Introduction
Contractual rights to adjust payment obligations in PBH agreements
Statutory rights to adjust contractual obligations
Comment



Introduction

Under long-term maintenance, repair and overhaul (MRO) agreements, airlines must usually pay a certain rate per flight hour (ie, the so-called power-by-the-hour (PBH) rate) to obtain engine or other component maintenance and repair services or just to have access to a certain spare parts pool.

However, during the COVID-19 pandemic, most airlines have ceased (or almost ceased) their entire flight operations for a considerable period. Thus, for an MRO agreement that calculates PBH rates based on planned flight hours or that requires a monthly or yearly minimum payment, airlines may want to adjust such payment provisions in relation to the period during which the fleet was grounded.

This article addresses possible contractual clauses and statutory rights on which a claim to adjust payment obligations under an MRO agreement may be based.

Contractual rights to adjust payment obligations in PBH agreements

If considering contractual provisions that excuse a party from performance of its obligations (at least for a certain period), force majeure clauses come to mind.

Many MRO agreements include a provision that defines certain circumstances that will be considered a force majeure event, which excuses one or both parties from their contractual obligations, sometimes called an 'excusable delay clause'. However, even though such a provision sometimes includes "epidemics, quarantine and government acts", it often relates only to the MRO provider's obligations or, where it affects the obligations of both parties, such a clause excludes the application to payment obligations. Thus, in most cases, an airline cannot base a payment adjustment request on a force majeure clause in an MRO agreement.

Therefore, a well-negotiated PBH agreement should include other provisions that allow for an adjustment of payment obligations under certain conditions. First, the parties' assumptions, on which the specific PBH rate is based, should be contained in the contract. Second, the MRO agreement should state consequences for payment obligations if the assumed parameters change. Parameters subject to change include the flight-hour-to-cycle ratio or the de-rate by which engines are operated as well as fleet changes by phasing in and out of aircraft. These changes may have an impact on the actual PBH rate payable, but a reduction of the fleet or a longer grounding may also have an impact on the assumed flight hours operated in a certain period.

In other words, if that assumption changes substantially (in excess of a certain percentage), the contract should contain a clause which states variations of the payment terms, whereby the parties may distinguish whether the airline was able to influence a grounding decision. If no such specific clause is included, the MRO agreement should have at least a general provision that entitles (ie, both parties) to renegotiate under certain conditions (eg, "a fair adjustment of the commercial terms shall be negotiated in good faith between the parties, if").

If an MRO agreement – governed by German law – provides for no adjustment of payment obligations, the airline may base its claim on statutory law.

Statutory provisions to adjust contractual obligations

German law provides three statutory provisions that deal with the adaption of contractual obligations: Article 79 of the UN Convention on Contracts for the International Sale of Goods (CISG) and Sections 275 and 313 of the Civil Code.

However, Article 79 of the CISG and Section 275 of the Civil Code will not assist an airline in the matter at hand, because these provisions do not excuse payment obligations, but rather only service obligations in force majeure-type scenarios. However, an airline may base a payment adjustment claim on Section 313 of the Civil Code. In brief, the law says that a party may demand adaptions of certain contractual provisions if circumstances which became the basis of the contract have significantly changed so that the parties cannot be expected to uphold it.

Section 313 applies to all contracts governed by German law. It is an exemption to the general rule that each party must abide by the contractual obligations that they once accepted (pacta sunt servanda). Therefore, this statutory provision must be understood narrowly and applies only when fundamental, mutual assumptions of the parties have changed substantially due to reasons outside the risk area of both contracting parties, which lead to unacceptable hardship for one party that is no longer compatible with the law. The underlying thought behind Section 313 is a re-evaluation of the risk allocation in a situation where the contractual risk has become unfair due to reasons outside the parties' control. While the economic risk inherent in a contract remains with the party that actively undertakes such risk in an agreement, the risk that stems from an unforeseeable situation outside a contract and which creates an excessive burden for just one party should be shared by both parties as a "risk bearing partnership".

There are no court rulings in Germany yet regarding Section 313 and the COVID-19 crisis. However, there is an ongoing debate on this subject in German legal literature and the prevailing opinion considers COVID-19 and its effects to be an "unforeseeable, uncontrollable, unparalleled event" which provides a valid reason for the application of Section 313. A claim based on Section 313 will neither lead to the termination of a contract nor a result that allows an airline to cease its payments altogether. Rather, it will lead to an adjustment of certain payment obligations that considers both parties' interests. The possible results are various and depend on the actual provisions of the MRO agreement and the negotiating power of each party, because these cases will rarely go to court.

Comment

If a (German law-governed) MRO agreement requires an airline to pay a monthly or annual minimum or the PBH payment relates to planned rather than actual flight hours and the agreement does not include a contractual provision for the adaption of the airline's payment obligations, the airline may base its payment adjustment claim – in connection with the effects of COVID-19 – on Section 313 of the Civil Code.

For further information on this topic, please contact Christine Kranich or Britta Liebert at Arnecke Sibeth Dabelstein by telephone (+49 403 177 9756) or email ([email protected]asd-law.com or [email protected]). The Arnecke Sibeth Dabelstein website can be accessed at www.asd-law.com.