COVID-19: Impact on Aviation Leases | By Somesh Arora

By | April 18, 2020
COVID-19: Impact on Aviation Leases

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This article is an attempt to ascertain for waiver of rentals on Aviation Leases or return of aircraft through the doctrine of frustration and force majeure under the common law.

Present Scenario of Aviation in India

The lockdown in India is extended until May 3rd, 2020. Until then all domestic operators engaged in scheduled, non-scheduled and private aircraft operations including scheduled international commercial passenger services shall remain seized.

Ministry of Civil Aviation on March 23rd 2020 under Section 8B (1) of Aircrafts Act, 1934 gave directions to all Schedule Operators and Non- Scheduled Operators for the ceasing of all commercial operations with effect from 24th March midnight. Thus, there shall be no commercial operations of aircraft for a minimum of 40 days, and this can be further extended upon any government extension, which is still a mystery. Though domestic operations still invoke some hope in the near future international operations looks gloomy in the current scenario.

IATO, WTTC, IATA have given their respective losses figures to this sector which is estimated to be in billions. Airlines have been suffering huge falls in their reserves under the dictum of impossibility to operate. As social distancing in the coming months will continue, travelling shall continue to face jolt at least for a few quarters.

Under this precarious position, lease rentals have gone up due to Indian Rupee depreciating against USD $ and cash flow being non- existent with many operators leading to non – payment of lease rentals.

This article is an attempt to ascertain for waiver of rentals on Aviation Leases or return of aircraft through the doctrine of frustration and force majeure under the common law.

India has about 650 Aircraft which mainly include Airbus 320 and Boeing 737, 787, 777. Importantly about 40% of them are on lease primarily from Irish companies.

Lease Agreements

As per Industry practice, there are primarily three types of Leases in aviation;

  1. Wet Lease;
  2. Damp Lease and;
  3. Dry Lease.

The types of the lease depend on the requirements and various considerations of tax and revenue by the lessee.

Wet Leasing the Lessor Company also provides ACMI (Aircraft, Crew, Maintenance, and Insurance) to the lessee whereas in Damp Lease only AMI(Aircraft, Crew, Maintenance, and Insurance) is provided. Wet or Damp Leases are short-term leases based on minimum guaranteed block hours where the Lessee pays fuel charges, airport fees, and other duties or fees payable.

In India the leases are predominately Dry Leasing arrangements, wherein the lessee provides for the crew, maintenance, and insurance. So, the Lessor just leases the aircraft, and the Lessee equip itself with all other things. A dry lease is a long-term lease usually lasting for more than a year and extends to half of the aircraft’s life, which ranges from ten to twenty years. The Lessee is responsible for registration (“CoR”) and Certificate of Airworthiness (“CoA”) and must be entered in the operating permit of the operator. According to Civil Aviation Requirements (“CAR”) regulations, registration of leased aircrafts is done in Category A.

Aircraft leases are generally drafted as a watertight document by the Lessors entirely in its favour. They are typically referred to as documents with ‘hell or high water’ clauses which provide that the payments with respect to the leased aircraft must continue irrespective of any difficulties which the paying party may encounter. Such clauses limit the applicability of the doctrines of impossibility or frustration of purpose. Even without the inclusion of such clauses under the agreement it becomes onerous to establish that contract can no longer be performed. These Lease Agreements may or may not contain a Force majeure clause.

Aircraft leases are generally drafted as a watertight document by the Lessors entirely in its favour. They are typically referred to as documents with ‘hell or high water’ clauses which provide that the payments with respect to the leased aircraft must continue irrespective of any difficulties which the paying party may encounter. Such clauses limit the applicability of the doctrines of impossibility or frustration of purpose. Even without the inclusion of such clauses under the agreement it becomes onerous to establish that contract can no longer be performed. These Lease Agreements may or may not contain a Force majeure clause.

Force Majeure

Depending on their drafting, such clauses may have a variety of consequences, including excusing the affected party from performing the contract in whole or in part; excusing the affected party from delay in performance, entitling them to suspend or claim an extension of time for performance; or giving the affected party a right to terminate.

Force majeure clauses are contractual clauses which alter parties’ obligations and/or liabilities under a contract when an extraordinary event or circumstance beyond their control prevents one or all of them from fulfilling those obligations.

To rely on a force majeure clause, a party would need to be able to prove that the pandemic or epidemic which may fall within the clause (either by direct words or act of God or government policies) was the cause of the inability to perform. An act of government will have occurred where a government body has imposed travel restrictions, quarantines, or trade embargoes, or has directed ceasing of operations. Causation is a necessary element of reliance on such a clause.

Contracts might, for example, refer to events or circumstances “beyond the parties’ reasonable control”. Determining whether this covers issues arising from COVID-19 is a question of interpretation and is fact-specific. In unprecedented circumstances like the present, the courts are likely to be generous in their interpretation of this sort of wording when faced with parties who have encountered directions by the government for non-operation.

Some force majeure clauses incorporate notice requirements as a mandatory requirement. In such cases, notice must be given in a timely manner and in accordance with applicable contractual provisions.

English/Irish law has no freestanding doctrine of force majeure. Rather, force majeure clauses are express terms that provide for the discharge of obligations, or other relief, in pre-defined circumstances. As a matter of Irish law, the effect of any particular force majeure clause will turn on its own wording.

The question whether COVID-19 constitutes a force majeure event is contract specific and will vary depending on the wording of each individual force majeure clause although, The World Health Organisation, on March 11th 2020, describing the COVID-19 crisis as a pandemic may amount to a trigger event for the purpose of some force majeure clauses. A force majeure clause may still be triggered even if it does not include an express reference to a “pandemic”. For example, in the correct circumstances, references to “disease”, “epidemic”, “national emergency” and other similar terms may be sufficient to provide a trigger.

In Coastal (Bermuda) Petroleum Ltd v. VTT Vulcan Petroleum SA [1] the Court of Appeal held that force majeure clauses should be interpreted by reference to the words used by the parties, rather than their general intention.

It is not unusual for force majeure clauses to cover a lengthy list of events, including Acts of God, natural or regional emergencies and government order or law.  Epidemics could also be expressly included in a force majeure clause.

Conversely, if, for example, a force majeure clause referred simply to unforeseen events, the Courts would likely look at the date of the contract and consider whether or not COVID-19 or something of a similar nature was foreseen or unforeseen at that time. If COVID–19 is covered by a force majeure clause, the party seeking to rely on the clause must demonstrate that their non-performance was due to COVID–19.

Further, if the force majeure clause states that the event in question must prevent performance, the party seeking to rely on the clause must show that performance was impossible – rather than simply uneconomic or difficult, as per Tennants (Lancashire) Ltd v. G.S. Wilson & Co. Ltd[2]UK case-law concerning the enforceability of force majeure clauses will be of persuasive value in the Irish courts in light of the paucity of Irish law in this area.

A party seeking to rely on a force majeure clause must also show that:-

  • the force majeure event was the cause of the inability to perform or delayed performance;
  • their non-performance was due to circumstances beyond their control; and
  • there were no reasonable steps that they could have taken to avoid or mitigate the event or its consequences.

A force majeure is a creature of contract and not of the general common law and therefore, differs from some other legal systems where force majeure is a general legal concept and where courts may declare that a particular event, such as a pandemic like COVID-19, is a force majeure event.

Frustration of Contract

If contracts do not include a force majeure clause, or if the clause arguably doesn’t cover COVID–19, parties seeking protection may be able to rely on the doctrine of frustration at common law. The question shall arise whether the contract has been frustrated.  This is where the extenuating circumstance (a) is preventing the relevant contract being performed, (b) is outside the parties’ control and (c) was both unforeseen and unforeseeable.

The legal threshold for frustration is extremely high and so it is difficult to prove. Importantly, frustration means that the relevant contract comes to an end and is not ‘re-activated’ when the circumstances return to normal.  Also, frustration applies to the entire contract.  In contrast, a force majeure clause can merely suspend the relevant obligation(s) for the time that the force majeure event exists.

Generally, frustration will only be available in the following circumstances:

  • The potentially frustrating event occurs after the date of the contract;
  • The potentially frustrating event is of a magnitude that it goes to the essence of the contract and performance is either impossible, illegal or radically different from what was contemplated at the point of entering the contract and;
  • The potentially frustrating event is not due to the fault of either party.

The courts of Ireland (and England & Wales) have struggled, over many years, to set out a single coherent test for frustration. The traditional touchstone, in both jurisdictions, has been the House of Lords decision in Davis Contractors v. Fareham UDC[3] and, in particular, Lord Radcliffe’s dicta that the: “obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract“.

In broad terms, the authorities in which frustration has been argued more successfully tend to be where the subject matter of the contract has been destroyed or put out of reach or impossibility of its performance. Indeed, in the celebrated Sea Angel case, 2013 (1) Lloyds Law Report 569, the modern approach to frustration is well put, and the same reads as under:-

In my judgment, the application of the doctrine of frustration requires a multi-factorial approach. Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.

Since the subject matter of the doctrine of frustration is contract, and contracts are about the allocation of risk, and since the allocation and assumption of risk is not simply a matter of express or implied provision but may also depend on less easily defined matters such as “the contemplation of the parties”, the application of the doctrine can often be a difficult one. In such circumstances, the test of “radically different” is important: it tells us that the doctrine is not to be lightly invoked; that mere incidence of expense or delay or onerousness is not sufficient; and that there has to be as it were a break in identity between the contract as provided for and contemplated and its performance in the new circumstances.”

In the context of the current pandemic, one can see that the doctrine may be more readily applicable where performance by a particular party is contemplated, and such performance then becomes impossible. If made out, the effect of frustration is that the contract is terminated automatically without an act or election on the part of the parties.

It should be recalled that the Irish courts or common law lean in favour of enforcing contracts and so there is a high threshold to proving force majeure and contractual frustration as defences for a party breaching its bargain.  Mere greater difficulty or greater expense in performing a contract is insufficient.  To reiterate the starting point, a court will assume that a party should perform its contractual obligations and it is for that party to establish why, in the particular extraordinary circumstances, it should be excused from having to do so.

In English law, “a contract may be discharged on the ground of frustration when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfill the contract or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of the entry into the contract.”

The juristic basis of the doctrine has evolved over a number of years. The English courts have over time rejected the notions of “just solution”, “foundation of the contract,” “failure of consideration” and “implied term”, and instead adopted the test of a radical change in the obligation, which is currently regarded by leading commentators as the preferred approach.

Furthermore, it is not simply a question whether there has been a radical change in the circumstances, but whether there has been a radical change in the obligation or the actual effect of the promises of the parties in the light of the new circumstances, viz. the court will have to establish that the performance was fundamentally different in a commercial sense. The House of Lords has also accepted the view that the test for frustration is objective, i.e. it is not a subjective inquiry into the actual or presumed intentions of the parties, as was suggested by the rejected “implied term” test because the discharge of a contract occurs automatically upon the occurring of the frustration event.

There is no known history of litigation in aviation contracts on similar epidemics or pandemics, Such disputes, maybe even challenging for Courts both in light of clauses of contracts in comparison with admitted unforeseeable events which created impossibility of performance.

Way Forward

The options for parties at this point are:

  1. the airline continues to pay lease rentals, causing it to burn through what limited cash reserves it may have (this will not be an option for many airlines, and even for stronger credits this is likely to be viable only very limited period);
  2. the lessors extend some goodwill in the form of payment holidays, waivers, or temporary decreases in lease rental rates;
  3. the airline stops making payments and defaults under the lease agreement; or
  4. the airline obtains or draws on a line of credit to enable it to maintain its payment obligations.

The Lessee companies have limited options for asking for a waiver of lease rentals during operation cease period from Lessors and concessions in rentals.  These companies, however in the present set of affairs, have reasonable reasons to revoke the existing contracts citing frustration and may look forward to the return of aircraft. In the given subdued situation Airlines won’t be able to earn revenues; thus, defaults of lease payments seems unavoidable.

The litigation too on force majeure or frustration may not be a cakewalk in extremely rigid in English jurisdiction settled in Taylor v. Caldwell[4] in comparison to India where the Courts have more pragmatic approach through Satyabrata Ghose v. Mugneeram Bangur & Co[5]. Though the Supreme Court of India in Energy Watchdog v. Central Electricity Regulatory Commission & Ors.[6] and Investments (P) Ltd. v. National Highway Authority of India[7] have relied on Taylor(supra), still given the impossibility of operations the Indian Courts may be more liberal to consider the frustration of contract due to COVID 19.

It shall be undesirable for lessors to accept the early return of aircraft or termination of lease agreements—or to take enforcement action—at a time of such market uncertainty, as it would be challenging to re-lease the aircraft into the fleet of another airline given that the global demand for flying has decreased so significantly.

In part, this may be a bet on the airline’s survival. But it is also a pragmatic reflection of the reality that creditors find themselves facing right now—even where defaults are clearly continuing, enforcements and the exercise of other steps (beyond the mere documentary reservations of rights) are severely hampered in an environment where many courts and public offices are closed, and even if obtained enforcement of injunctions vis a vis execution as insolvencies of airlines companies will only be paper decrees, many airports are at least partially locked-down. It would take a brave person to put a definitive value to a hard asset. The go-to solution of repossessing and repositioning assets with stronger credits or in more buoyant markets is not currently an option, and any lessor that did successfully repossess is then likely to be faced with mounting storage and maintenance costs.

The way forward should be a more balanced scenario in given times where both the parties are at sufferance, thus waiver of lease rentals and re-negotiations of contracts with more feasible terms with decreased rentals making it win-win for both the parties till the Aviation industry attains sunshine again.

Author – Somesh Arora

(Partner, Sapphire & Sage Law Offices)

The article is a personal opinion of the author and may not be considered as specialist guidance.

[1] [1996] 2 Lloyd’s Rep 383,

[2] [1917] AC 495

[3] [1956] 3 WLR 37

[4]  (1861-73) All ER Rep 24

[5] 1954 SCR 310

[6] (2017) 14 SCC 80

[7](2019) 173 DRJ 717

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