Parties to agreements require clarity and certainty in their contractual relationships: clarity as to what the contract means and certainty that when a dispute arises, such as a default, as to the likely outcome.
Over the years, the standard wording for aircraft operating leases has become more and more refined and whilst every deal is different commercially, parties do rely on what is sometimes called “boiler plate” to deal with the very important contractual wording which should be found in all well drawn leases.
It is for this reason that when a case involving an aircraft lease does come in front of the English Courts, perhaps greater than usual attention is paid to it by the aviation community. Two cases have recently been dealt with by the Commercial Court in London which will be of interest to those involved in aircraft transactions.
In Celestial Trading 71 Limited v Paramount Airways Private Limited  EWHC 185 (Comm) the High Court was asked to determine whether it had jurisdiction to grant relief from forfeiture under the operating leases which were before it and if so, whether it was appropriate for the Court to exercise its discretion to grant such relief.
Relief from forfeiture is a discretionary power which an English Court may have in certain circumstances to restore a lease to a lessee who has forfeited as a consequence of a default. The Court held here that it had no such discretion in respect of the leases in question mainly because the leases were aircraft operating leases conferring no proprietary rights on the lessee and that even if it had such discretion it would not have exercised it in favour of this particular lessee.
Celestial Trading 71 Limited (Celestial) leased three Embraer 175 aircraft to Paramount Airways Private Limited (Paramount), an Indian airline. The leases had terms of eight years and required Paramount to make payments of rent and supplemental rent (being monies to be paid by Paramount on account of maintenance costs associated with the aircraft). Paramount was also required to pay a security deposit to Celestial.
The Court held that Paramount had defaulted on numerous occasions during the term of the leases, in the payment of rent and supplemental rent, in the provision of letters of credit to constitute security deposits and in the provision of certain technical information. Celestial sent a number of notices of default to Paramount and eventually sought to terminate the leases by reasons of the defaults and recover possession of the aircraft as the terms of the leases permitted them to do.
Celestial applied for summary judgment before the English Commercial Court where Paramount intended that it should be entitled to relief from forfeiture. The Judge at the initial hearing decided that the question of Paramount’s entitlement to relief from forfeiture was arguable and gave directions for an expedited full trial.
Jurisdiction to grant relief against forfeiture?
The court at the full trial reviewed the various authorities (mainly from shipping cases) and held that in order to determine whether there was jurisdiction to grant relief against forfeiture in any particular circumstances, the following considerations are of relevance:
- Whether the contract involves the transfer of proprietary or possessory rights;
- If so, whether (i) it is possible to state that the object of the transaction and of the insertion of the right to forfeit is essentially to secure the payment of money and/or (ii) the primary object of the bargain is to secure a stated result which can effectively be attained when the matter comes before the Court and whether forfeiture provision is added by way of security for the production of that result; and
- If so, whether reasons of legal public policy support the existence of such a jurisdiction.
Here, the Paramount leases were operating leases with a term of approximately one third of the aircrafts’ useful lives. The court held that on the facts of the case, the lessee had no proprietary (but only possessory) rights over the aircraft and that the termination provision was not inserted essentially to secure the payment of money. The primary object of the bargain was not the repayment of money with the termination provision being inserted as security for the production of that result. The Court found as follows:
“In the present case … Paramount only has a right to possess the aircraft for a proportion of its economic life. As such, Celestial retains a very real interest in the aircraft themselves, including their proper maintenance, the extent of their use, their condition and their rental and resale value. Possession of the aircraft will revert to it at a time when the bulk of their economic life is still to run and there are detailed terms addressing the return of the Aircraft and their required redelivery conditions. Celestial therefore retains many of the risks and rewards of ownership. Moreover, rent was not calculated on the basis of recouping the cost of the Aircraft together with interest and profit …”.
The Court also went on to consider whether, even if it had had the relevant discretion, it would have exercised it in favour of this particular lessee and gave a robustly negative answer. The Court helpfully laid out the matters which it should take into account in deciding whether or not to grant relief including:
- The conduct of the lessee and whether his default was wilful or arose by “surprise, accident or ignorance”; In this case, the Court found that there was a long history of defaults. Over twenty separate notices (notice of events of default, warning and grounding notices) had been sent. Paramount had never paid rent on time for any of the aircraft, had never provided a utilisation report for any of the aircraft on time and had never paid supplemental rent on time for any of the aircraft, except once. The Judge described this as a “background of persistent default” and said that it showed a “cavalier disregard” to their contractual obligations and moreover of obligations which are stated to be of the essence and to involve a repudiation if breached. Paramount also had ample warnings of the consequences of continuing default.
- The gravity of the breaches;
- The disparity between the value of the property of which forfeiture is claimed as compared with the damage caused by the breach;
- Whether the asset in question is one which “as contrasted to land is easily moved, easily concealed and easily sold, is liable to rapid depreciation and require a considerable expenditure to maintain”; and finally
- The need for the lessor to take speedy and irrevocable action to protect his rights in the asset.
A need for certainty
The Court also emphasised the need for certainty in transactions of this type and noted that the granting of relief against forfeiture in these circumstances could have a destabilising effect on the operating lease industry as a whole.
In Tandrin Aviation Holdings Ltd v Aero Toy Store LLC (ATS)  EWHC 40 (Comm), Mr Justice Hamblen (again) gave judgment against a party who argued that the dramatic change in market conditions triggered a force majeure clause.
Tandrin entered into an Aircraft Sale Agreement with ATS for the sale of a jet aircraft for US$31.75 million. Under the Agreement, ATS paid a deposit of US$3 million to an escrow agent; with the balance due upon delivery of the aircraft. When ATS failed to take delivery of the aircraft or pay the balance, Tandrin terminated the Agreement and sought recovery of the deposit.
ATS's main defence was that the
"unanticipated, unforeseeable and cataclysmic downward spiral of the world's financial markets"
triggered the force majeure clause in the Agreement.
Mr Justice Hamblen rejected this argument and held that ATS could not rely upon the force majeure clause to excuse its non-performance. It is a well established principle of English law that a change in economic or market circumstances affecting the profitability of a contract or the ease with which the parties' obligations can be performed, is not regarded as a force majeure event.
Further, there has been no reported case where change of economic or market circumstances has been held by any English court to amount to force majeure.
Of course, whether a force majeure clause in a contract is triggered depends on the proper construction of the wording of the relevant clause. The force majeure clause in the Agreement did not refer to economic circumstances and Hamblen J could see no basis for construing the clause so as to include any funding difficulties encountered by ATS.
The decision follows a 2005 Commercial Court case, Thames Valley Power Ltd v Total Gas & Power Ltd  1 Lloyds's Rep. 441 where the defendant's attempt to rely on a force majeure clause was similarly rejected. In that case , Mr Justice Clarke referred to a line of cases on force majeure clauses and frustration to the effect that the fact that a contract has become more expensive to perform, even dramatically more expensive, is not a ground to excuse a party’s performance on the grounds of force majeure or frustration.
A robust approach
It could be said that these cases are indicative of the current economic times but they do give a clear indication of the robust way in which English courts deal with such disputes. Whilst parties look for certainty in their dealings, as always much depends on the clarity and accuracy of the contractual wording.
Patrick Farrell is a partner in the Dispute Resolution department, Norton Rose LLP , London and editor of Legalflyer.