9 February 2021
The widespread disruption caused by the COVID-19 pandemic has led to renewed interest in potential bases for avoiding contractual obligations. However, arguing in English law that an aircraft lease has been frustrated by the consequences of pandemic, may be unlikely to succeed.
Frustration of a contract occurs when its performance, as required by the literal terms, is rendered impossible or radically different from that which the parties originally agreed (see here for a more detailed explanation of general principles). Its application is narrow, and at times “highly improbable” as indicated by Mr Justice Foxton’s recent decision in Salam Air SAOC v Latam Airlines Group SA, heard in the English Commercial Court. There, Salam Air claimed its lease of aircraft from Latam had been frustrated by the imposition of Omani regulations prohibiting flights to or from its home airport.
The judgment raises two considerations. First, frustration of purpose – that is, the original purpose of the contract can no longer be met – is limited to the lessee’s ‘quiet possession’ of the aircraft. This means a court will be hesitant to find frustration if the lessee’s commercial purpose in using the aircraft for travel is thwarted, in the absence of terms incorporating into the contract this commercial intention as a ‘shared purpose’.
Second, the lessee’s obligations under standard English law are nearly absolute, including meeting rental payments in circumstances where aircraft are forced to be grounded. Lessees typically bear all the “commercial risks and rewards of operating the aircraft”.[1] In this case, broad drafting that made it the lessee’s obligation to pay rent “absolute and unconditional irrespective of any contingency whatsoever” including “the ineligibility of the aircraft for particular use or trade” made a finding of frustration inconsistent with the parties’ objective intention.
As such, Salam Air warns that lessees will struggle to escape their obligations from standard aircraft leases, which are “a challenging context in which to establish frustration”, merely by pointing to the impacts of the pandemic.
For further information, please contact:
May Tai, Managing Partner, Herbert Smith Freehills
