RATIFICATION OF THE CAPE TOWN CONVENTION BY THE UNITED KINGDOM
By Mark Bisset
On 27 July 2015 the United Kingdom's instruments of ratification to the Convention on International Interests in Mobile Equipment 2001 and the Protocol thereto on Matters Specific to Aircraft Equipment 2001 (together for the purposes of this article the "Cape Town Convention") were deposited with UNIDROIT. The Convention and the Aircraft Protocol will enter into force in the United Kingdom on 1 November 2015. The ratification by the United Kingdom of the Cape Town Convention serves as an interesting example of how a contracting state faces the legal and policy issues arising from the implementation of the Convention.
Introduction
The Cape Town Convention is the result of a remarkable effort by states to establish a commercially-oriented international legal framework that governs the creation, registration, priority, search and enforcement of security and leasing interests in aircraft. It has been ratified to date by 58 states (now 59 following UK ratification; in addition the EU has ratified in respect of its areas of competence) including major aviation jurisdictions such as the United States, China, India, Ireland, Russia and the UAE. There are important economic benefits from becoming a contracting state to the Cape Town Convention; aircraft operators increase their ability to obtain additional – and less costly – sources of financing in the market due to a reduction of legal risks, and not surprisingly, many have encouraged their states to become parties to it.
One fundamental aspect of the Cape Town Convention is that it is a tailor-made instrument that allows contracting states to make declarations on several key provisions (i.e. non-consensual liens, relationship with the 1933 Rome Convention, internal transactions, territorial units, remedies, pre-existing interests or rights and certain other provisions). The declarations that a contracting state makes can greatly enhance or diminish the Cape Town Convention's economic impact. For example, an aircraft operator (and, if different, the borrower/ buyer or lessor) may qualify for a reduction of export credit costs provided that the corresponding contracting state has made the recommended "qualifying declarations" set out by the Organisation for Economic Co-operation and Development's Aircraft Sector Understanding (ASU).
As part of the UK's ratification and implementation effort the Government invited stakeholders in the UK to be part of a consultation process and its results were published in March 2015 together with an impact assessment and a draft of regulations to implement the Cape Town Convention. Parties that submitted responses included manufacturers, lessors, airlines, legal practitioners and non-governmental organisations.
The Government analysed each of the responses and then explained the legal and policy considerations that it took into account in adopting a particular implementation option. One key consideration was to comply with the ASU export credit discount criteria by making the appropriate declarations in the Cape Town Convention so that eligible operators in the UK may be able to benefit from the discount.
Although the Cape Town Convention reflects basic concepts of English law, partly because of the central role that the UK played in its negotiations and at the diplomatic conference in which the instrument was concluded, its ratification and implementation by the UK involves addressing a number of issues. The UK signed the Cape Town Convention in 2001 so the ratification process has taken over a decade, partly because certain elements of the Convention which touch on the EU's jurisdiction were required to be addressed by the EU first (such as insolvency provisions). By EU Council Decision 2009/370/EC the EU ratified the Convention in April 2009 in so far as it has competency over the relevant subject of the Convention / Aircraft Protocol. The United Kingdom made declarations under Articles 39(1)(a)-(b), 39(4), 52, 53 and 54(2) of the Convention, and under Articles XXIX, XXX(1), XXX(2) and XXX(3) of the Aircraft Protocol.
As a result of ratification by the UK the Convention will become effective in certain offshore jurisdictions which are of significance in aviation: for example, the Convention is now due to come into force in the Cayman Islands on 1 November 2015 at the same time as the Convention takes effect in the UK.
Retention of non-consensual liens
Under English law, aircraft may be detained (and sold) to cover unpaid airport charges and air navigation charges incurred by an operator. These debts take priority over any security that a creditor may have over the aircraft and, most worryingly for parties holding an interest over them, the rules allow an aircraft to be detained to cover unpaid charges of an entire fleet (the "fleet lien" under Section 88 of the Civil Aviation Act 1982).
One of the main purposes of the Cape Town Convention is to establish a first-to-file priority based registration system for interests over an aircraft that is readily viewable by interested parties. Therefore, the fact that a set of third parties can detain an aircraft without registering their interests, and regardless as to whether there are other parties with prior interests registered with the international registry set up by the Convention, diminishes the very legal certainty that the Cape Town Convention hopes to provide. However, Article 39 of the Convention allows contracting states to make a declaration whereby non-consensual liens have priority over a registered international interest created under the terms of the Cape Town Convention. Therefore, by making the appropriate declaration, a contracting state that already has such provision in its laws is able to retain it under the Cape Town Convention.
The "fleet lien" has been strongly criticised by legal practitioners and academics, and many saw the ratification of the Cape Town Convention as an opportunity to repeal it. Indeed, respondents to the consultation raised their concerns by stating that the "fleet lien" is a draconian compliance mechanism that unjustly affects aircraft lessors and financiers. However, while noting the concerns regarding the potential impact of the fleet lien on third parties, the Government decided to grant all existing and future non-consensual rights that have priority under English law over a mortgage or lease the same priority over an international interest, including the fleet lien, and will, therefore, make the appropriate declaration. This is reflected in the implementing Regulations (the International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015).
Insolvency remedies
The Cape Town Convention contains alternative provisions in respect of insolvency remedies available to creditors. Article XI enables the contracting state which is the "primary insolvency jurisdiction" to specify a "waiting period" at the end of which the insolvency administrator or the debtor must give up possession of the relevant aircraft or engine to the creditor, unless the insolvency administrator or the debtor has cured all defaults and agreed to perform all future obligations under the relevant agreement. The main advantage of adopting Alternative A is that by stipulating a waiting period, together with the availability of remedies to de-register and export aircraft from the state where it is situated, creditors may be assured that in an event of default scenario the aircraft or engine can be recovered within a fixed period.
Alternative A essentially permits creditors to exercise selfhelp remedies and is much more flexible than Alternative B which is a more restrictive, court-based approach. This alternative allows for greater involvement of courts in line with civil law tradition. Finally, in the absence of a declaration of a contracting state as to which alternative it chooses, the remedies on insolvency are governed by applicable law.
Alternative A is, not surprisingly, favoured by lessors and financiers and is also required by the ASU discount criteria. The majority of stakeholders in their responses called for the Government to adopt Alternative A in the implementation of the Cape Town Convention. However, insolvency practitioners stated that English law insolvency rules are robust and well understood by parties and therefore there was no need to implement Alternative A; national insolvency rules should then be retained.
In the end, and in a departure from its initial position, the Government decided to adopt Alternative A based on the fact that (i) there are potential economic benefits for aircraft finance associated with the adoption of such alternative (i.e. it complies with the ASU discount criteria) and (ii) aircraft are a sufficiently unique type of asset that warrants a separate administration regime. Therefore, Alternative A is reflected in the Regulations and a 60-day "waiting period" was adopted as well, all in line with the ASU discount criteria.
Lex situs and the international interest
Under English law, the lex situs principle, as clarified by the (in)famous 2010 Blue Sky case, is used to determine whether a security interest has been validly constituted over an aircraft. This means in practice that in order for an English law security interest to be validly constituted over an aircraft, the aircraft needs to be physically located in England (or airspace over England) at the time of taking the mortgage. This has substantial practical implications when choosing English law as applicable law and can potentially increase the parties' transaction costs.
The Cape Town Convention seeks to exclude the application of conflict of laws when creating interests over aircraft. Therefore, the fact that the lex situs is applied under English law conflicts with this very goal because under the Cape Town Convention an international interest is constituted over an aircraft once the Convention's (straightforward) validity conditions are satisfied without taking into account national laws. Therefore, the UK had to address this crucial matter in the implementation of the Cape Town Convention.
The Government, in line with the provisions of the Cape Town Convention, declared that an international interest is a proprietary right that takes effect in law once the conditions for the creation and registration of an international interest are satisfied, effectively distinguishing an interest created under the Cape Town Convention from other interests created outside it. As a result, the validity of a security interest under English law which is not an international interest would still be determined by the application of lex situs. This interpretation is included in the Regulations, regulation 6 of which provides: "an international interest has effect where the conditions of the [Cape Town] Convention are satisfied (with no requirement to determine whether a proprietary right has been validly created or transferred pursuant to the common law lex situs rule)".
Irrevocable de-registration and export request authorisation
The Cape Town Convention sets out provisions in relation to an irrevocable de-registration and export request authorisation (IDERA) which allows the person in whose favour the authorisation has been issued to exercise the remedies available to it. Contracting States are able to make a declaration as to whether this provision applies and such a declaration is mandatory in order to obtain the benefit of the ASU discount qualifying criteria.
The Government acknowledged that under English law a power of attorney can be issued by the debtor and that therefore making a declaration to apply the IDERA provision was not altogether necessary. Nevertheless, the Government decided to apply the IDERA provisions. Under the Regulations, the UK's Civil Aviation Authority must honour a request for de-registration filed with it but subject to any applicable safety laws and regulations. The CAA will provide further guidance on this matter.
Conclusion
The UK is ratifying and implementing the Cape Town Convention in such a way that it achieves its maximum effect i.e. reducing legal risk by having an international framework under which aircraft financiers can better predict outcomes, and thus allowing operators in the UK to obtain financing on more favourable terms. In depositing the instruments of ratification at UNIDROIT Mr Jonathan Marshall, the Justice and Home Affairs Counsellor at the British Embassy in Rome, stated: "The United Kingdom's approach to the ratification of treaties on private law matters is known for being highly prudent and pragmatic". The Secretary-General said at the occasion: "We see in the United Kingdom ratification of the Cape Town Convention and the Aircraft protocol another demonstration of both the high quality of this Convention as well as the tangible economic benefits it generates."
Moreover, by the UK's having made all the ASU "qualifying declarations", operators in the UK should be able to benefit from the export credit discount. This is, however, provided that the "home country" rule is not applicable. This rule, which dates back to 1992, is an unwritten, informal understanding among the four principal ECAs supporting the manufacturers of large commercial jet aircraft: Export- Import Bank of the United States (Ex-Im Bank); Export Credits Guarantee Department (UK); Compagnie Française d'Assurance pour le Commerce Extérieur, also known as COFACE (France); and Euler Hermes (Germany). These agencies agreed not to provide financing for competing aircraft that will be principally located in their own or in each other's countries (including, for this purpose, Spain).
Although the Government stated that it evaluated the impact of each of the implementation options separately and on their own merit, it seems that the rationale behind the Government's choices was to effectively comply with the ASU criteria, as other contracting states to the Cape Town Convention have done. Unfortunately, however, because of the "home country" rule, it is unlikely that most UK airlines will be able to benefit from the export credit discount that follows from compliance with the ASU criteria.
This article was written with the assistance of Gustavo Boccardo, who was recently awarded his LLM in air and space law cum laude by Leiden University, while on an internship with the firm.
WHO IS A PASSENGER?
By Tina Collier
The question of who is a passenger on an aircraft may at first sight seem relatively straightforward. When we think of a passenger, we envisage a person who has purchased an airline ticket for a round trip or a single flight.
However, there are some different scenarios that call into question who a passenger on board an aircraft actually is. For example, where a person on board is a member of the operating crew (including e.g. student pilots), cabin crew or supernumerary crew, or indeed who is otherwise employed on the aircraft (e.g. a helicopter winchman), there is general agreement that they are not a passenger for the purposes of the international conventions relating to carriage by air (namely the Warsaw Convention 1929, the Hague Protocol 1955 and the Montreal Convention 1999). In respect of the latter category, being otherwise employed on an aircraft has been held to include the situation where the person's primary duties may not be intended to occur on the aircraft. For example, a maintenance representative employed to deal with procedures to be followed while the aircraft is on the ground at each stop, but who is also available during each flight should anything occur, would not therefore be classed as a passenger.
Herd v Clyde Helicopters
The question of who is a passenger arose in the 1996/97 Scottish case of Herd v Clyde Helicopters Ltd, which went all the way to the House of Lords. In that case, a police sergeant employed by the Strathclyde Police Authority was on a surveillance helicopter flight when it crashed and he was killed. It was the Police Authority that had contracted with the air carrier for the contract of carriage, not the sergeant, and the sergeant was clearly not an employee of the air carrier. The question before the court was whether he was a passenger under the Carriage by Air Acts (Application of Provisions) Order 1967 (this being a domestic flight) and therefore fell within the Warsaw Convention 1929 as amended by the Hague Protocol 1955, which was applied to qualifying domestic flights by the 1967 Order.
The House of Lords held (as had the First Instance and Appeal courts) that for the application of the 1967 Order it was not necessary for a person to be carried under a contract to which he was a party or under a contract of any particular type (the ticketing requirements of the Warsaw Convention 1929 not having been carried over into the 1967 Order). The sergeant was on board the helicopter for the purpose of carrying out his police duties and had no responsibility for the operation of the helicopter. He was therefore properly regarded as a passenger. There was no relationship between the carrier and the sergeant, other than that of carrier and carried.
If the sergeant had been employed directly by the air carrier to carry out employment duties on behalf of the air carrier (or had been part of the operating crew), then he would not have been a passenger. However, there was a contract of carriage between the Police Authority and the air carrier, and the sergeant was being carried pursuant to that contract. This was enough to put him within the realms of being a passenger.
Wucher and Euro-Aviation v Santer– Austrian Proceedings
The issue of who is a passenger was the subject of a recent (26 February 2015) preliminary ruling by the Court of Justice of the EU. The Supreme Court in Austria had referred the case of Wucher Helicopter GmbH and Euro- Aviation Versicherung AG v Fridolin Santer (C-6/14) to the CJEU in order to clarify a number of questions relating to who is a passenger on board an aircraft.
In this case, Mr Santer was employed by his employer, Ötztaler Gletscherbahn-GmbH & Co. KG, as a member of the avalanche commission responsible for safety in the glacier area of Sölden in Austria and his employer's ski pistes. Mr Santer had to decide which pistes must be closed and where avalanches needed to be blasted. Blasting was to be carried out from a helicopter, and for this purpose Ötztaler had entered into a contract of carriage with the air carrier (Wucher); a contractual situation similar to that in Herd, albeit in this case related to Austrian rather than UK domestic carriage.
Mr Santer's duties as a "guide familiar with the terrain" on board the helicopter included directing the pilot (who was employed by the air carrier) to the places where the explosive charges were to be thrown out. Mr Santer was also required to open the helicopter door during the flight at the pilot's direction and to hold it open for a particular period of time so that the person sitting behind him could throw out the charge. During this procedure on the incident flight a sudden gust of wind caught the slightly open door, causing it to fly open. Mr Santer was unable to let go of the door and as a consequence seriously injured his elbow. Mr Santer's claim was against the air carrier (Wucher) and the air carrier's insurer (Euro-Aviation).
The First Instance Austrian court held that Mr Santer was a passenger on the flight. However, the Appellate court held that Mr Santer was not a passenger within the Montreal Convention, since the purpose of the flight was the blasting of avalanches rather than to carry him from one place to another. However, Austrian law was not precluded from applying to Mr Santer's claim for compensation.
On appeal by Wucher and Euro-Aviation the Supreme Court considered that whether or not Mr Santer was a passenger was a crucial question as to whether the Montreal Convention applied to Mr Santer's claim for compensation. The Supreme Court chose to clarify certain questions with the CJEU, with the intention of obtaining a common understanding of the concept of "passenger" in EU law and in the Montreal Convention.
Wucher and Euro-Aviation v Santer– CJEU ruling
The essential question referred was whether Mr Santer, on the facts discussed above, was a passenger or ranked among "on-duty members of both the flight crew and the cabin crew". This raised issues related to the definition of "passenger" within the meaning of EU Regulation 785/2004, which imposes insurance obligations on air carriers and aircraft operators (such as Wucher), and Article 3(g) of that Regulation, which defines a "passenger" as: "...any person who is on a flight with the consent of the air carrier or the aircraft operator, excluding on-duty members of both the flight crew and the cabin crew". If Mr Santer fell within this definition and was a passenger, or indeed even if he fell outside this definition and was not a passenger, the Austrian court then wanted to know whether he was a passenger for the purposes of Article 17(1) of the Montreal Convention.
The CJEU first turned to the definition of "passenger" within the Regulation and held that Article 3(g) of the Regulation, classifying a person as a member of the flight crew and the cabin crew, is an exception to the rule that the person on board is a passenger. Such exceptions are to be interpreted strictly, so that general rules are not negated. Mr Santer did not perform tasks of the flight crew. His task of opening the helicopter door also did not confer on Mr Santer the status of being a member of the cabin crew. Indeed, the CJEU stated that the pilot, as commander on board, is always authorised to give instructions to any of those on board the aircraft, including passengers, so this fact did not mean that Mr Santer was part of the cabin crew.
Therefore, the CJEU found that Mr Santer was a passenger for the purposes of Article 3(g) of the Regulation. It went on to say that Article 3(g) must be interpreted as meaning that the occupant of a helicopter operated by a Community air carrier, who is carried on the basis of a contract (of carriage) between that air carrier and the occupant's employer in order to perform a specific task such as that at issue in the main proceedings, is a "passenger" within the meaning of that provision.
To answer the question relating to the Montreal Convention, the CJEU recognised that the Montreal Convention is an integral part of the EU legal order, and that it (the CJEU) has jurisdiction to give a preliminary ruling concerning the interpretation of the Convention. The CJEU considered that it must be ascertained whether the purpose of the flight at issue was the "carriage of passengers" within the meaning of the Convention, and expressed the view that the absence of documents of carriage did not affect the existence or validity of the contract of carriage.
Therefore, where a contract of carriage exists and all the other conditions for the application of the Convention (i.e. pursuant to Article 1 and the scope of application) are fulfilled, it applies, irrespective of the form that contract of carriage might take. The flight in question was one for the carriage of employees of Ötztaler (of whom Mr Santer was one) to the places where they had to perform their usual tasks. It was precisely on a contractual basis (that being the contract of carriage between the air carrier and Ötztaler) that the air carrier flew Mr Santer from the take-off location to the places where the avalanche blasting was to take place and then brought him back to the take-off location.
The CJEU therefore held that Article 17(1) of the Montreal Convention must be interpreted as meaning that a person who comes within the definition of "passenger" under Article 3(g) of EU Regulation 785/2004 also comes within the definition of "passenger" under Article 17(1) of the Convention, once that person has been carried on the basis of a "contract of carriage" (within the meaning of Article 3 of the Convention).
This finding of the CJEU is consistent with the conclusion of the House of Lords in Herd and is a welcome clarification at an EU-wide level of who is a passenger for the purposes of the Montreal Convention.
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