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English court rejects Covid-19 frustration argument in aircraft leasing case3 February 2021

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The English Commercial Court has rejected the argument of an airline operator that its aircraft leases had been frustrated as a result of the Covid-19 pandemic. In Salam Air SAOC v Latam Airlines Group SA,¹ Mr Justice Foxton determined that Salam Air’s case that its lease had been frustrated was “highly improbable”. Whilst, strictly speaking, the case does not set precedent on the point, the Court’s comments appear to confirm the predominant industry view: that a lessee’s obligation to pay rent under an industry standard English law aviation lease is absolute, and the English law doctrine of frustration will not relieve a lessee from that obligation as a result of the Covid-19 pandemic.

"The Court’s comments appear to confirm the predominant industry view: that a lessee’s obligation to pay rent under an industry standard English law aviation lease is absolute."

Background

Salam Air had leased three aircraft from Latam in 2017 in order to operate a regional low-cost airline out of Oman. The leases were on fairly standard terms. In lieu of a deposit, Salam Air had provided Latam with 3 standby letters of credit (SBLCs), which Latam was entitled to make demand on without notice and apply the proceeds in the same way as it would apply a deposit in the event of default under the leases. Salam Air’s application was for an injunction to restrain Latam from calling on the SBLCs following its failure to pay rent. The application was rejected without proceeding to assess in detail the merits of Salam Air’s underlying claim for relief from performance of its leases. However, the Court also commented on Salam Air’s argument that the leases were frustrated by the effects of Covid-19.

Frustration

The English law doctrine of frustration relieves a party from its contractual obligations where performance of the literal terms of the contract has been rendered so radically different from that contemplated as a result of extraneous circumstances that it would be “unjust to insist on compliance with those literal terms.”² Salam Air argued that the legal test for frustration of the leases was met following the Covid-19 pandemic. The effects of the pandemic on Salam Air included the unforeseeable collapse in demand and the introduction of regulations in Oman which prohibited (nearly) all flights to or from Oman airports and which effectively grounded their fleet.

The Court disagreed. The Court noted that it would be “challenging” for any lessee under a ‘hell or high water’ aircraft lease to establish frustration. The Court was of the view that the terms of the Salam Air leases clearly showed an agreed risk allocation between the parties. In taking on the lease, Salam Air had taken on the obligation to pay rent irrespective of whether its operating circumstances changed, even if that change was a dramatic and long-lasting fall in demand for aircraft, or a change in the regulatory framework which prevents flying. Where a lease makes clear that a lessee has taken on the risks inherent in the commercial operation of the aircraft, for example by agreeing to pay rent even if there is a total destruction of the aircraft, it is “highly improbable” that a lessee will be relieved of its obligation to pay rent where that commercial operation is impacted by the results of the pandemic. That does not meet the test of frustration, and there is nothing unjust in holding the lessee to the terms of its bargain.

"In commercial aircraft leasing, lessees will generally be responsible for the performance of their obligation to pay rent come hell, high water or a pandemic."

The Court concluded that Salam Air’s case on frustration was “far too weak” to justify the injunction it was seeking.

Conclusion

This is an important case for the aviation industry, and other sectors affected by Covid-19. The English Commercial Court confirmed that it will interpret contracts and grant remedies in accordance with the specific contractual allocation of risk. In commercial aircraft leasing, that means that lessees will generally be responsible for the performance of their obligation to pay rent come hell, high water or a pandemic. The judge’s comments are thus a helpful confirmation that the predominant industry view on frustration of leases as a result of the effects of Covid-19 appears to be correct, although of course each lease must be examined against its own relevant circumstances. Overall, the case serves as another timely reminder that contractual certainty and predictability remain the hallmarks of the English Commercial Court.

[1] [2020] EWHC 2414.

[2] National Carriers v Panalpina [1981] AC 675, 707.

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