The importance of specifying the correct termination rights in a contract: Peregrine Aviation Bravo Limited & Ors v Laudamotion GMBH & Anr

The High Court (obiter) recently considered this issue on 17 January 2023 when determining Peregrine & Others' (AerCap) right to contractual compensation after Austrian airline, Laudamotion GMBH (Lauda) terminated four A320 lease agreements.

Background

In summary, Lauda agreed to lease four Airbus A320 aircrafts from AerCap in July 2019 to be delivered before June 2020. Each agreement was for five years and Lauda's payment obligations under the lease of the first aircraft were guaranteed by Ryanair. The first aircraft had a target delivery date of March 2020, and the impact of COVID-19 began to be felt with many flights cancelled and fleets grounded.

Therefore, Lauda no longer had a need for these aircrafts so they informed AerCap that they would not be in a position to accept delivery of the aircraft and would be deferring delivery of the remaining four aircrafts until at least the end of June 2020. There was no contractual basis for this deferral but it was in line with what many other airlines where doing at the time during the pandemic. Lauda and AerCap entered into discussions regarding an amendment agreement to vary the scheduled delivery dates but this document was not actually signed by the parties. Subsequently Lauda contacted AerCap again to explain it would be unable to accept delivery of the first aircraft. However AerCap did not accept this and tried to deliver the first aircraft. The delivery was refused by Lauda as under the lease agreement Lauda had not been given timely notice of the delivery.  

Perceiving this is a threat to suspend payment, AerCap believed the following reasons entitled them to terminate each of the leases and sent a termination notice to Lauda:

• There was an insolvency event of default by Lauda due to their failure to pay rent or accept delivery in relation to all of the aircrafts.
• Lauda breached the contract by failing to take delivery when obliged to do so in respect of the first aircraft.
• The failure to accept delivery of the first aircraft resulted in a cross default in respect of the remaining aircrafts.

AerCap sought to rely on the following clause in the lease:

" …… (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."

Decision

Looking at the clause as a whole, the court concluded 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 clause should not be broadly construed and should only apply where there is an unequivocal suspension of payments or threat of suspension, and the debts are existing and not contingent. A mere threat of refusing delivery was insufficient.

Furthermore, Lauda was not obliged to take delivery of four aircrafts leased from AerCap. Assertions that there had been events of default and cross-defaults under the leases were dismissed as was the claim that Lauda had wrongfully refused to take delivery. AerCap's notice of delivery was unreasonable and left Lauda no time to consider whether the aircraft and documents were ready. Further, their aircraft had material deviations from the specification and so Lauda was not required to accept them. As a result, AerCap was not entitled to terminate the leases and their claim was dismissed.

Impact

This case was decided based on the facts and in the context at the time, but shows how important it is to carefully consider and draft the type of scenarios that would trigger an event of default and the associated grounds for termination before the agreement is actually terminated to avoid costly litigation.

Find the full judgement here.