Sublet jet(s)

FW Aviation (Holdings) 1 Limited v. VietJet Aviation Joint Stock Company [2025] EWHC 928 (Comm)

Earlier this year, a further judgment was handed down in the long running litigation between FW Aviation (Holdings) 1 Ltd (“FWA”) and VietJet Aviation Joint Stock Company (“VietJet”).

Picken J had, in July 2024, decided that FWA succeeded in its claim against VietJet insofar as liability was concerned. Quantum was resolved in part following a further hearing, but some quantum issues remained live. One such issue – the reasons behind any delay by FWA in exporting the Aircraft concerned – is to be subject of a further trial, likely to take place in 2026.

In the instant judgment, Picken J was required to consider four issues. The first of these four issues, on which this article focuses, was whether VietJet was liable to pay FWA in respect of payment defaults surrounding a lease of aircraft.

The dispute involved aircraft leased to VietJet through a Japanese Operating Lease with Call Option (“JOLCO”), the nature of the lease being of particular importance in the case. The characteristics of a JOLCO are that an aircraft is purchased by a lessor, with equity capital supplied by Japanese investors (say 25 per cent), and debt to finance the remainder (75 per cent). The aircraft is then leased to an airline, through a sub-lessor, such that the airline becomes a sub-lessee. However, the airline has one or more options to purchase the aircraft at a pre-agreed valuation (“the purchase option”), at agreed points during the leases. The intention is that the operator of the aircraft will exercise the purchase option but, if it does not, must return the aircraft at the end of the lease.

VietJet leased four Airbus aircraft – two CEOs and two NEOs. For each of the four aircraft, the JOLCO model was followed. It was not in dispute that the relevant Japanese investors held the equity, with banks holding the debt element (in the ratio 1:3) of the interest in the aircraft.

At the time of their delivery to VietJet, the total cost of the Aircraft (referred to as the ‘Lessor Cost’) was US$219 million, namely US$58.0 million for each NEO and US$51.5 million for each CEO. With rent also due, it was not disputed that, if there had been no default or termination of the leases, VietJet would have paid US$271 million between 2018 and 2028 to lease the four aircraft before acquiring them outright. It was, of course, not mandatory that VietJet would exercise the purchase options, but it was perhaps expected.

However, in mid-October 2021, the leases and sub-leases were terminated as a result of payment defaults by VietJet. Clause 19.3(a) in respect of both the NEO and CEO sub-leases provided that VietJet was to pay termination sums as a result of the default and termination. VietJet contended that the termination sums were unenforceable penalties and thus not due. The Court ultimately disagreed.

First, Picken J outlined from [38] a number of preliminary observations as to penalty clauses. These included noting that the burden of proving that a clause is a penalty would be on the party asserting that the clause is unenforceable (here, VietJet), and that this burden could not be discharged lightly. Additionally, determining whether a clause is a penalty is a question of construction, to be decided upon the terms and inherent circumstances of the particular contract, adjudged at the time of the making of the contract (although subsequent events may prove valuable evidence in determining what loss might reasonably have been expected at the time of breach). Further, the question of whether a damages clause is a penalty falls to be decided as at the time the contract was agreed.

Picken J noted that if, at the time of contracting, a secondary obligation might arise, giving rise to a number of different potential liabilities, then all the potential breaches and resulting liabilities must be taken into account in determining whether the provision is capable of having a penal effect.

Referring to the judgment in Makdessi v. Cavendish Square Holdings [2015] UKSC 67, Picken J accepted that the test of whether a clause was a penalty was clearly whether the challenged clause “imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation” [43]. There are, accordingly, two parts to the test: whether the clause supports a legitimate interest; and if so, whether the clause imposes a detriment on the contract-breaker out of all proportion to such interest [44].

Picken J was unpersuaded that the clauses were penal. He found, at [70], that the protections in Clause 19.3 were not penal, rather “legitimate and… neither extravagant, exorbitant or unconscionable” nor “wholly disproportionate” to the interests sought to be protected. Instead, they represented the “balancing of the interests of the financing parties (who had risked their capital) and VietJet (who had not) in light of a wide range of uncertain and unpredicted downside scenarios”.

Although not the only basis for his conclusions, Picken J noted VietJet’s “significant experience” in aircraft financing and noted that the Chair of the Board of Directors, was described as being “an expert with extensive experience in the aviation industry in Vietnam”.  Beyond, however, VietJet’s general commercial sophistication, was the fact that VietJet had specific familiarity of JOLCO arrangements, and that Clause 19.3 only mirrored the norm [77].  Against this background, and applying the Makdessi approach, Picken J found that there was both a legitimate interest and no detriment imposed on VietJet by the operation of Clause 19.3.

The Court went on to note that, if a JOLCO were terminated early, investors would lose the return that they had expected, but their tax liability may also be increased or brought forward through the loss of the accelerated depreciation that the investors would otherwise have enjoyed under the JOLCO. In that sense, the termination sums were compensatory, in respect of the losses that the investors would incur as a result of early termination [80-90]. 

In the Court’s mind, it was quite clear that the relevant clause was not a penalty and that VietJet was liable to pay FWA in respect of the termination values for both the NEOs and the CEOs. This is likely to come as a relief to those lessors particularly involved with JOLCO structured leases, insofar as the English Courts will interpret remedies for default contained within the contractual provisions. Those leasing aircraft, on the other hand, should approach any leases by considering the provisions for time-limited options and note carefully the liabilities which are likely to arise in the event of default.