UK: Pandemic Highlights Value Of Flexibility As Well As Enforcement Rights In Aviation Contracts

The COVID-19 pandemic has resulted in some challenges to the legal regime in the aviation sector, according to Donna Ager, Head of Maples and Calder's European Aviation team at the Maples Group. However, she says, one of the biggest lessons to come from the pandemic is that ensuring legal documents have sufficient flexibility to allow for arrangements to be amended and restructured by consent is just as important as having strong enforcement, exit or termination rights.

Speaking to Aviation Finance, Donna Ager, Head of Maples and Calder's European Aviation team at the Maples Group, said the pandemic had been unprecedented in its impact on the ability of airlines to operate normally as a result of lack of willingness amongst passengers to fly coupled with numerous governments passing legislation to effectively ground airlines and/or severely limit the nature of their operations.

However, she added, the consequences of those restrictions had, in the main, given rise to decidedly familiar consequences: notably non-payment or breach of financial covenants, albeit on a far more widespread scale than in previous crises. Generally legal documents were well prepared to protect the owners of aviation assets, such as lessors, she said.

'There have, however, been some challenges to the legal regime in the aviation sector as a direct impact of the COVID-19 pandemic, which include attempts to challenge contractual obligations – such as in Salam Air SAOC v. Latam Airlines Group SA [2020] EWHC 2414 (Comm). Here the lessee sought to have the lease contract set aside on the grounds of frustration as a result of a change in law in Oman which prevented the lessee operating the aircraft. In that case the contractual obligations were held as fully enforceable and the court specifically held that the obligation in the lease to pay rent in all circumstances (commonly referred to as the 'hell and high water' clause) was effective, notwithstanding the airline's inability to operate the aircraft,' Ager noted.

As well as breaches of contract, she said, the pandemic had also seen a number of airlines restructure and as a result, there have been challenges to insolvency processes. This included in the English courts, where access to the Alternative A Insolvency Regime pursuant to the Cape Town Convention is ratified into English law. Here it was argued that the administration process in the UK was not an insolvency proceeding per se and so not covered by the Cape Town related aspects of English insolvency law.

'While unfortunately this case was ultimately settled outside of Court and thus no judgment handed down, a similar point was considered by the Court in the case of Bucci v Carman (Liquidator of Casa Estates (UK) Ltd) [2013] EWHC 2371 (Ch) (a non-Cape Town/aviation case) where the Court held that if the assets and liabilities of a company would effectively mean the company could be deemed insolvent, then it does not matter if the company is currently meeting those debts. It is possible however, that going forward, to avoid challenges of this nature, we may see administration (and analogous proceedings) specifically stated in contracts to be an insolvency process within the terms of the Cape Town Convention to clarify the position,' Ager observed.

Asked what lessons she had learned, from a legal perspective, regarding aviation assets from the events around Covid, Ager said: 'From the outset of the pandemic, stakeholders in the aviation industry have largely adopted a commercial and pragmatic approach to the difficulties faced by airlines.?While lessors, owners and financiers are entitled to rely on their strict legal rights, including under the Cape Town Convention, the dominant theme has been that the industry as a whole recognises the seismic effect of the pandemic on aviation businesses that were previously sound and thus rights of enforcement are only part of the picture.'

Another lesson, she added, was that legal documents had also served the parties well as a framework from which owners and investors could negotiate with lessees. 'Ensuring that documents have sufficient flexibility to allow for arrangements to be amended and restructured by consent is just as important as having strong enforcement, exit or termination rights. This has never been more apparent than in the recent pandemic when the supply of aircraft far outweighed the demand and thus reaching a mutually satisfactory position as to the basis upon which relationships could move forward, notwithstanding a breach of obligation, was vital to ensure the industry kept afloat.'

Originally Published by Aviation Finance

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