The multibillion pound court battle keeping the City’s law firms busy
The barrage of sanctions against Russia following its invasion of Ukraine have hit many international companies hard. But there is one sector that was hit particularly hard.
Shortly after the invasion, UK and EU companies were banned from leasing aircraft to Russian entities. In response, Russia prohibited the export of aircraft currently operated in Russia.
The sanctions spat resulted in hundreds of aircraft being stranded in Russia, some of which are now believed to be under Russian control. It was estimated by Airfinance Journal that as of February 2022 approximately 500 foreign-owned aircraft remained in Russia, with a market value greater than $10bn.
The leasing companies immediately turned to their insurers as they sought to recover these losses – but they refused to cough up.
This has set up one of biggest legal commercial court battles in the UK courts right now, where the losers will be forced to deal with devastating multi-billion dollar bills.
The companies
The most notable name involved in this dispute is Dublin-based Aercap, one of the world’s largest aircraft leasing companies.
Its customer base covers the majority of the well-known airlines including British Airways, Air France, Virgin Atlantic and American Airlines. The company also had Russian airlines as customers, including the largest airline in Russia, Aeroflot.
Aercap filed multiple claims in London back in June last year against insurers including AIG, Lloyd’s of London, Fidelis Insurance, Swiss Re and Chubb, and is seeking a total of around $3.5bn for over 141 aircraft and 29 aircraft engines that have been left stranded in Russia.
Four other aircraft leasing companies – Dubai Aerospace Enterprise (DAE), US-Irish firm Merx Aviation, Ireland-based KDAC Aircraft Trading and Falcon 2019-1 Aircraft, an entity managed by DAE – have also filed similar claims against these insurers.
DAE catered to a lot of clients outside of Europe, such as Emirates, Etihad Airways, Virgin Australia and Air Canada, as well as Aeroflot.
DAE and its entity Falcon are seeking up to $900m, while Merx is suing for $255m and KDAC is claiming for $21.5m, according to court documents from the cases obtained by Morning Wire
However, due to the size and number of these types of claims, the court was forced to condense these five separate legal actions into one massive trial, which is scheduled to start on October 2 next year and run for approximately 12 weeks.
There are 13 different insurance companies and 10 syndicates being sued across these five claims.
This lawsuit has roped in most of the big City law firms. Herbert Smith Freehills, Morgan Lewis & Bockius and magic circle firm Clifford Chance are all acting on the claimants side, while the defendants have lined up: Clyde & Co, CMS, Holman Fenwick Willan, RPC, Kennedys Law and Pennington Manches.
It is understood that some of the law firm’s have teams between 10 to 15 people working on this case, with each of the parties drawing in anywhere between three to seven barristers.
The arguments
The first conundrum this case needs to deal with is does the claim come under the companies’ war policies or their all risk policies. The war policies have “an aggregate” meaning there is a maximum amount of money an insurance company will pay to cover claims, while the all risk policies do not.
According to court documents, Aercap is arguing it “has cover for such loss or damage under sections one and two of the all risks policy for aircraft and spares in the care, custody or control”. The claim added: “All risk insurers agreed to pay the agreed values of the aircraft in the event of their actual total loss or their constructive total loss.”
The insurers, however, have stressed that the aircraft may still be recovered amid the ongoing conflict, should agreements be made between the Russian and Western governments.
One of the defence documents for several insurers responding to Falcon’s claim, the parties argued “it is not admitted that the claimant has taken all reasonable steps to recover the aircraft.”
The insurers have also denied liability on the basis of international sanctions. In Chubb’s defence argument in response to the KDAC’s claim, the insurer said “in any event, by reason of the sanctions imposed by the UK and/or the EU”, with the insurer adding it “has no liability to the claimant under the policy.”
Morning Wire contacted all the parties in this case for comment.
Settlement?
Behind the scenes, as the legal industry sits and waits in anticipation for when this claim kicks off next year, some of the lessors have managed to strike settlement deals with Russian based insurers who are not linked to the London litigation.
Russian law requires that Russian air carriers must have their primary insurance coverage issued by domestic Russian insurers, meaning that one plane could have two insurance policies.
Aercap made the news in September this year after it settled its claim against Russian-state controlled Insurer NSK for $645m regarding aircraft lent to Aeroflot.
The deal is the first settlement linked to the matter. The deal received the seal of approval from the US authorities, in part to make sure the processing of the deal – sending US dollars via American banks – would not breach US sanctions.
As a result of its settlement with this Russian insurer, Aercap said the value of its claim in London will be reduced to approximately $2.75bn.
This week DAE also settled its claim with NSK over its provision of aircraft to Aeroflot for $118m, and said it “will continue to actively pursue” its separate and ongoing litigation in the English courts.
At this stage, it feels unlikely that a settlement will be reached in the London case.
One aviation expert told City A.M. that if the claims were smaller they could have been resolved earlier on, but as the value of the claims is in the billions, there is “a lot at stake” for the insurers.
More cases
Aercap launched a brand new lawsuit in September against 11 syndicates managed by Lloyd’s Managing Agents, with the claim instead targeting the reinsurance companies.
A source familiar with the case told Morning Wire that a wave of new claims targeting the reinsurance companies are set to be filed in the High Court in the coming months.
It seems that this issue is far from settled, and will be one keeping the City’s law firms busy for a while.