A former British army chief of staff gave a grim appraisal of the war in Ukraine recently in the High Court where insurers are resisting demands to compensate Irish leasing companies for aircraft lost because of the Russian invasion.
The Dublin court clash involving teams of the most expensive commercial lawyers in the State – some have reportedly been paid briefing fees of up to €1 million – is just one front in an international litigation clash arising from the war. The Dublin hearings, in a specially arranged courtroom in Smithfield that resembles the sitting of a tribunal as much as a court, will be followed by similar hearings in Britain and the US as the fallout from aircraft leasing losses of up to $15 billion (€13.78 billion) ripples through the international legal system.
As well as their disputes with their own insurers and reinsurers, leasing companies are also involved in disputes with the Russian airlines to whom they leased aircraft, the airlines’ Russian insurers and the western reinsurance companies with which the Russian insurers entered risk-sharing agreements.
They are also in contact with the US and EU authorities about the type of deals they can do without falling foul of sanctions on doing business with Russia.
Included in the many moving parts are the changes introduced by providers of war insurance in the wake of the February 2022 invasion of Ukraine, one of the areas where the evidence of retired General Sir Richard Barrons becomes relevant.
Engaged by the leasing company plaintiffs in the case, Barrons’ evidence covered matters including Russia’s objectives in starting the war, how the West and Russia expected Ukraine to respond, what they thought at the time the likely outcome would be, what would have happened if Russia had successfully overwhelmed Ukraine (munitions support from China might have allowed a Russian victory at one stage, the general said, but a Russian occupation would have faced protracted insurgency), the likelihood of the war ending any time soon (unlikely), and the prospect for sanctions being removed (a very long-term prospect).
These issues form the background for arguments about developments in the aviation leasing sector after the invasion and how these events impact the leasing companies’ insurance cover.
Russian invasion
“Before going in, the Russians were warned there would be heavy sanctions,” said a source connected to the Dublin case. “The Russians invaded on February 22nd, and on the 25th the sanctions, which are draconian, were introduced.”
The leasing companies could no longer lease or sell aircraft to Russia, and were obliged to terminate all lease agreements by March 28th, he said.
In response, the Russians decided not to return the aircraft. The aircraft were registered in Bermuda and Ireland and the regulators in the two jurisdictions cancelled their air worthiness certificates – Bermuda on March 3rd, Ireland on March 8th – meaning that, technically, the planes were no longer allowed to fly.
Russia introduced its own certification system and made commercial offers to the leasing companies that the companies did not, or could not, accept.
In November the leasing companies lodged claims for compensation for the loss of the aircraft with their insurers, even though the planes, which had been leased to Russian airlines such as Aeroflot, S7 and Ural Airlines, were still in the possession of the airlines to which they had leased them.
The resulting litigation involves leasing companies being in dispute not only with their insurers but also with various other insurance companies – such as those providing war insurance and others providing all-risk insurance – over which of them, if any, should pay.
The sanctions are being used to argue that western reinsurers should not pay out on policies involving the Russian airlines’ Russian insurance. There is also argument that claims by the Russian airlines against their own insurers do not make sense when they still have use of the aircraft.
In March 2022, in the wake of the Russian invasion, the companies supplying war insurance to the leasing companies issued notices to the effect that the policies would no longer cover the aircraft in Russia. The timing of this is one of the issues being fought over in Dublin, with the leasing companies arguing that war cover can’t be cancelled when the entities that have taken out the insurance are already in the “grip of the peril”.
Some leasing companies have actually negotiated settlements funded by the Russian airlines’ Russian insurers, even though the Russian state perceives itself as being at war with the West and the Russian insurance company making the payments is state-owned.
“It seems counterintuitive that they would pay settlements that [the leasing companies] had little chance of recovering, but if they are willing to pay, it is not for us to question the reason,” said a source monitoring international developments for one of the major leasing companies. “You could speculate that they are concerned about their ability to operate international flights, at least to those countries friendly to Russia, if they could not legitimise the operation of the aircraft.”
Ironically, the Russian insurers seem more eager to pay up than their western counterparts. They reinsured their cover with western reinsurers and some of these western reinsurers, who are being sued by the leasing companies in London, are arguing that they should not pay out as this would be in breach of the sanctions.
“The western reinsurance companies are saying no, we are not allowed to pay you,” says the source with knowledge of international developments.
Even in cases where settlements have been agreed with the Russian airlines and their Russian insurers, the payments are not equal to the full amount the leasing companies feel they are entitled to claim and so they are continuing to sue their western insurers and reinsurers for the difference.
For example, in December Dublin-based AerCap, the world’s largest aircraft leasing company – which is not involved in the Smithfield court action – filed a report in the US saying it had been paid $572 million in relation to 47 aircraft leased to Ural Airlines and S7 arising from the airline operators’ own insurance, with the payments having received approval from the US authorities.
The claim against its own “all risk” insurers for the same aircraft had been for $836 million and the company said it was now adjusting this claim to account for the amount received from the Russians.
The $572 million payment was made by the Russian insurer NSK, which is state-owned. The settlement is part of a total of more than €2 billion paid out by NSK to western leasing companies in return for lost aircraft.
NSK is now transferring ownership of these aircraft to the Russian airlines, thereby securing what is, according to General Barrons, “a vital strategic issue for Russia”, domestic civil aviation.
During his career the former commander of the UK’s joint forces command served in West Germany (during the Cold War), Croatia, Bosnia, Afghanistan, Iraq, Northern Ireland – in Belfast and South Armagh in 2004/2005 – and Nato headquarters. He retired in 2016.
The war in Ukraine, he told the Dublin court, is “existential” for both countries, with Russian president Vladimir Putin’s objective being to “subjugate Ukraine as an independent state”.
Contrary to the Kremlin view that his invasion would be welcomed, and that victory would be easy, Barrons said, the taking of Kyiv in February 2022, given the resistance encountered, would have required a force of approximately 500,000 soldiers and a daily expenditure of artillery shells approximate to the amount Russia currently produces in a year. “The battle for Stalingrad in 1943 lasted six months and cost Germany 500,000 casualties,” he said, when searching for a valid comparison.
His view on the current situation was equally grim, with the general at one stage describing the Ukrainian army as a “dad’s army”.
The average age of the Ukrainian soldier on the front line is 43 years old, “about 20 years older than most engaged in long wars over modern history – a policy designed to protect the Ukrainian economy but also reflecting the historically low birth rate” in Ukraine, he said. The result is a force that is “good at defence and terrible at attacking”, as older men with family ties are less effective when it came to offensives.
“By the end of 2023, the war had consumed most of the available stocks of people, equipment and ammunition that had fuelled two years of hard fighting,” the general said. “Both sides are now rationing their expenditure of people and ammunition and can now only resist and expect to advance in the future by mobilising more people from civil society and, above all, by mobilising industrial production to restock equipment and ammunition.”
His view was that the war is “likely to continue as a battlefield stalemate into 2026″. In this scenario, there was no prospect that sanctions would be lifted until the fighting had reached some sort of culmination, and indeed it was likely sanctions would be maintained to provide a form of leverage in respect of compromises agreed as part of any negotiated settlement, he said.
Russia is drawing heavily on Iran and North Korea for munition supplies. The only factor that could have allowed Russia to deliver an “overwhelming blow” to Ukraine in 2022 was if China had released its “vast stock of munitions to Russia”, he said. This had not happened as Beijing is happy to see the war in Ukraine distract the US but does not want to provoke a conflagration that would bring war to the South China Sea.
Plaintiffs
The plaintiffs in the case include the second and third largest leasing companies in the world, SMBC and Avolon, as well as BOC Aviation, CDB Aviation, NAC Aviation, and Hermes.
The CDB in CDB Aviation stands for China Development Bank. Almost all the management team at the state-owned bank are members of the central committee of the Chinese Communist Party, according to the bank’s website. At the recent Nato summit in Washington DC, China was described as the “chief enabler” of the Russian war on Ukraine, prompting China in turn to say its position on Ukraine was to “promote peace talks and political settlement”.
The defendants in the Dublin case include Lloyds, Chubb, AIG, Fidelis and Swiss Re International. The barristers involved include former attorney general Paul Gallagher and other well-known senior counsel such as Michael Collins, Martin Hayden, Michael Cush and Paul Gardiner. The law firms involved include Matheson, McCann Fitzgerald and Mason Hayes & Curran. The judge hearing the case is Ms Justice Eileen Roberts, a former head of litigation at A&L Goodbody.
The lawyers are currently arguing over liability. Next year they will start discussing the value of each of the more than 75 aircraft covered by the case. “The value of each plane will be fought over, and is worth fighting over, because they are worth about €200 million each,” one source said. A judgment is not expected until “well into 2025″.
While the legal fees being paid in Dublin are very much at the higher end of the scale for this State, sources say the legal costs in London are higher. “The level of fees globally is extremely high, for all of the parties involved, the claimants and the defendants,” said the source monitoring the dispute internationally.
- Sign up for Business push alerts and have the best news, analysis and comment delivered directly to your phone
- Find The Irish Times on WhatsApp and stay up to date
- Our Inside Business podcast is published weekly – Find the latest episode here
