Frustration due of COVID-19 not deemed sufficiently arguable in recent injunction case

Salam Air SAOC v Latam Airlines Group SA [2020] EWHC 2414 (Comm) concerned an injunction application made by a budget passenger airline (“the Airline”) to restrain an airline group (“the Group”) from making demands pursuant to several letters of credit. The letters of credit were securing aircraft leases that the Group had granted to the Airline.

The High Court rejected the application, holding that the Airline’s claim that the leases had been frustrated by the coronavirus pandemic was “far too weak” to support the grant of an injunction.

Analysis

The Court’s decision drew upon the authority of Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage and Towage) Ltd (The Sea Angel) [2007], which had established that: “the doctrine of frustration requires a multi-factorial approach. [These factors include] the terms of the contract itself, its matrix or context, the parties’ knowledge … and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances”.

In the present case, it was important that (1) the parties had agreed that the Airline would arrange for letters of credit rather than pay cash deposits for the aircrafts and (2) the leases had expressly provided that:

• the Airline would bare the full risk of any disruptive event to its business; and
• the Airline’s rental payment obligations were near-absolute and would persist “in almost any conceivable circumstances”.

On this basis, the Airline’s injunction application – founded as it was on the frustration claim – was insufficiently arguable to justify the Court’s interference with the normal operation of the letters of credit.

Conclusion

The High Court’s decision highlights the fact-sensitive nature of any frustration claim and the important role that “risk allocation” plays in the Court’s analysis. Consequently, where (as is often the case in the aviation industry) a lease provides that one party’s rental obligations are absolute, it is unlikely that the COVID-19 pandemic will constitute a frustrating event.

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