Case Law Update: COVID-19, Force Majeure, and Aircraft Leases

As we enter the coronavirus (COVID-19) pandemic’s “second wave” and aspirations for a “back to normal levels” rebound in 2021 for the aviation industry look less likely, the financial pressure point is quickly spreading from airlines to those up and down their vertical supply chain, notably aviation lessors. Mainstream aircraft lessors have historically had a relatively stable balance sheet underpinned by a market where demand for quality narrow body and wide body aircraft outstripped demand. This allowed lessors to maintain a relatively stable income and, critically, the ability to redeploy aircraft assets in the event of a problem with a lessee.

COVID-19 has turned this market upside down. At the outset of COVID-19, many lessees sought payment holidays from lessors; this has, in many cases, now escalated to deep discounts, write offs, and extreme cases of returning aircraft regardless of default risk. In light of this, it has been critical for parties, particularly lessors, to understand their contractual rights and the strength of their ability to enforce leases and therefore, have some faith in their balance sheet, cash forecasts, and ultimately their ability to survive.

In light of the above, lessees have sought to understand their contractual remedies and whether COVID-19 constitutes force majeure. Several cases arising from the initial outbreak of COVID-19 are before the courts and provide some helpful guidance for lessees and airlines considering their contractual rights. The recent High Court decision in Fibula Air Travel Srl v Just-US Air Srl (2020) EWHC 3048 makes it clear that the courts will look specifically to the drafting of the force majeure clauses and the factual matrix, including the wider commercial understanding between parties.

The current case arose from a purported termination of a wet lease by the lessee, Fibula Air Travel (Fibula), who applied for a freezing order over a security deposit it had paid to the lessor, Just-US Air (Just-US). The lease, which was dated 9 December 2019, required Fibula to pay the first instalment on 18 March 2020 and a second instalment on 1 April 2020.

A force majeure clause allowed either party to terminate if a situation arose which caused “failure or delay in the performance of any obligations under this agreement” which continued for a period of ten days or longer. While not explicitly stated in the contract, there was a commercial understanding between the parties that the wet-leased aircraft would be used for commercial flights between Romania and Turkey.

On 17 March 2020, Fibula claimed that the lease was terminated by force majeure and withheld payment of both instalments. Fibula then requested the return of the security deposit which Just-US refused.

The court ultimately did not accept the arguments by Fibula that a force majeure situation occurred on the 17 March 2020 for two reasons: (1) at that point, there were no suspensions in flights between Romania and Turkey and (2) the force majeure clause specifically required the situation to continue for a period of ten days or longer.

In finding that there was no force majeure situation on the 17 March, the court focused strictly on prevention/interruption of performance of the contract. As the aircraft was not scheduled to fly before 1 April, performance under the wet-lease was not prevented by the COVID-19 pandemic.

While the court did not explicitly decide on whether Turkey’s or Romania’s suspension of flights constituted force majeure, the court did consider Turkey’s suspension of flight on 28 March to “potentially to be a force majeure event which might…enable a termination to take place pursuant to that clause”. This was despite the fact that the lease did not explicitly state the aircraft would be limited to flights between Turkey and Romania. The court indicated that flight restrictions between principal areas of operations, even if what was only within the commercial contemplation of parties, could arguably constitute a force majeure situation.

However, even if a force majeure event was deemed to occur on the 28 March, the court found the force majeure clause’s requirement that the situation persist for ten days meant that the second instalment would have remained payable on the 1 April. Therefore, the court found that Just-US had a strong argument that even if the lease were terminated by force majeure, both instalments remained payable. As such, the court ruled that Just-US is entitled to retain the security deposit against the amounts unpaid by the claimant.

The judgment therefore makes clear that, absent specific wording in a force majeure clause covering disease outbreaks, the courts will be unlikely to accept arguments that the mere existence of COVID-19 constitutes a qualifying event merely because it impedes performance of contractual obligations. This judgment makes clear that the party claiming force majeure must demonstrate the specific restrictions significantly restricts performance of its contractual obligations. Additionally, the judgment highlights the importance of attention to specific contractual terms on preconditions necessary to claim force majeure and the sequence of events surrounding potential termination.

However, the court also indicated they are willing to consider non expressly agreed factors, such as the commercial intentions of both parties. In closing the door on spurious general claims of COVID-19 as a force majeure event, the courts have left open the door on arguments that national restrictions imposed as a result of COVID-19 can constitute a force majeure event that restricts performance of the specific commercial objectives implicitly agreed.