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The Validity and Effect of Choice of Law Clauses in Aviation Finance and Lease Agreements

As is explained supra, a consensual right which is validly established in a certain jurisdiction, may not be enforceable in the countries where the aircraft is operated. A group of lawyers[1] propose that a ‘choice of laws clause’, which is included in an international aviation finance or lease agreement, may solve this major issue. They suggest that the parties must choose a state which has created modern aviation finance and lease laws. In their opinion, the selected legal system could be enforced in the national Courts of this country and abroad. Besides, they contend that the selected regime would have third-party effect (erga omnes). Therefore, allegedly also the other (foreign) creditors of the debtor would be bound by their choice of law clause. In particular, currently it seems customary that in aircraft financing and leasing contracts the parties choose the law of England or the state New York. In practice, it is often proposed that these jurisdictions have adequate aviation finance and lease laws. Furthermore, some lawyers contend that when the parties opt for the law of New York-state, the Cape Town Convention would be applicable. They suggest that because the United States has ratified this instrument, it will also apply to the agreement which includes a choice of law clause referring to New York law. This view is erroneous. The present contribution argues that a clause selecting the law of England or New York merely has a limited effect. In addition, it does not solve the aforementioned global issues. This is because the choice only has effect between the parties (inter se). A choice of law clause is solely enforceable as far as the contractual aspects of the agreement are concerned. In almost all countries the chosen law does not affect the proprietary interests of third-parties.

In regard to the possibility to select the applicable law in agreements the following general statement has been made:

“That principle is that human beings have the right to agree upon what they will, due regard

being had to the rights of others”.[2]

This comment reflects the international common leading opinion which must always be observed. Therefore, the choice of English or New York[3] law does not bridge the elementary differences which exist in the substantive property laws of the states. This is because the choice cannot be upheld against (foreign) third-parties when the debtor is in default or insolvent. It is submitted that the lawyers who suggest the opposite are making a fundamental legal mistake.

Significant English Court cases confirm that the applicable English conflict of laws rule forbids choosing English or another national substantive property law. For instance, this view has been affirmed in the English ruling Blue Sky v. Mahan Air (Blue Sky case, 2010).[4] In the Blue Sky case the English Court analysed the scope of the lex contractus conflict of laws rule which is also called the rule of the ‘proper law of the contract’. See further below. In respect to the disputed validity of the English mortgage that was created in an aircraft which had the English nationality, the judge refused to apply English property law. He explicitly disregarded the circumstance that English law had been selected by the parties to apply to the English mortgage in the English aircraft.[5] In England and worldwide it is the common leading opinion of the doctrine that the raised issues concerning the creation, validity, effects and enforcement of property rights are not covered by the law that has been chosen by the parties to the contract. The Blue Sky case confirms that the custom to select English law has no effect on the proprietary aspects of international aviation finance and lease agreements. In other publications it is argued extensively that the devastating global impact of this ruling could have been avoided.[6] As far as the situation in the United Kingdom is concerned, since this jurisdiction has ratified the Cape Town Convention the problem of applying the lex situs conflict of laws rule to international aviation financing and leasing transactions is solved in regard to agreements that are entered into after the treaty has entered into force on 1 November 2015. This is because the treaty provides for a uniform substantive property law regime which governs the creation, validity, effects and enforcement of registrable international interests in aircraft objects.

Just recently, a handful of lawyers are promoting the conflict of laws rule called the proper law of the contract.[7] They are not successful as it is not endorsed by the local and international community. In regard to the disputed creation, validity, effects and enforcement of proprietary interests in a ‘thing’, historically the international doctrine[8] has argued that the lex rei sitae (lex situs) conflict of laws rule must be applied. It is the opinio iuris communis that this rule governs all property rights in (registered) movable and immovable objects, regardless whether these rights have been consensually or non-consensually created.[9] Only in regard to very few matters another conflict rule is accepted. For example, only regarding the consensual rights in aircraft the special lex registri(i) conflict rule is proper. However, the lex situs rule is still appropriate to cover disputed non-consensual interests[10] in aircraft. This is because in these situations the closest connection of the disputed issue at hand is with the legal system of the situs (connecting factor) in which the aircraft object is located.

The fundamental legal principle that a choice of law clause is merely enforceable between the parties to a certain agreement is explicitly endorsed in article VIII(2) Protocol. This provision states that the parties to an agreement may agree on the law which is to govern their contractual rights and obligations.[11] Provided, however, that the relevant Contracting State has made a Declaration to this effect (articles VIII(2) and XXX(1) Protocol). Therefore, the Cape Town Convention endorses the opinio iuris communis that solely in relations between themselves the parties may select the applicable law. This international common legal opinion is also expressed in the Official Commentary to the Cape Town Convention. It clarifies that the possibility of a choice of law clause that would affect third-parties is outside its scope.[12]

In any event, the current publication submits that when the parties to finance and lease contracts carefully ‘choose the flag’ of the aircraft, to a large extent the existing problems may be solved. For this purpose, they can establish a Special Purpose Vehicle in this jurisdiction of choice. This scenario certainly resolves the existing issues where the Cape Town Convention applies as the aircraft is registered as to nationality in a Contracting State. Provided, that this country has made the relevant

Declaration and it has implemented the treaty appropriately. This implies that the purposely chosen flag-state offers modern and adequate law which is attractive to the financiers, lessors and operators of aircraft.

  • [1] F. Sanders, Loophole in aircraft mortgages poses threat to lawyers and financiers, 8 November,2011; G. Hill, Financing and Investing in Engines, 31 March 2011, p. 7; E. Lawless, Enforcementof security over an aircraft, February 2010, p. 4; C.A. Gee, Choice of law after England’s Blue SkyOne Case, June 2011; M. Hamilton, Aviation law areas of practice, 2011.
  • [2] See the treatise on chattel mortgages by G. Gilmore, Security interests in personal property, Vol.I—II, 1965, p. 422. This author has been described as the ‘intellectual father’ of the UniformCommercial Code (UCC) which is implemented (differently) in the legal systems of all the statesof the United States.
  • [3] Th.A. Zimmer and D. Pearson, Aircraft mortgages-English law or New York law?, see Aviationfinancing and leasing 2014, p. 6 The authors point out that a selection of New York or English lawmerely covers ‘the contractual relations’ between the parties to a mortgage agreement! See alsoCheshire and North, Private International Law, 1999, p. 941.
  • [4] Blue Sky One Limited & O’rs v Mahan Air & Ano’r [2010] EWHC 631 (Comm).
  • [5] Blue Sky under paragraph 156. See also Glencore International AG v Metrotrading InternationalInc [2001] 1 Lloyds Rep 284.
  • [6] B.P. Honnebier, The devastating ‘Blue Sky’ judgment compels the member states of the EuropeanUnion to adopt the Cape Town convention, The Aviation & Space Journal, 2012-2, p. 10; TheEnglish Blue Sky case shows that the aircraft finance practice needs uniform international substantive mortgage laws as the existing conflict rules fail, TVR, 2011-2, 70; Rectified contribution toContemporary Issues and Future Challenges in Air and Space Law, November 2011; ZLW, 20111, p. 47.
  • [7] G.M. McBain, Anglo-American conflict of law rules relating to the conveyance of aircraft, 1991,p. 3.
  • [8] 50A. Schluter, Der Eigentumsvorbehalt im europaischen und internationalen Recht, InternationalesHandelsrecht, 2001-4, p. 142; J.A. van der Weide, Mobiliteit van goederen in het IPR, pp. 181184; B.P. Honnebier, ZLW, 2011-1, p. 61.
  • [9] B.P. Honnebier, Collecting EUROCONTROL air navigation charges by precautionary arrestingthe aviation fuel of aircraft in the European Netherlands, JLR, 2013-2/3, p. 33, at p. 40.
  • [10] As per 1 January 2012, article 10:127, sub 4 of the Civil Code of the European Netherlands prohibits that the parties to an agreement choose the applicable law as far as property rights in aircraftare concerned. It dictates that the lex registrii conflict of laws rule applies to both voluntarily andnon-voluntarily established interests in aircraft. The substantive property law of the state where theaircraft is registered as to nationality or is recorded (teboekgesteld) decides the existing issues.This rule is appropriate to cover consensual rights in aircraft. However, the new law makes anelementary legal mistake by applying it to non-consensual rights in aircraft. See B.P. Honnebier,JLR, 2013-2/3, p. 33, at p. 40; JLR, 2011-2, p. 34.
  • [11] See the comments to the draft CITEJA Conventions which refer to borrowed aircraft engines. Itis stated that the legal accession of an engine is: ... un acte illicite et meme susceptible de repression penale”, “... un vol...”. Compte Rendu, Doc. 162, 1931, p. 40.
  • [12] R.M. Goode, The Official Commentary, 2013; The international interest as an autonomous property interest, 12 European Review of Private Law, 1/2004; International interests in mobile equipment and the Cape Town Convention and Aircraft Protocol: adding a new dimension to internationallaw-making; The Cape Town Convention and Protocols and the Conflict of Laws, A commitmentto private international law, 2013, p. 221; B.P. Honnebier, Bookreview, ICLQ, 2005, p. 268. Seealso under Select Bibliography.
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