Aircraft Lease Arbitration Clause Comes Under High Court Microscope

Arbitration clauses are commonplace in commercial contracts and generally provide a relatively swift and cost-effective route to resolving disputes without resort to full-blown litigation. Their correct interpretation can, however, present a challenge and that was certainly so in a High Court case concerning an aircraft lease.

A company leased a Boeing aircraft to an overseas airline. The former took action with a view to recovering from the latter over $5 million in unpaid rent and interest. The airline impliedly admitted the debt in correspondence. It asserted, however, that the proceedings should be stayed under Section 9 of the Arbitration Act 1996.

The airline pointed to an arbitration clause in the lease agreement which stated in terms that any dispute arising out of or in connection with the lease, including any question regarding its existence, validity or termination, should be resolved by a three-member arbitration panel under the rules of the London Court of International Arbitration. Any award made by such a panel was to be treated as final, binding and incontestable.

The company denied that the matter had to be referred to arbitration. It asserted that another term of the lease provided an exception to the arbitration clause and entitled it to take appropriate court action in the event of default by the airline. The airline's continuing failure to pay rent was said to amount to such an event.

Following a hearing, the Court preferred the airline's construction of the agreement. Notwithstanding its implied acknowledgment that sums were due and owing under the agreement, its refusal to pay those sums meant that a dispute had arisen within the meaning of the arbitration clause. Granting the stay sought, the Court found that it was obliged to bow out in favour of the arbitration panel.