#6605 - Kuwait Airways V. Iraqi Airways - Commercial Remedies BCL

Kuwait Airways v. Iraqi Airways

Facts

On 2 August 1990 military forces of Iraq forcibly invaded and occupied Kuwait. They completed the occupation in the space of two or three days. The Revolutionary Command Council of Iraq then adopted resolutions proclaiming the sovereignty of Iraq over Kuwait and its annexation to Iraq.

When the Iraqi forces took over the airport at Kuwait they seized ten commercial aircraft belonging to Kuwait Airways Corpn ("KAC"): two Boeing 767s, three A300 Airbuses, and five A310 Airbuses. They lost no time in removing these aircraft to Iraq. By 9 August nine of the aircraft had been flown back to Basra, in Iraq. The tenth aircraft, undergoing repair at the time of the invasion, was flown direct to Baghdad a fortnight later. On 9 September the Revolutionary Command Council of Iraq adopted a resolution dissolving KAC and transferring all its property worldwide, including the ten aircraft, to the state-owned Iraqi Airways Co ("IAC"). This resolution, Resolution 369, came into force upon publication in the official gazette on 17 September. On the same day IAC's board passed resolutions implementing RCC Resolution 369.

On 11 January 1991 KAC commenced these proceedings against the Republic of Iraq and IAC, claiming the return of its ten aircraft or payment of their value, and damages.

Holding

Lord Nicholls

Causation in Conversion Cases

The need to have in mind the purpose of the relevant cause of action is not confined to the second, evaluative stage of the twofold inquiry. It may also arise at the earlier stage of the "but for" test, to which I now return. This guideline principle is concerned to identify and exclude losses lacking a causal connection with the wrongful conduct. Expressed in its simplest form, the principle poses the question whether the plaintiff would have suffered the loss without ("but for") the defendant's wrongdoing. If he would not, the wrongful conduct was a cause of the loss. If the loss would have arisen even without the defendant's wrongdoing, normally it does not give rise to legal liability.

I suggest that, if the test is to be applied at all, the answer lies in keeping in mind, as I have said, that each person in a series of conversions wrongfully excludes the owner from possession of his goods. The exclusionary threshold test is to be applied on this footing. Thus the test calls for consideration of whether the plaintiff would have suffered the loss in question had he retained his goods and not been unlawfully deprived of them by the defendant. The test calls for a comparison between the owner's position had he retained his goods and his position having been deprived of his goods by the defendant. Loss which the owner would have suffered even if he had retained the goods is not loss "caused" by the conversion. The defendant is not liable for such loss.

For these reasons I consider KAC's claims in respect of the Iran Six do not fail at the threshold stage. Had KAC not been unlawfully deprived of its goods by IAC KAC would not have suffered any of the heads of loss it is now claiming. Had KAC retained possession of the Iran Six, the aircraft would not have been evacuated to Iran.

Restitutionary damages

Sometimes, when the goods or their equivalent are returned, the owner suffers no financial loss. But the wrongdoer may well have benefited from his temporary use of the owner's goods. It would not be right that he should be able to keep this benefit. The court may order him to pay damages assessed by reference to the value of the benefit he derived from his wrongdoing. I considered this principle in Attorney General v Blake [2001] 1 AC 268, 278-280. In an appropriate case the court may award damages on this "user principle" in addition to compensation for loss suffered. For instance, if the goods are returned damaged, the court may award damages assessed by reference to the benefit obtained by the wrongdoer as well as the cost of repair.

Consequential Losses

Substitute aircrafts: It was eminently to be expected that until the missing aircraft were replaced, KAC would need to hire substitute aircraft capacity, both for passengers and cargo. Furthermore, it was eminently to be expected that until substitute capacity was obtained KAC would suffer losses of business and might suffer loss of profits. I see no reason to question that IAC's liability to KAC ought to extend to meeting the reasonable costs of chartering substitute aircraft and making good any loss of profits.

Financing costs for new aircrafts – Betterment problem: The other head of consequential loss claimed by KAC comprises finance costs associated with buying replacement aircraft. The basis of this claim is as follows. Faced with the destruction of the Mosul Four and the detention of the Iran Six, KAC decided to buy new rather than second hand replacements. Its practice was to accumulate funds needed to buy replacement aircraft over this 15-year cycle. Since KAC's aircraft were seized broadly in the middle of their 15-year life cycles, KAC had to borrow money to buy replacement aircraft between 1991 and 1995. KAC calculated that the additional cost of replacing the ten aircraft in the middle rather than at the end of their 15-year cycles was about $290m. KAC gives credit for the sale prices obtained for the Iran Six and for the scrap value of the Mosul Four.

The new aircraft bought by KAC were not mere replacements for the ten aircraft misappropriated by IAC. Having lost most of its fleet, KAC used the occasion to carry out a fundamental reappraisal of its aircraft requirements in the light of changing market conditions. These requirements dictated that the composition of KAC's fleet should be significantly different from its existing fleet. Different aircraft, with different specifications, were called for. Accordingly, in the early 1990s KAC did not seek to restore the airline to the position which would have existed if the Mosul Four had survived *1097 intact and the Iran Six had not become temporarily unavailable. KAC did not set out to replace the aircraft it had lost with the same models, or the closest available. It did not just buy new for old. The ten aircraft seized included five Airbus A310-200s. New aircraft of this model were still available for purchase from Airbus, but KAC chose to buy different aircraft.

This was not an unreasonable course for KAC to take. Indeed, it would have made no commercial sense for KAC to replace the ten aircraft without regard to its current and anticipated aircraft requirements. KAC was forced to review its aircraft requirements, and it seized the opportunity to make significant changes in the composition of its fleet. This may well have been a commercially wise decision. But I do not think it would be right to saddle IAC with the finance costs associated with this substantial restructuring of KAC's fleet. In agreement with the Court of Appeal and with the view expressed by Aikens J on this point, although not for precisely the same reasons, I would not allow this head of claim.

Test for Remoteness

Expressed in terms of the traditional guideline principles, the choice is between confining liability for consequential loss to damage which is "foreseeable", as distinct from damage flowing "directly and naturally" from the wrongful conduct. In practice, these two tests usually yield the same result. Where they do not, the foreseeability test is likely to be the more restrictive. The prevalent view is that the more restrictive test of foreseeability is applicable to the torts of negligence, nuisance andRylands v Fletcher: see the twoWagon Mound cases [1961] AC 388and[1967] 1 AC 617andCambridge Water Co v Eastern Counties Leather plc [1994] 2 AC 264. The Court of Appeal recently applied this test to the tort of conversion, apparently without any contrary argument, inSaleslease Ltd v Davis [1999] 1 WLR 1664, although the members of the court differed in the application of the principle to the facts of the case.

In contrast, the less restrictive test is applicable in deceit. The more culpable the defendant the wider the area of loss for which he can fairly be held responsible: see the discussion by my noble and learned friend Lord Steyn inSmith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254, 279-285.

This bifurcation causes difficulty with the tort of conversion. Dishonesty is not an essential ingredient of this wrong. The defendant may be a thief, or he may have acted wholly innocently. Both are strictly liable. But it seems to me inappropriate they should be treated alike when...