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Of turbulent relationships, aircraft financing and frustration

Tomasz Hara

The risk of contracts becoming impossible to perform is increasingly a topic of discussion in boardrooms as the Brexit uncertainty intensifies. Can the doctrine of frustration offer a way out for those who find themselves unable to perform their obligations? In APFL v CAI the answer was “no”.

APFL’s business model was to buy aircraft from Airbus and to lease that same aircraft to CAI, the parent company of the troubled Italian carrier Alitalia. Both relationships soured from 2009 to 2012, a period during which APFL, like many other European companies, struggled to secure financing.

On multiple occasions, APFL failed to find the funds needed to buy aircraft that Airbus was ready to deliver. After describing its relationship with APFL as “one of constant crisis management”, Airbus’ board terminated the agreement to sell aircraft to APFL.

The fact that APFL found itself without any aircraft to lease to CAI did not stop it from negotiating with the airline in parallel and ultimately making a US$260 million claim against it. CAI’s breach was said to be its insistence on leasing one type of aircraft (A319) rather than another (A320).

Did the fact that APFL had no aircraft to lease to CAI result in their contract being frustrated and both parties being released from their obligations? Certainly not. The doctrine of frustration only applies where “responsibility for the matters which give rise to the impossibility of performance is not allocated in the contract”. Here it clearly was. Phillips J dismissed APFL’s claim on another basis: that APFL itself brought about its inability to perform.

If Brexit and the potential customs ordeal will interrupt your company’s trading arrangements, seeking legal advice now to get clarity on where you stand contractually might not be a bad idea.