The Aviation Law Review: COVID-19 Impact on Aviation Contracts
Commercial aviation has been decimated by the pandemic, commercial flights to most jurisdictions having become uneconomic, and flights then becoming impossible to operate as governments closed airspace, either selectively or generally. All participants in aviation have been left with substantial contractual liabilities to third parties including, for airlines, prospective passengers, lessees, and suppliers of goods and services and without income to meet those liabilities. Operators have been compelled to investigate their responsibilities under these contracts with a view to determining whether the circumstances permit them to avoid their contractual responsibilities in order to enable them to hibernate and survive until the crisis passes.
Whether contractual responsibilities can be avoided will be decided differently depending upon the jurisdiction in which the question is asked. The starting point for consideration is, therefore, determination of the applicable law and whether, if there is a choice, the laws of one country may be more favourable than those of another. Most contracts contain a jurisdiction clause setting out which law governs and which courts have jurisdiction. These clauses are sometimes expressed to be exclusive, and sometimes non-exclusive, and the contracts may in some cases be silent on these issues. The rules to determine the applicable law in the absence of an express choice by the parties may also vary depending on the subject matter of the contract. For instance, in the European Union, according to the Rome I Convention, which was incorporated by Regulation 593/2008 of 17 June 2008 on the law applicable to contractual obligations, for a contract of carriage of goods, the law applicable shall in principle be the law of the country of habitual residence of the carrier (whether or not it is the law of a Member State of the EU). For a contract for carriage of passengers, the governing law shall be that of the country where the passenger has his or her habitual residence, providing that either the place of departure or the place of destination is situated in that country. Otherwise, the law of the country where the carrier has his or her habitual residence shall apply. In respect of classes of contracts not specifically regulated by the Regulation, the contract shall be governed by the law of the country where the party required to effect the characteristic performance of the contract has habitual residence, and where the law applicable cannot be determined in accordance with the specific provisions of the Regulation, the contract shall be governed by the law of the country with which it is most closely connected.
Once the jurisdiction and applicable law have been established, one can analyse whether the pandemic and consequences such as government actions flowing from it might relieve an operator of its contractual responsibilities as a consequence of the doctrines of force majeure or frustration of the contract. Force majeure, sometimes loosely referred to as 'Act of God', customarily requires unforeseeable circumstances preventing one of the contract parties from fulfilling its obligations under the contract. Frustration is a common law defence, which provides that where a contract has become impossible to perform, parties to it may be relieved of their legal obligations and the contact is determined.
It is highly unlikely that the courts of a common law country will imply a force majeure provision into a contract that does not contain it. In contracts governed by the common as opposed to civil law, if force majeure is agreed by the parties to provide a defence, the contract will spell out when it can be relied on. The court will then examine the circumstances and determine whether they fall within the terms of the clause. Most lease contracts will not contain a force majeure clause. This is because the vast majority of lease contracts are more or less contracts of adhesion, the terms of which are dictated by the lessor, who usually requires payment of the lessee's obligations regardless of the circumstances (the 'hell or high water' clause). Lease costs will have been calculated in the expectation that those charges will be met regardless of the circumstances. The lessor might reasonably argue that the contract thus drafted allocates risk to the parties and is part of the pricing calculation, and that a different allocation of risk would have led to a different price.
The alternative remedy for the contract party subject to a contract applying common law principles is to seek to aver that the contract has become frustrated. To determine whether a contract has been frustrated one has to show that it has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contact: 'it was not this that I promised to do' (per Lord Radcliffe in Davis Contractors Limited v. Fareham Urban District Council (1956) AC 696). Even if the virus prevents the lessee from earning the funds necessary for it to pay what it owes, the virus does not prevent a solvent lessee from paying its obligations and, therefore, the contract whereby the lessee agrees to pay a certain amount in return for being allowed to operate the aircraft has not become impossible to perform. Payment can still be made. In relation to other contracts into which an operator enters for the supply of goods or services, the situation may be different. If it is not possible for an operator to fly its aircraft to a particular destination, then it cannot take on the fuel for which it contracted at that destination. As has been seen, flights into a number of jurisdictions have been prohibited by local law so that avoidance as a result of frustration may be possible in relation to contracts for the supply of services and goods.
The issues fall to be considered differently in civil law countries.
In France and Belgium, it is common to select either New York law or English law as the governing law for aircraft leasing contracts. Common law considerations will hence apply to those contracts, unless the parties have agreed otherwise.
With regard to contracts of carriage of passengers, EU law governs the matter of compensation for flight cancellation. In the event of cancellation of a flight, passengers are in certain cases entitled to compensation, unless the cancellation was caused by extraordinary circumstances that could not have been avoided even if all reasonable measures had been taken. The European Commission considered that in the context of the covid-19 crisis, certain measures qualify as extraordinary circumstances, for example a ban by the public authorities on flights or traffic of persons or when an airline cancels a flight for reasons of protecting the health of the crew.
Governments have also taken measures for specific types of contracts to decide how the pandemic would affect the obligations of the parties. For instance, Belgium has adopted a Ministerial Decree concerning package travel. According to EU law, there is a possibility for the tour operator or the traveller to cancel the trip without penalty in the event of unavoidable and extraordinary circumstances. The EU decided that it had to be assessed on a case-by-case basis whether the pandemic could constitute such a circumstance authorising the parties to cancel the trip. If so, the traveller has the right to a full refund of any payments made for the package within 14 days. Belgium, however, specified that if a package travel is cancelled because of the pandemic, the operator can give a voucher valid for at least one year to the traveller. If the voucher is not used, the traveller is then entitled to a refund.
More generally, contracts governed by French or Belgian law will usually contain a force majeure clause. In France, force majeure is a statutory exemption found in the Civil Code that applies to all contracts governed by French law even in the absence of a force majeure clause. The parties are however free to derogate from this principle in their contract, or to insert certain clauses to amend the scope and effect of force majeure. Force majeure exists when an event occurs after the conclusion of the contract and prevents a party from performing its obligations. Firstly, the party must be faced with an impossibility to enforce its obligations. The non-performance of the contract must have become unavoidable, and not merely more difficult or more onerous. Secondly, the event needs to be beyond the control of the party, meaning that the debtor of the obligation could neither foresee nor prevent the event.
The EU has recognised that the aviation sector was facing exceptional circumstances because of the pandemic. Indeed, considering that aviation's contribution to the overall performance of the EU economy and its global presence is so significant, the Commission is proposing to take measures to support the aviation sector by temporarily modifying one of the most important Regulations concerning aviation, Regulation 1008/2008, in light of the pandemic. These measures comprise an amendment to the air carrier licensing rules in the event of financial problems caused by the pandemic but also have an impact on aviation contracts as it allows more efficient awarding of groundhandling contracts. The EU justifies this proposal by the urgency entailed by the exceptional circumstance, showing that the public authorities regard this situation as exceptional. Force majeure has the effect of releasing the parties from their correlative obligations. In both countries, if the force majeure event is temporary, the contract is suspended. If the event is permanent, or is temporary but due to its occurrence the contract has lost its purpose, the contract is terminated. The pandemic being a temporary event, would only suspend those contracts for which it is considered to be force majeure, unless the pandemic destroys the purpose of the contract.
In France, for the public sector, the Minister of Economy indicated that companies in charge of the execution of State public contracts could invoke covid-19 as an event of force majeure, exempting them from paying penalties. A French decree was also adopted creating a series of provisions for the consequence of the pandemic on private contracts, by, for instance postponing or paralysing penalties for the non-performance of certain contractual obligations. In Belgium, a draft Royal Decree also contemplated stating that the threat of the covid-19 virus and special measures taken by the authorities should automatically be considered as a instances of force majeure, releasing a debtor from its obligations. This was, however, not kept in the final version of the Decree. For most contracts governed by French or Belgian law, a case-by-case assessment will hence have to be made to see whether force majeure can come into play. A party will be able to rely on force majeure in light of the pandemic and its impact if it can show that all the conditions of force majeure are met. An alternative might be to rely on a hardship clause, if expressly contained in the contract. This customarily authorises the renegotiation of the contract when exceptional circumstances create an unreasonable imbalance in the respective contractual obligations of the parties.
If German law applies and if a contract party is unable to fulfil a contractual obligation as a consequence of covid-19, that contract party may be released under certain conditions from its contractual obligation or from a claim for breach of duty. This release may be based on the following provisions of the German Civil Code.
If circumstances that became the basis of a contract have significantly changed since the contract was entered into and if the parties would not have entered into the contract or would have entered into it with different contents if they had foreseen this change, an amendment of the contract may be demanded to the extent that, taking account of all the circumstances of this specific case, one of the parties cannot reasonably be expected to uphold the contract. If material conceptions that have become the basis of the contract are found to be incorrect, this is equivalent to a change of circumstances. If performance of the contract is not possible or one party cannot reasonably be expected to accept the terms that were agreed, the disadvantaged party may revoke the contract.
In respect of tour operators, the German Civil Code contains a provision which stipulates that, if the travel package is substantially obstructed, jeopardised or impaired as a result of force majeure not foreseeable when the contract was entered into, then both the travel organizer and the traveller may terminate the contract.
If the obligor breaches a duty arising from an obligation, the obligee may, in principle, demand damages for the damage caused thereby. However, this does not apply if the obligor is not responsible for the breach of duty.
The provisions under the German Civil Code mentioned above will not release a debtor from making a contractually agreed payment. As a consequence of covid-19, a debtor may have problems in fulfilling such a payment obligation, but this does not mean that material conceptions that have become the basis of the contract are found to be incorrect so that the debtor could revoke the contract. However, in relation to contracts for the supply of goods or services, the provisions of the German Civil Code may provide appropriate remedies. If a carrier is prevented from flying to a certain place of destination, it has become impossible for him or her to meet contractual obligations. If the reason for this impossibility results from covid-19, the carrier is not liable for damages since he or she is not responsible for the breach of duty.
1 Sean Gates is the CEO of Gates Aviation Limited, Dimitri de Bournonville is a partner and Joanna Langlade is an associate at Kennedys and Peter Urwantschky and Claudia Hess are partners at Urwantschky Dangel Borst and Partners.