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Aviation Case Review 202429 January 2025

Although the headlines may have been dominated by the ongoing impact of the Ukraine-Russia conflict on the aviation industry and its insurers, in 2024 courts across various jurisdictions dealt with a wide range of legal issues. We have brought together summaries of some of the more notable decisions that cover topics from grounding to insolvency, as well as the ever-present termination notice. A reminder of issues that have arisen can often help with avoiding such problems going forward. However, this crop of judgments also provides a glimpse of some further disputes that may appear in 2025.

Dubai

England and Wales

Australia

United States

Dubai

GROUNDING AIRCRAFT IN DUBAI NOW POSSIBLE (AGAIN) THROUGH DIFC COURTS

In the past, lessors have successfully obtained orders from the DIFC Courts grounding aircraft in Dubai airports, including Dubai International Airport, where lessees are in breach of their lease terms, typically due to non-payment of rent or sanctions breaches. This is despite the leases not expressly referring to the DIFC Courts in the jurisdiction provision but containing what is known as a “sweep up” jurisdiction clause allowing the lessor (at its option) to seek interim relief from any court of competent jurisdiction.

The DIFC Court of Appeal decision in Sandra Holding v Al Saleh meant that lessors could no longer seek such relief in support of foreign main claim proceedings where the lease in question makes no express reference to the DIFC Courts as having jurisdiction.

However, in late November 2024, the DIFC Court of Appeal in Carmon Reestrutura-Engenharia e Servicos Tecnios Especiais, (SU) LDA v Antonio Joao Catete Lopes Cuenda, overturned the restrictive approach taken in Sandra Holding. It held that the DIFC Courts have the power to grant interim relief, including freezing orders, restraining a party from dealing with any assets, whether located within the jurisdiction or not and whether or not there has been a claim for a final remedy of that kind. These powers exist to prevent the DIFC Court’s jurisdiction being thwarted, including the jurisdiction to recognise and enforce foreign judgments. The Court of Appeal overturned the decision in Sandra Holding as it has the power to decide that an earlier decision embodied an error of law that could impede the effective administration of justice.

"The Carmon decision now opens the doorway again for lessors to seek interim relief to ground aircraft in Dubai."

Although the grant of a DIFC freezing order remains a discretionary remedy, the Carmon decision now opens the doorway again for lessors to seek interim relief to ground aircraft in Dubai through the DIFC Courts. The DIFC Courts can in practice be a better option than the onshore Dubai courts due to the speed at which the interim relief can be obtained from the DIFC Courts and enforced.

Sandra Holding v Al Saleh [2023] DIFC CA 003

Carmon Reestrutura-Engenharia e Servicos Tecnios Especiais, (SU) LDA v Antonio Joao Catete Lopes Cuenda [2024] DIFC CA 003

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England and Wales

LEASES, LETTERS OF CREDIT, SANCTIONS AND THE CONFIRMING BANK REFUSING TO PAY

In our July 2023 bulletin (see here), we reported on a Commercial Court decision in an action brought by Celestial Aviation Services Limited and others against UniCredit Bank AG (London Branch) after Unicredit rejected demands for payment under standby letters of credit following the lessees’ failure to comply with their obligations under the leases, on the basis that it was prohibited from paying by UK, EU and US sanctions. The court held that UniCredit was not prohibited from paying because the supply of the aircraft and confirmation of the letters of credit took place before the sanctions came into effect.

Celestial Aviation Services Limited v UniCredit Bank AG, London Branch [2023] EWHC 1071 (Comm)

The Court of Appeal overturned that decision in June 2024, finding that the sanctions did entitle UniCredit to withhold payment. In contrast to the first instance decision, which considered that sanctions were intended to operate prospectively as opposed to retrospectively, the Court of Appeal held that Regulation 28 of the Russia (Sanctions) (EU Exit) Regulations 2019, SI 2019/855 (the “UK Regulations”) prohibited payment under letters of credit because payment was “in pursuance of or in connection with” an arrangement prohibited by the UK Regulations.

The Court of Appeal further found that even if the relevant sanctions did not apply, UniCredit would have been able to rely on a “reasonable belief” defence in section 44 of the Sanctions and Anti-Money Laundering Act 2018, which provides that a person is not liable in civil proceedings where they have done or omitted to do an act in the reasonable belief that they acted in compliance with UK sanctions.

Celestial Aviation Services Ltd v UniCredit Bank AG (London Branch) [2024] EWCA Civ 628

TERMINATION NOTICES AND ENFORCEMENT EVENTS

VietJet leased four Airbus aircraft under a Japanese Operating Lease with Call Option (“JOLCO”) structure, the key features of which were as follows:

  • Each aircraft was purchased from the manufacturer by an SPV representing the interests of a group of Japanese investors. The purchase in each case was funded by a mix of debt finance, through loans to the SPVs (each supported by certain security arrangements), and equity finance, which was provided by the investors.
  • The SPV in each case leased the aircraft to a lessee SPV owned by VietJet (the Head Lease).
  • Each lessee then sub-leased it to VietJet under a further leasing agreement (the Sub-Lease).
  • The rental payments payable under the leasing arrangements would repay the loans.

In October 2021, with VietJet in arrears on rental payments, termination notices were issued by the security trustees (acting on behalf of the lenders who provided the debt financing for the aircraft), to whom the lessors’ interests in the leases were assigned as part of the security package in place in respect of the finance arrangements. VietJet continued to operate the aircraft for over a year without paying any rent. FWA subsequently acquired the security rights under the JOLCO structures and moved to enforce those rights.

VietJet disputed the validity of the termination notices, arguing that the security trustee could not rely on an “Event of Default” under each of the lease agreements to terminate the leasing of the aircraft, even though such termination right had been assigned by the lessor to the security trustee.  Instead, the security trustee needed an “Enforcement Event” to have occurred, as defined in the lessor security assignments, in order to exercise not just the other rights provided under the security assignment, such as the right to sell, but also the right to terminate the leasing.

The Commercial Court held that the leasing of the aircraft had been validly terminated by the termination notices issued by the security trustees and that only required the occurrence of an “Event of Default” under the leases, even if there had been no “Enforcement Event” under the finance arrangements. The court distinguished between: (a) rights that had been assigned by the lessor to the security trustee under the security assignment at the outset of the transaction, such as the right to terminate the leasing, where the trigger for such rights was the “Event of Default”; and (b) a set of conditional powers that had been agreed by the lessor and the security trustee as being available to the security trustee upon the occurrence of an “Enforcement Event”, such as the right to sell. The court also refused VietJet’s application for relief from forfeiture holding that whilst, in principle, relief from forfeiture is applicable to this type of lease, various factors indicated that it was not unconscionable for FWA to enforce the termination rights. FWA’s actions were permitted under the contractual arrangements and VietJet’s conduct and substantial defaults led the court to determine that it would not be fair or equitable to grant relief.  Given the judge’s decision, he considered that it was unnecessary to deal with the question of whether the Cape Town Convention precludes relief from forfeiture.

The Commercial Court’s decision has been appealed by VietJet with a hearing listed for 20 May 2025.

FW Aviation (Holdings) 1 Limited v VietJet Aviation Joint Stock Company [2024] EWHC 1945 (Comm)

ANTI-SUIT INJUNCTIONS AND EXCLUSIVE JURISDICTION CLAUSES

The same VietJet JOLCO gave rise to a further judgment in 2024 in respect of applications for anti-suit injunctions made by FWA, Natixis and BNP against VietJet to stop proceedings brought by VietJet before the People’s Court of Hanoi (“PCH”) in Vietnam against both BNP and Natixis.

The loan agreement, head-lease and sub-lease all had exclusive jurisdiction clauses in favour of the English courts. The court held that Vietjet was bound by the jurisdiction clause in the sub-leases, which provided that:

“…the courts of England are to have jurisdiction to settle any disputes that may arise in connection with the legal relationships established by this Agreement … and any other Operative Document or otherwise arising in connection with this Agreement and any other Operative Document…”

FWA’s primary concerns around the Vietnamese proceedings related to the possibility that the PCH might make findings that would be inconsistent with those made by the Commercial Court in the FWA v VietJet proceedings (as discussed above) and might be relied on to resist enforcement of any judgment in FWA’s favour. Mr Justice Bright considered that it was not necessary to determine FWA’s application for an anti-suit injunction, in light of undertakings given by VietJet that should alleviate FWA’s concerns. FWA’s application was stayed. He noted that the court’s general position where undertakings have been given, is not to reject those undertakings and grant an order in their place.

However, the court did grant both Natixis and BNP anti-suit injunctions on the basis that:

  • the exclusive jurisdiction clause in the sub-leases extended the right to rely on the sub-leases to certain specified third parties in some circumstances. Those third parties included a “Financing Party”, which captured both entities;
  • the obligations of the sub-lessee (VietJet) included the obligation not to bring foreign proceedings in breach of the exclusive jurisdiction clause; and
  • it was clear from the Resignation and Appointment Agreements that assigned security rights from Natixis/BNP to another entity, that that entity’s appointment was intended to take effect from the date of appointment in each case. If Natixis and BNP remained responsible for anything done by them before their resignation, it would be unusual for their liability in respect of those things to be decided in a different jurisdiction.

FW Aviation (Holdings) 1 Limited, Natixis, Natixis (Singapore Branch), BNP Paribas S.A. v VietJet Aviation Joint Stock Company [2024] EWHC 3337 (Comm)

 

NON-ASSIGNMENT CLAUSES AND OPERATIONS OF LAW

 

Dassault Aviation SA (“Dassault”) and Mitsui Busan Aerospace Co Ltd (“MBA”) entered into an English law governed contract for the sale of two surveillance aircraft. That contract contained a non-assignment clause prohibiting assignment or transfer of the contract “in whole or in part by any Party to any third party, for any reason whatsoever, without the prior written consent of the other Party…”.

The aircraft were delivered late following which:

  • MBA claimed under an insurance contract it had entered into with Mitsui Sumitomo Insurance Co Ltd (“MSI”); and
  • MSI commenced arbitration proceedings against Dassault on the basis that, under Japanese law, an insurer is subrogated to an insured’s claim following satisfaction of an insurance claim.

Dassault challenged the jurisdiction of the arbitral tribunal based on the non-assignment clause in the sales contract. However, this challenge failed.

On appeal to the Commercial Court under section 67 of the Arbitration Act 1996, the court found in favour of Dassault and held that the tribunal had no jurisdiction to decide the dispute because the transfer of rights to MSI was within the scope of the non-assignment clause.

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"The non-assignment clause did not catch an assignment which took place by operation of law."

The Court of Appeal, however, overturned this decision, determining that the non-assignment clause did not catch an assignment which took place by operation of law and not through any action of a party. Mitsui was refused permission to appeal to the Supreme Court.

Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd [2024] EWCA Civ 5

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Australia

In 2024, two Australian domestic airlines faced insolvency.  The first, Bonza, entered voluntary administration in April 2024 and was placed into liquidation in July 2024. The second, Regional Express (‘Rex’) entered voluntary administration in July and will remain under administration until at least June 2025 as efforts continue to find a buyer. The administrators have ended its 737 operations and sold parts of its business, such as its flight training centre, to investors.

These are the first airline insolvencies in Australia since COVID-19, when Virgin Australia entered voluntary administration in April 2020 and exited once it was acquired by Bain in September 2020. The administrators of all three airlines have had to decide whether to repudiate and reject contracts, including leases of aircraft and engines. The decision of the Virgin Australia administrators to do so in relation to engines resulted in litigation. The lease terms required redelivery in Florida and the administrators refused to meet the costs of doing so and advised the lessors of the airports in Australia at which the engines were located and ready for collection.

Ultimately the High Court of Australia decided the administrators had complied with the requirement in Article XI(2) of the Cape Town Convention (“CTC”) to ‘give possession’ of each engine, when making the engines available ‘as is, where is’ at various Australian airports instead of delivering them to Florida. We discuss the judgment (‘the VA Judgment’) further here.

Key considerations following the judgment include:

  • whether to revise transaction documents in relation to administration and similar debtor protective procedures, in particular to define ‘commercially reasonable’ conduct by lessors and to stipulate steps required to make an aircraft or engine available, making these steps more positive obligations;
  • addressing and accommodating the risk that redelivery terms and conditions will be unenforceable when the airline/lessee is in administration or comparable debtor protective procedures; and
  • re-evaluation of jurisdictional analysis and risk assessments made before the VA Judgment, particularly in relation to the costs and ease of repossession and protection of lessor rights.

Wells Fargo Trust Company, National Association (As Owner Trustee) & Anor v VB Leaseco Pty Ltd (Administrators Appointed) & Ors [2022] HCA 8

Until overruled, all other Australian courts are bound by the VA judgment when determining disputes which relate to the exercise of CTC rights for an airline in administration. There may be some scope for distinguishing the facts of future disputes from those in the VA Judgment, but the courts may face significant challenges in handing down inconsistent judgments given the way in which the High Court approached the issues and the unanimous conclusion on the interpretation of the CTC obligations under Australian law.

"The domestic insolvency regime takes precedence over Australia’s international treaty obligations as a party to the CTC. "

The judgment also creates wider controversy as the impact is that the domestic insolvency regime takes precedence over Australia’s international treaty obligations as a party to the CTC. The Bonza or Rex administrations could have provided lessors with the opportunity to challenge the VA Judgment, but no challenges have been brought so far. Given the impact of the VA Judgment on the primacy of the CTC, courts in other common law jurisdictions, including Singapore, the UK and the US, will need to consider the judgment and decide, in the context of an airline insolvency:

  • whether to apply the VA Judgment and determine that Cape Town Convention rights are subordinated to local insolvency procedures and priorities to avoid a ‘reworking of generally accepted principles of insolvency law’;
  • whether the administrator has ‘take[n] whatever steps may be necessary to provide an opportunity for the exercise of the right to take possession which the creditor has under Art 8 or Art 10 of the Convention’, in particular where the exercise of repossession rights requires the administrator to take steps beyond written notice; and
  • where an administrator has repudiated a lease and made the aircraft or engine available ‘as is, where is’ regardless of the lease terms, whether the response of lessors is ‘commercially reasonable’.

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United States

RETENTION OF AIRCRAFT IS NOT “PHYSICAL LOSS OR DAMAGE”

In 2023, a Florida court dismissed claims brought by Zephyrus Aviation Capital, LLC (“ZAC”) against its all-risk aviation insurers, Berkshire Hathaway International Insurance Ltd and others, on the basis that no physical loss or damage had occurred where ZAC’s leased commercial aircraft were stranded in Russia following the start of the war in Ukraine.

In 2024, that decision was tested in the Florida appellate court, which affirmed the decision. The appellate court dismissed ZAC’s arguments alleging theft of the aircraft, holding that the applicable legal standard of ‘physical loss or damage’ was a long-established and simple principle. The court concluded that Florida law required ‘some physical change to the insured property’ to find physical loss and the continued operation of aircraft by Russian airlines in Russia after imposition of Russian sanctions did not constitute “physical loss or damage”.

Zephyrus Aviation Capital, LLC v. Berkshire Hathaway International Insurance Ltd., No. CACE23002230, 2023 WL 8599989 (Fla. Cir. Ct. June 30, 2023), affirmed by Zephyrus Aviation Cap., LLC v. Berkshire Hathaway Int’l Ins. Ltd., 386 So. 3d 919 (Fla. Dist. Ct. App. 2024)

CHEVRON DOCTRINE OVERRULED

In Loper Bright Enterprises v. Raimondo, the U.S. Supreme Court overruled the Chevron doctrine, which required courts to defer to a federal agency’s interpretation of ambiguous laws that the agency administers. Previously, in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. 104 S. Ct. 2778 (1984), the Supreme Court concluded that under certain circumstances courts should defer to the relevant agency’s interpretation of an ambiguous statute.

"Existing agency interpretations of statutes and regulations should be viewed critically and may hold less weight."

However, in Loper, the Supreme Court concluded that Chevron could not be reconciled with the Administrative Procedure Act (“APA”), which requires judges to decide relevant legal questions and interpret relevant statutory provisions. In so concluding, the Supreme Court stated that ‘Chevron’s presumption is misguided because agencies have no special competence in resolving statutory ambiguities.’ Unless Congress clearly delegates to federal agencies authority to interpret statutes, the courts must do so. Therefore, under Loper, ‘[c]ourts needs not and under the APA may not defer to an agency interpretation of law simply because a statute is ambiguous.’

As a result of the Loper decision, existing agency interpretations of statutes and regulations should be viewed critically and may hold less weight, making it easier for regulated entities to challenge these regulations.  This includes regulations administered by the U.S. Federal Aviation Administration, which is overseen by the U.S. Department of Transportation.

Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024)

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If you would like to discuss any of the above issues, please get in touch with any of the authors or members of our aviation disputes team, or your usual contact at Watson Farley & Williams.

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