PT Garuda Indonesia Persero Tbk : Slips In Drafting Can Result In Dangerous Falls! Jurisdiction And Arbitration Clauses In Aviation Leasing Agreements

The recently handed down case of Helice Leasing SAS v PT Garuda Indonesia (Persero) TBK [2021] EWHC 99 (Comm) is relevant to those interested in Guernsey law primarily due to the reference to aircraft registration and leasing - a growing area of work for financial services professionals within the Bailiwick - and because of the approach taken to the interpretation of the jurisdiction clauses in the Lease and the interpretation which the Court was prepared to place upon them.

In Helice, following a novation, Helice Leasing SAS ("the Claimant") became the lessor of a Boeing 737 MSN 3884, the lessee being PT Garuda Indonesia (Persero) TbK ("the Defendant"). The claim was one for non-payment of Basic and Additional Rent which was due to be paid monthly. The Defendant had largely acknowledged the debt by making payments of some USD 585,000 towards the outstanding amount but some USD5.15m remained outstanding and the Claimant alleged this constituted an Event of Default under the Lease.

Interestingly whilst the Defendant did not dispute the debt it challenged the jurisdiction of the Court on the basis that, inter alia, the proceedings were brought in breach of an arbitration agreement. There were also complaints about service and the correct forum for the proceedings (the Defendant alleging this was Indonesia) but it is the arbitration clause which is of particular interest.

The Lease contained a clause which provided that "any dispute arising out of or in connection with this Lease Agreement, including any question regarding its existence, validity or termination shall be referred to and finally resolved by arbitration under the Rules of the London Court of International Arbitration ("the CLCIA Rules").." On the face of it this looked very clear that any dispute must go to arbitration however the Claimant relied on clause 13.2 which provided that, "If any event of default occurs, and for as long as it shall continue, Lessor may at its option ...proceed by appropriate court action or actions to enforce performance of the Lease Agreement or to recover damages for the breach of this Lease Agreement".

An event of default was defined in the Lease and included "Non-payment", and if the Lessee failed to comply with "any other provision" of the lease agreement. Perhaps understandably therefore the Claimant's position was that this gave a unilateral option to the Lessor to proceed to the Court rather than arbitration where it anticipated a quicker resolution of matters.

The Defendant argued that the reference to "court action" was simply "an erroneous remnant of the original Lessor's template lease agreement.." and the reference to Court was a "slip". It seems that the novation involved the change of governing law from New York to English but all the necessary drafting updates were not undertaken. Furthermore the Defendant asserted the Claimant would have to prove an Event of Default and that would be for determination by arbitration - a stepping stone if you like before being able to initiate court action.

The High Court concluded that, despite the fact the Lease was not "happily worded", the parties had agreed to arbitrate any dispute and thus the assertion that clause 13.2 should trump that agreement ran contrary to the objective intention of the parties. As a result the Court stayed the proceedings in favour of arbitration, adopting the words of Clark J in Halki Shipping v Sopex [1998] that even though no defence had been advanced, "it made more sense to hold that the arbitration clause there (materially the same as the present clause) was intended to give the arbitrators jurisdiction over all claims which either party had refused to pay". The Halki case was one of refusal to admit and refusal to pay. And Clark J noted "It would be remarkable if parties had chosen to address the issue of jurisdiction by reference to whether non-payment was due to a failure to admit a valid claim rather than a failure to pay it."

Thus in Helice Mr Justice Calver concluded "by reason of D's refusal to pay in this case, which may very well be wholly unmeritorious, there is nonetheless a dispute within the meaning of the arbitration clause" and stayed the proceedings in favour of arbitration.

Conclusion - Don't Slip Up

This case comes as a salutary reminder of the importance of accurate drafting. Service of the Claim Form in Helice was issued on 16 April 2020 and the hearing of this matter occurred on 19 January 2021 with the written judgment being very promptly delivered on 20 January 2021 so the parties were lucky that this case was so effectively and quickly case managed by the Court however it still took eight months to be resolved. This argument over jurisdiction therefore cost the parties dearly in terms of not only the cost of proceedings but also wasted time and highlights the need to get the drafting right the first time round.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Ms Sarah Brehaut
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