Tay & Partners

The Right of a Lessor to Repossess Its Aircraft or Aircraft Engine

LegalTAPS Sept 2023

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The Right of a Lessor to Repossess Its Aircraft or Aircraft Engine

Introduction

The International Air Transport Association (IATA) Document No. 5016-01 Master Short-Term Engine Lease Agreement (“IATA Master Agreement”), a commonly used document in the aviation industry, is usually incorporated into a lease agreement between a lessor and a lessee for leasing of an aircraft or aircraft engine (“Lease Agreement”). The IATA Master Agreement provides for several contractual remedies to a lessor in the event of default by a lessee, which include the right to take possession of its aircraft or aircraft engine.

In this article, we will discuss a case in which we had assisted a client, who is a lessor of an aircraft engine, to arrest and ground an aircraft on which the engine was installed due to the occurrence of an event of default under the Lease Agreement. It is worthwhile to take note of three interesting aspects of the case. Firstly, the lessor and the lessee are foreign parties in Malaysia. Secondly, the governing law of the Lease Agreement is the law of a foreign country, England and Wales. Thirdly, the applicability of the Convention on International Interests in Mobile Equipment, an international treaty commonly referred to as the Cape Town Convention intended to standardise transactions involving movable aircraft objects, in England and Wales as well as Malaysia. Eventually the resolution of the dispute that is cross-border in nature ended up in the Malaysian court.

The background

The dispute arose when the lessee failed to pay rents due and owing pursuant to the Lease Agreement for leasing of the aircraft engine.

After the issuance of notice of default and demand for payment of the outstanding rents, the lessee was required to rectify the default by settling the outstanding rents; otherwise, it was obliged to cease all operations of the aircraft engine. However, the lessee failed to rectify the default. Neither did it cease to operate the engine installed on the airframe of an aircraft. Instead, it continued to utilise the engine and operate the aircraft on which the engine was installed to various international destinations including Malaysia.

The possession

The lessor commenced proceedings by originating summons premised on its contractual rights pursuant to the Lease Agreement. The applicable statutory regime is the Cape Town Convention which was given the force of law by the International Interests in Mobile Equipment (Aircraft) Act 2006 in Malaysia.

The Cape Town Convention provides for several default remedies to a lessor in the event of default by a lessee of aircraft objects. One of the default remedies is that the lessor may take possession or control of aircraft objects. A perusal of the provisions of the Cape Town Convention would show that the IATA Master Agreement and the Lease Agreement fall under the scope of the Convention where the word “object” is defined to include, among others, an aircraft and an aircraft engine.

The injunctive relief

The lessor’s aircraft engine was installed on the airframe of the aircraft which was regularly used by the lessee as a commercial passenger plane for several international routes. Hence obtaining an injunction for detention of the aircraft engine within Malaysia pending the disposal of the originating summons is essential to safeguard the lessor’s interest.

Such a need was envisaged by drafters of the Cape Town Convention as it provides for interim reliefs pending the final determination of disputes where a lessor or creditor may obtain from the court a speedy relief for the purpose of preservation, possession, control, custody or immobilisation of aircraft objects.

An ex-parte injunction application was filed simultaneously with the originating summons. The application aimed to restrain the lessee from operating the aircraft engine and removing it from Malaysia once the aircraft lands in Malaysia pending the disposal of the originating summons. Due to the urgency, the hearing was scheduled and heard expeditiously by the Malaysian court. An ex-parte injunction order was granted and issued by the Malaysian court on the same day of the hearing. It merely took less than 3 days from the filing of the application until the issuance of the injunction order.

The execution

The execution of the injunction order was a tricky one. On one hand, one must ensure that the lessee was not being alerted of the existence of the injunction order (as the aircraft may not “fly” to Malaysia if the lessee knew that it would be arrested); on the other hand, one must also ensure the relevant authorities who are required to assist on the arrest would be notified accordingly and cooperate with the execution of the injunction order. In this regard, time management and planning are imperative.

Four hours before the estimated arrival time of the aircraft, our team was on standby at the airport and closely tracked the location of the aircraft. Thankfully the relevant authorities were cooperative and the execution of the injunction order was successful. The aircraft with the engine installed on its airframe, which was supposed to pick up passengers and depart less than 2 hours later, was grounded and detained at the airport for several days.

The settlement

The aircraft arrest had received a wide media attention both international and local. There were numerous reports concerning the aircraft arrest as it was the second time that our team had assisted the lessor to enforce its contractual rights to take possession of the aircraft objects pursuant to two different lease agreements against the same lessee. The first time it was the aircraft and the second time it was the engine installed on the airframe of the same aircraft.

Shortly after the aircraft arrest, the lessee approached the lessor to negotiate for settlement and uplifting of the ex-parte injunction order. The negotiation yielded fruitful results almost immediately where the lessee settled the outstanding rents to secure the release of the aircraft. The lessor eventually agreed to withdraw the originating summons where as a result, the ex-parte injunction order was lifted by the Malaysian court.

Conclusion

The case demonstrated that Malaysia is a platform where international parties may rest assured that their contractual rights pursuant to cross-border agreements, including those commonly used for leasing of aircraft objects in the aviation industry, would be upheld by the Malaysian court. Interim remedies may be sought to preserve their contractual rights pending the final determination of the dispute in the Malaysian court.

The information in this article is intended only to provide general infor­mation and does not constitute any legal opinion or professional ad­vice. For further information and advice on this article and/or on any areas of Coporate and Coomercial Dispute Resolution, please contact Cheah Soo Chuan at soochuan.cheah@taypartners.com.my


Cheah Soo Chuan
Partner
T: +603 2050 1987
soochuan.cheah@taypartners.com.my

Khor Wei Wen
Associate
weiwen.khor@taypartners.com.my