Lease Rental Must Be Paid Come Hell Or High Water ' Airline Operator Fails In Bid To Restrain Call On Standby Letters Of Credit

Published date02 July 2021
Subject MatterTransport, Aviation
AuthorMr Shannon Rajan
The case of Salam Air SAOC v Latam Airlines Group SA [2020] EWHC 2414 (Comm) examines the airline operator's argument that its aircraft leases had been frustrated because of the COVID-19 pandemic so as to make it appropriate to injunct the lessor from issuing demands under standby letters of credit issued to secure the monthly rentals on the aircraft. Mr. Justice Foxton determined that the airline's case that its lease had been frustrated was "highly improbable" and "far too weak" in light of the existence of a "hell or high-water" clause.

Background facts

Salam Air SAOC ("Salam Air") leased three aircraft from Latam Airlines Group SA ("Latam") ("Aircraft Leases") to operate a regional low-cost airline from Muscat International Airport in Oman. The aircraft were delivered to Salam Air in the first quarter of 2017.

As security for performance of Salam Air's obligations under the Aircraft Leases, it provided three standby letters ("Letters of Credit"), which Latam was entitled without notice to withdraw all or part of the amount thereof in the event default under the Aircraft Leases. Thereafter in May 2020, Latam filed for Chapter 11 bankruptcy protection and provided notice of termination of the Aircraft Leases. Salam Air redelivered the aircraft in June 2020 by which time it was three months in arrears in lease rental payments.

In September 2020, Salam applied to the English Commercial Court for an injunction to prevent Latam from making a demand under the Letters of Credit contending that the Aircraft Leases were frustrated due to the regulations issued by the Public Authority for Civil Aviation in Oman ("PACA") in response to the COVID-19 pandemic, which prohibited nearly all flight to and from Oman airports. Salam Air contends that it had been relieved of its contractual obligations under the Aircraft Leases, in particular, its obligation to pay rent.

Salam Air's application to interfere with the operation of the Letters of Credit

Justice Foxton, in determining whether the court should grant an injunction which would interfere with the operation of the Letters of Credit, examined the law on injunctions against the credit-provider and the beneficiary.

The Judge restated the trite English law principle that the "court will only intervene by injunctive relief in the operation of irrevocable letters of credit and similar instruments (such as performance bonds) in exceptional circumstances." Irrevocable letters of credit are intended to be "equivalent of cash" and to allow payment to be restrained would threaten the future use of such instrument which is...

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