[Senate Treaty Document 108-10]
[From the U.S. Government Publishing Office]
108th Congress Treaty Doc.
SENATE
1st Session 108-10
_______________________________________________________________________
CONVENTION ON INTERNATIONAL INTERESTS IN MOBILE EQUIPMENT AND PROTOCOL
TO CONVENTION ON INTERNATIONAL INTERESTS IN MOBILE EQUIPMENT
__________
MESSAGE
from
THE PRESIDENT OF THE UNITED STATES
transmitting
CONVENTION ON INTERNATIONAL INTERESTS IN MOBILE EQUIPMENT AND PROTOCOL
TO CONVENTION ON INTERNATIONAL INTERESTS IN MOBILE EQUIPMENT ON MATTERS
SPECIFIC TO AIRCRAFT EQUIPMENT, CONCLUDED AT CAPE TOWN, SOUTH AFRICA,
ON NOVEMBER 16, 2001
November 5, 2003.--Treaty was read the first time, and together with
the accompanying papers, referred to the Committee on Foreign Relations
and ordered to be printed for the use of the Senate
LETTER OF TRANSMITTAL
----------
The White House, November 5, 2003.
To the Senate of the United States:
I transmit herewith, for Senate advice and consent to
ratification, the Convention on International Interest in
Mobile Equipment and the Protocol on Matters Specific to
Aircraft Equipment, concluded at Cape Town, South Africa, on
November 16, 2001. The report of the Department of State and a
chapter-by-chapter analysis are enclosed for the information of
the Senate in connection with its consideration.
The essential features of the Convention and Aircraft
Protocol are the establishment of an international legal
framework for the creation, priority, and enforcement of
security and leasing interests in mobile equipment,
specifically high-value aircraft equipment (airframes, engines,
and helicopters), and the creation of a worldwide International
Registry where interests covered by the Convention can be
registered. The Convention adopts ``asset-based financing''
rules, already in place in the United States, enhancing the
availability of capital market financing for air carriers at
lower cost. The Convention's and Protocol's finance provisions
are consistent with the Uniform Commercial Code with regard to
secured financing in the United States.
This new international system can significantly reduce the
risk of financing, thereby increasing the availability and
reducing the costs of aviation credit. As a result, air
commerce and air transportation can become safer and
environmentally cleaner through the acquisition of modern
equipment facilitated by these instruments. The new
international system should increase aerospace sales and
employment, and thereby stimulate the U.S. economy.
Negotiation of the Convention and Protocol has involved
close coordination between the key Federal agencies concerned
with air transportation and export, including the Departments
of State, Commerce, and Transportation, as well as the EXIM
bank, and U.S. interests from manufacturing, finance, and
export sectors.
Ratification is in the best interests of the United States.
I therefore urge the Senate to give early and favorable
consideration to the Cape Town Convention and Aircraft
Protocol, and that the Senate promptly give its advice and
consent to ratification, subject to the seven declarations set
out in the accompanying report of the Department of State.
George W. Bush.
LETTER OF SUBMITTAL
----------
Department of State,
Washington, September 8, 2003.
The President,
The White House.
The President: I have the honor to submit to you, with a
view to its early transmittal to the Senate for advice and
consent to ratification, the Convention on International
Interests in Mobile Equipment and the Protocol on Matters
Specific to Aircraft Equipment, concluded at Cape Town, South
Africa on November 16, 2001 (the ``Cape Town Convention''). The
Convention and the accompanying Protocol on aircraft equipment
were signed by the United States in Rome on May 9, 2003 at the
International Institute for the Unification of Private Law
(UNIDROIT).
The new treaty system will expand credit financing across
the world for the acquisition of commercial aircraft, and
eventually other types of equipment important to U.S. exports,
by introducing modern commercial finance law already in place
in the United States, which will directly benefit our
manufacturers and other export interests.
Enabling other countries to acquire newer aircraft will
also upgrade aircraft safety around the world. By facilitating
new sales and leasing transactions, the Convention will provide
a needed boost for the industry, a critical factor given the
effects of September 11 and more recent world events, as well
as the general downturn in the air transportation market.
The Cape Town Convention, when effectively implemented by
other States, will bring about a substantial change in the
secured transaction and leasing laws around the world. Many
legal systems lack transparent priority systems of the sort in
place in the United States, which will be remedied by the
International Registry. Many legal systems require elaborate,
time consuming and expensive enforcement procedures, which will
be streamlined by the Convention's procedures. In sum, the
Convention represents an opportunity for many States to quickly
upgrade their legal infrastructure, thereby attracting capital
to aircraft equipment, a major U.S. export and source of
employment. Prompt and wide adoption of these instruments will
also add momentum to other law reform initiatives that promote
other U.S. trade objectives.
BACKGROUND
The Convention and Protocol were negotiated over a five-
year period under the auspices of UNIDROIT, an international
body dealing with private law conventions, and ICAO, the
International Civil Aviation Organization. They were concluded
in November 2001 at a Diplomatic Conference at Cape Town, South
Africa, attended by 68 States and 14 international
organizations, and involved the active participation at all
stages of the Conference by private sector air transportation
and finance interests. Negotiations were intended to track
existing air finance practices in the major capital markets and
thereby facilitate new transactions, especially in developing
and emerging countries, which will be increasingly significant
in coming decades.
Analyses of the markets indicated that a treaty extending
financing methods which are already in place in the United
States through the Uniform Commercial Code (UCC) would benefit
other countries as well as U.S. manufacturing, employment,
finance and export interests.
Key federal agencies concerned with civil aviation and U.S.
exports, including the FAA, EXIM Bank, and the Departments of
Transportation, Commerce and State were fully involved in
negotiation of the Convention and in preparation for its
implementation. U.S. signature and ratification was endorsed by
these agencies in a recommendation made in October 2002 by the
Interagency Group on International Aviation (IGIA),
administered by the Federal Aviation Administration (FAA).
SCOPE OF THE CONVENTION AND PROTOCOL
Major Provisions
The Convention, which relates to air transportation and
interstate and foreign commerce, provides for the creation of
internationally recognized finance rights and enforceable
remedies designed to give greater security to financiers of
highly mobile equipment, particularly in markets where country
or business risk would not otherwise support such transactions.
This will boost transactions and directly benefit U.S.
manufacturers and other export interests. Increased aircraft
and engine sales, in turn, will contribute to more rapid use of
newer and thus safer and environmentally cleaner aircraft and
engines in all regions. In many cases, the use of asset-based
financing under the Convention will reduce sovereign debt for
developing States, and can assist them to attract capital
generally to upgrade their transportation infrastructure.
The Cape Town Convention can produce significant
macroeconomic benefits in the United States, principally by
enhancing (i) aerospace sales and increasing employment in the
aerospace sector, (ii) risk reduction for U.S. private sector
financial institutions, (iii) risk reduction to EXIM Bank,
which has already evidenced its firm support by offering
financing advantages to airlines located in States that ratify
the Convention, and (iv) operational and fleet flexibility for
airline operators with crossborder routes or interests.
Importantly, U.S. leadership will bolster and significantly
accelerate wide adoption of these instruments.
The Convention is designed as a ``multi-equipment'' treaty
system, an outcome strongly supported by the United States. The
protocol being submitted is the Aircraft Protocol, which
applies to airframes, aircraft engines and helicopters above a
minimum size or power threshold. The establishment of such
thresholds maximized the U.S. ability to achieve consensus on
the fundamental issues addressed in the Convention. The
Convention can apply to other categories of high-value mobile
equipment defined in additional protocols adopted through
diplomatic procedures and that would be subject in the United
States to ratification. Such protocols to the Convention would
most likely recognize specialized forms of financing applicable
to the category of equipment covered. This would permit the
development of best practices consistent with the needs of
different sectors.
Key Financing Concepts
The Cape Town Convention creates an international secured
finance system that may be summarized by the following points:
1. The Convention establishes an ``international
interest'', that is, a secured credit or leasing interest with
defined rights. Those rights consist principally of (a) the
ability to repossess and sell or lease the equipment in the
case of default by an airline operator (remedies), and (b) the
holding of an objectively determined and transparent finance
priority in the equipment, where competing claims are made
against such equipment (priority).
2. Quiet possession rights attached to an international
interest will be enforced and recognized in all States party to
the Convention and Protocol, thus assuring airline operators of
continued rights of usage of the equipment absent default or
contrary agreement.
3. Priority of interests will be established through a
``notice-based'' filing system, recorded in a high-technology
international registry, which will determine the priority of
competing interests on a first-in-time basis, subject to
certain exceptions. Pursuant to a declaration recommended
below, the FAA will serve as the authorizing entry point to the
International Registry for aircraft having or intended to have
U.S. nationality (this Convention does not deal with
nationality of aircraft).
4. Associated rights, such as future payment rights and
receivables in aircraft financing arising under contracts
directly related to the financing arising under contracts
directly related to the financing of equipment, are subject to
rules similar to those applicable to international interests.
5. The Convention promotes predictable and timely remedies
in the case of default, reflecting basic principles underlying
asset-based financing and leasing. This permits reliance on the
value of the asset to reduce overall transactional risk,
thereby reducing the cost of credit. States are given a number
of options, in the form of permitted declarations, which
directly relate to the timing of remedies, both in and out of
insolvency. These include certain basic concepts found in U.S.
law, such as the availability of non-judicial remedies, the
timing of remedies in the event of airline insolvency, and
efficient deregistration and export of aircraft in the event of
default, subject to national safety and airworthiness rules and
regulations.
6. Transaction party autonomy, the ability of creditors and
debtors to agree as among themselves on basic elements of their
contract and its enforcement, is central to the Convention.
7. The international finance Registry, a basic component of
the Convention, is similar to notice filing systems in the
United States and Canada. Unlike a documentary system, where
transaction documents are vetted before filing, a notice system
involves posting minimal information only, so that other
potential financing interests can make inquiries of possible
superior interests prior to financings.
ICAO will supervise the International Registry. A
Preparatory Commission, in which the United States is a very
active member, will establish the requirements for and
determine the initial host State of the Registry. The host
State is expected to fund the creation of the International
Registry and users will pay sustaining use fees, which are
expected to be low since the system is wholly electronic. The
feasibility of the system has already been tested by a
prototype developed by a body affiliated with airline
associations.
Effect on Other Treaties
The relationship of the Cape Town Convention to existing
aviation conventions was carefully worked out. The 1948
Convention on the International Recognition of Rights in
Aircraft (``Geneva Convention'') is the only convention in
force for the United States to which the relationship rule will
initially apply. As between parties to the Aircraft Protocol,
the Cape Town Convention will supersede the Geneva Convention,
to the extent matters are covered or affected by the new
instrument. The Geneva Convention will continue to apply to
matters not covered by the Cape Town Convention and will remain
fully in force as between States party to it which are not
parties to the Cape Town Convention.
Related International Developments
The Cape Town Convention would represent a change in the
financing laws for many other States. However, two new related
international legal texts have recently been negotiated in
other bodies, by some of the same States--one at UNCITRAL (a
new Convention on Accounts Receivable Financing, approved by
the UN General Assembly in December 2001), and the other at the
Organization of American States (an Inter-American Model Law on
Secured Financing, completed at an OAS Diplomatic Conference in
February 2002). Both adopted an approach to secured financing
similar to that in the Cape Town Convention.
DECLARATIONS IN CONNECTION WITH U.S. RATIFICATION
In order to allow States to tailor the Convention to
particular economic needs, a number of declarations are
provided for, consistent with practice in international private
law conventions. Since the United States already has a well
functioning capital market for air finance, only a limited
number of declarations are needed for the United States. The
situation differs for many other States, where the economic
value of the Convention is linked to the making of declarations
designed to substantially upgrade the substantive law in that
State, especially where that is needed to lower country and
credit risk.
Seven declarations (three for the Convention and four for
the Protocol) proposed for the United States were approved by
the Departments of Transportation, Commerce, State and DOD
through the FAA's Interagency Group on International Aviation
(IGIA), as well as by EXIM Bank. Where possible, the
declarations follow the recommended UNIDROIT form in order to
promote uniformity. The Department of State recommends that the
Senate give advice and consent to the Convention and the
Protocol subject to the declarations that follow:
1. Declaration for Convention Article 39(1)(a):
Priority of non-consensual rights and interests arising
by law
Pursuant to Article 39(1)(a), the United States
declares that all categories of non-consensual rights
or interests which under United States law have and
will in the future have priority over an interest in an
object equivalent to that of the holder of a registered
international interest shall to that extent have
priority over a registered international interest,
whether in or outside insolvency proceedings.
Purpose: This declaration preserves current U.S. practice.
Article 39(1)(a) allows States to identify non-consensual
rights and interests arising by law that, having priority
against consensual security interests without registration
under national law, shall maintain such priority as against
international interests registered under the Cape Town
Convention. United States federal and state law contain a
variety of such priorities which would be difficult to
harmonize (e.g., liens in favor of repairers of equipment and
taxing authorities). This declaration gives priority to all
such rights.
2. Declaration for Convention Article 39(1)(b):
Retention of Rights to Compensation for Public Services
Pursuant to Article 39(1)(b), the United States
declares that nothing in the Convention shall affect
its right or that of any entity thereof, any
intergovernmental organization in which it is a member
State, or other private provider of public services in
the United States to arrest or detain an aircraft
object under United States law for payment of amounts
owed to any such entity, organization or provider
directly relating to the services provided by it in
respect of that object or another object.
Purpose: This declaration allows a State to preserve rights
of detention or arrest by State entities in order to secure
amounts owing in connection with its provision of public
services relating to objects covered by the Cape Town
Convention, such as air navigation and landing charges for
aircraft. This declaration will ensure the continuation in the
United States of governmental rights; such rights, in addition
to their inherent policy importance, have not been impediments
to U.S. aircraft financing transactions.
3. Declaration for Convention Article 54(2):
Procedure for exercise of remedies
Pursuant to Article 54(2), the United States declares
that all remedies available to the creditor under the
Convention or Protocol which are not expressed under
the relevant provision thereof to require application
to the court may be exercised, in accordance with
United States law, without leave of the court.
Purpose: This declaration satisfies Article 54(2) which
requires States to declare whether they will permit or prohibit
the exercise of non-judicial remedies in the case of default by
a debtor. A declaration permitting such remedies ensures
consistency with the UCC, is fundamental to the continued
efficiency of U.S. secured transactions law.
The Department of State further recommends that the
following four declarations to the Protocol be included in the
U.S. instrument of ratification:
1. Declaration for Protocol Article VIII, as authorized by Protocol
Article XXX(1)
Contractual choice of law
The United States declares that it will apply Article
VIII.
Purpose: This declaration provides that parties can agree
as to the law governing their contractual rights and
obligations, wholly or in part. This declaration is consistent
with U.S. commercial law as applied to transactions of the type
covered by the Convention, and is consistent with other recent
Conventions on commercial law negotiated by the United States.
2. Declaration for Protocol Article XII, as authorized by Protocol
Article XXX(1):
Insolvency case assistance
The United States declares that it will apply Article
XII.
Purpose: This declaration supports cross-border judicial
assistance in insolvency cases, a practice now followed by U.S.
bankruptcy courts in appropriate cases. It addresses cases
where multiple national bankruptcy courts and administrators
may be involved in various proceedings involving the same
debtor and/or the same property. It is a non-intrusive rule,
only requiring maximum cooperation ``in accordance with the
law'' of the declaring State. This declaration is an important
signal for the United States to give other States, and will
help promote broader U.S.objectives in the field of cross-
border insolvency cooperation.
3. Declaration for Protocol Article XIII, as authorized by Protocol
Article XXX(1):
Deregistration and export requests
The United States declares that it will apply Article
XIII.
Purpose: This declaration recognizes the effect of the
power-of-attorney annexed to the Aircraft Protocol, to procure,
upon default, the timely deregistration of the aircraft for
nationality purposes and its export. This process is fully
subject to related aviation safety laws and regulations. It is
already customarily employed in the United States for
transactions covered by the Convention and Protocol, and will
streamline the deregistration process by establishing a
procedure for certifying interests of parties in the aircraft.
This U.S. declaration can set an important example for some
States where deregistration procedures have been used to block
the effective exercise of remedies.
4. Declaration for Protocol Article XIX (1) and (2):
FAA Entry point to the International Registry
1. Pursuant to Article XIX(1), the United States designated
the Federal Aviation Administration, acting through its
Aircraft Registry, FAA Aeronautical Center, 6400 South
MacArthur Boulevard, Oklahoma City, Oklahoma 73125, as the
entry point at which information required for registration in
respect of airframes or helicopters pertaining to ``civil
aircraft of the United States'' or ``aircraft to become a civil
aircraft of the United States'' shall be transmitted, and in
respect of aircraft engines may be transmitted, to the
International Registry.
2. Pursuant to Article XIX(2) of the Protocol, the United
States hereby specifies that the requirements of Chapter 441 of
title 49 of the United States Code and Part 49 of title 14 of
the Code of Federal Regulations be fully complied with before
such information is transmitted at the Federal Aviation
Administration to the International Registry.
3. For purposes of the designation in paragraph 1 and the
requirements in paragraph 2.
(a) information is transmitted at the Federal
Aviation Administration in accordance with procedures
established under United States law; and
(b) the terms ``civil aircraft of the United States''
and ``aircraft to become a civil aircraft of the United
States'' shall take their meanings from Chapters 401
and 441 of title 49 of the United States Code,
respectively.
Purpose: This declaration establishes the FAA as the
exclusive point in the United States entitled to authorize
electronic registrations relating to airframes pertaining to
U.S. registered aircraft and helicopters, and as the non-
exclusive point authorizing electronic registrations relating
to engines. It also will ensure that all such registrations
comply with 49 U.S.C. Ch. 441 and Part 49 of title 14 of the
Code of Federal Regulations, as amended, in order to be valid.
It will connect the FAA system and practices to the new
electronic International Registry in a manner compatible with
the existing FAA registry system.
Proposed FAA technical legislative amendments are intended
to integrate this arrangement into the FAA's existing
registrysystem, and will be transmitted to the Congress separately. The
FAA and DOT, together with U.S. air manufacturing and finance
industries and associations which work closely with the FAA's
registration facilities, collectively developed the draft legislation.
U.S. statements to be made at time of ratification
Owing to the fact that in large measure the Convention and
Protocol reflect existing U.S. law, the declarations made by
the United States are expected to be different than those made
by a number of other States. However, since the particular
declarations made by other States may determine the extent of
economic benefits under the treaty system, the Executive Branch
intends to ask the Depositary to circulate three statements of
a policy nature in order to bring to the attention of other
States the importance that we attach to their declarations in
the fields addressed. No Senate action is requested with
respect to these statements.
(1) The United States made no declaration regarding
Protocol Article XI, pursuant to Protocol Article
XXX(1), since existing United States law, specifically
11 U.S.C. Section 1110, will continue to apply, which
is substantially equivalent to Alternative A of
Protocol Article XI. However, the United States notes
the importance attached to declarations applying
Alternative A of Protocol Article XI in attracting
financing in aircraft transactions.
(2) The United States notes the importance in terms
of credit enhancement of the declarations under the
Convention and Protocol that will ensure the timely
exercise of remedies, in particular both non-judicial
remedies to the extent so agreed by the debtor
(Convention Article 54(2)), and relief pending final
determination (Convention Article 13, as modified by
Protocol Article X).
(3) The United States notes the importance of
circumscribing the extent of priorities for non-
consensual rights and interests (Convention Article
39(1)(a)), since the absence of clear and certain
limits prior to financing of this preference category
may significantly restrict extensions of credit in many
States.
IMPLEMENTING LEGISLATION
No implementing legislation is required, except for
technical amendments to certain authorities of the FAA relating
to the filing of interests in registries through the FAA,
discussed below. Otherwise, the UCC will apply, and no changes
to the Code are required.
Coordinating the International Registry with U.S. Practices; Technical
Amendments to FAA Statutes on the Registry System
United States industry and finance sectors have recommended
that the authorized entry point in the United States be through
the FAA Aircraft Registry, acting through its existing
facilities in Oklahoma City. FAA technical statutory amendments
will be submitted to Congress for implementation of the
registry provisions of the Convention. These amendments to
Title 49 of the U.S. Code, Chapter 441 were prepared by DOT,
FAA, and EXIM Bank, together with air finance and manufacturing
industries. The technical amendments will clarify the effect of
filings of financinginterests under the new computer-based
system vis-a-vis filings under existing FAA procedures.
The current FAA system would be merged seamlessly into the
International Registry process by requiring registering parties
to satisfy existing FAA requirements prior to making a
registration with the International Registry. An additional
filing would be added to those already recognized by the FAA
system for ``prospective'' registrations which would require
subsequent filing of full transaction documents. This approach,
which is standard in commercial lending, including practices
under the UCC, but not currently provided for under FAA's
existing filing regulations, will permit the continuation of a
well-established and efficient U.S. documentary system, while
simultaneously linking that process to the International
Registry. The FAA will assume no responsibility for the content
of filings under a notice-based computer system.
CONCLUSION
The Convention and Protocol will provide a needed boost to
our aerospace industry and provide significant benefits to many
other countries as well. It will promote modernization of
commercial law based on tested market practices. United States
ratification can have a significant effect on actions to be
taken by other countries, and will assure a U.S. lead role in
international implementation of the treaty system.
As prior sections of the report suggested, ratification of
the Convention and Protocol are supported by all affected
private interests in the United States. The Interagency Group
on International Aviation (IGIA) and the American Bar
Association's House of Delegates have endorsed ratification of
the Convention.
The Departments of Transportation and Commerce, as well as
EXIM Bank and the Federal Aviation Administration join the
Department of State in requesting that the Convention on
International Interests in Mobile Equipment and the Protocol on
Matters Specific to Aircraft Equipment be submitted to the
Senate for its advice and consent to ratification as soon as
possible, subject to the declaration previously described.
Respectfully submitted,
Colin L. Powell.