Recent Highlights in Aviation and Defense Arbitration

Progress, a Ukrainian State-owned defense company pursued arbitration at the Vienna International Arbitral Centre against OTL Firearms and Imports Corporation, an Arizona-based supplier, over a contract for the supply of military protective gear and ammunition. It alleged failure to timely deliver the goods, and the unjustified retention of over US$ 17 million in advance payments.

The tribunal found that the arbitration clause was valid, despite minor discrepancies in naming the arbitral institution and rules, and confirmed its jurisdiction. It then spent considerable time deciding upon the law governing the contract, which was not specified: settling on the United Nations Convention on Contracts for the International Sale of Goods (CISG) in the first instance, with Ukrainian law to fill any gaps. With these matters settled, it awarded Progress the return of the advance payments, with interest and penalties.

Key Takeaways: Poorly drafted dispute resolution clauses waste resources. This case shows the importance of taking care when drafting choice of law and dispute resolution clauses. Though the arbitral system is robust, and can deal with drafting errors and omissions, the fact remains that the majority of the Tribunal’s award was focused on such matters, as opposed to the underlying dispute.

II.    COMMERCIAL TRIBUNALS CONTINUE TO RECEIVE STRONG SUPPORT FROM DOMESTIC COURTS, THROUGHOUT THE ARBITRAL PROCESS

GlobeAir, based in Austria, is the leading private charter jet operator in Europe. All its aircraft are equipped with Pratt & Whitney turbofan engines. The parties’ services agreement for those engines included an ICC arbitration clause covering any dispute, “in connection with the Agreement.”

When GlobeAir tried to pursue Pratt & Whitney for design and manufacturing defects in the Quebec Superior Court, Pratt & Whitney were able to successfully apply to have the dispute referred to arbitration.

This case concerns a joint venture between the French defense firm Thales, and L3 Technologies, a US company working on pilot training and aviation security. The Limited Liability Agreement establishing the venture provided that Thales would have a right of first refusal over a sale of L3 Technologies’ stake in the venture. A dispute arose in the context of a potential sale of such stake to a third party, and Thales commenced an ICC arbitration to seek to enforce its right of first refusal.

In parallel, Thales sought relief from the United States District Court for the Southern District of New York to prevent L3 Technologies from closing the sale while the arbitration was pending. The Court granted a preliminarily injunction barring the sale for 9 months, to allow time for the ICC tribunal to consider the issue itself.)][Subject to DS’s approval]

Dassault Aviation SA sold two aircraft and related spares to Mitsui Bussan Aerospace Co. Ltd, under an English law contract, with a non-assignment clause prohibiting assignment or transfer of the contract or rights under it.

Mitsui Bussan Aerospace Co. Ltd entered into two further contracts: (i) to sell the planes on to the Japanese Coastguard and (ii) for insurance should delivery be delayed, with Mitsui Sumitomo Insurance Co. Ltd.

Delivery was late, and an insurance claim was made and paid.

Mitsui Sumitomo Insurance Co. Ltd then initiated arbitration against Dassault Aviation SA in reliance on Mitsui Bussan Aerospace Co. Ltd’s contractual rights, which it had acquired by subrogation under Japanese Insurance Law.

The arbitral tribunal affirmed its jurisdiction, on the basis that the (non-voluntary) subrogation in Japanese law did not fall foul of the non-assignment clause under English law. This highlights the importance of considering carefully the potential impact of all relevant legal systems in international transactions (in addition to the law that governs the contract).

However, the English High Court set aside the award for lack of jurisdiction, on the basis that the choice to take insurance had introduced a “taint of voluntariness” that engaged the non-assignment clause. The Court of Appeal then reinstated the award, based on a close reading: as the clause referred to assignment “by any party”, it could not be triggered by automatic assignment by operation of law.

Navayo International A.G. (Navayo), a Liechtenstein company, signed a contract (“Navayo Agreement”) for the sale of communications equipment to the Indonesian Ministry of Defence (“MOD”), in support of Indonesia’s SatKomHan Programme, which aimed to develop and operate communication satellites and ground facilities both for military and rural telecommunications. Ultimately Navayo, along with the Hungarian Export Credit Insurance Pte Ltd (MEHIB), initiated ICC arbitration to recover on unpaid invoices. They secured an award for US$ 16 million (plus interest and costs), and, then, an enforcement order from the Singapore Courts.

The MOD sought to set this aside on corruption grounds. The Singapore International Commercial Court (SICC) dismissed the MOD’s application, and maintained the enforcement order. It stated that although the MOD had a “well arguable case of fraud in the entry into and performance of the Navayo Agreement,” the MOD had not shown how that had affected the arbitral process and the award. In turn, the high threshold for refusing enforcement on public policy grounds was not met.

Key Takeaways: Domestic courts, around the world, remain committed to encouraging and supporting arbitral proceedings. As the cases above show, once arbitration has been contracted for by the Parties, domestic courts will compel arbitration. They will further often be willing to grant preliminary relief in support of arbitration, including where it is needed to preserve the status quo to allow time for the ICC tribunal to consider an issue itself.][Subject to DS’s approval. That said, they will police jurisdictional issues carefully once an award has been issued. With respect to corruption specifically, the SICC’s judgment demonstrates the predominant view in common law jurisdictions that, to set aside an award on corruption grounds, a connection between the alleged fraud and the making of the arbitral award must be shown. Though, in other jurisdictions, most notably France, courts are demonstrating a growing willingness to set aside awards on corruption grounds associated with the underlying transaction, absent such a connection. 

III.    INVESTMENT ARBITRATION WILL LIKELY BE INCREASINGLY RELEVANT IN THE AVIATION AND DEFENSE SECTORS

Uruguay intervened in and ultimately liquidated Pluna, the country’s flag carrier, in 2012. Latin American Regional Aviation Holding (LARAH), a Panama-based shareholder, claimed that a series of measures by Uruguay resulted in the total loss of its investment.

Uruguay successfully managed to reduce to 6% the claimed amount, by retaining a sunk costs based approach as opposed to a DCF approach. It also argued that the measures it took were necessary to avoid greater financial liabilities.

This dispute arose over the termination of a concession agreement for the construction and operation of an airport in Peru. The tribunal found that Peru had breached both the concession contract and the BIT. 

Volga-Dnepr Airlines v. Government of Canada 

Volga-Dnepr Airlines is a Russian operator and owner of a cargo aircraft that landed at Toronto on February 27, 2022 to deliver COVID-19 test kits from China. Three days after the aircraft’s arrival, Canada closed its airspace to Russian aircraft in response to Russia’s invasion of Ukraine; In June 2023, the Canadian government ordered the seizure of the aircraft under its sanctions regime against Russia.

Volga-Dnepr Airlines has initiated legal proceedings in Canada to challenge the seizure. In August 2024 it further indicated that it would make a claim for expropriation and other breaches under the 1989 Canada–Russia Federation BIT.

Key Takeaways: These proceedings exemplify the influence of global geopolitical challenges—such as the war in Ukraine—on the evolution of arbitration within the aviation and defense sectors. They also demonstrate the willingness of tribunals to sanction government action in this strategic sector. Further recourse to investment arbitration in such scenarios seems likely if geopolitical tensions continue to mount.