The impact of the covid-19 pandemic and the grounding of the Boeing MAX aircraft are back in the spotlight at the High Court. In a recent case, hell or high water provisions appeared to hold, and attention was on the cross-application of security deposits and the wording of disclaimer provisions in operating leases.
In Wilmington Trust SP Services (Dublin) Limited v SpiceJet Limited,(1) the claimants sought summary judgment against SpiceJet in relation to unpaid lease rental and maintenance reserves, and interests and costs, pursuant to the operating lease agreements for one Boeing 737-800 aircraft with a manufacturer's serial number of 41397 (aircraft 1) and two Boeing 737-MAX 8 aircraft with manufacturer's serial numbers of 64507 (aircraft 2) and 64509 (aircraft 3).
The operation of aircraft 1 had been curtailed as a result of the covid-19 pandemic, while aircraft 2 and 3 were grounded by the Indian Directorate General of Civil Aviation (DGCA) for an extended period as a result of the loss of other MAX aircraft in Ethiopia and Indonesia.
SpiceJet did not dispute that it had not paid lease rental or maintenance reserves in accordance with the lease agreements, and the claimants sought summary judgment on that basis. However, SpiceJet sought to resist a grant of summary judgment on the basis that there was a real prospect of a successful defence and compelling reason for a trial, as required under the applicable civil procedure rules.(2)
SpiceJet raised six potential points of defence that the Court considered; this article discusses five of them – namely:
- illegality (for aircraft 1);
- claim for restoration of security deposit (for aircraft 1);
- calculation of maintenance reserves (all aircraft);
- implied condition of satisfactory quality under the Supply of Goods and Services Act (SOGSA) 1982 (for aircraft 2 and 3); and
- frustration (for aircraft 2 and 3).
Illegality
SpiceJet claimed that at trial it would be able to argue that it had not been required to make the applicable payments to the claimant for aircraft 1 because any operation of the aircraft would have been illegal as a result of the restrictions imposed by the Indian government on the operations of aircraft during the covid-19 pandemic.
The Court found that this defence would not be available to SpiceJet – factually, aircraft 1 had been operated during the pandemic. However, even if it had not been capable of operation, the defence would also fail legally because the hell or high water provisions of the applicable lease agreement required payment regardless of the availability of the aircraft or its eligibility for any particular use of trade. Additionally, it was clear from the terms of the applicable lease agreement that the risk of any loss of use, possession or enjoyment of aircraft 1 fell on the lessee.
Claim for restoration of security deposit
SpiceJet provided a letter of credit in lieu of providing a cash deposit in relation to the lease agreement for aircraft 1. The terms of that lease agreement permitted the claimant for aircraft 1 to draw on the letter of credit following the occurrence of an event of default under that lease agreement or under the lease agreements for aircraft 2 and 3.
The claimant for aircraft 1 drew on the letter of credit on the basis of events of default under the lease agreements for aircraft 2 and 3, and sought restoration of the deposit for the amounts drawn. It is not clear whether the claimant for aircraft 1 applied the drawn funds to the losses accrued by the claimants for aircraft 2 and 3 as well as its own losses, as the claimant for aircraft 1 had initially indicated to SpiceJet in a letter dated 22 October 2019, or whether the funds were applied only to losses for aircraft 1.
The terms of the lease agreement for aircraft 1 permitted funds to be applied by the claimant for aircraft 1 for losses incurred pursuant to the lease agreements for aircraft 2 and 3 but it was not clear whether these were only losses under those lease agreements suffered by the claimant for aircraft 1, which could not be established.
SpiceJet succeeded with its argument that if the 22 October 2019 letter was correct, it would have an arguable case that the claimant for aircraft 1 should not have drawn on the letter of credit as it had not suffered losses under the lease agreements for aircraft 2 and 3, and, accordingly, SpiceJet would have no obligation to restore a deposit that had been wrongfully drawn down.
Calculation of maintenance reserve
SpiceJet sought to defend the claims for unpaid maintenance reserves on the basis that none were payable as the aircraft had not been operated as a result of the covid-19 pandemic (for all aircraft) and the grounding of the MAX aircraft (for aircraft 2 and 3). However, the judge found this argument to be "misconceived", since only some elements of the due amount were calculated by reference to flying hours, rather than calendar time, and the amounts that were calculated by reference to flying hours appeared to have been properly calculated by the claimants.
Implied condition of satisfactory quality under SOGSA
Given the design fault, noted by the judge, that had caused the grounding of all MAX aircraft, the question arose as to whether aircraft 2 and 3 were of "satisfactory quality" for the purposes of SOGSA or if the terms of the lease agreements, which sought to disclaim any representations or warranties about the condition of aircraft 2 and 3, meant that SpiceJet could claim for the loss of use of aircraft 2 and 3 against the claimants for aircraft 2 and 3.
In The Mercini Lady,(3) the Court of Appeal found that the condition of "satisfactory quality", implied pursuant to SOGSA, would apply notwithstanding disclaimer wording that purported to exclude "guarantees, warranties or representations, express or implied, [of] merchantability, fitness or suitability . . . for any particular purpose or otherwise" and that clear language covering the "conditions" themselves was required.
Following this, in Air Transworld v Bombardier Inc,(4) Mr Justice Cooke held that a similar clause that included the words "all other obligation . . . or liabilities, express or implied, arising by law" was sufficient to exclude SOGSA.
The judge found that the absence of general words such as "obligation" or "liability" meant that there was an arguable case that the statutory implied conditions were not excluded.(5)
Frustration
The grounding of the MAX aircraft meant that the leases for aircraft 2 and 3 were frustrated, giving further grounds for a defence, according to SpiceJet. In considering whether this would be an arguable defence, the Court applied the "radically different" test (ie, whether, through no fault of either party, performance of the contract had been rendered radically different from the obligation undertaken).
The judge assumed in SpiceJet's favour – for the purposes of establishing whether they had had an arguable defence – that there had been an intention for aircraft 2 and 3 to be operated for commercial use, rather than, as the claimants for aircraft 2 and 3 had claimed, just for SpiceJet to hire aircraft 2 and 3 in return for the payment of rent.
However, the Court found that the hell or high water provisions clearly allocated the risk of aircraft 2 and 3 being grounded due to any prohibition on use or defect in airworthiness to SpiceJet. This is similar to the findings of the Court in ACG Acquisition XX LLC v Olympic Airlines SA(6) (for further details please see "High Court rules on delivery process for commercial operating lease").
The Court further considered that the relatively short period – in the context of a 10-year operating lease – during which aircraft 2 and 3 had been grounded by the DGCA was not a frustration of the lease agreements for aircraft 2 and 3; the threshold test of radical difference had not been met.
It should be reiterated that the Court was deciding whether summary judgment could be entered against SpiceJet for unpaid lease rental and maintenance reserves, and interests and costs, so while SpiceJet may have succeeded on some of the potential heads of defence that it had raised, its success was only to the extent that there was a real prospect of a successful defence and not that the claimants' claims had been invalid.
In relation to the matters of illegality and frustration (for further details please see "Come hell, high water or pandemic – COVID-19 will not frustrate aircraft lease agreements"), the English courts will stand firmly behind hell or high water clauses and a lessee will have real difficulty in claiming any relief from its unconditional obligation to pay rent under an operating lease.
The judgment highlights two areas in which additional care may be required when drafting operating lease agreements:
- Where it is the intention of the parties to allow security deposits, or monies drawn under letters of credit provided in lieu of a cash security deposit, to be applied to cure defaults under leases with different lessors, clear drafting may be required to permit such application and the terms on which such deposits are restored.
- It may be useful for disclaimer wording to include references which clarify that no "conditions" are implied in relation to the aircraft and also that no "obligations" or "liabilities" accrue to the applicable lessor as well.
This article focused on drafting points for lease agreements, but the case is also of interest as the judge did find in favour of the claimants in relation to summary judgment on portions of their claims; however, she stayed judgment, encouraging the parties to use alternative dispute resolution.
For further information on this topic please contact John Pearson at Vedder Price LLP by telephone (+44 20 3667 2900) or email ([email protected]). The Vedder Price LLP website can be accessed at www.vedderprice.com.
Endnotes
(2) Civil Procedure Rules part 24(2).
(5) It is of interest that the word "condition" was included in the disclaimer, to which the Court of Appeal's decision had pointed.