Awesome Aviation Pty Ltd v Ad Astral Services Pty Ltd
[2018] WADC 21
•9 FEBRUARY 2018
JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL
LOCATION: PERTH
CITATION: AWESOME AVIATION PTY LTD -v- AD ASTRAL SERVICES PTY LTD [2018] WADC 21
CORAM: TROY DCJ
HEARD: 29 JANUARY & 1 FEBRUARY 2018
DELIVERED : 9 FEBRUARY 2018
FILE NO/S: CIV 3919 of 2016
BETWEEN: AWESOME AVIATION PTY LTD
Plaintiff
AND
AD ASTRAL SERVICES PTY LTD
First DefendantRONALD JAMES MAGRATH
Second Defendant
Catchwords:
Contract - Civil Aviation Safety Regulations - Fitness for purpose - Equitable set-off - Bankruptcy of second defendant - Turns on own facts
Legislation:
Bankruptcy Act 1966 (Cth) s 60(1)(b)
Civil Aviation Safety Regulations 1998
Result:
Judgment for the plaintiff
Representation:
Counsel:
Plaintiff: Mr J L W Henderson & Mr C Touyz
First Defendant : No appearance
Second Defendant : No appearance
Solicitors:
Plaintiff: HKT Legal
First Defendant : Not applicable
Second Defendant : Not applicable
Case(s) referred to in judgment(s):
Harbeck v Vasse Dozer Hire Pty Ltd (2009) 61 SR (WA) 375
Hazcor Pty Ltd v Kirwanon Pty Ltd (1995) 12 WAR 62
Maersk Australia Pty Ltd v Rebelo Nominees Pty Ltd [2008] WADC 81
P N Corporation Pty Ltd v Oxford Uniforms Pty Ltd [2012] WADC 149
Westwind Air Charter Pty Ltd v Hawker De Havilland Ltd (1990) 3 WAR 71
TROY DCJ:
Introduction
This action commenced by a writ of summons dated 24 October 2016 filed by the plaintiff, against the first and second defendants to recover an amount of $658,277.64 plus interest and costs. The second defendant was at all material times a director of the first defendant.
The case arises out of the plaintiff's lease of an aircraft to the first defendant.
The plaintiff lodged its statement of claim on 6 December 2016. Initially, both the first and the second defendant were represented by an Adelaide firm of solicitors, Charlton Rowley. Charlton Rowley formally ceased to act for the first defendant on 23 January 2018, six days before the trial.
On behalf of the first and second defendants Charlton Rowley filed a defence on 20 January 2017.
The plaintiff filed a reply and requested further and better particulars of the defence on 2 February 2017. The first and second defendants provided further and better particulars on 10 May 2017.
On 10 May 2017 Registrar Kingsley ordered that the parties exchange their expert reports on or before 29 July 2017. Further, that any report purely responsive to such expert report be exchanged on or before 18 August 2017.
The statement of Samantha Prentice
By letter dated 28 July 2017 Mr Touyz, on behalf of the plaintiff, attached documents on which the plaintiff relied at trial to prove the mechanical condition of the aircraft at the relevant times. That was the key issue between the plaintiff and the defendants on the pleadings.
The document attached was described as a preliminary witness statement of a Samantha Jane Prentice dated 28 July 2017.
Ms Prentice is a director of the plaintiff and holds the position of logistics director. Ms Prentice is a pilot and a designated flight examiner with the South African Civil Aviation Authority: Prentice witness statement par 5.
Mr Touyz stated that the purpose of attaching Ms Prentice's statement was to clarify the technical matters relied upon and to enable the defendants to consider filing responsive reports by the 18 August 2017 deadline.
Mr Touyz emphasised that Ms Prentice's statement was not a final trial witness statement and that the plaintiff reserved the right to add to Ms Prentice's evidence as adduced at trial.
Mr Touyz accepted that Ms Prentice was not an expert within the meaning of the orders of 12 May 2017. Mr Touyz further accepted that the authors of various reports referred to within Ms Prentice's statement would not be regarded as independent experts for the purpose of the proceedings. Rather, if they gave evidence, they would be regarded as eyewitnesses.
The first and second defendants have had notice of the content of Ms Prentice's statement for some six months.
The subsequent history of the proceedings
The defendants did not subsequently provide any expert report, nor indeed any witness statements.
The matter was electronically entered for trial on 22 August 2017. On 16 October 2017 Registrar Kingsley ordered that the matter be listed for a four day trial commencing on 29 January 2018.
On 10 November 2017 Charlton Rowley filed a minute of proposed orders that the defendants be allowed a further 14 days in which to amend their pleadings to include a counterclaim. Also, that the defendants be allowed until 15 December 2017 to file any expert evidence they intended to rely upon at trial.
The pleaded case on behalf of defendants did not dispute the plaintiff's contractual entitlement the subject of this action. Rather, the first and second defendants asserted that they were entitled to set off against the sum that they would otherwise owe to the plaintiff, expenses amounting to at least $331,725.04, together with loss of use of the aircraft while grounded for repairs. It was contended that they had incurred costs because of a number of serious deficiencies in the aircraft and that from 1 September 2010 onwards it was not fit for purpose.
On 14 November 2017 Registrar Kingsley ordered that the defendant file and serve an application for leave to amend its pleadings and for leave to adduce expert evidence on or before 4.00 pm 17 November 2017. Charlton Rowley complied with this order on 17 November 2017.
On 30 November 2017 the matter came before his Honour Judge Goetze on a chambers summons to deal with the defendants' application.
Dr Henderson appeared for the plaintiff. There was no appearance, however, on behalf of either defendant. His Honour ordered that the application be adjourned sine die and the defendants pay the plaintiff's costs of the application.
The pleadings were never amended (I note that the plaintiff would have opposed the application in any event) so that there is no counterclaim; rather there is, in effect, an attempted set-off, as pleaded at par 13 of the defence.
The solicitors for the defendant cease to act
After the defendants failed to prosecute their application to amend the pleadings, there were no further communications on behalf of the first or second defendants until 19 January 2018. On that date Charlton Rowley as solicitors for the first defendant filed a chambers summons for orders that they be removed from acting. Although up until that point Charlton Rowley were acting for both the first and second defendants, on the same date the second defendant provided a written notice of change of address for service, indicating that he was to be self-represented.
On 23 January 2018 her Honour Judge Vernon made an order declaring that Charlton Rowley will cease to act for the first defendant.
The trial
The matter then came before me for trial on 29 January 2018. Dr Henderson appeared along with Mr Touyz for the plaintiff. There was no appearance on behalf of the first defendant or the second defendant. Dr Henderson submitted that Ms Prentice's witness statement go into evidence unopposed. I granted that request.
Dr Henderson confirmed that there had been no communication from the first or second defendant since 23 January 2018. I reserved my decision initially until 1 February 2018. I reconvened the court, with notice to the parties, on that date to invite submissions on a number of facets of this case.
On 1 February 2018 Ms Prentice gave sworn evidence. Her witness statement was formally tendered and I received it, together with all annexures, as exhibit 1.
Again there was no appearance from the first or second defendant. I was advised by counsel for the plaintiff that their inquiries had revealed that as of 1 February 2018 the second defendant had been declared bankrupt.
I then reserved my decision until 9 February 2018 and made orders for the supply of transcript to the absent second defendant together with programming orders dealing with the potential impact of the second defendant's bankruptcy.
These are the reasons for my decision.
Background
As I have observed, this case is about an aircraft.
The Civil Aviation Safety Regulations (1998) (CASR) are the primary legislation relating to the maintenance obligations of owners and operators of aircraft in Australia. They provide a comprehensive regulatory regime which is enforced by the Civil Aviation Safety Authority (CASA) including, in the case of serious breaches, criminal penalties.
The CASR are supplemented and, where appropriate, explained by the CASA manual of standards (MOS) and airworthiness advisory circulars (ACs).
CASA can, and does, issue airworthiness directives (ADs) under the regulations in order to rectify problems identified by manufacturers. If they are mandatory in nature that must be specified, along with a timeframe for compliance.
Airworthiness directives sometimes contain reference to service bulletins (SBs) which are an advisory notice issued by a manufacturer and which are not mandatory.
The initial lease of the aircraft to the first defendant
The plaintiff carries on business, amongst other things, leasing out aircraft. The first defendant carried on business as an operator of aircraft. It is not in dispute that the second defendant was involved and concerned in the day to day operation of the first defendant's business.
As set out in the witness statement of Ms Prentice, there had been a business relationship between the parties since October 2005, in the course of which another aircraft was leased to the first defendant from 6 February 2006 until 14 November 2006: Prentice statement pars 8 – 12 and 16.
The aircraft the subject of these proceedings is a Beechcraft 1900 model, type 1900D serial number UE-94 registered in Australia as VH‑NOA (the aircraft). The aircraft was manufactured by Beechcraft Aircraft Corporation in 1994: Prentice statement par 20.
The plaintiff first leased the aircraft to the first defendant on 19 November 2007 under an aircraft hire agreement executed between the plaintiff and the first and second defendants on that date: Prentice statement pars 41 - 43 and annexure SP-9.
The 2008 lease
The parties then executed a further agreement on 2 January 2008 which specified that the first defendant would be responsible for the maintenance of the aircraft except for specified Provision items. Under this agreement the plaintiff leased the aircraft to the first defendant from 19 January 2008 to 18 January 2010: Prentice statement pars 44 ‑ 45 and annexure SP-10.
The Provisions items, which remained the responsibility of the plaintiff under the 2008 agreement, comprised engine overhauls every 6,000 hours, engine hot section inspections every 2,000 hours, propeller overhauls every 4,000 hours and landing gear overhauls every five years.
Ms Prentice explained the reasons, from the plaintiff's perspective, and the nature of these provisions at pars 50 – 52 and 109 - 113 of her statement.
On 18 December 2009, the 2008 lease was extended until 18 January 2011 by an addendum executed between the parties: Prentice statement par 53 and annexure SP-13.
The 2010 agreement
It is accepted, on the pleadings, that on or about 1 September 2010, at Perth, the plaintiff, first defendant and second defendant entered into a written agreement (the agreement) as a result of which the plaintiff leased the aircraft to the first defendant for a 36 month period ending on 31 August 2013: Prentice statement par 55 and annexure SP-14.
It is further accepted that the agreement was varied in writing by the execution between the parties of addenda dated 30 August 2013 and 14 December 2015 respectively. By these addenda the term of the lease was extended to respectively 30 August 2016 and 30 August 2018.
It does not appear to be in dispute that this agreement, extended as it was by the two addenda, represents the only written contractual terms with respect to the hire of the aircraft from 1 September 2010 onwards.
Was the aircraft fit for purpose on 1 September 2010?
The plaintiff submits that as of 1 September 2010 the aircraft as delivered included (as defined in article 1.1(3)) airframe, propellers, engines, pressurisation and hydraulic systems, avionics, wheels and all components in good and serviceable condition, including components and equipment described in the aircraft logbooks, whether attached to the aircraft or not. The plaintiff also delivered the aircraft logbooks, and all manufacturer's manuals and documents pertaining to the aircraft.
At the time of delivery, the plaintiff asserts that the aircraft was airworthy, serviceable and in good working order, condition and repair.
'Delivery' in this sense means delivery under the 2010 agreement because, according to Ms Prentice, and I accept, the aircraft had been in the possession or control of the first defendant from on or about 22 November 2007 until the plaintiff repossessed it (for the purposes of repairs) on or about 14 April 2016: Prentice statement par 60 and her oral evidence.
By the defence, the first and second defendants denied that the aircraft was delivered in good and serviceable condition, in that it had not been the subject of all scheduled and unscheduled maintenance and had extensive corrosion in the engine gas generator inlet case so that, as of 1 September 2010, it was not fit for purpose.
The defendants asserted that there were implied terms in the agreement that the aircraft would be delivered in good and serviceable condition and would be fit for its purpose.
Article 6.1 of the agreement, however, provided that:
The [Plaintiff] does not give any warranty as to the condition of the Aircraft, its fitness for any purpose or its airworthiness. Any implied warranty is also expressly excluded other than those unable to be excluded by reason of any statute or law.
In the response to the request for further and better particulars, the defendants contended that in or around October 2013, the first defendant discovered corrosion in the fuel tanks of the aircraft. The defendants assert that the corrosion existed as at 1 September 2010 and indicated that they would rely on expert evidence in support of this allegation.
The defendants did not file or adduce expert evidence or indeed any evidence at all.
The fact, as suggested by Ms Prentice at par 120, that corrosion is commonly found on gas generator cases is, in my view, borne out by the relevant part of the Pratt and Whitney Canada maintenance manual (annexure SP-33). This document sets out maintenance practices for the compressor inlet case which provides that corrosion must not be deeper than a specified depth, depending on the zone.
Further, corrosion must not cover an area more than a specified percentage of the total surface dependent on the zone. There is a requirement to repair in situ within 20 flight hours or one month, whichever occurs first, or alternatively apply corrosion inhibitor and examine at every minor inspection or three months, whichever occurs first.
Evidence suggesting the existence of significant corrosion prior to November 2007
By 'significant corrosion' I mean corrosion to a greater extent than would inevitably arise in the life of an aircraft and which, if identified in a timely fashion, would be susceptible to remedial action.
The aircraft's engines were completely overhauled in about October 2005 by Pratt and Whitney Canada so that the engines were in a condition equivalent to an engine that had flown zero hours since overhaul on completion of those works: Prentice statement par 20 and annexure SP-2 as explained by Ms Prentice in her evidence.
The condition of the aircraft shortly before possession passed to the first defendant is as set out in the documentation comprising annexure SP‑4. On 19 April 2007 the annual inspection had been carried out and the aircraft was considered to be airworthy: (SP-4 at page 11/23).
As required, and at the request of the customer, the engine manufacturer, Pratt and Whitney Canada carried out a hot section borescope inspection report in Singapore on 17 July 2007 (annexure SP‑6). There is no reference in this report to any finding of corrosion.
Ms Prentice describes the importance of a borescope inspection at par 30 - 33.
On 24 August 2007 the aircraft was considered appropriate to be issued with an export certificate of airworthiness (annexure SP-4 at page 16/23). No corrosion damage is recorded in this document.
I am satisfied from my consideration of the documentation comprising annexure SP-4 that shortly before the aircraft was imported into Australia, it had successfully completed all six 200-hour-interval detailed inspections (commonly known as Phase 1, 2, 3, 4, 5, and 6 inspections) at Hawker Pacific, a Beechcraft Service Centre in Singapore.
I accept the evidence of Ms Prentice that after the aircraft arrived in Australia, on or around 10 October 2007, it was taken to the premises of Airflite Pty Ltd at Jandakot airport where it passed an airworthiness inspection completed on or around 22 November 2007: Prentice statement par 82 and annexure SP-15.
Under the 2007 agreement I have referred to at par 38 the aircraft was delivered to the first defendant on or around the 22 or 23 November 2007: Prentice statement par 36 - 39.
As part of Airflite's inspection in November 2007 item 35 of annexure SP-15 relevantly reads:
Horizontal stabiliser to vertical stabiliser attachment inspection carried out found satisfactory, no corrosion found.
A CASA standard certificate of airworthiness was issued for the aircraft on 8 October 2009: annexure SP-7. This was at a time when it was in the first defendant's possession. No conditions were annexed to the certificate of airworthiness. It seems that this certificate was issued because the previous certificate had been lost.
I conclude that if any significant corrosion existed, reference would have been made to it in the documents generated by the November 2007 inspections.
Evidence suggesting the existence of significant corrosion in 2008 ‑ 2011
As I note a little later, the applicable maintenance schedule is as set out in ch 5 of the Beechcraft 1900D Airliner Maintenance Manual (1900D MM).
On 28 February 2011 the first defendant caused its contractor, Airflite to conduct a second 200-hour-interval detailed inspection (Phase 2) of the aircraft which included an inspection of both engines' gas generator inlet cases. No reference was made to corrosion: annexure SP‑36.
On 6 May 2011 the fuel system main left and right tanks inspection and fuel system collector tank inspections were performed on the instructions of the first defendant by Airflite: Prentice statement par 87 and annexure SP-22. No reference was made to corrosion.
I conclude that if any significant corrosion developed between November 2007 and May 2011, reference would have been made to it in the documents generated by these inspections.
Evidence suggesting the existence of significant corrosion in 2012
On 4 May 2012 Airflite again completed the fuel system main left and right collector tank inspections on the instructions of the first defendant. Microbiological contamination and sludge build-up was evident in the left-hand and right-hand collector tanks which were cleaned. No references were made to the observation of any corrosion: Prentice statement par 88 and annexure SP-23.
On 29 May 2012 at aircraft time 28,967.2 hours Airflite completed a specific scheduled fuel tank internal inspection for corrosion: Prentice statement par 90 and annexure SP-25. No reference was made to corrosion.
On 20 August 2012 the first defendant caused Airflite to conduct a second 200-hour-interval detailed inspection (Phase 2) of the aircraft. No reference was made to corrosion: annexure SP-37 at 2/36.
I conclude that if any significant corrosion developed between May 2011 and August 2012 reference would have been made to it in the documents generated by these inspections.
Evidence suggesting the existence of corrosion in 2013
On 3 May 2013, at 29,635 hours Airflite again completed the fuel system main left and right collector tank inspections on the instructions of the first defendant. No references were made to the observation of any corrosion: Prentice statement par 89 and annexure SP-24.
As I have noted, the original agreement of 1 September 2010 was extended on 30 August 2013. I accept that this plainly necessitated ongoing contact and discussion between the plaintiff and the first defendant.
The first defendant did not express any concerns about corrosion, to the best of the knowledge, recollection and belief of Ms Prentice having reviewed the plaintiff's business records: Prentice statement pars 102 ‑ 104.
No corrosion was demonstrably observed until 30 October 2013 when corrosion in the left-hand collector tank was noted in an Airflite maintenance worksheet (annexure SP-21 item 27 at page 10/38), with appropriate action seemingly taken on or before 2 December 2013.
Similarly on 1 November 2013 corrosion was found in the 'LH wing collector tank has corroded "J" stringer, bottom wing skin' (annexure SP‑21 item 41 at page 14/38), with appropriate action seemingly having been taken on or before 7 November 2013: Prentice statement par 86.
I conclude that if any significant corrosion developed between August 2012 and November 2013 reference would have been made to it in the documents generated by these inspections.
Evidence suggesting the existence of corrosion in 2014
In her statement at par 125 Ms Prentice refers to an engine borescope inspection carried out in March 2014 by Dallas Airmotive as well as a hot section inspection in September 2014, although the plaintiff has not adduced in evidence documents relating to these inspections.
Evidence suggesting the existence of corrosion in 2015
On 23 March 2015 the first defendant caused Airflite to conduct a second 200-hour-interval detailed inspection (Phase 2) of the aircraft. No reference was made to corrosion: annexure SP-38 at 2/36.
I conclude that if any significant corrosion developed between November 2013 and March 2015 reference would have been made to it in the documents generated by this inspection.
As I have noted, the original agreement of 1 September 2010 was extended for a second time on 14 December 2015. Again I accept that this necessitated ongoing contact and discussion between the plaintiff and the first defendant.
The first defendant did not express any concerns about corrosion, to the best of the knowledge, recollection and belief of Ms Prentice having reviewed the plaintiff's business records: Prentice statement pars 102 ‑ 104.
The discovery of corrosion in 2016
It is clear, however, that significant corrosion did exist in the gas generator inlet cases as of March 2016. At that time, some eight or more years into to the operation of the aircraft by the first defendant, the plaintiff became aware that significant repairs and maintenance were required to the aircraft's engine gas generator inlet case as a result of extensive observable corrosion: Prentice statement pars 114 ‑ 118.
Repairs needed to vertical stabilisers?
In addition to complaints about corrosion, in the response to the request for further and better particulars, the defendants asserted that in or around October 2014, the first defendant discovered that repairs were required to vertical stabilisers on the aircraft on account of fatigue. The defendants assert that unacceptable levels of fatigue existed as of 1 September 2010.
The defendants stated that they would rely on expert evidence in support of this proposition. Documentation relevant to this assertion was said to have been provided to the plaintiff's solicitors contemporaneously with the defendants' response. No expert evidence has been produced and no such documentation is before me.
The fuselage cabin structure of this particular type of aircraft is not such that it is automatically retired at a certain point of maximum hours or cycles. The continued use of the cabin structure is dependent upon a satisfactory inspection being carried out as described in the Model 1900D Airliner Structural Inspection Manual P/N 129-590000-65, 'A' Check, 'B' Check and 'C' Check sections: Prentice statement par 78.
These inspections take place every 3,000 hours or 4,000 cycles, whichever occurs first after the initial inspections, which take place after the aircraft has reached 12,000 hours (A check), 15,000 hours (B check) and 18,000 hours (C check): Prentice statement par 79.
Similarly, the life of the horizontal and vertical stabiliser structure is not life limited in the sense that it is not retired at a certain point of maximum hours or cycles. The horizontal and vertical stabiliser structure continues in use providing the mandatory inspection in the 'I' Check Procedure (Horizontal stabiliser to vertical stabiliser attachment inspection) in the Model 1900D Airliner Structural Inspection Manual P/N 129-590000-65, is carried out with satisfactory results: Prentice statement par 81.
As noted at par 67 an inspection in November 2007 revealed that the
Horizontal stabiliser to vertical stabiliser attachment inspection carried out found satisfactory, no corrosion found.
First claim
The plaintiff's first claim is for outstanding rental.
The plaintiff's entitlement to rental
By the defence the defendants accepted that article 4.1 and article 4.2 of the agreement as amended by the first addendum (annexure SP-26) provides that in consideration for the exclusive use and possession of the aircraft, the first defendant was required to pay to the plaintiff rental on or before the first day of each month of the term. As at April 2016 the amount payable for rental was $45,000 plus GST per calendar month.
It is not disputed that the first defendant, although it had exclusive use and possession of the aircraft for the entire period, failed to pay to the plaintiff, despite demand, the rental for the period April to August 2016 inclusive, as reflected in invoices issued and provided by the plaintiff to the first defendant.
The attempted set-off
In my view, notwithstanding the terms of O 20 r 17 of the Rules of the Supreme Court 1971 (RSC), the authorities are plainly to the effect that a defendant cannot set off against a plaintiff's claim for payment under a contract an unliquidated claim for defective performance of the contract. The RSC O 20 r 17 permits a counterclaim to be raised as a set‑off, but does not displace the common law and equitable rules substantively governing set-offs.
The alleged loss and damage, as set out at par 13.4 of the defence and as amended by response 2.1 of the response to the request for further and better particulars of the defence, is an unliquidated claim.
In this respect I have had regard to the decisions of Murray J in Westwind Air Charter Pty Ltd v Hawker De Havilland Ltd (1990) 3 WAR 71, Kennedy J (with whom Malcolm CJ & Murray J agreed) in Hazcor Pty Ltd v Kirwanon Pty Ltd (1995) 12 WAR 62 and the decisions of Principal Registrar Gething (as his Honour then was) in Maersk Australia Pty Ltd v Rebelo Nominees Pty Ltd [2008] WADC 81, Harbeck v Vasse Dozer Hire Pty Ltd (2009) 61 SR (WA) 375; and P N Corporation Pty Ltd v Oxford Uniforms Pty Ltd [2012] WADC 149.
The pleaded defence to this claim was, in my view, inappropriately pleaded as an equitable set-off. It would only have arisen for consideration if it had been pleaded, as it should have been, as a counterclaim. It would seem that those acting for the defendants realised that in November 2017, but having made an application for leave to amend the pleadings then failed to attend the hearing which had been convened for that purpose.
Conclusions on fitness for purpose
On 18 December 2009 the parties executed an addendum extending the term of the 2008 lease to end on 18 January 2011. I accept that the first defendant made no complaint at that time concerning the aircraft.
I further accept that when on 1 September 2010 the parties entered a new lease for a 36 month term ending on 31 August 2013, the first defendant raised no concerns indicating that the aircraft was unfit for purpose, or that it was not up to date with its maintenance schedule.
The only reasonable inference available to me is that as of 1 September 2010 the first defendant, having been in possession of the aircraft for nearly three years at that stage, was content with its condition.
Even if it was open to the first defendant to set off against the plaintiff's claim the unliquidated claim I have referred to, no material of any sort has been adduced by the first defendant in support of that contention. No documents have been filed, there is no expert report, no witness statements have been filed and neither defendant appeared at the trial of the matter.
I find that the first defendant failed to notify the plaintiff prior to March 2016 that the aircraft was allegedly unfit for purpose. Despite the assertion that the aircraft had been unfit for purpose for some five and a half years at that stage, there is no material that suggests that the first defendant desisted from using it, for commercial purposes, in that period and indeed continued to pay the required rental up to March 2016.
Conclusion on first claim
The assertion by the plaintiff that the aircraft was airworthy, serviceable and in good working order, condition and repair has not been negated by the defendants. The plaintiff was entitled, under the agreement, to payment of rent from April to August 2016. I find that the first defendant is liable to pay the plaintiff the sum of $247,500, being the outstanding rental due to the plaintiff under the agreement.
Second claim
The plaintiff's second claim is for engine corrosion damage. It arises out of article 8.1(1) of the agreement.
Prior to the 2010 agreement, the 2008 lease specified that the first defendant would be responsible for the maintenance, except for specified Provisions items: Prentice statement par 44 and annexure SP-10.
Under this agreement the first defendant was responsible at its cost for all and any necessary service and maintenance to keep the aircraft safe and airworthy during the term including, non-exhaustively, all scheduled and unscheduled maintenance in accordance with an 'approved class A Raytheon based' maintenance schedule and all corrosion control/repairs required.
It is accepted that article 8.1(1) of the 2010 agreement provided that:
8.1(1)Save for those Provisions items the Lessee will be responsible at its cost for all and any necessary service and maintenance to keep the Aircraft safe and airworthy during the Term including without limitation, all scheduled and unscheduled maintenance in accordance with a Manufacturer approved class 'A' maintenance schedule and all corrosion control/repairs required.
Responsibility under the maintenance schedule
Accordingly, by the second claim, the plaintiff asserts that the first defendant was responsible at its cost for all corrosion control and repairs to the aircraft and its engines in accordance with a manufacturer approved class 'A' maintenance schedule.
The plaintiff asserts that the maintenance schedule set out in ch 5 of the Beechcraft 1900D Airliner Maintenance is an approved class 'A' maintenance schedule (annexure SP-5). The pleaded denial of this claim by the defendants has not been sustained or supported by any material.
Indeed, on 21 February 2011 the second defendant signed a logbook statement part 1, confirming that all inspection requirements contained in ch 5 of the Hawker Beechcraft 1900D Airliner maintenance manual shall be complied with: annexure SP-12.
I accept, having heard evidence from Ms Prentice on this point, that this schedule is an approved schedule.
In the pleaded defence the defendants asserted that by operation of articles 4.7(a) and (f) the plaintiff, not the first defendant, was responsible under the agreement for overhauling and repairing the engines of the aircraft.
I note that article 4.7(f)(iii) provides that the plaintiff was not responsible for repairing the aircraft's engines if such repair was occasioned by any negligence on the part of the first defendant in the proper care, operation and maintenance of the aircraft.
By article 7.1 the first defendant was responsible at its cost for the maintenance of the aircraft during the agreement and all defects were to be reported upon discovery by the first defendant to the plaintiff.
The obligations of the first defendant under the agreement were proscribed by the Manufacturers Maintenance Schedule (Civil Aviation Regulations Part 4A Maintenance; Division 2 - Approved Systems of Maintenance 42A): annexure SP-11 pages 58-60/125).
I have referred previously to the 18 December 2009 addendum. I accept that the first defendant made no complaint at that time concerning the plaintiff, the aircraft, or the division of responsibility for maintenance, nor any dissatisfaction with the terms of the lease or the aircraft.
I further accept that when the agreement was executed on 1 September 2010 the first defendant raised no concerns about any outstanding maintenance that had to be performed nor did it at any time prior to 1 September 2010 indicate that the aircraft was not up to date with its maintenance schedule: Prentice statement pars 56 - 59.
I further accept that the first defendant raised no concerns when the agreement was extended on two subsequent occasions.
I conclude that as a consequence of cl 8.1 of the 2010 agreement the first defendant was responsible at its cost for all and any necessary service and maintenance to keep the aircraft safe and airworthy during the duration of the agreement.
The tasks required under the maintenance schedule
The maintenance tasks and inspection instructions for the aircraft are detailed in the Hawker Beechcraft Continuous Inspection Program. They consist of both routine inspections and 200-hour detailed inspections. Routine Inspections are completed every 50 hours of flight time and take approximately one day to complete. They consist mostly of a visual inspection of the major components of the aircraft: Prentice statement pars 70 ‑ 71.
Six separate individual detailed inspections every 200 flight hours make up one complete inspection program. Only a portion of an aircraft's components or systems are inspected at each 200-hour interval inspection. Each inspection inspects different components and areas. It follows that these six detailed inspections comprise one complete inspection occurring every 1,200 flight hours. The six inspections need to be completed within 24 months: Prentice statement par 72.
Discrepancies found during these checks must be listed on the inspection work sheets and corrected before the aircraft is returned to service. Any life limited components or other inspections which have become due are also noted on the work sheets and transferred to the aircraft's status report and updated in the next due list: Prentice statement par 73.
Discrepancies which are not deemed by the chief engineer to affect the airworthiness of the aircraft must be noted in the work packs and be transferred as open defects onto the status report and due list. These would be attended to at the next inspection or as per the time limits imposed by the chief inspector: Prentice statement par 73.
In addition, the aircraft is also subject to time limited inspections, time limited major maintenance schedules, airworthiness limitations, a corrosion prevention program and unscheduled maintenance checks: Prentice statement par 74.
A status report shows all the inspections required and when they are next due. It also includes all life limited parts and component life limits and when they are due for inspection, repair or replacement. A list which is called a 'due list' shows hours or cycles or days remaining to the life limit of a part or to an inspection due: Prentice statement par 75.
A life limited part is a part with an established replacement time or inspection and as a condition of its type certificate, may not exceed a specified time, or number of operating cycles or hours, in service. Time, cycle or hour limits are governed by the 1900D MM ch 05. The purpose of life limited parts is to ensure that any part which will ultimately fail due to the stress of use is removed from the aircraft well ahead of the earliest date on which that failure may occur: Prentice statement par 75.
The first defendant necessarily outsourced some of their maintenance obligations to an authorised maintenance organisation, Airflite Pty Ltd. I accept Ms Prentice's evidence that as part of that process the first defendant continuously forwarded to the plaintiff files (referred to as work packs) including all the paperwork required for an inspection, all work performed, descriptions of work and engineer signatures: Prentice statement pars 76(f) and 76(g).
None of the work packs so provided reflected that the aircraft was unfit for purpose or otherwise in poor or unexpected condition: Prentice statement par 77.
The maintenance manual provides for the fuel system main fuel tank inspections, including the main fuel tank, to occur every 12 months. Prentice statement par 85 and annexure SP-20 page 3/6.
I accept that the maintenance schedule provided for mandatory inspections of the engines gas generator inlet casing as part of the standard phase inspection program, which required that an inspection of the engine gas generator inlet case be done during every routine inspection: Prentice statement pars 28 ‑ 29 and annexure SP-5 items 10(a) and (b) page 4/13. This was the first defendant's responsibility.
The consequences of the corrosion discovered in 2016
The plaintiff submits that the extent of the observed corrosion as discovered in March 2016 required the removal of the aircraft engines and an overhaul level event, which would not otherwise have been required had the first defendant carried out the required preventative maintenance and inspections.
In table 201 of the engine maintenance manual, the acceptable compressor inlet case repair limits are listed: Prentice statement par 121 and annexure SP-33.
Vector Aerospace Australia provided an eight page report entitled 'compressor inlet case overview' on 3 June 2016: Prentice statement [118] and annexure SP-32. Photographs at pages 3 and 6 show corrosion exceeding the prescribed limits and which required repair at an overhaul facility before the next flight.
As a consequence, the plaintiff submits that it has suffered loss and damage in the amount of $135,213.84 being that portion of the repair costs to the aircraft engines associated with the corrosion damage sustained to the engines during the first defendants operation of the aircraft.
The invoice reflecting this claim was tendered as exhibit 2.
The defendants denied any liability for this sum. The defendants assert that extensive corrosion existed as at 1 September 2010. The defendants stated that they would rely on expert evidence in support of this allegation but of course did not do so.
By the pleaded defence, the defendants submit that the corrosion to the engine gas generator inlet case was caused by the plaintiff's failure to perform all necessary maintenance on the aircraft prior to 1 September 2010, so that it was not fit for purpose at that time.
Was there a requirement to replace a magnesium inlet case assembly with aluminium?
In the defendants' response to the plaintiff's request for further and better particulars, the defendants asserted that prior to entry into the agreement, the plaintiff knew or ought to have known that there was a requirement to replace the compressor inlet case assembly on the aircraft made from magnesium, which was susceptible to corrosion, with a similar one made from aluminium alloy which would have better corrosion resistance.
The defendants claimed that the plaintiff knew or ought to have known of this requirement because as the owner of the aircraft it would or should have received Service Bulletins for the aircraft from time to time.
On or around 10 June 2010, Pratt and Whitney issued SB 14443 that required the replacement of the compressor inlet case assembly on the aircraft made from magnesium which was susceptible to corrosion with a similar one made from aluminium alloy with better corrosion resistance.
As of 1 September 2010 the compressor inlet case assembly was made from magnesium rather than aluminium. The defendants assert that had the plaintiff delivered the aircraft with an aluminium compressor inlet case it would not have suffered from corrosion.
Firstly, I accept that the first defendant did not make any request of the plaintiff to comply with SB 14443, nor did it express any concern about having magnesium gas generator cases installed in the engines, note any concern about corrosion found in the gas generator cases of the engines or require the gas generator cases to be replaced with aluminium types prior to or during any of the addenda negotiations in August 2013 or December 2015: Prentice statement pars 103 ‑ 104.
Safety Bulletin 14443 was published on 10 June 2010 (annexure SP-28) and was revised on 24 March 2011 and 22 August 2013 (annexures SP-29 and SP‑30).
I accept that it did not become an airworthiness directive (AD) as explained by Ms Prentice at par 64. AD's are issued under the CASR and typically arise because of a serious condition identified in an aircraft of a particular type and are often mandatory with prescribed time limits.
Service bulletins (SBs) by contrast are advisory notices issued by the manufacturer of an aircraft, engine or an aircraft part. Their purpose is often to alert operators to actual faults, or to provide information on remedial maintenance required or to provide information on modifications required.
A service bulletin is not legally enforceable. Should CASA determine that the content should be mandatory, that is achieved by the issuing of an AD.
Further, article 8.1(2) of the agreement provided that any mandatory service directives from the manufacturer are the responsibility of the first defendant, as well as compliance with AD's. The only qualification being costs which resulted in betterment of the aircraft.
In the circumstances the plaintiff was entitled not to comply with SB 14443 for the reasons set out by Ms Prentice at par 106.
Contended for repairs carried out by the first defendant
The defendants asserted that the repairs and maintenance consequent upon the identification of corrosion in the fuel tank of the aircraft around October 2013 were incurred at a cost to them of $128,377.90.
The defendants asserted that the repairs and maintenance consequent upon the identification of fatigue in the vertical stabilisers corrosion in the fuel tank of the aircraft in around October 2013 were incurred at a cost to them of $40,000.
Relevant documentation was said to have been provided to the plaintiff's solicitors contemporaneously with the 10 May 2017 response but no such documentation has been produced during this trial.
Conclusion on second claim
I accept that at the time of handover of the aircraft to the first defendant in November 2007 it was in a good and serviceable condition and fit for the purpose for which it was provided.
I accept that a plain reading of the agreement makes it clear that as at 1 September 2010 the obligation to ensure that the aircraft was maintained in a good and serviceable condition was the first defendant's responsibility not the plaintiff's.
I find that no significant corrosion existed in this aircraft prior to 23 March 2015.
I find that the first defendant did not perform the maintenance and corrosion control that was required of it under the agreement or did not do so adequately. I find that when, at some stage after 23 March 2015, extensive corrosion began to develop the first defendant did not take appropriate mitigation action to arrest its development.
The consequence of these failures was that corrosion developed to an extent where expensive and extensive repair was necessitated.
The cost of that repair has been established to my satisfaction to amount to $135,213.84 and I find that the first defendant is liable to pay that amount to the plaintiff.
Third claim
The plaintiff's third claim is for the rectification of defects discovered in the aircraft and which were, under the agreement, the responsibility of the first defendant, being non provision items. The plaintiff submits that the first defendant, under the provisions of the agreement at article 4.7 read with articles 8.1, 8.10, 8.11 and 8.13, was responsible for the cost of certain required maintenance that was not specifically covered by the amounts for which the plaintiff itself was responsible under article 4.7.
The defendants accepted that the agreement determines the responsibilities of the parties for repair and maintenance of the aircraft. The defendants reserved the right to rely on the full terms and conditions of the agreement at trial. As I have noted repeatedly the defendants did not appear at trial.
Article 8.10 provides that all time-lifed components of the aircraft, save for those covered by the provisions amount, which become due for replacement during the term must be overhauled to 0 (Zero) time, or be replaced with overhauled exchange units, or be replaced with new parts supplied and fitted at the cost of the first defendant.
Article 8.11 provides that the first defendant will pay for all maintenance, parts and associated costs relating to or in respect of the aircraft while the agreement remains in force, save for the Provisions items which are covered by the provisions amount and which were more particularly described above.
Article 8.13 provides that if at the time that the aircraft is returned any item of repair or maintenance is necessary to be carried out which was the obligation of the first defendant and which was not carried out, the plaintiff may effect such repair or maintenance and deduct the costs thereof from the Security Deposit and if the Security Deposit is insufficient to cover such cost, it can claim the costs as a debt due from the first defendant.
Ms Prentice testified that during the installation of the engines after the corrosion repair, several defects were found on the airframe by Execujet Maintenance and which the plaintiff was required to meet.
I find that as a consequence of the first defendant's non-compliance with its obligations under the agreement the plaintiff suffered losses and damages in the sum of $16,925.94 as particularised in invoice number IN002841. This invoice was received as exhibit 3.
Fourth claim
The plaintiff's fourth claim, redelivery condition, arises in this way. The plaintiff recovered possession of the aircraft on or about 14 April 2016 and by reason of the first defendant defaulting in paying the rental provided for by the agreement, the agreement was subsequently terminated in about June 2016.
Under the agreement the first defendant was obliged to ensure that at the time of the termination of the agreement the aircraft was delivered to the plaintiff in a condition whereby the first defendant had complied with its obligations under articles 8.10, 8.12 and 8.13 of the agreement.
Article 8.12 specified an obligation to deliver the aircraft to the plaintiff upon expiry of the Term with a fresh and properly issued Phase I through VI inspection certificate and a fresh maintenance release, with all systems serviceable, and with no component or maintenance inspection, save for those covered under provisions amount, having less than (where applicable)
(a)12 (twelve) calendar months' life and;
(b)1200 (twelve hundred) flight hours and;
(c)1200 (twelve hundred) cycles.
remaining before replacement, repair, maintenance or overhaul is required in respect of such component or maintenance due. All components not meeting the requirements of the agreement must be overhauled to 0 (Zero) time, or be replaced with overhauled exchange units, or be replaced with new parts supplied and fitted at the cost of the first defendant: (8.12).
Ms Prentice testified that having repossessed the aircraft prior to the end date of the agreement the plaintiff, at its cost, complied with the required inspections to get the aircraft back to what is termed to be a 00 position for the next lease.
The cost incurred is particularised in the invoice received as exhibit 4, namely $123,072.11.
I find that as a consequence of the first defendant's non-compliance with its obligations under the agreement the plaintiff suffered losses and damages in that sum.
Fifth claim
The plaintiff's fifth claim, lost rental, arises in this way. Because of the early termination of the agreement, caused, I find, by the various breaches of the first defendant, the plaintiff was unable to lease out the aircraft to others immediately upon its repossession. That was because the aircraft was retrieved in such a state as to require substantial repairs and maintenance work to be undertaken before it could be made available for hire by others.
Accordingly, the plaintiff lost rental on the aircraft for September and October 2016 which it would otherwise have earned in the approximate sum of $99,000 (being the rental that would have been payable by the first defendant under the agreement).
The plaintiff was able to lease the aircraft to another entity in about November 2016, thus mitigating its loss.
I find that as a consequence of the first defendant's non-compliance with its obligations under the agreement the plaintiff suffered losses and damages under this head in the sum of $99,000.
Responsibility of the second defendant
It is accepted that as a result of article 29.1 and 29.2 of the agreement the second defendant is liable to guarantee to the plaintiff the observance and performance by the first defendant of all of the first defendant's obligations under the agreement and the payment to the plaintiff of all unpaid rental or all and any other monies due by the first defendant to the plaintiff.
By application of article 29.3, the second defendant is liable to indemnify the plaintiff and hold it harmless against all and any loss or damage suffered by the plaintiff by reason of the non-payment of monies owed by the first defendant to the plaintiff under the agreement or by reason of any breach of the agreement.
Bankruptcy issue
At the hearing of 1 February 2018 counsel advised me that she had received instructions that the second defendant had been declared bankrupt as of that date. By an email to my associate on 3 February 2018 the second defendant provided bankruptcy details, in the sense of a reference number for both the second defendant and his wife. No further submissions or information was provided. No reason has been advanced for me to stay this process against the second defendant under s 60 (1) (b) of the Bankruptcy Act 1966 (Cth) and I decline to do so.
Conclusion
For the foregoing reasons I give judgment for the plaintiff in the sum of $621,711.89 with interest and costs. I will hear the parties as to appropriate orders and calculations in that regard.
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