Asian Sky Quarterly 2021Q1

COMMENTARY: CLYDE & CO
Existing Transactions
in Pressure Circumstances
Testing Relationships and Contracts
The pandemic has tested the relationships of banks/financiers
and aircraft managers/operators in numerous ways, both as between
themselves and with their owner/borrower customers. It is
not uncommon for defaults to first occur under a management
agreement between an operator and the aircraft owner, before
the owner/borrower defaults under its financing arrangements.
It is also not uncommon for tell-tale problems to surface many
months or even years before any action is taken. If the aircraft is
financed, then it is likely that a manager/operator will be unable
to exercise a lien over the aircraft in competition to the financier.
If a default then occurs under the financing, a bank/financier is
likely to have to act quickly and repossess and sell the aircraft
to protect its interests. It is at this point that relationships and
contracts really matter. Banks/financiers need the help of managers/operators
to locate and safeguard the aircraft, whether to
exercise self-help remedies or to enforce court orders. Managers
and operators, who may well be owed substantial management
fees and costs by then, will not want to be required to incur further
costs without pay.
(b) if they are costs incurred by a party at the direction of another
party and whether that (or another) party is responsible for
those costs; and
(c) what time period the costs apply to (for example, before or
after the relevant default), and whether any indemnities or other
costs provisions cover those costs over that time period;
(iv) if a party is permitted or restricted from taking legal proceedings
against any other party; and
(v) if a party has any right to terminate or suspend any of the transaction
contracts or arrangements (including under their own contracts
and those of other parties) and the ability of other parties
to do so.
When reviewed in the context of a particular default and the practical
circumstances existing at that time, some parties may find
the legal requirements of the documentation are at odds with their
preferred way to manage or resolve the situation. They will need to
proceed carefully to ensure they maximise their own best interests,
whilst protecting their commercial relationships and complying
with their own contractual obligations.
Upon the occurrence of a default situation, most banks/financiers
and managers/operators will typically review the legal requirements
of the transaction documentation governing their
relationships. Common contractual clauses which are typically
relevant in these circumstances include provisions governing:
(i) the extent to which the parties are required or permitted to
provide and exchange information concerning other parties (particularly
the owner/borrower), the aircraft and the circumstances
of the default;
(ii) whether, and to what extent, a party must either
(a) coordinate their proposed actions with another party, or
(b) follow the instructions of another party to take particular
actions;
(iii) whether any fees, costs or expenses (collectively referred to
here simply as ‘costs’) of a party are recoverable in circumstances
where the owner/borrower does not pay. There are usually
multiple aspects to consider and analyse regarding these provisions,
including:
(a) the type of costs incurred (for example, if the costs are
incurred by a manager/operator, whether they are aircraft-related
costs or service-related costs, and whether different types of
costs are treated differently under the documentation);
Defaults and Recovery Actions
Tensions commonly escalate due to default situations being handled
by some parties differently in practice from how the transaction
documentation anticipated it would be handled. This divergence
is not surprising, bearing in mind that the documentation
was probably agreed in a different practical context – i.e., at a time
when there were no problems and when banks/financiers and managers/operators
may have had an idealistic view that problems
would be handled in a fully transparent and cooperative manner as
between themselves. It is not uncommon for parties to have loosely
assumed at the time of entering a transaction that, if problems
did arise, then there would be
(i) a free flow of ‘perfect information’ between the parties,
FIRST QUARTER 2021 — ASIAN SKY QUARTERLY | 17