Canada: Canadian Ratification Of The Convention On International Interests In Mobile Equipment And Of The Protocol To The Convention On International Interests In Mobile Equipment On Matters Specific To Aircraft Equipment

(i) "airframes"⁸ that are type certified to transport at least eight (8) persons including crew or goods in excess of 2,750 kilograms;

(ii) "aircraft engines"⁹ having in the case of jet propulsion aircraft engines at least 1750 lb of thrust or its equivalent or in the case of turbine-powered or pistonpowered aircraft engines at least 550 rated take-off shaft horsepower or its equivalent; and

(iii) "helicopters"¹⁰ that are type certified to transport at least five (5) persons including crew or goods in excess of 450 kilograms. Each of the foregoing includes all installed, incorporated or attached accessories, parts and equipment (in the case of airframes, other than aircraft engines) and all data, manuals and records relating thereto.

Note that the Protocol specifically provides that ownership of or another right or interest in an aircraft engine shall not be affected by its installation on or removal from an airframe¹¹.

There is no defined term "helicopter engines", but in the Official Commentary of the CTC¹² (hereafter "CTC Official Commentary"), Professor Goode states:

Instead of registering a new international interest every time a helicopter engine is removed from a helicopter or registering an international interest against a helicopter engine while it is installed on a helicopter, the CTC Official Commentary suggests to adapt the security agreement in order to contemplate the existence and registration at closing of both current and prospective interests against the engine (i.e. when the engine will be removed from the helicopter, the prospective registration against the engine will become effective)¹³.

3.1 Agreements covered by the CTC.

The CTC is intended to apply to a broad range of agreements, both current and prospective, creating or evidencing a security agreement, a title reservation agreement or a leasing agreement of an aircraft object, as these terms are hereafter defined.

None of the following agreements recognized by the CTC require a minimum term or duration to meet the definition requirements and to thus become subject to registration at the IR.

3.1.1 Security agreement;

Under the Convention:

"security agreement" means an agreement by which a chargor grants or agrees to grant to a charge 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;¹⁴

This definition is sufficiently broad to cover most forms of security interest and would include a security trust (fiducie-sûreté), a sale with a resolutory condition and a sale with a right of redemption securing a loan (as understood in the province of Québec under Article 1755 of the Civil Code of Québec ("C.c.Q.")), given that transfers of ownership interests as security are included. Of course, it also includes a Personal Property Security Act ("PPSA") type security agreement and hypothec under the C.c.Q.

Applicable law will determine if the agreement in question is a security agreement, a title reservation agreement or a leasing agreement (see Articles 2(4) and 5(2), (3) and (4) of the Convention).

3.1.2 Title reservation agreement;

Under the Convention:

"title reservation agreement" means an agreement for the sale of an object on terms that ownership does not pass until fulfilment of the condition or conditions stated in the agreement;¹⁵

Under Article 2(2) of the Convention, an agreement cannot be both a security agreement and a "title reservation agreement". This last definition is arguably broad enough to include a consignment agreement where title will typically pass, subject to the other conditions of the agreement, upon consumption, use or resale of the property. While in the CTC Official Commentary¹⁶ Professor Goode states that a consignment agreement "without a rental charge" cannot be a leasing agreement, he also states earlier on that a consignment "does not cross the threshold of falling within a Convention category..."¹⁷. In our view, a consignment may arguably qualify if all other requirements of the CTC are met. The conceptual differences as to when titles passes between a conditional sale and a consignment are full payment of the purchase price in a conditional sale, as opposed to the payment thereof upon use, consumption or sale in the case of a consignment. They are all "conditions" contemplated by the definition, which when fulfilled, trigger the transfer of title to the property involved.

3.1.3 Leasing agreement;

This Convention provides:

"leasing agreement" means an agreement by which one person (the lessor) grants a right to possession or control of an object (with or without an option to purchase) to another person (the lessee) in return for a rental or other payment;¹⁸

This definition is broad. Certain transactions which would not be subject to a registration at a personal property register or at the Québec register of personal and movable real rights, are leasing agreements under this definition and qualify for registration at the IR if the aircraft object is involved in a transaction where an international interest is created. This would include sale and leaseback transactions in PPSA jurisdictions (which include all Provinces in Canada, save Québec).

The definition undoubtedly includes the more common "financial leases" as well as "rental agreements", as these terms are understood at common law and as codified in the C.c.Q. In the case of the C.c.Q. this is the case irrespective of the codified meaning given to "lease" (louage) and "leasing" (credit-bail) thereunder¹⁹.

However, we again note that applicable law will determine if a lease or leasing is a "leasing agreement" under the CTC or a security agreement (see Article 2(4) of the Convention).

3.2 Formal requirements.

The Convention defines "international interest" as follows:

"international interest" means an interest held by a creditor to which Article 2 applies;

Article 2 of the Convention reads as follows:

Article 2 — The international interest

1. This Convention provides for the constitution and effects of an international interest in certain categories of mobile equipment and associated rights.

2. For the purposes of this Convention, an international interest in mobile equipment is an interest, constituted under Article 7, 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; or

(c) vested in a person who is the lessor under a leasing agreement.

An interest falling within sub-paragraph (a) does not also fall within sub-paragraph (b) or (c).

3. The categories referred to in the preceding paragraphs are:

(a) airframes, aircraft engines and helicopters;

(b) railway rolling stock; and

(c) space assets.

4. The applicable law determines whether an interest to which paragraph 2 applies falls within subparagraph (a), (b) or (c) of that paragraph.

5. An international interest in an object extends to proceeds of that object.

3.2.1 a writing;

The requirement of a writing may seem innocuous. However, readers from civil law jurisdictions should note that certain formal domestic law rules do not apply. For instance, this is the case for the rule prescribed by Article 2692 of the C.c.Q. for hypothecs in favour of a person holding the power of attorney (fondé de pouvoir) of the creditors, which rule requires that the document be signed "...on pain of absolute nullity be granted by notarial act en minute...". An agreement failing to comply with this rule, when it applies, would nevertheless create an effective international interest even if invalid as a matter of domestic law.

Also note that a "writing" includes electronic records of information²⁰.

3.2.2 having the power to dispose of the aircraft object;

This requirement is very broad and it was drafted as such so that entities which may not legally own, but have the "power" (as opposed to "right") to create an interest in or dispose of an aircraft object could do so²¹ (for instance a conditional buyer reselling or leasing, a lessee sub-leasing or a trustee acting under a trust agreement). This includes every type of transfer whether by sale, lease, conditional sale or a transfer by way of security.

3.2.3 identification of the aircraft object conforms to the Protocol requirements; This requirement is important and is completed by Article V of the Protocol in respect of contracts of sale and by Article VII of the Protocol which states:

Article VII — Description of aircraft objects

A description of an aircraft object that contains its manufacturer's serial number, the name of the manufacturer and its model designation is necessary and sufficient to identify the object for the purposes of Article 7(c) of the Convention and Article V(1)(c) of this Protocol. (emphasis added)

This rule in effect prohibits the recognition of an international interest, current or prospective, in future aircraft objects and it follows that neither a general security agreement on all present and future personal property, nor a universal movable hypothec on all present and future movable property would charge future aircraft objects. See also the reference to "uniquely identifiable objects" in Article 2 of the Convention.

In Canadian PPSA provinces, except Ontario, the Personal Property Security Regulation²² requires that reference be made to the Canadian registration marks of the aircraft (issued by Transport Canada), in any filing instead of the manufacturer serial number. This will no longer be required for IR purposes. However, it will still be possible to include such registration marks, as we will see later.

3.2.4 a security agreement must permit the determination of the obligations secured but not an amount or maximum amount secured;

Domestic law in several States or territories of States (in respect of a Federated State see Article 5 (4) of the Convention) such as the province of Québec in the case of hypothecs, requires that the maximum amount for which any property is being charged be specifically mentioned. Again, domestic law rules of form are ousted for international interests (such as the requirement to have a hypothec amount), provided that the secured obligations are determinable.

As the IR is not a document filing system, should someone wish to ensure compliance with the above formal rules for an international interest to be created, such person would need to obtain copy of the underlying agreement. No rule is provided obligating a creditor to provide copy of the agreement to someone requesting it, as is the case for instance in various PPSA jurisdictions²³. Domestic law could apply to this question²⁴.

3.3 Choice of law/applicable law.

3.3.1 Choice of governing law recognition;

Article VIII (2) of the Protocol provides:

The parties to an agreement, or a contract of sale, or a related guarantee contract or subordination agreement may agree on the law which is to govern their contractual rights and obligations, wholly or in part.

This rule applies in Canada which has made a Declaration adopting it as is permitted under the first paragraph of this Article. The governing law of an agreement should be contrasted with the applicable law. The applicable law of where the debtor is situated will apply irrespective of the chosen governing law of an agreement. For instance, the rules governing registration and perfection of agreements under applicable law of a non-Contracting State would apply even if a debtor situated in a non Contracting State agrees to a choice of law clause which selects the laws of a Contracting State as the governing law of the contract. Conversely, a debtor situated in a Contracting State who agrees to a choice of the laws of a non-Contracting State would not, by doing so, avoid the application of the CTC to its agreement.

3.3.2 Domestic law suppletive;

Article 5 (2) of the Convention provides:

2. Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the applicable law.

This rule is self-explanatory. It should be noted that both Article 5 (3) of the Convention and Article VIII, paragraph 3 of the Protocol provide that it is the domestic rules of law which are applicable, as opposed to conflict of laws rules of that State. This would exclude a possible transfer (renvoi) to the laws of another State.

3.4 Paramountcy of Protocol over the Convention.

4.1 Location of debtor.

The term debtor is defined as follows in the Convention:

"debtor" means a chargor under a security agreement, a conditional buyer under a title reservation agreement, a lessee under a leasing agreement or a person whose interest in an object is burdened by a registrable non-consensual right or interest;²⁵

Article 3 of the Convention provides:

Article 3 — Sphere of application

1. This Convention applies when, at the time of the conclusion of the agreement creating or providing for the international interest, the debtor is situated in a Contracting State.

2. The fact that the creditor is situated in a non-Contracting State does not affect the applicability of this Convention.

Article III (1) of the Protocol further provides:

1. Without prejudice to Article 3(1) of the Convention, the Convention shall also apply in relation to a helicopter, or to an airframe pertaining to an aircraft, registered in an aircraft register of a Contracting State which is the State of registry, and where such registration is made pursuant to an agreement for registration of the aircraft it is deemed to have been effected at the time of the agreement

These definitions make clear that the location of the debtor in a Contracting State is the main element required (connecting factor) for the CTC to apply in respect of aircraft objects, except aircraft engines. However, a debtor may be located in a non-Contracting State if the helicopter or airframe is registered as a civil aircraft in a national registry of a State which is a Contracting State.

In respect of a contract of sale, Article III of the Protocol adds "purchaser" as a "debtor" for the purposes of certain Articles.

Article 4 of the Convention provides the following rules to determine the location or "situs" of a debtor:

Article 4 — Where debtor is situated

1. For the purposes of Article 3(1), the debtor is situated in any Contracting State:

(a) under the law of which it is incorporated or formed;

(b) where it has its registered office or statutory seat;

(c) where it has its centre of administration; or

(d) where it has its place of business.

2. A reference in sub-paragraph (d) of the preceding paragraph to the debtor's place of business shall, if it has more than one place of business, mean its principal place of business or, if it has no place of business, its habitual residence.

As these rules are relatively clear and have been inspired by Uniform Commercial Code ("UCC") UCC/PPSA-type statutes rules such as "centre of administration" or the better known "chief executive office", they will be familiar to most. In the province of Québec, the private international law "domicile" rule is now replaced by these rules in respect of a "...corporeal movable ordinarily used in more than one country..."²⁶, when it qualifies as an aircraft object under the CTC.

4.2 The location of the debtor rule is not applicable to aircraft engines.

While mounted on an airframe, an aircraft engine will follow the same rule as other aircraft objects but are separately registered at the IR, as we shall see below. An engine which is not mounted on an airframe is subject to the rules of the place where it is physically situated. It is to be noted that the engines situated in a non-Contracting State may be registered at the IR. Whether the courts of a non-contracting State would recognize and enforce such an international interest is another matter.