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2013 Thomson Reuters South Asia Private Limited

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International & Comparative Law Quarterly


2003

The new lex mercatoria: international interests in mobile equipment


Iwan Davies Subject: International law. Other related subjects: Commercial law Keywords: Aircraft; Equipment; International law; Title to goods Legislation: Convention on International Interests in Mobile Equipment 2001 Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment 2001

*I.C.L.Q. 151 I. INTRODUCTION


Historically, the trend towards the harmonisation of commercial laws has been concerned either with the creation of a regime dealing with international transactions while preserving the identity of national laws or alternatively the emergence of supranational entities where the focus has been upon progressing a common market or political or economic grouping. The legal instruments that have promoted harmonisation1 have mainly revolved around a model law such as the UNCITRAL Model Law on International Commercial Arbitration (1985) or those instruments that deal with international commercial contracts and depend for their application on incorporation into contracts. Clearly there are limits on the effectiveness of international proposals for contractual incorporation. By definition. they are not mandatory and for them to have any realistic effect there must exist a considerable degree of homogeneity in commercial practice as seen, for example. with documentary letters of credit.2 In addition, contractual mechanisms have mainly an inter-partes dimension3 and are not therefore apt to deal with third party rights including the recognition and enforcement of international security interests. During the course of the twentieth century several attempts were made to achieve some degree of uniformity within the international community with respect to security interests. These initiatives were noted4 in the study *I.C.L.Q. 152 commissioned by Professor Drobnig who was asked by UNCITRAL to study the law of security interests in principal legal systems and to assess the need and also the prospects for harmonisation in this context. To this end, Drobnig recommended a unified law on security interests and noted with approval Article 9 of the American Uniform Commercial Code (UCC) as being the most modernised, rational and comprehensive system of security interests in the present world.5 Despite this the Project was abandoned mainly because of the difficulty and complexity of the law and the refusal of receiving states to recognise security interests attached to mobile property before it entered the receiving state.6 However, at the close of the twentieth century a significant shift can be seen in the attitude of legal policy makers to the challenge posed of recognising international security interests largely due to the following factors: First, increasing globalisation of the world economy and the privatisation of state monopolies with the consequent conversion of sovereign risk to enterprise risk has brought into focus the need for an international framework of security interests; secondly, there has been a growing international recognition of the standing of Article 9 of the UCC as an appropriate model for reform;7 thirdly, the collapse of the Soviet Block has resulted in the rewriting of the commercial law of these emerging states to as to facilitate a market economy;8 fourthly, the European Bank for Reconstruction and Development Model Law as Secured Transactions (1994) clearly draws its inspiration from Article 9 and this has also been evident in various World Bank initiatives9 and lastly, the work of UNCITRAL in proposing a Convention on assignment of accounts receivable10 and also that of *I.C.L.Q. 153 UNIDROIT in respect of security interests in mobile equipment11 are highly significant. Both of these initiatives deal

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with a specific type of secured transaction (or equivalent) rather than secured transactions generally and also ensure that adoption of these rules do not at least prima facie require domestic law changes to secured credit. The Cape Town Convention dealing with international interests in mobile equipment is not ecumenical in the sense that it represents a harmonisation of laws of different legal systems and jurisdictions. Harmonisation as a model for law reform embraces diversity in that what is sought in the process of harmonisation is the making of regulatory requirements of different jurisdictions similar. Essentially. it is a normative assertion that the differences in the laws and policies of (at least) two jurisdictions should be reduced.12 The main characteristic of harmonisation is that it eschews uniformity and preserves the diversity of the laws harmonised.13 What is seen in the Cape Town Convention is not a type of harmonisation process14 but rather a unification of laws process.15 The significance of the Cape Town Convention is that it cuts new ground in international commercial law by establishing a substantive legal regime of international secured credit law. As such, it is not concerned with promoting merely an international commercial standard or practice such as the ICC Uniform Customs and Practice for Documentary Credits.16 Neither is the Convention concerned with a sui generis form of commercial instrument such as that seen in the earlier UNIDROIT Convention on International Financial Leasing 1988.17 The Cape Town Convention is clearly policy based with commercial conclusions firmly in focus. The following policy premises are put forward by the protagonists of the Convention:18 First, the aim of the law should be to promote efficiency in commercial transactions; secondly, transactions should be externally efficient, that is, the legal regime should promote certainty in *I.C.L.Q. 154 order to make credit easier by ensuring that creditors have expeditious remedies to recover identifiable assets; third, internal efficiency in credit transactions is promoted, that is, by cutting down transactional costs and the costs attendant with monitoring security and enforcement of security. The Cape Town Convention represents a considerable achievement and draws its inspiration from Article 9 of the UCC in that it is a complete system of secured credit law and its provisions are close textured, that is, they are self-contained and self-explanatory. The protagonists of the Cape Town Convention essentially represent the political economy of what amounts to a private legislature. The focus of this article is upon the Cape Town Convention as representing a new lex mercatoria for international secured transactions. In examining the political economy of the Convention it is therefore appropriate to refer at the outset to the North American experience, as this will illustrate the bases of the hypotheses underlying the Convention.

II. THE POLITICAL ECONOMY AND PRIVATE LEGISLATURES: THE NORTH AMERICAN EXPERIENCE
A large amount of American Commercial Law originates with private law-making groups so, for example, the radical revisions undertaken at the end of the twentieth century to Article 9 of the Uniform Commercial Code19 owe their origins to the work of the American Law Institute (ALI) and the National Conference of Commissioners on Uniform State Laws (NCCUSL). No work has been done on the structures of these organisations and the rules they adopt other than that undertaken by Schwartz and Scott who applied structure-induced equilibrium 20 theory to study the ALI and NCCUSL.21 Essentially, this involves identifying the utility functions that participants in the legislative process maximize, specifies the institutional structures that transform participant preferences into legislative outcomes, and then shows what outcomes these preferences and structures will produce. 22 In analysing the outcomes a distinction is drawn in respect of the different type of outcomes available to the law-maker. On the one hand there are rules which can be described as bright line where they confine judicial discretion whilst on the other extreme there are standards where judicial discretion is high.23 Bright line rules confine the rule applier's discretion and at one level can be described *I.C.L.Q. 155 as crude since they will tend to be both under and over inclusive.24 A higher level of abstraction in terms of rules will vest more discretion in the rule applier, for example, the rule is to be applied in accordance with the mischief of the legislation or can be even vaguer where criteria such as reasonableness apply or where behaviour is measured against criteria which are unweighted: in effect, this transfers much of the law-making authority from the rule-maker to the rule-applier. There was extensive interest group participation largely by asset-based financiers and banks in the early drafting of Article 9.25 Indeed, during the drafting process, the banking interests blocked amending clauses which were perceived as being consumer-protection in orientation.26 Furthermore.

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the original draftsmen of Article 9 were careful to ensure that it did not regulate railroad car trusts and also insurance in order to diffuse any opposition from these sectors of the US economy. In effect, Article 9 created a chattel security system which facilitated the taking of security interests in assets and as a matter of policy sought to lower the costs of asset-based financing. This policy is articulated further in the revision to Article 9 completed in 2001. As such, Article 9 has been comprehensively reorganised, rewritten, renumbered and is an expanded restatement of the law of personal property security. The new Article 9 was drafted by people who were moulded by the old Article 9 and they have taken the concepts further by making it easier for financiers to create and perfect security interests in the various contexts in which secured financing is used. The vast majority on the Working Study Group were senior practitioners (3 legal academics and 13 practising lawyers the majority being senior counsel for asset financiers) and the effect of the composition of the group was that the policy agenda was set by the in-house counsel and consisted mainly of allowing the financier to have recourse to any or all of the personal property assets of the enterprise.27 Attempts made to place significant proposals for reform of Article 9 were unsuccessful, notably, the Warren proposal that 20 per cent of the collateral proceeds of an insolvent be reserved for unsecured creditors.28 In contrast to this the new Article 9 facilitates security interests in deposit accounts, expands the financier's automatic claims to *I.C.L.Q. 156 proceeds of collateral, permits filing against a corporate debtor in its state of incorporation even though the collateral assets are located in other jurisdictions and also assists the securitisation of rights to payment.29 The experience in the UK has been different as here there has been resistance by the banks and financial institutions to the chattel security systems presented by Article 9.30 One reason why the UK has been resistant to change is that the banks are well protected especially through fixed charges on book debts, the limitation on the scope of retention of title clauses (in particular the extended variety)31 and also through their exploitation of super-lightweight floating charges with the purpose of keeping out the appointment of an administrator. Thus, whilst the approach adopted by Article 9 is to assume that consensual security interests are summum bonum this view is not shared by UK financial institutions.32 In stark contrast, in Canada, the passing of the Newfoundland Personal Property Security Act (PPSA) in 1999 marked an important point in the history of personal property security law in that by then all of the common law provinces had implemented personal property security law regimes and remote-access computerised registries33 modelled on Article 9 of the UCC. This represented the culmination of 20 years of PPSA-type enactments in Canada. Even so, this legislation was not the product of a demand for reform from Canadian financial institutions because as one of the principal draftsmen of Canadian PPSAs has observed: The PPSAs are not the product of a demand for change from the Canadian finance industry or the Commercial Bar. They are the result of the conclusions on the part of a few practitioners, academics and government officials that modernisation of this area of Canadian Commercial Law would produce significant benefits for many Canadians.34 The North American and also the UK experience illustrates that powerful interest groups can have a significant impact on the reform or otherwise of domestic secured credit law.35 This phenomenon can be seen as well in the *I.C.L.Q. 157 private legislative process which represents the Cape Town Convention. It is simplistic to accept at face value that the rules outcomes from the underlying UNIDROIT process amounted to no more than a rule-generating black box. With this in mind the historical background and political economy of the reform process must be examined.

III. THE DEVELOPMENT OF THE CAPE TOWN CONVENTION


Historically, UNIDROIT's main efforts to alleviate legal uncertainty has been to unify existing rules of domestic law where these had a transnational dimension in an attempt to identify an internationally accepted regime. Indeed. Article 1 of the UNIDROIT Charter36 identifies its principal purpose as being to examine ways of harmonising and co-ordinating the private laws of states and of groups of states and to propose gradually for the adoption by various states of uniform rules of private law. The UNIDROIT process anticipates a number of stages. The key early stages involve the establishment of a Restricted Exploratory Working Group to ascertain the need for and feasibility of uniform rules. Following the receipt of a favourable report. the Governing Council of UNIDROIT then decides whether to establish a Study Group to prepare uniform rules and this will normally involve a small group of experts sitting in a non-governmental capacity. The next major stage entails consideration of that instrument by a much larger group of experts representing UNIDROIT Member states and it is only at this point that the preliminary draft text is converted into a draft instrument capable of being submitted to a diplomatic conference.

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The work which was begun in 1974 and which culminated in the UNIDROIT Convention on International Financial Leasing 1988 was conceptually different from the orthodox UNIDROIT approach of harmonising and co-ordinating commercial instruments. The 1988 Convention's enshrinement of a priority rule regulating the respective rights in the leased equipment of the lessor and the lessee's trustee in bankruptcy and unsecured creditors was groundbreaking.37 This persuaded the Government of Canada which had hosted the Diplomatic Conference Proceedings for the Leasing and Factoring *I.C.L.Q. 158 Conventions38 that there was scope for attempting an international regulation of certain international aspects of security interests in mobile equipment, that is, the recognition of a similar right(s) in favour of parties taking security over high value mobile assets moving between national frontiers. Thus, at the meeting of the UNIDROIT Governing Council which took place in April 1989 the decision was taken to include in its new Work Programme an examination of the feasibility of an International Convention on Security Interests in Mobile Equipment. The decision to proceed was based on a Report prepared by Professor Ron Cuming (the Canadian delegate)39 which alluded to the inappropriateness of the lex rei sitae conflicts of law rule in respect of high-value assets regularly moving across or beyond national frontiers. In particular, the validity, enforceability or priority rankings of security rights in such an asset would vary depending on the jurisdiction where the asset happened to be at the time when proceedings were brought40 and this was perceived to be a major inhibiting factor for financial institutions extending secured financing in respect of such assets. The Study Group which was formed to consider whether work should be undertaken required further information and this took the form of a Questionnaire designed to test empirically the assumptions made by Professor Cuming in his Report.41 This was circulated to a cross-section of sellers, *I.C.L.Q. 159 buyers, banks and financial institutions including lawyers who typically advised such clients and also international organisations and professional associations. Approximately 100 replies were forthcoming and the main results were analysed42 as follows: First, high value equipment subject to secured finance agreements does move between frontiers; secondly, the extent of such activity was significant; thirdly, the lack of an international system of law was a negative factor in respect of creditors who wished to take security interests in equipment moving from one state to another; fourthly, a wide variety of different types of equipment was identified by respondents as the subject-matter of security interests taken by them and that many of the respondents indicated an eagerness to have included the complete range of equipment, although it is noteworthy that aircraft were not included on the list of movables; fifthly, the scope of the Convention should be set by a reference to a generic definition of security interests; sixthly, the Convention should deal with priorities through a set of substantive priority rules which should prevail in bankruptcy proceedings. It is interesting that in respect of the appropriate conflicts of law rule which was included on the Questionnaire, Professor Cuming acknowledged43 that the question posed was over general and the responses therefore failed to grasp the meaning of the question. However, the analysis proffered in respect of this was to adopt the anticipated conclusion sought to be achieved, namely, where there is a internationally recognised national ownership registry validity or efficacy should be governed by the lex libri, the place of registration. The responses were viewed as positive and were considered to confirm the case for UNIDROIT to proceed with the Project. Even so the UNIDROIT Governing Council at its May 1991 session decided that it was prudent to convene a restricted exploratory working group of experts to include both representatives of the business world and practising lawyers with expertise in these matters, to report back to it on the utility and feasibility of UNIDROIT drawing up uniform rules on this subject.44 This Restricted Working Group consisted of 3 Law Professors, 2 representatives of the aircraft industry and 2 senior practitioners who advised asset financiers. In addition there were representatives form the Banking and Financial Institutions Division of the European Commission, the Security General of the Hague Conference on Private International Law and also a representative from the Bank for International Settlements. Not surprisingly, when the Group met it concluded that such a Convention would be beneficial. Moreover, the Group set the focus for the proposed Convention as revolving around an international security interest providing a right in rem, that is, subject to national priority rules, the right to follow the equipment into the hands of third parties whilst also giving the secured party a right to payment from the proceeds of sale or other disposition *I.C.L.Q. 160 of the equipment in preference to other creditors. The Group concluded that the legal characteristics should in terms of effect be publicised by an interna tional registration system. A Study Group was convened with responsibility for the drawing up of uniform rules. The Group consisted of 7 Professors of Law and 6 legal advisers to asset financiers. In addition there were observers from Intergovernmental Organisations and International Non-Governmental Organisations.

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One of these Observers was from the International Maritime Committee and he pressed for the exclusion of ships although no decision was taken.45 The focus was upon the creation of an international security interest in respect of assets.46 No agreement was reached as to whether it should be limited to specific assets or a general class of assets. However, there was agreement that the international regimen should not apply to purely domestic situations and should in fact apply to equipment of a kind normally moving from one state to another in the ordinary course of business. It was agreed that the elements for the creation of an international security agreement should be that it was security agreement made in writing signed by or on behalf of the debtor containing a description of the asset. The issue of perfection by possession was excluded on the basis that possession was recognised as being of relatively limited use in the case of mobile equipment and it was accordingly acknowledged that perfection would in most cases have to be by registration. 47 In terms of priority it was considered that the Convention should not try to displace national bankruptcy rules but should try to ensure the survival of the international security interest in bankruptcy proceedings. A sub-committee of the Study Group for the preparation of uniform rules as a first draft was convened.48 There were 7 members in the Group, 5 of which were Professors of Law whilst the 2 others were senior lawyers who represented the Russian Federation and the US Department of State. In addition, there were Observers from intergovernmental organisations.49 Significantly at this meeting it is noted: In view of the special interest the Institute's project in this area of the law had generated in the aviation finance community, as reflected inter alia in the comments submitted by the Boeing Company to the sub-committee [a representative of the *I.C.L.Q. 161 legal advisors Firm to Boeing] was also invited to attend the meeting as a special guest with a view to illustrating the concerns of this community.50 The sub-committee reached preliminary conclusions since the rules on enforcement and priorities had yet to be formulated. Two of these preliminary conclusions are worthy of note: First, there should be a broad approach to the definition of mobile equipment covering mobile equipment generally with specific exclusions rather than defining mobile equipment in terms of a limited list;51 secondly, a broad functional approach to security interests should be adopted including the retention of title mechanism and a lease. Since jurisdictions outside North America did not regard such interests as security interests and the European Leasing Industry was very concerned to ensure that they were not treated as such it was agreed that the proposed Convention should be expressed as laying down uniform rules for interests (as opposed to security interests) in mobile equipment and a distinction was drawn between security interests and interests arising by way of retention of title and leases. This approach is at variance with the conclusions gleaned from the 1990 Survey. In the second session of the drafting sub-committee,52 the Group accepted the conclusions made in the Memorandum prepared jointly by Airbus Industrie and the Boeing Company on behalf of the Aviation Working Group.53 The Drafting Group signalled its recognition that special provision should be made for aircraft and aircraft engines in the proposed Convention.54 Thus at its third session the Aviation Working Group's recommendations for a system of core and optional provisions was formally noted, that is, giving effect to party autonomy regarding choice of law clauses and the secured creditor/lessor's rights in the event of the debtor/lessee's insolvency. At this Group Meeting the Study Group endorsed the particular requirements of aircraft finance and expressed particular appreciation for the considerable amount of work of [the legal adviser to Boeing] who was invited to act as expert consultant to the Study Group on aviation needs.55 In particular the (now) new consultant to the Study Group was asked to liaise with the Aviation Working Group and aviation finance interests to propose the text of supplementary rules for aircraft and aircraft engines, designed to reflect the special needs of the aviation finance community in a manner consistent with the Aviation Working *I.C.L.Q. 162 Group's recommendations to date.56 Clearly the stage was set for unbundling the requirements of the aviation industry. In turn, this invites scrutiny of the political economy of the UNIDROIT process which eventually led to the Convention on International Interests in Mobile Equipment and its accompanying Protocol dealing with Aircraft Equipment.

IV. THE POLITICAL ECONOMY OF THE CONVENTION


As we have discussed above,57 the process leading to the Convention was initiated by a reformer, in this case, Canada. The UNIDROIT Council decided that a Study Group should be established to consider the matter further and called for additional information in the form of a Questionnaire. In analysing the decision to proceed with the work of drafting and re-drafting the Convention it is

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appropriate to identify the constraints upon the process. In this respect, there was little constraint in terms of embracing the process of law reform which could, for example, have arisen out of a desire to maintain the status quo ante because the principal purpose of UNIDROIT as set out in its Statute is to harmonise and co-ordinate the private laws of states.58 Further, there was no enactment constraint in the sense of this being based upon the low likelihood of the Convention being adopted. The reason for this is that the probability or otherwise of widespread adoption is difficult to assess because it involves predicting the behaviour of a large number of state legislatures. This can be illustrated by the 1988 UNIDROIT Convention on International Financial Leasing which has not been a success in terms of the numbers of ratifications and curiously where ratification has occurred this has often been done by states without developed leasing markets.59 In addition there was no enactment constraint from those involved in the reform process because participation in the process itself was a gain, that is, involvement for its own sake in the process of law reform.60 What is significant about the UNIDROIT process in respect of the Cape Town Convention is the participation of interest groups and in particular the Aviation Group. This had its supporters and lawyers participating as a Working Party on a dedicated Protocol as well as the advisory board on the *I.C.L.Q. 163 Convention. The influence of this Working Group can obviously be seen in the way the Draft Convention and Protocol structures were shaped. The Group was highly knowledgeable of the aviation industry and this knowledge was clearly transferred to the UNIDROIT process. In terms of acquisition of this knowledge, the alternative for UNIDROIT was to hold a hearing(s) bringing together witnesses and experts from all over the world but this process would have inevitably been more expensive and also time consuming. Significantly no competing interest groups were invited.61 The effect of this Interest Group's involvement was to promote bright line rules62 and this was achieved through changing the structure of the Convention mechanism itself by the separate development of an Aircraft Protocol.

V. THE DEVELOPMENT OF THE TWO-INSTRUMENT APPROACH


The economic interests of the aviation industry to the Convention can be traced back to 1994 with the formation of the ad hoc Aviation Working Group (AWG) consisting of representatives from the aircraft manufacturers and financiers that was later joined in 1996 by the International Air Transport Association (IATA) representing member airlines' interests. As a result of the emphasis put by the aviation industry on the economic aspects of the international private law system, in 1997,63 the International Civil Aviation Organisation (ICAO), a specialised Agency of the UN established its law-making process which provides for the exercise of the sovereign interest of all its 185 member states regarding matters of international civil aviation.64 This represented a dramatic volte face because in 1989. ICAO had officially informed UNIDROIT of an absence of interest in the proposed Convention. The Aviation Working Group proposed a bifurcated approach to the development of the UNIDROIT Project involving the negotiation of an umbrella Convention to be supplemented and modified by individual protocols to address different categories of high value equipment. The need for this *I.C.L.Q. 164 approach arose because the lynchpin concept of the Draft Convention, mobile equipment is not a unified one and equipment types are regulated in different ways in various countries. Furthermore, different types of mobile equipment are regulated internationally by specialist bodies, notably, shipping by the International Maritime Organisation (IMO),65 rail by the International Carriage by Rail Convention66 whilst the broad responsibility for space property is vested in the Office for Outer Space Affairs of the UN.67 It is also the case that different types of equipment are subject to different financing customs and norms and these differences were considered so significant that these would lead to the failure of harmonization/uniformity of law across the equipment types. One proposal for a set of equipment specific stand-alone Conventions68 was rejected as being inconsistent with the wider law reform objectives of the need to efficiently re-organise international secured credit law as it relates to mobile equipment. The legal framework which emerged in 1997 for the regulation of international interests in mobile equipment accepted by UNIDROIT69 is innovative in terms of treaty law. There are two instruments--first the base Convention70 which under Article 2(1) provides for the constitution and effects of an international interest in certain categories of mobile equipment and associated rights and secondly, an equipment-specific Protocol. Whilst the Convention is envisaged under Article 2 as potentially applying to a wide range of categories of uniquely identifiable objects to include in Article 2(3) airframes, aircraft engines, railway rolling stock and space property, it is not anticipated that the base Convention will stand by itself, that is, apart from the Protocol prepared by and in conjunction

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with sector experts. The relationship between the Convention and Protocol is unorthodox and the following characteristics emerge: First, it is the Protocol and not the Convention that controls in respect of the specific category of equipment; secondly, the base Convention only *I.C.L.Q. 165 applies in respect of the equipment specific Protocol with the coming into force of the Protocol and only in respect of the parties to the Protocol; thirdly, the Protocol can only amend or modify the base Convention where the special characteristics of the equipment sector requires this; lastly, it follows that the obligation of the states in respect of the base Convention will vary in accordance to the Protocols adopted. The approach of a framework Convention with controlling Protocols is unusual because Protocols are normally considered to be amending instruments.71 The essential consideration is to ensure that specific modifications do not undermine the basic objectives of the Convention by compromising the structural coherence of the base Convention. Whilst this is an obvious danger as the number of Protocols increase the phenomenon is also evident in the first Protocol that was devised, organised, and promoted by the aviation industry. Indeed, the bright line rules which emerge from this Protocol represent considerable success in the private legislative process for the Aviation Working Group that shaped it.

VI. THE AIRCRAFT PROTOCOL


The approach of the aviation industry to UNIDROIT was to recognise the project's potential to facilitate asset-based financing and leasing of aircraft. This was considered to be essential in order to meet the demand for new aircraft over the next twenty years from emerging markets in Asia, Africa, Latin America, and Eastern European countries.72 As such, the Protocol reflects the Western financing and security model in an industry which is highly capital intensive and is heavily dependant upon external financing. A key concern for the provider of external finance is the assumption of risk and the momentum provided to the Aircraft Protocol by the aviation industry reflects the perception that effective asset-based security reduces the commercial risks inherent in the decision to lend.73 The availability of recourse to asset-based security is especially important to the aviation industry not least because of the strong residual value of an aircraft but also the length of time involved in the financing of it as well as the amounts lent in respect of financing it. As McGairl has pointed out: *I.C.L.Q. 166 The asset cannot fully support the financing if the financier's rights to the asset cannot be enforced in the jurisdiction where it happens to be at the time of default, if the rights of other creditors have priority in that jurisdiction, if repossession is held up by a bankruptcy moratorium or if significant delays in enforcement are a probability. Given the mobility of the asset this is something of a lottery.74 The ability of the financier to take effective security in the aircraft assumes that the legal environment facilitates the taking of priority in respect of competing claims on insolvency and also, following default the asset can be recovered, its value realised promptly and the proceeds recovered applied against the underlying indebtedness. The rationale therefore underlying the Aircraft Protocol is to promote secured financing in the above sense and the legal reform anticipates the facilitation of creation of a security interest through a notice mechanism (registration), provision of expedition in respect of enforcement and also realisation of contractual rights upon insolvency.75 It should also be noted that the issue of an effective security interest is not merely confined to loans made in respect of aircraft but it is also significant to the securitisation of these loans. Securitisation has the effect of reallocating risk further between the originator of the funds (a bank or a syndication of banks) and investors thereby providing a greater source of funding. To this end, asset-backed bonds for institutional investors are considered to present lower risks76 which in turn reduces the cost and availability of financing.77 The first draft of the Aircraft Protocol was approved in 1998. The Aircraft Protocol Group then commissioned an economic impact study of the Protocol which was carried out by the Institut Europan d'Administration des Affaires (INSEAD) and the New York Solomon Centre.78 They concluded that the proposed Protocol and Convention had the potential to attract significant *I.C.L.Q. 167 microeconomic and macroeconomic benefits including a reduction in borrowing costs for the aviation industry.79 These conclusions reflect in broad measure the outcomes of empirical work conducted by the World Bank which indicated that there is a relationship between the financial development of a country and its level of income and economic growth. A further connection is made between the legal protection afforded to the financier and the scale and scope of the development of

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financial systems within a jurisdiction.80 It is this indication of a causal relationship between a country's domestic laws ability to permit cheap, efficient and equitable collection of debts secured by movable property 81 and the ability of that same country to generate wealth through the use of the equipment acquired on the credit secured on it that informed the work of the Convention and the Aircraft Protocol. This in turn brings into focus the current divergence in the law of personal property amongst legal regimes. Significantly some countries do not have legal provisions which facilitate the taking of security in mobile assets82 at all whilst in other countries the priority scheme is not clear and legal enforcement is uncertain and slow.83 The result is that only land, that is, non-depreciating real estate, is treated as a form of security.84 Where this is the case, it is simplistic to maintain that the risk for the financier can be alleviated by raising interest because the higher these become this can reduce the expected returns to the lender since more excessive rates may induce higher risk taking in respect of *I.C.L.Q. 168 the asset by the borrower. In this situation the financier has no choice but to ration credit.85 The purpose of the Aircraft Protocol is to facilitate asset-based financing. Herein lies the fundamental distinction with the Geneva Convention on International Recognition of Rights in Aircraft86 that provides a harmonised conflicts of law approach to security interests in aircraft, namely, the lex situs rule prevails. The problem of the failure in the local jurisdiction to recognise non-possessory security is left to be addressed through specific national aviation legislation and often the difficulty is that such laws treat aircraft as immobile assets against which non-possessory mortgages may be taken.87 The task of the Aircraft Protocol is conceptually different to the Geneva Convention because whereas the latter is concerned with recognition of rights, the Protocol establishes substantive rules regarding secured transactions and leasing. In addition, the Geneva Convention is concerned with nationally created and perfected property interests whilst the Protocol and the Cape Town Convention establishes an international secured interest regime with an international registry. Lastly, whilst the Geneva Convention makes provision for security interests in stored spare aircraft engines this is only in broad terms whereas the Protocol treats them as distinct and valuable and separate financable assets.88 In many respects the Convention and the Aircraft Protocol represent the common law tradition with regard to the legal treatment of personal property. Under the common law, security may be freely created in any kind of property and the parties have a wide degree of autonomy in determining the rights and remedies of the secured party which includes self help.89 This approach finds expression in the three objectives seen in the UNIDROIT sponsored law reform: First, the need to provide a transparent priority principle; secondly, a prompt enforcement principle; third, a bankruptcy enforcement principle. We shall consider each of these objectives in turn as they apply to the Aircraft Protocol. The priority principle. The Convention establishes an international registry90 in which security interests and in the case of aircraft, sale contracts, and prospective sale contracts must be registered.91 Priority setting is the exclusive function of the international registry. However, lack of registration *I.C.L.Q. 169 does not affect the contractual position as between the parties to the agreement. Neither does the act of registration rectify a defect if, for example, it is false. Thus, first registration operates as a notice function and actual knowledge of an unregistered interest at the time of registration is not relevant.92 Further tacking is envisaged so that the priority of the first registered interest applies even as regards value given by the former with actual knowledge of the latter's interest.93 In addition, as between competing priority interests party autonomy is maintained since these interests may be varied by agreement inter se. 94 In the case of an outright buyer, it (in the case of a company) will take subject to an interest registered at the time of purchase but free from an unregistered interest even if taking with actual knowledge. The reason for this is that the interest acquired by the buyer under the Convention is not registrable as an international interest and it would therefore be unfair to give priority to a subsequent holder of a registered international interest because the earlier buyer will not have the machinery to give public notice. It is otherwise under the Aircraft Protocol which covers outright transfers of aircraft equipment. 95 The general part of the Convention does not therefore apply since the outright buyer can register its interest. However, in the case of non-consensual rights such as repairers' liens, tax creditors and execution creditors these are included by the Convention in the general priority scheme because this will enhance the utility of the international registry system. The States have the option of setting out categories of non-consensual rights and interests that are registrable as if they were rights or international interests.96 To this extent, States are permitted to contract to retain the full preference of non-consensual rights. Obviously, the decision of a State to declare wide preference could adversely prejudice the contractual position of airlines in the state in respect of the availability of secured

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finance.97 The scope of the Aircraft Protocol extends to airframes, aircraft engines and helicopters.98 Article 29(7) of the Convention provides as a general rule that it does not determine priority as between the holder of an interest in an item held prior to its installation into an object and the holder of an international interest in that object. This rule does not apply to aircraft engines99 thereby providing a mechanism to protect financiers of aircraft engines.100 In *I.C.L.Q. 170 addition, the International Registry in aircraft and aircraft objects in common with all the types of equipment covered by the Convention operates independently of national registration systems. Whilst the Convention does not preclude registration in national registries, nonetheless, a registered international interest has priority. The political concern about imposing an international regime on a domestic transaction and the threat of double registration was considered to be outweighed by the need for commercial predictability.101 To satisfy the requirements for an international interest four conditions have to be satisfied102 : First, the agreement must be in writing; secondly, it must relate to an aircraft object which the obligor has the power103 to enter into agreement; thirdly, the agreement must describe the aircraft object with reference to the manufacturer serial number, the name of the manufacturer and its model designation; fourthly, in the case of a security agreement, it must enable the secured obligations to be identified. Where these conditions exist, no additional requirements under national law need to be satisfied as a condition to the exercise of default remedies, or, in the event a filing is made with the international registry, to the establishment of priority. Prompt enforcement. This lies at the heart of the default remedies104 included in the Convention and Aircraft Protocol. Article 8 of the Convention provides that upon default105 the chargee may take possession or control of the object charged, sell or grant a lease, collect or receive income or profits arising from the management or use of such object or apply for a court order authorising or directing any of these.106 In the case of a lessor or conditional seller the remedies provided for under Article 10 are termination, repossession or control of the object. The remedies of a chargee must be exercised in a commercially reasonable manner.107 Significantly under the Draft Aircraft Protocol an agreement between the debtor and creditor as to what is a commercially reasonable manner was deemed to be conclusive108 but *I.C.L.Q. 171 crucially at the Diplomatic Conference this was qualified to reflect the Convention exception in respect of a provision which is manifestly unreasonable.109 Furthermore, under the Protocol. a chargee may not exercise sale or re-lease remedies without giving interested persons at least 10 calendar days written notice.110 An important self-help mechanism under the Aircraft Protocol is the procedure relating to de-registration of an aircraft.111 The obligor may issue an irrevocable de-registration and export request to its national civil aviation authority in a form annexed to the Aircraft Protocol in favour of the obligee or its certified designee. The effect is that this may not be revoked without the written consent of the beneficiary. Thus the beneficiary will have the sole right to de-register and export the aircraft. Again a State may expressly reserve its position in respect of the application of this provision. 112 In the same way a contracting country may also have the option of setting up a system of expedited relief in order to set out an objective standard articulated in a declaration which will identify and trigger remedies against the aircraft object within a specified time period.113 The bankruptcy enforcement principle. The issue of the application of the Convention/Protocol remedial regime in national insolvency regimes is difficult because such national regimes will be policy laden by reference to state-specific preferential and pre-preferential creditors. Under the Convention an international interest is valid against the debtor's trustee in bankruptcy if it is registered.114 However, this is not a rule of invalidity because an international interest which is not registered will be effective against the trustee if this is valid under the applicable law.115 The application of the party autonomy principle is not appropriate in the insolvency context in that the cutting off of third party creditors is not a matter which can be resolved by freedom of contract.116 Thus, under the Aircraft Protocol countries may opt to adopt one of the special international insolvency rules set out in the Protocol. The first alternative set out in Article XI117 is that the insolvency administrator shall at the end of the waiting period (defined in the declaration of the Contracting State in adopting118 the Protocol or subsequently)119 give up possession of the aircraft equipment in pursuit of a remedy sought by the creditor unless during this period the debtor has cured all defects and has also agreed to perform all future obligations under the agreement. The right to cure is limited and under this alternative a further waiting period will *I.C.L.Q. 172 not apply in respect of another default in the performance of obligations under the agreement.120 The second alternative set out in the Protocol is that acceding countries may opt to adopt the rule that within a

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period (declared by the Contracting State) after an act of insolvency has occurred, the debtor must either cure all defects under the transaction or give the creditor the opportunity to take possession of the aircraft object in accordance with the applicable law.121 Under this softer alternative, the enforcement of remedies depends upon a discretion exercised by the national court. Even so, a common theme of both alternatives is that the obligor must cure the defect within a limited specified time. The logic here is to ensure expeditious realisation of the security interest.122 The insolvency of the obligor will test the efficacy of the international regime. Whilst the Convention provides the basic rule on the validity of the international interest in insolvency123 it does include the qualifying provision that the substantive rights of the holder of this interest are not intended to displace special rules of bankruptcy law restricting the exercise of remedies or avoiding unfair preferences in the domestic regime.124 The Aircraft Protocol is ambivalent in that it defers to the domestic insolvency regime which gives States the opportunity to declare full or partial accession to the alternatives identified in Article XI providing for remedies on insolvency. At the same time Article 40 of the Convention grants Contracting States the choice to designate non-consensual national security interests that can gain priority over an international interest in or outside the debtor's insolvency. Article XXX of the Aircraft Protocol attempts to define the obligee's rights conclusively on the insolvency of the obligor subject only to the reservations expressly declared. These conditions or restrictions will be made known through the International Registry. Of course the danger is that every Contracting State will make reservations thus turning an exception into a rule but at least international creditors will be able to make adjustments in respect of the assumption of risk.125 The common law basis of the Aircraft Protocol cannot be underestimated. In particular, the adoption of self-help remedies (self-attribution) on the basis of freedom of contract is repugnant to the civil law tradition.126 As Harmanthy as pointed out: Continental law generally regards this approach as one-sided *I.C.L.Q. 173 and seeks to protect the debtor's interests not only ex post, by means of a possible obligation to pay damages, but also ex ante, by preventing abuse deriving from unilateral enforcement of rights. 127 Similarly the application of the international security regime to aircraft engines128 is not compatible with the civilian concept that component parts of one asset (in this case an aircraft) cannot be made subject to a separate security right129 if such a component part is considered an integral and indispensable part of that other object. Nevertheless, the purpose of the Convention and the Aircraft Protocol is to facilitate secured financing and it is increasingly common for airframes to be financed separately from aircraft engines. The justification as to why engines are separately chargeable is one of degree and commercial practice. Presumably this is why aircraft seats even in the case of large passenger capacity aircraft which are equally specifically identifiable are not chargeable under the Protocol.130 Whilst it is contrary to the civilian concept that components cannot be made the subject of a separate security right, nonetheless, a balance has been sought so civilian influence can be seen in that the chargee is required to exercise its remedies in a commercially reasonable manner. Further an intended sale or lease by the chargee requires under the Convention the leave of the court unless the debtor and all other persons having an interest in the equipment agree to the sale or lease and a Contracting State may make a declaration prohibiting the creditor granting a lease in respect of equipment within its jurisdiction. In order to enhance predictability of outcomes in terms of the exercise of security rights the civilian concept of good faith in the enforcement of remedies is substituted in favour of commercial reasonableness.131 As we have discussed, in the Aircraft Protocol, an agreement between the debtor and creditor as to what is a commercially reasonable manner in the application of default remedies is conclusive except where this is manifestly unreasonable.132 Significantly, the Draft of the Aircraft Protocol that was presented at the Diplomatic Conference sought to make the agreement wholly conclusive in this regard. Such an approach, if implemented, would have represented a departure from the conventional position because Article 1-7 of the UNIDROIT Principles of International Commercial Contracts (1994) provides that parties must act in accordance with good faith and fair dealing in international trade and parties are not free to exclude or limit this duty. This is the case even under the English common *I.C.L.Q. 174 law tradition which whilst not formally recognising good faith as a legal principle, the courts have, nevertheless developed functional equivalents principally through the intervention of equity.133 Moreover, in Article 9:102 of the UCC the definition of good faith includes both honesty in fact and the observance of reasonable commercial standards of fair dealing. The draftsmen of the Draft Article Protocol eschewed such an approach in an attempt to produce bright line rules so as to promote predictability in the enforcement of remedies. The qualification of the Diplomatic Conference by the introduction of the concept of manifest unreasonableness provides an opportunity for national courts to potentially undermine the priority position of the holder of the international security interest through the development of doctrines

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including bad faith, fraudulent conveyance and equitable subordination.134

VII. CONCLUSION
The object of secured financing is to reduce the credit risk for the financier upon the debtor's default. In this respect the efficacy of the security depends upon the willingness of the applicable legal regime to recognise the rights of the secured party when they come into conflict with conflicting claims, for example, those of the debtor or liquidator upon the debtor's insolvency. The problem becomes particularly acute when assets move from one jurisdiction to another and the issue then becomes the extent to which the laws of the new jurisdiction(s) are conceptually compatible with the law governing the transaction at its inception. It is self-evident that as economic activity intensifies in the wake of the process of globalisation, national frontiers have become less important. Indeed, high cost equipment such as railway rolling stock, lorries, aircraft, construction equipment move across national frontiers even though they may be subject to security interests arising out of financing extended to the operator or debtor to acquire the specific asset. The narrow issue for the financier relates to the recognition or otherwise of the security interest and the rights claimed in respect of that interest. To this end, the focus of an asset financier is the need to be confident that default procedures will allow him to realise the asset on default through being able to seize the equipment.135 In this respect the Cape Town Convention on International Interests in Mobile Equipment breaks new ground in that it purports to be international substantive law informed by commercial objectives: First, a transparent priority principle; secondly, a prompt enforcement principle; thirdly, a bankruptcy enforcement principle. As such, it is not concerned with comparative methodology *I.C.L.Q. 175 and neither is it an open-text solution or compromise as part of a unification model in international law.136 The Cape Town Convention is clearly policy based with commercial conclusions firmly in focus. The objectives of the project are identified in the mandatory Convention provisions and are self-contained. The dual instrument approach through equipment-specific Protocols provides flexibility by introducing a multi-track element in the development of rules for different assets, that is relational criteria that accommodate policy issues which are in conformity with the mandatory provisions of the Convention but are incidental to them. These criteria are reflected in rules that are binding on a Contracting State if and only to the extent that the State has not entered into a reservation. The State in determining this is essentially making a second-order policy decision as to whether or not the benefits of furthering the policy of the mandatory parts of the international Convention outweigh the objectives of the national law that would otherwise be displaced.137 In the Aircraft Protocol these second-order policy decisions relate to expeditious relief even against the insolvency administrator. Bright line rules confirming judicial discretion in the application of remedies upon default are evident and good faith standards in the enforcement of rights have been eschewed in favour of commercial reasonableness where behaviour is measured against criteria laid down in the case of the Aircraft Protocol by the parties themselves except where this is manifestly unreasonable. The danger is that these rules will be perceived as a set of norms that fit the preferences of the more powerful nations that are likely to be providing the secured financing. This is especially the case when the draftsmen of the Convention and in particular the Aircraft Protocol were informed by extensive specific interest group participation in the legislative process. In an attempt to address this danger several of the creditor protection provisions in the Convention and Protocol come into operation in a Contracting State only where it has made a declaration to the effect that they should, while other provisions may be excluded by declaration. Thus, in the case of the insolvency provisions in the Aircraft Protocol, States have a choice to declare between alternatives or make no declaration at all, leaving the matter to be dealt with by their national law. In dealing with the harmonisation of commercial law and especially personal property security law, it is necessary to recognise that there are differences between legal cultures and also business cultures. In the context of the Convention on International Interests in Mobile Equipment, the differences in *I.C.L.Q. 176 legal cultures between the common law and civil law are well known. Any solution must not only be commercially oriented but it also has to be politically acceptable.138 The success of the Convention and Protocols will ultimately be tested in their acceptance and adoption over time139 by the international community of what amounts to a new and discrete international substantive personal property security law regime. Sir Julian Hodge Chair in Law, Head of Department of Law, University of Wales, Swansea. I.C.L.Q. 2003, 52(1), 151-176

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The various types of harmonisation have been identified as falling into four broad categories: First, legislation; Secondly, judicial parallelism and judicial cooperation: Thirdly, business practices. codes, and model forms; Lastly, international restatements. See Goode, Insularity or Leadership? The Role of the United Kingdom in the Harmonisation of Commercial Law (2001) 50 ICLQ 751. International Chambers of Commerce, Uniform Customs and Practice Rules. This phenomenon can be illustrated in the case of retention of title clauses. An attempt was made in the EEC Draft Directive Working Paper 111/D/278/80 to harmonise the recognition of such clauses within the (then) Member States of the Community. What was modestly proposed was the recognition of simple retention of title clauses but no progress was made. See generally Monti, Nejman, Reuter The Future of Reservation of Title Clauses in the European Community (1997) 46 ICLQ 866. See United Nations Commission on International Trade Law, Security Interests: Feasibility of Uniform Rules to be used in Financing Trade, YB of the United Nations Commission on International Trade Law (1979), vol x. pt 2. 81: (1980) vol xi pt 2 89; Fdration Bancaire EEC 1970, Projet du convention relative aux effets extraterritoriaux des srets mobilieres sans dessaisissement (1970); International Institute for the Unification of Private Law, Study on Sales of Movables by Instalment and on Credit in Member Countries of the Council of Europe (1968). See Report of the Secretary-General: Study on Security Interests, YB of the United Nations Commission on International Trade Law (1977) UN Doc A/CN 9/131. On the basis of the study undertaken the UNCITRAL Secretary, Professor Drobnig, reported that significant problems remained when receiving States refused to recognise security interests attached to mobile property before it entered the receiving State and also there were different registration laws making unification of laws overly complex. See United Nations Commission on International Trade Law, YB (1979), vol x pt 2 (1), at 81. This has been adopted throughout the anglophone Provinces in Canada and also in New Zealand. It has inspired reform proposals in Australia and the UK. See now Law Commission Consultation Paper No 164, Registration of Security: Company Charges andProperty other than Land (2002). The major characteristics of Art 9 are the bringing of all security devices under one regime accompanied by a functional/purposive definition of security interests with a simple perfecting priority mechanism linked to notice filing. The transition from one economic regime to another allows the opportunity for fresh examination of the basic assumptions of the other system that are often taken for granted, notably, the facilitation of security interests. See Drobnig, The Conversion of a Socialist Economic System to a Market Economy: Legal Implications, ch 15 in Commercial and Consumer Law (1993) ed Cranston and Goode. The World Bank has linked many of its leading provisions to the reform of secured transactions law in debtor countries. See Head, Evolution of the Governing Law for Loan Agreements of the World Bank and Other Multilateral Development Banks (1996) 90 Am J International Law 214. The UNCITRAL Project would govern virtually any international assignment of a receivable and any assignment (domestic or international) of an international receivable, that is, a receivable for which the debtor and creditor are in different countries. Convention On International Interests In Mobile Equipment done in Cape Town, Nov 2001. The Convention does not adopt the name UNIDROIT in its title. At the Diplomatic Conference the Secretary-General of UNIDROIT withdrew the proposal to include the name UNIDROIT in the title in view of the role played by the South African Government in hosting the Diplomatic Conference. The Convention is now referred to as the Cape Town Convention although this does not form part of the official title. See also Protocol To The Convention On International Interests In Mobile Equipment On Matters Specific To Aircraft To Aircraft Equipment (the Aircraft Protocol) that was also completed at the same Diplomatic Conference. See Leebron, Claims for Harmonization: A Theoretical Framework (1996) 27 Canadian Business LJ 63. See Boodman, The Myth of Harmonization of Laws (1991) 39 American J Comp Law 699. For a discussion see Leebron, op cit, n 12, at 68-91. See David, The International Unification of Private Law (1971) 2 International Encyclopaedia of Comparative Law, at pp 24-54. Cf Wood Rethinking the Notion of Uniformity in the Drafting of International Commercial Law [1977] Uniform Law Review 46. Done at Ottawa, 1988. Cf Macdonald, The Counter-reformation of Secured Transactions Law in Quebec (1991) 19 Can Bus LJ 239. These were implemented by the States in the summer of 2001. See Mooney and Harris How Successful Was The

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Revision of UCC Article 9? Reflection of the Reporters (1999) 74 Chicago -Kent Law Review 1357. 20. 21. 22. 23. See Shepsle and Weingast Structure-induced Equilibrium and Legislative Choice (1981) 37 Pub Choice 503. See Schwartz and Scott, The Political Economy of Private Legislatures (1995) 143 University of Pennsylvania LR 595. Ibid, at 597. See Kaplow, Rules versus Standards: An Economic Analysis (1992) 42 Duke LJ 557; Schuck, Legal Complexity: Some Causes, Consequences and Cures (1992) 42 Duke LJ 1. See Ehrlich and Posner. An Economic Analysis of Legal Rule-Making (1974) 2 J Legal Studies 257. See Gilmore, The Ages of American Law (1977). at 86. See Kripke. The Principles Underlying the Drafting of the Uniform Commercial Code [1962] Univ III LF 321. As Schwartz and Scott have pointed out above n 21, at 640: The privileged status of hands-on working knowledge of Art 9 rules thus gave the in-house counsel and the private commercial lawyers the power to determine what the Study Group did. Efforts by the academic members--that is. the reformers--to place significant reform proposals on the agenda were uniformly unsuccessful. Professor Warren proposed to the Council of the American Law Institute in 1996 that 20 per cent of the collateral proceeds be reserved for unsecured creditors in order to redress the secured versus unsecured credit balance. This was rejected by the Drafting Committee of Art 9. See McDonnell, Is Revised Article 9 A Little Greedy? (1999) 104 Commercial Law Journal 241. See Mooney and Harris op cit, n 19. Art 9 as a model for the reform of English personal property security law is discussed in the Law Commission Consultation Paper No 164, op cit, n 7. See also Davies, The Reform of Personal Property Security Law: Can Art 9 of the US Uniform Commercial Code Be A Precedent? (1988) 37 ICLQ 465. See Davies, Reservation of Title Clauses in the UK, ch 13, Davies (ed), Reservation of Title Clauses in Europe (1999). See Bridge, How Far is Art 9 Exportable? The English Experience (1996) 27 Canadian Business Law Journal 196. The Quebec Civil Code that was reformed in 1992 provides a conceptual structure for security interests which parallels the Canadian Personal Property Security Acts. See Cuming, Personal Property Security Law in Canada: The Revolution is Nearly Complete (1998) 72 ALJ 918. Ibid, at 918. This is not always the case as can be demonstrated in the experience of the passing of the English Imperial Sale of Goods Act 1893. No commercial pressure group actively interested itself in the matter to a significant extent and the major factor which precluded Parliamentary vis inertiae with respect to the Sale of Goods Bill was that in 1892, Lord Herschell who was the main protagonist of the Bill was Lord Chancellor and in that position he was able to guide the Bill on to the Statute Book. The English Commercial Codes of the nineteenth century (The Bills of Exchange Act 1882: The Partnership Act 1890: The Sale of Goods Act 1893: The Marine Insurance Act 1906) were enacted not to reform substantive law but rather to re-form its shape and organisation. Such Codes were influenced by lawyers, the major English personalities being Chalmers who produced a Digest of the Laws of Bills of Exchange in 1878 having been encouraged to produce this Code by Sir Farrer Herschell who became Solicitor-General (1880-1885) and later Lord Chancellor (1886 and 1892-1895). UNIDROIT was established in 1926 within the framework of the League of Nations. It was reconstituted after the Second World War and its principal purpose is set out in Art 1 of the UNIDROIT Charter. See Stanford, The UNIDROIT Convention on International Financial Leasing and the Preliminary Draft UNIDROIT Convention on International Interests in Mobile Equipment [1999] International Journal of Legal Information 188. At the same time Canada was half way through the process of introducing personal property security legal regimes in its Provinces. See Cuming, Personal Property Security Law in Canada: The Revolution is Nearly Complete (1988) 72 ALJ 918. Cuming, International Regulation of Aspects of Security Interests in Mobile Equipment, UNIDROIT 1989, Study LXXII Doc 2. The conflict of law rule reduces the level of predictability in a transaction thereby increasing the risk. Some national legal rules favour domestic over foreign parties particularly in the context of priority disputes. See Cuming, ibid, at 28-9 and 38-9. The conclusions drawn by Professor Cuming were included in the Questionnaire and were highlighted as follows: The lex situs rule is inadequate in determining validity and priority status of security interests in movable equipment which frequently moves between frontiers; The North American experience is that the law of the debtor's principal place of

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business is more appropriate as a workable mechanism; A functional approach to the categorisation of a security interest should be adopted; A set of priority rules that reflect functional considerations should emerge including the registration requirements that a State might think necessary to protect persons who acquire interests in collateral. In addition there should develop an appropriate choice of rule or set of international rules applicable to inter partes rights and remedies; No attempt would be made to address the status of security interests in bankruptcy although it was acknowledged that it would be necessary to secure acceptance that title retention sale contracts would be treated in bankruptcy proceedings as creating security interests the validity of which would be a matter for the law of the debtor's principal place of business and not the forum of the bankruptcy proceedings; A workable system for the international recognition of security interests should be embodied in a Convention.The Questionnaire was divided into 3 parts: Part 1 was concerned with identifying what kinds of movable property were security interests taken and if so, the experience of creditors in respect of the validity and enforcement of the security in foreign jurisdictions; Part 2 was concerned with the questions as to the nature of the proposed Convention whilst Part 3 gave an opportunity for general comments. 42. 43. 44. 45. 46. 47. 48. See UNIDROIT 1992 Study LXII Doc 4. Ibid, at 6. See Circular letter dated 1 Sept 1992 from Mr Riccardo Monaco, President of UNIDROIT. Cf Goode Battening Down Your Security Interests [2000] LMCLQ 161. See UNIDROIT 1993 CD (72) 18 at para 6. Ibid, at para 11. Even at this first meeting it was recognised that the European Bank for Regional Development was working on its model law for Central and Eastern Europe and the CIS. At the same time it was recognised that work was proceeding sponsored by the IMF regarding the preparation of a similar model law for Latin America. The Study Group at its first meeting proposed that the UNIDROIT Governing Council should consider authorising the Secretariat together with other interested organisations to look into the feasibility of the preparation of a model law on secured transactions in general. The Hague Conference on Private International Law and the European Bank for Reconstruction and Development. UNIDROIT 1994, Study LXXII, Doc 12. It was noted that registered ships would be excluded but that this category of asset should still be included in brackets denoting that the decision was not final because there might turn out to be provisions in the proposed Convention that would be useful to shipping interests. See UNIDROIT 1995, Study LXXII, Doc 18. The sub-committee of the Study Group for the preparation of uniform rules which met in November 1994 to consider the responses to the First Draft had invited Boeing and Airbus, the major aircraft manufacturers, to prepare a memorandum for consideration by the drafting group and the sub-committee setting forth a representative aviation industry view on the desired content of the proposed Convention as it related to aircraft. See UNIDROIT 1995, Study LXXII, Doc 15. UNIDROIT 1995, Study LXXII, Doc 18, para 5. UNIDROIT 1995 Study LXII. Doc 21, at 3. Ibid. See pp 157-158 above. UNIDROIT Statute, Art 1. Fifty-nine states were represented at the diplomatic Conference in Ottawa which led to the UNIDROIT Convention on International Financial Leasing in 1988. By 31 Dec 1990, thirteen states had signed the Convention namely, Belgium, Czechoslovakia, Finland, France, Ghana, Guinea, Italy, Morocco, Nigeria, Panama, Philippines, Tanzania, and US. The Convention entered into force on 1 May 1995 pursuant to the deposit of instruments of approval/ratification. The following States have deposited such instruments: France (1991), Italy (1993), Nigeria (1994), Panama (1997), Hungary (1997), Latvia (1997), Russian Federation (1998), Belarus (1998), Uzbekistan (2000). A reformer will derive utility from being involved in the passage of a reform proposal irrespective of whether the proposal ultimately becomes law. See Schwartz and Scott, The Political Economy of Private Legislatures (1995) 143 University of Pennsylvania LR 595, at 610. Cf Schwartz and Scott, op cit. at 633: In a world of asymmetric information, interest group power is substantially diluted when groups compete. Further the institutional bias of private legislators to behave conservatively is reinforced. See above. See Weber and Espinola, The Development of a New Convention relating to International Interests in Mobile Equipment in particular Aircraft Equipment: A Joint ICAO-UNIDROIT Project (1999) 2 Unif L R 463.

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Three UNIDROIT-ICAO co-sponsored meetings of governmental experts and members of an ICAO legal subcommittee were held in 1999 and 2000 at which the UNIDROIT proposals were further developed. See Report of the First Joint Session of the Unidroit Committee of governmental experts and the Sub-Committee of the ICAO Legal Committee on the preparation of a draft Convention on International Interests in Mobile Equipment and a draft Protocol thereto on Matters Specific to Aircraft Equipment. UNIDROIT CGE/Int.Int/-Report (ICAO Ref LSC/ME-Report; Report of the Second Session (Dec 1999), UNIDROIT CGE/Int Int/2-Report; ICAO Ref LSC/ME/2-Report; Report of the Third Session (Mar 2000), UNIDROIT CGE/Int/Int/3-Report; ICAO Ref. LSC/ME/3-Report. Additional refinements were made at a further meeting of the ICAO Legal Committee and were approved by the ICAO Council. See Legal Committee--31st Session, Doc 9765-LC/191 (Nov 6/00). See generally Convention on the International Maritime Organisation, 6 Mar 1948, 289 UNTS. See Convention Concerning International Carriage by Rail, 9 May 1980. For a general discussion see Larsen and Heilbock, UNIDROIT Project on Security Interests: How the Project Affects Space Objects (1999) 64 Journal of Air Law and Commerce 703. In 1999 the German Delegation to UNIDROIT proposed that the Aircraft Protocol be merged into a stand-alone text. This was rejected. See Proposal submitted by the Delegations of Germany, First Joint Session (Rome 1-12 Feb 1999) UNIDROIT CGE/Int/WP/9. Practical considerations have caused UNIDROIT to be cautious as regards the number of equipment-specific protocols to be dealt with at any particular time. See Stanford, A broader or a narrower band of beneficiaries for the proposed new international regimen? (1999) 4 Uni LR 242. Preliminary draft protocols were completed by the Space Working Group and the Railway Rolling Stock Working Group in 1999. These Groups were made up of representatives from manufacturers, operators and also the financial community. See Panaby and Mittal The Prospective UNIDROIT Convention on International Interests in Mobile Equipment as applied to Space Property (1999) 4 Unif LR 303; Rosen Creating an International Security Structure for Railway Rolling Stock: An Idea Ahead of its Time (1999) 4 Unif LR 313. Convention on International Interests in Mobile Equipment. Even so, this approach has been contemplated by customary international law as seen, for example, in the Vienna Convention on the Law of Treaties (23 May 1969, 1155 UNTS 331) which defines a treaty to include two or more related instruments. For a discussion on the impact of the two-instrument approach in respect of the base Convention and the equipment specific protocol see Chinkin and Kessedjian. The Legal Relationship between the Proposed UNIDROIT Convention and its Equipment-Specific Protocol (1999) 4 Unif LR 323, at 325-34. See Saunders, Srinivasan. Walter, and Wood, The Economic Implications of International Secured Transaction Law Reform: A Case Study (1999) 22 Univ Pa J Int Econ Law 309. This does not eliminate risk because the effectiveness of security depends upon the ability of the creditor to enforce it. There are also residual political risks for Western financiers in funding projects in developing countries. McGairl, The Proposed UNIDROIT Convention: International Law for Asset Finance (Aircraft) (1999) 2 Unif LR 439, at 440. See below. The major international credit rating agencies will give a rating enhancement to the bonds issued where they are backed in the case of aircraft with asset security. See Fabozzi and Modigliani, Capital Markets (1996). By using asset-backed bonds an airline can achieve a higher credit rating from the rating agencies and then pay lower coupon interest on the bonds. The savings occasioned depend on the rating of the airline borrower (or its home country where it is a nationalised industry) and the degree of the over-collateralisation of the asset-backed bond. See Saunders, Srinvasan, Walter, Wood op cit, n 72, at 337-9. In terms of cost it is estimated that the cost of a secured loan transaction discounting legal or political risks on a fixed rate transaction is LIBOR plus forty basis points whereas an acceptable unsecured transaction is estimated at LIBOR plus 250 basis points. Considerable potential savings are then possible which obviously increase with the spread between the unsecured rate and the secured lending rate. See Saunders, Srinvasan, Walter, and Wood, op cit, at 336. Even direct sovereign credit support for national airlines does not ensure low-cost financing because lending rates will reflect the credit standing of the government guarantor. See Smith and Walter, Risks and Rewards in Emerging Market Investments [1997] J Applied Corp Finance 1. See Proposed UNIDROIT Convention on International Interests in Mobile Equipment as applicable to Aircraft Equipment through the Aircraft Equipment Protocol: Economic Impact Assessment (Sept 1998). It was estimated that a strong legal regime for international security interests and the expeditious enforcement of those rights would have a significant effect on risk assessment and credit ratings and save several billion dollars per annum which would be passed on to the airlines, aircraft manufacturers and their shareholders and customers. See Goode Battening Down Your Security Interests [2000] LMCLQ 161, at 173-4. See La Porta et al, Legal Determinants of External Finance (1997) 52 J Fin 1131. Fleisig The proposed UNIDROIT Convention on Mobile Equipment: Economic Consequences and Issues (1999) 4 Unif LR 253, at 261.

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It is possible to classify jurisdictions on the basis of their sympathy or hostility to the creation of non-possessory security interests. Thus, Wood concludes that Belgium. Luxembourg and most Latin American countries, Greece and Spain are quite hostile whilst Austria, France and Italy are very hostile to the creation of non-possessory security interests. See Wood Comparative Security Law (1997), 5-6. See Fleisig and de la Pena, Peru: How Problems in the Framework for Secured Transactions Limit Access to Credit (1997) 3 NAFTA Law and Business Review of the Americas 33. In this study ibid, at 35 of the Peruvian framework for secured transactions based on the findings of a World Bank Mission to Peru, the authors point out: Few types of property, besides real estate, seemed really to serve as collateral. In each case, legal and institutional limits in using movable property as collateral for loans limited access to credit to profitable transactions and growing businesses. These limits in using movable property as collateral for loans do not arise from macro-economic problems of from high intermediation spread, but from problems in the Peruvian secured transactions framework that makes movable property a very risky collateral. These problems in the Peruvian secured transactions framework have been observed in other countries such as Argentina, Mexico, Uruguay, Bolivia, Peru. Honduras and El Salvador that share Peru's Civil Code tradition. But it is not confined to these countries. Bangladesh, India and Pakistan are Common Law countries with similar problems that arise from an inadequate framework for security interests in movable property. Cf Fleisig, Aguilar and de la Pena, Legal Restrictions on Security Interests Limit Access to Credit in Bolivia (1997) 31 The International Lawyer 65, at 70. Bolivia has one of the most concentrated patterns of land ownership in Latin America, with about 5 per cent of the people owning about 95 per cent of the land. Problems with using movable property as collateral, therefore, lead the present system to distribute credit even more narrowly than the distribution of wealth. Signed at Geneva, 19 June 1948, 310 UNTS 151. See Wood, The Next Generation of International Aviation Finance Law (1998) 23 Air and Space Law 243, at 245. Ibid, at 271-3. See Bridge, How far is Article 9 Exportable? The English Experience (1996) 27 Can Business LJ 196. The international registration system is set out in Chapter IV of the Convention. The modalities of registration are set out in Chapter V of the Convention. See Art III Aircraft Protocol. Art 29 Convention. Art 29(2) Convention. Article 29(5) Convention. See Art XIV Aircraft Protocol. See Chapter X Convention. Cf Wool The Next Generation of International Aviation Finance Law: An Overview of the Proposed UNIDROIT Convention on International Interests in Mobile Equipment as Applied to Aircraft Equipment (1998) 23 Air and Space Law 243. Art 1(2)(c) Aircraft Protocol. Art XIV(3) Aircraft Protocol. It should be noted that the Aircraft Protocol does not create an engine sub-registry. There is only one international registry for aircraft objects. with separate treatment for airframes, aircraft engines, and helicopters. The Convention allows Contracting States to designate an entry point for transmission of registration to the International Registry but these entry points cannot be construed as amounting to sub-registers. In the case of aircraft engines a Contracting State may permit but not require registration to be made through entry points the reason being that unlike aircraft there is no system of national registration for engines. See Wool, op cit, n 97. These are set out in Art 7 Convention. The issue of power is problematical because it does imply numerous factual and legal issues which will be addressed by the national law. See Art 5, Convention. The default remedies come into play whether or not the international interest has been registered in the international registry. The function of registration is to give notice and outside bankruptcy registration has no role as between the parties themselves. The provisions relating to default remedies are relevant only to the extent that the parties have not stipulated them or the security agreement may provide otherwise.

83.

84.

85.

86. 87. 88. 89. 90.

91. 92. 93. 94. 95. 96. 97.

98. 99. 100.

101. 102. 103.

104.

16/10/2013 105. 106.

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The party autonomy principle applies. See Art 11, Convention. Under the Convention, the remedies not specified as requiring the leave of the court may be exercised without such leave. However, Art 54(2) of the Convention provides that a State may make an express declaration requiring an application to be made to the court in respect of a creditor exercising a remedy. Subject to this, remedies are required under Art 14 to be exercised in accordance with the procedural law of the place of exercise. Art 8(3) Convention. Draft Protocol to the UNIDROIT Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment, Art IX(3). Aircraft Protocol Art IX (3). Aircraft Protocol Art IX (4) Aircraft Protocol Art XIII. Art IX (1) of the Aircraft Protocol provides that a creditor with the agreement of the debtor can following default procure the de-registration of the aircraft and procure the export and physical transfer of the aircraft object from the territory in which the aircraft object is situated. Aircraft Protocol Art XXVIII. See Art 13 Convention; Art X Aircraft Protocol. Art 30(1) Convention. Art 30(2) Convention. Art 30(3) Convention. Aircraft Protocol, Art XI, Alternative A. Aircraft Protocol Art XXVIII. Aircraft Protocol Art XXIX. Aircraft Protocol, Art XI Alternative A (7). Aircraft Protocol, Art XI Alternative B (2). See McGairl, The Proposed UNIDROIT Convention: International Law for Asset Finance (1999) 2 Unif LR 439, at 454-5. Art 30(1) Convention. Art 30(3) Convention. The reservation mechanism has been portrayed as a matter of calculation for the State as to whether or not debtor protection or bankruptcy reorganisation issues are more important to a State than the renewal of a national carrier's ageing aircraft fleet. See Wood, The Case for a Commercial Orientation to the Proposed UNIDROIT Convention as applied to Aircraft Equipment (1999) 24 Unif LR 289. Art 8 Convention; Art IX Aircraft Protocol. It should be noted that Art 54(2) of the Convention allows a Contracting State to exclude self-help. Harmanthy, The Regulation of Secured Transactions under the Future UNIDROIT Convention: A Hungarian Point of View (1999) 2 Unif LR 433, at 436. Art XIV Aircraft Protocol. For a comprehensive discussion see Wood, Comparative Law of Security and Guarantees (1995), 215-21. Cf Crans. The UNIDROIT Convention on International Interests in Mobile Equipment and the Aircraft Equipment Protocol: Some Critical Observations (1998) 23 Air and Space Law 277. Art 8(3) Convention. Art IX(3) Aircraft Protocol. See Smith In Defence of Substantive Fairness (1996) 112 LQR 140. Cf McDonnell, Is Revised Article 9 A Little Greedy? (1999) 104 Commercial Law Journal 241.

107. 108.

109. 110. 111.

112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122.

123. 124. 125.

126.

127.

128. 129. 130.

131. 132. 133. 134.

16/10/2013 135. 136.

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See Baird, Security Interests Reconsidered (1994) 80 Virginia LR 1249. See Wool, Rethinking the Notion of Uniformity in the Drafting of International Commercial Law: A Preliminary Proposal for the Development of a Policy-based Unification Model (1997) 22 Uniform LR 46. This is sometimes referred to as the policy-based unification model of international commercial law reform in that it allows for policy decisions to be made by States in determining whether or not to adopt an analytical framework by way of a Protocol for a specific category of mobile asset. See Wool, op cit, at 50. See Weber and Espinola, The Development of a New Convention relating to International Interests in Mobile Equipment, in particular Aircraft Equipment (1999) Unif LR 463. Twenty states, including the UK signed the two instruments at the Diplomatic Conference.
2013 Cambridge University Press

137.

138.

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