COVID-19, Force Majeure and Frustration: Where does this leave contracts within the aviation industry?

On 6th July 2020/ By Maariyah Islam

COVID-19 has severely affected the performance of contracts across numerous sectors and industries, including the aviation industry. The pandemic has added strain to contractual relationships within the aviation industry, such as those that exist between airline lessees (and borrowers) and aircraft lessors (and financiers). According to Centre for Aviation (also known as CAPA), half of all commercial aircraft are leased by airlines. A relatively small percentage of airlines have the cash resources to purchase aircraft outright from manufacturers, and in the circumstances that this purchase is possible, a significant proportion of their fleet is estimated to be leased or financed. This article focuses on the legal issues faced by the aviation industry during COVID-19 including force majeure and frustration.

Force Majeure

The widespread disruptions across the globe caused by COVID-19 have made it difficult for businesses within the aviation industry to perform contracts many of which are presently seeking to find legally acceptable justifications for the non-performance of various contractual obligations.

Force majeure is a contractual term through which one or both the parties is entitled to suspend performance of its impacted obligations, or to claim an extension of time for performance arising from a designated event or events beyond its control.[1] The precise mechanics of the force majeure doctrine varies according to different legal systems, and English law does not define force majeure within statute or case law. However, three key aspects of force majeure have been identified and recognised across various industries.[2] First, the designated event or circumstance must be unrelated to the contract and be beyond the control of the party relying on the force majeure condition. Second, the event should not have been foreseen or preventable. Third, the event renders the performance of the contract impossible for a specific period of time or possible only in a manner drastically different from that originally agreed by the parties.

Force majeure claims have risen since the pandemic, with more parties attempting to rely on the doctrine for legal protection. However, the precise way in which such claims can be sought within the aviation industry remains unclear.  A party seeking to rely on this doctrine must establish that their inability to perform the contract was caused by the claimed force majeure event. Legal practitioners and academics seem to agree that there is no force majeure protection for a buyer under an aircraft purchase agreement. Consequently, under a purchase agreement airlines cannot rely on the doctrine of force majeure as providing an  exemption to paying rent or performing their contractual obligations regardless of whether or not it is due to an ‘act of god’ or in the present circumstances: a global pandemic. Force majeure is only applicable on the grounds that it is expressly drafted within the contractual agreement and this is not usually the case on a normal aircraft dry lease. The China Council for the Promotion of International Trade has issued over 5000 force majeure event certificates to companies affected by COVID-19, but we are yet to see the extent to which these certificates hold up outside of China.

Instead, the contractual specifics of leases often take an opposite direction by including a ‘hell high water provision’ rendering the lease a net lease. For example, in an aviation context, this essentially requires an aircraft to pay rent and perform its obligations for the duration of the lease term regardless of unforeseen circumstances which have impacted the airlines’ operations, such as the COVID-19 pandemic. The established law makes it very clear that ‘hell or high water’ provisions place an absolute and irrevocable obligation on the lessee to make the necessary payments, without any contractual defence, including force majeure.

Frustration

In the absence of a force majeure provision, there has also been much debate about whether airlines can rely on the doctrine of frustration on the grounds that it has become impossible to carry out their contractual obligations. Under English law, frustration can apply where an event occurs subsequent to the closing of the contract. Such an event must not be foreseen by the contractual parties and must render further performance as impossible, illegal or drastically different from what the contracting parties had contemplated at the time of the contract was created. When a contract is recognised to be frustrated, the contract is automatically terminated and all of the parties are released from their remaining contractual obligations. The question of whether frustration may or may not apply to contracts within the aviation industry as a result of the COVID-19 pandemic remains unsettled. Undoubtedly, there will be many lessees within the aviation industry who will want to raise this legal doctrine as a potential safety net, but the success of such claims does not seem very promising.  

Specifically, there is a further question that stands in regard to purchase agreements. If lessees are successful in an argument for frustration, do they really wish for the lease to totally terminate? Undoubtedly, when restrictions are further eased, airlines will wish to continue with as many flights as possible but the frustration of leases is going to cause difficulties in recommencing operations and hinder progress.

In addition to the above two legal claims, a further matter that has been considered largely during the COVID-19 pandemic related to contract law is whether in such circumstances it is possible to proceed with the delivery of the aircraft. Although practically it does not seem sensible to proceed with such delivery, contractually a lot of airlines are in the position where their sales purchase agreement requires them to take delivery once the aircraft is manufactured and ready to go. During the pandemic, many lessees have had or attempted to have conversations with manufacturers in relation to deferring the delivery of aircraft and some of these discussion have been successful, whilst others have not.

Regardless of the practical difficulties in taking aircraft during COVID-19, many individuals have been left with no option but to seek legal advice in relation to deals where aircraft are scheduled to be delivered during the pandemic. Not only does this situation give rise to various legal issues, but it also creates practical difficulties for airlines such as: (i)  the actual inspection of the aircraft; (ii) the documentation and signing of legal instrument such as deeds; and (iii) questions regarding what actually happens to the aircraft once the documentation is released. Nonetheless, deliveries have been taking place during the pandemic and continue to do so with the help of legal firms across the world.

To summarise, there is not a simple solution to the massive contractual challenges faced by the aviation industry as a result of COVID-19. Although airlines are used to narrating business risks as required in good corporate governance practices, the pandemic has elevated business risk like never before. Indeed, there is much to be seen in how the law develops during these unprecedented times particularly with the anticipated wave of COVID-19-related claims being put before courts all across the globe. 

DISCLAIMER: This article is for information purposes only and does not purport to represent legal advice. Specialist legal advice should be sought if you are affected by the matters discussed within this article.


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