Hell and High Water Clause: A Stumbling-Block for lessee in the Aviation Industry

The financial stability of the aviation industry has been severely crippled due to COVID-19 pandemic. As the “big bird” is an expensive affair, most of the aviation industries resort to take aircrafts on lease rather than purchasing them. Across the globe, nearly 70% of the air fleets are grounded, which has hampered their ability to satisfy their obligations[1] and fulfil the requisites stipulated under aircraft lease agreements. Further, the decline in passenger revenue and demand which is also expected to mitigate by USD 8.8 billion and 36% respectively[2], together with various other taxes, levies and aeronautical charges, have created a burden on the lessee forcing them to file for bankruptcy. For escaping this liquidity crunch one may argue to bring in the “Force Majeure” or “Doctrine of Frustration” or “illegality clause”. But as far as the aviation industry is concerned, the above-mentioned tenets have a very little say. It is due to the general practice of incorporating “hell and high water clause” (herein referred to as ‘HOHW’) in aircraft lease agreements. The HOWH clause will play a pivotal role for understanding the implications of COVID-19 on the aviation industry as this clause renders the lessee unconditionally and entirely responsible for payment of the rent, irrespective of the unforeseen circumstances which have affected the airline’s operations. The authors in this article will ponder upon various facets of HOWH clause in tandem with other provisions of contract. Further, emphasis will be laid upon the extent to which the clause is enforceable. Lastly, suggestions and futuristic approach for the lessee will be dealt with.

 INTERPLAY BETWEEN VARIOUS TENETS OF CONTRACT LAW AND   HOWH CLAUSE

In India, most of the aircraft lease agreements are governed by common law. It is pretty evident to apply common law, especially, English Law, for regulating the lease agreement. The only thing worth noting is that the rights arising out of the lease, which the parties are trying to enforce through English Law should not be in derogation with the public policy or any other law of India[3]. As per the current standards, the lease agreements are characterised by two principal features. The first principle feature is the delivery of the aircraft in ‘as is, where is’ basis whereas the second feature relates to the ‘HOWH’. Both the features when clubbed together leave the lessee helpless in situations such as Covid-19, where the fulfilment of obligations is severely curtailed. However, there are certain tenets of contract which may act as a safe haven for the contracting parties.

Under the contract law, force majeure is a provision which makes the performance of a contract impossible and absolves the party from non-performance of contractual obligations which is caused by circumstances or events out of the parties’ control. If an aircraft lease has incorporated force majeure—which in itself would be rare—then the corona virus pandemic could eventually qualify as a force majeure event. It is important to note that the relevancy of this tenet is dependent upon its express mention in a lease agreement; no automatic or implied assumption of force majeure is permissible. Therefore, it is highly unlikely that a court would impliedly infer force majeure in an aircraft lease where the parties had not expressly provided for one. The aircraft leases are typically  HOWH agreements which further overshadow the invocation of force majeure making its imposition even less likely.

Alternatively the lessee can invoke the Doctrine of Frustration emphasising upon the fact that grounding of aircraft fleet due to the orders of the government has made the performance of the contract impossible. As per the doctrine, if some unforeseen circumstance occurs during the performance of a contract which makes it impossible to perform, in the way that the fundamental basis of the contract requires, it need not be further performed, as insisting upon such performance would be unjust [4].

The bar or the threshold for claiming Doctrine of Frustration has been kept very high which could be a problematic contention to make for the airlines, therefore the fact that COVID-19 has made a dent upon the stability of many business entities would not, by itself, frustrate a contract[5] to which that entity was a party.

Another potential alternative for the airline companies can be “price negotiation” clause or the “illegality event” clause. The former clause is not much in practice under the English Law governed contracts due to the general principle[6] that an agreement to agree is not enforceable. However, if the parties have included the price negotiation clause in their contract, then it can certainly be a relief for the airlines as a mishap of COVID-19 will definitely fall under it.

Under the latter clause, the illegality is occurred due to change in law or any scenario for that matter by the government intervention, which makes the performance of the contract impossible for the lessee. In the current scenario, the standard operation of flying aircraft has been changed due to the pandemic; the obligation of the lessee towards the lessor of paying rent has not been affected. Accordingly, this pandemic is, therefore, unlikely to fall under the definition of an “illegality event” or constitute a “change in law”.[7]

It is now pretty evident that the  HOWH is rigid, in comparison to other tenets of contract, leaving the lessee helpless.

ENFORCEABILITY OF THE HIGH AND HELL WATER CLAUSE

It is a well-confirmed postulation of common law that HOWH place an absolute, irrevocable and unconditional obligation on the lessee to make the necessary lease payments, notwithstanding the happening of any circumstance of any nature whatsoever[8]. In Olympic Airlines v. ACG[9], the rigidity of the clause was further strengthened by the court after stating that the risks which are inherent in the aircraft lease have to be borne by the lessee and the clause will forbid him to claim force majeure or frustration of contract.

The flexibility of the clause is not apparent prima facie, due to the rigid meaning to the clause. However, flexibility in the clause can be inferred from different views of courts wherein some have restricted the application of the clause whereas, some have sustained it. In Equitex, Inc. v. Ungar[10], the Court disregarded the HOWH and held that permitting the hindering party to benefit from its intentional or wilful wrongful act would violate public policy and thereby will be unenforceable.

On the other hand, the HOWH clause was enforced against a lessor of copiers whose equipment was damaged when Hurricane Sandy flooded FPL’s Long Island offices. The Court, in this case, rejected the argument that the lessee could not have assumed the risk of loss because Hurricane Sandy was not reasonably foreseeable, concluded that “the contract explicitly assigns to the assessed risk of loss from ‘any cause whatsoever’ and requires FPL to make monthly payments regardless of whether the copiers get damage.”[11]

SOLUTIONS TO THE PRESENT STATE OF AFFAIRS

It is well within the fundamental principle of contract to have an entitlement of being paid. However, if the liquidity of the lessee (airline) is crippled it will not be in the interest or favour of the lessor to drive them against the wall. It must be kept in mind that many other industries depend upon the aviation[12] industry for their survival like travel and tourism; the stubbornness of the  HOWH clause can lead to the liquidation of many airlines causing a ripple effect. There are two options left for the contracting parties, the first one is to allow the lessee to commit default where the lessor will assume the possession of the aircraft in ‘as is, where is’ basis, whereas the second option is to renegotiate the payment obligations disregarding the clause and deferring the entire payment including inter alia a standstill for an agreed period along with an agreed repayment plan.

THE WAY FORWARD

The risk allocation of the aircraft operating leases is asymmetric in nature due to the fact that the obligations of lessors are limited in comparison to lessee. The extensive obligations of lessee to meet the payment under any circumstance further refute the scope of “rental holiday” by virtue of “HOWH” clause. Post-pandemic crisis, the parties (especially the lessee) should bear in mind to have some mechanisms in place which can be of assistance during such unforeseen events. The operating lease should be drafted in such a manner which can allow the airline to implement a consensual restructuring at times of distress. It should involve the rescheduling the debt which will have the potential of alleviating the liquidity pressure at times such as COVID-19 through Scheme of Arrangement or Company Voluntary Arrangement[13]. Further, price negotiation clauses can also act as potential option which will allow the contractual parties to competently set some temporary standards of transactions. At last the aviation industry have to learn aftermath the pandemic, that whether championing an airline at times of perturbation will improve their financial stability post the crisis or whether the benevolence of giving room for the lessee to survive was futile and accordingly should revamp their future as well as present leases.


*4th Year Student, Institute of Law, Nirma University, Ahmedabad

**4th Year Student, Dr. Ram Manohar Lohiya National Law University, Lucknow

[1] Global COVID-19 Airport Status  

[2] Livemint , “Over 20 lakh jobs at risk in Indian aviation, dependent sectors: IATA”

[3]Chambers and Partners, “Aviation Finance & Leasing 2019”, Nitin Sarin, Syed Tamjeed Ahmad, Ritesh Agarwal https://practiceguides.chambers.com/practice-guides/aviation-finance-leasing-2019/india

[4] Taylor v. Caldwell, [1863] EWHC QB J1

[5] Dentons, “Dentons Aircraft Finance Briefing on COVID-19 related frustration and force majeure issues

[6] Lexology, “Force Majeure in Aviation Contracts”, Winston & Strawn LLP – Ben Bruton, Daniel R. Meagher, Mark Moody and Alison Weal

[7] Lexology, “Navigating the terms of an Aircraft lease agreement amidst the COVID-19 pandemic”, Tay & Partners – Yip Jia Hui and Michelle Pauline Lim

[8] Rhythm Hues, Inc. v. Terminal Marketing Company, Inc., 01 Civ 4697 (DAB) (GWG) (SDNY May 4, 2004).

[9] Olympic Airlines v. ACG, [2013] EWCA Civ 369.

[10] P.3d 746, 750 (Colo. App. 2002

[11] In General Electric Capital Corp. v. F.P.L. Services Corp., 986 F Supp 2d 1029, 1036 (ND Iowa, 2013).

[12] The Hindu,“Will the aviation industry recover from the pandemic?”, Murali N. Krishnaswamy 

[13] CMS Law-Now, “COVID-19 Challenges for the Aircraft Leasing Industry

Join the discussion

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.