Turkey: Why The Cape Town Convention is Really Important?

Last Updated: 21 August 2015
Article by Serap Zuvin and Mehmet Ali Akgun

To understand the success of the Cape Town Convention on International Interests in Mobile Equipment (2001) ("Cape Town Convention"), which purports to harmonize the law of secured interests of high value mobile equipment in international transactions, we must analyze a case when the Cape Town Convention did not exist. Before the Cape Town Convention, the Geneva Convention[1] applied a uniform conflict of law rule. Therefore, it is important to first understand the concept of conflict of law rules at the outset then observe the provisions of the Geneva Convention so that the importance of the Cape Town Convention can be appreciated.

The Concept of Conflict of Law Rules

The function of conflict of law rules is to indicate merely the legal system which is to be used,[2] not the substantive relief or remedy sought in the particular case as opposed to the internal or domestic law rules. Therefore, conflict of law rules are generally not concerned with the substantive outcome of disputes.[3]

In resolving a conflict of law issue, it is necessary to answer two questions. First, what is the connecting factor designated by the relevant choice of law rule of the forum, and second, according to which system of law should the factor be defined.[4] Many connecting factors comprise one or more elements which may be changed by the wills of the respective parties, such as domicile, or the location (situs) of movable property. This is quite a common problem with tangible movable property, and is specifically a problematic matter with high value mobile equipment.

Lex Situs Argument

The situs of an object, means a settled relation of the object to a particular locality.[5] This relation is similar to the relation between a person and a locality, which we call "domicile". Used in this sense, situs does not include the temporary location of an object, but refers solely to a location which has such a degree of permanence that the object may fairly be described as settled within the place and as forming a part of the mass of property in that place.[6]

In most jurisdictions the law governing rights regarding movable property is the lex situs (the law of the place where the property is situated). The application of the rule, when movables subject to a security interest validly created under the law of one state are moved to another state and thereby acquire a new situs, leads to the question whether a security interest acquired in the first state has an extra-territorial effect outside its jurisdictional boundaries, even though the security, if taken in the state, would be invalid.[7] Furthermore the existence of the conventions like Geneva Convention, efforts and reformulations prepared for conflict of laws rules are definite and constitute persuasive evidence as to inefficiency of the lex situs as a suitable conflict of law rule for determining the validity and priority position of security interest in mobile equipment.[8]

The Geneva Convention

Before the Cape Town Convention, many nations[9] had adopted the Geneva Convention,[10] which opened for signature in 1948. The Geneva Convention is, in essence, a choice of law treaty.[11] Its working method is displacing existing conflict of law rules and allowing aircraft to carry with them the legal attributes of their registration country.[12] It provides that parties to it will recognize "rights in aircraft"[13] that are "regularly recorded"[14] in the national registration jurisdiction of the aircraft, provided that the rights are constituted in accordance with such country's laws.[15] As a result, the regime created by this convention did not require any Contracting State to change its own laws in proprietary rights. On the other hand, the regime created by the Geneva Convention brought a requirement for signatory countries to accept that any aircraft arriving on its territory under another country's flag (another signatory country) carries with it the legal rights and proprietary interests validly prepared and registered under the law of that country.[16]

The Geneva Convention provides international recognition of the inappropriateness of the lex situs as a source of law for determining the validity and efficacy of security interests[17] in mobile equipment. The main focus of the Geneva Convention is to identify a stable source of law in order for the finance organizations involved in secured financing of aircraft have a greatly reduced risk of loss of their security as a result of refusal on the part of forum courts to recognize the validity and enforceability of their security interests.[18] So, it can be said that if lex situs were applied universally and consistently, it would achieve the same sort of result as the Geneva Convention.[19]

However, the situs rule does not always solve the problem of movable assets such as the equipment[20] as the Cape Town Convention deals with. Some countries only apply the law of the first situs (where the aircraft was located at the time of creation of the security) if the security interest is alike to that found in the second situs (place of enforcement). If this place of enforcement is a civil law country with a specifically defined (exhaustive, numerous clausus) list of security interests which can also be created in its territory, a foreign security interest created in a common law country and not corresponding to any security interest known in the place of enforcement may be held to be invalid. It may be treated as if it were a local security interest with results quite different from of those the parties intended. As a main principle, civil law does not accept security interests in mobile equipment where the debtor remains in possession, although this principle is modified to different degrees in civil law countries.[21]

Furthermore, during its implementation certain other problems came into existence for the signatory states of the Geneva Convention. The signatory countries were obliged to accept the effects of property rights, particularly security interests as designated thereunder, of a type which is not possible to create under their own legal system. What is more to that, these states would be obliged to accept rules of priority of security interests which significantly reduce the rights of government agencies to charge an aircraft for unpaid taxes, landing charges, etc.[22] Last but not the least, the Geneva Convention does not have any provision in the way in which a domestic insolvency proceeding is to be balanced against "rights," like leases and mortgages, recorded against an aircraft.[23]

In short, the Geneva Convention does not offer a benchmark for organizing what is a confusing array of laws, rules, and customs that come into play when aircraft perform as expected (i.e. when they travel inter-continentally in the pursuit of revenue for their operators) and when businesses act as businesses do[24] (i.e. they fail at times). One of the purposes of the Geneva Convention is to provide a conflict of law rule for determining validity and place of registration of security interests in aircraft.[25] Therefore, it could be said that while the Geneva Convention is useful in some ways, it is generally (and correctly) seen as a choice of law tool.[26]

The Cape Town Convention

The Cape Town Convention goes beyond the Geneva Convention, in determining the law applicable to securities for aircraft. The Cape Town Convention addresses the "widely differing approaches of legal systems to security and title reservation rights" which creates "uncertainty among intending financiers as to the efficacy of their rights".[27] Such uncertainty inhibits "the extension of finance, particularly to developing countries" and increases borrowing costs.[28]  In this sense, the Cape Town Convention was necessary to create a more predictable and secure, substantive legal environment to address these concerns and solve them, rather than just determining procedurally which legal system would apply should a protectable security interest existed. 



[1] Geneva Convention on the International Recognition of Rights in Aircraft 1948
"The International Civil Aviation Organisation (ICAO), at its Second Assembly held in Geneva in June 1948, approved a Convention on the International Recognition of Rights in Aircraft." Wilberforce, R. O. (1948). The International Recognition of Rights in Aircraft. International Law Quarterly, pp.421-458. p.421

[2] In case of renvoi they indicate the conflict of law rules of the countries.

[3] Carruthers, J. M. (2005). The Transfer of Property in the Conflict of Laws. Oxford University Press. p.1

[4] Ibid. p.2

[5] Beale, J. H. (1919). The Situs of Things. Yale Law Journal, 525-541. P.525

[6] Ibid.

[7] Supra. Gopalan, S. (2003). Harmonization of Commercial Law: Lessons from the Cape Town Convention on
International Interests in Mobile Equipment. p.256

[8] Cuming, R. C. (1990). International Regulation of Aspects of Security Interests in Mobile Equipment. I Unif. L. Rev. os, pp.62-206 p.139

[9] 89 parties are signatory to the Convention.

[10] Supra note 1.

[11] Stone, T. A. (1999). In Flight between Geneva and Rome: Abandoning Choice of Law Systems for Substantive Legal Principles in International Aircraft Finance. U. Pa. J. Int'l Econ. L., 20, pp.487-500, p.492

[12] McGairl, S. J. (1999). Proposed UNIDROIT Convention: International Law for Asset Finance (Aircraft), The. Unif. L. Rev. ns, 4, pp.439-462. P.443

[13] Article 1 of the Geneva Convention

[14] Ibid.

[15] Article 1 of the Geneva Convention, Stone, T. A. (1999). In Flight between Geneva and Rome: Abandoning Choice of Law Systems for Substantive Legal Principles in International Aircraft Finance. U. Pa. J. Int'l Econ. L., 20, pp.487-500, p.492

[16] McGairl, S. J. (1999). Proposed UNIDROIT Convention: International Law for Asset Finance (Aircraft), The. Unif. L. Rev. ns, 4, pp.439-462. P.443

[17] "The Geneva Convention takes as its starting point a nationally created property interest, whereas the Cape Town Convention uses an international interest." Wool, J. (1999). 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. U. Pa. J. Int'l Econ. L., 20, pp.499-567. p.557

[18] Supra. Cuming, R. C. (1990). p. 113

[19] Supra. McGairl, S. J. (1999)P.445

[20] Airframes, aircraft engines and helicopters; railway rolling stocks; and space assets. Article 2(3) 

[21] Supra .McGairl, S. J. (1999). P.445

[22] McGairl, S. J. (1999). Proposed UNIDROIT Convention: International Law for Asset Finance (Aircraft), The. Unif. L. Rev. ns, 4, pp.439-462. P.445

[23] Supra Stone. (1999) p.493 

[24] Supra Stone. (1999) p.495  

[25] Supra Cuming, R. C. (1990). p.111 

[26] Supra Stone, T. A. (1999). p.49 

[27] Overview of Cape Town Convention, UNIDROIT, February 21, 2014, available at http://www.unidroit.org/overview-2001capetown.

[28] Ibid.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Serap Zuvin
Mehmet Ali Akgun
 
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