Aircraft Leasing: Coronavirus v. "Hell or High Water"

“Do you suppose it will always go on?"                                        "No."                                                                                                                               "What's to stop it?"                                                                                                                  "It will crack somewhere.”

― Ernest Hemingway, A Farewell to Arms

Many airlines in Asia-Pacific are currently requesting or even demanding payment holidays or reductions from aircraft lessors based on the revenue and cost disruptions resulting from the ongoing Coronavirus outbreak. The airline and aircraft leasing community will together weather the current storm until it passes, and there will no doubt continue to be concessions granted by the latter to the former during this period in the interest of commerce over contract. This article briefly discusses certain noteworthy contractual dynamics in the interest of open knowledge sharing.

Mistaken. In requesting or demanding payment holidays or reductions, some airlines (in China in particular and, interestingly, almost in unison) are referring to the Coronavirus outbreak as a “force majeure event” under their aircraft lease agreements. By doing so, such airlines are suggesting that they have some contractual basis for their request or demand, notably in the face of “hell or high water” payment clauses. In almost all of these cases, however, the airlines are mistaken – confusing “force majeure” for “frustration”, to begin with.

Force Majeure. Force majeure is a risk apportionment mechanism that is borne of a contract and only ever exists within the four corners of a contract.The Coronavirus outbreak could eventually qualify as a force majeure event under an aircraft lease agreement, depending on the scope of the force majeure clause in the aircraft lease agreement. That said, it is estimated that approximately 1% of nearly 1,000 aircraft lease agreements that the author has worked on or seen over the past ten years actually contain a force majeure clause. There is much already written about the drafting and utilization of force majeure clauses, which history has shown to be best considered something other than archaic boilerplate. There is also a notable foundation of jurisprudence, including in the context of the largely analogous 2003 SARS outbreak and inclusion or exclusion or the word “epidemic” in such clauses in that context. Fortunately, or unfortunately, force majeure is entirely irreverent where no force majeure clause or similar provision is actually included in the contract in question.

Superimposed? The sanctity of contract between sophisticated parties is of paramount importance under the common law tradition. It is near certain that no common law court would ever superimpose a force majeure clause into an aircraft lease agreement, under any circumstance, in order to excuse an airline from its obligations under that aircraft lease agreement - including and especially its “hell or high water” lease rental and other payment obligations. In the likely scenario that an aircraft lease agreement does not contain a force majeure clause, then an airline may still attempt to invoke the common law doctrine of frustration instead.

Frustration. The common law doctrine of frustration of purpose deals with the problems that arise when a change in circumstances makes one party's performance of a contract effectively worthless to the other, frustrating the terminating party’s entire purpose in making the contract in the first place. The frustration must be so severe that it is not fairly to be regarded as the risks that the party invoking the doctrine assumed under the contract. This would, based on present facts, be a very challenging argument for an airline to make. A common law court would typically be expected to discharge the airline contractual obligations under an aircraft lease agreement on such grounds only if (i) after the execution of the agreement a supervening event leading to the frustration of the contract has occurred that was not reasonably foreseen by the parties at the time they entered into the contract and (ii) the purpose of the agreement that was realized by both parties at that time has been completely or almost completely destroyed by that supervening fact.

Hell or High Water. A frustration of purpose argument by an airline is almost certain not to survive the wrath of the typical – and aptly named - “hell or high water” payment clause. Almost all aircraft lease agreements include such a payment clause, which clearly states that an airline must pay its lease and other payments on an unconditional and absolute basis once it has taken delivery of the subject aircraft on lease. Such a clause, especially where thoroughly drafted and firmly negotiated by or on behalf of an aircraft lessor, already apportions the risk of events like the Coronavirus outbreak, which are inherent in the airline industry. That risk is squarely on the airline’s plate. Further, the common law position is such that the inconvenience or hardship - including significant financial losses – of an airline in performing its contractual obligations under an aircraft lease agreement is almost certainly insufficient to excuse its payment obligation under typical aircraft lease agreement.

Looking Forward. The question that remains is how, if at all, the contractual apportionment of such risks will evolve in the aircraft lease market going forward. While it is highly unlikely that there will be greater instances of force majeure clause in aircraft lease agreements, it is now likely that more time will be spent negotiating the lessor protective “hell or high water” payment provisions in many instances in the future and that cracks may start to appear.

[The views expressed above are personal to the author.]