THE FORTHCOMING UNIFORM INTERNATIONAL INTERESTS REGIME SAFEGUARDS THE NETHERLANDS RIGHTS IN REM OF THE HOLDER OF AN AIRCRAFT
The Netherlands consensual real rights in the acquisition and possession of an aircraft may be vested in an airline company. These rights originate in the United States. Some maintain that the future Convention on International Interests in Mobile Equipment as applied to aircraft objects is not applicable to these rights. This contribution submits the opposite view.
Mr B. Patrick Honnebier, LL.M.
Of Counsel
Gomez & Bikker
Anmsterdam
1. Introduction
In November 2001 the Convention on International Interests in Mobile Equipment (CIME) and the Aircraft Equipment Protocol (AEP) will be concluded in South Africa. The Convention and this Protocol shall be known as the Convention on International Interests in Mobile Equipment as applied to aircraft objects (CIME/AEP). The CIME/AEP, and the protocols subsequently introduced, promise to be one of the most important regulations in the area of international commercial law. It is expected that worldwide both industrialised and developing countries will accede to this instrument. The CIME/AEP contains inter alia provisions relating to property law. The convention provides the creation of an autonomous international interest. This unique right in rem, which is consensual in nature, encompasses the following categories of national legal relationships: an interest under a) security agreement, b) title reservation agreement or c) leasing agreement. These three legal devices are the methods of finance which are used most often in international practice and which require uniform rules of property law. The regime of the CIME/AEP also provides for special remedies which may be exercised by the holder of an international interest. An international interest can be constituted only in specific categories of mobile equipment. In general the term mobile equipment encompasses objects which by their very nature are used internationally. For the purpose of the AEP this term encapsulates only airframes, aircraft engines and helicopters.
With effect from 1996 in the Netherlands the property law status of aircraft was laid down in Title 15 (Aircraft) of Book 8 of the Netherlands Civil Code (NCC). The present rules result from the incorporation of the substantive law section of the separate Statute of Registered Aircraft (SRA) into the NCC. The statute was motivated by the text and objective of the Convention on the Recognition of Rights in Aircraft (1948 Geneva Convention). Dutch air law provides inter alia for the possibility to grant an airline company a right in rem in the acquisition of an aircraft once it has paid a certain amount of money or it has fulfilled another obligation (article 8:1308 NCC). Furthermore, the holder can be granted a right in rem in the possession of an aircraft provided that the agreement is concluded for at least six months (article 8:1309 NCC). These rights are consensual in nature. The persons entitled acquire a full right in rem by registering the notarial deed, into which the agreement is incorporated. The real rights of the holder of an aircraft occupy an exceptional position in the Netherlands system of property law, both in dogmatic and conceptual terms. The general rules of property law contained in Books 3, 5 and 6 of the NCC are not fully applicable. The part of the air legislation of the Netherlands that results from the Geneva Convention is a lex specialis. It has supremacy over the general provisions relating to property law contained in these Books.
The rights in rem of Dutch airlines originate in the laws of certain states of the United States which existed before the Second World War. Under specific American conditional sale transactions and under certain versions of an equipment trust the buyer or lessee was afforded protection equally as favourable as that afforded to the seller or lessor. These proprietary interests were incorporated into the Geneva Convention under American influence. These foreign legal devices were then transposed into domestic Netherlands legislation. The reason for this was the need to apply them in national practice with regard to the financing of aircraft. It is interesting to note, however, that at this moment in time no other Member State of the European Union has similar substantive rules of property law for the benefit of its airlines. In the United State the legal devices of conditional sale and equipment trust, as well certain forms of lease transactions, are currently governed by the regime of Article 9 of the Uniform Commercial Code (UCC). The UCC contains general rules on virtually all forms of secured transactions. These American secured interests fall in turn within the sphere of application of the CIME/AEP.
The question arises whether the sphere of application of the forthcoming CIME/AEP also extends to the Netherlands rights in rem of a holder in the acquisition or possession of an aircraft (8:1308 and 8:1309 NCC). These legal relationships satisfy the application criteria of the CIME/AEP regime where they can be characterised as an international interest. In Dutch legal practice some assume that the regime of the CIME/AEP does not govern the abovementioned real rights. Consequently, the interests of Dutch airlines would not be protected and that, in their view, would be one of the most important arguments against accession to the CIME/AEP. It would substantiate their opinion that the coming regime is solely financier-friendly. Unfortunately, these persons fail to put forward any legal argument in support of their opinion. In any event, their assumption is incorrect. On the basis of the history and purpose of the American and Netherlands air regulations and the intent of the Dutch legislature, it is argued in this contribution that the sphere of application of the future CIME/AEP extends to these special rights. Consequently, in the near future it will be possible to protect the major interests of Dutch airlines also at international level, while at present they are afforded only national protection. This is yet another reason for the Kingdom of the Netherlands to ratify the future CIME/AEP.
In the following sections the author focuses on the history of the Netherlands rights in rem of a holder in the acquisition and possession of an aircraft and the pragmatic securities regime of the forthcoming CIME/AEP. In section two the American history of Netherlands air law is considered. The objective and purpose of the Geneva Convention are then discussed in section three. Section four relates to the present Netherlands rights in rem of the holder of an aircraft. Section five deals with the sphere of application of the CIME/AEP and the fact that the Netherlands rights in rem fall within the applicability thereof. This is followed finally by certain concluding remarks.
2. The American rights of the holder of an aircraft
In most (European) countries the national authorities traditionally occupy an important position as regards financing the acquisition and use of aircraft. The State is often the sole or a major shareholder in the national airline. Frequently, in such cases new aircraft are financed by means of government funds. For this reason many airlines have no need to make use of the modern American financing transactions discussed below. However, the current trend towards privatisation of national airlines is changing this situation. These companies are increasingly having to turn to private financiers. In the United States, on the other hand, civil aviation has always been in the hands of private undertakings which have had to bear responsibility for financing the necessary aircraft themselves. However, no American airline can fund such high-value objects from its own resources. Therefore, these companies have to arrange loans with banks and other financial institutions. In such cases a right in rem can be constituted in high-value aircraft, which presently have long commercial lives, in order to protect the interests of a financier. In American practice use is made in particular of asset-based financing and leasing transactions. A common feature of these categories of modern financing techniques is that the aircraft is used as the object of credit. However, when civil aviation first began there was no uniform law on financing the acquisition and use of aircraft in the American states. Depending on the circumstances of the case, the financier and airline could conclude, for example, a chattel mortgage, fleet mortgage, conditional sale, lease, equipment trust or hire purchase agreement. There were significant differences from state to state, however, as regards the content and scope of these legal devices. This resulted from an absence of uniform American rules of property law and from unequivocal jurisprudence concerning this area of the law.
In 1938 the Civil Aeronautics Act (CAA) was introduced in the United States. The CAA laid down provisions on the registration of agreements constituting rights in rem in aircraft and on the consequences thereof in all states. The legal validity of the origin, contents and scope of these rights, on the other hand, was determined by the property law of these states themselves. As noted above, the property law regimes of the states could, however, display considerable differences, in particular in respect of the abovementioned conditional sale transactions. The contents and purpose of these transactions were subject to different rules from state to state. According to the courts of certain states, under a conditional sale the buyer had to be regarded as the owner, while the courts of others ruled that the seller had to be regarded as the owner. Since there were too many versions of conditional sale, the CAA was designed to put an end to the problem by means of the two following definitions. A conditional sale means:
a) any contract for the sale of an aircraft or portion thereof under which possession is delivered to the buyer and the property is to vest in the buyer at a subsequent time upon the payment of part or all of the price, or upon the performance of any other condition or the happening of any other contingency; or
b) any contract for the bailment or leasing of an aircraft or a portion thereof by which the bailee or lessee contracts to pay as a compensation a sum substantially equivalent to the value thereof, or has the option of becoming the owner thereof upon full compliance with the terms of the contract.
The conditional sale in turn formed the basis for the development of the aforementioned equipment trust. This legal device was used in the first instance in the financing of canal boats and railway rolling stock. Following the Second World War it was also frequently applied in the acquisition of aircraft. The equipment trust phenomenon encompassed aspects of conditional sale, lease and trust. However, the equipment trust assumed different legal forms depending on the state in which it was created. The version of conditional sale defined in subparagraph (a) of the CAA became the basis for an equipment trust developed in the State of New York. Pursuant to the law of this state, the buyer under a conditional sale, which in turn formed part of an equipment trust, was entitled to extensive protection (New York Plan). The type of conditional sale defined in subparagraph (b) of the CAA, on the other hand, formed the basis for a special equipment trust which emerged in the State of Pennsylvania (Pennsylvania Plan). This version was developed in Pennsylvania since in that state a “New York” conditional sale had effect only as between parties. Even if such a right were registered, the person entitled could not invoke it against third parties. The property law of the State of Pennsylvania, on the other hand, did provide for the invocation of registered lease agreements against third parties.
The absence of uniform property law in the United States continued until the establishment of the rules on secured transactions in the Uniform Commercial Code (UCC) and the introduction thereof into the legal systems of all the states. Under Article 9 of the UCC secured transactions means: “…security interests created by contract including…equipment trust, conditional sale…and lease”. Security interests in turn fall within the sphere of application of the future CIME/AEP, since they can form the basis for an international interest. That is because they fall within the broad definition: “an interest granted by the chargor under a security agreement” (Article 2(2)(a) of the CIME). The sphere of application of the CIME/AEP is examined in section five below.
3. The rights of the holder of an aircraft under the Geneva Convention
In 1933 an attempt was made by the International Technical Committee of Legal Aeronautical Experts (CITEJA) to lay down international rules on the establishment of mortgages in aircraft, since at that time there were insufficient rules concerning the private law aspects of international aviation law. However, this organisation encountered, inter alia, the problem that no mortgages on aircraft could be established, for example, in the Netherlands and many other countries. Consequently, effective uniform rules on the property law aspects of air law appeared to be impossible. The convention proposed by the CITEJA never entered into force. Subsequently, there was a desire both in the United States and Europe to see the introduction of a convention as soon as possible. However, since an aviation convention covering aspects of substantive property law was not feasible at that time, a decision was finally taken to be content with a convention on recognition. The result was the present Convention on the Recognition of Rights in Aircraft. Since the (1948) Geneva Convention governs only the recognition of foreign rights in rem in aircraft, it is by its very nature less effective than an unifying convention which complements the national (closed) security regimes of the Contracting States. The Geneva Convention has, from the outset, been regarded as a provisional body of rules.
The Geneva Convention provides that four distinct classes of rights may be constituted in aircraft in a Contracting State and that they must be recognised in the other Contracting States. The Netherlands ratified the Geneva Convention in 1957. According to the Netherlands Explanatory Memorandum relating to the approval of the convention, “the purpose thereof is primarily to provide international protection for the rights of those who have a right in rem (and in particular a mortgage right) in an aircraft. Consequently, its objective is to promote the extension of credit to owners of aircraft. Without international recognition of these security rights, the extension of credit for aircraft is a precarious business”. According to the Explanatory Memorandum, the ratification of the convention and the adaptation of Dutch laws to the convention were, therefore, desirable.
Article I(1) of the Geneva Convention incorporates the following categories of rights in rem in aircraft which must be recognised by the Contracting States:
1. “rights of property in aircraft” (subparagraph (a)). For example, outright ownership, fiduciary transfer of ownership for security purposes (fiducia cum creditore), the right of a seller under a title reservation agreement and the right of a (American true) lessor.
2. “mortgages, hypothèques and similar rights in aircraft which are contractually created as security for payment of an indebtness” (subparagraph (d)). For example, chattel mortgage, title mortgage, fleet mortgage, lien mortgage, hypothèque, and any other type which is in the nature of a mortgage, pledge and equivalent rights in rem which involve payment of a debt.
3. “rights to acquire aircraft by purchase coupled with possession of the aircraft” (subparagraph (b)). On account of its important position in international civil aviation the United States very much left its mark on the contents of the convention. The American delegation insisted, for example, that the right of the holder in the acquisition of an aircraft be incorporated into the convention. As was explained above, this right originated in New York. Under the law of that state, a buyer on the basis of a conditional sale or equipment trust enjoyed as much protection as a seller. The primary aim of these transactions was to allow the airline to become the owner once it had fulfilled its contractual obligations. In the first instance there was criticism of the incorporation of this provision from the non-American side since it did in fact run counter to the primary objective of the convention, that is to say to protect financiers. The same criticism was expressed concerning the right of possession of an aircraft which will be discussed below. Nevertheless, the American rights found their way into the convention: “These (four) classes of rights are so described as to break down into their various constituent elements every known interest regarded as a recordable interest in American law. When finally so broken down the bugaboo of the equipment trust which confronted the foreign lawyers soon vanished”.
4. “rights to possession of aircraft under leases of six months or more” (subparagraph (c)). The American delegation also played an important role in the incorporation of this provision into the convention. This article was based on the abovementioned special forms of conditional sale and equipment trust, as developed in the State of Pennsylvania. In this state a lease was used to grant the holder of an aircraft rights which he could invoke against third parties. Although this provision is aimed primarily at promoting the financing of aircraft, its wording is so broad that “conventional” rental agreements also fall within the scope thereof. The countries, which have acceded to the convention, are therefore required also to recognise a registered rental contract of six months or more as a right in rem of the airline. The period of six months is incorporated in order to ensure that the courts need not examine lease transactions of only a short duration.
The Contracting States were entirely free as to how they gave effect to Article I of the Geneva Convention. This freedom created legal uncertainty since the convention was implemented in completely different ways in the Contracting States. The Netherlands, for example, was the only country in Europe to incorporate into its national law the abovementioned rights in rem of a holder in the acquisition and possession of an aircraft. This fact can give rise to legal uncertainty concerning, for example, the enforcement and the transposition of these rights in the closed property law systems of other (European) countries.
4. The rights of a holder of an aircraft under Netherlands law
In 1957 the Netherlands implemented the Geneva Convention in the Statute of Registered Aircraft (SRA). The contents of the statute were, as far as possible based on the wording and purpose of that convention. The reason for the adoption of the SRA lay in the inadequate Dutch property law which applied to aircraft at that time. For example, an aircraft could be encumbered with a pledge but not with a mortgage. The nature of the then existing pledge legislation, in particular the requirement that possession of the pledged object be transferred to the financier, gave rise to great problems in practice (article 1196 of the previous NCC). The introduction of the SRA made it possible to establish mortgages in respect of certain Netherlands aircraft. Furthermore, the aforementioned rights of the holder of an aircraft which originated in the United States were accommodated in the SRA. From then on it was possible to grant a right in rem in the acquisition of an aircraft to a Netherlands airline, provided that the agreement was laid down in a notarial deed which had been registered in the public registers (article 8 SRA). This right was similar to the foreign right of an airline, which had to be recognised under the Geneva Convention, “to acquire aircraft by purchase coupled with possession of the aircraft”. According to the Explanatory Memorandum to the SRA, “the incorporation of this article into Netherlands law opens up the possibility of creating legal devices such as conditional sale which exist in Anglo-Saxon law”. The “features of this (conditional sale) agreement” were laid down in the SRA. The legislature intended to create a Netherlands equivalent of these transactions because they were unknown in this country. Consequently, the foreign right could “as it were, be transposed into Netherlands law”. This fact is of great importance as regards the question of the enforcement of foreign rights in the closed Netherlands system of rights in rem and the mandatory priority status of conflicting rights.
Furthermore, under the SRA the holder of an aircraft could be granted a right in rem by virtue of a lease agreement provided that it was entered into for a period of at least six months. The agreement had to be laid down in a notarial deed and entered into the public registers (article 9 RCA). This Netherlands right reproduced the “right to possession of aircraft under leases of six months or more” contained in the Geneva Convention. According to the Explanatory Memorandum, “this article creates the possibility of making the lease of a registered aircraft a full right in rem”. Furthermore, the Explanatory Memorandum referred specifically to what was noted in respect of the abovementioned property right of the holder, laid down in article 8 of the RCA, in the acquisition of an aircraft. Various facts also applied to the provision in question. As a result, the American conditional sale and equipment trust could be assimilated into the right in rem in possession provided for in the Netherlands legal system.
As an argument in favour of incorporating the two abovementioned special rights in rem of the holder of an aircraft into the SRA, the Explanatory Memorandum contended that Netherlands recognition of the rights, which were unknown here, would be undesirable without further adaptation of national legislation. “The Netherlands had ratified the Geneva Convention at the time to make it possible to obtain foreign credit for aircraft sold to the Netherlands. This could be achieved only by granting the same protection to those with rights in rem in foreign aircraft and those with rights in rem in Netherlands aircraft. This meant that the property law status of a Netherlands aircraft had to be made to conform, wherever possible, with the convention. Otherwise, the Netherlands would experience the disadvantages of the Geneva Convention but not the advantages.” However, those drafting the WtbL were well aware that as a result of this law, the property law status of aircraft would differ greatly from that of other objects. The separate and distinct property law regime, which would apply to the civil aviation sector following the introduction of the law, would differ considerably from the existing system of property law which applied to other branches of trade and industry. According to the Explanatory Memorandum, straight rental and hire purchase agreements became full real rights as a consequence of the law. As a result of the new regime, the holder of an aircraft gained more extensive protection than the holder of other items of property. As a consequence of these rules the Netherlands airlines were, so to speak, elevated to a superior class of rightful claimants. According to the Explanatory Memorandum, the disadvantage in the detriment caused to existing Netherlands (property) law did not cancel out the advantage gained. The advantage lay in the possibility of attracting foreign capital and of leasing out aircraft while at the same time granting the lessee a right in rem. In the absence of the SRA the financing of the acquisition and use of high-value aircraft would be inhibited. The abovementioned intentions of the Netherlands legislature must be taken into account in classifying present Netherlands rights in rem in aircraft which will be discussed below.
It was stated in the Explanatory Memorandum to the Statute on Registered Aircraft that the substantive law section of this separate law would ultimately be incorporated into Book 8 of the NCC. In 1996, for reasons of convenience this law was inserted into Title 15 of Book 8 of the BW, entitled “Aircraft”. This legislation lays down rules on the special property law status of aircraft. The functional air law is regarded as a lex specialis. It follows from the Explanatory Memorandum that the provisions of Title 15 stemming from the Geneva Convention must be interpreted autonomously. The property law regime of Books 3, 5 and 6 of the NCC do not apply to these rules. The decisive factors in the interpretation of air law are the aims and objectives underlying the Geneva Convention. Regard must also be had to the abovementioned intentions of the Netherlands legislature in implementing this convention in national law. Existing air law provides inter alia for improved structuring of the abovementioned articles 8 and 9 of the SRA. According to the Explanatory Memorandum, the new legislation dovetails more effectively with the regime of the Geneva Convention, in particular as regards the foreign rights in rem which must be recognised by the Netherlands. It is also clear from existing air law that the rights to be constituted in an aircraft are enumerated exhaustively. The only rights in rem of which a registered aircraft may form the subject-matter are ownership, mortgage and the rights in rem of the holder in the acquisition and possession of an aircraft which will discussed below (article 8:1305 NCC).
The right of an airline in the acquisition of the possession of an aircraft is set out as follows in Book 8 of the NCC: “A right in rem may be constituted in a registered aircraft, that consists in the right of the holder of the aircraft to acquire the ownership thereof under a purchase agreement, which he has concluded or is to conclude, following payment of a certain amount or fulfilment of another condition. The notarial deed relating to the constitution of this right shall indicate clearly the aircraft which is subject to this right” (article 8:1308 NCC). The Explanatory Memorandum clearly refers back to the Explanatory Memorandum to the Statute of Registered Aircraft, which is in turn is based on the Geneva Convention. Present legislation also pursues the aim of that convention. According to the Explanatory Memorandum, in the abovementioned article “the broad definition is maintained so as not to inhibit the application of legal devices which are unknown here”. In that respect particular regard must be had to “the conditional sale provided for in Anglo-Saxon law”. This kind of agreement was an important reason for the introduction of the SRA. As stated above, this particular version of conditional sale was the impetus for the development of the equipment trust in the State of New York. According to the Explanatory Memorandum, “a characteristic of this type of agreement (conditional sale) is that the prospective buyer has possession over the aircraft, that he is entitled to acquire the ownership if he fulfils a particular condition (for the most part, but not always, payment), and that he has a right in rem in the aircraft. The wording articulates the broad meaning more effectively than article 8 of the SRA”. The new law is intended to cover two situations in conformity with the SRA: “in one case the purchase agreement has already been concluded but transfer of title is made contingent on fulfilment of a condition, in the other case the purchase agreement will be concluded only when the condition has been fulfilled”. A right may be constituted, for example, by virtue of title reservation agreements, including hire-purchase agreements. “It follows from the wording of the article that it derogates from article 3:92(2) of Book 3 of the NCC so that the restrictions which the later article contains regarding the possibility of stipulating title reservation in a legally valid manner do not apply in this regard. A different outcome would be detrimental to the possible methods of financing which the Geneva Convention is intended to provide.” According to the Explanatory Memorandum, an option to purchase in a lease agreement can also establish a right in rem in the acquisition, irrespective of the level of the purchase amount. On the other hand, an operational lease, most of which, according to the Explanatory Memorandum, do not include an option to purchase, will, in many cases, give rise to a legally valid title in respect of the constitution of the right in rem in possession which is to be discussed below. It is clear that in this case, just as in the case of the introduction of the SRA, the intention of the Netherlands legislature has been to create an equivalent of the American conditional sale and similar rights. According to the Explanatory Memorandum, “there is no legal term for the right in rem in question.”
Book 8 of the BW, which was inspired by the Geneva Convention, lays down the following rules on the (American) right in rem of a holder in the possession of an aircraft: “A right in rem may be constituted in a registered aircraft and shall consist in the right of the holder to possess the aircraft on the basis of a lease agreement concluded for at least six months. The notarial deed relating to the constitution of this right shall indicate clearly the aircraft which is subject to this right” (article 8:1309 NCC). This right is similar to the special version of conditional sale and equipment trust developed in the State of Pennsylvania which was discussed in section two above. By constituting the full real right of the holder in the possession of an aircraft, the Netherlands legislature has created an equivalent of the abovementioned equipment trust. In the case of such an American agreement use was made of a lease in order to secure the airline’s possession of the aircraft in respect of third parties. Article 8:1309 of the NCC relates to this specific aspect of possession. According to the Explanatory Memorandum, an operation lease agreement can fall within the scope of the definition. There is likewise no legal term for this right in rem of possession.
5. The pragmatic securities regime of the CIME/AEP
There is, as a result of the expanding international trade, an ever-increasing demand for various forms of high-value equipment, which by their nature are used internationally. According to the CIME, there is a need to facilitate the financing of the acquisition and use of these objects in an efficient manner. The modern asset-based financing and leasing transactions are advantageous for that purpose. However, the financing of mobile equipment is severely hampered by the varied treatment to which these transactions are subjected in different national property law regimes. Consequently, there is a lack of legal certainty and this merely has the effect of increasing costs. The CIME/AEP desires to establish clear rules to facilitate the aforementioned transactions and it wishes to ensure that interests in mobile equipment are recognised and protected universally. In order to provide the requisite protection at international level, the convention contains uniform substantive rules of property law. Since it is desirable that the convention will be ratified universally, its regime must be able to accommodate both civil law and common law jurisdictions. However, the creation of an internationally acceptable securities regime requires great ingenuity since the rules of property law differ fundamentally in many countries. Some countries, for example, have opted for a functional approach to securities law. In these legal systems there has been a complete break with the traditional concept of security rights and the dogmatic obstacles have been abolished. In these countries a regime has been created which has adopted a functional approach to the concept of security interests. In most other countries, on the other hand, there has been adherence to the past and securities law is still based on the traditional model. In order to be able to bridge the differences which exist, the CIME/AEP opted for a pragmatic securities regime.
The CIME/AEP provides for the constitution of an international interest, of which aircraft objects may form the subject-matter. The international interest is a unique right both conceptually and dogmatically. The right is consensual in nature. Under the regime of the CIME/AEP, the holder of an international interest has or may be given important remedies which he may exercise both in and outside the insolvency of a debtor. These remedies are examined more extensively below. However, neither the convention nor the protocol contain a detailed definition of the term international interest. The real right is derived from the provisions of the convention which relate to the scope thereof. The CIME provides the following general description: “For the purposes of this Convention, an international interest in mobile equipment is an interest, constituted under Article 6, in a uniquely identifiable object of a category of such objects listed in paragraph 3 and designated in the Protocol:
a) granted by the chargor under a security agreement;
b) vested in a person who is the conditional seller under a title reservation agreement;
c) vested in a person who is the lessor under a leasing agreement”.
The abovementioned broad definition of international interest is aimed at the functional as well as the traditional approach to securities law. On the one hand, the modern American and Canadian functional approach to rights in rem is fully reflected therein. The states of the United States and many Canadian provinces have rid securities law of the dogmatic aspects of property law, which still characterise the parochial legal systems. In the earlier mentioned jurisdictions the same rules apply to security interests, inter alia in respect of constitution, publication requirements and priority. A security interest is any proprietary interest which secures payment or performance of an obligation. All interests that are intended to create securities in order to protect financiers and borrowers fall within the scope of this uniform regime. As stated in section two above, title reservation agreements, conditional sale agreements, equipment trusts and certain forms of lease agreements intended as security, for example, can be classified as secured transactions. Under the CIME, all the American and Canadian security interests belong to category a): interests granted by the chargor under a security agreement.
On the other hand, the regime of the CIME/AEP has not opted exclusively for the American and Canadian functional approach to securities law. Article 2(2) of the CIME is worded in such a way that the traditional approach to securities law is also reflected therein. The conventional distinction between security agreement, title reservation agreement and leasing agreement is maintained in the definition of international interest. The three legal relationships are incorporated separately into the regime of the CIME in order to indicate that they differ completely under the property law of many countries. Therefore, the legal systems which do not take a functional approach to securities law need not fear any unacceptable infringement of their property law regimes. However, the aim is not to impose the distinction between the terms security, title reservation and leasing agreements on the United States and the provinces of Canada which draw no such distinction.
It follows from article 2(2) of the CIME, that specific interests which are constituted by a security agreement, title reservation agreement and leasing agreement merge to form an autonomous international interest. As noted above, there are special remedies attached to this real right which afford the holder protection where a debtor fails to fulfil his obligations. The question arises as to what is implied by the terms: a) an interest granted by the chargor under a security agreement, b) an interest vested in the conditional seller under a title reservation agreement, and c) an interest vested in the lessor under a leasing agreement. The characterisation of these legal devices (agreements) is of great importance since they alone can form the basis for an international interest. For example, the regime of the CIME/AEP applies to the Netherlands rights in rem of the holder in the acquisition and possession of an aircraft (articles 8:1308 and 8:1309 NCC) only if these legal relationships are treated as one of these three classes of interests. The abovementioned Netherlands rights in rem do not belong to categories b) and c), since they are not interests vested in the conditional seller or in the lessor. However, they do fall within category a) for the following reasons.
The CIME incorporates the following flexibly worded definition of a security agreement: “Security agreement means an agreement by which a chargor grants or agrees to grant to a chargee an interest (including an ownership interest) in or over an object to secure the performance of any existing or future obligation of the chargor or a third person” (article 1(ii) CIME). This broad definition of security agreement needs to be filled in at national level. The term security agreement encompasses all types of agreements of a legal system, which have the security function set out in the definition. The national legal relationships that fall under the definition are not clarified in the CIME/AEP and are not even enumerated (exhaustively). A specific legal device must be characterised on the basis of applicable national law. The international private law of the forum, the lex fori, determines which legal system is to be applied.
The security agreement set out above can be tailored to aircraft as follows: “A security agreement is in principle any agreement, irrespective of the term assigned to it, through which, under the applicable national law of a Member State, a right in an aircraft is constituted whose purpose is to provide a chargee with security in respect of the payment of a sum of money or of the fulfilment of another obligation.” The chargee can be, for example, an American secured party, a Netherlands mortgagee, a Belgian pledgee or any other holder of a right in rem. The definition of security agreement encompasses, for instance, an agreement establishing an American or Canadian secured interest, including a conditional sale, title reservation, equipment trust and certain lease agreements intended as security. In order to avoid characterisation problems, the convention provides the following provision. A specific legal relationship which, under the law of a Contracting State, falls within category a) interest under a security agreement, does not also fall within the abovementioned categories b) interest under a title reservation agreement or c) interest under a leasing agreement (final sentence of article 2(2) CIME).
In addition, a security agreement is also: an agreement through which the owner (chargor) grants the holder (chargee) of a Netherlands aircraft the full right in rem to secure the obligation of the owner to transfer the ownership of the aircraft to the holder once a specific condition has been fulfilled. This definition is consistent with the contents and purpose of article 8:1308 NCC. The definition of security agreement also covers an agreement through which the owner (chargor) grants the holder (chargee) of a Netherlands aircraft the full right in rem to secure the obligation of the owner to grant the holder possession of the aircraft for a period of over six months. This definition is consistent with article 8:1309 NCC. The Netherlands rights in rem of the holder in the acquisition and possession of an aircraft thus belong to the category: “an interest granted by the chargor under a security agreement” (article 2(2)(a) CIME). This means that they fall within the sphere of application of the CIME/AEP and may constitute an international interest.
The CIME/AEP lays down detailed rules on the remedies available to the holder of an international interest in the event that the other party defaults. These important remedies relate only to the parties inter se. Further, in relation with each other the parties may derogate from the majority of the provisions of the CIME/AEP concerning the remedies. The convention and the protocol continue to build on the principle of the contractual freedom of professional parties that applies in international financial practice. The CIME/AEP states explicitly that its regime promotes the autonomy of parties in asset-based financing and leasing transactions. For that reason some kind of “mandatory consumer related law” to protect (national) airlines is non-existent in current international air law, and the same is true under the future CIME/AEP. The market in aircraft is characterised by the extremely high standard of the sophisticated market participants. For example, many airlines are owned (to a large extent) by the State or have other affiliations with it. Furthermore, the parties concerned traditionally commission highly qualified legal and financial experts to act for them when concluding complicated transactions. The creation of inequality is not good for a market in which only equal parties come together. This holds true both for the law and the economy. Consequently, it is legitimate for the CIME/AEP to expect that the parties will lay down their mutual rights and obligations in agreement tailor-made to suit them.
However, the CIME/AEP regime draws an important distinction between the remedies which may be granted by the parties to the chargee, the person entitled under a security agreement, on the one hand, and the remedies which are available to a conditional seller or lessor, on the other. The CIME/AEP incorporates this distinction since special remedies can be made available to the holder of an international interest. In many countries these remedies are available to a conditional seller or lessor by law, or may be granted to them. In other countries the same remedies are not available to a chargee and cannot be granted to it by the parties. For these reasons, under the CIME/AEP the abovementioned special rights are available to the chargee only where the chargor has agreed to such remedies. This provision means that, for example, the owner of an aircraft (chargor) may grant the special remedies to a Netherlands airline (chargee) under a security agreement (article 7 CIME and article IX AEP). In this respect too the CIME/AEP regime proceeds from the freedom of the parties to contract. The parties may agree between themselves on the remedies set out in the CIME/AEP which they regard as desirable in respect of their specific legal relationship. Which remedies the Netherlands airlines will in fact be able to stipulate depends entirely on the economic and financial leverage of the parties.
For an international interest to be invoked against third parties it must have been published in the manner prescribed in the CIME/AEP. The regime opts for a system of registration in an International Registry, which is to be established. The register will be completely computerised and it will use the most up to date technology. The serial number of the aircraft in which the international interest is constituted effects the registration. An international interest may be registered by either party with the |
