English High Court Confirms Enforceability of Termination Sum Provisions in JOLCO Structures

The English High Court has confirmed the enforceability of provisions providing for significant termination payments from a defaulting airline following the termination of an aircraft leasing arrangement using a JOLCO Structure. On 17 April 2025, Mr. Justice Picken issued a judgment that will likely be regarded in the aircraft leasing community as a reinforcement of lessors’ rights following lease defaults in JOLCO Structures. However, the decision looks set to generate wider interest as market participants seek to consider whether it is capable of being applied to similar provisions in other aircraft leasing structures.

On 17 April 2025, the English High Court issued its latest judgment in a long-running aviation leasing dispute involving FW Aviation (Holdings) 1 Limited (FW Aviation)—an entity associated with the FitzWalter Capital group—and VietJet Aviation Joint Stock Company (VietJet), a low-cost Vietnamese airline.

This decision addressed various consequential issues (principally those concerning quantum) arising from his previous judgment on the case. It will likely be of particular interest to the aviation leasing market because of Mr. Justice Picken’s determination that VietJet’s obligation as the defaulting airline to pay significant liquidated sums (approximately $180 million) to FW Aviation following the termination of the leasing was enforceable.

Though this ruling is grounded on a careful and detailed analysis of the specific financing and leasing arrangements at issue (as further described below), there is scope for parties to contend that the High Court’s reasoning, which included an examination of how the interests of the parties within the structure should be balanced, should be applied to equivalent provisions in other structures.

BACKGROUND

The dispute concerned four Airbus A320 aircraft (the Aircraft) that were originally leased to VietJet under a so-called Japanese Operating Lease with Call Option structure (JOLCO Structure). Due to issues arising from the COVID-19 pandemic, VietJet had defaulted on its rental payments under the relevant leasing arrangements. The subsequent enforcement of the leases led to legal proceedings in multiple jurisdictions involving various parties, including before the High Court and courts in Vietnam and Singapore.

JOLCO Structures

In high-level terms, a JOLCO Structure involves an aircraft’s price being financed by a mix of debt finance and equity finance. The equity portion of the aircraft is provided by Japanese investors (the Investors) who are the ultimate owners of the aircraft. The full aircraft price is financed without the use of capital from the airline seeking to operate the aircraft (the Airline).

Key features of a typical JOLCO Structure are as follows:

• The aircraft is acquired by a Japanese SPV that represents the interests of the Investors—who typically have no expertise or desire to be involved in aircraft leasing. Using an SPV provides tax benefits to the Investors because the SPV makes substantial losses in the first years of the deal as the aircraft depreciates in value, which the Investors set off against their tax bills (thereby effectively deferring the Investors’ tax liabilities until the later years of the deal when the SPV makes a profit).
• The aircraft is leased by the SPV to the Airline (or a lessor that sub-leases the aircraft to the Airline). The leasing arrangements typically last for between eight and 12 years.
• The SPV receives rent payments under the lease/sub-lease, which correspond with the payments that the SPV is required to pay to the lenders who provided the loan obtained by the SPV to finance the balance (the Lenders). The rent payments, accordingly, are used to repay that loan.
• The SPV’s liability is limited: the Lender’s recourse comprises the security package over the aircraft, including the proceeds derived from the sale of the aircraft and from the lease (which is assigned to a security trustee).
• During the term of the JOLCO Structure and at its maturity, the Airline may have one or more call options that it can exercise to purchase the aircraft. Among the call option prices will be an amount sufficient to repay the Investor’s original equity investment, plus a pre-agreed return on their investment.
• Where the leasing of the aircraft is terminated, there will be various requirements placed on the Airline, including to return the aircraft in full compliance with the return conditions and to satisfy different liabilities under the JOLCO Structure via different payments (each, a Termination Sum). In particular, where the termination occurs following the Airline’s default (and the Airline has not exercised its call option):
  • There will be Termination Sums corresponding to the repayment of the outstanding balance of the loan provided by the Lenders.
  • Because the early interruption of a JOLCO Structure can be very damaging to the Investors, there will be Termination Sums in the form of liquidated amounts that include (1) a sum compensating the Investors for the reduced tax benefit and (2) a sum reflecting the Investor’s expected return on their equity investment.

The Dispute

Following VietJet’s failure to make rental payments owed under the relevant leasing agreements, notices terminating the leasing of the Aircraft were issued in October 2021 by the original lessors. Those lessors also transferred their security rights under the JOLCO Structure to FW Aviation via assignments and other related transactions.

However, VietJet refused to recognise the validity of the termination notices and the assignments: it retained possession of the Aircraft (and was found by the High Court to have interfered with attempts to repossess them) and continued their operation throughout 2022.

By the litigation before the English courts, FW Aviation was seeking to recover possession of the Aircraft along with various sums owed under the terms of the relevant leasing arrangements. VietJet sought to resist those claims through various defences, including the following:

• The contention that the terminations were invalid
• The argument that FW Aviation’s rights to pursue the relevant claims had not been validly obtained (either via the assignments or otherwise)
• An application for relief from forfeiture (as part of a counterclaim)
• The contention that relevant Termination Sums were unenforceable penalty clauses

PREVIOUS JUDGMENTS

Prior to Mr. Justice Picken’s judgment dated 17 April 2025, the parties’ dispute had already generated three important previous decisions from the English High Court.

First, on 16 July 2024, the High Court issued a judgment on VietJet’s application to strike out parts of FW Aviation's Defence to Counterclaim, arguing that statements made during without prejudice communications were inadmissible and could therefore not be included in that pleading. In that ruling, the High Court concluded that remarks allegedly made by a representative of VietJet were (1) protected by the without prejudice rule; and (2) not, as FW Aviation alleged, excluded from the scope of that rule because they were threats (and therefore constituted unambiguous impropriety).

Second, on 31 July 2024, Mr. Justice Picken issued a lengthy judgment that addressed issues of liability.

• At paragraphs 7 to 17, the judgment provided a helpful explanation of a typical JOLCO Structure (as broadly replicated above).
• The High Court confirmed that the termination notices served in October 2021 had validly terminated the leasing of the aircraft.
• The High Court found the right to terminate under the lease agreements had been properly assigned through the security assignments (on the basis of a broad interpretation of what constituted a “financial institution” for the purposes of the relevant lease agreements).
• The High Court, while indicating that relief from forfeiture is available in principle for leases within JOLCO Structures, refused VietJet’s application for that relief, on the grounds that it would not be fair or equitable due to (among other things) VietJet’s substantial defaults and egregious conduct, including its attempts to obstruct the export of the Aircraft from Vietnam.

In October 2024, Mr Justice Picken granted VietJet permission to appeal his 31 July 2024 judgment (on all five grounds of appeal put forward by VietJet). According to a recent announcement issued by VietJet, that appeal is set to be heard by the Court of Appeal in May 2025.

Third, on 23 December 2024, Mr. Justice Bright issued a judgment that granted anti-suit injunctions preventing VietJet from initiating proceedings before the People’s Court of Hanoi in Vietnam. Among other points of interest, the High Court was willing to grant an anti-suit injunction that benefited the financing banks under the JOLCO Structure on the basis that they were third parties entitled to rely on the exclusive jurisdiction clause in the relevant sub-lease agreement.

THE LATEST HIGH COURT DECISION

The relevant leasing arrangements provided that, in the event of termination of the leasing of the Aircraft following an Event of Default, VietJet was required to pay Termination Sums,  along with various other amounts that may be owing as of the date of termination. More specifically, VietJet was required to pay the following:

• In respect of two of the Aircraft, a Termination Sum of approximately $108 million
• In respect of the other two Aircraft, a Termination Sum of approximately $57 million

VietJet invited the High Court to conclude that the relevant clauses providing for the payment of the Termination Sums (Clause 19.3 of each Sub-Lease) were penalty clauses, and therefore unenforceable in accordance with long-standing English authorities.

In assessing VietJet’s position, Mr. Justice Picken considered the test for penalty clauses established in the decision of the UK Supreme Court in Cavendish Square Holding BV v. Makdessi [2015] UKSC 67. In that judgment, the Supreme Court made clear that the question to be assessed was whether the relevant clause “imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.” To undertake this enquiry, the English courts assess whether the clause (1) supports a legitimate interest and (2) if so, imposes a detriment that is out of all proportion to that legitimate interest (i.e., an obligation that is considered “extravagant, exorbitant or unconscionable.”)

Applying this test, the High Court found it was clear that (1) there was a "legitimate interest"; and (2) Clause 19.3 "does not impose a detriment on VietJet that is out of all proportion to that interest." Among other things, Mr. Justice Picken concluded the following:

• The arguments raised by VietJet failed properly to account for the nature of the applicable JOLCO Structure.
• The obligation to pay the Termination Sums served a legitimate interest of mitigating the risks of early termination to the relevant Investors, who had particular “vulnerability” in the case of default.
• The protection built into Clause 19.3 represented the balancing of the interests of the relevant Investors (who had risked their capital) and VietJet (who had not). The scheme established by Clause 19.3 accordingly reflected the parties’ expectations that there should be protection for those parties whose capital was at risk (the relevant Lenders and the relevant Investors), while allowing VietJet to fund the acquisition of the Aircraft at a lower cost than might otherwise be available through other financing forms.
• The “entire viability of the JOLCO structures” relied on “prompt rental payments” due to the way that payments flowed up the structure: if VietJet defaulted on its rental obligations, then the relevant Investors (via the SPV) would default on their obligations to the relevant Lenders under the loans. The acceleration and enforcement of those loans would “collapse the whole structure,” creating cash flow problems and losing the relevant Investors their tax advantages, without which “there would have been no equity investors and the JOLCOs would not have been entered into in the first place.”
• A relevant factor was that VietJet was a “sophisticated commercial actor with significant experience in aircraft financing [and] very experienced in the leasing of aircraft”—as part of which it had familiarity with JOLCO Structures and key aspects of those arrangements. It had therefore entered into the relevant lease agreements in full knowledge of the nature and terms of the specific JOLCO Structure in this case.

Having determined that Clause 19.3 was valid and enforceable, Mr Justice Picken ordered VietJet to pay FW Aviation the Termination Sums (a total of $165 million). Separately, VietJet was held liable for an extra $16.7 million for the period during which the Aircraft had been sold but not yet returned.

ANALYSIS

This decision will be of particular interest for aircraft leasing companies who have aircraft within their portfolios that are on lease pursuant to JOLCO Structures. Those lessors are likely to take significant comfort that clauses similar to Clause 19.3 do not amount to penalty provisions, which will buttress their ability to rely on those clauses following leasing termination on default.

It remains to be seen whether the High Court’s decision may be capable of wider application to non-JOLCO Structures. In this regard, it is fair to say that a key aspect of Mr Justice Picken’s reasoning appears to be the fragility of JOLCO Structure in relation to early interruption of rental payments—and the particular “vulnerability” that the relevant Investors had in that scenario. Accordingly, it may be that the High Court’s analysis as to what constitutes a “legitimate interest” may not carry across to other structures that are less susceptible to “collapse” in the event of rental payments not being promptly made.

Equally, however, courts may be prepared to adopt and/or apply Mr. Justice Picken’s reasoning where the Termination Sums play a crucial role in the function of the leasing structure (and without which such structures may not be capable of existing in the first place).

Ultimately, the extent to which the ruling in FW Aviation v VietJet will be capable of wider application will turn on the specific terms of the contracts underpinning the relevant leasing arrangements. The facts of each particular case will likewise be important; factual considerations that may come into play include (1) whether the relevant Airline could be said to have experience with JOLCO Structures and aircraft leasing comparable to VietJet’s; and (2) whether the relevant Investors’ interest in the structure are more substantive than the tax advantages provided by JOLCO Structures.

Trainee solicitor Oliver Barnes-Dean contributed to this LawFlash.