New Protocols to the Cape Town Convention: an update on UNIDROIT Governing Council’s meeting of 2014

New Protocols to the Cape Town Convention: an update on UNIDROIT Governing Council’s meeting of 2014

Arnold van Steenderen
Charlotte van Steenderen
20 May 2014

The Cape Town Convention on International Interests in Mobile Equipment (“Cape Town Convention”)was opened to signature in Cape Town on 16 November 2001. This Convention provides a generic legal framework for registration of ownership and security interests as well as the legal remedies for default situations. The Cape Town Convention harmonizes these interests by a general treaty and mobile equipment specific Protocols. The Protocol on Aircraft Equipment came into effect in 2006 and it has now been ratified by 45 states. The Luxembourg Protocol on Railway Rolling Stock has been adopted but has not come into effect yet. The Berlin Protocol on Space Assets has not yet entered into force as well, lacking the minimum number of ratifications.

In this article we will primarily deal with the UNIDROIT agenda for future Protocols and the issues raised by those opposing some of the new Protocols presently discussed. In May 2013 UNIDROIT published a memorandum in which the results are outlined of a preliminary investigation into the possibility to introduce two new Protocols to the convention for maritime equipment and off-shore wind power equipment.[1] Furthermore, a report on the possible economic impact prepared by the Center for Economic Analysis of Law (CEAL) (Washington D.C.) on a proposed Protocol on mining, agricultural and construction equipment was published in February 2013.[2]

The rationale behind the Cape Town Convention is that harmonizing security rights would lower the costs of financing, as financiers would have certainty that their priority is safeguarded in many jurisdictions (and especially in jurisdiction with a less developed property law regime). Furthermore, an easily accessible electronic International Registry would enhance the publicity of security rights.

In orderto achieve the abovementioned goals the Cape Town Convention creates sui generis international security rights that can be registered in an International Registry. These registered rights enjoy priority over otherwise valid but unregistered[3] security rights created in accordance with national laws. Furthermore, the Cape Town Convention overrides national rules of accession by introducing new categories of goods that may be subject to separate security rights, such as aircraft engines, making separate financing of these high value goods possible.[4]

Ship finance and aircraft financing are primarily asset-based. A significant feature of asset-based financing is that the creditworthiness of the borrower is becoming less significant, while the worth of the application (the asset in question) is becoming more significant. Leasing, factoring, leveraged buyouts and securitization are modes of asset-based financing. Asset-based financing will generally be successful if goods are of a high value and have a long useful life-time, provided the asset is properly maintained to optimize the residual value.

Ships and maritime equipment

It is not difficult to see the similarity between sea-going ships and aircraft operating international routes. Both are high value goods that travel across jurisdictions and therefore different legal systems may be applied to consensual security rights in these goods, depending on the geographical location of the ship or aircraft.

As the authors of the UNIDROIT memorandum also note, harmonizing security rights covering ships (mortgages and hypothecs) was attempted before but has not been very successful until now. The reason the authors mention is that the previous conventions were too ambitious by trying to harmonize non-consensual priority rights, e.g. maritime liens.[5] However, the Cape Town Convention provides a possibility to limit a new Protocol to harmonization of consensual security rights on ships.

Furthermore, new categories of maritime equipment[6] could be introduced, which could make separate financing of ‘eco-ships’, e.g. by use of Flettner rotors, more attractive. However, the same reasons behind the decision of some governments not to sign or ratify the other Protocols could turn out to be equally valid for a ‘Maritime Protocol’. The system of the Cape Town Convention is largely based on a flexible security rights system  with regard to the creation of consensual security rights, such as article 9 of the U.S. Uniform Commercial Code, whereas some civil law jurisdictions are traditionally opposed to such an approach. In these jurisdictions debtors may enjoy some more protection, for example in the enforcement phase.[7]

The latest information indicates, however, that UNIDROIT will not pursue a new ‘maritime Protocol’ in the near future, as it assigned a low priority to the possible protocol during its session in May 2014 “in the light of potential industry opposition expressed to some members of the Council, as well as continued, although limited, use of the 1993 International Convention on Maritime Liens and Mortgages”.[8]

Off-shore wind power generation and similar equipment

Although the mobile equipment to which the current Protocols apply, can at first glance not easily be compared to off-shore wind power equipment, the German Federal Ministry of Justice proposed to consider introducing an additional Protocol covering such equipment. In the preliminary study of UNIDROIT the current legal difficulties with regard to financing of off-shore wind power equipment are identified.

Where the wind-power turbines are located outside the territorial sea of a coastal state, but within the exclusive economic zone or a continental shelf, difficulties arise with regard to the applicable property law regime for wind energy equipment. Specific national conflict rules have been introduced to tackle this problem, but also specific property law rules, not necessarily part of the international private law of the forum.[9] Furthermore, the secretariat notes that there are also uncertainties as to the applicable law if the off-shore wind power equipment is registered in national registers, if the wind power equipment is located in the high seas and when it is transported across different jurisdictions.[10]  Since this situation may create legal uncertainty regarding the applicable law, a new Protocol could offer a solution.

In the 2013 memorandum a number of current issues related to ownership and security rights (property law) in off-shore wind power equipment, which could hamper the private financing and thus the economic feasibility of wind power creation have been mentioned. In most jurisdictions, the seabed of the territorial sea is owned by the State and national property rules often would rule accession of the property fixed wind power equipment to the sea/land.[11] The sea in general is not owned by anyone, and therefore it cannot be subject to real security rights. Although several jurisdictions and market practice came up with solutions to this problem, some of the solutions adopted are cumbersome and imperfect.[12] A new Protocol could take away all these uncertainties and such a protocol would be suitable for these kinds of equipment.[13]

In spite of the abovementioned advantages a new Protocol could offer, the Governing Council assigned a low priority to the creation of such a Protocol during it session in May 2014, as “opinions varied on whether wind energy equipment was in fact mobile equipment and, if that were the case, whether the Cape Town system could be tailored to provide adequate solutions”.[14]

Mining, Agricultural and Construction Equipment (“MAC Equipment”)

Another category of mobile equipment that is considered is the ‘MAC’-category. As with the wind-turbines, this equipment does not typically cross borders other than when they are exported or re-exported. Furthermore, MAC Equipment does not necessarily have a relatively high-value. However, the CEAL study identified that a lot of low-income countries do not have sufficiently advanced property law regimes to create easily enforced security rights. The CEAL study furthermore expected a rise in GDP for these countries, as well as the main producers and exporters of the equipment in this category, such as the United States and Germany.[15] A new Protocol to the Cape Town Convention would thus solve the lack of national law reform in these countries.

The CEAL report is mainly concerned with economic considerations and the exact legal drafting is still to be considered. For example, the scope of the Protocol and the Equipment still needs to be defined.[16] This equipment could be made individually identifiable by using existing codes of the Harmonized System of Tariffs and manufacturer’s serial numbers. [17] A preliminary list of goods, varying from tractors to certain engines, and their HST code which may be subject to international interests in a new Protocol has already been published.[18]

During its session in May 2014, the Governing Council assigned medium priority to the work of creating a MAC-protocol and therefore a study group may be appointed.[19]

[1] UNIDROIT 2013 – C.D. (92) 13, Governing Council 92nd session, Rome 8-10 May 2013,  Item No. 5 on the agenda: International Interests in Mobile Equipment (b) Possible preparation of other Protocols to the Cape Town Convention (ii) Ships and maritime transport equipment (iii) Off-shore wind power generation and similar equipment (memorandum prepared by the Secretariat). Available at the UNIDROIT website, http://www.unidroit.org.

[2] Heywood Fleisig (CEAL), Extending UNIDROIT’s Cape Town Convention to Mining, Agricultural, and Construction Equipment, February 18, 2013.  Available at the UNIDROIT website, http://www.unidroit.org.

[3] That is to say not registered in the International Registry.

[4] For example, according to Dutch property law an aircraft engine will as long as it is attached to the aircraft be regarded as part of the aircraft, which makes it necessary to come up with relatively complicated legal solutions for the financing of aircraft engine pools. See Berend  Crans, ‘How Many Engines on a Boeing 737? An analysis of Accession Rules in Relation to Aircraft Engines’, (2013) 38 A & SL 229.

[5] UNIDROIT (n1), page 5.

[6] UNIDROIT (n1), page 24 containers are mentioned.

[7] See for example Arthur Salomons, ‘Should we ratify the Convention on International Interests in Mobile Equipment and the Air Equipment Protocol? Some Remarks from a Dutch Point of View’ (2004) 1 ERPL 67.

[8] UNIDROIT 2014 C.D. (93) 4(b), Governing Council 93rd session, Rome 7-10-May 2014, ,  Item No. 5 on the agenda: International Interests in Mobile Equipment (b) possible preparation of other Protocol to the Cape Town Convention, in particular on agricultural, mining and construction equipment. Available at the UNIDROIT website, http://www.unidroit.org.

[9] UNIDROIT (n1), page 33.

[10] UNIDROIT (n1), pages 37 and 38.

[11] UNIDROIT (n1), page 39.

[12] UNIDROIT (n1), page 44.

[13] UNIDROIT (n1), page 49.

[14] UNIDROIT (n8).

[15] Fleisig (n2), page 13.

[16] National Law Center for Inter-American Free Trade, ‘Secured Financing for Mobile Equipment: The Proposed Protocol on Mining, Agricultural and Construction Equipment’, available at http://www.unidroit.org/english/governments/councildocuments/2014session/nlcift-e.pdf.

[17] Fleisig (n2), page 18.

[18] UNIDROIT (n8), page 3.

[19] UNIDROIT (n8).