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

• Published date: 02 June 2021
• Subject Matter: Finance and Banking, Transport, Insolvency/Bankruptcy/Re-structuring, Financial Services, Insolvency/Bankruptcy, Aviation, Leasing
• Law Firm: Maples Group
• Author: Ms Donna Ager

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.

Donna Ager: "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".

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...