US and EU aircraft owners, financiers, lessors are seeking re-possession and grounding of their aircrafts leased to or operated by Russian entities.
Yazan SaoudiPartner,Transport & Insurance
Bushra Abu TayehSenior Counsel,Transport & Insurance
Wael ElgouhariAssociate,Transport & Insurance
As the Russian – Ukrainian crisis continues to escalate and significant sanctions are already placed on Russian financial system in addition to various airlines, lessors and operators. US and EU aircraft owners, financiers, and lessors are increasingly seeking re-possession and grounding of their aircrafts leased to or operated by Russian entities. Council Regulation (EU) 2022/328 issued by the Council of the European Union on February 25, 2022 (the “EU Regulation”) prohibited, among other things, the supply, insurance and overhaul or repair of goods and technology suited for use in aviation, directly or indirectly, to any natural or legal person, entity or body in Russia or for use in Russia. The aforementioned EU Regulation had a significant implication on the validity of leases entered with Russian operators.
Furthermore, the US restrictions prohibit US citizens and financial institutions from conducting business with various Russian individuals and financial institutions. US entities were requested to “block property or interests in property” that is owned 50% or more by the Russian entities or individuals. Furthermore, several Civil Aviation Registries revoked the Certificate of Airworthiness (“CoA”) of multiple aircrafts due to the violation of the insurance coverage requirements and other type of violations as well.
Therefore, all the US and EU-based owners, financiers, and lessors sought to take immediate action for the repossession of their aircrafts. UAE Airports being a busy hub for international airlines were expected to receive various applications for grounding and/or re-possessing of aircraft leased to Russian operators while they were under maintenance in UAE maintenance facilities.
Our aviation team advised several owners and lessors regarding the possible avenues under the UAE law or the applicable conventions for the attachment and repossession of the aircrafts. Most of owners / lessors were of the view that the EU Regulation and the US sanctions constitute sufficient grounds for terminating the lease agreements as it became unlawful for them to continue with the lease in addition to the termination of the insurance coverage, nonetheless, there were several challenges under the UAE law.
While we appreciate that the aforementioned reasons could represent lawful grounds for termination under the leases, we were concerned that the UAE Court may interpret the application of the EU Regulation 2022/328 and the Russia –Ukraine conflict as the main driver for termination (i.e. political reasons and not strictly legal grounds) which, in their assessment, does not qualify as lawful grounds for the attachment and repossession.
Although it is a common procedure for the UAE courts, based on an ex parte application by a lessor/creditor, to issue attachment orders against defaulting debtors/ lessees (subject to the proof of the default and the outstanding debt), nevertheless, rendering an order for the repossession of certain assets is relatively rare.
The procedures and requirements for attachment applications are regulated under the Federal UAE Civil Procedure Code Law No. 11 of 1992 (the “CPC”), the Cabinet Resolution No. (57) of 2018 Concerning the Civil Procedure Law (the “CR”) and their subsequent amendments thereof, specifically under article 112 which relates to the attachment of Chattels. The said article provides that “The owner of a movable property and any person having a right in rem thereto related, or the right to withhold the same may apply for the prejudgment attachment to be imposed on such property with the person holding possession thereof, by virtue of a Petition containing sufficient description of the property required to be attached.”
As for the repossession application, we were of the view that it may be based on the provisions of the Cape Town Convention and its Protocol. The Cape Town Convention was ratified by the UAE on 2006, subsequently it was incorporated into UAE Federal law by Federal Decree No. 32 of 2006. The Cape Town Convention provides various remedies for the lessor in case of a default by the lessee of an aircraft. Such remedies include, inter alia, the repossession and grounding of the aircraft.
In light of the above, we opined that it should be permissible for the lessor to request the repossession and grounding of the relevant aircraft via an ex parte application to the relevant summary judge. Such application may be filed independently or jointly with the attachment application. As a general rule, a summary judge would issue interim orders based on the face value of the evidence submitted by the applicant and without examining the merits of the dispute.
It should be noted that the interpretation and application of the remedies set out under the Cape Town Convention (and the Protocol), to the best of our knowledge, has been tested in a very narrow context before the UAE courts. Accordingly, it would be difficult to opine how a UAE court would interpret and/or apply those provisions of the Convention or the likelihood of success.
The granting of interim orders is not guaranteed and is left to the discretion of the summary judge who may reject the attachment and/or repossession application(s) on account of lack of evidence and/or jurisdiction. An ex parte/interim order can be practically obtained within 24-48 hours if the party seeking the order has all of their documentation ready, including a valid power of attorney, and translated into Arabic and legalized prior to filing the application.
It is to be noted that if the attachment application is granted and effected, the applicant will be required to produce an evidence that a substantive proceedings have been commenced either by way of litigation and/or arbitration within (8) days as of the attachment date, failing which the attachment order would be void.
Should the UAE Court award the attachment / repossession order, the lessee and/or any party of interest would be entitled to file a grievance, before the competent court, challenging the procedural aspects of the attachment order in addition to highlighting any deficiency of documentation, capacity and forgery of documents submitted to the court. The judge hearing the grievance, in practice, would be the same judge who ordered the attachment. In majority of grievances, the attachment will remain valid and the grievance would be dismissed, unless, a significant violation is proven to the judge hearing the grievance.
In case where the court rejects the attachment order, the lessor would be entitled to challenge the decision by way of filing grievance. However, the lessor will be obliged to notify that lessee of the proceedings so as to allow the lessee the opportunity to attend and submit his statement of defence.
There remains a possibility that the UAE Courts may accept the attachment application premised on the CPC provisions but reject the repossession request filed under the Convention. In this case, the attachment would remain in place until a final determination is made in the substantive proceedings / arbitration. Subsequently, the final court judgment or arbitral award would be submitted to the UAE Court for enforcement subject to satisfying the applicable recognition/ ratification and enforcement steps (in respect of the foreign court judgment or arbitral award as the case may be).
It is worthy to note that the lessor would likely be obliged to settle the outstanding dues to the Airport, crew, MRO and other similar third-party expenses before the aircraft can be allowed to depart. This could possibly entail a significant expenditure should the repossession request is denied by the court.
In consideration of the aforementioned challenges, we noted the need for an unconventional remedy to prohibit the aircraft from departing the UAE pending the finalization of the preparatory requirements including the PoAs and the translation of the relevant documents. The assessment of the provision of the UAE Federal Civil Aviation Law No (20) of 1991 (“Civil Aviation Law”) identified the mandatory requirement of the validity of the CoA in order for an aircraft to fly over the UAE aerospace. This is supported by the provision of Articles (7) and (30) of the UAE Civil Aviation Law which provides that: “The Aircraft's Certificate of Airworthiness must be valid and issued or attested by the state in which the Aircraft is registered.” Additionally, Article (30) states that “An Aircraft shall not operate in the Territory of the State and its overlying airspace unless it holds a valid Certificate of Airworthiness issued or approved by the Competent Authority in the State of Registry in accordance with its applicable laws”.
Accordingly, Al Tamimi & Company conveyed the revocation of the CoA to the UAE Civil Aviation Authority (“GCAA”) which in return will not accept the departure of the aircraft until providing a valid CoA. This method was believed to be effective in preventing the aircraft from leaving UAE and allowed lessors and owners sufficient time to complete their paperwork and negotiate settlements simultaneously.
It is pertinent to say that seeking an attachment and a repossession of an aircraft in the UAE is relatively challenging due to the nature and complexity of similar applications. Additionally, the UAE Courts enjoys a wide discretion in the assessment and determination of the application. Although the success of the application is relatively possible, it was helpful to identify alternative venues through the UAE GCAA which believed to prohibit the aircrafts from departing the UAE without complying with all airworthiness requirements. This widely assisted our clients in reaching a favourable settlements and avoiding the risk of lengthy and costly litigation.
For further information, please contact Wael Elgouhari.
Published in November 2022
