FW Aviation (Holdings) 1 Limited v VietJet Aviation Joint Stock Company

A contractual termination payment is not a penalty merely because it exceeds a conventional pre-estimate of loss. The court must identify the innocent party’s legitimate interest in performance and ask whether the detriment imposed on the contract-breaker is out of all proportion to that interest. That interest may extend beyond direct compensation, may include the interests of third parties, and may include preserving a wider commercial or financing structure. Negotiation between sophisticated parties of comparable bargaining power is relevant, but does not displace the penalty rule.

A contractual payment triggered by failure to return leased aircraft in the required condition may be liquidated damages rather than rent or consideration for possession. Such an obligation may survive termination and remain payable until compliant redelivery. Declaratory relief is appropriate where it resolves a real dispute and provides practical certainty.

The claimant acquired contractual rights arising from Japanese operating leases with call options for four aircraft leased to the defendant. In an earlier liability judgment, the claimant succeeded and relief from forfeiture was refused. This judgment determined outstanding quantum issues and the claimant’s entitlement to possession.

The principal questions were whether termination sums under clause 19.3 were unenforceable penalties; whether the basic termination amount could be severed and recovered separately if necessary; whether the claimant was entitled to a declaration of immediate possession; and whether enhanced payments under clause 20.4(c) remained payable after the aircraft had been sold to trustee owners and until compliant redelivery.

1. Clause 19.3 was not penal. It was a secondary obligation, but the relevant test was that in Makdessi v Cavendish Square Holdings [2015] UKSC 67: whether the clause protected a legitimate interest and, if so, whether the detriment was out of all proportion to that interest. The genuine pre-estimate approach remains relevant in straightforward damages cases, but it is not the complete or universally applicable test.

2. The legitimate interests extended beyond repayment of capital. They included protecting lenders and Japanese equity investors, preserving the tax advantages and viability of the JOLCO structure, ensuring prompt rental payment, mitigating the risks of early termination, and incentivising exercise of the purchase option. Third-party interests could properly be taken into account. The uncertain costs and risks of recovering, restoring, selling or re-leasing the aircraft meant that payment of the termination sums was neither extravagant nor wholly disproportionate.

3. The alternative severance argument failed. Clause 19.3 imposed one obligation to pay a composite termination sum. Removing the equity component would require rewriting the clause, would affect the operation of the purchase option, and would not cure the alleged penal effect because no credit would be given for the aircraft’s value. The court therefore declined to recover the basic termination amount separately.

4. A declaration that the claimant had the right to immediate possession was granted. The claimant had acquired legal title to all four aircraft, there was a real and continuing dispute, and declaratory relief provided useful and necessary certainty. The court also expressed the view that the claimant had possessed a freestanding entitlement under the International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015 as assignee of associated rights.

5. Clause 20.4(c) was a liquidated damages provision. Its operation was triggered automatically by default, continued after termination, and required payment at 150% of rental until compliant redelivery. The payment was not consideration for continued possession. The claimant was therefore entitled to the post-sale sums, totalling US$8,315,992 for the 8906 Aircraft and US$8,421,213 for the 8937 Aircraft. The precise form of relief was left for further agreement.

The judgment followed an earlier liability judgment in the same proceedings, [2024] EWHC 1945 (Comm), in which the claimant succeeded and relief from forfeiture was refused. The present judgment determined the remaining quantum and possession issues at first instance.