THE üNIDROIT -IONAL AVfATION FINANCE L W REE'ûRM PRûJECT
Preparing the World to Adopt a New Aircraft Mortgage Convention
by Anda Djojonegoro
A t h e s i s submi t t ed t o t h e Facu l ty of Graduate S t u d i e s and Research i n p a r t i a l f u l f i l h e n t o f t h e requirernents
f o r t h e deg ree of Master o f Laws (LL.M)
Institute of Air & Space Law McGill University Montreal , Quebec
Canada
O Anda Djojonegoro February 2000
Acquisitions and Acquisitions el Bibliographie Services seNices bibliographiques
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A t p r e s e n t , i n t e r n a t i o n a l a t t e n t i o n is focused on an
emerging draft t r e a t y concern ing s e c u r i t y i n t e r e s t s i n
mobi le goods. Highly valued mobile assets (such as a i r c r a f t )
by nature move from one jurisdiction t o another, and
t h e r e f o r e , an i n t e r n a t i o n a l convent ion d e a l i n g the c r e a t i o n
and r e c o g n i t i o n of p r o p e r t y r i g h t s i n such goods is
necessary. This t h e s i s w i l l c o n c e n t r a t e on the laws
govern ing t h e t a k i n g of a i r c r a f t a s s e c u r i t y .
The d ra f t UNIDROIT Convention, once approved and
irnplernented by s t a t e s , would i n t r o d u c e a v a s t degree of
economic b e n e f i t s to a i r l i n e s and t h e i r r e s p e c t i v e
governments, ranging from lower banking i n t e r e s t rates t o
more c r e d i t being genera ted , a l 1 o f which w i l l b e n e f i t
n a t i o n a l economies and t h e t r a v e l i n g p u b l i c a t Large.
Given the s t r o n g a t t i t u d e shown by a m a j o r i t y of states
t h a t reflects t h e i r unwi l l i ngness t o s u r r e n d e r some b a s i c
l e g a l p r i n c i p l e s r e l a t i n g t o p r o p e r t y r i g h t s , t h e a u t h o r
considers it proper t o under take t h i s work, which w i l l
c o n c e n t r a t e on impor tan t legal problems relating t o
i n t e r n a t i o n a l a i r c r a f t f i nanc ing .
C e t t e t hèse e s t en l i g n e d i r e c t e avec l e p r o j e t en
cours de reforme du d r o i t a é r i e n i n t e r n a t i o n a l s u r l a
s é c u r i t é des aéronefs . Les équipements mobiles de grande
va leur , t e l qu 'appl icable aux avions et l e u r s p ièces ,
déménagent df une j u r i s d i c t i o n à l ' a u t r e , par là , une
convention s u r l a c r é a t i o n e t l a reconnaissance des d r o i t s
p r o p r i é t a i r e s dan les équipements mobiles deviens
i n é v i t a b l e .
Une f o i s approuvée e t implantée par l e s gouvernements,
l a p ropos i t ion drUnidroi t promet des bénéf ices économiques
s i g n i f i c a t i f s aux t r anspor teurs a é r i e n s e t l e u r s
gouvernements r e s p e c t i f s , sous l a forme de taux d ' i n t é r ê t s
banca i res p lus f a i b l e s à un accès a des c r é d i t s p l u s
importants , bénéfices q u i vont éventuellement se r e f l é t e r
auprès des voyageurs.
Selon de l ' a t t i t u d e des é t a t s m a j o r i t é qui r é f l é c h i t
l e u r s répugnances à abandonner des pr inc ipaux de d r o i t
relatif aux d r o i t s de p ropr ié te , Ir au teur t e n t e de
p r e s e n t e r une analyse q u i se concentre à des problèmes l é g a l
relatif aux f inances d'aéronef in ternat ionaux.
F i r s t and foremost , 1 wish t o ex tend my d e e p e s t
g r a t i t u d e t o my s u p e r v i s o r Professor Richard Janda who has
always been a g r e a t sou rce of i n s p i r a t i o n and guidance
throughout t h e complet ion o f t h i s t h e s i s .
T h i s t h e s i s has been completed wi th t h e v a l u a b l e h e l p
and s u p p o r t of t h e fo l lowing persons:
-Professor Michael Milde, Direc to r of t h e Center of A i r and
Space Law, whose encouragement and academic s u p p o r t has made
a i r and space iaw s t u d i e s i n Montreal n o t o n l y p o s s i b l e , but
memorable.
-Jeffrey Wool, P a r t n e r a t t h e Firm o f Pe rk ins & Coie, who
has provided m e w i th t h e g r e a t e s t i n s i g h t on t h e UNIDROIT
P r o j e c t and who has urged m e t o undertake t h i s c h a l l e n g i n g
wor k
S p e c i a l i ndeb tedness is owed t o my p a r e n t s f o r t h e i r
c o n s t a n t s p i r i t u a l suppor t and, above a l l , my h e a r t f e l t
g r a t i t u d e t o my wife, Gian i t a , wi thout whom t h i s t h e s i s
would n o t have been completed.
iii
Abstract .............................................. i
Résumé ............................................... ii
Acknowledgements .................................... iii
Table of Contents .................................... iv
C-TER 1 INTRODUCTION .............................. 1
1 . Background ....................................... I T I . Scope of Research ................................ 3
CEAPTER 2 THE AVIATION INDUSTRP AtlD ITS SOüRCES
OF F m - ............................... 10 .... f . The Aviation Industry's Capital Requirements 10
A . Overview ..................................... 10 ................ B . Future Airline Capitalization 12
11 . Historic Review of Aircraft Financing
Techniques ...................................... 15
A . The E a r l y Years of Aviation .................. 15
B . Post World War II Era ........................ 16 C . The Enerqy Crisis Decade of the 1970s ........ 20
III . Aircraf t Financing in View of the Airline
Crisis .......................................... 23
CflAPTER 3 LEGAL AND ECûNWIC OBJECTIVES FOR REFüRMiNG
CREDITOR PROTECTION LkWS POR AIRCRAFT .... 30
1 . Credit Enhancement Devices in Aircraft Finance
Transactions .................................... 30
A . Equipment Trust and Conditional Sales ........ 30
......... . B Chatte1 Mortgage and Aerial Hypothec 3 2
........................... . C Leasing Agreements 35
II . Principal Objectives for Reforming Creditor
Protection Laws for Aircraft .................... 37
A . Economic Considerations ...................... 38
1.The Importance of Credit Valuation in
Aviation Financing ........................ 38
........... 2.The Economic Value of Collateral 40
B . Key Legal and Political Problems ............. 4 1
1 . Non-recognition of Title or Security Interest ................................... 4 2
......... . 2 Deprivation and Repossession Risks 43
3 . De-registration and Export Authorization Delays ..................................... 44
4 . Bankruptcy Laws Which Impede Aircraft .............................. Repossession A 5
5.Choice of Law Issues ....................... 47
6.Sovereign Immunity ......................... 48
CHAPTER 4 THE INTERNATIONAL LEGAL REG- M R AIR-
FINANCING TRANSACTIONS ................... 49 1 . International Legislation and Rights in
Aircraft ........................................ 49 A . The Rome Convention on Precautionary Arrest of
Aircraft 1933 ................................ 51
B . The Geneva Convention on the International Recognition of Rights in Aircraft 1948 ....... 53 1 . Scope of the Geneva Convention 1948 ........ 57
a) Rights Recognized ..................... S 7
.................. b ) Registration of Rights 59
.......... C) Privileged and Priority Claims 60
d) Transfer of Aircraft Between
Registries .............................. 62 e ) Spare Parts ............................. 63
............ f) Enforcement by Judicial Sale 65
2 . Problems with the Geneva Convention 1948 .. 67 C. The 1988 UNIDROIT Convention on International
Financial Leasing ............................ 72 II . Prospects of Harmonizing the Law Governing
Security Interests in Aircraft ................... 75 A . International Initiatives to Reform Secured
Transaction Laws ............................. 75 B . The UNIDROIT Agenda .......................... 76
C. The Draft UNIDROIT Convention on Inter-
national Interests as Applied to Aircraft
Equipment ..................................... 81 1) Creation of an International Interest ... 84 2) Default Remedies ......................... 86 3) Effects of Registration and Priority
Rules ................................... 8 9
4) The International Registration System ... 9 1
5) Assignment of International Interests ... 93 6) Jurisdiction ............................ 94 7) Relationship with other Conventions ..... 95
C. Prospects of the Proposed UNIDROIT
Convention .................................. 102
vii
1. Background
Aircraft are regarded as highly movable ob jects,
capable of crossing political boundaries within a relatively
short period of time. Aircraft are also high-value assets
having great economic value. They represent valuable
collateral as a basis for extending aviation credit.
This thesis focuses on the economic problems of
aircraft financing as a cornplex international commercial
activity, one that is increasingly affected by the
globalization of credit economy, whereby:
(a) the internationalization and the huge growth of the
air transport industry has made financing of highly-
valued assets such as aircraft, become heavily
reliant on multiple sources of funding.
Consequently, the financing of aircraft can involve
parties spaming different countries;
(b) the high moveability of aircraft as collateral has
led to the worldwide distribution of assets
translating to greater physical distances between
the actual location of the aircraft and its
registered owner; '
Yet, the legal remedies available to a financier as to
the recoverability of the collateral in the event of default
by the borrower, greatly differ in each jurisdiction. This
is because each legal system may have its own provisions
relating to the treatment of rights in property over
aircraft, including its legal enforcement measures.
Depending on the location of the aircraft at the Lime
remedies are sought, the laws of certain jurisdictions can
be more accommodating to foreign creditors, whereby prompt
recourse to the value of the asset is readily available. In
other jurisdictions, treatment towards security can be
hostile where legal enforcement may take seaeral years-
Hence, reliance on the l ex s i t u s has generated many
uncertainties for aircraft financiers. 2
'sec R.M Goode, "Security in Cross-border Transactions"
(1998) 33 Tex Intrl L-J. 47-
'~ee P.R. Wood, Comparative Law of Security and Guarantees
(London: Sweet & Maxwell, 1995) at 5.
II. Scope o f Rerearch
The economics of c r e d i t a r e s imple . I n s h o r t ,
e x t e n s i o n s o f c r e d i t rnust be p r o f i t a b l e f o r bo th t h e
borrower and c r e d i t o r . For t h e borrower, c r e d i t is s e e n as a
fund-genera t ing mechanism which i s c r i t i c a l f o r f i n a n c i n g
i ts d a i l y o p e r a t i o n s and /o r expansion p l a n s . On a l a r g e r
s c a l e , c r e d i t money a l s o f u e l s t h e growing econorny. The
c r e d i t o r , on t h e o t h e r hand, sees t h e ex t ens ion o f c r e d i t a s
a t o o l t o enhance s a l e s and e a r n i n t e r e s t a t t h e same t i m e . 3
However, it is impor tan t t o n o t e t h a t n o t a l 1 c r e d i t i s
s e e n a s be ing p r o f i t a b l e . On one hand, a c r e d i t o r w i l l g a i n
b e n e f i t s o n l y i f t h e borrower f u l f i l l s h i s o b l i g a t i o n s . A
d e f a u l t i n g borrower would s u r e l y mean l o s s of p r o f i t s f o r
t h e c r e d i t o r . On t h e o t h e r hand, a borrower w i l l e n j o y
economic g a i n s from t h e l o a n i f t h e r e t u r n s o f inves tment
a r e g r e a t e r t h a n t h e i n t e r e s t pa id . The borrower w i l l n o t
p r o f i t from t h e t r a n s a c t i o n i f t h e c r e d i t o r charges a h i g h
i n t e r e s t r a t e . 4
' ~ e e N.B. Cohen, " H a m n i z i n g the Law Governing Secured
Credit: The Next Frontier" (1998) 33 Tex I n t ' l L .J . 173.
' ~ e e ibid.
I n t h e l e g a l con tex t , problems o f c r e d i t economy
a s s o c i a t e d w i t h a i r c r a f t f i nanc ing a r e ve ry o f t e n t h e r e s u l t
of a weak framework of s ecu red t r a n s a c t i o n s . According to
Nuria de l a Pena, t h e s e problems have t h e i r r o o t s i n t h e law
and l e g a l i n s t i t u t i o n s themselves . I n b r i e f , t h e y can be
e x p l a i n e d a s fol lows:
( a ) j u r i s d i c t i o n s wi th less developed l e g a l systems rnay
pose d i f f i c u l t i e s f o r t h e t a k i n g o f s e c u r i t y ove r
a i r c r a f t . For example, some l e g a l regimes l i m i t t h e
t y p e s of p r o p e r t y t h a t can s e r v e a s c o l l a t e r a l .
Others may be u n f a m i l i a r w i th c e r t a i n t y p e s o f
c r e d i t enhancement dev ices . Hence, unaccommodating
l e g a l regimes may prove t o be u n a t t r a c t i v e f o r
a i r c r a f t f i n a n c i e r s and would l i k e l y r e s u l t i n t h e
r e f u s a l o f t h e g r a n t i n g of credit;
(b) f i n a n c i e r s f a c e g r e a t d i f f i c u l t i e s when t h e y need t o
de te rmine t h e i r p r i o r i t y ranking a g a i n s t a
p a r t i c u l a r a s s e t . Under some j u r i s d i c t i o n s , a
secu red p a r t y may f a c e g r e a t c h a l l e n g e s i n
de te rmin ing i ts p r i o r i t y ranking a g a i n s t o t h e r
c l a i m a n t s of t h e c o l l a t e r a l i z e d a s s e t . F u r t h e m o r e ,
t h e r e i s no uniform method o f p u b l i c i z i n g security
i n t e r e s t s . I t is p o s s i b l e that any unknown competing
or hidden clairns against the collateral may render
the financier's security interest subordinate to
third parties;
seizing and repossessing the collateral may take
several years in certain countries, rendering the
aircraft inoperative. In some cases, the process far
exceeds the economic Life of the asset. Particularly
in countries where repossession requires judicial
involvement, repossession can be quite costly. 5
Given the internationality of most aircraft
transactions, this research paper attempts to examine the
role of international law governing such transactions in the
light of increasing international pressures to reform the
international legal framework related to secured
transactions. Accordingly, much attention will be dedicated
to the law reform project sponsored by the International
Institute for the Unification of Private Law (UNIDROIT) and
CO-sponsored by the International Civil Aviation
Organization (ICAO) . Both organizations are in the process
' ~ e e N. de la Pena, "Reforming the Legal Framework for
Security Interests in Mobile Property" (19991 2 Unif. L. Rev. 347
at 350 .
of drafting an international convention which contains
provisions that better protect airline creditors.
In view of the price of an aircraft today (e .g , 8-777
having a List price in excess of USS150 million), and the
total value of aircraft orders anticipated ovcr the next
decade, airline cornpanies will require substantial
capitalization if they have to pay cash for aircraft. Hence,
it has been a growing practice that airline companies resort
to alternative methods of fleet financinq, such as aircraft
leases and hire-purchases. Consequently, greater reliance
will be placed on aviation credit.
Decisions to extend aviation credit depend highly on
the risk assessment of a particular airline and its
goverment, as the creditor seeks to establish the extent of
whether a reliable legal system and institutional framework
exists in the airliners base country.
On the above note, renowrLed economist Heywood F l e i s i g
observed that, "many problerns in access to credit arise from
defects in the Iegal, regulatory and institutional framework
for extending redit."^ This observation is further
supported by a recent study which suggests that adherence to
the UNIDROIT Convention would result in substantial cost
savings for aircraft financing transactions, and increase
their overall credit rating. 7
Many authors have contributed exhaustive scholarly
research to the legal aspects of aircraft financing and the
international conventions that deal with this subject
matter. The notion of real rights in aircraft, as applied to
international settings, has been carefully examined by
taking into account the applicable international rules as
well as comparable national conceptions.
- --
6 See H. Fleisig, "The Right to Barrow" (April 1995) 44
Viewpoint 5 (The World Bank, Private Sector Development
Department) . '~ee UNIDROIT Convention, infra note 167. See also A.
Saunders & 1. Walter, Annotated Project Outline on the Proposed
Convention on International Interests in Mobile Equipment as
Applicable t o Aircraf t Equipment through the Aircraf t Equipment
Protocol: Economic Dpact Assesment (Study prepared under the
auspices of INSEAD and the New York University Salomon Center,
1998) [hereinafter Economic Impact Assessment] . For a
reproduction of the Economic Impact Rssessmen t , see ( 1998 )
XXI1I:VI Air IS Sp. L. 339.
Thi s t h e s i s does n o t endeaoor t o add ano the r l a y e r o f
p e r s p e c t i v e t o t h e numerous e x i s t i n g works on t h e l e g a l
a s p e c t s of a i r c r a f t f i nanc ing ; r a t h e r , it w i l l c o n c e n t r a t e
on t h e economic problems of a i r c r a f t f i n a n c i n q and
i n t e r n a t i o n a l e f f o r t s d i r e c t e d a t improving and harmonizing
t h e i n t e r n a t i o n a l l e g a l framework f o r secured t r a n s a c t i o n s
i n a i r c r a f t and its a s s o c i a t e d equipment. Consequently, t h i s
t h e s i s a l s o examine t h e d r a f t i n t e r n a t i o n a l i n s t rumen t on
i n t e r n a t i o n a l i n t e r e s t s i n mobile equipment j o i n t l y
undertaken by UNIDROIT and ICAO.
Thi s t h e s i s is d iv ided i n t o f i v e chap te r s :
-Chapter Two provides a g ~ n e r a l i n t r o d u c t i o n t o t h e
commercial a s p e c t s of t h e a v i a t i o n i n d u s t r y and i ts s o u r c e s
o f f i nance . I t examines t h e p r o s p e c t s of f u t u r e a i r l i n e
c a p i t a l i z a t i o n and b r i e f l y reviews t h e h i s t o r y o f a i r c r a f t
f i n a n c e techniques . The c h a p t e r concludes wi th a d i s c u s s i o n
on t h e causes of t h e r e c e n t Asian economic crisis. Th i s
c h a p t e r concludes by a rgu ing t h a t c r e d i t r i s k , e s p e c i a l l y i n
c o u n t r i e s wi thout well-developed f i n a n c i a l and s e c u r e d
t r a n s a c t i o n laws, becomes one o f t h e most impor tan t d r i v i n g
f o r c e s behind t h e u rgen t need f o r a v i a t i o n f i n a n c e law
reform.
-Chapter Three reviews commonly used security devices in
aircraft finance transactions and examines the current
legal, economic and political issues associated with
international aircraft finance.
-Chapter Four focuses on the prevailing international law
relating to aviation finance. It begins with an analysis of
the conventions
effectiveness
applicable
accommodating
aircraft objects and t h e i r
the modern practice
aircraft finance and concludes with a special section on the
U N I D R O I T proposal embodied in a draft convention on
international interests in mobile equipment as applied to
aircraft objec t s .
-Chapter Five sets forth the analysis, swnmary and
conclusion flowing from the preceding discussion.
THE AVIATION InDVSTRP AND ITS SOWRCES OF FïNANCE
1. The Aviation Industry and its Capital Roquirewnts
The l a s t decade of the 2oth century was a highly
unstable macroeconomic era for the commercial air transport
industry. The world's airlines lost USSl5.6 billion on their
international scheduled services during the first half of
the 1990s'. In the second half, the airlines suffered the
chain-effects of the worldwide financial recession that
stemmed from Mexico and Southeast Asia between 1994 and
1997. Altogether, the economic consequences and effects of
the crises have lingered towards the end of the millennium.
As global economic and financial conditions start to show
signs of recovery, the air transport industry will
undoubtedly endeavor to make up for its record losses and
business opportunities in the last several years - this
being its first order of business in the new millennium.
' ~ e e IATA, Annual Report 1999 (Montreal: IATA, 1999) at 6.
-10-
The prospects of the air transport industry over the
new millennium are promising. The International Air
Transport Association (IATA) reports USS3.1 billion in net
profits for its mernber airlines in 1998, for revenues of
USS142.7 billi~n.~ There is also expected to be an increase
in air travel of 5.5 percent per annum between 1998-2002,
which is highly attributable to the forces of market
liberalization and an increase in world trade, resulting in
more flights and lower costs. 10
'~ee ibid. at 8. Analysts at IATA consider the net profit of
USS3.1 billion (which is 2.2 percent of revenue) to be quite
reasonable given the sharp decline of average load factors during
the economic crisis. The present low fuel prices and interest
rates factors are attributable to the airlines' profit margin.
%iee ICAO, Outlook for Air Transport to the Year 2005
(Montreal: ICAO, 1995). ICA0 reports that the worldls scheduled
passenger traffic (in tems of passenger-kilometers performed)
increased at an average rate of 8.9 percent between 1960-1995.
Forecasts through the year 2005 show that the highest growth in
passenger traffic is expected to corne from the airlines of the
Asia/Pacific region at: 8.5 per cent per annum, followed by the
traffic of airlines of the Middle East, Latin America and Europe,
which are anticipated to grow at an average annual rate of 5.5,
5.0 and 4.5 respectively. Meanwhile, traffic projections for both
North American and African airlines are estimated at around 4 per
cent per annum.
B. E'uture Airline Capitalization
I n o r d e r t o meet t h e a n t i c i p a t e d growth of pas senge r
t r a f f i c , 'l which i s t h e key element of eve ry component i n
t h e commercial a i r t r a n s p o r t bus ines s , a i r l i n e s undoubtedly
w i l l have t o expand t h e i r a i r c r a f t f l e e t . I t should a l s o be
t a k e n i n t o account t h a t , i n o r d e r f o r a i r c r a f t t o be
economica l ly e f f i c i e n t and n o i s e and emiss ion c o n t r o l s
cornpl iant , a i r l i n e s w i l l have t o i n v e s t i n modern and newer
a i r c r a f t . Consequently, a l a r g e body of t e c h n i c a l l y o b s o l e t e
a i r c r a f t , such a s t h e o l d e r turbo-props c u r r e n t l y s e r v i c i n g
r e g i o n a l markets, would have t o retire and be r e p l a c e d w i t h
j e t s . 12
A s i n t e r n a t i o n a l a i r t r a f f i c grows, t h e s i z e o f t h e
world' s a i r l i n e f l e e t i n c r e a s e s . I n 1998 , t h e r e were 1,463
t u r b o j e t a i r c r a f t o rde red a t an es t i rna ted va lue o f USS84
%ee ibid. Althougn passenger t r a f f i c growth w i l l Vary by
region because of d i f f e r i ng regional f ac to r s , ove ra l l demand for
new aircraft : is very l i k e l y t o increase . On a regional l e v e l ,
Europe and North America a r e considered es tab l i shed a i r t r a v e l
markets and, consequently, the requirement f o r new a i rp lanes w i l l
be expected from these regions. However, Asia must not be
overlooked as it rebounds from the crisis and is an t i c ipa t ed t o
grow f a s t e r than average.
l Z ~ i r c r a f t pu t ou t of operation w i l l average around 250 per
year s i nce very feu a i r c r a f t a r e considered useful and s a f e i n
passenger t rançpor ta t ion beyond 30 years.
b i l l i o n . I3 According t o Boeing p r o j e c t i o n s , t h e w r l d f leet
w i l l r e a c h 28,600 i n t h e nex t 20 y e a r s from t h e p r e s e n t
12,600 a i r p l a n e s i n s e r v i c e today. O v e r a l l , a i r c r a f t
a c q u i s i t i o n by t h e y e a r 2008 w i l l r e q u i r e a d d i t i o n a l c a p i t a l
1 4 of USS1.1 t r i l l i o n . Na tu ra l ly , w e w i l l see a l a r g e and
growing need for money i n o r d e r t o a c q u i r e a i r c r a f t . How
w i l l new c a p i t a l be rnobilized t o fund t h e s u b s t a n t i a l number
of a i r c r a f t r e q u i r e d t o rneet t r a f f i c growth?
I n p r i n c i p l e , t h e r e a r e t h r e e methods of r e s o l v i n g t h e
a i r l i n e i n d u s t r y f s c a p i t a l problerns:
( a ) t o i n c r e a s e t h e i r borrowing power;
( b ) t o reduce t h e i r own c a p i t a l inves tment and seck
a d d i t i o n a l funding through t h e s t o c k markets ; and
?Se@ ICAO, "Annual Review of Civil Aviation 1998" (1999)
54:6 ICA0 Journal 29. Out of 1,463 orders, 929 aircraft were
delivered. The number of turboprop aircraft delivered was 78,
%oeing forecasts that the composition of the world f l e t
by the year 2018 will be: 17% regional jets, 23% intemediate-
sized airplanes, 54% single-aisle airplanes and 6% 747s or larger
airplanes. See Boeing, Current Market Outlook 1999,
(c) to increase government support and subsidies. ~5
While any of the three aforementioned alternatives may
provide a solution to the problems related to capital, calls
for increased government assistance may prove to be
unworkable, given that most airlines today are privatized or
are in the process of privatization. On the other hand,
reduction of capital investment often implies a reduced
level of service. 16
It should also be noted that in terms of private
capital formation in general, there would be massive
additional capital required to fuel the growing economy over
the next decade. The estimates point to trillions of dollars
of investment in new plants and equipment required by
capital intensive industries such as the energy,
telecornrnunications, information processing and transporta-
tion sectors. Consequently, the airline industry would alço
have to compete for available capital resources to meet i t s
daily and non-daily expenditures, including the acquisition
of new aircraft.
L 5 ~ e e G.A. Wiegers, 'The Outlook for Air l i ne Capital
Formation" (1979) 7:3 Int. Bus. L. 162.
'"ee ibid.
II. Historie R e v i e w of Aircraft Financinq Techniques
A. The Early Years of Aviation
When airline companies were still in their infancy, air
transportation was considered a highly speculative venture.
High ratings were given to those carriers which were "fit"
and "able" in the operational context, rather than in
management standards. Access to credit was not easy and,
hence, aircraft acquisitions were mainly financed by private
equity money. It was not uncommon for an investor to act as
the airline operator and business partner at the same
tirne.'' Furthermore, the industry had a relatively simple
capital structure, and because it did not require large
overheads, funding iesources came mainly from individual and
private investors. 18
As the years went by and the airline industry rapidly
developed, it required additional capital to finance its
growing fleet. Meanwhile, individual investors were still
unwilling to extend credit. Consequently, the air transport
industry turned to the public to seek new ways of funding.
Attracted by the tremendous growth of the airline industry,
" ~ e e G.D. Brown fi W.T. Ashby, "Airline Financinq" (1949) 16
J. Air L. h Corn. 460.
"~ircraft unit costs before the War were relatively
affordable without participation of third party lenders.
the public demonstrated its interest to participate in the
development of the air transport industry by purchasing
airline stock, even when it meant that there would be no
irnmediate reward for their investment. Accordingly, this
process was later on facilitated by the introduction of
convertible preferred stocks which allowed airlines to offer
large amounts of cornmon stock significantly above market
prices . L 3
B. The Post World W a r II Era
Shortly after the World War and until the late 1 9 6 0 ~ ~
airlines were drawn to other methods aircraft financing.
Faced with new and substantial capital necessities as a
consequence of their growing fleet and increasing traffic
demands, most U.S. carriers have been able to obtain long
term (10-20 year) debentures for sale to the public and
institutional investors, such as insurance companies.
"~ee Brown h Ashby, supra note 17.
'O~ee J. D. Lambert, "Survey of Domestic and International
Aspects of Aircraft Equiprnent Financinq" (April 1963) 18 Bus. L
627 [hereinafter Lambert] citing D. 1. Johnston, Legal Aspects of
Aircraft Finance (LL .M Thesis, McGill Univers i ty , 1961)
[unpublished] at 18.
In a d d i t i o n , t h e s u b s t a n t i a l increase i n t h e price of
a i r c r a f t Z 1 forced carriers to i n c u r large amounts of medium
long-term bank c r e d i t s yea r s ) through s y n d i c a t e d
l o a n s , where 7 y e a r s i s cons ide red t o be t h e u s e f u l l i f e o f
a p i s t o n engine-powered a i r c r a f t . 22 F u r t h e m o r e , con t inued
a i r l i n e so lvency provided t h e r e q u i r e d p u b l i c confidence i n
t h e i n d u s t r y and consequent ly a s s u r e d l e n d e r s that it was
safe t o ex tend the medium and long-term funds needed by t h e
a i r l i n e s . Meanwhile, non-U.S. a i r c a r r i e r s con t inued t o
a c q u i r e t h e i x aircxaft by way of bank l o a n s and government
g r a n t s , and t o a c e r t a i n e x t e n t , through U.S. Export-Import
Bank Loans. 2 3
.! --Se@ Lambert, supra n o t e 20,
%ee ibid. I n l i g h t of p r o t e c t i n g the i n s t i t u t i o n a l
lenders ' i n t e r e s t , t h e loan agreements requ i re t h a t t h e
carr ier /borrower mainta in a f i x e d debt-equity r a t i o .
Addi t ional ly , these t r a n s a c t i o n s were o f t e n secured by a mortgage
inden tu re on a i r c r a f t equipment and o t h e r a s s e t s of the c a r r i e r .
"se@ H.F. Olson, "Acquisi t ion and Financing of A i r c r a f t by
r Carr iers" i n Secured Financing f o r the Transportatian
Industry (New York: P r a c t i c i n g Law I n s t i t u t e , 1979) a t 749.
During t h e post-war per iod, and a s a d i r e c t r e s u l t of t h e cold
war, where m i l i t a r y demands involved the u t i l i z a t i o n o f t r a n s p o r t
a i rplanes . rnanufacturing i n d u s t r i e s were s t i m u l a t e d i n t o
producing more aircraft, and thus, increased t h e p r i c e o f new and
used a i r c r a f t . This was considered as a favorable per iod f o r t h e
a i r t r a n s p o r t indust ry , and consequently, the i n d u s t r y r e l i e d
more on commercial loans r a t h e r than e q u i t y f inancing,
At the time of rapid technological evolution in the
1960s, the air transport industry went £rom piston-engine
aircraft to turbo-props and jets, which substantially
increased the size and range of commercial aircraft. This
era was considered favorable to U.S. carriers and,
consequently, there was increasing availability of capital
through banks and institutional credit and a significant
appreciation in the market value of airline stocks. For
those carriers requiring additional debt, but lacking proper
security to guarantee their loans, several aircraft lease
structures were utilized with options to purchase at a low
and bargain price at the end of the te~m.'~
Through leasing, carriers were able to obtain new
aircraft equipment without having ta deposit substantial
funds as down-payment. Furthemore, this was a way of
conserving significant working capital and was soon viewed
as a popular alternative to straight commercial borrowing.
Most importantly, leasing arrangements enabled carriers to
ï 4 ~ e e S. R. Kruft, "Leveraged Aircraft Leases : The Lender' s
Perspective" (1989) 4 4 Bus. L. 737.
benef it £rom c e r t a i n " t ax advantages", a l l owing them t o
deduct r e n t a l payments a s a bus ines s expense. z5
A s a consequence of t h e d e c l i n e i n e a r n i n g power and
r a p i d d e p r e c i a t i o n o f a i r c r a f t and a i r c r a f t equipment i n t h e
mid 1960sZ6, U.S. carriers were no l o n g e r a b l e t o t a k e f u l l
advantage o f t h e i r a v a i l a b l e investrnent t a x c r e d i t wi th
r e s p e c t t o a i r c r a f t and i t s a s s o c i a t e d f l i g h t equiprnent.
A l t e r n a t i v e l y , t h e s t r u c t u r i n g of a i r c r a f t l e a s e s p u r e l y a s
a f i n a n c i n g v e h i c l e became a common p r a c t i c e . I n a pure
a i r c r a f t l e a s e , t h e investrnent t a x c r e d i t and d e p r e c i a t i o n
deduc t ions a r e passed t o t h e l e s s o r of t h e a i r c r a f t . The
c a r r i e r , on the o t h e r hand, r e c e i v e s b e n e f i t i n t h e form of
a lower i n t e r e s t r a t e a p p l i e d
cases, t h e r e g i s t e r e d ownership
l e s s o r . 27
The s i m p l e f i n a n c i a l l e a s e
t o t h e lease c o s t , I n sucn
o f t h e a i r c r a f t i s wi th t h e
was l a t e r developed t o be a
" leveraged" l e a s e , wi th i n v e s t o r s c o n t r i b u t i n g 20 t o 40
p e r c e n t o f t h e c a p i t a l . Na tu ra l ly , t h e y a l s o assumed a
"~ee 0.1. Johnston, "Aircraft Leasing" (1963) 9 McGill Law
Journal 32.
"see Lambert, supra note 20.
" ~ e e J. V. Babcock, "US Ai rc ra f t Leasing" i n S. Hall, ed.,
Aircraft Financinq (London: Euromoney Publications, 198 9 ) 68.
higher risk with a higher return on investment. Meanwhile,
the lessor/lender received a fixed rate of return having a
priority in the security interest. This structure seemed to
have attracted even more institutional lenders in becoming
parties to leveraged aircraft lease transactions. 2e
C. The Energy Crisis E r a of the 1970s
The global financial situation in the 1970s was plagued
by an oil and banking crisis. The price of oil increased
sharply in 1973, followed by the collapse of the global
banking sector. For the air transport industry, bank credit
and institutional long-term funds became difficult to
obtain. The banking sector, on the other hand, sought
lending opportunities at the international level and
targeted developing countries (sovereign borrowers). The
relationship was rnutual, as the economic policies of the
developing countries also encouraged off-shore borrowing in
order not to use up their own resexves. The substantial
"~he definition of leverage, according to Black's Law
Dictionary, is "the ability to finance an investment with a small
amount of one's own funds, such as a down-payment, with the
balance consisting of borrowed funds. The use of a smaller
investment to generate a larger rate of return through
borrowing." See J.R. Nolan & J.M. Nolan-Haley, Blackrs Law
Dictionary" (St. Paul: West Publishing, 1991) at 628.
dernand for new funds did not consequently result in full
access to the money markets. The bond market, for instance,
was difficult to access. Those still wishing to borrow would
be regarded as high-risk borrowers and institutions were
only willing to lend to the strongest credit airlines at
abnormally high rates. Furthermore, a security was required
for the loan, which came in the form of high-value mobile
assets, including aircraf t . ''
The econornic turmoil of the 1970s escalated airline
unit costs and made it increasingly unfavorable for rapid
increases in lending. But this did not completely prevent
the air transport industry from counteracting, as the
problem of raising capital for the industry was facilitated
by two changes:
(a) aircraft manufacturers became more involved with
raising capital for their airline customers by
extending them short-term credit on a secured basis,
or, by making extensive use in export sales
supported by national credit agencies, such as the
Export-Import Bank of the United States, the
'%ee 1. Spight, "The Syndicated Bank Loan" in S- Hall ed.,
Aircraft Financinq (London: Euronioney Publications, 1991) 47.
C r e d i t s Guarantee Department i n t h e UK and, the
Compagnie F r a n c a i s e d 'Assurance pour l e Commerce
E x t e r i e u r i n France; 30
t h e e s c a l a t i n g p r i c e s o f a i r c r a f t u n i t s have forced
a i r l i n e s t o l e a s e a i r c r a f t , r a t h e r t h a n borrow money
t o p u r c h a s e a i r c r a f t . T h i s e r a was a l s o
c h a r a c t e r i z e d by t h e emergence of a c o n s o r t i a o f
banks o f which purchased a i r c r a f t f o r t h e purpose o f
l e a s i n g them a g a i n t o t h e a i r l i n e s . The b e n e f i t s t o
t h e c o n s o r t i a were t a x c o n c e s s i o n s and l e g a l
ownership of t h e a i r c r a f t . The c o n s o r t i a o f banks
s o o n deve loped i n t o s p e c i a l purpose l e a s i n g
companies, of which t h e two l a r g e s t i n t h e 1980s
were Guinness P e a t A v i a t i o n (GPAj o f I r e l a n d a n d
I n t e r n a t i o n a l Lease F inance C o r p o r a t i o n ( I L F C ) o f
the U n i t e d S t a t e s , 3 1
%ee J. D. Hanson, ' Manufacturer's Support: An Overview" i n
S. Ha l l ed . , Aircraf t Financinq (London: Euromoney Publ ica t ions ,
1991) 197; C- Thaine, "Role of the Manufacturer i n A i r c r a f t
f inancinq" (1989) 17 I n t ' l Bus. L. 212; M. Ghonaim, The Legal
Aspects of Aviation Finance in Developing Countries (LL .M Thesis ,
M c G i l l Universi ty, 1991).
%ee R. Doganis, Flying Off-Course: The Economics o f
International Airlines, (London: Routledge, 1995) a t 7.
Non-U.S. carriers, however, continued to depend on
funds generated from their operations, loan or goverment
subsidies and, sometimes Eximbank loans, guarantees and in a
few instances, leasing.
III. Aircxaft Financinq in View of the Airline Csisis
In mid-1997, a financial crisis devastated East Asia,
once regarded as one of the most successful emerging
markets. Untii the crisis occurred that year, East Asian
economies had enjoyed an outstanding economic performance,
with a consistent annual GDP growth in the region of 5 to 8
percent over the last three decades. 32
The boom in capital inflows to Asia in the years
leading up to the crisis, which attracted almost half of the
total capital inflows to developing countries of nearly
USSIOO billion, 33 was intermediated in large part by
domestic banks, fuelling rapid credit growth. When cornbined
with regulatory failure to strike a balance between the
guarantees necessary for financial stability and bank
7 -5ee T. Lane, The A s i a n F i n a n c i a l C r i s i s : W h a t Have We
L e a r n e d ? " (1999) 36 Finance h Development; "Asiars Economic
Crisis" The Economist (15 November 1997) 19.
33~ee W. Bello, "Rethinking Asia: Inviting Another
Catastrophe" The Far Eastern Economic Review (12 Auqust 19991.
supervision and regulation to minimize excessive risk-
taking, high risk h a n leverage ratios relative to output,
rendered financial systems extremely vulnerable to
liquidity, market and credit ris ks. 3 4
Analysis of the problems in East Asia reveals that its
causes revolve mainly around privats foreign debt, and not
public debt. However, other factors that contribute towards
the crisis were:
(a) the failure to reduce the domino-effect triggered by
the large external deficits and stock market bubbles
in several South East Asian States which originated
in Thailand;
(b) the maintenance of pegged exchange rate regimes for
too long, which encouraged external borrowing and
Led to excessive exposure to foreign exchange risk
in both the financial and corporate sectors; and
"IMF, World Economic Outlook (Washington: IMF, 1998); IMF,
The A s i a n C r i s i s : C a p i t a l Market Dynamics a n d S p i l l o v e r , IMF
International Capital Markets (Washington: IMF, 1998) ; S. Fisher,
"The Road to a Sustainable Recovery in Asia" (Address to the
Singapore World Economic Forum, 18 October 1999) [unpublished] ,
(c) lenient rules on legal lending limits and financial
oversight, led to a sharp deterioration in the
quality of banks' loan portfolios. 3 5
Until early 1997, Asiars airline industry was
flourishing. The staggering regional economic growth,
increasing air transport liberalization, and the enormous
tourism potentials of countries such as China and Thailand,
rendered Asia as the one of the most attractive markets and,
the fastest growing region for passenger and freight traffic
in the world.
When the financial crisis devastated East Asia causing
the collapse of regional economies and consequently the
devaluation of national currencies, air travel of local
origin became increasingly expensive, especially when
denominated in Asian currencies, resulting in higher
capacity and weaker demand. Responsible governments could
.
3 5 See, J. Stiglitz, "The Role of International Financial
Institutions in the Current Global Economy" (Address to the
Chicago Council on Foreign Relations, 27 January 1998)
[unpublished]. See also, S. Fisher, "The Asian Crisis: A View
from the IMF" (Address to the Midwinter Conference of the
Bankersf Association for Foreign Trade, 22 January 1998)
[unpublishedl; J. Booman, "Asian Crisis: World Must Cooperate to
Find Solutions" The [Singapore] Straits Times (4 March 1999) .
lend Little assistance to their flag carriers while
operating under the strict budgetary constraints imposed by
international creditors - notably the World Bank and the
IMF.
As a result, the East Asian air transport industry has
faced immense challenges over the past two years. Effects
from the crisis on Asian air carriers have included
bankruptcies, employee layoffs, aircraft grounding and route
restructuring, as well as the cancellation or deferral of
aircraft financing arrangements, causing a further effect on
îhe aircraft market. The combined operating revenue of the
Association of Asia Pacific Airlines IAAPA) for the i997/98
fiscal year dropped by 3.5 percent and reported a collective
loss of USS843.8 million. Carriers also suffered high losses
and escalating debt levels, which exceeded their equity in
the worst cases, by a factor of 10 . 3 6
Those carriers unable to meet their debt obligations
confronted threats of aircraft repossession proceedings.
Arnong thosr carriers is Sempati Air, the Indonesian private
%ee "How the
Interavia Business
Jarrett, "Into a New
Year of the Tiger Bit Boeing" (1999) 54:627
h Technology 28 [hereinafter
Daun" (1998) 34:8 Asian Business
Boeing] ; 1.
4 8 .
airline which has been forced to shut down its operations
and later filed for bankruptcy. Philippine ~iriines (PAL)
suspended its routes and was required to reschedule its debt
payments to about 1000 creditors owed USS2.2 billion. In
addition, PAL was locked into accepting a rehabilitation
program that included a reduction in fleet size, disposal of
excess assets and layoffs of approxirnately 13.000 of its
workforce. Other airlines that were affected similarly
include, among others, Garuda Indonesia, which was deemed
technically bankrupt with a foreign debt of over USS400
million and Thai Airways which has sold 3 DC-10s and failed
to take delivery of nine aircraft in 1998.37
The sharp currency declines throughout Southeast Asia
has also created troubles for aircraft manufacturers such as
Boeing and Airbus, as the financial crisis has made mrst
airlines in the region either cancel or defer delivery of
aircraft orders from these manufacturers. 38 With the sale
"~ee Boeing, supra note 36.
%ee ibid. The airlines are: Cathay Pacific Airlines
(withdrawing 20 B-747s between 1997-99) , EVA Airlines (cancelled 12 Airbus orders in 1999 and delayed delivery of 5 8-747s due in
2000), Garuda Indonesia (to cut 39 aircraft by terminating
leases, including the return of 6 newly delivered B-737s, 6 MD-
Ils, sold 5 DC-10s and cancelled orders for 6 B-737s and 6 B-
7 7 7 ~ ) ~ Korean Airlines (sold 6 B-747s and 2 MD-Ils in 1999),
and acquisition of new aircraft denominated in US dollars,
such currency declines make Boeing and Airbus products
signif icantly more expensive. For example, in Indonesia,
where in early 1998 local currencies plummeted to 80 percent
of their original value, the price of new commercial
aircraft became 80 percent more expensive.
Ironically, it is in the Asia Pacific region that both
airframe manufacturers are expecting to find the most sale
opportunities. According to surveys conducted by the Center
for Asia Pacific Aviation, airlines in Asia are the world's
biggest users of large wide-body aircraft, of which some 30
percent of the aircraft currently in service across the
region, are in the 350 to 400 category. 39
Although the Asian air transport industry is presently
recovering from this crisisr4' regional carriers continue to
face intricate pzoblems with respect to aircraft financing.
Malaysian Airlines (arranged USS100 million for aircraft sale and
lease-backs, sub-leased 15 aircraft and delayed deliveries of 8
8-777s and 6 B-747s up to 3 yearsl, Singapore Airlines (deferred
purchase of Il A-340s) and Thai Airways (sold 3 DC-10s and
delayed delivery of 17 Boeing aircraft due in 2002). 39 See Boeing, supra note 14.
'OP. Harbison, "Asia's Airlines: The Real Thing or Just
Virtual Recovery?" (October 1999) 25 Aviation Anaylyst 9.
Aging aircraft and engines must be replaced, whereas fleet
sizes must be increased to meet the projected capacity for
growth in the next millennium.
LEGAL AMI ECON-C OBJECTIVES FOR REFORMING CREDITOR
PROTECTION LAWS AS APPLIED Tû AIR- OBJECTS
1. Credit Enhancement Devices in Aircraft Finance
Transactions
Security devices protect and safeguard the interests of
a creditor in the event that a debtor fails to fulfill its
obligations - a mechanism which allows creditors prompt
access to the aircraft and associated equipment.
Furthemore, it will give creditors a superior priority
claim against the asset .
A. Equipment Trust and Conditional Sales
Historically, commercial aircraft financing techniques
evolved f rom railroad equipment financing . 'l The legal
structure of equipment trust was invented in the early l g t h
century and was primarily intended for financing railroad
equipment.42 At that time, there was no legal device
available to create a security interest in movable
41~ee L.D. Adkins & D. Billyou, "Current Developments in
Railroad Eqipment Financing" (1957) 12 Bus. L. 207.
4 2 ~ e e M. D. Rice, "Railroad Equipment Financing" (198 9) 18
Trans. L. J. 85.
equipment. Although mortgages on real property were common,
a security interest in persona1 property in absence of
possession was considered illegal. 4' .
Hence, the equipment trust was invented. Under this
structure, an investor (or group of investors) would finance
the acquisition of equipment for the purpose of leasing it
to a third party. This could be done by way of deferring
legal title to the equipment until the full purchase price
is paid. In the meantirne, the equipment user retains
physical possession of the equipment. The payment of the
purchase price might come in the form of lease, rent or
installments. Eventually, once al1 rent due has been paid
for, the "lessor" will have legal title and become the owner
of the equipment. 4 4
The use of equipment trust, either by way of retention
of title to the leased equipment by a trustee in favor of
the party providing the funds or, by way of a conditional
sale agreement where the title is withheld for the benefit
4 3 ~ e e ibid. 44 See M.D. Rice, "Current I s sues i n A i rc ra f t Finance" (1991)
56:4 J. Air L. & Corn. 1027.
of the equipment manufacturer, were considered useful
devices in railroad equipment financing. 4 5
B. Chattel Mottgaqe and Asrial Hypothrc
C h a t t e 1 mortgage. Originally derived from the French
words 'mort" which means dead and "gage" meaning pledge, 46
the chattel mortgage is a security device used within Common
law systems and once regarded as the most commonly used
security instrument in aircraft finance transactions. 47
Barron a n d O'Brian provide the following definition of a
chatte1 mortgage:
" [a]n agreement vesting in the creditor the title
to the chattel, defeasable by performance on the
part of the debtor of the obligation for which
title to the chattel is conveyed as sec~rity.'~~~
?3ee ibid.
4 6 ~ e e D. H. Bunker, The Law of Aerospace Finance i n Canada
(DCL Thesis , M c G i l l University, 1988 1 136 [ h e r e i n a f t e r Bunker]
c i t i n g J. A. Barron & A. H. OrBrian, Chat t e l Mortgages and B i l l s
o f Sale (Toronto: Canada Law Journal Company, 1897) 1.
"~ee Lambert, supra note 20 a t 650. 48 See J. Cohen, The Challenge of Aircraft Financinq and its
Legal l l np l i ca t ions (LL-M Thesis, M c G i l l Univers i ty , 1996)
[unpublished] a t 38 c i t i n g J, A. Barron & A. H. O'Brian, supra
note 40.
Prior to the 1960s, the chatte1 mortgage procedure was
better adapted to aircraft financing than other rnethods of
aircraft finance transactions, including conditional sales.
There are three main reasons for this:
(a) the chatte1 mortgage cculd be used to create a first
or subordinated interest on an owned property, even
if such property had been previously encumbered as a
result of a pre-existing debt. Conversely, such a
practice would be impossible in conditional sale
transactions;
(b) generally described property could be mortgaged,
prcvided that applicable local recording
requirements are satisfied. This rule extends to
spare parts and other accessories attached to the
encumbered aircraft;
(c) the likelihood of the chattel mortgagees' tort
liability exposure for damages arising out of an
event caused by the secured aircraft, is minimal
when compared to the risk borne by title-holders in
title-based aircraft financinq. 4 9
I n t h e 1980s, t h e advantages of utilizing chattel
mortgages as s e c u r i t y devices was soon weakened by t h e
enactment of a number of laws i n t he United States. First,
the adoption of Section 504 of t h e US Federal Aviation
AC^," a s amended, has eliminated t h e risk of t o r t l i a b i l i t y
for injuries t o and death of persons, o r darnage t o o r l o s s
5 1 of p rope r ty imposed on security t i t l e - h o l d e r s . Secondly,
section 1 1 6 (5) of t h e US Bankruptcy granted security
title-holders priority mer chattel mcrtgagees in reclaiming
t h e i r assets in the event of bankruptcy. 5 3
The a e r i a l h y p ~ t h e c ~ ~ on t h e other hand, is the C i v i l
Law counte ipa r t of the chatte1 mortgage and is c h a r a c t e r i z e d
as a non-possessory pledge. Although C i v i l law systems do
' 9 ~ e e Lambert , supra n o t e 20 a t 651 citing F. E. Hines,
"Legal Difficulties i n Secured A i r l i n e Equipment Financing"
(1948) 15 J. Air L. & Corn. 13.
"49 U.S.C. 5 1404 (1976).
"see ibid.
" ~ l O.S.C. S 516 (51 (19761.
%ee aià.
'%ee Cohen, supra note 48 citing R, Rodiere, D r o i t des
T r a n s p o r t s Terrestres et A e r i e n s (Paris: Dalloz, 1990) at L5.
n o t g e n e r a l l y recognize t h e n o t i o n of non-possessory p ledge ,
where posses s ion o f t h e secuzed o b j e c t rests wi th the
c r e d i t o r , t h e C i v i l law system p e r m i t s r e g i s t r a b l e moveable
o b j e c t s t h a t a r e e a s i l y i d e n t i f i e d and l o c a l i z e d such a s
s h i p s and a i r c r a f t . Unl ike mortgages i n Common l a w , hypothec
deeds have t o be drawn up by a n o t a r y and p e r f e c t e d by be ing
r eco rded i n a p u b l i c r e g i s t e r i n o r d e r t o be e f f e c t i v e . "
C. Leasing Aqrecrmcrnts
Leasing i s a key and growing sou rce of funds f o r t h e
a i r l i n e i ndus t ryS6 and a i r l i n e s r ega rd a i r c r a f t Leasing a s
t h e p r e f e r r e d method o f a i r c r a f t a c q u i s i t i o n , f o r a v a r i e t y
o f reasons . From a n economic p o i n t of view, l e a s i n g has
enab led a i r l i n e s t o avo id making huge down-payments and
heavy c a p i t a l comrnitments a s opposed t o pu rchas ing
a i r c r a f t . " Equal ly impor tan t , l e a s i n g has p e r m i t t e d
a i r l i n e s t o b e n e f i t from t a x a t i o n i n c e n t i v e s , which
under l ies t h e p r i n c i p a l d i f f e r e n c e between l e a s i n g and
"Sec i b i d .
5 6 ~ e e R. Gr i t t a h P. Lynagh, "Aircraft Leasing: Panacea o r
Problem?" (1973) 5:I Trans. L. 3 . 12.
"Sec W. W. Eyer, "The Sale, Leasing and Financing o f
Zlircraft" (1979) 45 J. Air L. h Com. 231.
purchas ing . There are many def i n i t i o n s of l e a s i n g , 59 but
i n i t s s i m p l e s t terms, a l e a s e is:
"a c o n t r a c t of h i r e whereunder one p a r t y , the
lessee o b t a i n s t h e use of an a s s e t i n r e t u r n f o r
the payment of r e n t t o t h e owner of the a s s e t ,
the l e s s o r . "'O
I n p r i n c i p l e , l e a s e s can be c l a s s i f i e d as capital (or
f inancial) and o p e r a t i n g l e a s e s . 6' Other s p e c i f i c t y p e s of
l e a s e s , such a s "dry lease", " w e t l e a ~ e ' ~ , "double-dip
lease" , "g randfa the r lease" , "Irish lease", "Musashi lease*,
'e~ee T. M. Clark, "Aircraft Acquisitions: Lease or
Purchase?" (19741 2:4 Int. Bus. L. 90.
"~ee Bunker, supra note 46 at 23. Bunker cited sevexal
definitions of leasing from accounting and tax, as well as legal
perspectives.
60~ee S. Holloway, Airc ra f t Acquisition Finance and Air l ine
Credit Analysis (Great Britain: Pitman, 1992) at 140.
%.A. Greenspon, "Documentation of Aircraft Operating
Leases" (1989) 18 Int. Bus, L. 227. According to Greenspon, a
capital lease is a financing instrument whereby a lessee
(airline) can acquire use of an asset for most of its useful life
by paying a specific amount of rent over the term of the lease
and where the total rent paid will amortize the lessor's capital
investment in the asset. On the other hand, an operating lease is
a short-term lease whereby the lessee (airline) cari acquire use
of an asset for a fraction of its useful life at a fraction of
its cost.
"underwater l e a s e " and numerous o t h e r s evolve £rom t h e
p r i n c i p l e o f c a p i t a l and o p e r a t i n g leases . " Although t h e
s t r u c t u r e and phi losophy of l e a s e s o f t e n sounds ve ry
cornplex, t h e y a r e a c t u a l l y q u i t e s imple .
I t is impor tan t t o no te , however, t h a t d e s p i t e t h e i r
f ancy names, a comrnon l e g a I element i n leasing i s title
r e t e n t i o n , whereby a legal t i t l e o f t h e a i r c r a f t i s u s u a l l y
h e l d by a t r u s t e e a c t i n g on beha l f of the l e n d e r s ( t i t le-
based s e c u r i t y i n t e r e s t ) . The l ende r s ' b a s i c o b j e c t i v e i s t o
e n s u r e t h a t t h e y w i l l r e c e i v e t h e i r p r i n c i p a l and i n t e r e s t
payments r e g a r d l e s s of any change i n c i rcumstances . Should
an e v e n t of d e f a u l t occur , t h e l e n d e r s would expec t t h e
r e t u x n o f a v a l u a b l e and marketable a i r c r a f t . 6 3
II. Principal ûbjmctivei for Reforming Creditox Pzotection
Laws for Aitcraft
As a i r c r a f t c o n s t a n t l y move between p o l i t i c a l bo rde r s ,
a f i n a n c i e r needs t o be a b s o l u t e l y s u r e o f h i s a b i l i t y t o
r e c o v e r and r eposses s a i r c r a f t i n t h e e v e n t of a d e f a u l t o r ,
6 2 ~ e e Bunker, supra nate 46.
%ee Kruft, supra note 24 at 738.
a t l e a s t , be aware o f t h e i n h e r e n t r i s k a s s o c i a t e d w i t h
i t . 64
A. Economic Considerations
1. The Importance of C t e d i t Valuation in Aviation
Financins
One o f t h e most important d r i v i n g forces behind t h e
i n c r e a s i n g complexi ty o f a v i a t i o n f i n a n c e t r a n s a c t i o n s i s
t h e a l l o c a t i o n o f r i s k s between t h e p a r t i e s i nvo lved i n such
t r a n s a c t i o n s . 65 Assess ing t h e a i r l i n e s t c r e d i t , t h e r e f o r e ,
becomes a c r i t i c a l a s p e c t . 6 6
Holloway i d e n t i f i e s some of t h e p r i n c i p a l r i s k s of a
g e n e r a l n a t u r e which f i n a n c i e l s should be aware o f :
( a ) c r e d i t r i s k s posed by t h e o b l i g o r ;
( b ) a s s e t a c c e s s r i s k ;
(c) a s s e t v a l u e r i s k ;
( d ) r i s k s as a result of t h e p h y s i c a l l o s s o f o r damage
t o aircraft ;
(e) l i a b i l i t y r i s k s a r i s i n g o u t of t h e u se o f a i r c r a f t ; - -- - - - - -- - - -
"sec Greenspon, supra note 61 a t 229. 65 See Holloway, supra note 60 a t 209.
%ee R. S. Sowter, "Lease Finance f o r Airl ines" (1979) 4:1
Air L. 20.
( f 1 political ris k;
(g) tax risk; and
(h) currency rate and interest ri~k.~'
Prior to considering the above risks, and in view of
various methods of financing an airline, an assessrnent
should also be made based on the following questions:
(a) whether the lending guaranteed by an export credit
agency, in this case, a financier's primary
security, will be the guarantee of the export credit
agency to repay the financier in the event of
default;
(b) or whether in the case of Lending to the governmcnt
sector (government agencies, state-owned airlines or
against government guarantees), the financier's
concern would be placed on the goverment's
cornmitment to honor repayment obligations;
(c) or whether in asset-based financing, where the
aircraft (asset) is the principal security to the
transaction, the prime concern of the financier
would be on the priority of the security interest it
has over the secured asset;
67~ee Holloway, supra note 60 at 209,
(d) o r whether t h e l end ing is based on t h e a i r l i n e r s
c r e d i t a lone . 68
2 . Economic Value of Collateral
I t is e s s e n t i a l t o v e r i f y t h a t an a i r l i n e has t h e power
t o borrow money and c r e a t e s e c u r i t y i n t e r e s t s i n i t s a s s e t s .
An a i r l i n e w i t h weak c r e d i t w i l l p l a c e g r e a t e r r e l i a n c e on
t h e resale va lue of t h e a i r c r a f t a s s e c ~ r i t ~ , ~ ~
Consequently, t h e economic va lue o f c o l l a t e r a l f o r a
l e n d e r is of g r e a t importance i n de te rmin ing f i n a n c i n g
s t r a t e g i e s where t h e assetrs v a l u e a s s e c u r i t y i s a c r i t i c a l
f a c t o r i n p x i c i n g t h e whole t r a n s a c t i o n . I f t h e f u t u r e
res idual va lue of a i r c r a f t i s f o r e c a s t e d t o be high, l e n d e r s
might be more a t t r a c t e d i n t o s t r u c t u r i n g a more a t t r a c t i v e
method of f i nanc ing , o r , banks may o f f e r l a r g e r l oans . sa
60 See A. Robinson "Assessing an A i r l i n e r s Credit : The
Lender' s Perspective" i n S .A. D. Hall, ed., A i r c r a f t Financinq
(London: Euromoney Publications, 198 9) 151.
6 g ~ e e Holloway, supra note 60 a t 123. Ï O See M. JI Durham h D. P. Garton, "Selecting the
Appropriate Structure: The Decision-Making Process" i n S.A.D.
Hall, ed . , A i r c r a f t FinancUig (London : Euromoney Publications,
1989) 27 a t 33 .
One popular trend of aircraft financing techniques,
asset-based financing, depends on clear evidence that
aircraft can retain a certain market value in order to cover
the financier's capital costs and expected returns. The idea
is that in the event of default, the aircraft used as
security must be quickly returned and put back into
operation with another operator. In this case, the aircraft
must also stand on its own value-7L Accordingly, the
financial condition of the airline, or goverment
quarantees, becomes less important in asset-based
transactions where asset itself serves as the primary
guarantee. 72
B. K e y Leqal and Political Problems
When an aircraft is put on cross-border operations, the
differing systems of aircraft registration, commercial
codes, legal frameworks and overall political instability of
many jurisdictions generate vast problems and concerns as to
"~ee S. Pierce, 'The Industryf s Requirements : The Growth of
Asset-based Financing" in S .A- D. Hall, ed., A i r c r a f t F inanc ing
(London: Euromoney Publications, 1989) 3 at 7.
"~ee F. Kennedy, "Financing National Rirlines in Developing
Countries" in S.A. D. Hall, ed., Aircraft F i n a n c i n g (London:
Euromoney Publications, 1989) 39 at 41.
whether the financier will be able to repossess the aircraft
quickly in the event of a defaul t .
In security-based aircraft financing, the financier has
to ensure that the airline has validly acquired title and
that the financier himself has acquired a valid first
priority security interest. This also applies to title-based
financing whereby the financier has to verify that title-
retentian devices are generally recognized worldwide.
By virtue of the Convention on the International
Recognition of Rights in Aircraft 1948'', customary
international practice regards a lease or security interest
in aircraft to be deemed valid if constituted in accordance
with the Law in which the carrier is ~ertified.'~ However,
it is not possible to generalize as to how a country would
treat foreign security interests as the Law of property
rights must u s u a l l y conform to the Laws of the individual
States as the foms of secured transactions, be it chattel
mortgages, hypothecs or title-retention devices, which Vary
" ~ e e Geneva Convention, i n f r a note 9 8 .
" ~ e e Geneva Convention, infra note 9 8 , a r t . 1 (Il (a) .
from coun t ry t o count ry . I t is p o s s i b l e t h a t one o r more
d e v i c e s a r e unknown w i t h i n c e r t a i n j u r i s d i c t i o n s . 7s
Although t h e Geneva Convention has been s igned by most
c o u n t r i e s , t h e convent ion h a s n o t been r a t i f i e d by a
m a j o r i t y of s i g n a t o r i e s . Accordingly, t h e r i g h t s c r e a t e d
under t h e laws of non-contract ing s t a t e s w i l l no t have t h e
same impact a s t h o s e c r e a t e d by c o n t r a c t i n g s t a t e s .
F u r t h e m o r e , t h e Convention does n o t have a n erga omnes
e f f e c t , meaning t h a t ownership r i g h t s a r e on ly p r o t e c t e d
when an a i r c r a f t f l i e s e x c l u s i v e l y between c o n t r a c t i n g
s t a t e s . 7 6
2, Deprivation and Reposaession Rïsks
When an a i r l i n e i s based i n a p o l i t i c a l l y u n s t a b l e
coun t ry , t h e a i r l i n e may be a t r i s k of be ing exposed t o a
weak l e g a l system. F i r s t , t h e system may b e l a c k i n g a body
of commercial law, which does n o t p r o t e c t h o l d e r s of t i t l e
o r s e c u r i t y i n t e r e s t s i n a i r c r a f t . Secondly, i ts l e g a l
75 See W. W. Eyer, supra note 57 at 242.
'%ee M. Chobaux, "Ensuring the Law is on your Side"
(January 1994) Asset Finance & Leasing Digest 21.
processes are slow or uncertain and its judiciary may be
susceptible to political interference. 77
Deprivation occurs when a financier is deprived of
access to an aircraft. For example, the state where the
aircraft is located at the time of repossession may deny
entry and exit visas to recovery crews. Important manuals
and technical and maintenance records belonging to the
aircraft must also be recovered. Failure to recover the
aircraft's current records may burden the financier by
having him perform a heavy check on the repossessed aircraft
in order to re-establish its maintenance credentials. The
inability to do so would render the aircraft unmarketable. 78
Desegistration and Expost Authorization Delayr
The issue of political risks is one of the most common
issues in cross-border financing, from both commercial and
legal perspectives. These risks can range from confiscation
by the host government, to a refusal on the part of local
aviation authorities to issue the necessary aircraft export
licenses/export authorizations, or to other actions
exercised by a host government which prevent or delay
77 See Holloway, supra note 60 at 262.
'%ee ibid.
realization of the creditor's rights to repossession. : 9
Some devices that are used tu increase t h e degree of
cornfort include signed and undated deregistratiun fortns,
export licenses for the aircraft, a blank power of a t t o r n e y
signed by the airline and a government undertaking to
facilitate or refrain from hindering deregistration.
However, since most airlines are owned by governments, and
in view of the accumulated capital Lnvested in the aircraft,
there is no guarantee that the operator or its government
would be willing to cooperate in the repossession of the
aircraft by foreigners. BO
4 . Bankruptcy Lawr which -de Aircraft Repossession
Under the mechanism of insolvency laws of most
jurisdictions, a borrowerrs liquidator or bankruptcy
administrator, can challenge a validly created security
being deemed to be a preference or a f r a u d u l e n t conveyance
i n favour of the rnortgagee. A preference is deemed given if
a bankrupt Company allows anything t h a t can be constituted
as granting preferential treatrnent to a creditor or
79 See A. Littlejohns & S. Hall, "Legal Issues in Aircraft
Finance" in S .A. D. Hall, ed., Aircraft Financinq (London:
Euromoney Publications, 1989) 219 at 223.
Holloway, supra note 60 at 228.
g u a r a n t o r , s o as t o p u t such a creditor i n a better position
than o t h e r c r e d i t o r s , B 1
An excep t ion can b e found i n S e c t i o n 1110 of t h e US
Bankruptcy Code,02 which e s s e n t i a l l y p r o h i b i t s bankruptcy
c o u r t s and t r u s t e e s i n Chapter 11 r e o r g a n i z a t i o n s from
i n t e r f e r i n g wi th t h e r i g h t s o f owners and s e c u r e d p a r t i e s ,
i n compliance wi th t h e p r o v i s i o n s o f t h e a p p l i c a b l e s e c u r i t y
agreement, l e a s e or c o n d i t i o n a l s a l e c o n t r a c t . The r i g h t of
t h e s ecu red p a r t i e s , l e s s o r s and c o n d i t i o n a l vendors t o
r e p o s s e s s a i r c r a f t , a i r c r a f t engines, p r o p e l l e r s , a p p l i a n c e s
o r s p a r e p a r t s is suspended i f , w i t h i n a s ix ty-day w a i t i n g
p e r i o d , t h e debtor a g r e e s t o perform a l l o b l i g a t i o n s and
c u r e e x i s t i n g d e f a u l t s . 8 3
" ~ e e A. L i t t l e johns h S. Hall, supra note 79 a t 231.
"11 U.S.C. S 1110 (1982)
or a de t a i l ed discussion of S 1110 of t h e Bankruptcy
Code and i t s his tory, see Goldman, Album & Ward, "Repossessing
t h e S p i r i t of St. Louis: Expanding t h e Protection of Sections
1110 and 1168 of the Bankruptcy Code" (1985) 4 1 Bus. L. 29; G. S.
Gerstell 6, K . Hoff-Patrinos, "Aviation Financinq Problems Under
Section 1110 of the Bankruptcy Code" (1907) 61 Am. Bankr. L, J.
1; R. Greenspon, "AirLine Reorganizations in t h e US and t h e i r
Impact on the In t e re s t s of Ai rc ra f t Lessors and Secured
Creditors" (1986) 1 4 Intl. Bus. L. 100.
5 . Choice of Law Issues
C o n f l i c t s of law i s s u e s a r e i n h e r e n t t o c ross -border
f i n a n c i n g s . The cons t an t movement of a s s e t s adds t o t h e r i s k
o f j u r i s d i c t i o n a l c o n f l i c t . Therefore , f i n a n c i e r s wishing t o
r e p o s s e s s a n a i r c r a f t should be aware o f t h e d i v e r g i n g
systems o f law which can impose thernselves : 8 4
( a ) Governing law. While t h e cho ice of law s e l e c t e d by
t h e p a r t i e s i n a t r a n s a c t i o n , g e n e r a l l y governs most
i s s u e s i n connect ion wi th t h e c o n t r a c t , one must
n o t e t h a t t h e law of t h e a c t u a l p l a c e where t h e
c o n t r a c t i s s igned (lex loci contractus) may govern
some m a t t e r s regard ing v a l i d i t y and e n f o r c e a b i l i t y ;
( b ) Lex s i t u s . Some j u r i s d i c t i o n s , e s p e c i a l l y t h o s e o f
non-cont rac t ing s t a t e s t o t h e Geneva Convention may
l o o k a t t h e phys i ca l l o c a t i o n of t h e a i r c r a f t t o
de te rmine t h e v a l i d i t y o f t i t l e t r a n s f e r o r c r e a t i o n
o f s e c u r i t y r i g h t s ;
(c) Lex forum. The law of t h e state where the c o u r t
chosen t o hea r a d i s p u t e governs j u r i s d i c t i o n a l and
procedural mat t e r s , as w e l l as any assessment o f
damages. While it i s g e n e r a l l y safe t o choose a
forum on a non-exclusive b a s i s , o r even, one which
8 4 See Holloway, supra note 60 at 211.
-4 7-
acco rds t h e cho ice of governing law, it would be
e a s i e r f o r f i n a n c i e r s t o select t h e forum where t h e
judgment w i l l be enf orced.
6. Sovereign ïmmunity
There are f e a r s t h a t when government-owned a i r l i n e s a r e
brought t o c o u r t , t h e y w i l l r a i s e t h e d e f e n s e of sove re ign
immunity. However, i t has been a g e n e r a l l y accep ted p r a c t i c e
t h a t a s l ong a s t h e a i r l i n e is cons ide red t o b e conduct ing
commercial o p e r a t i o n s , accord ingly , t h e a c q u i s i t i o n and
f i n a n c i n g o f a i r c r a f t a r e t o be regarded a s p u r e l y
commercial t r a n s a c t i o n s , r e g a r d l e s s of whether one o f t h e
p a r t i e s t o t h e t r a n s a c t i o n a c t s on beha l f o f a government o r
government e n t i t y . While most sove re ign immunity de fenses
a r e u n l i k e l y t o p r e v a i l i n most c o u n t r i e s , i t is p o s s i b l e
t h a t goverment-owned a i r l i n e s r a i s e a r e l a t e d de fense
c l a iming t h a t t h e enforcement of a l e a s e o r s e c u r i t y
i n t e r e s t w i l l v i o l a t e p u b l i c o r d e r by i n t e r r u p t i n g its
n a t i o n a l a i r s e r v i c e . 86
" ~ e e ibid.
'%ee W. W. Eyer, supra note, 57.
THE -IONAL L&GAL REG= FOR
AIR- FINANCïNG TRANSACTIONS
1. International L e g i s l a t i o n and Rights i n Aircraft
International work in legislating matters related to
recognition of title and mortgages in aircraft began as
early as 1925. In that year, the International Chamber of
Commerce established a special commission consisting of
legal experts in the field of air law known as the CITEJA
(Comité International Technique d'Experts Juridiques
Aériens) which had the following basic objectives:
(a) to set-up a program for the examination of air law;
(b) to prepare tcxts for international conventions on
air law;
(c) to elaborate a single international code for air
law . 8 7
or or a review of CITEJA's history see J.J. Ide, "The
History and Accomplishments of the International Technical
Committee of Aerial Legal Experts (CITEJA) " (1932) 3: 1 J, Air L.
& Corn. 27.
Since its establishment, CITEJA has been engaged in the
preparation of a number of major international air law
conventions. The adoption of the ce lebra ted Warsaw
Convention for the Unification of Certain Rules Rela t ing to
International Carriage by Air 1929'' represents CITEJA' s
principal achievement.
Shor t ly a f t e r CITEJA was established, it was charged t o
begin work on a d r a f t convention that would provide a basis
for the international recognition of security interests in
a i r c r a f t , comparable to custornary practice in maritime
law. 90 By 1931, the commission had produced two draft
conventions. The first d ra f t contained provisions dealing
%e Convention f o r the Unificat ion of Cer ta in Ru1 es
Rela t ing t o International C a r r i a g e by Air, signed at Warsaw, 12
October 1929. Authentic French Text: II Conférence Internationale
de Droit Privé Aérien, 4-12 Octobre 1929, Varsovie [Warszawa
19301 pp. 220-233. Englisti Translatian: ScheduLe ta the United
Kingdom Cârriage by Air Act, 1932, 22 & 23 Geo.5, ch.36.
'%ee R.O. Wilberforce, "The International Technical
Cammittee of Experts in Air Law" (1947) 1 I .L .Q . 509.
"see i b i d . See also C.S. Doskow, "Transitory Chattels and
Stationary Law" (1959) 26 J. A i r L. 6 Corn. 36 at 47 [hereinafter
Doskow] ; Rice, supra note, 40 at 1055. iinder customary practice
in maritime law, the validity of interests in ships are
determined by the l a w of the state where the vesse1 is registered
for nationality purposes.
w i t h t h e ownership of a i r c r a f t and an a e r o n a u t i c a l r e g i s t e r .
The second d r a f t covered mortgages and o t h e r s e c u r i t i e s . 9 1
The CITEJA d r a f t s were no t submi t ted t o an i n t e r n a t i o n a l
con fe rence u n t i l s h o r t l y b e f o r e t h e end o f t h e Second World
War . 92
A. The Rome Convention on Precautionaxy Arrest for
Aircraft 1933
Lenders r ega rd p recau t iona ry a r r e s t a s a u s e f u l method
t o g u a r a n t e e t h e payment of a deb t . This is p a r t i c u l a r l y
t r u e a s l ong a s t h e arrest s e r v e s t h e b e n e f i t of p r i v a t e
i n t e r e s t s . However, p r ecau t iona ry arrest may t h r e a t e n t h e
g e n e r a l i n t e r e s t i f t h e a r r e s t causes economic d i s t u r b a n c e s
i n a i r t r a n s p o r t . 93
The Convention f o r t h e U n i f i c a t i o n o f C e r t a i n Rules
R e l a t i n g t o t h e Precaut ionary A t t a c h e n t o f ~ i r c r a f t ' ~ s e e k s
"Sec C.W. Shawcross & K.B- Beaumont, Air Law (London:
Butterworths, 1966) a t 585.
3 ' ~ e e ibid.
3 3 ~ e e N .M. Matte, Treatise on Air-Aeronautical Law (Toronto :
Carswell, 1981) 497.
9 4 ~ e e Convention for the Unification of Certain Rules
R e l a t i n g t o the Precautionary Arrest o f Aircraf t , signed a t Rome,
29 May 1933, 192 L.N.T.S. 289 , [hereinafter Rome Convention]. See
t o p reven t t h e s e i z u r e of a i r c r a f t r e g i s t e r e d i n a
C o n t r a c t i n g S t a t e from a r r e s t o r d e t e n t i o n i n a n o t h e r
C o n t r a c t i n g S t a t e , provided t h a t such s e i z u r e would
s e r i o u s l y i n t e r r u p t p u b l i c , commercial o r s t a t e
t r a n s p o r t a t i o n and t h a t t h e fo l lowing c i r cums tances apply :
( a ) t h e a r r e s t must be a form o f p r e - t r i a l o r i n t e r i m
r e l i e f , and n o t an enforcement o f a judgment debt;'=
( b ) t h e a i r c r a f t must be e x c l u s i v e l y a p p r o p r i a t e d t o a
s t a t e o r p o s t a l s e r v i c e o r , i n service on a regular
l i n e o f p u b l i c t r a n s p o r t ; 96
( c ) i n c a s e of a i r c r a f t a p p r o p r i a t e d t o a commercial
t r a n s p o r t , imrnunity a p p l i e s o n l y when t h e a i r c r a f t
is ready t o s t a r t t h e journey, u n l e s s t h e a r r e s t is
i n r e s p e c t of a c o n t r a c t d e b t i n c u r r e d for t h e
purposes o f t h e journey which t h e a i r c r a f t is about
t o make. 97
a l so C.W. Shawcross 6 K.B. Beaumont, Air Law (London:
But temorths , 1951) a t 499.
3 5 ~ e e i b i d . , a r t . 2 (1).
'"ee i b i d . , a r t , 3 (1) (a ) & (b) . "sec i b i d . , a r t . 3 (c) .
Presently, there are only 28 States parties to the
Convention. Neither the United States nor the United Kingdom
is a party to the treaty.
B. The Geneva Convention on the International Recognition
of Riqhts i n Aircraft 1948
Driven by its strong economic interest in facilitating
aircraft exports to other countries and backed by a
sophisticated method of equipment financing, the United
States realized the importance of defining an
internationally accepted standard of property rights in
aircraft. Furthermore, there was a growing number of
aircraft financed by US corporations at that time, where the
United States became particularly concerned when aircraft
they had financed became exposed to a foreign jurisdiction
with a hostile treatment towards property rights in
aircraft . 98
Consequently, the United States becarne the strongest
advocate for the preparation of an international aircraft
mortgage treaty that sought to protect the security interest
'%ee Matte, supra note 93 at 5 5 4 .
-5 3-
o f t h e i r financier^.'^ Hence, t h e c a l l i n g f o r t h e adop t ion
of an a i r c r a f t rnortgage t r e a t y r ece ived growing suppor t from
t h e i n t e r n a t i o n a l community. The fo l lowing were t h e
suppor t ing ci rcurnstances p r e v a i l i n g a t t h e t i m e :
( a ) i n c r e a s i n g a i r c r a f t f u n c t i o n a l i t y raised t h e va lue
of modern a i r c r a f t cons iderab ly ;
(b) newer a v i a t i o n technology improved a v i a t i o n s a f e t y ;
(c) s i g n i f i c a n t developments i n t h e i n su rance s e c t o r
p rovided g r e a t e r a s su rance and conf idence i n a i r
t r a v e l . 'Oo
Pursuant t o an assembly r e s o l u t i o n of t h e I n t e r n a t i o n a l
C i v i l Av ia t ion Conference, which met i n Chicago i n 1 9 4 4 , t h e
conference was i n v i t e d t o g i v e c o n s i d e r a t i o n t o t h e e a r l y
convening of a n i n t e r n a t i o n a l a i r law conference f o r t h e
purpose of adop t ing a convent ion d e a l i n g wi th a i r c r a f t
mortgages. For t h a t purpose, t h e conference was t o u s e for
' g ~ e e R.O. Wilberforce, "The Internat ional Recognition of
Rights i n Aircraf t" (1948) 2 I.L.Q. 4 2 1 [here inaf te r
Wilberforcel 1 ; S. P. Honig, The Legal S t a t u s of Aircraf t (The
Hague: Martinus Nijhoff, 1956) a t 79.
loOsee, 1. P. Diederiks-Verschoor, Introduction t u A i r Law,
(Boston: Kluwer Law, 1991) a t 161.
its deliberations, the earlier draft conventions prepared by
CITEJA. 'O1
In accordance with such a recommendation, CITEJA
continued its intensive study on the subject and Later
decided to consolidate the two draft conventions. Following
the end of the Second World War, the ICAO Legal Comrnittee,
which took over the functions of CITEJA, resumed earlier
efforts to prepare a convention on the international
recognition of rights in aircraft. In 1948, the second ICAO
Assernbly in Geneva adopted the Convention on the
International Recognition of Rights in Aircraft, which was
signed by fourteen States and came into force on 17
Septernber 1953. 'O2
Io'see E. Warner, "PICAO and Development o f A i r Law" (1947)
14 J. Air L . & Corn. 9 .
'O'see, Convention on the International Recognition of Rights
i n Aircraft, signed in Geneva, 19 June 1948, 310 U-N-T-S. 151,
T.1-A-S. 2847, 4 D.S.T. 1830, ICAO Doc. 7620 [hereinafter Geneva
Convention]. For a complete his tory o f t h e l eg i s la t i ve process o f
t h e Geneva Convention, see Report and Commentary o f the Legal
Committee of ICAO on the D r a f t Convention Concerning the
International Recognition o f Rights i n Aircraft, ICAO Doc, 4627,
LC/63.
The Geneva Convention was endowed with a simple
structure, consisting of 23 articles that touch upon the
creation, perfection, and recognition of rights in aircraft.
Lord Wilberforce, who signed this instrument on behalf of
the United Kingdom, noted that the drafting of the
Convention involved one of the rnost elaborate exercises ever
undertaken in international Law, since it attempts to
address issues arising from a specific area of law,
variously regulated under a wide divergence of national
conceptions, concerning real rights in aircraft that move
between several countries. 103
The Convention provides a solution to the problerns of
recognizing and enforcing financiers' rights in aircraft, on
the condition that such rights have been created in
accordance with the laws of the State where the aircraft is
duly registered. Thus, in addition to its significance for
operating lessors of aircraft, purchasers, lessees, and
secured financing parties who take a mortgage as security,
the Geneva Convention also serves to inform Contracting
States of their respective rights concerning lease,
ownership, and secured interests. The basic objectives of
the Convention are: - - -
?àee Wilberforce 1, supra note 98.
( a ) c r e d i t o r p r o t e c t i o n f o r l e n d e r s who have f inanced
t h e purchase of a i r c r a f t , wi th t h e a i r c r a f t i t s e l f
s e r v i n g a s t h e main s e c u r i t y f o r t h e loan;
( b ) t h e p r o t e c t i o n o f t h i r d p a r t i e s who a r e e i t h e r
d i r e c t l y o r i n d i r e c t l y involved i n t h e f i n a n c e o f
t h e a i r c r a f t . P r o t e c t i o n is a l s o a f f o r d e d t o t h i r d
p a r t i e s who may have hidden charges i n r e s p e c t o f
t h e a i r c r a f t ;
(c) t h e p r o v i s i o n of r u l e s d e f i n i n g p r i o r i t y d a i m s
a g a i n s t a i r c r a f t ; and
( d ) t h e f a c i l i t a t i o n o f t h e t r a n s f e r of a i r c r a f t between
n a t i o n a l i t y r e g i s t e r s . 104
The Geneva Convention dues no t o b l i g a t e c o n t r a c t i n g
s t a t e s t o make changes t o t h e i r own laws r e l a t i n g t o
p r o p e r t y r i g h t s . It onLy requires c o n t r a c t i n g s t a t e s t o
r ecogn ize t h o s e r i g h t s c a r r i e d by a i r c r a f t created and d u l y
r e g i s t e r e d i n a n o t h e r c o n t r a c t i n g s t a t e . The r i g h t s
recognized under t h e Convention a r e :
'04see ibid. See also, Geneva Convention, supra note 102,
arts. 1, III, I V , V, V I 1 & I X .
r i g h t s o f p r o p e r t y o r ownership i n a i r c r a f t ; l o 5
r i g h t s t o a c q u i r e a i r c r a f t by purchase coupled by
posses s ion o f t h e a i r c r a f t , such a s h i re -purchase o r
c o n d i t i o n a l s a l e s ; l o6
r i g h t s t o possess ion of a i r c r a f t under l e a s e s of s i x
months o r more, which inc ludes one of t h e f e a t u r e s
of equipment t r u s t ; L07
mortgages, hypotheques and s i m i l a r r i g h t s i n
a i r c r a f t which a r e c o n t r a c t u a l l y c r e a t e d a s s e c u r i t y
f o r payment of an indebtedness . "loe
I t i s impor tan t t o n o t e t h a t t h e s e r i g h t s a r e no t
v a l i d a t e d by t h e onv vent ion."^ Con t r ac t ing S t a t e s a r e f r e e
t o cnoose whatever method t h e y wish o f s e c u r i n g an i n t e r e s t
over an a i r c r a f t , provided t h a t such a i n t e r e s t is
r e g i s t e r e d i n a p u b l i c r eco rd and c o n s t i t u t e d i n accordance
wi th t h e law of t h e S t a t e i n which t h e a i r c r a f t is
r e g i s t e r e d a s t o n a t i o n a l i t y . 110
'''see Geneva Convention, supra note 102, a r t 1 (1) (a ) . '06see ibid., art. 1 (1) (b) . '07see ibid., a r t . 1 (11 (c ) . 'OB!3ee i b i d . , art. 1 (1) ( d l .
" ' ~ e e Wood, supra note 2 at 265,
'Iosee Geneva Convention, supra note 102, art. 1 (1) (i)
The principal reason why the drafters of the Convention
did not provide for a global standard for the constitution
and creation of security rights, was mainly due to the lack
of agreement as to which law is to govern a contractual
creation of an interest.''' Furthermore, the drafters found
great difficulty in finding an expression that would
describe security interests in aircraft in such a way as to
embrace aLl legal systems. 112
b) Registration of Rights
In order to effect recognition, an interest rnust be
recorded.'13 An unrecorded interest will not qualify for
international recognition. 11* Ironically, the Geneva
Convention does not impose an obligation for states to
maintain a record, nor does it properly define the meaning
" ' ~ e e A. Kadletz, Conf l ic t s o f Laws i n Private International
Air Law: The Contracts o f Carriage by A i r , Aviation Insurance,
Airrraft Purchase, Finance, the Crea t i o n o f Securlty R i g h t s i n
A i r c r a f t and a Common General P a r t (LL-M Thesis, McGill
University, 1996) at 142 citing O. Riese, Luftrecht (Stuttgart:
K.F. Koehler, 1949) a t 375.
'I2see Wilberforce 1, supra note 98.
LL3~ee Geneva Convention, supra note 102, art, 1 (d) ( ii) . "4~ee i b id .
of "pub l i c r e c ~ r d " . " ~ It should a l s o Se assumed t h a t t h e
Convention l eaves d i s c r e t i o n t o s t a t e s on whether t o keep a
s i n g l e a e r o n a u t i c a l r eco rd o r , s e p a r a t e n a t i o n a l i t y and
mortgage r eco rds . There i s no doubt t h a t s t a t e s wi thout a
r e c o r d may no t be f u l l y a b l e t o en joy t h e b e n e f i t s of t h e
Convention s i n c e unrecorded r i g h t s a r e s u b o r d i n a t e t o
recorded r i g h t s . 116
C) Privileqed and Priority Claims
Aside from t h o s e r i g h t s enumerated under A r t i c l e 1 of
t h e Geneva Convention, t h e r e a r e o t h e r r i g h t s having
p r i o r i t y over Article 1 r i g h t s . I n o r d e r of t h e i r rank,
t h o s e r i g h t s are"':
'"~ee Geneva Convention, supra note 102, a r t . 1 (1) (ii) . ?Sec Diedericks-Verschoor, supra note 100 a t 165. 1 i 7 Sec B.J.H Crans, "Selected P i t f a l l s and Booby-traps i n
A i r c r a f t Finance" (1992) L7:l Air & Sp. L. 45 c i t i n g K. Rijks,
H e t Verdrag van Geneve (Thesis, Leiden Universi ty, 1952) a t 181,
Compare, D.I. Johnston, "Legal Aspects of A i r c r a f t Finance"
(1963) 29 J. Air L. & Corn. 317. According t o Johnston, t h e o r d e r
of rank a r e as follows: (1) c o s t s of j u d i c i a l s a l e ; (2 ) sa lvage
and p rese rva t ion claims; ( 3 ) claims a r i s i n g from damage t o
persons on ground; ( 4 ) a r t i c l e 1 r i g h t s ; and (5) o t h e r r i g h t s
according t o t h e i r s t a t u s under t h e n a t i o n a l law of t h e a i r c r a f t .
(a) claims based on immigration, customs and a i r
navigat ion charges imposed by na t iona l l a ~ ; l ~ ~
(b) c o s t s of t h e j u d i c i a l s a l e which a r e l e g a l l y
chargeable under t he law of t h e Contract ing S t a t e
where the sa l e t akes place;11g
(c) claims i n respect of t h e s a l e of spare parts;'''
(d) claims f o r a i r c r a f t salvage and/or ext raordinary
expenses associa ted with t h e preservat ion of t h e
a i r c r a f t; 12'
( e ) claims a s a xesul t of i n ju ry t o persons o r damage t o
proper ty caused by t h e a i r c r a f t , provided t h a t such
i n j u r y o r damage occurred on the su r face of t h e
Contract ing S t a t e where the execution sale of t h e
a i r c r a f t takes place. Such a d a i m i s l imi ted t o 20
per cen t of t h e execution s a l e p r i c e aga in s t
'''sec Geneva Convention, supra note 102 a r t . XII. 119 See ibid., ar t . VI1 (61.
'"sec ibid., a r t . X. lxSee ibid., a r t . I V (21 ( a ) & (b). Aïso known as
"pr ivi leged c l a h s " , these a r e r i gh t s i n rem which have t o be
respected only i f the lex s i t u s ( t he law s t a t e where t he rescue
and preservat ion took place) recognizes them as having pr iv i lege .
Reference t o t h e term "extraordinary" expenses s h a l l include a l 1
non-ordinary and recurring expenses, which a r e associated with
r epa i r s t o t h e a i r c r a f t .
c r e d i t o r s c la iming under Article 1 o f t h e
C ~ n v e n t i o n ; ~ ~ '
( f ) purchase o p t i o n s , l e a s e r i g h t s and mortgage
r i g h t s . 123
d) Transfer of Aircraft Between Registries
Article I X o f t h e Geneva Convention was p r i m a r i l y
des igned t o d e a l wi th t h e r i s k s of a secu red c r e d i t o r when
t h e a i r c r a f t used a s s e c u r i t y i s t o be s o l d (and
subsequen t ly d e r e g i s t e r e d ) i n ano the r s t a t e . The Convention,
t h e r e f o r e , p r o h i b i t s t h e t r a n s f e r o f a i r c r a f t from one
n a t i o n a l r e g i s t r y of a Con t r ac t ing S t a t e t o a n o t h e r r e g i s t r y
of a n o t h e r c o n t r a c t i n g s t a t e , excep t when t h e fo l lowing
circurnstances apply:
( a ) a f o r c e d s a l e i n execu t ion s u b j e c t t o a r t i c l e VIT;
( b ) a l 1 h o l d e r s of recorded r i g h t s have been d u l y
n o t i f i e d and g iven consent t o t h e t r a n s f e r . 124
Yet, t h e Convention f a i l s t o p reven t a t r a n s f e r from
one C o n t r a c t i n g S t a t e t o a "non-contract ing" State. 125
" '~ee ibid., a r t . vfI (51.
'%ee ibid. , art . 1 (1) . 1'4~ee ibid., art. IX.
Article IX rnakes r e f e r e n c e t o "holders of r eco rded r i g h t s "
but i s u n c l e a r whether h o l d e r s of " p r i o r i t y r i g h t s " under
Art icle I V are also ~ 0 v e r e d . I ~ ~ Another weakness is t h e
absence of a mandatory d e r e g i s t r a t i o n p r o v i s i o n once an
a i r c r a f t becomes e l i g i b l e f o r s u b s e q u e n t r e g i s t r a t i o n i n
ano the r s t a t e . This e n a b l e s t h e double r e g i s t r a t i o n of
a i r c r a f t , which con t r avenes Article 18 of t h e Chicago
Convention r e g a r d i n g dual r e g i s t r a t i o n of a i r c r a f t . "'
e) Spare P a r t s
The i n c l u s i o n of s p a r e p a r t s under t h e Geneva
Convention r e f l e c t s t h e s i g n i f i c a n t p r o t e c t i o n r e q u i r e d f o r
a i r c r a f t f i n a n c i e r s as spare p a r t s g e n e r a l l y account fo r 25
percent of t h e aircraft purchase p r i c e . 126
L25~ee M.V. Polak, "Conflicts of Laws in the A i r " (1992)
18:2 Air & Sp. L. 83.
"%ticle IV (3) of t h e Geneva Convention does not require
privileged cla ims to be "recorded", instead, a "note" on the
record must be entered within three months frorn the date of t h e
t e m i n a t i o n o f the salvage or p rese rva t ions operations.
' " ~ e e Convention on International C i v i l Aviation, signed a t
Chicago, 7 December 1944 , 15 U.N.T.S. 295, ICA0 Doc. 730016 art.
1 0 . i Z B S e e G.N. Calkins Jr., "Creat ion and I n t e r n a t i o n a l
Recognition of T i t l e and Security Rights i n Aircraft" (1948) 15
J. Air L. & Corn. 177.
The Convention d e f i n e s s p a r e p a r t s a s " p a r t s of
a i r c r a f t , engines , p r o p e l l e r s , r a d i o appa ra tus , i n s t rumen t s ,
a p p l i a n c e s , f u r n i s h i n g s p a r t s o f any of t h e foregoing , and
g e n e r a l l y any o t h e r a r t i c l e s of whatever d e s c r i p t i o n
main ta ined f o r i n s t a l l a t i o n i n a i r c r a f t i n s u b s t i t u t i o n f o r
p a r t s o r a r t i c l e s r e m ~ v e d . " ' ~ ~ The Convention does n o t
s t i p u l a t e a l 1 t y p e s of s p a r e p a r t s , bu t r a t h e r , p rov ides
C o n t r a c t i n g S t a t e s wi th t h e o p t i o n t o dec ide whether t h e y
would i n c l u d e s p a r e p a r t s w i t h i n t h e scope of t h e
Convention. Spare p a r t s may be used a s s e c u r l t y f o r
indebtedness , provided t h a t :
( a ) t h e law o f t h e Con t r ac t ing S t a t e where t h e a i r c r a f t
i s r e g i s t e r e d provides f o r t h e i r i n c l u s i o n ;
(b) c r e a t i o n of r i g h t s i n s p a r e p a r t s must r e l a t e t o an
indebtedness i n connec t ion wi th t h e f i n a n c i n g o f
a i r c r a f t . Th i s i s because s p a r e p a r t s , u n l i k e
a i r c r a f t , do n o t posses s t h e i r own n a t i o n a l i t y .
Hence, t h e Geneva Convention p r o h i b i t s t h e
r e c o g n i t i o n o f independent s e c u r i t y d e v i c e s i n s p a r e
p a r t s ;
Z 2 9 ~ e e Geneva Convention, supra note 102, a r t . X ( 4 ) .
"O~ee ibid. , art. X ( 1) . "'sec ibid.
(c) t h e y a r e s t o r e d a t a s p e c i f i e d p l a c e o r places;13'
( d ) a n a p p r o p r i a t e p u b l i c n o t i c e s p e c i f y i n g t h e
d e s c r i p t i o n of t h e r i g h t , t h e r i g h t h o l d e r ' s name
and addres s and t h e r eco rd i n which such r i g h t s i s
recorded is e x h i b i t e d a t t h e p l a c e where t h e s p a r e
p a r t s a r e l oca t ed .
f) Enforcement by Judicial Sale
The o n l y method of enforcing a r i g h t a g a i n s t a i r c r a f t
i s through a fo rced j u d i c i a l s a l e . l I4 F u r t h e m o r e , t h e Geneva
Convention p reven t s any c r e a t i o n o r t r a n s f e r of r i g h t s by a
person wi th knowledge o f t h e j u d i c i a l sale.L35 AS r ega rds
procedure , t h e c o n t r o l l i n g law r e l a t i n g t o t h e proceedings
of a j u d i c i a l s a l e is determined by t h e law o f t h e forum
where t h e sale t a k e s p l ace . However, c e r t a i n requirements
must b e observed:
13'see i b i d .
%ee ibid.
' 3 4 ~ e c T. Conlon, "The ~ r c r a f t Mortgages Convention: The
United Kingdom Moves Toward Ratification" (1977) 4 3 J. Air L. &
Corn. 731. t35 See Geneva Convention, supra note 102, a r t . VI.
t h e d a t e and p lace of s a l e s h a l l be set a t least s i x
weeks p r i o r ta t h e j u d i c i a l sale; "6
t h e execut ing c r e d i t o r s h a l l f u r n i s h t h e cciurt o r
o t h e r competent a u t h o r i t i e s with c e r t i f i e d e x t r a c t s
of t h e a i r c r a f t records; 13'
t h e execut ing c r e d i t o r s h a l l g i v e p u b l i c n o t i c e o f
t h e s a l e a t t h e p lace where t h e a i r c r a f t is
r e g i s t e r e d f o r n a t i o n a l i t y purposes, i n accordance
with t h e law of t h e f l a g state;13'
t h e above n o t i c e s h a l l be d ispatched a t l e a s t one
month p r i o r t o e x e c ~ t i o n ; ' ~ ~
t h e execut ing c r e d i t o r s h a l l provide n o t i f i c a t i o n a s
t o t h e d a t e and p lace of t h e j u d i c i a l s a l e t o a l 1
recorded r i g h t holders of t h e a i r c r a f t by r e g i s t e r e d
a i r mai l ; 140
A s it concerns t h e d i s t r i b u t i o n of proceeds of t h e
judicial sa le , t h e Convention provides t h a t preference be
given t o those having p r i o r i t y over claims of t h e execut ing
- -
136~ee i b i d . , a r t . VI1 ( 2 ) ( a ) .
L'7~ee i b i d . , a r t . VI1 ( 2 ) ( b l .
L 3 B ~ e e ibid.
13%ee ibid.
I4'see i b i d .
c r e d i t o r . 141 Consequently, j u n i o r c r e d i t o r s may r e c e i v e
no th ing unless a l 1 proceeds of t h e sa le cove r a l 1 s e n i o r
l i e n s and r i g h t s .
Problems w i t h the Geneva Convention 1940
O v e r a l l , t h e Geneva Convention i n h e r i t s a vast degree
of complexi ty . In t h e i r a t t empt t o i n c o r p o r a t e major l e g a l
concepts p e r t a i n i n g t o r i g h t s i n a i r c r a f t i n t h e l e g a l
ins t rument , t h e framers of t h e Convention had t o d e a l w i th a
s p e c i f i c f i e l d of law, t h a t even many legaL systems f i n d
extrernely c h a l l e n g i n g and d i f f i c u l t - t h e c r e a t i o n , e f f e c t s
and p r i o r i t y of s e c u r i t y r i g h t s i n a i r c r a f t . 142 Although t h e
d r a f t e r s had o r i g i n a l l y env i s ioned a u n i f i c a t i o n t r e a t y t h a t
would u n i f o m l y r e g u l a t e r e a l r i g h t s i n a i r c r a f t , t h e
a t t empt was u n a t t a i n a b l e f o r t h e fo l lowing r easons :
( a ) a l a c k o f p receden t f o r such a s t a n d a r d f o m ; and
(b) t h e d i v e r g i n g n a t i o n a l concept ions of s e c u r i t y
r i g h t s t o b e accommodated made it q u i t e imposs ib l e
t o d r a f t a t r e a t y i n a r e l a t i v e l y s h o r t
'42~ee Wilberforce 1, supra note 98.
%ee ibid. Wilberforce noted the following:
" [T]he United S t a t e s had a h ighly developed technique
of a i r l i n e f inance, evolved by p r a c t i c e and analogy
Hencefor th , t h e d r a f t e r s agreed t h a t t h e i r focus would
n o t be d i r e c t e d a t a t t empt ing t o u n i f y p r o p e r t y r i g h t s laws
i n a i r c r a f t , bu t r a t h e r , t o e n a c t a t r e a t y t h a t would a l l ow
S t a t e s t o r e t a i n t h e i r own laws r e l a t i n g t o a i r c r a f t
mortgages. P re sen t ly , t h e r e are g r e a t problems f o r c o u n t r i e s
i n c o n s i d e r i n g whether t o r a t i f y t h e Geneva Convention:
( a ) t h e Convention does no t make a clear r e f e r e n c e a s t o
t h e law governing t h e c r e a t i o n of i n t e r e s t s i n
a i r c r a f t ; '44
- - - - ~ - -
from r a i l r o a d finance; i t was not prepared t o throw
overboard a system which was serving w e l l i n p r a c t i c e
f o r t h e uncer t a in ty of an u n t r i e d and undeveloped
method. Other na t ions could be d iv ided i n t o two
c a t e g o r i e s . The f i r s t , which included t h e United
Kingdom and t h e major i ty of o t h e r S t a t e s , had not y e t
formulated t h e i r own domestic law of charges on
a i r c r a f t ; t h e second, which included France, I t a l y and
some South American coun t r i e s , had t h e i r own n a t i o n a l
laws on t h e s u b j e c t which conformed n a t u r a l l y with t h e
r e s t of t h e i r r e spec t ive l e g a l systems. While t h e
f i r s t ca tegory might have been r e a d i e r than t h e second
t o accept some i n t e r n a t i o n a l system c r e a t e d de novo,
n e i t h e r could be expected t o e n g r a f t on t h e i r own
immature na t iona l l e g i s l a t i o n s on t h e s u b j e c t t h e
e l a b o r a t e cons t ruct ions of t h e United S t a t e s lawyers." i 4 4 See Geneva Convention, supra note 102, a r t . 1. Although
t h e absence to a clear re fe rence of t h e law is hard ly no t i ceab le ,
t h e fo l lowing provis ions :
it does no t p r o t e c t secured p a r t i e s w i t h r e s p e c t t o
a l 1 a i r c r a f t , The Convention merely p r o t e c t s
c r e d i t o r s wi th r e s p e c t t o f o r e i g n a i r c r a f t and n o t
t o domes t ic c r e d i t o r s w i t h r e s p e c t t o f o r e i g n
c r e d i t o r s in domest ic a i r c r a f t ;
t h e Convention only refers t o p r i o r i t y r i g h t s i n
terms of t h i r d p a r t y r i g h t s . It does no t t a k e away
any p r i o r i t y g ran ted by n a t i o n a l laws i n t h e case of
s a l v a g e and i n t h e c a s e of g o v e r m e n t s e i z u r e of t h e
a i r c r a f t pursuant t o customs and immigrat ion
proceedings. 146
"[plrovided that such rights have been constituted and
are recorded in a public record in conformity with the
law of the Contracting State whose nationality the
aircraft possesses [,.] "
does not point out the specific municipal Law of such state.
Furthemore, the Convention completely haves contracting States
to freely choose whatever form of security device. So for
instance, a Civil law country that does not recognize a
"mortgage" will be required to recognize a mortgage over aircraft
pursuant to the Geneva Convention. See generally J.M. Fortier,
Real Rights in Aircraft (LL.M Thesis, McGill University, 1980)
[hereinafter Fortier]; F.E.Hines, "Legal Difficulties in Secured
Airline Equipment Financinq" (1948) IS S . Air L. & Com. Il;
I4'see Fortier, supra note 140.
"%ee Geneva Convention, supra note 102, art. II, IV and
XII; B.J.H. Crans, "The UNIDROIT Convention on International
Interests in Mobile Equipment and the Aircraft Equipment
Protocol: Some Critical Observations" (1998) XXII1:VI Air & Sp.
(d) t h e scope o f t h e Convention is l i m i t e d t o t h e
r e c o g n i t i o n of s e c u r i t y i n t e r e s t s i n a i r c r a f t .
Because it is n o t a mortgage t r e a t y , an
i n t e r n a t i o n a l s t a n d a r d form o f s e c u r i t y was n o t set
L47 up ;
(e) t h e r e is no requirement f o r S t a t e s t o m a i n t a i n a
r e c o r d o r system f o r r eco rd ing s e c u r i t y i n t e r e s t s . 148
Despi te i ts f laws , a s no ted earlier, many p r a c t i t i o n e r s
and s c h o l a r s s t i l l r ega rd t h e Geneva Convention a s one of
t h e rnost comprehensive p r i v a t e i n t e r n a t i o n a l law i n s t r u m e n t s
e v e r d r a f t e d . The Convention h e l p s t o a d m i n i s t e r a s o l i d
l e g a l frarnework f o r p a r t i e s t h a t ho ld p r i v a t e law c l a i m s
w i t h r e s p e c t t o a i r c r a f t .
During t h e 50 y e a r s s i n c e it was opened f o r s i g n a t u r e ,
t h e Geneva Convention has been of v i t a l importance t o
prospective a i r c r a f t o p e r a t o r s and pu rchase r s , a s w e l l a s t o
--
L. 227 a t 280. Mr. Crans cited paragraph 1 4 (5) of the UK
A i r c ra f t Mortgaging Order 1972 which provides a bas i s a s t o why
the United Kingdom has been hes i t an t t o r a t i f y t he Geneva
Convention. Under English Law, contractual s ecu r i t y r i g h t s such
a s mortgages have no p r i o r i t y over over common law r e p a i r e r r s
l i e n s and s t a t u t o r y r igh t s .
' 4 7 ~ e e Doskow, supra note 90 a t 45.
L 4 8 ~ e e Calkins, supra note 128 a t 156.
creditors who finance the sale and lease of aircraft
destined for use in signatory countries. The Convention has
successfully unified, under an international regime, certain
sacred principles of air law previously defined exclusively
under national law. On the other hand, it continues to rely
on national law to resolve more complex problems,
particularly the conflict of laws. In other words, as
underlined by Diederiks-Verschoor, "the Geneva Convention
merely provides rules relating to or designed to avoid
conflicts of law. " 14'
Presently, the Geneva Convention has 69 ratifications
out of a total of 79 parties since it first opened for
signature. Important jurisdictions such as Canada,
Australia, Japan, UK, India, China and Indonesia have not
ratified the Convention. Without a total global acceptance
to fulfill its objectives, a global system whereby each
state would be required to recognize validly created
interests in other nations, would not be achieved. ' ' O
L49~ee Diederiks-Verschoor, supra note 100 at162,
L50~ee DOS~OW, supra note 90 at 46.
C . Tho 1988 IRSIDROIT Convention on International Financial
Leasing
There have been many attempts to provide an
internationally accepted definition and categorization of
leasing. Unfortunately, attempts have failed mainly because
a number of jurisdictions have been inclined to rnaintain
their own perceptions of leasing. Hence, in 1974 the
governing council of UNIDROIT saw that there was an urgent
need for uniforrn rules on international leasing.
Subsequently, a study group was formed to prepare a draft
convention which will focus on tripartiteL5' international
financial leasing. 153
C I "'See P. Pompongsuk, I n t e rna t i o n a l Leas ing: Impact on
I n t e r n a t i o n a l A i r Law T r e a t i e s (LL.M Thesis, McGill University,
1997) at 116 citing A. Hornbrook, ed., "Introduction to Leasing - UNIDROIT" (19861 W. Leasing Y.B. 41 at 41.
'5'~ee i b i d . , at 118. Generally, there are two independent
contracts in a leasing transaction: between the lessor and lessee
and, hetween the supplier and lessor. It was envisaged that the
convention would regard these transactions as a single
transaction, which, for the purposes of this convention, is known
as a triangular or tripartite relationship.
:'=~ee M. K. Kantaatma ja, "International Financial Leasing-
DNIDROIT 1987" in Wiradipraja E.S. & Kantaatmaja M. .K., eds.,
Hukum Angkasa dan Perkembangannya (Bandung : Remadj a Karya, 198 8 )
at 79; R.M. Goode, "Conclusions of the Leasing and Factoring
Conventions" (July 1988) J. Bus. L. 347; R.M. Goade, "The
The complexity and predominance of tax issues in
leasing agreements initially posed a problem of achieving
uniform standards to be incorporated in the draft
convention. Additionally, there was the issue of security
interests in movables. However, since the elements of a
lease are generally the same, the drafters agreed to avoid
the problem, and instead, introduced a new concept called
the sui gener is financial lease. 1 5 4
Thus, the Convention on International Lease Financing
was adopted under the auspices of U N I D R O I T in 1988.L55
Pursuant to the Preamble,"' the Leasing Convention seeks to:
(a ) remove legal impediments to the international
financial leasing of eqnipment;
Proposed New Factoring and Leasing Conventions" (1987) J. Bus. L.
318. msee Kantaatmaja, supra no te 153 c i t i n g UNIDROIT,
Explana tory Report on the Draf t Convention on International
Financial Leasing (Rome: UNIDROIT, 1987).
"%ee Convention on International Financial Leasing, signed
a t Ottawa, 20 May 1988, 27 I.L.M. 932 [ h e r e i n a f t e r UNrDROIT
Leasing Convention] . lS6see Preamble of t h e lJEIIDROIT Leasing Convention.
(b) maintain a fair balance of interests between the
different parties to the transaction;
(c) make international financial leasing more available;
(d) adapt the rules of law governing the traditional
contract of hire to the distinctive triangular
relationship of the financial leasing transaction;
and
(e ) formulate certain uniform rules relating primarily
to the civil and commercial law aspects of
international financial leasing.
Nonetheless, the U N I D R O I T Leasing Convention mainly
deals with the contractual relationship between the Lessor,
lessee and supplier. Given the complexity and sophisticated
character of aircraft transactions, parties will usually
draw-up their own agreement containing tailored provisions
which allocate their rights and responsibilities. This
renders the Leasing Convention irrelevant for most aircraft
finance transaction^'^^
L57~ee S. S. McGairl, "The Proposed UNIDROIT Convention:
International Law for Asset Finance (Aircraft)" (1999-2) 4 Unif.
L. Rev. 439 at 446.
II. Proapacts o f Earaionizing the Law Governinq Secur i ty
A. International Init iat ives to Refow Secured Transaction
The international efforts directed towards drafting
uniform rules in order to better protect creditors'
interests in general movable assets was first initiated in
1968. In that year, a study was conducted under the auspices
of the United Nations International Commission on
International Trade Law (UNCITRAL) in attempt to find
solutions to the problems associated with the non-
recognition of foreign forms of security in the context of
international equipment financing, with a view to harmonize
the laws of this field. Unfortunately, the study concluded
that such a goal was too difficult to attain at that tirne, 158
?Sec "Report of t h e üN Cornmission on I n t e r n a t i o n a l Trade
Law on t h e Work of its Third Session" (UN Doc. A/8017) i n
UNCITRAL Yearbook 1970, vo l . 1, Par t Two (New York, 1970) a t 143-
145; "Report of the Secre tary General: Study on s e c u r i t y
i n t e r e s t s " (UN Doc. A/cn.9/131) i n IMCITRAL Yearbook 1977, vol.
V I I I , P a r t Two (New York, 1977) a t 171-221; "Report of t h e
S e c r e t a r y General: s e c u r i t y i n t e r e s t s ; f e a s i b i l i t y of uniform
r u l e s t o be used i n t h e f inancing of t rade" (UN Doc. A/CN.9/165)
i n üïVCITRAL Yearbook 1979, vo l . X , P a r t Two (New York, 19791 a t
81-87; "Report of t h e Secre ta ry General: Secur i ty i n t e r e s t s ;
i s s u e s t o be considered i n t h e p repara t ion of uniform rules (CM
B. The UNIDROIT Agenda
UNIDROIT is an independent i n t e r - g o v e r m e n t a l
o r g a n i z a t i o n having i t s headqua r t e r s i n Rome. The
o r g a n i z a t i o n was o r i g i n a l l y set up i n 1926 a s a n organ of
t h e League o f Nat ions . A f t e r i ts d i s s o l u t i o n i n 1 9 4 0 ,
UNIDROIT was r e - e s t a b l i s h e d pursuant t o a r n u l t i i a t e r a l
agreement known a s t h e UNIDROIT cha r t e rL5 ' The p r i n c i p a l
o b j e c t i v e of UNIDROIT, a s c o n s t i t u t e d i n t h e Cha r t e r , i s " t o
examine ways of harmonizing and c o o r d i n a t i n g t h e p r i v a t e law
of S t a t e s and groups of S t a t e s , and t o p r e p a r e g r a d u a l l y f o r
t h e adop t ion by v a r i o u s S t a t e s of uniform l e g i s l a t i o n i n t h e
f i e l d of p r i v a t e la^."'^^ The C h a r t e r i s c u r r e n t i y adopted by
f i f t y - e i g h t S t a t e s . 161
I n accordance wi th t h e Cha r t e r , U N I D R O I T has sought t o
harmonize p r i v a t e law by sponsor ing nurnerous d r a f t treaties
and convent ions i n v a r i o u s a r e a s o f law, many o f which have
been adopted a t d ip loma t i c conferences . Among rnuch o f
Doc. A/CN.9/189) i n [RJCITRILL Yearbook 1980, vol. X I , Part Two
( N e w York, 1980) a t 89-95 [hereinaf ter 17NCITRAL Reports] .
I5'see Charter o f the International I n s t i t u t e for the
Unif icat ion o f Private Law, 15 March 1 9 4 0 , 15 U.S.T. 2494,
T.1.A-S. No. 5743, U.K.T.S. 1965 No. 54.
" '~ee ibid. , a r t . 1.
L6L~ncluding I t a ly , Japan, The Russian Federation, China,
India, France, Germany, t he United Kingdom and the United Sta tes .
UNIDROITfs work serving as a basis for international
agreements are the UNIDROIT Leasing Convention, the
UNIDROIT Convention on International Factoring ( 198 8 ) '63 and
the 1980 United Nations Convention on Contracts for the
International Sale of Goods. 164
Immediately following the adoption of the UNIDROIT
Convention on International Financial Leasing in 1988, a
member of the Canadian delegation proposed that UNIDROTT
begin workinq on another international convention, one which
would exclusively provide for unif orm rules governing
security interests in mobile equipment. The underlying
background for this Canadian initiative was motivated by a
desire, shared by some other drafters of the UNIDROIT
Leasing Convention, to expand upon certain international
recognition principles provided under the Leasing Convention
to include the broader issues surrounding the enforcernent of
security rights. 165
'6'~ee UNIDROIT Leasing Convention, supra note 155.
l6lSee [TNIDROIT Convention International Factoring, 20 May
1988, 27 I.L.M. 943.
: 6 4 ~ o r a complete list of t r e a t i e s and o t h e r i n t e r n a t i o n a l
agreements prepared by UNIDROIT, see http://m.üNIDROIT.org.
LES~ee R.C.C. Cming, "The Draft üNIDROIT Convention i n
I n t e r n a t i o n a l I n t e r e s t s in Mobile Equipment" (1998) 30 UCC J.
365.
Henceforth, pursuant to a UNIDROIT Governing Council
Resolution in 1993, a study group was formed in order to
prepare a draft convention on international interests in
mobile equipment. In preparing the draft convention, the
study group sought to address two main legal problems:
( a ) creditors* ris ks associated with the
unpredictability and uncertainty of the law of the
jurisdiction in which mobile assets are located ( l e x
s i t u s ) ; and
(b) the non-recognition of non-possessory security
interests, particularly in Civil law jurisdictions
where the security in movables have to be physically
pledged to a financier. 166
In view of the above problems, this UNIDROIT initiative
cornes at a critical time, given the increasing concerns
I6?3ee S . Wool, 'The Next Generation of International
Aviation Finance Law: An Overview of the Proposed üNIDROIT
Convention on International Interests in Mobile Equipment as
Applied Aircraft Equipment" (1998) XXII1:VI Air & Sp. L, 245
[hereinafter Wool] citing Shilling, "Some European Decisions on
Non-Possessory Security Rights in Private International Law",
(1985) 34 Int. & Comp. L. Q. 77-93
a s s o c i a t e d wi th t h e r ecogn i t i on and enforcement o f f o r e i g n
s e c u r i t y i n t e r e s t s i n mobile eqt~ipment . A s t h e s e h i g h l y
movable o b j e c t s c r o s s j u r i s d i c t i o n s i n t h e o r d i n a r y c o u r s e
of bus ines s , consequent ly t hey become exposed t o v a r i o u s
n a t i o n a l laws ( l e x s i t u s ) , each wi th i t s own d i f f e r i n g
p r o v i s i o n s r e l a t e d t o t h e t r ea tmen t of p r o p e r t y and s e c u r i t y
r i g h t s . Therefore , t h e u n p r e d i c t a b i l i t y o f laws p r e s e n t s
g r e a t r i s k t o f i n a n c i e r s as t h e r e are no gua ran tees t h a t
t h e i r s e c u r i t y i n t e r e s t i n a moving c o l l a t e r a l w i l l be
recognized i n a p a r t i c u l a r j u r i s d i c t i o n . 16'
Thus, bo th t h e u n c e r t a i n t y and u n p r e d i c t a b i l i t y o f t h e
lex s i t u s r e l a t i n g t o c la ims i n f o r e i g n s e c u r i t y be ing
cha l l enged by o t h e r c r e d i t o r s , may cause f i n a n c i a l l o s s e s
f o r t h e h o l d e r s o f s e c u r i t y i n t e r e s t s . Without doubt , such
r i s k s have a l s o caused most banks and f i n a n c i a l i n s t i t u t i o n s
t o avo id cons ide r ing mobile c o l l a t e r a l a s t h e b a s i s f o r
ex t end ing c r e d i t . 168
Cornmon law j u r i s d i c t i o n s t e n d t o t a k e a l i b e r a l
a t t i t u d e towards s e c u r i t y , d i f f e r e n t Erom t h e C o n t i n e n t a l
16?see Wool, supra note 166. See also A. Djojonegoro, "The
UNIDROIT Proposal f o r a Unifom Law: A New Aircraft Mortgage
Convention?" (1997) XXI1:II Ann. Air & Sp. L, 54.
?Sec Economic Impact Assesment, supra note 7 .
Civil Law states. The preferential treatment of the Common
law systems towards security can be explained as follows:
freedom for parties to create security interests in
an object;
greater autonomy for parties ta a security agreement
in agreeing upon the rights and remedies of the
secured Par ty ;
self-help remedies such as repassession and sale
without a court order are permitted.'6g
On the other hand, the Continental Civil law states
tend ta respect the legai rights derived from the original
s i t u s , provided that, the laws of the new si tus recognizes
those rights. Consequently, there is no guarantee that a
security interest created in one jurisdiction may be
considered valid in the new jurisdiction. Although it is
possible that the laws of the new s i t u s afford greater
benefits t u the holder of security interests than do the
IG9see R.M. Goode, "Transcending Boundaries of Earth and
Space: The Preliminary Draft UNIDROIT Convention on International
Interests in Mobile Equipment" (1998-1) Unif. L. Rev. 62.
laws of the original s i t u s , it still presents a great degree
of uncertainty for the secured Party. 170
C . The Draft UNIDROIT Convention on International
Interests a s Applied t o Aircraft Equipment
UNIDROITfs efforts culminated in its July 1994 release
of the Draft Convention on International Interests in Mobile
Equipment . "' Thereafter, the draf t Convention has undergone modifications and improvements and has been circulated to
government experts worldwide for consideration.
Driven by inherent economic motives to help the world's
airlines meet the swelling demand for aircraft over the next
20 years, and in response to a request from UNIDROIT to
provide recommendations on the preparation of an
international treaty dealing with security interests in
mobile equipment, the leading aerospace manufacturers joined
with financial institutions and leasing companies to
'''see P.B. Harsen & J.A. Heilbock, "UNIDROIT Project on
Security Interests: How the Project Affects Space Objects" (1999)
63 J. Air L. & Corn. 21.
'"sec Preliminary Draft DNIDROIT Convention on International Interests in Mobile Equipment [hereinafter CTNIDROIT Convention].
For a reproduction of the ûNIDROIT Convention, see ICA0 Ref.
LSC/ME/3-WP/2 - 4/1/00 Appendix 5 .
organize an informal group known as the Aviation Working
Group. "* The group succeeded in convincing the UNIDROIT
study group that their respective interests are related to
broader aviation sector objectives, namely the potential to
facilitate asset-based aircraft financing and leasing.
On the recommendations of both the Aviation Working
Group and IATA, an instrument was designed to supplement the
UNIDROIT Convention with particular provisions reflecting
aviation finance and practice - the Aircraft rotoc col . '73 In
short, the Convention - Protocol framework dernonstrates the
following advantages:
"'~embers of the international grouping are Airbus
Industrie, Boeing, Bombardier, Boulioun Aviation Services, Chase
Manhattan Bank, CIBC Wood Gundy, Crédit Agricole Indosuez,
Deutsche ErkerhsBank, General Electric Aircraft Engines, GE
Capital Aviation Services, International Lease Finance Corp.,
Kreditanstalt fur Wideraufbau, Pratt & Whitney, Rolls-Royce
Capital Limited, Singapore Aircraft Leasing Enterprise and
Snecma . If3see Preliminary Draft Protocol to the Preluninary Draft
CMIDROfT Convention on International Interests in Mobile
Equiprnent on Matters Specific to krcraft Equipment [hereinafter
fircraft Protocol] . For a reproduction of the Aircraft Protocol, see ICA0 Ref. LSC/ME/3-WP/2 - 4/1/00, Appendix 6.
( a ) it maintains the general p r i n c i p l e s and n a t u r e of
t h e Convention d e s p i t e i ts rnul t i - face ted c h a r a c t e r ;
and
(b) 1 w i l l allow prospective contracting states to
adopt and r a t i f y t h e Convention in p a r t , based on
t h e relevant p r o v i s i o n s cover ing c e r t a i n t y p e s of
equipment a s t a t e wishes t o be bound t o .
Moreover, t h e U N I D R O I T p roposa l has also been p laced on
t h e agenda of t h e ICAO Legal Sub-cornmittee. Successful
lobbying a t t h e i n t e r n a t i o n a l l eve l has prompted ICAO to
a u t h o r i z e its Legal Sub-cornittee t o study proposa l s and
r e p o r t t o t h e Legal Cornmittee. Pursuant t o a Legal Comrnittee
p roposa l , t h e 32"d ICAO Assembly has endorsed a
recommendation to :
( a ) commend the ICAO and UNIDROIT Secretariars for their
ongoing e f f o r t s and ma jur c o n t r i b u t i o n s t o
deve loping and promoting t h e proposed t r e a t y
i n s tnunen t s ; and
{b) urge the ICAO Legal Cornmittee to pursue further
j o i n t work w i t h U N I D R O I T aimed a t complet ing the
draft texts, i n c o n s u l t a t i o n with t h e Aviation
Working Group and m'TA, wi th a view t o submi t t i ng
them to a Diplornatic Conference at the earlisst
possible date. 174
Creation of an International Interest
Unlike its predecessor, the Geneva Convention, the
UNIDROIT Convention introduces a distinct new genus of
property right~."~ It provides for the creation and effects
of an international interest, a process which does not
derive from any particular national law, and therefore,
becomes independent f rom the various categories of similar
national interests created under its own domestic laws. The
Convention defines an international interest in mobile
equipment as an interest in a covered object which is:
(a) granted by the chargor under a security agreement;"'
(b) vested in a person who is the conditional seller
"'ICAO Assembly, Thirry Second Session, Montreal, 22
September - 2 October 1998, Legal Commission, Report, A32-WP/195, P/42.
"'~ee M.J. Stanford, "Completion of a First Draft of
üN1DROITrs Planned Future Convention on International Interests
in Mobile Equipment" (Address at a meeting organized by Agip
S . p . A . , Rome, 29 April, 1996) [unpublished] . I7=.See UNIDROIT Convention, supra note 171, art. 1 (1) . "'sec i b i d , , art. 2 (2) (a) .
under a title reservation agreement;''' or
(c) vested in a persan who is the lessor under a leasing
agreement. 179
Additionally, an agreement creating an interest under
t e UNIDROIT Convention must meet the following
requirements:
(a ) be in writing;ls0
(b ) relate to an object over which the creditor, seller,
or lessor can enter into an agreement;lal
(c) p r o p e r l y identify the object;la2 and
( d ) identify the secured obligation. 183
Upon satisfaction of the above requirements, the
international interest will become valid and enforceable
between the parties in any contracting state. A domestic
security interest which conforms to the simple conditions of
Article 8 automatically qualifies as an international
''@~ee i b i d . , art. 2 ( 2 ) (bl . " '~ee ibid., art. 2 (2) (c) . ' " ~ e e ibid., art. 7 (a)
'"sec ibid., art. 7 (b) . " * ~ e e ibid. , art 7 (cl . lg3see ibid., art. 7 (d) .
interest.
Certainly, this new concept is a novelty when compared
to the recognition concept provided in the Geneva
Convention, as the latter does not purport to create an
international interest, but merely provide a promise by each
adherent state that it will recognize rights created by
others, provided they are constituted in accordance with the
law of the State of the aircraft's nationality.lg4
2) Default Remedier
The UNIDROIT Convention introduces self-help
repossession principles required to better assure creditors
because obtaining court rulings can be lengthy and costly. 185
The self-help repossession principle, which is borrowed from
Common law, might not be recognized in Civil law States
since the concept of self-help repossession is not part of
the legal system. In most Civil law jurisdictions,
repossession requires a court ruling.
'"compare ITNIDROIT Convention, supra note 171, art. 2 (2) (b)
6 ( c ) 6 Geneva Convention, supra note 102, art. 1 (a) - (d ) . 135 See generally, Sinclair Roche h Temperley, ed., Industry
Report, Repossession of Aircraft and Insolvency in EC Countries
(London: Lloyd's of London Press, 1993).
In order to strike a balance between Common law and
Civil law concepts, the drafters of the Convention
accordingly inserted a provision that would require a court
ruling to authorize the exercise of certain remedies. ' O 6
Furthermore, upon ratification, States may also make a
declaration by reserving the right not to permit the
exercise of self-help remedies within their jurisdiction,
The Convention provides the parties with complete
freedom to specify the types of default or any event ather
than default, which will give rise to remedy provisions in
the convention/protocol. Therefore, should an event of
default occur in the course of the performance of a secured
obligation, the secured party under a security agreement may
exercise the following judicial remedies singly or in
combinat ion:
(a) seize the secured asset;le8
(b) sel1 or grant a lease on the secured asset;"'
(c) collect income or profits which arise from
'?3ee CWIDROIT Convention, supra note 171, a r t . 12 (2)
Alternative A.
'"Sec i b i d . , ar t . Il.
'"~ee i b i d . , ar t . 8 (1) ( a ) . 1e9~ee i b i d . , ar t . 8 ( 1 ) (b) .
management of the secured as set; lgO
(d) deregister the aircraft for nationality purposes; lgl
(e) export and physically transfer the aircraft object
£rom the territory in which it is s i t ~ a t e d . ~ ~ ~
The Convention sets forth the following remedies in
event of default by the conditional buyer, under a title
reservation agreement or the lessee under a leasing
agreement:
(a) termination of the conditional sale or lease
agreement; Ig3
(b) repossession of any object to which the agreement
relates; lg4
(c) application for a court order authorizing any of
the above acts. L95
Additionally, this U N I D R O I T Convention/Aircraft
Protocol provides a tirnetable according to which a court
'90~ee i b i d . , art . 8 (1) (c) . '"sec A i r c r a f t Protocol, supra note 173, a r t . I X ( 1 ) ( a ) . "'sec i b i d . art . I X ( 1 ) ( b ) .
Ig3see 17NIDROIT Convention, supra note 171, ar t . 10 ( a ) .
lg4see i b i d .
lg5see i b i d . , ar t . 10 (b)
shall rendex a final r u l i n g , not s u b j e c t t o any appeal , w i t h
r e spec t t o a remedy claimed by t h e secured party. lg6
Effects o f Reqistration and Priori- Rules
Contrary t o t h e general notion of s e c u r i t y r i q h t s a s
appl ied i n most Civil Law States, whereby r e g i s t r a t i o n
validates and perfects an i n t e r e s t , "' t h e UNIDROIT
Convention does not require a n interest t o be r e g i s t e r e d in
order to become e f f e c t i v e . The Convention simply deerns
r e g i s t r a t i o n as se rv ing t h e purpose of g iv ing p u b l i c n o t i c e
the exis tence i n t e r e s t third p a r t i e s . 198
i 3 6 The propasal implicating t h e tirneframe t o which à. cour t
s h a l l render a final ru l ing has been left blank a w a i t i n g
consensus mong the drafters of the Convention. On previous
d r a f t s , it has been proposed t h a t a r u l i n g shall be rendered no
Later than 30 days after the lodging of such instrument
i n i t i a t i n g t h e proceedings with the cour t . See A i r c r a f t
Protocal, supra note 173, art. X.
"'se@ S.A. Bayitch, Aircraft Mortgage (Miami: University of
Mimi Press, 1953) a t 3 3 .
' g B ~ e e UNIDROIT Convention, supra note 171, a r t . 27 ( 1) . See
a l s o R.C.C. Cuming, "Considerations i n the design of an
I n t e r n a t i o n a l Registry for Interests in Mobile Equipment" (1999-
2 ) 4 Unif. L. Rev. 276. Professor Cuming descr ibed t h e term
" r e g i s t r a t i o n " a s :
' [ t Ihe f i n a l s t e p i n t h e c r e a t i o n of property rights
in assets. In other words, property r i g h t s i n t h e
a s s e t s vest i n a named pzrson when t h a t person becomes
t h e r e g i s t e r e d owner of t h e a s s e t s a s a resalt of an
Therefore, provided that an interest meets the basic
requirements of the UNIDROIT Convention, it will be valid
between the parties to a transaction creating such an
interest, irrespective of whether it is registered or not.
Nevertheless, the Convention encourages registration in
order to ensure and protect the interest-holder from al1
other competing third-party claims. L39 The Convention
therefore supports the first-to-file principle, whereby the
first person to register an interest will have priority over
al1 prior unfiled and al1 subsequent interests, filed or
not . 'O0
Non-consensual interests, which are those arising from
e n t r y i n a p u b l i c record o r r e g i s t r y . I n t h i s context ,
r i g h t s are c r e a t e d through t h e r e g i s t r a t i o n process .
The term a l s o i s a l s o used t o r e f e r t o a legal
r e v i r e m e n t t h a t must be met i f t h e r i g h t s i n p roper ty
c r e a t e d by c o n t r a c t o r otherwise a r i s i n g under Law a r e
t o be enforceable a g a i n s t o t h e r persons cla iming
i n t e r e s r i n t h e proper ty . Reg i s t r a t ion does no t create
t he r i g h t , bu t is a p r e r e q u i s i t e t o l e g a l r ecogn i t ion
of t h e p r i o r i t y of t h e r i g h t i n t h e c o n t e x t of a
c o n f l i c t x e s u l t i n g from a competing c l a h t o t h e
p roper ty [...] "
' "~ee 17NIDROIT Convention, supra note 171, a r t . 27.
'ao~ee üNIDROIT 1995, Study LXXII - Doc. 16 (Rone: IJNIDROIT,
19951 a t 20.
statutorily or judicially-preferred national creditors
(either under attachent, execution, or by way of a lien), 202
will have priority over an international interest. The
UNIDROIT Convention requires that States declare or provide
a list of preferred nationai creditors on the day of
adherence to the Convention. 202
4 ) The International Rsqistration System
The UNIDROIT Convention establishes an asset-based
international registry which will record al1 filings of
international interests, including prospective international
interests, assignrnent of international interests and
subordination of international interests. 203 1n an asset-
based registry, al1 filings would be recorded by reference
to the manufacturer's serial number. 204
The registry would also coordinate with local
registration facilities, which may be designated as
operators of registration facilities. These local operators
would be located in each contracting State and possibly
-
'O1see U N I D R O I T Convention, supra note 171, ar t . 3 8 .
'02see i b i d .
'03see ITNIDROIT Convention, supra note 171, art. 15.
204~ee Aircraf t Protocol, supra note 173, art. X I X (1) .
l o c a l a i r c r a f t r e g i s t r y o f f i c e s . 'O5 F i l i n g s made w i t h t h e
s a t e l l i t e r e g i s t r i e s would be t r a n s m i t t e d t o , and pooled i n ,
t h e c e n t r a l r e g i s t r y ' s da t abase . 206 A p a r t y i n t e n d i n g t o
f i l e o r conduct a s e a r c h on a p a r t i c u l a r i n t e r e s t w i l l
conduct such a c t i v i t i e s e i t h e r through t h e l o c a l
r e g i s t r a t i o n f a c i l i t i e s o r w i th t h e c e n t r a l r e g i s t r y .
A t t h i s p o i n t , t h e drafters of t h e UNIDROIT Convention
have sugges ted two a l t e r n a t i v e s u i t h r e g a r d t o t h e s t r u c t u r e
of the I n t e r n a t i o n a l Reg i s t ry :
( a ) a s t r u c t u r e i n which an in te rgovernmenta l e n t i t y
w i l l o p e r a t e and r e g u l a t e t h e r e g i s t r y ; and
( b ) a s t r u c t u r e i n which an intergovernrnental e n t i t y
only regulates t h e r e g i s t r y o p e r a t o r , i n which t h e
o p e r a t o r cou ld be a p r i v a t e e n t i t y . 2.07
The p roposa l t h a t i m p l i c a t e s a n independent a f f i l i a t e
of IATA a s t h e e n t i t y which w i l l o p e r a t e t h e r e g i s t r y ,
r e c e i v e d s t r o n g r e s e r v a t i o n s . These r e s e r v a t i o n s reflect t h e
concerns over t h e l a ck of IATA's a p p r o p r i a t e a u t h o r i t y t o
'n5~ee I7NIDROIT Convention, supra note 171, art. 16 ( 2 ) . '06see ibid.
' 0 7 ~ e e Aircraft Protocol , supra note 173, art. XVT
Alternative A & B.
operate an international registry. Others have pointed out
that IATA's status as a private entity/association, rather
than as an inter-governmental organization, may result in
the absence of support from potential contracting tat tes'^'.
5) Assignments of International Interests
As an event of default by the lessor under its loan
agreement with the lender is often attributable to a
corresponding lease default by the lessee, therefore, the
lender would most likely be in contest with the lesseers
jurisdiction when exercising his rights (either rights of
cancellation of the lease subject to the lease assignrnent or
repossession of aircraft) . 209 On that note, security and
lease assignments are covered under the UNIDROIT
C~nvention,~'~ in order to safeguard the lenderrs rights from
being challenged by the other competing daims of the
le~sor,~~' especially in jurisdictions without well developed
'Oasee ibid. IATA is a private association of airlines, not
an organization of States or a group of governments. However,
since some of IATA1s member airlines may be State-owned companies
or divisions of their respective governments, IATA can also be
considered a quasi-governmental association.
'09see I'Oçee
?IlIn
CO llateral
üNIDROIT 1995, supra note 188 at 15.
IRIIDROIT Convention, supra note 171, art. 29 - 38. most aircraft finance transactions, the lender' s
includes an assignment of the aircraft lease (in
law regarding the assignment of general intangibles. 2 12
6 ) Juridiction
The UNIDROIT Convention provides four bases where a
court of a Contracting State may exercise jurisdiction to
grant judicial relief:
(a) the secured object is within the territory of such a
state; 213
(b) either one of the parties to the transaction is
located within the tzrritory of a Contracting
State;'14 and
( c ) agreement between the parties to submit to
jurisdiction of a particular co~rt.~'~
a d d i t i o n t o t h e mortgage), where t h e lender has t h e r i g h t s t o
rece ive payrnents d i r e c t l y from t h e lessee i n the event of d e f a u l t
by the l e s s o r . See a l s o R.J. Goldstein, "Ai rc ra f t T i t l e
Reg i s t ra t ion and Per fec t ion of Lien Rights i n Aircraft" (1979) 4
Air L. 2.
'%ee ibid.
'L3~ee üïVIDROIT Convention, supra note 171 ar t . 40 (1; (a).
'I4see ibid., a r t . 40 (1) (b) . 2L5~ee ibid., ar t . 40 (1) (c) .
7) Relationship with other Conventions
Geneva Convention 1948. The reiationship between the
Geneva Convention and the UNIDROIT Convention/Aircraft
Protocol deserves much attention.'I6 This is especially true
as many legal and political considerations may impede the
future success of reforming international aviation finance
law.
It must be borne in rnind that there are conceptual
differences between the two treaty instruments. Analyzing
the critical shortcomings of the Geneva Convention, while
at the same time, comparing its outdated provisions to
those belonging to the UNIDROIT Convention/Aircraft
Protocol, is important. The following are highlights of the
main differences between the conventions to help better
understand the underlying philosophy of how the two
instruments will be c~ordinated:'~'
(a) the Geneva Convention relies heavily on its conflict
of laws rules. It does not contain substantive
provisions regarding the creation of rights in
aircraft nor does it create rights in aircraft. This
-
""ee Wool, supra note 166.
2 1 7 ~ e e Wool, supra note 166 a t 2 7 1 .
is especially true of those provisions which relate to
registration of rights, priority rules and procedural
requirements in connection with the attachment and
judicial sale of aircraft which are out of date;21s
( b ) the U N I D R O I T Convention, on the other hand, introduces
a new genus in property rights called the
international interest, which does not exclusively
der ive £rom national law. It has been designed to fit
the contours of sophisticated international aviation
finance; 219
(c) there is no comprehensive priority regime in the
Geneva Convention. Furthermore, the existing priority
rules rely on the law of the flag of the air~raft;~~'
(d) there is no international publication of rights
recorded in the Geneva Convention as rights and
interests are recorded in national registries. Unlike
the Geneva Convention, the U N I D R O I T Convention
introduces an international registration system
"'sec Geneva Convention, supra note 102, a r t s . 1 - X I I .
219~ompare ibid., art 1 with lJNTDROIT Convention, supra no te
171 a r t s . 2 & 7.
' * ' ~ e e Geneva Convention, supra no te 102, a r t s . IV, VI VI1
( 4 ) 1 (5) & (6).
whereby filings and searches can be conducted on a
one-stop basis through the international registry;'*l
(e) the Geneva Convention regards spare parts as an
extension of the aircraft. Consequently, they cannot
be treated as abjects of rights on its own. In order
to be treated as a secured object under the
Convention, spare parts must fulf il1 certain
requirements e.g. be stored in a specified place,
identified as being a security and rernain in a stored
location. The UNIDROIT Convention/Aircraft Protocol
sets forth provisions that regard spare parts as
separate a~sets;~~'
(f) there is only one method of enforcement against
aircraft which is through judicial sale. Additionally,
certain formalities prior to execution would have to
be observed. The basic and speedy remedies available
under the UNIDROIT Convention/Aircraft Protocol
"I~ompare Geneva Convention, supra note 102, art. 1: (1) (i)
with UNIDROIT Convention, supra note 171, art. 15.
Z22~ompare Geneva Convention, supra note 102, art. X & XVI
with Aircraft Protocol, supra note 173, art. 1 (2) .
r e f l e c t t h e c u r r e n t p r a c t i c e s and c h a l l e n g e s o f modern
a i r c r a f t f i nance . 223
I n view of t h e above, s e v e r a l a l t e r n a t i v e s as t o t h e
a p p r o p r i a t e l e g a l r e l a t i o n s h i p between t h e Geneva
Convention and t h e U N I D R O I T Convention were sugges t ed by
t h e a v i a t i o n i n d u s t r y s e c t o r : t o supersede t h e Geneva
Convention o r , t o c o o r d i n a t e t h e two t r e a t y i n s t r ~ r n e n t s . " ~
While supersed ing t h e Geneva Convention i n whole would
c o n s t i t u t e a s i g n i f i c a n t improvement t o a v i a t i o n s e c u r e d
t r a n s a c t i o n s laws, it would a l s o cause a g r e a t d i s r u p t i o n
t o t h e e x i s t i n g i n t e r n a t i o n a l l e g a l f ramework .225 First,
t h e r e would be a p o l a r i z a t i o n o f systems governing a v i a t i o n
f i n a n c e , t h e Geneva system and UNIDROIT system. Secondly,
it would be i n e v i t a b l e t h a t t h o s e S t a t e s f a v o r i n g a
n a t i o n a l i s t i c approach towards t h e t r ea tmen t o f s e c u r i t y
r i g h t s i n a i r c r a f t would c r e a t e an unfavorab le env i ronnen t
'4.7
- - k o m p a r e Geneva Convention, supra note 102, a r t , VI1 w i t h
UNIDROIT Convention, supra note 171, chap. III and Aircraf t
Protocol, supra note 173, chap. II.
'"sec UNIDROIT 1996, Study LXXII - D o c , 23 (Rome: UNIDROIT,
1996) a t 6 .
'25~ee ibid.
to t h e improvement and legal reform of i n t e r n a t i o n a l
a v i a t i o n f i n a n c e law.
Ln o r d e r t o keep t h e e x i s t i n g legal framework r e l a t i n g
t o a i r c r a f t f i n a n c e i n t a c t and thereby cause t h e l e a s t
d i s r u p t i o n t o the e n t i r e system, the Geneva Convention would
be kept a l i v e t o a c e r t a i n extent. I n p r i n c i p l e , t h e
UNIDROIT Convent ion /Aircra f t P ro toco l and the Geneva
Convention would be coord ina ted i n t h e fo l lowing mariner:
( a ) t h e Geneva Convention w i l l maintain i ts c o n f l i c t s o f
laws p r i n c i p l e under Article 1 ( 1) (i) , e n s u r i n g
minimal d i s r u p t i o n o f t h e e x i s t i n g l e q a l o r d e r . Th i s
c o o r d i n a t e d approach aims t o r e t a i n t h e c o n f l i c t s of
laws p r i n c i p l e w h i l e supersed ing outdated
p r o v i s i o n s . S t a t e s which are p a r t i e s t o bo th t h e
U N I D R O I T Convent ion /Aircra f t P ro toco l and t h e Geneva
Convention would, i n p r i n c i p l e , keep t h e r e f e r e n c e
t o t h e " l a w " a s p rovided i n t h e Geneva Convention. 226
T h i s s imply means t h a t r i g h t s c r e a t e d i n accordance
w i t h t h e l a w of a Geneva Convention c o n t r a c t i n g
state would still be recognized by o t h e r Geneva
Convention S t a t e s , p rovided t h o t t h e ref e r e n c e t o
'?5ee Geneva Convention, supra nate 102, art. 1 (1) (d) (i) .
-99-
the "law" of such a Contracting State shall include
substantive laws of the UNIDROIT Convention/Aircraft
Protocol; 227
(b) the term aircraft, as provided in the Geneva
onv vent ion^^', is replaced by the terms "airframes",
"aircraft engines" and "he~icopters";~~~
(c) reference to the "public record"230 of a Contracting
State provided in the Geneva Convention, would be
replaced by the UNIDROIT Convention' s International
~ e ~ i s t r ~ ; ~ ~ '
(d) in the event of any inconsistencies between the two
conventions, the UNIDROIT Convention/Aircraft
Protocol will pre~ail;~~'
(e) provisions relating to the sale of aircraft in
execution under the Geneva Convention will prevail,
" ' ~ e e Airc ra f t Protocol, supra note 173 , art. XXII ( 1 ) . '%ee Geneva Convention, supra note 102, a r t . X V I .
'"~ee Airc ra f t Protocol, supra note 173, art. X X I I (1) (2) . The UNIDROIT Convention does not deal with third party parts or
components other than a ircraf t engines.
?Sec Geneva Convention, supra note 102, art. 1 (1) (ii) . '31~ee UNIDROIT Convention, supra
232~ee Airc ra f t Protocol, supra
(2).
note 171, art. 15 - 28.
note 173, art. XXII (1) &
provided that, parties to a transaction expressly
opt for such remedie~.'~~
Rome Convention 1933. The U N I D R O I T Convention
Contracting States who have not made a reservation in
respect of non-judicial r e r n e d i e ~ , ~ ~ ~ would be in violation of
the Rome onv vent ion,^^^ and therefore, the U N I D R O I T
Convention/ Aircraft Protocol shall supersede the Rome
Convention.
UNIDROIT Financial Leasing Convention 1988. Although
regarded as a useful instrument in creating international
law relating to lease transactions, the multi- dimensional
financing methods of international aircraft acquisition
requires a more sophisticated and specific international
instrument to govern aircraft transactions. Furthermore, the
provisions of the U N I D R O I T Convention/Aircraft Protocol is
superior to that of the UNIDROIT Leasing Convention.
Henceforth, the ü N I D R O I T Convention/Aircraft Protocol
t 3 3 ~ e e ibid., art. XXII (1) & ( 3 ) . ' 3 4 ~ e e ibid. , art. XXIII.
'%ee Rome Convention, supra note 94, art. 2 (1).
supe r sedes t h e Leas ing Convention a s it r e l a t e s t o a i r c r a f t
ob j ects . 236
D. Prospects of the Propored VNIDROIT Convention
By keeping t h e g e n e r a l i t y o f t h e Convention, and
the reby , having d i f f e r e n t p r o t o c o l s supplement and modify
t h e Convention a s it r e l a t e s t o each equipment, makes t h e
Convention - Pro toco l framework a t r u l y un ique one. The
a i r c r a f t equipment s e c t o r , wi th t h e suppor t of t h e a v i a t i o n
i n d u s t r y , has been f a r ahead when compared t o o t h e r s e c t o r s
covered by t h e Convention - t h e y were t h e f i r s t t o deve lop a
p r o t o c o l . Meanwhile, t h e r e has been no i n d i c â t i o n o f when
t h e o t h e r s e c t o r s might fo l low s u i t .
I n l i g h t of t h e r e l a t i v e l y less r a p i d movement of t h e
o t h e r s e c t o r s , and should t h e r e be no i n t e r e s t o r speedy
a t t e m p t by any o t h e r s e c t o r t o develop a p r o t o c o l , it wuuld
be q u i t e u s e l e s s t o i n s t i t u t e a Convention-Protocol
framework. I n s t e a d , a s i n g l e ins t rument d e a l i n g e x c l u s i v e l y
w i t h s e c u r i t y i n t e r e s t i s s u e s i n a i r c r a f t would be more
d e s i r a b l e . 237
'36~ee Aircraft Protocol , supra note 173, ar t . XXIV.
'37~ee ICA0 Legal Sub-cornmittee, Second J o i n t Session,
Montreal 24 August - 3 September 1999, Report, LSC/ME/2-WP/14.
The degree of political pressure for the legal reform
of aircraft financing is expanding from within the
international community. Economic globalization is fueling
the imperative for legal reforrn, pressuring governments to
offer greater stability, transparency, and accountability.
These elements are being demanded by international
investors comprising of western nations and private donors,
who have poured hundreds of millions of dollars into various
legal reform projects devoted to this purpose. The private
donors carry western legal models in their briefcases,
intended for introduction and implementation within eastern
legal systerns. These models, although successfully
implemented in their originating States, are not necessarily
compatible with domestic notions of law in other countries.
The aerospace industry will undoubtedly play a crucial
role in the developrnent and expansion of international
aviation. This is clearly evidenced by the extent of the
enormous demand for aircraft forecasted by the aerospace
manufacturers as well as ICA0 and IATA.~~' Furthemore,
more airlines are becoming privatized as their respective
governments gradually disengage £rom capital support and
subsidies.
Consequently, new sources of funding must be devised.
Resort is often made to asset-based financinq techniques as
a form of credit extension, in which the aircraft itself
serves as the underlying security for the transaction. By
that token, highlight is placed on the weaknesses of the
existing national principles and legal systems relating to
the creation, registration and enforcement of rights over
aircraft, as well as the role of international law in
dealing with the subject matter.
The chairman of the UNIDROIT study group preparing the
initial draft UNIDROIT Convention, Professor R. M. ~ o o d e , 239
wrote that the proposed UNIDROIT Convention, once adopted,
'promises to be one of the most important ever to be
concluded in the field of private commercial law." However,
one must rernember that international legal processes,
2 3 E ~ e e re levant subchaptcrs in Chapter 2.
'Igsee R.M. Goode, 'The Prel iminary Draft üNIDROIT Convention
on In te rna t iona l In te res tç i n Mobile Equipment: The Next Stage"
(1999) 2 Unif. L. Rev. 265.
p a r t i c u l a r l y i n t h e f i e l d o f p r i v a t e i n t e r n a t i o n a l a i r law,
a r e long and d i f f i c u l t . Fu r themore , t h i s p r o j e c t has been
regarded a s having been s t e e r e d by i n d u s t r i a l a c t o r s t h a t
r e p r e s e n t t h e powerful commercial i n t e r e s t s o f t h e i r
c o r p o r a t i o n s .
Although promising t o g e n e r a t e economic b e n e f i t s f o r
n a t i o n a l a i r l i n e s and governrnents, t h e r e have been f e a r s
t h a t t h e U N I D R O I T p roposa l l a r g e l y t e n d s t o r e f l e c t t h e
i n t e r e s t s o f ae rospace rnanufacturers and o t h e r commercial
e n t i t i e s . T h i s c a r e f u l l y c r a f t e d p roposa l , once i n c o r p o r a t e d
i n t o a b ind ing i n t e r n a t i o n a l t r e a t y , would o b l i g e
C o n t r a c t i n g S t a t e s t o undertake major l e g a l r e f o m s t h a t
r a d i c a l l y a f f e c t v a r i o u s n a t i o n a l laws and r e g u l a t i o n s .
While s p e c i f i c l e g a l reform p roposa l s may be u r g e n t l y
needed, o t h e r s may be less a p p r o p r i a t e , and u l t i m a t e l y prove
incompat ib le w i t h c r u c i a l n a t i o n a l i n t e r e s t s and fundamental
n a t i o n a l p r i n c i p l e s of p r i v a t e a i r law.
Indones ian s c h o l a r M. K. Kantaatma j a is among many i n
s u p p o r t o f p r o t e c t i n g n a t i o n a l r u l e s . P r o f e s s o r Kantaatma j a
n o t e s t h a t d e s p i t e t h e e x i s t i n g i n t e r - r e l a t i o n s h i p between
r e l e v a n t p r o v i s i o n s o f i n t e r n a t i o n a l and n a t i o n a l l a w , any
a t t e m p t t o create uniform i n t e r n a t i o n a l r u l e s w i t h o u t having
due regard to their admissibility in national legal systems
will result in unworkable complexity. 240
Ulrich Drobnig, who prepared the UNCITRAL Study on
Security ~nterests~~' in 1968, also noted that "it would
probably be difficult to obtain sufficient goverment
support for an international conference dealing with the
relatively technical topic of security interests; and even
if the text of an international instrument could be agreed
upon, national parliaments would probably be slow and
perhaps even reluctant to ratify such a text." Conversely,
f o r airlines and governments who are willing to s u r r e n d e r
their interest in setting and implementing national policy,
the draft convention promises to introduce certain economic
benefits .'42
Nonetheless, in this conclusion, the author believes
that to highlight the polarization of arguments with respect
to the prospects of the future Convention, would assist in
identifying certain advantages, as well as weaknesses, of
the UNIDROIT proposal, as to whether the convention would
' 40~ee M. K. Kantaatma ja, S e c u r i t y R i g h t s i n Indones ian
A i r c r a f t : An Air Law Perspec t i ve (Bandung: Alumni, 1 9 8 9 ) a t 322.
' 4L~ee iJNCITRAL Repor ts , supra note 158.
'4'~ee Economic Lmpact Assesment, supra note 7.
materially benefit airlines and governments. Accordingly,
the persona1 views of the author will conclude this chapter.
Advan tages. The UNIDROIT proposal would produce
comprehensive reform in international secured transactions
laws - it deals with al1 aspects relating to the creation,
registration, priority rules and enforcement of security
interests. In the previous chapters, the author has linked
the consequences of differing secured credit regimes - both
the substantive principles and their procedural
effectuation, with the uncertainties for financiers rhat
would result in higher transaction costs. Indeed, the
problem may even be worse, because secured credit law is
designed to operate largely without court supervision. These
reforms are crucial to facilitating modern aviation finance.
In order to determine whether such satisfies the
requirements for legal and economic efficiency, it must meet
the following requirements:
(a) the constitution of a security interest must be
simple, inexpensive and universally recognized;
(b) procedures for enforcing a security interest must
permit expeditious non-judicial remedies;
(c) detennining superior and/or hidden claims against
collateral must be quick, inexpensive and easy. For
example, allowing public access to registries and
having professional, profit-oriented corporations
run the operation of an international registry
(instead of goverment bodies) are among the
principal elements of an effective and well-managed
registry;
(d) the system must afford protection to the secured
party against third party claims, including secured
and unsecured creditors, trustee in bankruptcy and
purchasers of collateral.
There can be no doubt that the U N I D R O I T Convention/Aircraft
Protocol meets the above requirement by virtue of the
provisions set forth therein.
Weaknesses. Same States may regard the U N I D R O I T
proposa1 as having some intolerable weaknesses and, thereby,
formulate objections towards the draft treaty on the
following basis:
(a) an international interest is created when simple
requirements are met.243 Needless to Say, such new
techniques of securing an interest over an object
will likely contravene most Civil law regimes
regarding the creation of rights. For example, sorne
countries require a notary's presence at the time of
the constitution of an interest. Others require
perfection (registration with a public/governrnent
authority) in addition to the notary's presence. The
UNIDROIT Convention does not stipulate any of the
above formalities;
(b) the aviation industry sector and other related
sectors highly involved in promoting the draft
treaty (such as the financial sectors) guarantees
that certain economic benefits will be enjoyed by
governments if they adhere to this Convention.
Conversely, what we would probably see is very
little direct monetary benefit passed to airlines.
Instead, the benefits would simply be an increase in
their overall credit rating;
(c) the UNIDROIT Convention/Aircraft Protocol does not
provide direct solutions to the issue of political
risk. One of the central features of the Aircraft
2 4 3 ~ e e üNIDROIT Convention, supra note 171.
-109-
Pro toco l i.e. speedy j u d i c i a l r e l i e f and de-
r e g i s t r a t i o n / e x p o r t a u t h o r i z a t i o n may b e r e s e r v e d by
Con t r ac t ing S t z t e s which make a d e c l a r a c i o n upun
adherence. The Convention, t h e r e f o r e , can a c h i e v e
Little i n t h i s r ega rd wi thout t h a s e p r o v i s i o n s ;
(d ) t h e convent ion r ega rds t h e r e g i s t r a t i o n process as
s e r v i n g t h e purpose of p u b l i c i z i n g an i n t e r n a t i o n a l
i n t e r e s t . Therefore , the c r e a t i o n of an i n t e r e s t
dues n o t depend on r e g i s t r a t i o n . This May be i n
c o n f l i c t wi th most c o u n t r i e s , p a r t i c u l a r l y t h o s e
be longing t o t h e C i v i l law system where r e g i s t r a t i o n
i s still regarded a s a l e g a l p roces s to "perfect" a
s e c u r i t y i n t e r e s t ;
( e ) pu r suan t t o t h e A i r c r a f t P r o t o c o l f s i n t e r n a t i o n a l
i n so lvency r u l e s , creditors of a i r c r a f t and a i r c r a f t
equipment w i l l have t h e r i g h t t o require t h a t t h e
bankrupt a i r l i n e c u r e a l1 d e f a u l t s and perforrn al1
f u t u r e o b l i g a t i o n s under t h e agreement and r e l a t e d
t r a n s a c t i o n documents. The a i rLine must a l so give
posses s ion of t h e a i r c r a f t o b j e c t t o t h e o b l i g e e .
These actions must be conducted w i t h i n a p e r i o d of
no t less than a s p e c i f i e d number of days from t h e
in so lvency date. The au tho r b e l i e v e s t h a t this
p r o v i s i o n may prove t o be unworkable s i n c e t h e
underlying philosophy of bankruptcy laws and
proceedings is the general balancing of al1
creditors interests. A preferential treatment given
to those with capital intensive assets (such as
aircraft and aircraft equipment) may be
unacceptable;
the convention calls for the establishment of an
international registry. Meanwhile, there have been
strong proposals that IATA assume the responsibility
for the registry. While the final determination of
who will operate the registry for the initial 5-year
term has not been made, certain lobby groups are
working to promote IATA within the influential
States actively involved in preparing the draft
Convention. The author suggests a provision to be
inserted in the draft Convention to allow al1
Contracting States to agree on an impartial process
for the selection of the registry operator.
Furthemore, final determination should be based on
criteria such as cost, timeliness, error rates,
language, accessibility etc.
Finally, the author concludes that the Convention's
success will depend upon the overall acceptance of its final
objectives: a global framework of security rights in
aircraft. Interestingly, debates during the ICAO Legal-
subcommittee sessions held in March and August 1999 clearly
reflect that government representatives are still far from
establishing a firm grip on the underlying philosophy and
principles of the Convention. The cornmon questions posed by
government representatives are:
(a) what will this Convention do to the existing
property rights laws in Our country?;
(b) will this Convention harm Our national air carriers
( e . g . disrupt national air service in the event of
aircraft repossession) ?;
(c) how much will Our government/airline save by
adhering to this Convention?
There is plenty of work to be done for governments in
the advent of the new millennium. A third round of
discussions of the ICAO Legal-subcornmittee will take place
in Rome in March 2000. The discussions are expected to
result in a recomendation to bring the draft Convention
into the framework of ICAO's Legal-Committee. Thereafter,
and upon the recomendation of the committee, a diplomatic
conference would be convened to consider the draft
Convention. Finally, it is important that when government
representatives meet at the diplornatic conference, due
regard is given to balancing al1 the interests that would be
served by the proposed treaty i .e. governments, airlines and
the traveling public, rather than those particular
(political and commercial) interests the treaty seeks to
benefit .
1. TREATIIS, LEGISLATION, OFFICIAL D-S
Convention f o r the Un i f i ca t i on o f Certain Rules Relat ing
t o In ternat ional Carriage by Air, signed at Warsaw,
12 October 1929. Authentic French Text: II Conférence
Internationale de Droit Privé Aérien, 4-12 Octobre
1929, Varsovie [Warszawa 19301 pp. 220- 233. English
Translation: Schedule to the United Kingdom Carriage
by Air Act, 1932,; 22 & 23 Geo.5, ch.36.
Convention for the Uni f i ca t ion o f Certain Rules Relat ing
t o the Precautionary Arrest o f A i r c r a f t , signed a t
Rome, 29 May, L933, 192 L.N.T.S. 289, ICAO. Doc.
150/AT/30/9/11/1945.
Convention on International Financial Leasing, signed a t
Ottawa, 20 May 1988, 27 I.L.M. 932.
Convention on In ternat ional C i v i l Aviat ion , signed a t
Chicago, 7 December 1944,lS U.N.T.S. 295, ICAO Doc.
7300/6.
Convention on the Interna t ionaI Recognition of Rights i n
A i r c r a f t , signed a t Geneva, 19 June 1948, 310
U.N.T.S. 151, T.I.A.S. 2847, 4 U.S.T. 1830, ICA0 Doc.
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Federal Aviat ion Act o f 1958, 49 U.S.C. 5 1404 (1976)
Bankruptcy Act o f 1898, 11 U.S.C. 5 516 (5) (1976) & S
1110 (1982)
IATA, Annual Report 1999 (Montreal: IATA, 1999) . IATA, Asia Paci f ic Air Transport Forecast 1980-2010
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ICAO, Outlook for Air Transport t o the Year 2005 (Montreal :
ICAO, 1995) - ICAO Doc. 4627, LC/63, Report and Commentary of the Lêgal
Committee o f ICAO on the D r a f t Convention Concerning
the In ternat ional Recognition o f Rights i n A i r c r a f t .
ICAO Assembly, T h i r t y Second Sess ion , Montreal , 22
September - 2 October 1998, Legal Commission,
Report , A32-WP/195, P/42.
ICAO Legal Sub-committee, Second J o i n t Ses s ion , Montreal
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IMF, World Economic Outlook (Washington: IMF, 1998) .
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Report of t h e UN Commission on I n t e r n a t i o n a l Trade Law on
t h e Work of its Thi rd Sess ion ( U N Doc. A/8017) i n
U N C I T W Yearbook 1970, vo l . 1, P a r t Two (New York,
1970) a t 143-145.
Report of t h e S e c r e t a r y General: Study on s e c u r i t y
i n t e r e s t s ( U N Doc. A/cn. 9 /13 l ) i n UNCITRRL Yearbook
1977, vol. VITI, Part Two ( N e w York, 1977) a t 171-
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Report o f t h e S e c r e t a r y General: s e c u r i t y i n t e r e s t s ;
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f i n a n c i n g o f t r a d e (UN Doc. A/CN.9/165) i n CTNCITRAL
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UNIDROIT 1987, Explana tory Report on the Draft Conva t i o n
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1 9 8 7 ) .
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UNIDROIT 1996, Study L U I 1 - Doc. 23 (Rome: U N I D R O I T ,
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Preliminary Draft CNIDROIT Convention on In ternat ional
I n t e r e s t s i n Mobile Ecpipment, ICA0 Ref. LSC/ME/2-
WP/2 - 4/1/00, Appendix 5. Preliminary Draft Protocol to the Preliminary Draft
UNIDROIT Convention on In ternat ional I n t e r e s t s i n
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