THE CONVENTION OF CAPE TOWN: THE CREATION OF INTERNATIONAL INTERESTS IN MOBILE EQUIPMENT

B. Patrick Honnebier

Of Counsel

Gomez & Bikker

Amsterdam

This special issue of the European Review of Private Law concerns the Convention on International Interests in Mobile Equipment (CIME) and the Aircraft Equipment Protocol (AEP). These instruments were concluded at a Diplomatic Conference in Cape Town, South Africa in November 2001[1]. It is expected that the Convention of Cape Town and this Protocol will enter into force in the first half of 2004. The CIME is a framework Convention incorporating general provisions. The regime relates only to certain categories of mobile equipment, which are defined in separate Protocols. In general, the term mobile equipment encompasses objects which by their very nature are used internationally. For example, aircraft, satellites, trains, containers and ships. For the purpose of the AEP, however, it includes only airframes, aircraft engines and helicopters. The AEP is the first Protocol that has been completed. The Railway Rolling Stock Protocol and Space Assets Protocol are already at an advanced stage of preparation with a view to adoption in due course. Furthermore, Protocols for oilrigs, containers and trucks may follow.

In international practice the following three legal devices are used most frequently in relation to the financing of mobile equipment: a charge under a security agreement, a conditional sale under title reservation agreement and a lease agreement. If these methods of finance are to work effectively, to reduce economic risk and to promote the availability of money from the private financial institutions they require a secure legal regime.[2] Considering the substantial funds needed for the financing of the acquisition or use of mobile equipment, it is imperative that this regime protects the financier’s rights when the debtor defaults. The problem is, however, that presently there exists a great variety of municipal conflict of laws rules regarding the recognition, enforcement and priority status of foreign proprietary interests in mobile equipment. As a result of the absence of a uniform conflict of laws rule there is a large degree of legal uncertainty at the international level and in particular at the European level. The reason for this is that traditionally most Member States of the European Union apply the lex situs, also known as the lex rei sitae, the conflict of laws rule in relation to the recognition of property rights in movables. In general it is the law of the situs where the equipment is situated at the time that the property right is created which is applicable[3]. These European jurisdictions require, however, that the characterisation of the kinds of foreign interests that may be protected in the forum state is addressed by means of a subsequent transposition. Therefore, the prospective recognition, enforcement and priority status of a foreign security interest depends on its similarity to an existing national proprietary right of the new situs. In a practical sense, however, mobile equipment does not have a specific situs. It is continuously moving from state to state in the course of business, or, in the case of space assets, it is not physically connected to any state at all. Consequently, there is a danger that each time mobile equipment crosses a border the interest constituted therein will not be recognised or enforced. For that reason, the lex situs rule is considered to be manifestly inadequate in relation to mobile equipment. The possibility that the rights of the financier may not be upheld abroad is regarded as a considerable economic risk. It will negatively influence the financier’s confidence in the international transaction. As great economic risk leads to substantial costs, the lex situs rule hinders the financing of mobile equipment. Furthermore, the existing ‘Convention on the International Recognition of Rights in Aircraft (Geneva Convention, 1948)’ is inadequate. Although it endorses the view that the lex situs is unsatisfactory and replaces it by the more identifiable lex registry conflict of laws rule, its applicability is highly conditional upon specific circumstances. For example, it has not been ratified at a global level. Moreover, a third of the Member States of the European Union have not accepted it.

Besides, even if a ‘satisfactory’ uniform conflict of laws rule could be created, it could not solve the problem that presently national property laws dominate the financing of mobile equipment. In general there is a great diversity of property law regimes at the international level and in particular at the European level. More specifically, in the European Union there is no uniform law dealing with security interests in mobile equipment.[4] Moreover, previous international attempts at codifying secured interests in aircraft have been unsuccessful.[5] Particularly, the complexity and diversity of the national European property rights have accounted for this fact. The past has proved how difficult it is to transcend the dogmatic issues that exist in the legal proprietary regimes of the European states. The reason for this is that many European jurisdictions are very restrictive with regard to the creation and effects of security interests, as they have closed proprietary regimes (numerus clausus). Furthermore, presently some continental European states are still hostile to non-possessory security interests.[6] As a result, the financier’s proprietary interests differ from state to state and accordingly it is uncertain as to whether its rights can be upheld against third parties in other European countries. Consequently, the absence of uniformity in the European Union (EU) in relation to the security interests of the financier creates barriers to the financing of mobile equipment. Therefore, the EU needs a secure international system of law to facilitate the use of the above-mentioned three legal devices which in turn will make the financing of mobile equipment more easily available and at lower costs.

The CIME/AEP and the forthcoming Protocols resolve the problems at hand. They contain a set of uniform substantive provisions relating to property law. Furthermore, these instruments introduce rules in respect of the recognition, enforcement and priority status of interests in mobile equipment. For this purpose, the CIME/AEP provides for the creation of an autonomous international interest which has a proprietary character (ius in rem). The Convention has a pragmatic approach in relation to the establishment of such an interest. The definition of an international interest accommodates both the traditional civil law and the functional common law systems of property law. The international interest encompasses the following national legal devices: a) security agreements; b) title reservation agreements; and c) various forms of leasing agreements and the equivalents thereof. As mentioned above, these are the methods of finance which are used most often in respect of mobile equipment. Additionally, the regime of the CIME and its Protocols lays down the extensive remedies of the holder of an international interest. Furthermore, the Convention establishes an International Registry at which an international interest may be registered. Following international registration, and depending on its priority status the holder can exercise its international interest against any party in any Contracting State. This rule applies both in the case of and outside the insolvency of the debtor.

Although, as discussed above, in Europe the law of property in relation to aircraft and other forms of mobile equipment financing is still a national affair, significant changes may be expected in the future. The Convention of Cape Town and the Aircraft Equipment Protocol provide explicitly that a Regional Economic Integration Organisation (REIO) may accede to these documents. Recently, on behalf of the European Commission[7] it has been announced that this institution will put the acceptance of the CIME and AEP on its agenda in 2003. It will be co-ordinating with the fifteen Member States of the European Union with a view to ratification. However, when a REIO accedes to the CIME/AEP, it has the rights and obligations of a Contracting State. In that case the Member States of this REIO no longer have independent authority in relation to the legal issues covered by its regime. Therefore, it goes without saying that some of the Member States will raise the question of the competence of the European Union to conclude international agreements concerning all the legal issues covered by the CIME/AEP. Consequently, a ratification procedure by the EU will be a lengthy process. Still, the great importance of the announcement lay in the fact that the European Commission has come to the conclusion that the Convention and Aircraft Equipment Protocol will be advantageous to the Member States. It endorses the view that the CIME/AEP will provide for the needed solid uniform European property regime which will make the financing of aircraft objects more available and less costly. This point of view has persuaded the European Commission to instigate the necessary procedure. Finally, the CIME/AEP will be a potential stepping-stone towards the unification of any other European security interests.