Salam Air SAOC v Latam Airlines Group SA

Injunctions restraining calls on irrevocable letters of credit or similar instruments are available only in exceptional circumstances. The enhanced merits standard applicable to injunctions against the credit-provider also applies to an injunction restraining the beneficiary from making a demand. The applicant must ordinarily show a strong case that the demand is not permitted, or establish the fraud exception. A contractual claim that the underlying transaction has been frustrated will rarely justify interference where the instrument was intended to be equivalent to cash and the contract allocated the relevant commercial risks to the applicant. A long-term dry aircraft lease containing an absolute and unconditional rent obligation was not sufficiently arguably frustrated by Covid-19 restrictions on passenger flights.

Salam Air SAOC applied without notice for an injunction restraining Latam Airlines Group SA from demanding payment under three standby letters of credit confirmed by Barclays Bank Plc. The instruments secured rent under three six-year dry aircraft leases governed by English law.

The aircraft had been redelivered after Oman imposed Covid-19 restrictions preventing passenger flights to and from Oman. Latam had entered Chapter 11 bankruptcy and had terminated the leases. SalamAir did not allege fraud, challenge the validity of the standby letters of credit, or rely on an express contractual restriction on Latam making a demand.

The issues were whether the court could restrain the beneficiary from making a demand and whether SalamAir had a sufficiently strong case that the leases had been frustrated.

1. The application was refused. The court would intervene in the operation of an irrevocable letter of credit or similar instrument only in exceptional circumstances. The recognised grounds included impeaching the validity of the instrument and the fraud exception, where the bank knew that the demand was clearly fraudulent: [1984] 1 WKR 392.
2. The enhanced merits test applied to an anti-beneficiary injunction as well as to an injunction against the credit-provider. The autonomy of the instrument and its commercial equivalence to cash would otherwise be undermined. SalamAir therefore had to establish a strong case, rather than merely a seriously arguable or conventional interim case, that Latam was not entitled to call.
3. Themehelp v West remained binding at first instance. It was accepted only on the narrow basis that an injunction might be available where the applicant had a fraud claim against the beneficiary. The decision was not extended beyond fraud, nor to a case where the beneficiary’s right to call had already arisen. The enhanced merits standard was also applied.
4. The leases placed the relevant commercial risks on SalamAir. Rent was absolute and unconditional irrespective of any contingency, including aircraft unavailability, ineligibility for a particular use or trade, total loss and requisition. In a six-year dry lease, the lessor’s essential obligation was quiet possession, while the lessee assumed the risks and rewards of operating the aircraft.
5. The Covid-19 restrictions and reduced passenger demand therefore did not provide a strong case of frustration. The frustration argument was weak, although it would have satisfied the conventional American Cyanamid Co v Ethicon Ltd merits threshold if that test had applied.
6. The judge would, alternatively, have found the balance of convenience in SalamAir’s favour because Latam’s bankruptcy created a risk of an inadequate personal remedy. That alternative conclusion did not overcome the failure to satisfy the threshold legal and merits requirements.