V. LUBININ, E. LUBININA. CHANGING LEGAL APPROACHES IN INTERNATIONAL LEASING: APPLICABLE LAW AND JURISDICTION

Vasily Lyubinin, CEO of JSC “Business Alliance”
Elena Lyubinina, Deputy Head of the Legal Affairs Department, JSC “Business Alliance”

In the modern economy, international leasing has become a vital tool for financing expensive assets across various sectors, from industrial equipment to vehicles. Leasing transactions are carried out beyond one individual state, which complicates legal relations, as it involves diverse national legal systems and private law concepts.

INTERNATIONAL REGULATION OF LEASING RELATIONS
The international regulation of leasing relations is a set of unified norms, with the UNIDROIT Convention on International Financial Leasing (May 28, 1988) as the backbone text, which is the result of decades of international efforts to harmonise the leasing legal framework and is viewed as one of the most successful examples of international unification of private law. Russia acceded to the Convention on February 8, 1998, thereby making its provisions binding for Russian courts when considering relevant disputes.

The Convention applies solely in cases where the lessor and lessee are registered in different states, so the criterion to consider the leasing transaction international is not the provenance of the leased asset or the payment currency, but rather the distinct national affiliations of the key participants. Internal leasing operations fall outside the scope of the Convention, even if the leased asset is produced abroad or financing comes in foreign currency.
The key conflict-of-law provision establishes a crucial principle of the subsidiary application of national law. For matters not fully regulated by the Convention, the law determined by the rules of private international law is to be applied, suggesting that the Convention does not claim to comprehensively regulate all aspects of leasing relations but leaves ample room for the national law.

NATIONAL CONFLICT-OF-LAWS REGULATION

Since the UNIDROIT Convention does not regulate all aspects of leasing relations, each jurisdiction has its own conflict-of-laws rules and regulations for determining applicable law. Speaking of Russia, specific approaches to establishing the applicable law in leasing relations are incorporated in national legislation. The Decree of the Plenum of the Russian Supreme Court No. 24 “On the Application of International Private Law Norms by Courts of the Russian Federation” (July 9, 2019) provides fundamental clarifications that are of great importance for leasing disputes, ruling that the choice of a Russian court does not automatically imply the application of Russian law.
Given there is no agreement on applicable law, Russian courts are guided by the principle of the closest connection of the contract with the law of a particular country under Article 1211 of the Russian Civil Code. It requires the court to analyse all circumstances of the case to determine the state with which the contract has the most substantial connection. An important novelty in Russian law is the possibility to choose “neutral law”—parties may select the law of a country that has no direct connection with the agreement or its parties.

INTERNATIONAL LEASING: APPLICABLE LAW AND LEGAL REGIME

Determining Applicable Law in the Absence of an Agreement.
Despite a well-developed framework of international and national regulations, legal practice reveals serious issues in the application of conflict-of-laws rules, particularly when parties have not pre-agreed on the applicable law.
For example, the critical importance of correctly applying conflict-of-laws rules in the absence of an agreement on applicable law becomes evident in a Belarusian case heard by the Belarusian Supreme Court.
In a dispute between a Belarusian seller and a Kazakh buyer, the parties agreed on an arbitration clause stipulating that disputes would be handled “in an arbitration court at the plaintiff’s location,” but did not specify the applicable substantive law for the supply agreement. It should be noted that such a scenario is quite typical in commercial practice, where parties focus primarily on commercial terms, underestimating the importance of legal aspects.

The Kazakhstan International Arbitration Court, which considered the dispute, applied Kazakh law without providing adequate justification for its choice. The arbitrators assumed that since the dispute was being heard in Kazakhstan, Kazakh law should apply. Yet this approach is inaccurate under the international private law, as the location of the proceedings does not automatically determine the applicable substantive law.

The Belarusian Supreme Court, when addressing the enforcement of the arbitration award, reasonably refused to acknowledge it. The court pointed out that according to the conflict-of-laws rules of both Article 1125 of the Belarusian Civil Code and Article 1113 of the Kazakh Civil Code, in the absence of an agreement between the parties on the applicable law for the supply agreement, the law of the seller’s country—Belarusian law—should apply. The improper choice of Kazakh law by the arbitration was qualified as a violation of legality, which runs counter to public policy and leads to a refusal to recognise and enforce the arbitration award.

Legal Regime of Composite Leasing Objects.
International leasing often uses complex composite projects, where particular attention must be paid to the applicability of various legal regimes to individual components. In such structures, it is crucial to plan the jurisdictional aspects of the entire project, not just individual agreements.
The case of Regional One Inc. v. the Bankruptcy Estate of Cimber Sterling A/S (2013) highlighted a fundamental issue in determining the legal regime of composite leasing objects. Following the bankruptcy of the Danish airline Cimber Sterling on May 3, 2012, a dispute arose over the ownership of an aircraft engine valued between 5 and 12 million Danish kroner, provided on a short-term lease by the American leasing company Regional One Inc. as a backup asset. The bankruptcy estate refused to return the engine, arguing that its installation on the aircraft the day before the bankruptcy resulted in a transfer of ownership according to the accession principle. The arbitrators proceeded on the basis that movable property, once attached to a principal item, becomes part of it, thus Regional One Inc. lost its ownership rights. However, the Bankruptcy Court in Sønderborg rejected the argument on December 4, 2013, confirming the retention of the lessor’s ownership rights. The court noted that applying an absolute principle of accession would make leasing aircraft engines impossible, contradicting the established practice in aviation.

Traditional Approaches.
An analysis of such approaches to choosing applicable law reveals their inadequacy in modern days. Long-standing practices, which seemed reliable for decades, now face new challenges that call for reevaluating the basic principles. The historical supremacy of English law in international leasing developed as London became a global financial hub. Until recently, most international leasing agreements referenced English or American law. The choice of English law was often seen as a benchmark for international transactions, as English courts were reputed for being independent and competent in commercial law. London arbitration institutes, such as the LCIA, held high authority in the international community.

The case of Blue Sky One Ltd & Ors v. Blue Airways LLC (2009) shows the fundamental limitations of applying English law in complex international leasing structures. The English Commercial Court examined a multi-layered aviation leasing structure involving three Boeing 747-400 aircraft, designed to circumvent U.S. sanctions against Iran. The structure included Balli, a British leasing company as the owner of the aircraft, Blue Airways, an Armenian airline as the lessee, and Mahan Air, an Iranian airline as the actual user through FZE, a UAE-based company.
After the lease term expired, the aircraft were not returned to Balli. Instead, they were transferred to the Iranian side using counterfeit sales documents. Mahan Air re-registered the aircraft in Iran in violation of U.S. sanctions. Although the English court recognised Balli as the legitimate owner and dismissed claims of the agreements being sham, the decision had limited practical implications. The aircraft were physically located and operated in a jurisdiction where English law had restricted application, making their actual return impossible. The case highlighted the challenge in choosing a legal framework without considering the physical location and the place of use of the assets.

These examples reveal the systemic issues inherent in traditional approaches to selecting applicable law in international leasing. Choosing a prestigious jurisdiction without considering the actual location and the place of use of the leased assets can significantly impair the effectiveness of legal protection. Courts may refuse to apply foreign law if it contradicts fundamental principles or if the choice of law is artificial, especially when all substantial connections of the contract point to a different jurisdiction.

The practical enforcement of judgements is still a vital factor, outweighing the formal advantages of prestigious jurisdictions. The mobility of leased assets poses additional risks, as physical control over the property may prove to be more crucial than legal titles, particularly in politically volatile regions.

MODERN TRENDS
Changes in international legal practice reveal several consistent trends. The key directions of transformation include the geographical diversification of arbitration centers, a reassessment of the criteria to choosing applicable law, and the search for jurisdictions free of political bias. The criteria for selecting modern arbitration institutions have significantly evolved in response to current international setup. While reputation, the quality of arbitrators, and procedural efficiency were once the primary factors, political neutrality and independence from geopolitical ebb-and-flow have now come to the forefront. Participants in international business seek arbitration that can guarantee impartial dispute resolution, regardless of the nationality of the parties or the political relations between their states.

The lack of sanctions has become a critical factor in selecting arbitration, which must be able to accept payments from all parties involved and ensure full participation in the proceedings, regardless of sanction regimes. A developed legal system remains an essential criterion, as the effectiveness of arbitration largely depends on the quality of the legal environment in which it operates.
Experience in handling complex commercial disputes and expertise in individual industries are also taken into account when selecting arbitration in leasing disputes. Institutions should have experience in resolving financial disputes and an understanding of the specifics of leasing relations. The ability to effectively enforce arbitration awards across various jurisdictions remains a key factor, as an award holds value only if it can be practically enforced.

One of the most marked trends in actual international commercial dispute resolution is the shift towards Asian arbitration. Geopolitical changes have prompted a radical reassessment of preferences by international business when choosing arbitration and applicable law. English law and London arbitration were once the gold standard for international transactions, but now the situation has changed drastically. Russian businesses have begun to actively realign with arbitration that demonstrate greater political neutrality and independence from the West. This shift is not spontaneous but reflects deeper changes in international economic relations and the search for more equitable and predictable dispute resolution.

The Hong Kong International Arbitration Centre (HKIAC) has gained particular popularity among Russian companies and is now seen as a leading alternative to traditional Western arbitration. Its appeal is due to several factors: Hong Kong’s political neutrality as a special administrative region, its well-developed legal system rooted in common law, its highly professional arbitrators, and efficient dispute resolution procedures.

The Singapore International Arbitration Centre (SIAC) is also in high esteem among Russian businesses. Singapore actively positions itself as a neutral arbitration hub for Asia-Pacific, proving its independence from the political pressure of major powers. SIAC is valued for its highly professional administration, modern arbitration rules, and efficient arbitration management.
The Dubai International Arbitration Centre (DIAC) is also viewed as a promising and developing alternative for international dispute resolution. The UAE holds a unique position in modern geopolitics, maintaining business relations with various countries regardless of political disagreements between them, thus fostering a favourable environment for the neutral settlement of international commercial disputes.

PROSPECTS FOR LEGAL REGULATION
The evolution of international leasing law unfolds against the backdrop of global trends in legal unification and regional integration. Despite current geopolitical disagreements, the long-term trend to harmonise the legal regulation of international leasing relations still persists. The UNIDROIT Convention remains the primary tool for the unification, although its application is politically constrained.
The advancement of digital technologies is creating new vistas for automating legal processes in international leasing. Smart contracts and blockchain technologies can enhance the effective performance of lease obligations and reduce dependence on traditional enforcement mechanisms.
Increasing focus on environmental and social aspects of business influences the structuring of international leasing transactions, introducing additional constraints when choosing applicable law and jurisdiction.

CONCLUSION
The modern context calls for a reassessment of traditional approaches when choosing applicable law in international leasing disputes. An analysis of legal practice shows that a formal stipulation of applicable law in an agreement does not always guarantee its enforcement. Courts actively employ mandatory rules and public policy exceptions to limit the enforcement of foreign law, particularly when it comes to the interests of national economy. Meanwhile, the world is living through a geographical shift in the choice of arbitration. Asian arbitration centres are gaining popularity due to their political neutrality and professionalism. This trend reflects broader changes in international trade and the search for alternatives to traditional Western institutions.

Understanding current trends is becoming vitally important for the effective structuring of international leasing transactions. Market participants must consider not only formal legal requirements but also the practical possibilities of enforcement in various jurisdictions when choosing optimal legal protection.