Review of Cape Town Core Principles

Jeffrey WoolSecretary General, AWG

Seminar on the Cape Town Convention and its Aircraft Protocol – Practicalities and Opportunities relating to Canadian Ratification

Toronto, 29/30 April 2013

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Review of Cape Town Core Principles - Topics

• I. Background : past, present and future of the aviation industry and its financing and consequences for text

• II. Historical development of the Cape Town Convention

• III. Legal overview and assessment

• IV. Implementation aspects: International Registry: relation with national law; and contract practices

• V. Benefits analysis and comments in the Canadian context

• herein, ‘C’ = convention, ‘P’ = aircraft protocol, and ‘CTC’ = C as modified by P

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I. Past, present and future of the aviation industry / financing

Phase 1: Statism

– State ownership/control/guarantee– High degree of regulation– Low probability of default

• Phase 2: Transition

– Advanced contracting practices– Complex structures and reliance on favorable choice of law/forum– Eroding phase 1 features

• Phase 3: Privatism

– Private ownership/control; less State guarantee– Less regulation– Increased probability of default

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II. Past, present and future …Consequences for text

The objective of the treaty is to reduce the risk of loss in transactions

• That depends on timely and predictable access to collateral

• Such widening is the basis of the economic benefits of the text

• Cape Town is based the core 'asset based financing principles‘

– (1) prompt / predictable enforcement, including in insolvency, – (2) clear and objective priority rules, and – (3) on party autonomy, and reducing gap b/ contact and law

• Cape Town permits a set of declarations that produce such benefits

• Without the key declarations (below), and the proper implementation of the treaty, major risks are not reduced

– Canada has made such declarations and taken such implementation action

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II. Past, present and future …Consequences for text

• In other words: from the aviation perspective, Cape Town represents a ‘best practice treaty’ or a treaty which ‘facilitates a transaction type’, not a scientific attempt to ‘balance’ legal systems

– Comparative method is tool, but not the central vehicle

– Concepts created in the texts reflecting the transaction structure

– Compare recitals in (i) Cape Town, and (ii) the CISG

• Each provision, and the text generally, has been measured against this standard: does it increase the availability and reduce the cost of aviation finance

• For the aviation sector, the lex situs problem was not fundamental (addressed by the widely adopted Geneva Convention of 1948)

• Economic impact assessment, undertaken early in the process, dictated focus on major risk reduction (timing / insolvency / priorities), not 'transaction cost' or 'information theory' law and economics

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II. Historical Development of the Cape Town Convention

• Unprecedented cooperation between governments and industry, a credit to Unidroit's approach to law reform

• AWG was formed, at the request of Unidroit, to contribute to the effort. AWG members sell and lease or finance a substantial majority of the world’s aircraft and engines. See next slide

• AWG (creditor) – IATA (debtor) alignment of interest and joint positions. Indication of ‘technical nature’ of Cape Town

• The realities behind the Convention plus Protocol approach

• The negotiating dynamics, all relating to the core purpose of the treaty: (a) law v. economics, (b) developing v. developed countries, (b) legal system tension, (c) rules v. standards (open v closed textured drafting), (d) the extensive use of declarations (the key aspect of compromise) and its implications (deferring decision-making to the time of ratification)

• Rapid adoption of Aircraft Protocol (51 countries (Convention – 57)), with ‘economic declarations’, initially driven by role of international export credit

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Aviation Working Group - Membership

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III. Legal Overview and Assessment

• A. Basics

• Connecting factors - state of registry (save engines) (Protocol) added to debtor location (liberal rule, makes sense regarding property interests)

• New interests, not ‘pre-existing’ – no retroactivity

• Creation – uniform criteria for creating interests in airframes / engines

• Enforcement / remedies – prompt and contractually based; declaration on role of the court. (For ‘relief pending’, see part B)

• Priority – first to file, based on an electronic International Registry

• Insolvency – ‘validity’ . Meaning and limitations

• Justiciability – choice of law (Protocol) / choice of forum (Convention), each party autonomy based

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III. Legal Overview and Assessment

• B. Key Points in the Aircraft Protocol

• Extension to sales – deals with lex situs problem and permits a comprehensive priority regime (art III)

• Engines as separate property – overrides national accession law (definitions) (cf. art XIV(3) with C, art 29(7))

• Extensive treatment of insolvency – hard v. soft options and their rationale. Insolvency cooperation (definitions and arts XI and XII)

• Relief pending final determination – treaty-based form of court remedies, similar to but different from traditional interim remedies (art X; C, art 13)

• Deregistration and export – innovative, creative concept (IDERA); relationship with public law (art IX and XIII)

• Waiver of sovereign immunity – validity of waiver, not affirmative rule

• Quiet possession system – unique, based on the international registry

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III. Legal Overview and Assessment

• C. Declaration system

• Declarations - choices to be made at the time of ratification – provide flexibility yet have significant economic implications

• Declarations are not permitted on basic conceptual elements (e.g., the elements of an ‘international interest’), as that would render the treaty unworkable in practice

• Conscious decision was made to permit that flexibility and economic calibration rather the to impose uniformity

• First reaction is often: ‘retention of current law’ v. ‘move to an international standard’ (the latter producing the economic benefits). That often evolves during the ratification process

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III. Legal Overview and Assessment

• OECD Qualifying Declarations / Key Economic Declarations

• 1. Insolvency (Alt. A with up to a 60 day period) – P, Art. XI

• 2. Method of exercising remedies: non-judicial remedies – C, Art. 54(2) and/or judicial timetables – P, Art. X (with up to 10 calendar days for conserving remedies (C, Art. 13(a)-(c)) and up to 30 calendar days for disposition remedies (C, Art. 13(d)-(e))

• 3. Deregistration and export – P, Art. XIII

• 4. Choice of law – P, Art. VIII

• Most States that have made a full set of declarations under Cape Town have selected the above. See next slide

• Declarations not to be made in connection with the foregoing

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Insolvency

ExpeditedRemedies

Deregistration and Export

Choice Of Law

Non-judicialRemedies

Remedies orNon-judicialRemedies

Percentage of countries that have made each of the main qualifying declarations in the ASU

DRAFT

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IV. Implementation Aspects: International Registry; Relationship with National Law; and Contract Practices

• Registrations in the IR determine the priority of competing interests in aircraft objects

• The system is ‘notice-based’, not documentary

• ICAO is the Supervisory Authority, with the responsibilities set out in C, Art. 17(2). That role has been critical to the system

• ICAO established a Commission of Experts of the Supervisory Authority of the IR (‘CESAIR’). CESAIR has met six times, ensuring that the Regulations and Procedures respond to issues that arise in practice

• The IR has established an advisory board, to ensure the coordinated input of users of the system

• More than half the world’s new transactions are now being registered

• Generation 2 of the IR: fundamental redesign to enhance efficiency by (1) replicating a transaction closing, and (2) permitting entries of data application to multiple registration. Timing – phased in 2013 / 2014

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IV. Implementation Aspects: International Registry; Relationship with National Law; and Contract Practices

• Legal Hierarchy of rules relating to the IR

– C: Chapters IV – VII (IR system; related matter; immunities; liabilities)

– P: Chapters I and III; n.b.: overrides C (see C, Art. 49(1)(b))

– Regulations: As amended; basis: P, Art. 17(2)(d)

– Procedures: As amended; basis: R, Sec. 15

• Schematic A: Overall structure / framework of the IR

• Schematic B: Approval process

• Schematic C: Registration process

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Schematic A: Description of the IR - Overall

Notes:1. The Preparatory Commission (PCIR) was established by Resolution 2 of the diplomatic conference to act (pending entry into force of the

Convention/Protocol), under the guidance and supervision of the ICAO Council, as the 'Provisional Supervisory Authority'. Its main task was to set up the International Registry by entry into force of these instruments.

2. ICAO was invited by Resolution 2 (see also Protocol, Art. XVII(1)) to act as Supervisory Authority (SA). ICAO accepted that function.3. See Protocol, Art. XVII(4). The group, ‘CESAIR’ first four times. Its recommendations are submitted for approved to the ICAO Council.4. The selection occurred in May 2004. The initial and Regulations and Procedures were also approved by the PCIR.5. See Convention Art. 17(2) for list of supervisory responsibilities.6. Standard host state arrangements were put in place.7. See Convention, Art. 17(5) for Registrar responsibilities.8. AWG accepted an invitation to chair the Advisory Board.9. Entry points may or shall be used where a declaration has been made by the State in which an aircraft (airframe) is registered for nationality purposes.10. See Schematics on Approval Process and Registration Process for greater detail and more precise use of terminology.11. Any person may search the International Registry upon payment of the applicable fee.

Provisional Supervisory AuthorityPreparatory Commission

Supervisory Authority

ICAQ

Commission of ExpertsNominated by StatesAssigns

Assists

Creates

International RegistryRegistrar (Aviareto)

Host StateIreland

Registry UsersSearching

PersonEntry Points

Advisory Board

SupervisesSelects

Searches

Search Certificates

Advice

Creates

4 567

8

9

10

11

3

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Schematic B: Description of the IR – Approval Process1

1. The result of the approval processes is the issuance of a digital certificate (and password). That is a necessary, but, except for an administrator, not a sufficient condition to accessing the International Registry (save for searches, where no approval is needed). The required additional step is 'authorisation'. See Schematic on Registration Process.

2. See Reg. 4.1 (registry user entity/administrator approval). There is a two part test: Registrar concludes (a) that the entity/administrator are who they assert they are, and (b) on the basis of information submitted, the administrator is entitled to act for the entity.

3. See Reg 4.2 (registry user electronic approval). This is an electronic procedure which, upon payment of the applicable fee, is automatic.

Notes:

Transacting User Entity

Professional User Entity

Transacting User Entity

Professional User Entity Registry User

Registry User EntityAdministrator

International RegistryRegistrar

Electronic Approval3

Approval Review

Seeks Approval

(Largely Electronic)

2

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Schematic C: Description of the IR – Registration Process1

Notes:1. This chart applies to any 'registration' (as defined in Convention, Art. 16(3) to include amendments, extensions and discharges) where, both parties

or the non-submitting party must consent thereto under Convention, Art. 20 (see also Convention, Art. 18(1)(a)) and Regulations 2.1.1 to 2.1.3 and 5. It applies equally to the ‘registration’ of a ‘pre-existing right or interest’.

2. An initiating person must seek authorisation from the ‘named party’ on whose behalf the registration is being made. If there is no authorised person for the initiating party, only its administrator can so initiate.

2a. If an entry point was designated, whether 'authorising' or 'direct', electronic consents to the International Registry are nonetheless required. See Regulation 5.11.

3. The changes to Regulation 4.1 made at the 3rd meeting of the PCIR were intended to provide much flexibility to users by permitting a wide range of authorisations (i.e., to any person for one, many, or all objects, or to more than one person for one, many, or all objects, in each case where a company is a ‘named party’).

4. Upon receipt of the electronic consents from all other named parties, the registration is completed for purposes of Convention, Art. 19, is assigned a sequentially ordered file number, and becomes searchable - thus establishing its time for purposes of priority.

5. N.B.: Substantial practical changes will be effected in Generation 2 of the IR

Authorising person/’named party’ #1’Administrator of that

‘transacting user entity’

International RegistryRegistrar (Aviareto)

Authorising person/’named party’ #2’Administrator of that

‘transacting user entity’

Authorised person or Administrator for ’named party’ #1’(‘transacting user’ or ‘professional user’)

Authorised person or Administrator for ’named party’(‘transacting user’ or ‘professional user’)

Notice of Authorisation

3

Entry Point

2a2

4Notice of Authorisation 3

Responding Party

Initiating Party

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IV. Implementation Aspects: International Registry; Relationship with National Law; and Contract Practices

Effective implementation (Relationship with National law)

• Basic requirements

– 1. Force of law– 2. Priority over conflicting law – N.B.: Limits of Vienna Treaty on Treaties, 1969

• Need for legislation or not

• Country assessment required; N.B.: AWG’s ‘Implementation Project’

• Role of legal advisers and legal opinions

• Contract practices

• AWG led effort to coordinate or inform contract practices (example: when is an amendment to a contract a new transaction) and opinions

• Centerpiece: Practitioner’s Handbook (www.awg.aero)

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V. Benefit analysis and comments in the Canadian context

• Practicalities and limits of benefit assessment (confidentiality; limited precedent; question of pass through of risk reduction / saving)

• Yet, with the proper declarations, CTC is in line with:

• (a) the requirements of the international capital markets;• (b) the methodology of the rating agencies; • (c) the direction of capital requirements under BIS II and BIS III; • (d) lending credit committee approval processes; • (e) export credit rules under the OECD; and • (f) basic concepts of efficiency

• Canada has the ideal profile to maximize the economic benefits from the CTC

• Cape Town is already one of the most successful commercial law treaties, with even brighter future

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Tracking Eligibility for OECD Discount

Evaluated by ECA, underEvaluated by ECA, underconsideration by OECDconsideration by OECD

Colombia19 FEB 07

South Africa18 JAN 07

Mexico31 JUL 07

UAE29 APR 08

Ireland23 AUG 05

USA28 OCT 04

Albania30 OCT 07

Saudi Arabia7 JUN 08

Cuba28 JAN 09

Aruba17 MAY 10

Netherlands Antilles17 MAY 10

Yet to be reviewed by Yet to be reviewed by OECDOECD

Qualifying declarations Qualifying declarations not adopted not adopted

Qualifying declarations, Qualifying declarations, but implementation issuesbut implementation issues

Cameroon8 JAN 11

Latvia8 FEB 11

Belarus28 JUN 11

China3 FEB 09

Tajikistan31 MAY 11

Panama28 JUL 03

Oman12 MAR 05

Ethiopia21 NOV 03

Nigeria16 DEC 03

Pakistan22 JAN 04

Malaysia2 NOV 05

Senegal9 JAN 06

Angola30 APR 06

Singapore28 JAN 09

New Zealand20 JUL10

Indonesia16 MAR 07

Luxembourg27 JUN 08

Rwanda28 JAN 10

Norway20 DEC 10

Eligible for OECD discountEligible for OECD discount

Proper declarations and implementation requiredProper declarations and implementation requiredProper declarations and implementation requiredProper declarations and implementation required

India31 MAR 08

Mongolia19 OCT 06

Jordan31 AUG 10

Turkey23 AUG 11

Russia1 AUG 13

Togo27 JAN 10

Afghanistan25 JUL 06

Cape Verde26 SEPT 07

Bangladesh15 DEC 08

Malta11 OCT 10

Brazil30 NOV 11

Tanzania30 JAN 09

Kenya13 OCT 06

Kazakhstan 21 JAN 09

Fiji 30 MAY 12

Canada1 APR 13

Madagascar 1 AUG 13