Aviation Finance & Leasing 2023

Arbitration for Aviation

In the grand theatre of global commerce, the aviation industry contributes nearly USD3 trillion to the world’s gross domestic product annually. Not only this, with its vast global operations, intricate supply chains and other interlaced systems, it also serves as a crucial artery of global commerce. It is also an industry where contractual disputes are an undeniable reality, since its daily labyrinth of international deal-making, operations and law layered with complex technical dynamics make for an environment ripe for such disputes.

Historically, the hallowed halls of justice that are various national courts of law have been the primary battlegrounds for contractual disputes within the aviation industry. Litigation (particularly that involving multiple jurisdictions and complex engineering and technical subject matter) has proven to many in the aviation industry to be ferocious, unedifying, publicly embarrassing and astoundingly expensive. It is often a process that consumes vast reserves of bandwidth and sanity. What is worse, outcomes occasionally veer into the realm of absurdity when left to the judgement of those bereft of industry-specific knowledge or – worse still – neutrality.

In many other industries, the strain of litigation has helped usher in the renaissance of an age-old method of conflict resolution – arbitration – as a preferred method of contractual dispute resolution, especially in a cross-border context. Much like a finely aged wine poured afresh, arbitration, having matured and adapted to the demands of our modern era, now offers a panoply of benefits to the aviation industry that warrant informed consideration. This is especially true in the case of specialised arbitration as now offered to the global aviation industry by The Hague Court of Arbitration for Aviation, the launch of which likely represents the single most significant legal development in the business of aviation globally since the last edition of this guide.

The genesis of arbitration

Arbitration was a fundamental instrument of conflict resolution in numerous ancient civilisations. From Cairo to Athens to Rome, arbitration lent its strength to resolving a broad range of disputes, from commercial and property rights to domestic issues. This age-old mechanism of justice has transitioned from a rudimentary tool to a refined, nuanced process, well-suited to the modern business landscape.

The 20th century witnessed arbitration solidifying its place as the dispute resolution method of choice in industries such as construction, commodities, shipping, and insurance, where the technical expertise of the arbitrator was highly valued. This was, in effect, what is now regarded as specialised arbitration.

Over the past half-century, international businesses have increasingly embraced arbitration as the primary recourse for resolving complex, transnational contractual disputes generally. The growing caseload and estimated value of disputes underline this trend, with new cases worldwide in 2021 representing more than USD100 billion. This preference towards arbitration is not merely a sectoral phenomenon, but rather an international trend. It is also worth noting that courts around the globe, both common law and civil law jurisdictions, increasingly advocate for or at least endorse arbitration, particularly in the specialised context.

The benefits of arbitration for aviation

The best aviation industry attorneys live in the blank white spaces between the lines and at the edges of contracts, where law meets business and strategy. They also advise their clients and companies to choose the method of dispute resolution which puts them in the best and least painful position should a contractual dispute or need to enforce arise. A multitude of variables guide the choice between litigation and arbitration as modes of dispute resolution. These determinants are contingent on the specific transactional context, the composition of the parties, and a thorough evaluation of available alternatives to litigation.

Historically, aviation industry market participants have been largely reticent toward due consideration of arbitration. Such resistance stems largely from cultural factors and has been fuelled by inertia and standardised documentation. Still, to seasoned deal-makers, litigation is often viewed as a last resort for settling contractual disputes after they arise, whereas arbitration is often viewed as a tool for managing business relationships in the context of contractual disputes that may arise.

In the complex and often turbulent landscape of cross-border aviation deal-making, the five key pillars of efficiency, confidentiality, flexibility, neutrality and finality serve to elevate arbitration as the preferred method of dispute resolution and as a sturdy foundation upon which rests what is by far the most expansive platform for enforceability around the world.

Efficiency

Arbitration can offer aviation market participants an effective antidote to the costly and time-consuming quagmire of litigation. It empowers these parties to shape the proceedings, curbing the scope of the dispute resolution process, and in turn, helping to reduce costs. Bypassing the often tortuous paths of court procedure, arbitration can assist in avoiding the pitfalls of delays and unanticipated costs. Of note, the traditional courtroom spectre of procedural gamesmanship or weaponisation of process is greatly diminished in arbitration. Moreover, the limited scope of discovery compared to litigation in some jurisdictions also serves to truncate timelines and preserve resources, thereby enhancing overall efficiency. This system thus preserves parties’ energies for their true purpose: reaching a fair and tenable resolution to their dispute. In arbitration, efficiency is not a mere buzzword but a fundamental design attribute.

Confidentiality

Among other things, aviation’s volatile landscape of fierce competition and rapidly evolving dynamics necessitates a measure of discretion in handling contractual disputes. In most jurisdictions (most notable in the context of international aviation by published case volume being the United States, England and Canada), court proceedings, by their public nature, can inadvertently expose business conflicts to the public. In contrast, arbitration in most cased offers a veil of confidentiality, protecting businesses’ reputation and avoiding a “trial by press release”. For an industry where public perception can significantly impact trajectories, confidentiality is not a mere benefit but a compelling requirement.

Flexibility

Arbitration’s inherent flexibility affords parties significant control over the proceedings, much like a pilot and co-pilot commanding a flight. From the rules governing the proceedings to the choice of arbitral tribunal, language, and venue (including virtual venues), arbitration offers a level of customisation unique to each dispute, paving the way for a more efficient and palatable resolution for the parties compared to litigation.

Neutrality

In a courtroom, the tune of resolution is occasionally played in discordant notes that are bound by nationalistic or other strings that bind. In stark contrast, arbitration provides a platform of neutrality in the often multi-jurisdictional (and multicultural) theatre of aviation contractual disputes. By enabling the selection of unbiased arbitrators with no geographical or personal ties to the disputing parties, arbitration ensures an impartial approach to dispute resolution.

This process significantly reduces the notorious “home court” advantage occasionally sometimes apparent – sometimes subtle, but still evident – in court litigation, which can skew the balance of justice. The neutrality of arbitration dilutes any disproportionate influence of a party’s domestic laws or practices on the proceedings. In essence, it offers an unprejudiced terrain, fostering a fair and balanced environment indispensable for effective dispute resolution in the international aviation industry.

Finality

Appellate review of arbitral awards is, in most cases, very limited. Judicial scrutiny of awards is typically confined to issues such as jurisdiction, procedural fairness or public policy. In contrast, many national court systems permit rigorous (and often very lengthy) appellate review of first instance judgments and often permit reconsideration of both factual matters as well as matters of law. Avoiding appellate review mechanisms reduces additional litigation costs and delays and enhances the efficiency and finality of the process.

The New York Convention: a 172-state enforceability solution

Given the global footprint of the aviation industry, the enforcement of court judgments often requires a prevailing party to somehow navigate differing legal systems and potential for further contention. The task of ensuring that a resolution in one jurisdiction holds force in another is no small feat, and often a prescription for failure. This is where arbitration, under the robust enforcement framework of the New York Convention (the common name for the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards), stands very well apart from litigation.

Consider a simple but poignant illustrative truth: a properly constituted arbitral award is more readily enforceable in most circumstances in more foreign jurisdictions than, for example, either an English or New York court judgement. With the endorsement of 172 signatory nations, the New York Convention not only serves as a cornerstone of international arbitration, but is also often described as the single most successful treaty in all of private international law. Much like an international peace treaty that seeks to harmonise relations between nations, this convention provides a comprehensive framework to ensure the global enforcement of arbitral awards.

The New York Convention mandates contracting states to recognise and enforce arbitral awards issued abroad, subject to a narrow list of exceptions that relate to very serious defects in the arbitral procedure (such as lack of fundamental due process) or award, thereby casting a wide net of legal jurisdiction that spans the globe. While the undoubtedly high bar for refusal to enforce a foreign arbitral under the New York Convention has been confirmed by courts around the world, the key to successful enforcement of arbitral awards is for parties to nevertheless be aware of peculiarities and risks that arise in each particular jurisdiction where enforcement is sought. Still, in the context of an industry that crosses borders every second of the day, this global reach of the New York Convention provides a semblance of predictability and coherence in an otherwise complex and fluctuating international legal environment when it comes to enforcement. This level of certainty and predictability often proves invaluable.

The use of arbitration in aviation

The areas of deal-making where arbitration can potentially demonstrate its transformative potential in the aviation industry are as vast and varied as the industry’s deal-making. Arbitration’s scope in the aviation industry encompasses a variety of claim subject matters, all predominantly contractual in nature, and also embraces the more specialised segments of the industry.

From the ground up

The potential uses of arbitration extend from the high-stakes realm of aircraft sale and purchase, where many transactions involve monumental sums and critical business objectives, down to the ground-level services that keep our airports, heliports and – soon – vertiports functioning seamlessly.

In the whirl of hangars and tarmacs, where maintenance, repair, and overhaul (MRO) services keep fleets airborne, disputes can cause significant delays and financial losses. Similar challenges can arise within the sphere of aviation supply chains and the domain of catering services, often operating under tight schedules and rigorous quality standards. Ground handling services are another area where swift conflict resolution can mean the difference between smooth operations and logistical nightmares. Disputes involving fuel services are often critical due to their direct impact on flight operations. Aircraft charter disputes are a further example, which often involve a complex interplay of contractual terms, operational realities, and international regulations. Aircraft lease returns can quickly trigger contention in a critical segment of the industry where equipment and time equals money. Finally, it is worth noting that arbitration can serve as a crucial tool for pursuing and managing investor-state claims, which can involve significant financial stakes and complex interplay of national and international laws.

Despite the vastness of the forgoing list, it is critical to keep in mind the tenet that the aviation industry is far from monolithic, and its complexities and potential far exceed the scope of a single list.

Arbitration and aviation finance generally

Any blanket assertion that arbitration is unsuitable for aviation finance or leasing requires a change in perspective. Indeed, it has long been seen as suitable, but historically mostly in situations where there were jurisdictional limitations on the enforcement of court judgments. Regardless of whether purely in-rem actions are arbitrable, the value of arbitration in aviation finance is not diminished, given the wealth of other dispute contexts it can effectively address.

Contrary to the myth that arbitration is unsuited for financial disputes generally due to the limitations on the reach of interim measures ordered by arbitral tribunals, numerous mechanisms exist within arbitration that allow for emergency and interim relief and uphold the enforceability of such orders. Furthermore, depending on the applicable laws, disputing parties in arbitration can often also seek interim relief from courts in support of an arbitration. Moreover, many complex financial transactions can benefit from the procedural efficiency, flexibility, privacy, and expert knowledge that arbitration offers. The rising use of arbitration in the banking and finance sector testifies to this evolving perspective. In fact, the London Court of International Arbitration recently reported that, at 26%, disputes in the banking and finance sector represented its biggest industry sector in 2021, overtaking energy and resources disputes. It is not alone in this trend, as an increase in the sector can also be seen in other arbitral institutions as well.

Arbitration and The Cape Town Convention specifically

There exists a degree of mostly misinformed apprehension surrounding the interplay between the application of the Cape Town Convention (CTC) and arbitration. Importantly, it is not the intention of arbitration, particularly within specialised contexts, to undermine or supplant the CTC in any way. On the contrary, when the CTC does not apply or applies only indirectly, arbitration serves as a valuable adjunct tool, drawing its strength from the New York Convention’s robust support for the enforcement of arbitral awards more generally.

The CTC, through its asset-based remedies, seeks to enable rapid and predictable recovery and redeployment of aviation assets, while arbitration’s primary focus is addressing rights beyond the scope of these remedies where available. For the time being, no arbitral court is defined as a “court” under the CTC. Of note, this means that the CTC’s Article 42 jurisdiction provisions do not apply to any arbitral court. As such, any arbitral order seeking enforcement lacks the CTC-backed authority of an equivalent court order. Furthermore, the New York Convention provides guardrails to prevent overreach by limiting the enforcement of arbitral awards in certain scenarios. Therein lies the true barrier between CTC and arbitration – the challengeability of an arbitral award that overreaches in so far as two of the rather limited bases for a New York Convention contracting state not recognising and enforcing an arbitral award apply: (i) if the subject matter of the arbitral award is not capable of settlement by arbitration under the law of the contracting state (which would be the case if the CTC applied), or (ii) if the award goes beyond the scope of the submission to arbitration (which, again, would be the case if arbitration applied).

The Hague Court of Arbitration for Aviation

While the landscape of arbitration is dotted with a multitude of generalist arbitral institutions around the world, the unique dynamics and needs of the aviation industry fuelled the launch in July 2023, on the mainstage of the Farnborough International Airshow, of a truly tenable, neutral and specialised arbitration and mediation service designed for and in the genuine service of the entire global aviation industry: the Hague Court of Arbitration for Aviation (the “Hague CAA”).

Arbitration “for us, by us”

The Hague CAA exemplifies each of the benefits of arbitration discussed above, and further offers specialised arbitration fine-tuned to the distinctive dynamics of the global aviation industry. The true beauty of the “for us, by us” nature of The Hague CAA rests in the fact that it was and continues to be engineered to the contours of aviation contractual disputes by a diverse global consortium consisting of many dozens of senior aviation legal and technical professionals working alongside several dozen senior arbitration professionals under the guidance of a nearly 75 year-old arbitral institution – representing in sum well over 1,000 years of combined aviation expertise and well over 1,000 years of combined arbitration (and mediation) expertise.

There are several aspects of the Hague CAA, beyond its specialised nature discussed below, that set it is apart from most generalist arbitral institutions. To begin with, the Hague CAA is a genuine non-profit foundation, which not only lowers the administrative costs for parties involved relative to most other arbitral involved, but also ensures that its mission remains focused on serving the aviation industry. Indeed, is also notable that the mission of the Hague CAA is in the bona fide service of the aviation industry and not just the Hague CAA itself – to which end its mission statement reads “To promote the use of arbitration and mediation as preferred methods of contractual dispute resolution throughout the vast global aviation industry, wherever and however helpful to the parties involved.” The Hague CAA also mirrors the values of the aviation industry in a number of ways. In terms of gender, race, age, geography and other diversity, The Hague CAA stands as one of, if not possibly the most, diverse arbitral institutions globally. Moreover, the Hague CAA’s commitment to diversity and to sustainability are expressly embodied in the rules and procedures.

The role of the NAI and importance of the Hague

The Hague CAA is rooted in the rich arbitration soil of the Netherlands. To begin with, its arbitration cases are administered solely by the Netherlands Arbitration Institute (NAI). The Hague CAA may be “new”, but NAI was founded in 1949 and has successfully administered over 5,000 arbitration cases. It is one of the oldest and most respected international arbitral institutions in the world. In 2022 alone, the NAI administered a caseload representing more than USD2 billion in dispute worldwide.

For the past century or so, the municipality of the Hague has earned its reputation as the international city of peace and justice. Its unique position as an international centre of decision-making and influence has led to it becoming home to more than 200 international organisations, including the Permanent Court of Arbitration and the International Court of Justice. It is now also the default seat of the Hague CAA.

The seat of arbitration, distinct from its physical location, determines the legal framework. Parties may choose a seat different from the institution’s default seat. They may also choose a different physical location – though the vast majority of arbitration today occurs through written correspondence and other electronic means, avoiding much of the need for physical travel compared to the past. For example, an arbitration administered under the Hague CAA arbitration rules may be seated and/or physically held in, say, London, Paris, Dubai, Singapore, Hong Kong or New York. The seat affects crucial aspects of an arbitration, however, such as parties’ access to national courts (for example, for an order to freeze assets by way of interim measures), challenges to tribunal decisions, and enforcement provisions. Jurisdictional support varies, with interventionist courts posing risks and generally best avoided. The Dutch legal system, however, is highly supportive of arbitration, typically intervening only to assist and uphold the process – including for example, by way of a comprehensive regime for interim measures before a Dutch court.

Specialised expertise

The arbitrators involved in the Hague CAA bring with them more than just a proficiency in arbitration. An arbitrator’s insights into the operational, regulatory, technical, legal and commercial aspects of the aviation industry, combined with his or her unique understanding of arbitration, provide a rare blend of expertise that enriches the dispute resolution process. The Hague CAA encourages the use of its two lists of vetted neutrals in both its arbitration rules. The first is a list of sole/chair-eligible arbitrators, which consists of highly experienced, “top name” senior arbitrators around the world, and a high percentage of whom have experience arbitrating aviation disputes. The second is a list of co-arbitrators, which consists solely of seasoned legal and technical veterans of the aviation industry, with years of practical experience tucked under their wings, who are also trained arbitrators. The Hague CAA also maintains a large and diverse list of senior aviation technical experts, many of whom also serve as members of its one-of-a-kind Technical Standing Committee, which continually provides input and guidance to inform The Hague CAA’s design thinking and especially its rule-making processes.

Specialised rules

The specialised arbitration rules of the Hague CAA are not arbitrary, but carefully crafted to expedite proceedings, improve time and cost efficiency, and avoid absurd outcomes that do not reflect the realities of the industry. As such, they seek to address the industry’s critical pain points with litigation before national courts. There are many, many unique examples to point to, from the electronic submissions to virtual hearings to early determination, but perhaps the poignant example concerns speed. The Hague CAA has broken new ground in the realm of arbitration generally by mandating an unprecedented default expedited procedure with shorter time limits and more potent remedies to reduce delay, providing parties with an arbitral award within only six months from the date of the initial case management conference. The initiation of proceedings, and the proceedings themselves, under the rules are designed to go twice as fast as most international arbitrations. The contrast to litigation is even more pronounced – for example, the median length from the initiation of a claim to the conclusion of a jury or bench trial in civil cases in the United States is over 27 months, and that is not accounting for potential appeals.

The Hague CAA is not frozen in time or stuck to a founding text or treatise. Its very hallmarks are flexibility and party autonomy, which, along with the overall structure of the project, allow it to develop and adapt in response to the needs of its users. In that light, it is worth noting that although its launch was preceded by many months of work on its arbitration rules and procedures, the Hague CAA undertook a wide ranging industry consultation process immediately following its launch, which resulted in the release of its first arbitration rule enhancements in February 2023, less than seven months of its launch. These innovative rule enhancements bear testimony to the agility and dynamism of the HCAA and reflect its commitment to evolving with the industry’s needs, mirroring the aviation sector’s constant push towards greater efficiency and excellence.

A decades-long mission

Arbitration presently stands as a promising alternative for the aviation industry to traditional court litigation in many cases. The Hague CAA in particular is poised to offer the industry greater expertise, efficacy and efficiency in the resolution of contractual disputes by its industry-specific approach – dynamic, responsive, and acutely attuned to the distinctive nuances of the global aviation industry. The early adoption of the Hague CAA is evidenced by the fact that over USD1 billion worth of aviation transactions were known to have included provision for the Hague CAA arbitration and/or mediation within nine months of its launch – an unprecedented feat for any newly established arbitral institution. As arbitration slowly but surely continues to be woven into the fabric of aviation deal-making around the world in the years and decades to come, it will progress from “promising alternative” to “standard operating procedure.” A new flight plan has been charted by the Hague CAA, the course set, and the destination clear.