The impact of the COVID-19 pandemic, and the grounding of Boeing MAX aircraft, are back in the spotlight at the High Court – the validity of hell or high water provisions was re-affirmed, and attention was brought to the cross-application of security deposits and the wording of disclaimer provisions in operating leases.

Background

In Wilmington Trust SP Services (Dublin) Limited and Others v SpiceJet Limited[1], the Claimants sought summary judgment against SpiceJet in relation to unpaid lease rentals and maintenance reserves, and interests and costs, pursuant to the operating lease agreements for one Boeing 737-800 aircraft with manufacturer’s serial number 41397 (Aircraft 1) and two Boeing 737-MAX 8 aircraft with manufacturer’s serial numbers 64507 (Aircraft 2) and 64509 (Aircraft 3).

The operation of Aircraft 1 had been curtailed as a result of the COVID-19 pandemic and Aircraft 2 and Aircraft 3 were grounded by the Indian Directorate General of Civil Aviation (the 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 rentals or maintenance reserves in accordance with the lease agreements, and the Claimants sought summary judgment on that basis.  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 heads of defence that the court considered; we will consider five of them here: (i) illegality (for Aircraft 1), (ii) claim for restoration of security deposit (for Aircraft 1), (iii) calculation of maintenance reserves (all Aircraft), (iv) implied condition of satisfactory quality under Supply of Goods and Services Act 1982 (SOGSA) (for Aircraft 2 and Aircraft 3) and (v) frustration (for Aircraft 2 and Aircraft 3).

Potential heads of defence

Illegality

SpiceJet claimed that at trial it would be able to argue that it was not 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 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 but even if it had not been capable of operation then, legally, the defence would also fail because the hell or high water provisions of the applicable lease agreement required payment regardless of the availability of Aircraft 1 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 Aircraft 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 Aircraft 3 ,and sought restoration of the deposit for the amounts drawn.  It is not clear if the Claimant for Aircraft 1 applied the drawn funds to losses accrued by the Claimants for Aircraft 2 and Aircraft 3 as well as its own losses, as the Claimant for Aircraft 1 initially indicated to SpiceJet in a letter from 22 October 2019, or if the funds were only applied to losses for Aircraft 1

Ruling in SpiceJet's favour, the court found that SpiceJet would have an arguable case, based on the 22 October 2019 letter, that as the Claimant for Aircraft 1 was not the lessor for Aircraft 2 or Aircraft 3, the Claimant for Aircraft 1 should not have drawn on the letter of credit as it could not suffer losses under the lease agreements for Aircraft 2 and Aircraft 3, and, accordingly, SpiceJet would have no obligation to restore a deposit on the basis that it had been wrongfully drawn down by the Claimant for Aircraft 1.

Calculation of maintenance reserves

In relation to the claims for unpaid maintenance reserves, SpiceJet sought to defend the claim 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 MAX aircraft (for Aircraft 2 and Aircraft 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 those 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 caused the grounding of all MAX aircraft, the question arose as to whether Aircraft 2 and Aircraft 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 Aircraft 3, meant SpiceJet could claim for the loss of use of Aircraft 2 and Aircraft 3 against the Claimants for Aircraft 2 and Aircraft 3.

SOGSA operates, unless its provisions are excluded, to imply into contracts for the supply of goods and services conditions that, for example, the supplied goods are of satisfactory quality, meaning that they must meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all the other relevant circumstances.

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 “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” were 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 Aircraft 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 – through no fault of either party, performance of the contract has been rendered “radically different” from the obligation undertaken.

The judge assumed in SpiceJet’s favour – for the purposes of establishing if they may have an arguable defence – that there had been an intention for Aircraft 2 and Aircraft 3 to be operated for commercial use, rather than, as the Claimants for Aircraft 2 and Aircraft 3 claimed just for SpiceJet to hire Aircraft 2 and Aircraft 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 Aircraft 3 being grounded due to any prohibition on use or defect in airworthiness to SpiceJet.  On a similar note, please see our article relating to ACG Acquisition XX LLC v Olympic Airlines SA[6] – “High Court rules on delivery process for commercial operating lease.”[7]

The court further considered that the relatively short period – in the context of a ten-year operating lease – that Aircraft 2 and Aircraft 3 were grounded by the DGCA was not a frustration of the lease agreements for Aircraft 2 and Aircraft 3.  The threshold test of “radical difference” was not met.

Conclusion

It should be reiterated that the court was deciding if summary judgment could be entered against SpiceJet for unpaid lease rentals and maintenance reserves, and interests and costs, so while SpiceJet may have succeeded on certain of the potential heads of defence it raised, its success was only to the extent that there was a real prospect of a successful defence and not that the Claimants’ claims were invalid.

In relation to the matters of illegality and frustration – and as seen in our recent article “Come hell, high water or pandemic – COVID-19 will not frustrate aircraft lease agreements”[8] – 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:

1. 1. 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; and

2. 2. it may be useful for disclaimer wording to include references that 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 is 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 but stayed judgment, encouraging the parties to alternative dispute resolution.