Worldwide: Navigating Priorities Under The 2001 Cape Town Convention

Last Updated: 3 April 2019
Article by Adrian Iordache

As the adoption of the Cape Town Convention and Protocol rumbles on, it becomes critical to check what is the fate of a service provider's lien in convention states.

On 21 March 2019 I had the pleasure to speak to a great audience for Aeropodium's 7th European Corporate Aviation Summit in Malta. I spoke about priorities under the 2001 Cape Town Convention and Protocol, in particular to raise awareness that the Convention is coming of age and that the rules it brings with it have the potential of making quite a change in traditional real property rules where adopted.

I'll excerpt here my notes on just one such potential change, viz. on the fate of non-consensual interests such as the repairer's, or other service providers', liens.

The Inn-keeper and the mechanic

Mechanic's liens have been with us for centuries, both in common law and civil law traditions. The basic rule and rationale for them is to confer some measure of 'self-help' security to repairers and other service providers of vehicles and other goods, for the costs of their improvements, by giving them the right to hold on to the asset ('retain' it) pending payment.

It has been common to grant such liens priority even over other contractually based rights (including registrable ones), in recognition of the fact that it might be burdensome to require that the service provider perform recordations or other formalities in order to secure its rights. For instance, historically the lien benefited the inn keepers, who'd be permitted to hold on to the traveler's language until payment. Considering a hotel keeper having to register a charge with some public registrar over each client's trunks as they check in, requiring them to pass security deeds before notaries upon handing out the keys, makes clear why the rule emerged in the first place.

Priorities under Cape Town

The Cape Town Convention tinkers with this ancient practice.

The Convention on International Interests in Mobile Equipment (pdf) was concluded in Cape Town on 16 November 2001, as was the Protocol on Matters Specific to Aircraft Equipment (pdf). They constitute a single legal instrument for our purposes. The Convention was ratified by 65+ states so far, which is not bad at all, as far as multilateral conventions go.

Among its purposes, we note:

  • To resolve the problem of obtaining certain and opposable rights to high-value aviation assets;
  • Worldwide contract enforcement delay is 10 months - ratification of the Convention and the Protocol reduces this delay to 2 months (per World Bank data);
  • To reduce risks for creditors, and consequently, the borrowing costs to debtors, through the resulting improved legal certainty.

I will assume that the Cape Town Convention and Protocol are general knowledge in the business and say not much more about it, except that when it applies to your aircraft, its rules on priority apply, with some important consequences.

The principal rules are pretty straight forward and revolve around registration in the International Registry set up pursuant to the Convention, of 'international interests' in aircraft frames, engines and helicopters.

At the risk of over-simplifying a complex piece of international law, at its core the registration rule can be stated as:

If you'd like to keep your priority, register it.

OK, let's break it down a little further. Here are some important effects of the Convention:

  1. For international interests: a registered interest beats both later registrations and unregistered interests, irrespective of actual prior notice.
  2. For outright sales: we have the same strong 'registration rule' for competing sales by the same seller, meaning, a registered sale beats:
    1. a second sale by same seller;
    2. subsequent registered or unregistered international interest;
    3. registrable but later or unregistered non-consensual rights:
    4. non-registrable non-consensual rights or interest not carved out by art 39 declaration;
    5. any other interest not registrable;
    6. a national interest notice, unregistered or subsequent.

Art. 39 and 40

Of course, nothing really is that simple in ballet and property law, so much less in aircraft property law.

In particular, the fate of non-consensual interests (those not arising out of specific types of written contracts) is surprisingly complex given the otherwise elegant approach of the Convention in other matters of priority.

Here are some pointers:

  1. There is no default priority granted to traditional non-consensual rights such as repairer's lien.
  2. Nevertheless, contracting states (signatories of the Convention) can do three things (under the art. 39 and 40 of the Convention):
    1. Declare that certain listed national non-consensual rights will enjoy the priority they otherwise would enjoy in national law;
    2. Reserve priority for rights of 'detention' otherwise enjoyed by state agencies, entities and such;
    3. Make certain national interests registrable in the International Registry despite being not 'international interests.'

What this means is that for each specific transaction or 'object' (airframe, engine or helicopter), one has to check not only whether a relevant connecting state has ratified the Convention, but also what declaration is made in connection to it.

Of particular interest is the following situation: let's say a State makes the (b) declaration above (reserving 'detention' rights), but not the (a) declaration (not reserving the national effects of non-consensual rights in general), and doesn't bother to make any national interest registrable under (c) above.

What does that give? If (a) is not reserved by declaration, that means that the national non-consensual rights do not enjoy their national priority over registered interest, and if (c) is not reserved, then neither are they registrable.

So where does that leave a national Maintenance and Repair Organisation holding on to an aircraft for unpaid bills where the Convention applies? Can they rely on their ancient common law (or Civil Code) rights? Do they now have to prepare security agreements that qualify as 'international interests' in order to become registrable under the Convention?

Some good questions that need to be answered each time one deals with aircraft in the emerging era of "Cape Town".

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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