The aviation industry is in a period of great uncertainty at present. The effects of global “lockdown” measures in response to the COVID-19 pandemic have had dire financial implications for the industry, with some predicting revenue losses across the industry of around USD 250 billion in 2020.[1] It therefore comes as no surprise that many commercial airlines are reviewing and scaling back the number of aircraft within their fleets, to counter the financial effects.
As airline businesses consider downsizing fleets and retiring aircraft, they will undoubtedly have to consider exercising provisions within their aircraft maintenance, repair and overhaul agreements which may allow for withdrawal, either in whole or in part (a “Withdrawal Option”).
The financial implications of exercising a Withdrawal Option will turn on the specific terms in the relevant agreement. However, given pressures on the industry as a whole, we can well envisage push-back on the exercise of any Withdrawal Option and/or arguments over the financial implications. One trend that we are seeing is ever increasing creativity in seeking to imply terms in contracts in support of one party’s position. For example, arguments that:
- there should be an implied term as to good faith within the Withdrawal Option in light of the long-term relationship between the parties, preventing it from being operated except in a way that would objectively be regarded by a reasonable person as commercially acceptable; or
- if a termination payment is due, any provision providing for a termination payment cannot be exercised in an arbitrary and/or unreasonable manner, for example, demanding the termination payment in full without properly considering the options and/or engaging in commercial negotiations.
Given what is at stake, we are likely to see these arguments playing out in disputes over the coming months. The recent High Court decision in Cathay Pacific Airways Limited v Lufthansa Technik AG [2020] EWHC 1789 (Ch) considered the circumstances in which these arguments might be successful. The case concerned a dispute between two commercial entities as to the operation of a certain financial provision applied at the end of a contract. In giving judgment in favour of the claimant, the Court tackled all the usual arguments on contractual construction and addressed what are becoming more common arguments about the role good faith now plays in contract law in England. Here is our Law-Now on this case, in which we analyse the High Court’s decision.
[1] As reported in this article: https://home.kpmg/xx/en/home/insights/2020/04/airlines-and-covid-19.html
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