English High Court finds alleged frustration of contract due to COVID-19 pandemic is not sufficiently arguable to grant injunction restraining demand under letter of credit

The English High Court has dismissed an application for an injunction to prevent an airline group from making demands under bank-confirmed standby letters of credit (SBLCs), securing aircraft leases granted to the claimant (a budget passenger airline), on the basis that it was not sufficiently arguable that the leases were frustrated due to the effects of the COVID-19 pandemic: Salam Air SAOC v Latam Airlines Group SA [2020] EWHC 2414 (Comm).

The English court’s decision confirms the established position on the law of frustration, which requires a multi-factorial approach (as per Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage and Towage) Ltd (The Sea Angel) [2007] 1 CLC 876). Factors to be considered under this approach include, as held by the Judge in The Sea Angel: “the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract, at any rate so far as these can be ascribed mutually and objectively, 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”.

The decision highlights the importance that the nature of the contract and its terms may play when applying the multi-factorial approach. Here, the claimant had agreed to provide the SBLCs as an alternative to paying a cash deposit for the aircraft, and the SBLCs were commercially and legally intended to be equivalent to cash. The terms of the leases also expressly placed on the claimant the full risk of any disruption whatsoever to their airline business; they had been drafted to make it clear that the claimant’s obligation to pay continued in almost any conceivable circumstance. Taking these factors into account, the court found that the claimant’s frustration case was “far too weak” to justify the step of interfering with the operation of the SBLCs.  For more information see this post on our Banking Litigation Notes blog.

Similar to the law in England & Wales on frustration, a contract under Hong Kong law is discharged by frustration only when some supervening event (outside the parties’ control) makes performance of the contract impossible, illegal or something radically different from what was originally envisaged by the parties.  Whether a Hong Kong court will deem a contract frustrated will also ultimately depend on the specific facts of the case.

This recent English case is likely to be helpful in circumstances where a Hong Kong court is asked to consider a lease or similar contractual arrangement which has an agreed risk allocation between the parties, particularly where a party has specifically taken on the obligation to pay irrespective of whether operating circumstances change going forward.  Arguably, it is not unjust to hold contracting parties to the terms of their bargain in such circumstances.  The case serves as a reminder that contractual certainty remains of utmost importance and that contracting parties must carefully examine the terms of their draft agreements with reference to industry standards and practice prior to signing to avoid unintended consequences.