Salam Air SAOC v Latam Airlines Group SA
| Jurisdiction | England & Wales |
| Judge | Foxton J. |
| Judgment Date | 08 September 2020 |
| Neutral Citation | [2020] EWHC 2414 (Comm) |
| Court | King's Bench Division (Commercial Court) |
[2020] EWHC 2414 (Comm)
Foxton J.
Queen's Bench Division (Commercial Court).
Aviation — Aircraft leases — Rent — Frustration — Letters of credit — Lessee claiming that aircraft leases frustrated by Omani regulations restricting passenger flights during coronavirus pandemic — Lessee seeking to restrain lessor from claiming on standby letters of credit given as alternative to deposit — Circumstances in which court would restrain beneficiary of letter of credit — Strength of case required to be shown — Frustration case far too weak to justify interfering with operation of letters of credit.
This was an application by the lessee of three aircraft to restrain the lessor from making demands under three standby letters of credit which secured the payment of rent under the leases.
The lessee was an Omani airline based at Muscat International Airport. It leased the three aircraft in 2017. The leases provided for English law and jurisdiction. The leases were for a period of six years and the lessee had the right to terminate on six months' notice after four years if it had ceased operations.
The lessee's obligation to pay rent was ‘absolute and unconditional irrespective of any contingency whatever’ including airworthiness, fitness for any purpose, ineligibility for any particular use or trade or total loss of, or any damage to, the aircraft.
The lessee provided the standby letters of credit as an alternative to paying a deposit of three months' rent and the lessor was entitled to use them in the same way as a deposit.
The lessee's case was that the Public Authority for Civil Aviation in Oman had issued three regulations in response to the COVID-19 pandemic, which had had the effect of frustrating the leases. The third and most significant regulation, dated 26 March 2020, prohibited almost all flights to or from Omani airports with the exception of cargo flights. The last rent paid by the lessee was in March 2020 and in June it redelivered the aircraft to the lessor.
Held, refusing the lessee's application for an injunction:
1. The court would only intervene by injunctive relief in the operation of irrevocable letters of credit and similar instruments such as performance bonds
in exceptional circumstances. In principle there were only two circumstances in which an applicant could obtain an injunction restraining the credit-provider from paying out under the instrument: (i) where the validity of the instrument (as opposed to the underlying commercial transaction) was impeached; and (ii) where it was proved that the bank knew that any demand for payment was or would be fraudulent. Also an applicant was required to show a stronger case than would ordinarily be required for an interim injunction. In relation to the fraud exception, an applicant's evidence had to establish clearly both the fraud and the credit-provider's knowledge of it. (Bolivinter Oil SA v Chase Manhattan Bank[1984] 1 WLR 392andAlternative Power Solution Ltd v Central Electricity Board[2014] UKPC 31; [2014] 2 CLC 371; [2015] 1 WLR 697applied.)
2. It was arguable that in some circumstances an injunction to prevent the beneficiary from making a demand under an irrevocable letter of credit or performance bond could be obtained even though the applicant was unable to satisfy the requirements of the fraud exception so as to obtain an injunction against the credit-provider. Such an injunction could be obtained when the applicant had a claim in fraud against the beneficiary and the injunction was sought well before the right to claim under the performance guarantee had accrued. The enhanced merits requirement also applied, not just to cases in which the fraud exception was relied upon but to applications to restrain payment on the basis that the pre-conditions to a call on the instrument had not been satisfied. (Themehelp Ltd v West[1995] CLC 703; [1996] QB 84considered.)
3. The lessee was not entitled to an injunction: it did not contend that there had been any fraud by the lessor in relation to the aircraft leases, nor did it contend that the lessor was not permitted to make a demand under the leases in the prevailing circumstances. Further, this was not a case in which the lessee sought an injunction well before the right to claim under the letters of credit had arisen.
4. Under the leases the lessee took the commercial risks of operating the aircraft and agreed to pay rent on a ‘hell or high water’ basis. The terms of the leases were fundamentally inconsistent with any suggestion that regulations in Oman which prevented the lessee from using the aircraft in Oman, or any long-term suppression of air travel after such regulations had ceased to have effect, would frustrate the leases. Those risks were inherent in the commercial operation of the aircraft and did not relieve the lessee of the obligation to pay rent. The lessee's frustration case was weak. Far too weak to justify interfering with the operation of the letters of credit. (ACG Acquisition XX LLC v Olympia Airlines SA[2012] EWHC 1070 (Comm); [2012] 2 CLC 48considered.)
The following cases were referred to in the judgment:
ACG Acquisition XX LLC v Olympia Airlines SA [2012] EWHC 1070 (Comm); [2012] 2 CLC 48; [2013] EWCA Civ 369; [2013] 1 CLC 775.
Alternative Power Solution Ltd v Central Electricity Board [2014] UKPC 31; [2014] 2 CLC 371; [2015] 1 WLR 697.
American Cyanamid Co v Ethicon Ltd [1975] AC 396.
Bitumen Invest AS v Richmond Mercantile Ltd FZC [2016] EWHC 2957 (Comm).
Bolivinter Oil SA v Chase Manhattan Bank NA [1984] 1 WLR 392.
Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch).
Costain International v Davy McKee (London) Ltd (CAT 1009, 26 November 1990).
Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] CLC 1148.
Edwinton Commercial Corp v Tsavliris Russ (Worldwide Salvage & Towage) Ltd (The Sea Angel) [2007] EWCA Civ 547; [2007] 1 CLC 876.
Group Josi Re v Walbrook Insurance Co Ltd [1995] CLC 1532; [1996] 1 WLR 1152.
Herne Bay Steam Boat Co v Hutton [1903] 2 KB 683.
HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6; [2003] 1 CLC 358.
Krell v Henry [1903] 2 KB 740.
National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675.
Ouais Group Engineering & Contracting v Saipem SpA [2013] EWHC 990 (Comm).
Sirius International Insurance Co v FAI General Insurance Ltd [2002] EWHC 1611 (Ch); [2003] 1 WLR 87; [2003] EWCA Civ 470; [2003] 1 CLC 1124; [2003] 1 WLR 2214.
Solo Industries UK Ltd v Canara Bank [2001] CLC 1651; [2001] 1 WLR 1800.
State Trading Corp of India Ltd v ED & F Man (Sugar) Ltd (CAT 307, 17 July 1981).
Themehelp Ltd v West [1995] CLC 703; [1996] QB 84.
United Trading Corp SA v Allied Arab Bank Ltd [1985] 2 Ll Rep 554.
Hugo Page QC (instructed by Watling & Co) for the applicant.
Foxton J: Introduction
1. This is the hearing of an application by Salam Air SAOC (‘SalamAir’) made without notice for an injunction to restrain Latam Airlines Group SA (‘Latam’) from making demand under three standby letters of credit confirmed by Barclays Bank plc (‘the SBLCs’).
2. The SBLCs are intended to secure the payment of rent under three aircraft leases, in which Latam was the lessor and SalamAir the lessee (‘the Aircraft Leases’). The aircraft which were the subject of those leases (‘the Aircraft’) were physically redelivered to Latam in June 2020. Latam had entered Chapter 11 bankruptcy shortly before that, on 26 May 2020.
3. SalamAir's application raises two threshold issues:
(i) Whether it would be appropriate for the court to interfere with the operation of the SBLCs by injuncting Latam from making a demand under them?
(ii) If so, whether SalamAir can demonstrate a sufficiently arguable case that the Aircraft Leases have been frustrated by the effects of the COVID-19 pandemic, and, in particular, restrictions on air passenger flights imposed by the authorities in Oman, where SalamAir and the Aircraft are based?
4. Before I consider those issues, and cogency of the case which SalamAir would have to establish, I will briefly set out the background facts as they appear from the evidence filed by SalamAir for the purposes of this application.
5. SalamAir is a joint stock company registered in Oman which was established in 2016. Two companies controlled by the Omani government own 30% of SalamAir and the remaining 70% is owned by private shareholders. It is based at Muscat International Airport and has 500 employees mostly based there or in Salalah.
6. The Aircraft were delivered on 25 January 2017 (MSN 3035), 23 February 2017 (MSN 3047) and 29 March 2017 (MSN 3111). In addition to the Aircraft which are the subject of the Aircraft Leases, SalamAir has leased six other aircraft from other lessors which it has not re-delivered.
7. SalamAir was established to be a profitable low-cost passenger airline, and its original business plan envisaged that it would begin with domestic flights between Muscat and Salalah, and then expand to short and medium haul international flights to Qatar, Bahrain, India, Turkey, Egypt, Iran and Sudan. Between its first flight, in March 2017, and March 2020, when the Aircraft ceased to operate, it carried over three million passengers. It was always envisaged that it would operate at a loss in its early years, but move to profitable operation over time.
8. It is SalamAir's case, and the effect of its evidence, that it explained its proposed business to Latam when negotiating the Aircraft Leases, and that Latam was aware that the Aircraft were to be operated from Muscat International Airport.
9. I am told that the Aircraft Leases are in identical terms. They are governed by English law and subject to the exclusive jurisdiction of the English courts, albeit Latam (but not SalamAir) has a right to elect to have any dispute resolved by LCIA Arbitration...
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