It also follows and Mr Shah did not seek to argue otherwise - that these provisions do not of themselves restrict the entitlement of DTVA to general damages in the event of breach.)
- The other terms of the Base Agreement (for example, repeated references to "during the term of this deal") although not by themselves conclusive also seem to me to be consistent with the proposition that there was here a contractual obligation to establish and to operate a two based aircraft operations for a term of 10 years.
- I accordingly reject Mr Shah's arguments on this point.
- I should note one or two other points:-
i) First, the phrases "based aircraft" and "operating exclusively" are aviation industry terms, having the meaning I have explained previously. This is common ground.
ii) Mr Shah, however, at one stage raised a quibble as to whether "operating" connoted "flying". Set in context, it obviously does. Further, if it be necessary, Mr Stephenson (one of the experts) said, and I accept, that that is its generally understood meaning in the aviation industry, in referring to aircraft. He was evidently astonished that it could even be suggested that, in this Agreement, it did not include flying.
iii) Mr Shah queried the words "initially B737" what happens, he asked, after the initial period? In my view, common sense indicates that it would be a Boeing 737 or equivalent aircraft.
iv) What is meant "by Summer 2004"? This is loose wording and the word "summer" is not defined in the Base Agreement. The word "summer" can have varying meanings depending on context, as I see it. Sometimes it can be used to connote a 3 month season (June, July, August) to be contrasted with the other 3 month seasons of autumn, winter and spring. According to the Shorter Oxford English Dictionary, sometimes in popular usage it connotes the period from mid-May to mid-August. Sometimes again it may be used in contrast simply to winter, in denoting one half of the year. I was told, in evidence, that for the scheduling purposes of the International Air Transport Association, "summer" is defined as meaning from the last Sunday in March (corresponding presumably to the start of British Summer Time) until the last Saturday in October, with "winter" being for the remainder of the year: although there was no evidence that this particular definition was widely accepted for airport/airline contracts (which, as I have said, are individually negotiated). All the same, I think, on the whole, that it is this last sense it has here. I note that under the heading "Tourist Board Funding" in the Base Agreement there is a reference to "a winter 2003 launch of services". That at least fits with the IATA definition. "Operation" also defines the lead-in programme to commence no later than 31 October 2003, which is approximately consistent with the IATA definition. Moreover, under the heading "Route Development" in the Base Agreement, there is reference to certain repayments "should any such destination fail to operate for a full IATA season". On the whole, therefore, I would interpret the words "by summer 2004" as connoting the end of the six month period from 31 October 2003: which means that the operation was to be established and operating by no later than 1 April 2004. (It is tempting, but not legitimate, in this context, to refer to the subsequent Agreement, which revises the starting time to "Spring 2006", with a defined commencement of no later than 30 April 2006).
- Turning then to the Novation and Variation Agreement, this is even plainer, as I see it, as to the obligation both to establish and operate a two based aircraft operation. (Indeed it seems odd, objectively viewed, for the parties simply to replicate a "permissive" agreement in circumstances where DTVA had in correspondence been alleging breach of contract to operate and bmibaby had been saying it accepted its "contractual obligation": a dispute the parties were seeking to compromise.) At all events Mr Shah was in argument constrained to accept that the words "agrees to the establishment" of a second based aircraft operation mean what they say. However, he then maintained there was no obligation to maintain a base. That is a senseless interpretation. He went on to submit that the words "operating exclusively from [DTVA]" were descriptive only, connoting no obligation to operate and cannot be construed as meaning "agrees to operate". I cannot possibly accept that either the words must be there for a purpose and the purpose is clear. Mr Shah's interpretation is very strained and operates to deprive those words of meaningful and commercial effect and really amount, in my view, to hairsplitting: there can be no sense in having an establishment of an operation without the intent also of actually operating it. Moreover, Mr Shah's interpretation also serves to deprive the second sentence ("For the avoidance of doubt
") of any meaningful effect.
- Mr Shah again relied on the clawback provisions repeated in this Agreement (and as to which my views are as set out above). He also relied on Clause 5.1 as connoting that bmibaby was under no obligation to operate flights. That clause operates to say where route exclusivity may be lost. But the fact that bmibaby is not required to fly a sufficient number of flights to maintain "exclusivity" on certain routes does not of itself mean that it is free not to fly any flights at all under the Agreement. I will have to come back to this clause in the context of the argument on implied terms. But in this context of the express terms, it in my view cannot bear the weight Mr Shah seeks to give it. He also suggested that Clause 5.2 relates only to the summer 2006 programmes because it was not assumed that bmibaby would be around at DTVA after that season: but again I do not think this clause can bear that weight, set in the context of the Agreement as a whole
- Thus I conclude that on the terms of the Novation and Variation Agreement bmibaby was obliged to establish by 30 April 2006, and thereafter to continue to base and to operate two aircraft: and this obligation was for the term of the contract, defined by Clause 3(b) as expiring on 30 April 2014. Such a conclusion is, in my view, consistent moreover with the factual matrix and also gives rise to (objectively viewed) a commercially sensible result.
Agreement to agree
- Mr Shah's next argument was to say that the Novation and Variation Agreement gave rise to an unenforceable agreement to agree. The argument was that, to give effect to this agreement, flight programmes had to be agreed: Clause 5.2 was therefore essential to the implementation of the Agreement. But Clause 5.2, on its wording, gives rise only to an agreement to agree: and therefore the whole agreement is unenforceable.
- Put like that although here too I will have to refer to aspects of this argument when I come to deal with implied terms I reject that too. It is self-evident that Clause 5.2 is not a precondition of the operation of the entire Novation and Variation Agreement: for the agreement was to liaise and consult to agree the Summer 2006 programmes by the end of November 2005. No doubt this clause had been drafted much earlier in point of time: but the fact is that the parties were prepared to contract on 23 December 2005 when this whole purported obligation was spent (presumably the parties had come to some practical agreement in the meantime on the summer 2006 programmes). Mr Shah was then reduced to submitting, contrary to his earlier submission, that the clause extended not only to the programmes for Summer 2006 but to all future programmes. That, however, is flatly contrary to the words of Clause 5.2.
Implied terms
- I turn next to the question of implied terms. To me, this is the real difficulty in this case.
- The law as to implied terms has long established principles. The usual problem and this case is no different is applying the principles to the contract in question.
- Two of the crucial principles are these. A term may not be implied simply because it is reasonable it must be necessary to imply the term. Conversely, if a term is to be implied, it must be a reasonable term: and one aspect of that is that it must be sufficiently precise to be capable of effect being given to it.
- Although historically there have been quite rigid categorisations of the circumstances in which terms may be implied, the position is not inflexible. As Lord Wilberforce said in Liverpool City Council v Irwin [1977] AC 239 at p.253:-
"But there are varieties of implications which the counts think fit to make and they do not necessarily involve the same process
."
He went on to say in that case at p.254:-
"The present case represents a fourth category or, I would rather say, a fourth shade on a continuous spectrum. The court here is simply concerned to establish what the contract is, the parties not having themselves fully stated the terms. In this sense the court is searching for what must be implied."
- Here too I do not think I need to go into the authorities in any detail not least because, in reply, Mr Brealey helpfully cited to me the very recent decision of the Privy Council in Attorney General of Belize v Belize Telecom Limited (unrep. 18 March 2009) where the general principles are restated. Lord Hoffmann, in assessing the issue of when and when not a term may be implied, reviewed a number of the authorities. He pointed out (paragraph 16) that the court has no power to "improve upon" the instrument which it is called upon to construe and that it cannot introduce terms to make it fairer or more reasonable. He went on to say at paragraph 22, after reviewing the authorities:-
"It follows that in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument read against the relevant background would reasonably be understood to mean."
And at paragraph 27 he said:-
"
the fact that a proposed term would be inequitable or unreasonable, or contradict what the parties have expressly said, or is incapable of clear expression, are all good reasons for saying that a reasonable man would not have understood that to be what the instrument meant."
- Mr Brealey's starting point was beguilingly simple. The express obligation on bmibaby, contained in the contracts, was to establish and operate two based aircraft at DTVA and to continue to do so for the 10 year period. In November 2006 bmibaby conclusively breached the contracts by withdrawing the two based aircraft from DTVA. Therefore, he says, liability is established: and the matter simply becomes one of quantifying the damages: albeit he accepted that "difficult issues", as he put it, of quantification could arise.
- But such an approach only operates to defer to another forum a decision which has to be made in any event and is appropriately made at this stage. For the question still has to be asked: what is it that, contractually, bmibaby was obliged to do? Until that is established, an assessment of whether there is a breach causative of loss cannot be made. And to assert that bmibaby was obliged to base and operate two aircraft from DTVA over 10 years immediately raises the question of the nature and extent of its obligations: how many flights? how many passengers? and so on.
- Mr Brealey accepted that this had to be decided. Indeed the point was pleaded at the outset fully in the Particulars of Claim, no doubt just because it was appreciated that it was an essential element of the claim. There is proposed in paragraph 13.3 of the Particulars of Claim an implied term as follows:-
"13.3 that the First Defendant, and previously BMRL, would during the term of the first agreement and subsequently the novation agreement ensure or alternatively use its best endeavours to ensure that its operations from the Airport in respect of the 2 aircraft based there exclusively were performed to the maximum capacity in respect of the number of flights and the number of passengers per flight and that the maximum number of flights capable of being achieved were achieved and that the maximum number of passengers capable of being secured to fly on its aircraft and to use its services were secured."
(An express term to the same effect had been also pleaded in paragraph 10, but clearly there is no express term to this effect.)
- One only has to look at such a proposed implied term to see that it bristles with difficulties (and Mr Shah duly pointed some of them out). In the event, by amended particulars of claim served on 13 March 2009 shortly before the trial, the proposed implied term in paragraph 13.3 was amended by deleting the words "ensure or alternatively". But in addition a further implied term was now pleaded to this effect:-
"13.4 that the First Defendant and previously BMRL would operate the two aircraft based at the airport in a manner which was reasonable in all the circumstances."
And at trial Mr Brealey disclaimed reliance altogether on the implied term as formulated in paragraph 13.3 (as amended). He relied solely on that now pleaded in paragraph 13.4.
Submissions and disposal on implied term
- The issue then is whether this is a term which can properly be implied. Bmibaby says that it is too vague and imprecise to be workable or enforceable and cannot be taken as one which (objectively) reasonable parties could be taken to have agreed. Mr Shah was in a position to redeploy for this purpose many of the points which he had deployed at the earlier stages of the construction argument as to the extent of the express obligation.
- As I see it, Mr Brealey has a favourable starting point. These were formal contracts intended between business people to have legal force and effect. Further, as I have concluded, bmibaby was under an obligation to base and operate two aircraft from the airport for a 10 year term. In such circumstances no authority is needed although there is in truth ample authority for the proposition to justify an approach whereby the court strives to uphold the bargain and give effect to the Agreements.
- I feel compelled, however, to the conclusion that it is not legally permissible to imply the term which is advanced. My reasoning is as follows.
- An implied term, no less than an express term, must be sufficiently precise as to be enforceable; it is after all, part of the agreement. If matters essential to a bargain are not agreed, whether expressly or impliedly, then the courts may not be able to cure the defect and certainly no court can remake a bargain for the parties. Relevant principles are helpfully summarised by Chadwick LJ in BJ Aviation Limited v Pool Aviation Limited [2002] P&CR 25 at pages 373-4 in these terms:-
"18. The problems which arise in law in a case where parties have entered into an agreement which, although it has the appearance of a bargain, leaves something to be agreed, are the subject of numerous authoritative decisions. The cases are, if I may respectfully say so, helpfully and comprehensively reviewed in the judgment of Rix LJ in Mamidoil-Jetoil Greek Petroleum Co SA v Okta Crude Oil Refiner AD neutral citation [2001] EWCA Civ 406, reported at [2001] 2 Lloyd's Rep.76. The principles to be derived from those cases are set out at paragraph 69 of that judgment see page 89 in the Lloyd's Reports.
19 It is unnecessary, and would be superfluous, to review those authorities again in this judgment. It is I think sufficient to identify five propositions which, as it seems to me, are not capable of dispute.
20. First, each case must be decided on its own facts and on the construction of the words used in the particular agreement. Decisions on other words, in other agreements, construed against the background of other facts, are not determinative and may not be of any real assistance.
21. Secondly, if on the true construction of the words which they have used in the circumstances in which they have used them, the parties must be taken to have intended to leave some essential matter, such as price or rent, to be agreed between them in the future on the basis that either will remain free to agree or disagree about that matter there is no bargain which the courts can enforce.
22. Thirdly, in such a case, there is no obligation on the parties to negotiate in good faith about the matter which remains to be agreed between them see Walford v Miles [1992] AC 128 at page 138G.
23. Fourthly, where the court is satisfied that the parties intended that their bargain should be enforceable, it will strive to give effect to that intention by construing the words which they have used in a way which does not leave the matter to be agreed in the future incapable of being determined in the absence of future agreement. In order to achieve that result the court may feel able to imply a term in the original bargain that the price or rent, or other matter to be agreed, shall be a "fair" price or a "market" price, or a "reasonable" price; or by quantifying whatever matter it is that has to be agreed by some equivalent epithet. In a contract for sale of goods such a term may be implied by section 8 of the Sale of Goods Act 1979. But the court cannot imply a term which is inconsistent with what the parties have actually agreed. So if, on the true construction of the words which they have used, the court is driven to the conclusion that they must be taken to have intended that the matter should be left to their future agreement on the basis that either is to remain free to agree or disagree about that matter as his own perceived interest dictates there is no place for an implied term that, in the absence of agreement, the matter shall be determined by some objective criteria of fairness or reasonableness.
24. Fifthly, if the court concludes that the true intention of the parties was that the matter to be agreed in the future is capable of being determined, in the absence of future agreement, by some objective criteria of fairness or reasonableness, then the bargain does not fail because the parties have provided no machinery for such determination, or because the machinery which they have provided breaks down. In those circumstances the court will provide its own machinery for determining what needs to be determined where appropriate by ordering an inquiry (see Sudbrook Trading Estate Ltd v Eggleton [1983] AC 444)."
- I have already dealt with Mr Shah's argument by reference to Clause 5.2 of the Novation and Variation Agreement. That, as I have held, was not integral to the Agreement if only because such obligation as it purported to impose had in point of time elapsed before the Novation and Variation Agreement was even signed. But he is entitled to point out in the present context by reference to Clause 5.2 that where the parties had attempted to address the issue, they had done so in language of "consultation to agree" conventionally unenforceable in law. He went on to submit that this sort of difficulty cannot be overcome by the use of an implied term appealing to reasonableness. In this context, he said, that is simply inoperable: what bmibaby might view as reasonable DTVA might not, and vice versa (see the last sentence of Chadwick LJ's fourth proposition): and there is no objective yardstick by which the required number of flights could be assessed. Indeed the evidence of all the relevant witnesses before me (both of fact and expert) was to the effect that, although consultation with an airport was appropriate, the ultimate decision as to flying programmes for each season was for the airline.
- By way of illustration, and amplification, Mr Stephenson said in his report at paragraph 3:-
"The decision to operate a flying programme will be dependent on the programme being capable of achieving profitability within an acceptable time frame and sustaining it thereafter. What is an acceptable time frame will be different for individual airline investors as will the level of profitability itself
. The development of an optimised and sustainable profitable programme can take some time, as route and scheduling options which look good on paper sometimes don't or can't work, and the economic and competitive environment can change
"
He commented that a flying programme "rarely stays completely stable" and that an operating pattern would not necessarily be uniform in each season. Mr Price in his report (at paragraph 74) commented that the suspension and termination by airlines of routes or operations is common in the industry. He reiterated (as did other witnesses) that it is general practice that it is the individual airline which makes the ultimate operational decisions as to routes, schedules, flying programmes and so on. As he later put it, emphasising that every airline and airport is unique: "A flying programme is a bespoke design by each airline to take account of its economic requirements." He added that "historical information is of little use in deciding on a future programme
. There is no industry practice that allows the assumption to be made that a past operation could or would continue into the future". Evidence of other witnesses was to like effect. All this I accept.
- For his part Mr Brealey accepted that it is, ultimately, for an airline to decide on its flying programmes. But he said that the failure of the parties in either of the Agreements to agree on such programmes, or to introduce an objectively enforceable mechanism for agreeing such programmes (or, for example, to include contractual requirements as to a minimum number of flights per year or a minimum number of passengers carried) was not fatal.
- Mr Brealey pointed out that, as is undoubtedly correct, in many contexts an implied term by reference to reasonableness can commonly be made. For example, that is sanctioned in a number of contexts in the Sale of Goods legislation. He also says that phrases like the "reasonably skilful and careful doctor" "termination on reasonable notice" and "not unreasonably to be withheld" and so on are well known to, and unobjectionable in, the law. The modern trend, he also emphasised, has been for the courts to seek to uphold contracts by the implication of reasonableness where an agreed mechanism contained in the contract has broken down: see the Sudbrook Estates case, by way of example.
- Even so, there are as I see it formidable difficulties in the way of implying the proposed term here.
i) First, it does not sit at all well with Clause 5.2. As I have held, Clause 5.2 cannot be construed to extend to future programmes in the 10 year term: it only extends to the summer 2006 programmes. But what one can see is that, by reference to the 2006 Summer programmes, the parties had proceeded on the footing that they would "agree to liaise and consult diligently in order for them to agree" the programmes. No back up mechanism in the event of failure to agree is provided. Moreover, as Mr Shah observed, there is no objective requirement of "reasonableness" contained in such provision. On the contrary each party could be assumed reasonably from its own point of view to argue for such a programme as suited its own commercial interests. Their respective interests were by no means coincident. The parties are not contractually required to behave reasonably in the other parties' interests: indeed that is not an easy or natural position to take in a commercial context. It would perhaps be going too far to say that the proposed implied term pleaded in paragraph 13.4 of the amended Particulars of Claim contradicts Clause 5.2 but it does not fit at all well with it.
ii) Second, and reflecting the first point, while the proposed implied term is, in one sense, easy enough to understand as a matter of English language, I find it extremely hard to see how it is to operate in practice. Thus, for whom must the operation be reasonable and how is this to be assessed (over a 10 year term) where the parties have different commercial interests? The situation is entirely different, as it seems to me, from a position where, say, a particular price for land or goods can be ascertained as reasonable by reference to prevailing market prices - or a manner of performance can be assessed as reasonable against an accepted minimum standard. It is very hard, in such circumstances, to see how objectively an airline operator (or airport) could be expected to be taken to have impliedly agreed a term such as is proposed. Certainly there was no evidence of aviation industry usage and practice adduced before me to justify the implication of such a term.
- In support of his argument, however, Mr Brealey relied on two particular cases. The first was that of Abrahams v Herbert Reiach Limited [1922] 1KB 477, a decision of a particularly famous constitution of the Court of Appeal: Bankes LJ, Scrutton LJ and Atkin LJ. In that case a firm of publishers agreed to publish articles in the form of a book, with royalties of 42p. per book sold. The form and price of the book, number of copies to be printed and date for publication were not agreed but left to the discretion of the publisher. It was held at first instance by Sankey J that there was a contract: and that required the defendant to publish one edition of the book, albeit not to continue thereafter to publish it. The only issue before the Court of Appeal was the quantum of damages payable.
- The approach of the three judges to the issue arising was not in all respects the same. In his judgment, Bankes LJ referred to the general principle that where a contract may lawfully be performed in one of several ways damages are to be assessed by the standard least onerous to the contract breaker. But his view was that there was not here a contract of this kind. Rather this was a contract containing only one obligation viz. to publish. The question thus came to assessing how the publisher would have performed the contract, had they not repudiated it. Without over much analysis, he concluded that a figure of £100 damages was a fair amount. Scrutton LJ commented that the contract was "so vague and general in its terms that it is hard to say what it means". He rejected the contention that if just one copy was published that would satisfy the obligation; he concluded that the publishers were "bound to make such a publication as could be considered reasonable in the circumstances". Atkin LJ said that, where there was a breach, the first task was to "ascertain what the contract was". He went on to say that there were no alternative obligations in this contract and "to adjust the rights of the parties the only method is to form a reasonable estimate of the amount the respondents would be in pocket if the appellant had kept his promise". He went on to observe that everything likely to affect the amount of profit must be considered but that "the publishers are not bound to run risks contrary to their judgment". It is, incidentally, clear from Atkin LJ's closing remarks at page 484 that the evidence showed that there would have been a substantial sale.
- The second case on which Mr Brealey relied was the case of Paula Lee Limited v Robert Zehil Limited [1983] 1 All ER 390, a decision of Mustill J. There the defendants were appointed sole distributors for the plaintiffs for the sale of their range of garments in certain countries. Under the agreement the defendants expressly agreed to purchase not less than 16,000 garments each season. The agreement made no stipulation as to sizes or styles of garments comprising the minimum obligation under the agreement. The defendants wrongfully terminated the agreement with two seasons left to run. On the assessment of damages they argued that, under the agreement, they were free to choose the cheapest garments and therefore the plaintiff's loss of profits was to be assessed on 32,000 of their cheapest garments. Mustill J rejected that. He commented (at p.392j) that "The scheme of the contract is not fully worked out in the document and it is not easy to complete the scheme by implication". He referred to the authorities, including Abrahams; and then said this at p.393 e-f:
"I believe that some at least of the difficulties which arise in this branch of the law can be minimised if it is kept in mind that inquiry always involves a comparison between the plaintiff's actual position in face of the breach and the position which he would have occupied if the contract had been performed. This must involve an identification of the promise, followed by a valuation of its promised worth to the promisee. Each part of the inquiry may involve considering a choice which would have been open to the promisor."
He went on to say this at p. 394 ad:-
"There is one further distinction which must be mentioned, namely that which exists between (a) an obligation expressed in terms of a range of alternatives from which the promisor may choose and (b) a simple obligation expressed in an indefinite way. A duty of the latter kind may often be construed as an obligation to act reasonably, and the damages will be assessed on the basis of what would have been reasonable. That this distinction does exist cannot, I think, be disputed, and it presents no serious theoretical difficulty when it is possible to say that there is one reasonable mode of performance, and one alone. But what of the case where there is more than one reasonable method, or a whole range of reasonable methods, shading into one another? One possible view is that the court should try to forecast how the defendant would have performed but for the repudiation. In my opinion this approach is inconsistent with principle, since the defendant may in the event have done no more than was necessary to qualify as reasonable, and to assess damages on any other basis would be to penalise him for failing to do something which he was not obliged to do. The answer must, in my judgment, be that the court is to look at the range of reasonable methods, and select the one which is least unfavourable to the defendant, bearing in mind, of course, that in deciding what methods qualify as reasonable the question must be approached with the interests of both parties in mind. This is, I believe, the way to account not only for the decision in Abrahams v Herbert Reiach Ltd, but also for the divergencies of approach which might seem to exist between the various judgments, and within the individual judgments, delivered in that case."
It may be noted that, in saying that a duty of the latter kind "may often be construed as an obligation to act reasonably", Mustill J was being careful not to lay down any general rule of universal application. He went on to conclude at p.396 that, in the circumstances of that case, there was an implied term that the choice of dresses must be made in a manner that was reasonable in all the circumstances; that it was hard to think that it was contemplated that the defendants could permissibly have ordered 16,000 garments per season of the same size, colour and price; and accordingly "some constraint on the defendants' freedom of choice must be assumed, in order to make sense of the agreement"; and thus that the agreement was to be construed as subject to an implied term that the garments would be selected in a reasonable manner.
- It is apparent that the term that DTVA seeks to imply in the present case has been formulated by reference to these two authorities. But the present case is not on all fours with either of them. In Abrahams, the agreement was to publish an edition of a book hardly comparable to an obligation to operate two based aircraft over a term of 10 years, in foreseeably fluctuating economic conditions, from an airport. In Paula Lee, there was a contractual obligation to take 16,000 garments per season. Damages were thus payable. The limitation was on the invocation, for the purposes of assessing damages, of the usual entitlement to rely on the "least onerous" method of performance by reference to commercial practice had the suppliers performed the contract, realistically they simply would never have taken only the 16,000 cheapest garments but would have taken a reasonable selection. Thus these cases illustrate the proposition that the courts will not in assessing damages sanction an unreal "cut off the nose to spite the face" argument: see Laverack v Woods of Colchester Limited [1967] 1QB 278 at p.295 (per Diplock LJ). Again, that is not comparable with the present case. One might (perhaps) see some analogy with Paula Lee had the Base Agreement or Novation and Variation Agreement expressly stipulated for a minimum number of flights or passenger movements: the matter would then be left to the discretion of bmibaby as to which flights and routes it chose to operate, but subject (arguably) to a constraint on its discretion to ensure that it did not act unreasonably. But the Agreements did not do that how many flights or passenger movements, as a minimum, there should be was left completely open. Nor is there any way of assessing how bmibaby would have operated had it stayed at DTVA for the 10 years. I should add in case it be thought relevant and, as the law currently stands, it is neither relevant nor admissible - that at one stage in negotiations there had in fact been raised a proposal that a specified yearly minimum of flight departures and passenger movements be included in the Base Agreement and a draft of the agreement was prepared accordingly; but this was mutually abandoned as recorded in an e-mail of 5 February 2003. What is relevant and admissible, in point of fact, is that neither the Base Agreement nor Novation and Variation Agreement as concluded include any specified annual minimum of passenger movements and/or flights.
- For his part Mr Shah went down a rather different road on the authorities.
- He placed particular emphasis on the very well known case of Hillas and Company Limited v Arcos Limited 1932 43 LL Rep. 359. In that case, the existence of a contract and its breach had been established after a trial. There was then an assessment of damages. The respondents, under the contract, had an obligation to supply softwood goods "of fair specification" over a season. The respondents argued that was an insufficient description to be contractually enforceable and contemplated a further agreement upon an essential term of the overall arrangement, and so was unenforceable. This argument succeeded in the Court of Appeal but failed in the House of Lords.
- Lord Tomlin observed at p.364 that, in the circumstances, "for the contract to fail it is, I think, necessary to exclude as impossible all reasonable meanings which could give certainty to the words". He concluded that the words were sufficiently certain and that the method of assessing the contracted supply was "something which if the parties fail to agree can be ascertained just as much as the fair value of a property".
- Lord Thankerton posed the problem of principle raised in this way (at p.366):-
"The question on which I have had doubt is whether the words "of fair specification", on their proper construction, will enable the subject to be identified by the Court. In other words, do they provide a standard by which the court is enabled to ascertain the subject-matter of the contract, or do they involve an adjustment between the conflicting interests of the parties, which the parties have left unsettled and on which the Court is not entitled to adjudicate? Does the phrase mean a specification which is fair as between the interests, on the one hand, of the seller in respect of the stock of wood, comprising various kinds of wood and various qualities and sizes, available for sale in the season of 1931, and, on the other hand, the interests of the buyer in respect of the requirements of his trade during that season? Or does the phrase mean a fair selection from the seller's stock of wood available for sale in that season? If the former construction be the proper one, I would be of opinion that the Court would not be entitled to adjudicate between the opposing interests of the two parties. If the latter construction be the proper one, the ascertainment of a fair selection from the seller's available stock is within the province of the Court; in that case the Court is applying a standard which is provided by the contract, and is thereby merely identifying the subject-matter of the contract."
He concluded, observing that the parties undoubtedly thought they had concluded a contract, that the second alternative was the right one. Lord Wright in the course of his speech said at p.367:-
"The document of May 21, 1930, cannot be regarded as other than inartistic, and may appear repellent to the trained sense of an equity draftsman. But it is clear that the parties both intended to make a contract and thought they had done so. Businessmen often record the most important agreements in crude and summary fashion; modes of expression sufficient and clear to them in the course of their business may appear to those unfamiliar with the business far from complete or precise. It is accordingly the duty of the Court to construe such documents fairly and broadly, without being too astute or subtle in finding defects, but, on the contrary, the Court should seek to apply the old maxim of English law verba ita sunt intelligenda ut res magis valeat quam pereat. That maxim, however, does not mean that the Court is to make a contract for the parties, or to go outside the words they have used, except in so far as there are appropriate implications of law, as, for instance, the implication of what is just and reasonable to be ascertained by the Court as a matter of machinery where the contractual intention is clear but the contract is silent on some detail. Thus, in contracts for future performance over a period the parties may neither be able nor desire to specify many matters of detail, but leave them to be adjusted in the working out of the contract. Save for the legal implication I have mentioned, such contracts might well be incomplete or uncertain; with that implication in reserve they are neither incomplete nor uncertain.
"
- Mr Shah emphasised that where essential matters were left open and here, he says, the number of flights and routes have, as a matter of obligation, been left entirely open by the parties, whether because they were hoping to agree them for the future (rather as for 2006 they had hoped to do so under Clause 5.2) or for some other reason then a binding agreement can only be regarded as concluded by a process of implication if there are objective criteria available to fill the gap. And here, he submitted and I accept, there simply are none. While an objective yardstick for assessing a "reasonable price" or "reasonable fitness" and the like may well exist in a given case, there is no such yardstick here. For example, there is no course of conduct established here to show what annual programmes or number of flights could be regarded as "reasonable in all the circumstances". Further, as already noted, the evidence was agreed that although consultation was normal and desirable ultimately in aviation practice such matters were, in terms of final decisions, for the individual airline. Further still, this was an individual agreement negotiated between the airport and bmibaby relating to a wholly new operation at DTVA: thus there could be no valid comparison for this purpose with, say, bmibaby's (or any other low cost carrier's) operations at other bases: nor did Mr Stephenson or Mr Price suggest otherwise. Mr Brealey noted that Mr Price, in the course of his evidence, had said that bmibaby's choice of routes for 2006 for DTVA seemed "reasonable" and a "fair mix". But that, in my view, takes Mr Price's observation out of context. Mr Price was not asserting here any objective industry standard (indeed he was denying there was one). It tells one nothing, by way of objective yardstick, for what is "reasonable" over a 10 year term. Certainly, Mr Brealey, accepting as he did that it was for bmibaby to decide on its flight programmes, could identify no "irreducible minimum" as bmibaby's obligation or any means of identifying it. By way of example, from 2004 bmibaby had introduced flights from DTVA to Belfast but those (as with certain other routes) had proved to be unsuccessful and so were reduced or discontinued. Moreover, even on what were agreed in evidence to be "core" low cost carrier routes, for which exclusivity was negotiated in the Novation and Variation Agreement, (including Palma, Malaga, Alicante and so on) bmibaby was not required to fly a minimum of three rotations a week or indeed any flights at all to those destinations: Clause 5.1 clearly, on its wording, permitted it not to do so, albeit at the price of losing its exclusivity and thence favourable passenger charge rates - if it did go below three rotations a week.
- Mr Shah cited to me the Court of Appeal decision in Phillips Petroleum Company Limited v Enron Europe Limited 1997 CLC 329 as an example of a case where, after a detailed review of the authorities, it was held that failure to introduce objective criteria (in a formal long-term agreement, intended to have legal effect but where the parties had, as part of it, agreed to use endeavours to agree an essential matter) rendered the contract ineffective and no term could be implied to meet the deficiency. Potter LJ (agreeing with Kennedy LJ; Sir John Balcombe dissented) said at p.343:-
"The standard of fairness and reasonableness is an objective criterion to which the court is frequently willing to resort when determining a price or other sum not specifically agreed but readily assessable by reference to market rates and prices in the relevant sphere. No such straightforward or well-established exercise arises in a "one-off" case of this kind, in which no criteria have been specified and there are a variety of considerations which may legitimately operate in the minds of the parties in relation to their ability or willingness to agree upon a specific date."
Those observations, in my view, have resonance in the present case. The parties here clearly had differing commercial interests to protect as indeed is illustrated by the very fact that, for commercially justifiable reasons in its own interests, bmibaby eventually withdrew its loss making operations at DTVA altogether in 2006.
- I was referred also to the Privy Council case of Australian Blue Metal Limited v Hughes [1963] AC 74. That was a case concerning a permission to extract minerals from an area of land. The case was, of course, one decided on its own circumstances. But it is relevant that, in delivering the judgment of the Board, Lord Devlin also said this at p.94:-
"The second feature is that no express obligation was imposed on the appellants to do any mining at all, and in their Lordships' opinion none can be implied. The only practicable way of framing such an obligation with sufficient precision to make it enforceable is to do what was done by the parties in the 1942 agreement and specify a minimum quantity of material that has to be won in a given period. Their Lordships were referred to Hillas & Co Ltd v Arcos Ltd, a case in which the House of Lords was able to use the implication of reasonableness to fill the gaps left by the parties. But in the present case there are no criteria which would enable a court of law to determine what would be a reasonable quantity. There would be too many uncertain factors to be taken into account, such as the profitability of mining in the future
."
Mr Shah says that is likewise so in the present case: even granted that here is an express obligation to base and fly aircraft (as I have concluded there was) the obligation is insufficiently imprecise, there is no requirement for a minimum number of flights or passengers, there are too many uncertain factors as between parties with competing interests and the defect cannot be met by an implication of reasonableness. There is, in my view, obvious force in these submissions.
- Another important authority, to my mind, in this context is the case of Baird Textiles Holdings v Marks & Spencer plc [2002] 1 All ER (Comm) 737. In that case the claimant had supplied garments to the defendant for many years. There was no written contract. The defendant terminated the arrangement with effect from the current season. The claimant alleged (among other things) that there were implied contractual obligations on the defendant, pleaded as including, among others, an obligation "to acquire garments from it in quantities and at prices which in all the circumstances were reasonable". The Court of Appeal (Sir Andrew Morritt VC, Judge LJ and Mance LJ) held that the alleged obligation was insufficiently certain to found any contractual obligation because there were no objective criteria by which the court could assess what would be reasonable as to quantity or price. It was also observed that the case was not one in which the court was seeking to uphold the validity of a contract which the parties had evidently sought to make.
- In the present case, of course, there were written contracts: the situation is thus different from that in Baird. Even so, as it seems to me, the approach of the Court of Appeal (which endorsed the judgment of Colman J at first instance on this issue) is very instructive. The authorities were fully reviewed. At paragraph 24 of his judgment Sir Andrew Morritt VC said:-
"The crucial point, in my view, arises from the third issue, namely whether the obligations arising from the alleged implied contract would be sufficiently certain to be contractually enforceable."
He referred to the Abrahams and Paula Lee cases and reviewed Hillas v Arcos and the Australian Blue Metal case. At paragraph 28 he said this:-
"28. In both the cases relied on by Baird, namely Abrahams case and the Paula Lee case, the existence of a contract was not in doubt. The court was concerned with the assessment of damages for the breach of an undoubted obligation. The issue was how it was to be performed. I do not consider that either of them is of relevance to this case."
And at paragraph 30 he, among other things, said this:-
"30. I agree with the conclusion of the judge. The alleged obligation on M&S to acquire garments from Baird is insufficiently certain to found any contractual obligation because there are no objective criteria by which the court could assess what would be reasonable either as to quantity or price. This is not a case in which, the parties having evidently sought to make a contract, the court seeks to uphold its validity by construing the terms to produce certainty. Rather it is a case in which the lack of certainty confirms the absence of any clear evidence of an intention to create legal relations.
"
- It is of course true that the Vice-Chancellor was speaking in the context of a case where the existence of a contract at all, intended to create legal relations, was in issue, and on that basis regarded the Abrahams and Paula Lee cases as being distinguishable, being assessments of damages for breach of an undoubted obligation. But, as I read his judgment, the Vice-Chancellor was not only saying that: he was also saying that, on the issue of certainty, an implied term to the effect that the defendant would acquire garments from the claimant at quantities and at prices which in all the circumstances were reasonable was in any event insufficiently certain to give rise to a contractual obligation.
- Judge LJ agreed with the Vice-Chancellor on the contractual issue (see paragraph 48), as did Mance LJ (see paragraph 57). Mance LJ went on to say this at paragraph 68:-
"68. When the suggested long-term contract is put in these terms, it becomes clear that it would, in case of any dispute, involve the court writing a 'reasonable' contract for the parties, after making a complete review of their situations, needs abilities and expectations. It could only become relevant to seek to identify the impact of such long-term obligations in a situation where actual co-operation had broken down or one or the other party wanted to reduce its commitment to the minimum. So the court would be expected to undertake the exercise in the very situation where the parties' actual behaviour could no longer serve as a guide to the answer. I agree with the Vice-Chancellor that this is not an exercise that the court can or should undertake, or, indeed, which the parties can objectively be taken to have intended. The presence in the suggested contractual formulation of implied duties of good faith is an additional barrier in the way of the conclusion for which Baird contends, in view of English law's general refusal to recognise any duty of this nature as an implied contractual term."
- In my view that is also the situation in the present case. The proposed term is insufficiently precise, and no objective criteria are available as to the manner of performance of the long term obligation to fly (in terms of flight or passenger numbers) to justify in law its implication. The case is thus one of the first kind as identified by Lord Thankerton in Hillas v Arcos. It seems to me that, for the court to seek to assess damages on the basis of the existence of such an implied term and its breach, would not just be an exceptionally difficult, if not impossible, exercise: it would also necessarily involve the court making a bargain for the parties, under the guise of reasonableness, which objectively the parties cannot be taken to have agreed or intended. I repeat that it is also, in my view, of note that where the contracts show that the parties had applied their mind to the issue (viz. in Clause 5.2 in respect of the 2006 summer flying programmes, and also, indeed, the term as to "Capacity" in the Base Agreement) they came up with a formula which was insufficient to amount to any enforceable legal obligation (see BJ Aviation; Phillips Petroleum) and which itself provided no criteria for determination of differences in the event of disagreement. No different conclusion, in my view, can be reached for subsequent flight programmes, for which no express contractual provision at all is made. I thus agree with Mr Shah that to imply the term put forward by the claimant would have the effect of seeking to require the Agreements to do something which they had not been designed to do.
- As to Abrahams v Reiach and Paula Lee they are, as I have indicated above, distinguishable. In Abrahams, the contract was for one edition, which could be produced with good sales: thus it is an illustration of a case where, for the purpose of assessing damages, reasonableness is to be implied as a constraint on choice of "minimum performance" to prevent an otherwise wholly theoretical, improbable and uncommercial performance of the publishing agreement. So the focus was on what (in all probability) the Defendant would have done had he not been in breach. Similarly in Paula Lee: there the agreement was for the supply of a fixed number of garments. It had been operated for a number of seasons and the method of supply and the way the defendant would select garments could be objectively ascertained for the purposes of assessing damages by ordinary commercial considerations of reasonableness in the interests of both parties. That is not the position in the present case. Nor can the position in the present case be equated with an assessment of damages for breach of the kind of exclusive distributorship agreement relating to the sale of goods such as is illustrated by the case of And So To Bed Limited v Dixon [2001] FSR 935.
- Accordingly on this ground, in my judgment, the defence succeeds.
Other Matters
- Having reached that conclusion, other matters fall away. However, out of respect to the careful arguments which I heard, I will briefly record my views.
- First bmibaby contended that if there have been breaches of contract, then by the terms of the Novation and Variation Agreement the claimant had at least waived its rights in respect of any breach of the Base Agreement.
- I reject that.
- It is true that, from a commercial viewpoint, the situation was that the parties could, at the time of the Novation and Variation Agreement, be said to have resolved their differences and were looking to the future, not the past. Clause 5.4 provided that the Base Agreement remained in full force and effect "save as varied by the terms set out in this Novation and Variation Agreement": and, as Mr Shah submitted, the Novation and Variation Agreement had the effect of extending the start up of the two based aircraft operation from "Summer 2004" to "Spring 2006" (no later than 30 April 2006). Thus, he submitted, DTVA had waived its right to claim damages for failure to establish a two aircraft base by Summer 2004.
- However, as I see it, DTVA had in prior correspondence before the Novation and Variation Agreement was made been asserting a right to claim compensation for breach of contract in bmibaby's failing to establish and operate a two based aircraft operation by Summer 2004. It would, I think, be quite a strong thing to deprive DTVA of its right so to claim in the absence of clear wording. So far from the Novation and Variation Agreement containing such wording it in fact contains wording to the contrary. For Clause 1.2 dealt expressly with waiver; and by Clause 1.2(c) it was expressly provided that the novation should be without prejudice to any rights accrued prior to the date of the Agreement and be enforceable by or against bmibaby in place of BMRL. That, in my view, concludes the matter. I note also that the period of the agreement was not, by the Novation and Variation Agreement, extended to Spring 2016 but was to expire in 2014 (that is, broadly corresponding to the 10 year term provided in the Base Agreement): which also is at least consistent with no waiver being intended.
- Mr Shah sought to make something from the fact that in Clause 1.1(a) bmibaby took on "all the obligations" of BMRL whereas by Clause 1.1(b) the claimant released BMRL from "all its obligations and liabilities". I attach no significance to that linguistic differential, nor is there any sense in doing so.
- On the issue of foreseeability of indirect losses, the evidence was all one way. The issue was, in substance, whether loss of income to DTVA from non-aviation sources was foreseeable by reason of breach of the Agreement. DTVA in its evidence made it clear that non-aviation income (i.e. income from car-parking, retail and so on) was an important part of its projected income from the arrangement with bmibaby. It is clear that was factored into the passenger charge rates agreed with bmibaby: indeed Mr Turner frankly said in the course of his cross-examination that he assumed DTVA had done so. He further accepted that he appreciated that the failure to introduce a second aircraft after 2004 would, as he knew, mean less commercial income for DTVA. Mrs Irving's evidence in her witness statement was to similar effect: although she stated that she did not know the extent of such earnings or the details of the airport's contractual relations with concessionaires. Mr Price confirmed that general commercial income for an airport can itself depend on the aeronautical income and passenger volumes and that an airport would generally suffer if passenger numbers dropped: for example, if an airline left. In the event, Mr Shah rightly, having regard to the evidence in reply conceded on the facts the forseeability issue: he accepted that it was foreseeable, and to be taken as in the contemplation of the parties, that non aviation income for DTVA would be adversely affected if bmibaby breached its contract by failing to base and operate two aircraft at DTVA.
- However, in reply Mr Shah also sought to develop an argument that nevertheless such putative loss of income was not recoverable, in particular in the light of the recent House of Lord's decision in The Achilleas [2009] 1 AC 61; in that bmibaby should not, especially where the extent or the size of the non-aeronautical operations could not have been known to bmibaby, be taken as having assumed responsibility for non-aeronautical losses. I declined to enter at such a stage into that debate (which had hardly been flagged up before). It seemed, and seems, to me that such arguments were better raised at the assessment of damages stage, if there were one, when the precise claims for lost income had been formulated. When I indicated this view in argument, both Mr Brealey and Mr Shah readily accepted that the determination of such points could without any disadvantage or prejudice to either side be made at the assessment stage.
Conclusion
- In deciding this case in favour of the defendants, I do so with some reluctance. In the present case, the parties entered into written agreements which they clearly intended to have legal effect and by which (as I have concluded) bmibaby was to base and fly two aircraft from DTVA for a 10 year term. Further, it seems to me that throughout bmibaby has adopted a very hard-headed attitude: although I suppose that in the commercial world it is in order to consult solely one's own interests without over much concern for the other side's. But be that as it may, I have decided that it is not legally permissible to imply into the contractual arrangements a term of the kind advanced by the claimant.
- Accordingly, although the claimant may (in some ways) have the merits it is bmibaby which has the law. There will be judgment for the defendants accordingly; and I will hear counsel on any consequential matters, including costs.
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