Enforcement of Security Interests

Default Remedies Under the Cape Town Convention

Meaning of Default

I. The regime contained in Chapter III of the Convention (“Default remedies”) is based on party autonomy, regarding the existence of the default as well as the organisation of the remedies that the creditor may exercise.

The remedies set out in Articles 8 and 9 (and also in Article 10) are extra-judicial remedies, if the parties have so agreed. The application to the court is, in this context, an option of the creditor.

However, in many jurisdictions, some of these remedies may be exercised only with leave of the court.^[1]

II. Article 11 of the Convention deals with the meaning of default.

First, the debtor and the creditor may at any time agree in writing as to the events that constitute a default or otherwise give rise to the rights and remedies specified in this Chapter (Article 11(1)). Therefore the events of default may comprise the debtor’s failure to perform and also some non-default events giving rise to the impossibility of performance such as the debtor’s insolvency or an adverse change in taxation law applicable to the transaction.

Secondly, where the debtor and the creditor have not so agreed, “default” only means a failure which substantially deprives the creditor of what it is entitled to expect under the agreement (Article 11(2)).

The criterion used in this provision to define “default” reminds the notion of “fundamental breach of contract”, contained in Article 25 of the United Nations Convention on Contracts for the International Sale of Goods.

• [1] This is the case in Portuguese law, in what concerns the execution of mortgage: L.C. Fernandes,Ligoes de direitos reals, p. 159; R.P. Duarte, Curso de direitos reals, p. 249 f; L.M. Leitao,Direitos reais, p. 480.