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Setting new standards for aircraft lease agreement
The first lesson which can be drawn from this pandemic is that drafting a clear, comprehensive and detail force majeure clause in a lease contract is a must.
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Garuda Indonesia's 'masked' Airbus A330-900 Neo. (twitter.com/IndonesiaGaruda/File)
M
ost airlines in the aviation industry choose to lease aircraft rather than buy them. This is understandable as the big bird is very expensive. Unfortunately, in the last two years, the aviation industry, both domestically and internationally, has been one of the hardest-hit industries worldwide because of the COVID-19 pandemic. Most airlines are suffering severe financial distress, several of them have closed down and others are on the brink of bankruptcy.
The pandemic has also hit Indonesia’s beloved flag carrier Garuda Indonesia and private airlines. The flag carrier is battered by the aircraft rental fee causing significant debt accumulation, not to mention the steep decline in passenger revenues, while other costs related to aircraft leasing and aeronautical charges remain high. No wonder Garuda has been declared technically bankrupt.
The aviation industry has learned a lot from this pandemic. From a legal perspective, one lesson from the situation faced by airlines has been to reassess the standard commercial lease contract commonly agreed between airlines and their lessors.
One may question why airline companies do not use the force majeure clause in their lease contracts to reduce their costs and losses. As far as the aviation industry is concerned, the concept has very little weight or does not even exist in these contracts because of the general practice of incorporating a hell or high water (HOHW) clause.
Force majeure is a provision that defines certain acts, events or circumstances beyond the control of the contracting parties, therefore excusing the party from non-performance of its contractual obligations. Although it seems to be an ordinary clause included in long-term and high-value contracts, interestingly, this provision is very rarely found in commercial lease contracts.
Force majeure is always associated with an act of God, or the act of God is part of the force majeure provision itself. Act of God is a legal term which may absolve performance under a contract, and it applies when forces of nature, like floods, earthquakes or tornados are so severe that the impact could not be prevented or avoided by reasonable care or foresight, and performance of the contract is rendered impossible. Forces of nature involving human intervention likely destroy the viability of this defense.
Having said that, a substantial question arises as to whether the pandemic could be part of a force majeure clause or not. Further consideration should be whether the government’s actions that prevent its citizen from air travel could be classified as acts of God, and by extension part of the force majeure provision, hence excusing a party from performing its contractual obligations.
