English Court rejects Lessor’s claims that Events of Default had occurred in aviation leasing dispute

In a rare victory for an airline lessee in pandemic related litigation, Ryanair and its Austrian subsidiary Laudamotion (the “Defendants”) have successfully defended a claim brought by AerCap entities (“AerCap”, the “Claimants”) in the English Commercial Court following Laudamotion’s refusal to accept delivery of an Airbus A320 (the “Aircraft”) during the pandemic.

Following that initial refusal, the Claimants purported to terminate the lease and three other A320 leases for cross-defaults and claimed indemnities for lost rental income and expenses. Mr Justice Henshaw dismissed Aercap’s claims on the basis that Laudamotion did not wrongfully fail to take delivery of the Aircraft, that no Events of Default had occurred, and that the Claimants were not entitled to terminate the leases of any of the aircraft. As such, the Court also held that Ryanair were not liable to the Claimants under the guarantee that Ryanair had issued in support of the obligations of Laudamotion.

The case (Peregrine Aviation Bravo Limited and others v (1) Laudamotion GmbH (2) Ryanair Holdings plc [2023] EWHC 48 (Comm)) is fact specific but raises issues that are of general interest to the industry, including the extent to which lessors should communicate with lessees regarding the delivery process and the importance of the careful drafting of termination notices and reliance on particular events of default.

The Claimants alleged that the following Events of Default (“EoD”) had occurred and therefore it was entitled to terminate the leases:

1. an insolvency EoD by Laudamotion for all the aircraft;
2. in respect of the first Aircraft, failure to take delivery of the Aircraft when obligated to do so under the terms of the lease; and
3. cross-default in respect aircraft 2-4, as a result of Laudamotion's failure to accept the first Aircraft.

In a lengthy and detailed judgment, the Court rejected the Claimants’ case on all grounds and found that they were not entitled to terminate the agreements.

The Insolvency EoD

The relevant Insolvency EoD clause in the Lease stated:

(n) Insolvency. LESSEE or Guarantor (i) is or becomes, or is deemed for the purposes of any Law to be, insolvent or unable to pay its debts or other obligations as they fall due, or admits its inability to pay its debts or other obligations as they fall due,

(ii) suspends or threatens in writing to suspend payment with respect to all or any of its debts or other payment obligations or a moratorium is declared in respect of all or any of LESSEE’s or Guarantor’s debts or other payment obligations or

(iii) proposes, enters into or is a party to any proceeding regarding (or takes any corporate action to authorize or facilitate) any arrangement or composition with, or any assignment for the benefit of, its creditors.

The leases had been entered into in July 2019, i.e. before the start of the COVID-19 pandemic. The international lockdowns which started in around March 2020 and related consequences for the aviation industry prompted the Defendants to send certain letters to the Claimants, which in turn caused the Claimants to invoke the Insolvency EoD. Specifically, the Claimants alleged that the Defendants’ letters of 18 March and 20 April 2020, in which the Defendants indicated they would not be in a position to accept delivery of the Aircraft, were in effect threats to suspend payment of some of Laudamotion's debts or other payment obligations, entitling the Claimants to terminate each of the leases. The March letter from Ryanair referred to the pandemic and stated that "the Ryanair Group must immediately take all actions to preserve liquidity”. It went on to say that Laudamotion is deferring the leases “until we see a return to normal flight services”. The 20 April letter from Laudamotion’s CFO referred to the collapse of aircraft values and lease rentals and the need to preserve cash and cut payment obligations. It advised that “Since Lauda has been completely grounded since 17 March last, and will be forced to substantially downsize its operation (and future growth plans) as a direct response to the Covid-19 crisis, it is clear that Lauda cannot accept delivery of [the Aircraft].”

Significantly, in interpreting the express language of the EoD clause, the Court found that “the context and the language "its debts or other payment obligations" suggest that the phrase concerns actual or threatened non-payment of debts/payments obligations that (a) actually exist (even if they have not yet fallen due for payment), i.e. are not merely contingent, and (b) are not seriously disputed.”

Consistent with the English courts’ general approach to contractual construction, it construed the clause in the context of the lease as a whole and found that “it would be strange if a threat not to accept delivery of an aircraft could in itself be an Event of Default under Article 24.2(n) when an actual failure to accept delivery would be such an Event only if it continued for 5 Business Days”. The Court found that the clause should not be broadly construed and should only apply where there is an unequivocal suspension of payments or threat to suspend payments and where the debts are existing and not contingent. A mere threat not to accept delivery of the Aircraft was insufficient. Parties to leases should carefully consider the application of the express wording of events of default clauses to their particular facts before invoking any associated rights.

Delivery of the First Aircraft

Duty to consult and give reasonable notice

Under article 3.2 of the lease, the Lessor was required to consult with the Lessee before determining the delivery date and to provide reasonable notice of the intended delivery date. The Claimant sent letters dated 1 and 5 May 2020 to the Lessee notifying them of a delivery date of 7 May 2020 – the Court held that this was not reasonable notice and the Lessor did not consult with the Lessee as required under the lease so the Lessee was not bound to accept delivery of the aircraft.

The Claimants argued that the Defendant had “disengaged from the delivery process” so they should not have been expected to consult with a lessee who clearly does not want the aircraft. However, the Court decided that even in these circumstances “it does not follow that a reluctant or recalcitrant Lessee loses altogether the right to be notified, consulted and given reasonable notice” and that the Claimant should have complied with its obligations to consult and notify the Lessee in accordance with its obligations under the lease. It is worth noting that the Court’s interpretation of consulting with a lessee includes giving “periodic updates” and “inviting any comments the Lessee may wish to make” which implies that even if a lessor were to receive little or no response from a lessee, they should still make a conscious effort to comply with their consultation obligations.

The Claimants also argued that once the delivery process commences there is an implied contractual term in the lease for the parties to cooperate with one another. This submission was rejected by the Court which held that if the Lessee fails to engage with the delivery process then they do so at their own risk but this does not excuse the Lessor for failing to comply with its obligations.

Deviations in Delivery Condition

Article 6.2 of the lease provides that the Lessee is not obliged to accept delivery if there are “Material Deviations” from the delivery condition (unless corrected by the Lessor before the Final Delivery Date). It was also a condition precedent to delivery that the aircraft conformed with the delivery condition or the Lessee was otherwise obliged to accept delivery pursuant to article 6.2 (i.e. if the Material Deviations had been cured by the Lessor within the timeframe).

Certain aircraft documents (including an export certificate of airworthiness, a CAT.IDE statement and an EASA compliance letter) were not provided to the Lessee as required on or prior to delivery which constituted a “Material Deviation” from the delivery condition. Pursuant to article 6.2 of the Lease, the Lessor was required to cure these deviations before the Lessee became required to accept the aircraft. The missing aircraft documents became available shortly after the intended delivery date on 7 May 2020 but rather than curing the deviations by providing the documents to the Lessee, the Claimants took steps to terminate the leasing of the aircraft. The Court held that the Lessee was not obliged to accept the aircraft when tendered for delivery and therefore the relevant EoD had not been engaged such that the Claimants were not entitled to terminate.

Effect of the termination notice and damages

The termination notice served in respect of two of the aircraft referred to the failure to take delivery of the Aircraft but made no reference to the insolvency EoD. While the Court decided that the insolvency EoD was not applicable, and therefore the Claimants were not entitled to terminate on the basis of it, it went on to consider whether, if that EoD had been applicable, the Claimants would have been able to claim damages under an express clause in the lease (rather than for common law repudiation). The Court’s obiter decision on the point is significant in the context of the termination of contracts generally.

In submitting that the failure to mention the insolvency EoD did not matter, the Claimants relied on the principle in Boston Deep Sea Fishing & Ice Co v Ansell (1888) 39 Ch D 339, according to which a party who terminates a contract for a bad reason can defend itself against a claim for wrongful termination by reference to a good reason that existed at the time of termination, even if they were not aware of it. The Claimants sought to distinguish the decision in Phones 4U Ltd (in Administration) v EE Ltd [2018] EWHC 49 (Comm) where the Court had held that a loss of bargain damages claim requires the claimant to show that the termination of the contract resulted from the relevant repudiatory breach (and therefore that it had to show it terminated for that reason).

However, in the present case, the Claimants (the terminating party) were suing for sums due under express terms of a contract rather than for common law repudiation. The relevant clause referred to recoverable expenses being recoverable "directly as a result of" the Event of Default. In finding that the insolvency EoD did not give rise to the termination i.e. the necessary causal link between the EoD and the termination was not satisfied, the Court relied on the principle in Loefelis v Lonsdale Sports [2012] EWCA Civ 985, and the words of Pill LJ: “if the premature determination of the contract is for reasons other than those that subsequently emerge, a claim for post-termination loss cannot be sustained.” The language in the termination notice, which stated “certain other additional Events of Default and breaches have occurred and remain outstanding” was not sufficient to enable the Claimants to establish that they terminated in part by reason of the insolvency EoD.

From a Lessor’s perspective, the Court’s conclusion on this point suggests that, in order to gain the benefit of any express contractual damages or indemnities, it is important to be comprehensive and precise in referring to all potentially relevant events of default in a termination notice. Failure to do so may deprive a Lessor of sums due under an express contractual clause.

Comment

Whilst this case was decided on its own specific facts, it highlights the importance of the careful drafting of termination notices to ensure that all relevant events of default are relied upon and costly subsequent litigation about the effect of termination is avoided. Further, it confirms that lessors should carefully comply with all their pre-delivery obligations, even in circumstances where a lessee is not explicitly cooperating with the delivery process. As regards the delivery condition, the missing aircraft documentation was directly linked to the aircraft’s airworthiness and so was fundamental to the operation of the aircraft. Had the lessor cured the “Material Deviations” rather than proceeding to terminate the leases there may have been a different outcome.