The penalties for unreasonably refusing a genuine request to mediate during the course of Court proceedings are well known and as we explained in our article on the DGT v Cubitt case, if a contract has a mandatory adjudication provision, then Court proceedings can be stayed to enable the adjudication to take place. However, can a party claim damages for the breach of a dispute resolution agreement? This was the question which came before the Court of Appeal recently in the case of Sunrock Aircraft Corporation Limited v Scandanavian Airlines System Denmark-Norway-Sweden –  EWCA Civ 882.
SAS had entered into a sale and leaseback arrangement with Sunrock for two Boeing 767 aircraft. The agreement was subject to English law. Prior to the re-delivery of the first aircraft, disputes arose between the parties including in relation to SAS obligation to repair what were known as "scab patches" on the fuselage of the aircraft.
Clause 19.7 of the original agreement provided means whereby disputes were to be "resolved by an independent firm of aircraft technical consultants". SAS did not consider that this clause was applicable to their dispute with Sunrock and they made an ad hoc agreement, referred to in court as a re-delivery agreement, clause 10 of which noted that the parties had been unable to agree certain issues and that in accordance with the provisions of 19.7 the parties:
"hereby resort to the Dispute Resolution procedure on these two specific matters. Sunrock would consequently request that SAS nominate an independent firm of aircraft technical consultants for approval by Sunrock (whose approval shall not be unreasonably withheld or delayed) with a view to resolving the specific matter in question in accordance with the provisions of Clause 19.7."
However, SAS declined to appoint a consultant and thereby broke the re-delivery agreement. It appears from the court judgments that SAS preferred that the issues of construction should be decided by the English Courts rather than an expert. Consequently, Sunrock had no alternative but to begin proceedings in the Commercial Court. One of the issues before the court was whether SAS were in breach of the re-delivery clause and the dispute resolution agreement and if so what was the measure of damages recoverable for the breach? At first instance, the Judge decided this issue in favour of Sunrock concluding that as the expert would have awarded the costs of the repairs in respect of the scab patches, Sunrock should be entitled to this sum as damages for breach of the dispute resolution agreement.
Sunrock claimed that they were entitled to the reasonable costs of replacing the scab patches with a flush repair. SAS maintained that no damages were payable as Sunrock had suffered no loss. SAS argued that Sunrock had not repaired the damage by the time the aircraft was subsequently sold to another airline. Further, it would not have been reasonable for them to do so as the failure to replace the scab patches had not affected the value of the aircraft.
Everyone agreed that the correct measure of damages for re-delivering a hired chattel in damaged condition was the cost of repairs, unless it was unreasonable to carry out those repairs. If it was unreasonable to carry out the repairs, then the measure was the diminution in value. In his judgment in the Court of Appeal, LJ Thomas referred to the well known comments of Lord Jauncy in the case of Ruxley Electronics v Forsyth  UKHL 8:
"Damages are designed to compensate for an established loss and not to provide a gratuitous benefit to the aggrieved party from which it follows that the reasonableness of an award of damage is to be linked directly to the loss sustained. If it is unreasonable in a particular case to award the cost of reinstatement it must be because the loss sustained does not extend to the need to reinstate."
Sunrock’s expert had set out in his report reasons why the scab patches could reduce the value of the aircraft and an estimate of the cost of repairs. However the Court of Appeal disagreed with this and found that on the evidence before the court, it was clear that it would have been unreasonable to carry out the repairs. The evidence was clear that the scab patches did not affect the marketability of the aircraft for leasing or its value. This was because of the age of the aircraft at the time in question. The evidence also showed there was no point in repairing them as the scab patches had no effect on performance or value. It followed therefore that on the evidence before the court, the only damages to which Sunrock were entitled were nominal damages as they had suffered no loss.
Nevertheless, Sunrock maintained before the Court of Appeal that they were nonetheless entitled to damages for breach of the agreement to refer the matter to expert determination and that the damages they were entitled to were for the costs of repairs. The reason for this was that these were the damages that the expert would have awarded had the matter been referred to an expert determination. As noted above, at first instance, the Judge had agreed that there was good reason to consider that had SAS not reneged on Clause 19.7 of the Lease, then an expert third party would have approached the matter in the same way as Sunrock’s expert. The Judge at first instance stated that:
In my judgment, it was in the contemplation of the parties that an expert determination would adopt a costs of repair methodology and that it was intended that financial adjustment should be made on that basis. That approach would obviate the need for research into market values and is a simple approach within the spirit of the mediation provisions."
The Court of Appeal agreed that damages could be awarded for a loss incurred by a failure to comply with the terms of an exclusive jurisdiction clause or alternative dispute resolution clause. The difficulty was that, the damages claimed were for the amount of the costs of repairs. As noted above, the Court of Appeal did not consider that such a claim for the cost of repairs could succeed on the evidence and the application of well known legal principles. There was no suggestion that the evidence available to the expert would be any different to that adduced before the court.
Therefore, the Court of Appeal considered that it should assume that the expert would have approached the issue of damages for breach of the repair obligation in the same way. It had to be assumed that the expert would determine the matter in accordance with the law. The problem with Sunrock’s case was that it was based on the premise that the expert would proceed on a basis that was contrary to the applicable law.
Therefore, although, it was accepted that in theory Sunrock could maintain a claim for damages as a consequence of SAS’ failure to comply with the dispute resolution clause in their agreement with Sunrock, on the facts of this case, the claim failed. There was no factual or legal basis on which the court could reach the conclusion that an expert would, once the law had been explained to him, have awarded damages on an incorrect legal basis.
This article is based on an article from a forthcoming issue of the Fenwick Elliott Dispatch, a monthly newsletter which summarises recent key developments relating to contentious and non-contentious construction law issues. To see the current issue please visit www.fenwickelliott.co.uk.
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