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Aircraft leasing contracts in the Russia-Ukraine Conflict: the case of Zephyrus Aviation vs. Fidelis Underwriting

In a recent decision, the High Court of Justice of the United Kingdom ([1]) asserted its jurisdiction over proceedings concerning the loss of aircraft leased by Western lessors to Russian airlines, despite contractual clauses in the insurance policies granting exclusive jurisdiction to Russian Courts.

The judgment, delivered in the case of Zephyrus Aviation vs. Fidelis Underwriting ([2]), represents a groundbreaking decision compared to the traditional stance of English Courts, which typically give decisive importance to exclusive jurisdiction clauses in favour of foreign courts and consequently suspend concurrent proceedings concerning those contracts initiated in the UK.

The High Court based its decision on an analytical assessment of the circumstances of the case and on the consideration that English Courts enjoy a margin of discretion regarding the suspension of proceedings. Therefore, if parties can prove the existence of valid reasons, English jurisdiction can be established despite contractual clauses granting exclusive jurisdiction to a different country and requests for suspension of the proceedings can be legitimately rejected.

Factual and Procedural Background

The Zephyrus Aviation vs. Fidelis Underwriting case is part of a series of disputes concerning the aviation market that started following the escalation of the Russia-Ukraine conflict in February 2022. The disputes involve as plaintiffs aircraft owners/lessors who leased aircraft to Russian airlines (lessees). Those aircrafts are now stranded in Russia, despite the notifications of contractual termination notices, due to the Western sanctions on Russia.

In the case at hand, the plaintiff is Zephyrus Aviation, the owner and lessor of aircraft leased to Russian lessees. Specifically, Zephyrus’ leasing contracts required Russian lessees to insure the aircraft against damage and destruction and against damages resulting from armed conflicts (via the so-called Hull All Risks and Hull War and Allied Perils Risks policies). Additionally, if the insurance policy was taken out outside the US, European, or English market, Zephyrus’ leases required the reinsurance of risks with Western reinsurers recognized in such markets or, in any case, with internationally renowned reinsurers approved by the lessor, such as Fidelis Underwriting. Moreover, the reinsurance was to include a clause known as a cut-through clause, which provides for direct compensation from the reinsurer to the damaged party, allowing a party that does not have a direct contractual link with the reinsurer to exercise rights against it.

Following the onset of the conflict, due to the impossibility of reclaiming the aircraft, these cut-through clauses allowed Zephyrus to act against Russian insurers and concurrently bring a direct action before the English Courts against Fidelis Underwriting, as the Western reinsurer of the aircraft.

The defendants objected, stating that the reinsurance policies between the Russian lessees and Fidelis provided for the exclusive jurisdiction of Russian courts. They consequently requested the suspension of the proceedings before the High Court.

Upon the production of the reinsurance policies by the defendants, Zephyrus stated that they had discovered for the first time in court the exclusive jurisdiction clauses in favour of Russian courts, arguing that they had never been made aware of such provisions, as they were not parties to the reinsurance contract.

Zephyrus then requested the High Court to reject Fidelis’ suspension request, as English jurisprudence provides that specific jurisdiction agreements may be disregarded if there are “strong reasons” or “valid reasons”. According to Zephyrus, the valid reasons in this case were:

1. the concrete risk of not receiving a fair trial in Russia;
2. the potential contrast between the request to initiate proceedings in Russia and public policy, considering that such a request would undermine the effectiveness of sanctions imposed by the UK and others against the Federation and instead guarantee effectiveness to Russian counter-sanctions;
3. the risk of multiple judgments with potentially conflicting outcomes.

The decision

Having considered these arguments, the High Court confirmed that, according to English jurisprudence, there may be valid reasons to:

1. override principles such as contractual autonomy, enforcement of agreements, and certainty in commercial exchanges ([3]);
2. disapply an exclusive jurisdiction clause in favour of foreign courts;
3. reject a request to suspend proceedings initiated in the UK.

Following a detailed review of its precedents, the English High Court based its decision on the following legal principles:

1. the elements constituting valid reasons to disapply an exclusive jurisdiction clause and reject a suspension request depend on the facts and circumstances of the specific case;
2. the burden of demonstrating the existence of valid reasons lies with the party intending to invoke them;
3. identifying the UK as the “appropriate” forum based on foreseeable reasons evaluated in a mere convenience analysis is not sufficient to support the presence of valid reasons;
4. a matter merely concerning the interests of justice might not constitute a valid reason if such a matter was foreseeable and, as such, could have been evaluated in the parties’ agreement on the jurisdiction clause;
5. the risk of prejudice the plaintiff would suffer by having to start proceedings before a foreign court if, because of political, racial, religious, or other reasons, that would undermine their possibility of obtaining a fair trial is a valid reason ([4]).

In light of these principles, the High Court considered whether it was likely for Zephyrus to receive a fair trial in Russia. Particular importance was given to expert testimonial evidence, based on which the Court deduced that Russia, in cases of significant public interest, does influence the normal course of justice. Therefore, according to the Court, the specific circumstances of the case suggest a strong state involvement and that it is likely that Zephyrus would not be guaranteed a fair trial. Specifically, the Court noted a significant interest of the Russian National Reinsurance Company, a state-owned insurance company, in the outcome of proceedings concerning aviation insurance/reinsurance linked to leasing contracts with Russian lessees and that the decision in such a case would have a significant impact on Russia’s interests in the aviation sector. Furthermore, the fact that Russian Courts could not objectively evaluate and decide on a series of relevant factual circumstances, such as the validity of Russian countermeasures against Western sanctions and the existence of war and conflict-related damages, was taken in consideration.

Ultimately, the Court considered it likely that Russian Courts would not apply the leasing contract conditions to assess the validity of the contractual terminations and the plaintiffs’ right to the restitution of the aircraft. As an “unfriendly State”, the unlikelihood of obtaining a fair trial in Russia was indicated by the Court as a valid reason to disapply the exclusive jurisdiction clauses stipulated in the reinsurance contracts and thus reject the request to suspend the proceedings in the UK.

Conclusions

The decision in the Zephyrus Aviation vs. Fidelis Underwriting case sets a significant precedent for future litigation in the aviation sector. It is a precedent that could significantly influence future decisions on similar cases, also due to the analytical and detailed nature of the judgment.

The decision does not imply that English Courts will be more inclined in the future to deny suspension requests, but it makes clear that – in the presence of specific factual circumstances – it is possible for English judges to set aside jurisdiction clauses agreed upon by the parties, whose validity would be supported by general principles, in favour of the principle of fair trial and overriding justice needs.

 

[1] High Court of Justice, Business and Property Courts of England And Wales, King’s Bench Division, Commercial Court.

[2] Zephyrus Capital Aviation Partners 1D Ltd & Ors vs. Fidelis Underwriting Ltd & Ors (Re: Russian Aircraft Operator Policy Claims (Jurisdiction Applications)) [2024] EWHC 734 (Comm) (28 March 2024). In this dispute, Zephyrus Aviation acted on behalf of numerous Western owners/lessors, and Fidelis Underwriting represented an equal number of insurers/reinsurers, for a total of 78 claims.

[3] Which otherwise support the validity of exclusive jurisdiction clauses.

[4] On this point, the Judge noted, however, that judicial decisions present differing views and that, in fact, in the majority of cases, factors of mere convenience are always considered and evaluated separately from the interests of justice.