A survey of aviation disputes in the Americas

In summary

It has been a year since our last aviation update,^[1] so we’re back with another round-up on aviation disputes in the Americas. In the past year, the aviation industry continued its positive growth trend, with a record year in aviation safety even as the amount of aircraft movement increased by 17 per cent from 2022.^[2] While social media can sometimes make it seem like delays and cancellations in the industry have increased, 2023 was also a record year in the United States for reliability, with a cancellation rate below 1.2 per cent – the lowest in a decade.^[3]

The aviation industry continues to be a key driver of economic growth across communities and countries globally. A recent economic impact report^[4] by the National Association of State Aviation Officials, the Alliance for Aviation Across America and the American Association of State and Highway Transportation Officials found that in the United States, aviation supports more than 1.1 million jobs and creates more than US$246 billion in ‘economic impact’ annually. According to the Global Outlook for Air Transport,^[5] demand for air travel is expected to double by 2040 growing at an average rate of 3.4per cent. Despite oil price volatility, geopolitical changes and inflation, the airline industry as a whole has recovered well from the losses suffered in 2020.

Of course, with increases in demand and traffic, the potential for disputes also increases. Given the sheer size and breadth of the industry, it is hardly surprising that challenges and issues that occur within the industry can have an enormous effect on travel and the wider economy. And with the continued development within the industry and new laws and regulations, there are a lot of unknowns when it comes to future disputes.

With this backdrop in mind, in this article we discuss the benefits of an alternative dispute resolution (ADR) process tailored to the aviation industry and analyse some recent aviation disputes in the Americas, with an eye towards effective and efficient dispute resolution through ADR.

Discussion points

• The benefit of tailored ADR to aviation
• The importance for practitioners to understand the regulatory frameworks governing the industry
• The need for practitioners to understand the interconnectedness of the airline industry in the context of a dispute
• A review of some recent aviation-related investment treaty decisions
• A round-up of recent aviation-related commercial disputes

Referenced in this article

• Memorandum of Understanding between Chile and Peru, 7 April 2011
• Official Gazette No. 87, Volume 429, 15 May 2023
• The Hague Court of Arbitration for Aviation Rules, 14 February 2023
• Chicago Convention on International Civil Aviation, 7 December 1944
• Montreal Convention, 28 May 1999
• Aviation Holdings S de RL v Uruguay
• Sociedad Aeroportuaria Kuntur Wasi SA and Corporación América SA v Republic of Peru
• Thales Avionics, Inc v L3 Technologies, Inc
• Bombardier Inc v Nicholas Air Services, LLC d/b/a Nicholas Air
• Go Airlines Limited v International Aero Engines, LLC

Introduction

As noted in our previous article, the aviation industry has not adopted arbitration as the sine qua non method of dispute resolution, but legal professionals have nonetheless developed a framework and infrastructure for industry-specific dispute resolution. The Hague Court of Arbitration for Aviation (HCAA), created in 2022,^[6] recently commenced accepting cases. The HCAA is billed as a ‘specialized court of arbitration and centre for mediation for the global aviation industry’ that offers a ‘fast, fair, flexible and final form of binding dispute resolution’ tailored to the unique needs of the aviation industry. The HCAA had a slow take-off, but after publishing its revised rules in February 2023, it seems to be at cruising altitude. According to its founder, Paul Jebely, by mid-2023 the HCAA had been written into over US$2 billion worth of transactions.^[7] While only a small percentage of the total transactions within the airline industry, we expect to see a continued rise in the number of agreements in the aviation industry that incorporate arbitration clauses, whether new industry-specific clauses or traditional arbitration clauses designating international institutions.

While the courts are suitable for an array of commercial cases, arbitration offers significant benefits for commercial disputes in the aviation industry. Notably, the parties are able to select the decision maker, unlike in most court systems. They can also design the process to facilitate an efficient resolution of the dispute in a way unique to the relationship between the parties. Disputes relating to aircraft financing have different timing considerations and touchpoints than disputes relating to ticketing software. Yet both require a level of aviation-related sophistication that judges are unlikely to possess. As such, the purpose of this article is to highlight certain benefits of arbitration and mediation when specifically tailored to aviation. We also highlight some recent air travel industry cases from the region.

Benefit of ADR tailored to aviation

It is undeniable that industry knowledge can be an effective tool in resolving legal disputes. Arbitration is older than any existing court system and has been used for centuries to resolve commercial disputes among merchants. It was not uncommon for the trier of fact to be a fellow merchant with an understanding of the specific issues in dispute. Imagine a process in which the judge needs no background of the industry or description of the technical issues at stake. While we do not advocate for the abolition of courts of general jurisdiction by any means, there is always a case for specialised, industry-specific systems. That said, one of the benefits of arbitration is that the parties can agree in advance on the qualities of their tribunal, the specific procedural and substantive rules to govern the dispute, the timing, and the extent to which document disclosures and discovery may be requested, and they can even set parameters for the tribunal’s preparation of the final award. Thus, whether the parties choose an industry-focused institution to administer the arbitration such as the HCAA, or designate the International Chamber of Commerce Court of Arbitration, they can control the process by mutual agreement.

The aviation industry, as a regulated and global industry, may be even more amenable to arbitration, as described below.

Understanding the regulatory framework of the aviation industry

In our last article, we commented on the Chicago Convention,^[8] an aviation treaty that has 193 member state signatories.^[9] It provides a framework of policies and standards for the International Civil Aviation Organization. The Montreal Convention^[10] is an international treaty to protect passengers and establishes airline liability. It has been signed by 197 countries. These conventions are just some examples of the overarching international frameworks that regulate the airline industry. In addition, each jurisdiction has its own industry-specific regulations governing air travel.

Aviation is one of, if not, the most heavily regulated industries in the world. The regulatory framework spans international treaties (such as the Montreal Convention) to bilateral agreements between countries (eg, air service agreements and air safety agreements) to state regulatory and investigative oversight. Often in a dispute, the various regulatory systems overlap. For example, an aircraft (and aircraft operator) may be subject to requirements associated with multiple jurisdictions based on the state of design, the state of operation, the state of manufacturer and the state where the incident occurred. As a result, understanding the complex regulatory framework is an essential element of navigating aviation-related arbitrations.

Below are just a few examples of regulatory developments in the past year in Latin America alone:

• The Civil Aeronautics Board of Chile (JAC) recently decided to reduce low-cost airlines Sky and JetSmart’s slots on the Santiago–Lima route and assign them to the flagship carrier, LATAM. Under the memorandum of understanding between Peru and Chile,^[11] the Santiago–Lima route must be publicly tendered among different carriers. The decision by the JAC caused controversy, particularly by JetSmart, which previously had the route, and has since called for a review of the auction model under the treaty.^[12]
• El Salvador recently reformed its Civil Aviation Law, removing several bureaucratic barriers and hurdles to attract air operators to the state.^[13] For example, the new legislation removes the practice of post-certification hearings and tariff registrations, a practice no longer implemented internationally. Its aim is to make El Salvador more attractive to investment within the sector and to the growth of the state’s national air operators.
• In Argentina, on 20 December 2023, the National Executive Branch issued the Necessity and Urgency Decree No. 70/2023 aimed at generally deregulating the economy. The Decree has some notable provisions in relation to aviation, including removing exclusivity implications from route operation authorisations and enabling companies to set tariffs freely without the approval from authorities. Its aim is ultimately to promote competition and market freedom. In addition, the Decree will permit foreign carriers to operate domestic flights pursuant to reciprocity agreements, meaning that foreign airlines can now expand their operations within Argentina. This is further bolstered by the fact the Decree removes the obligation to allocate a minimum of 50 per cent of the domestic routes to Aerolíneas Argentinas. These changes mark a significant shift in Argentina’s regulatory framework, and will likely lead to increased foreign investment, greater private sector participation and new entrants into the airline industry. We will likely see new commercial transactions developing between the key players in the market, looking to expand into Argentina and, as a result, existing business agreements may need to be renegotiated to stay competitive.

Understanding the interconnectedness of the aviation industry

Arguably, the main objective of the passenger airline industry is to serve passenger needs safely and efficiently in line with the rising demand of passengers. That objective puts inevitable pressure on global supply chains to not only keep airplanes in the air but to also innovate and develop new systems, engines, materials and aircraft parts. This overwhelming demand on manufacturers in turn creates risks and challenges for those very businesses to deliver quickly and reliably, and often this can result in disputes.

The aviation industry is highly interconnected, meaning that issues in one area can have a disproportionate impact on the industry as a whole. Understanding those issues and factoring their practical implications into dispute resolution process allows parties to approach disputes in an effective and efficient way. Take, for example, the grounding of certain Boeing 737 Max 9s following the Alaska Air incident in January 2024. The fleet was temporarily grounded to allow for inspections of the Boeing 737 Max 9s.^[14] Each affected airline had to conduct or arrange for inspections in accordance with Federal Aviation Administration requirements before the aircraft could be placed back in service. Boeing and Spirit AeroSystems also temporary halted production of the aircraft model. The impacts were felt by airlines and passengers alike. Southwest Airlines considered reducing the number of seats offered and reducing its capital spending programme after receiving fewer Boeing aircraft than anticipated, and United Airlines paused pilot hiring for May and June 2024.^[15] Meanwhile Boeing’s customers, including United Airlines and Alaska Airlines, cancelled hundreds of flights as a result of the grounded aircraft.^[16]

Owing to the knock-on effect that one incident can have on the industry as a whole, there is an increasing pressure to resolve commercial disputes quickly to limit disruption to the broader industry. Given the length of court litigation, commercial airline disputes are often resolved out of court, informally and confidentially. Arbitration, however, can also provide an efficient, confidential and timely method to resolve disputes, if properly planned and managed.

Recent ADR in aviation

Investment treaty decisions

This year has seen an uptick in investment treaty-related disputes. The International Centre for Settlement of Investment Disputes (ICSID) registered 57 cases in 2023 under its rules, representing the third highest number of cases registered in a single year with an additional 20 cases registered under non-ICSID procedural rules (14 of the 20 applying the United Nations Commission on International Trade Law rules).^[17] In addition, Central American and Caribbean states accounted for 23 per cent of all new cases in 2023 – the most of any region. In the majority of cases, jurisdiction was asserted on the basis of a bilateral investment treaty. Below are some of the aviation-related cases heard before ICSID this year.

Larah v Uruguay

In our previous article, we discussed the dispute between Latin American Regional Aviation Holding (Larah), which held a 75 per cent stake in Uruguay’s national airline, Pluna Lineas Areas Uruguayas (Pluna), and the Uruguayan government.^[18] To recap, in 2018, Larah submitted a notice of dispute against Uruguay invoking the 1998 Panama–Uruguay bilateral investment treaty accusing Uruguay of illegally expropriating Pluna. In May 2019, Larah submitted its request for arbitration to ICSID. The dispute arose when, in 2012, Pluna was hit by financial troubles and, according to Larah, Pluna’s success was undermined by arbitrary and politically motivated measures by Uruguay. Pluna alleged that such measures ultimately destroyed Larah’s investment and forced the sale of the airline to a government-owned trustee, with Larah receiving no compensation. Larah’s claims included breaches of Uruguay’s obligation to provide fair and equitable treatment to foreign investors and full protection and security of their investments.^[19]

The tribunal rendered an award on 13 February 2024 for Larah in the amount of US$56.6 million in damages, and pre- and post-award interest and costs for breaches of the Panama–Uruguay bilateral investment treaty’s provisions on fair and equitable treatment and indirect expropriation.^[20] However, Larah’s original claim was in the region of US$900 million, so its award was only 6 per cent of the claimed amount.

Sociedad Aeroportuaria Kuntur Wasi SA and Corporación América SA v Republic of Peru

Peru is one of the top countries with ICSID cases against it.^[21] Peru has signed a number of state contracts containing ICSID arbitration clauses, and one-third of Peru’s arbitration proceedings are being arbitrated based on these rather than the terms of the relevant bilateral investment treaties.^[22] Interestingly, Peru has a strong track record of recovering and winning ICSID disputes.^[23] In fact, it is estimated that the state has been required to pay only 0.086 per cent of total claims brought against it by investors.^[24]

However, on 11 August 2023, the tribunal ruled against Peru in a dispute that arose after an Argentine-led consortium won a 40-year concession for the construction and operation of an airport near Machu Pichu that was later cancelled by the newly elected Peruvian government in 2017.^[25] The claimants argued, inter alia, that Peru’s unilateral termination of the concession contract was contrary to the terms of the contract as well as Peruvian law, and the state breached the concession contract. Peru maintained that the termination of the contract was for reasons of public interest, namely that Sociedad Aeroportuaria Kuntur Wasi SA (Kuntur Wasi) would not have been able to suitably carry out the project. The tribunal dismissed this argument and held that Peru was unable to provide for circumstances in which Kuntur Wasi might be considered a deficient contractor unable to carry out the project. The tribunal rendered its award on 9 May 2024 and ordered the state to pay US$91,205,056 plus interest to Kuntur Wasi.^[26]

Interestingly, in relation to damages, the claimants relied upon a 2017 statement by the former Transport Minister, Martín Vizcarra, that Peru could be ordered to pay US$8 million in damages and US$264.8 million in lost profits if it were found liable.^[27] However, the tribunal held that Kuntur Wasi had no right to recover lost profits under the concession contract. To read the relevant section of the contract as permitting by silence the recovery of lost profits based on Peruvian law (as argued by the claimants) was not a logical conclusion, according to the tribunal. Further, the statement made by the Transport Minister in 2017 should not be taken as constituting binding admissions of the state as to the amount of damages.

The case is notable as being one of few ICSID arbitrations in which the Republic of Peru has been ordered to pay damages.

Honduras leaves ICSID

On 24 February 2024, Honduras announced its denunciation of the ICSID Convention in accordance with article 71 of the Convention. As a result, the denunciation will take effect six months after receipt of the notice (ie, on 25 August 2024). This follows threats by Honduras to leave the ICSID after its alleged handling of a claim brought against Honduras worth US$11 billion. Honduras is the fourth country (after Venezuela, Bolivia and Ecuador) to withdraw from the ICSID. Ongoing claims will not be impacted, and any claims pursued before the August deadline are likely also to be within the ICSID’s jurisdiction. Time will tell whether the August deadline leads to a rise in arbitrations brought against Honduras before then.

Commercial transactions

The following cases highlight the overlap between arbitration and court proceedings, particularly in the context of joint ventures and commercial transactions in the aviation industry:

• In January 2024, Thales Avionics Inc, a company that specialises in aerospace manufacturing services, requested a preliminary injunction against L3Harris, a technology company that provides airlines with advanced electronic equipment (such as flight data analytics, simulators and navigation products), in the US District Court for the Southern Court of New York.^[28] The companies share a joint venture, Aviation Communication & Surveillance Systems LLC, that designs and sells traffic collision avoidance systems to the industry. The injunction sought to prevent L3Harris from closing the sale of the joint venture until the conclusion of a pending ICC arbitration.^[29] The arbitration concerns whether L3Harris effectively offered to Thales the right of first refusal before agreeing to sell its 70 per cent stake in the joint venture to the Jordan Group. L3Harris maintains the right of first refusal expired, while Thales contends the offer was a ‘sham’ and did not reflect a bona fide offer. In February 2024, the court issued a memorandum opinion and order granting the preliminary injunction finding that Thales had sufficiently demonstrated serious questions going to the merits of the claim, irreparable harm and the balance of hardships that weighed decidedly in its favour.^[30]
• In the US District Court for the Northern District of Mississippi, plaintiffs Nicholas Air and Corr Aviation brought a claim against the Canadian aircraft manufacturer Bombardier, Inc (Bombardier) for alleged breach of warranty terms in relation to a business aircraft manufactured by Bombardier and owned by Nicholas Air. The relevant agreements were initially between Bombardier and various other companies but were later resold to Nicholas Air. The warranties relate to, inter alia, Bombardier’s obligations to repair and replace, or rework defects in material, manufacture or design at Bombardier’s facilities. Bombardier has since moved to dismiss the action for lack of personal jurisdiction, and in the alternative, to compel arbitration in accordance with the arbitration agreement contained in the warranty agreement. The added complication is that Nicholas Air was not a signatory to the warranty agreement and, thus, the arbitration agreement. The plaintiffs resisted the motion to dismiss and instead applied for a preliminary injunction to prevent Bombardier from proceeding with arbitration. The court was therefore asked to consider whether a decision to arbitrate can be enforced against Nicholas Air as a non-signatory and whether that was a question for the court or the arbitrators. Deciding that it was for the court to decide, the court held that Nicholas Air was subject to the arbitration provision, and Bombardier could compel arbitration both under the ordinary principles of contract and the doctrine of equitable estoppel. The court noted that a party cannot seek to claim the benefits of a contract and, at the same time, avoid being held to its arbitration provisions.^[31] In an industry like aviation, where there are only a handful of key suppliers and manufacturers, the selling on of aircraft parts and agreements is common and relationships between key players is critical. This case serves as a key reminder that third-party buyers could still be subject to arbitration provisions within the original agreements and to bear this in mind when entering into such commercial arrangements.
• The next case further demonstrates why arbitration’s speedy resolution may be preferred for aviation-related disputes. The dispute arose between an ultra-low cost carrier (Go Airlines) and a Delaware-registered joint venture aeroengine manufacturing company (International Aero Engines). The crux of the claims is that International Aero Engines’ supply of certain aircrafts to Go Airlines were faulty and resulted in a number of its aircraft being grounded. Go Airlines initially sought emergency relief in relation to the ongoing dispute and applied to the US District Court for the District of Delaware to enforce that relief. Go Airlines argued, inter alia, that the relief was required immediately owing to a significant number of the aircraft that needed to be repaired and to ensure it can maintain a normal schedule of operations. Go Airlines applied for the relief without waiting for the formation of a tribunal under the Singapore International Arbitration Centre rules. The tribunal initially granted a certain portion of the emergency relief, emphasising this would be interim relief only, owing to the relevant court proceedings and other related actions that were ongoing in other jurisdictions. When International Aero Engines applied to have the emergency relief vacated, the tribunal amended the relief and as part of its order, directed the parties to provide quarterly updates on the progress of the ongoing court proceedings.^[32] The dispute reflects the ability of the tribunal to offer quick and effective relief and can step in to do so, while court proceedings are ongoing. This is particularly important in aviation, given the potentially disruptive macroeconomic effects of litigation in aviation, as we have noted in this article.

^*With a special thank you to our colleagues across the Americas for their contributions to this article, including, among others, Luis Dates (Buenos Aires), Valentina Biondi Grane (Buenos Aires),Maria Eugenia Salazar (Caracas), Ana María Arrarte (Peru), Joaquim P Muniz (Rio de Janeiro), Felipe Soza (Santiago), Rodrigo Diaz de Valdes (Santiago), Luis H Borghi (Sao Paolo) and Marcio S Polto (Sao Paolo).

Endnotes