Transpacific Pty Ltd v Prudential Retirement Insurance and Annuity Company

REASONS FOR JUDGMENT 1 By notice of motion filed on 13 May 2011 the applicant in this proceeding Transpacific Pty Ltd moves the Court for orders in respect of the control and operation of a Boeing 737-400 aircraft; registration number VH-JWL (Aircraft). 2 The applicant operates an air freight business through its subsidiary, HeavyLift Pty Ltd. It specialises in freighting large and unique cargo. It is controlled by Mr Nicholas Leach who has extensive experience in the air freight business. The first respondent (Prudential) is the mortgagee of the Aircraft under a Deed of Mortgage dated 20 January 2011 (Mortgage). The second and third respondents are receivers and managers of the mortgaged property appointed by the first respondent. They have taken no active part in the present dispute and, in these reasons reference to "the respondent" is a reference to the first respondent. 3 The background to the applicant's motion may be stated briefly. The applicant agreed to purchase the aircraft from the respondent pursuant to an Aircraft Purchase Agreement of 29 September 2010. The applicant provided vendor finance by way of a Purchase Money Credit Agreement dated 29 September 2010 (Credit Agreement). The sale was completed on or about 20 January 2011 at which time the applicant and the respondent entered into the Deed of Mortgage (Mortgage) which is expressed to be governed by the laws of New South Wales. 4 By letter dated 31 January 2011 the respondent advised the applicant that there had been "an Event of Default" under the Credit Agreement by virtue of the applicant failing to make the scheduled payment of principal and interest to Prudential due on January 20, 2011. The letter demanded payment of the outstanding principal, interest and expenses by 7 February 2011 in default of which "Prudential intends to exercise its rights and remedies". 5 On February 7, 2011 the respondent again wrote to the applicant alleging that there had been a continuance of the Event of Default and that as a result of this and "your failure to reimburse Prudential" as demanded in the letter of 31 January, the respondent had accelerated the time for payment of the mortgage debt. The respondent demanded immediate payment of the "Secured Money" and "all amounts owing to Prudential". On 8 February 2011, the respondent appointed the second and third respondents as receivers and managers of the property charged by the mortgage. 6 The applicant challenges the respondent's right to appoint receivers and managers and to accelerate payment under the mortgage. That application is scheduled for hearing in October this year. 7 In the meantime the applicant also sought interlocutory relief and, on 14 February 2011, I made orders for interlocutory relief with the consent of the parties, without admissions and subject to the applicant giving the usual undertaking as to damages. Those orders were directed to maintain the status quo except that they provided for maintenance of the Aircraft, allowed for the process of having the Aircraft certified and accepted for operation by the Civil Aviation Safety Authority (CASA) to be continued and permitted the respondent to have access for valuation purposes. With these exceptions both the applicant and the respondent were restrained from moving the Aircraft (including engines and other equipment) from its location at Old Brisbane International Airport (order 1) and the respondent was "restrained from taking any steps to sell, encumber, lease, transfer, change any details on the CASA register of Australian aircraft, or advertise for sale the Aircraft" (order 5). 8 The applicant's plans for the commercial use of the aircraft were summarised in its written submissions as follows: The applicant's intention, expressed to the first respondent's agent, was to convert a passenger jet into a cargo jet for use as a freighter, to be based in Australia. Specifically, the applicant intended to lease the Aircraft to a person which had the legal capacity to operate it (including providing crew and taking care of maintenance), and then HeavyLift to lease the Aircraft back from the operator, together with the crew, effectively hiring the Aircraft like a taxi. The applicant commenced discussions with Nauru Air Corporation (NAC), Nauru's national carrier, which trades as "Our Airline", in parallel with its discussions with the first respondent, in relation to NAC being the operator of the Aircraft. By August 2010, both sets of negotiations had reached an advanced stage. By the end of August 2010, the applicant had expressly advised the first respondent that NAC would be the operator of the Aircraft, once the deal between the applicant and the first respondent was closed and the Aircraft converted and transported to Australia. 9 An aircraft is required to be noted on an AOC in order to operate commercially. When the orders of 14 February 2011 were made neither the applicant nor its proposed lessee, held an Air Operator's Certificate (AOC) in respect of the Aircraft. That position changed on 29 April 2011 when NAC received the requisite authority from the Australian Civil Aviation Safety Authority (CASA) by way of amendment to the AOC held by NAC. The authority is, however, subject to the mortgagee's consent which is also required under clause 5.1(c) of the Mortgage. Clause 5.1(c) requires the consent of the respondent, as mortgagee, to any lease of the Aircraft including a lease to NAC. Moreover, clause 15.8 of the Mortgage provides that the mortgagee's consent, "may be given or withheld, or may be given subject to any conditions, as the Mortgagee (in its absolute discretion) thinks fit, unless this mortgage expressly provides otherwise". 10 The respondent has refused to give its consent at this stage. The applicant says it has not ruled out consenting to the lease to NAC however it requires more information from the applicant before it can come to a final conclusion. In addition, it submits that the terms of the lease as presently drafted, do not adequately protect its interest. 11 The applicant characterised the respondent's position as capricious and not within the purpose of the contractual power. It asserts the respondent's requirements for consent are particularly unreasonable given that the value of the Aircraft is many times more than the value of the respondent's security. In his affidavit of 13 May 2011, Mr Leach placed considerable emphasis on the addition to the Aircraft's value resulting from the applicant's expenditure in having it converted for the carriage of cargo and to meet CASA standards. The applicant submitted that the Aircraft's value was such as to give the respondent more than sufficient security for its interest. The applicant also focused on the expense of keeping the Aircraft inactive and the opportunities and profit forgone as a result. 12 The applicant claims that the respondent's conduct in withholding consent is unconscionable and a breach of s 22 of the Australian Consumer Law which is found in Sch 2 to the Competition and Consumer Act 2010 (Cth). It also raises pleas of estoppel and misleading and deceptive conduct and claims that the respondent has waived its right to rely on clause 15.8 of the Mortgage. The applicant moves the Court for orders requiring the respondent to consent to the lease to NAC or authorising the applicant to grant a lease to NAC without the respondent's consent. In the alternative the respondent seeks various other orders that would facilitate its use of the Aircraft and restrain the respondent from interfering with that use. 13 The applicant alleges that at the time of the negotiations for sale of the Aircraft the respondent knew that the applicant was planning to lease the Aircraft to NAC and did not indicate that it had any objection to that proposal. According to the applicant it relied on the absence of any objection by the respondent to persist with its plan to lease the Aircraft to NAC. This has required considerable expenditure, approximately in the order of US$3,015,000, in converting the passenger jet into a cargo jet suitable for carriage of air freight. 14 In his affidavit of 13 May 2011, Mr Leach explained that the respondent's conduct was such that he understood obtaining its consent to the lease to NAC would be a mere formality: For the reasons which follow, it has always been my understanding that the First Respondent did not have any problems or concerns about these arrangements and would provide the formal written consent required for NAC to operate the Aircraft upon the Applicant's request: a. I had informed the First Respondent of my intention for NAC to operate the Aircraft from the beginnings of my dealings with the First Respondent; b. a representative of Our Airline inspected the Aircraft and its records for this purpose in September 2010, to the First Respondent's knowledge; c. as outlined in paragraph 34 above, NAC had been listed as the Nominated Registered Operator on the Applicant's application to CASA for registration of the Aircraft in Australia, to the First Respondent's knowledge; d. as outlined in paragraph 45 above, NAC had been listed as the operator on the CASA Certificate of Registration, dated 25 January 2011, to the First Respondent's knowledge; and e. the First Respondent did not at any time indicate in any way that it would not consent to NAC being the operator of the Aircraft. It was my understanding that the formality of obtaining the First Respondent's consent to NAC operating the Aircraft was a matter of the Applicant providing copies to the First Respondent of the leasing arrangements with NAC and NAC's Air Operator's Certificate to show that the arrangements complied with Australian regulations, along with a copy of HeavyLift's International Airline Licence to show the First Respondent the destinations to which the Aircraft would be operated. I anticipated that, if the First Respondent required any further information, it would relate to where the Aircraft was to be operated. That information could be readily provided. 15 In support of its allegations that the respondent's conduct has been unconscionable, misleading and deceptive the applicant relied on documents appended to Mr Leach's affidavit of 13 May. The documents, which included email correspondence between the parties, amply demonstrate that both parties were aware that the applicant contemplated leasing the Aircraft to NAC. They do not, however, support the submission that the respondent's consent would be a mere formality. 16 Mr Newlinds SC, counsel for the respondents conceded that there are no drafting issues in relation to the draft lease provided to the respondent. He also confirmed that the respondents did not, per se, object to the granting of a lease to NAC however their consent depended on their being satisfied as to several matters. These include NAC's financial status, appropriate insurance of the Aircraft, and that the jurisdictions into which it was proposed to fly the Aircraft were safe and would not preclude the respondent enforcing its security if that were necessary. There is also an issue in relation to the respondent's request for an indemnity from NAC. 17 Clause 15.8 of the Mortgage gives the respondent a very wide discretion in imposing conditions on its consent to lease or in refusing its consent, however the rights of the mortgagee are not without some limitation. The mortgagee is entitled to prefer its interests to those of the mortgagor and to act even unreasonably in pursuit of those interests. Nevertheless even such a wide discretionary clause as 15.8 must be construed in context which, in this case, is the right of the mortgagee to protect its security interest. The limits imposed by context might be expressed as a duty to act in good faith in exercising its contractual rights. 18 It is not necessary at this time to consider the vigorous debate in Australian contract law about the role of good faith in contract and whether it is an implied term or inherent in the content of what the parties have agreed: see for instance Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187; GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1 at [918]-920]; Esso Australian Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228 at [25]; and Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17 at [61]-[71]. While I have little doubt that a condition of consent or a refusal which is unrelated to the protection of the security would not be within the mortgagee's discretion, this is not the position that pertains at present. 19 In considering whether the concerns identified by the respondent go beyond the legitimate scope of its discretion and protection of its security interest, the nature of the physical security must be taken into account. An aircraft has peculiar vulnerabilities related to its maintenance, operation and capacity to be deployed in areas far and near. It is legitimate for the respondent to wish to be satisfied that a proposed lessee has sufficient resources to maintain the aircraft at an appropriate level and to employ competent staff for both maintenance and operation. In these days of heightened sovereign risk it is no disrespect to the government of Nauru to say that it is understandable that the mortgagee may not want to rely on the fact that the NAC is wholly owed by the government of Nauru. 20 The fact that an aircraft can be flown into areas where it is exposed to the perils of war and political instability raises legitimate concerns. Similarly, an aircraft may also be flown to locations beyond the reach of Australian or United States law in which it might be difficult or even impossible for the mortgagee to exercise its security in the event of default by the applicant. The respondent is entitled to be given sufficient information to enable it to assess the risk and to decide whether the terms of the lease and the terms on which consent may be given are sufficient to protect it. 21 Statements made in Mr Leach's affidavit of 13 May 2011 show that these issues had been discussed between the parties before the applicant purchased the Aircraft. The issue of high risk jurisdictions was raised in an email sent on 1 July 2010 by Gary Weissel to Mr Leach (among others). Mr Weissel is a merchant banker engaged by Mr Leach to assist with the finance of the Aircraft. Mr Weissel said: Prudential will want some assurances and a clause in the documents restricting flying of the aircraft to certain high risk jurisdictions. Our understanding is that you use your [aircraft] for mainly domestic operations. Prudential doesn't have an issue with int'l routings but we'll need to negotiate jurisdictions that are off-limits (like high risk African nations, war zones, etc. where the difficulty of repossession would be extreme in the event of a default). 22 Mr Leach says in his affidavit that he considered these restrictions "to be usual and reasonable" and added that neither the applicant nor NAC had any intention to operate the Aircraft in such places. The respondent says that it has asked for information about where the applicant intends to fly the Aircraft but has not received it. On cross-examination Mr Leach distinguished between operation of the Aircraft in "regular public transport" and under Charter. While, under the AOC, the Aircraft is permitted to fly in regular public transport to a limited number of places, under Charter the AOC entitles it to fly "worldwide". That being so the respondent's insistence on knowing into which jurisdictions it is intended to fly the Aircraft appears to be legitimate. 23 As far as financial information is concerned Ms Francesca Rush, a solicitor who acts for the respondent, said that the financial information sought by the respondent would include "balance sheets, profit and loss statements, audited accounts" and the like. Ms Rush agreed that the Air Nauru Corporation had recently produced some documents to the Court in response to a subpoena issued by the respondent but added that her client had not yet had the opportunity to consider them. The respondent should be given an opportunity to review these documents. 24 In relation to the other risks I have mentioned it is not for the Court to say what level of satisfaction is commensurate with the respondent's right under the mortgage. It may be, as the applicant has implied, that the mortgagee's requirements have become more stringent than would otherwise be the case because of the alleged default under the mortgage. Whether there was a default and, if so, whether the mortgagee has waived any of its rights in respect of that default are questions for another time. Irrespective of what prompts the mortgagee to impose conditions on its consent, the question remains whether those conditions are within its rights under the mortgage. 25 For present purposes it is sufficient that I am not satisfied that the applicant has raised a serious question that (a) the mortgagee's present position has gone beyond what is necessary for the protection of its legitimate interest; (b) that the respondent's conduct has been misleading or deceptive or unconscionable; or (c) that it has waived its right to rely on clause 15.8 of the Mortgage. It is therefore not necessary for me to consider the balance of convenience. 26 For the reasons given above I am therefore not prepared to make any order that would compel the respondent to consent to the lease to NAC or would authorise the applicant to enter into the lease without the respondent's consent. Thus in so far as it moves the Court for orders 1 to 5, the applicant's notice of motion is dismissed. 27 Order 6 in the notice of motion seeks a variation of order 1 made on 14 February 2011; see [7] above. Order 1 restrained both the applicant and the respondent from moving the Aircraft although only the applicant gave any undertaking as to damages. Although the order was made by consent it is not unreasonable that the respondent should be required to give a similar undertaking if the restraint on the applicant is to continue. By order 6 proposed in its notice of motion, the applicant seeks that the respondent be required to give the usual undertaking as to damages as well as security "in the form of a bank guarantee for such an undertaking in the amount of $2,280,000 or such other amount as the Court thinks fit, to be provided in a form acceptable to a Registrar of the Court". In the absence of such an undertaking and security the applicant seeks the discharge of order 1 and an order that the respondent (effectively) be compelled to consent to the lease. 28 For the reasons given above I am not prepared to compel the respondent to consent to the lease. Nor am I prepared to authorise the applicant to enter into the lease without the respondent's consent. I am prepared, however, to consider that in the absence of an undertaking by the respondent I should exercise my discretion and rescind order 1. The applicant's undertaking in respect of order 5 made on 14 February would be unaffected. As I have explained in these reasons, there are restraints on the applicant's operation of the Aircraft that are in addition to the restraint imposed by order 1. It would not follow that discharging order 1 would leave the applicant free to operate the Aircraft. Nevertheless, there is much to be said for holding that the respondent should not have the additional sanction of a court order without giving the usual undertaking. On 2 June 2011, I sought the parties' views on this issue and allowed them time to obtain instructions before making the orders contemplated. I will hear the parties in relation to this issue. 29 As the applicant has been almost wholly unsuccessful in its application I see no reason why costs of the notice of motion should not follow the event. However, as no submissions were made in relation to costs I will hear the parties in relation to this issue. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.