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The Grave Problem of the Alleged Accession of Aircraft Engines to Aircraft

At present, the most serious issue arising in the international aviation finance and lease practice is caused by the allegation that the ‘doctrine of accession’ applies to aircraft engines. In essence, the ‘accretion theory’ means that an engine which is installed in or on an aircraft (airframe) legally becomes a ‘component part’. As from the 1990s, at the international level it is continuously debated whether by operation of law (ex lege) and under all circumstances the title to a financed or leased engine is transferred to the owner of the airframe as soon as the former object is mechanically attached to the latter. Therefore, if the strict accession theory applies it is not guaranteed that the interests of the financier or lessor (owner) of the high-value engine can be upheld. Considering the disastrous financial impact of the accession doctrine, the aviation industry has submitted since the 1930s that its application would be improper. More precisely, at that time it was already argued that this theory would ‘legalize’ engine-stealing.55 Consequently, in most jurisdictions the title- shift theory is not applicable to aircraft engines.[1] [2] Besides, any interpretation of a local or international special law (lex specialis) which frustrates aviation financing and leasing transactions is wrong per se. This is because the primary intent of a purposefully created lex specialis is to facilitate the availability of these arrangements as the applicable general property law (lex generalis) is not adequate. Therefore, interpreting the special legal regime[3] in such a manner that it would (even more than the lex generalis) hinder the finance and lease of aircraft and engines is by definition unjustified as such a view clearly contravenes its main goal.

Nevertheless, practice shows that the legal and practical implications of cross border engines-related operational or financial lease transactions are not always understood. More precisely, some lawyers do not comprehend the fundamental legal differences between the regimes of the ‘Convention on the international recognition of rights in aircraft’ (Geneva Convention, 1948) and the Cape Town Convention. When a finance or lease transaction is considered, the financier, lessor and operator must analyse the legal and economic risks that are involved. At that time, determining the type of regime of the applicable aviation treaty plays a pivotal role. The fundamental discrepancies between the two existing conventions are addressed subsequently.

It must be kept in mind at all times that the Geneva Convention is not a substantive property law treaty. In this respect, the following has been submitted:

“It must be remembered that in the Geneva Convention there is no intention or attempt to achieve the international unification of air law which is inherent to the other Conventions. Since the subject dealt with was too complex, it was enough to establish certain principles concerning the recognition of rights in aircraft, and to refer frequently to the variety of national laws to resolve the numerous problems concerning details which might arise in this respect. Thus, the Convention was confined to binding member states only with regard to certain rules which constituted an urgent response. Since complete codification of financing on an international basis would, at that time, have been premature”.[4]

In other words, the Geneva Convention does not envision to establish a uniform international substantive property regime. Therefore, it does not cover the creation, validity, effects and enforcement of consensually or non-consensually created rights in aircraft. Consequently, no proprietary rights can be derived from its regime. As its name indicates, it merely requires that its Contracting States recognise four[5] broadly defined categories of contractually created rights in the specific aircraft.[6] For this purpose the term aircraft extends to its airframe, engines and all other things, provided that they are intended for use in the (specific) aircraft. As it was not an aviation-related uniform substantive law treaty, from the day that the Geneva Convention was realised, it was considered to be a provisional regime. Its draftsmen and national lawmakers agreed that as soon as possible such a convention had to be realised. However, it took until 2001 when the Cape Town Convention was realised. Besides, the Geneva Convention does not apply to non-contractually constituted rights in aircraft.[7] This fact is significant, as an installed engine becomes, or does not become, a component part of a specific aircraft by operation of law. Consequently, the Geneva Convention does not cover the matter of the accession of aircraft engines per se. Besides, the primary goal of the Geneva Convention is, as a conflict of laws treaty and in its limited way, to enhance the international financing of aircraft. Evidently, the suggested interpretation of article XVI would frustrate its scope. This fact is corroborated by the Minutes and Documents of the ICAO Legal Committee.[8] Accordingly, the view that the Geneva Convention covers the question whether the engines are component parts of the certain aircraft is inconsistent with its scope and intent.

Nonetheless, several legal practitioners, particularly in Denmark and the European Netherlands, persist that article XVI of the Geneva Convention would endorse the accession doctrine. Anecdotal evidence indicates that this has convinced the international aviation finance and lease practice that leasing engines is a major economic risk. For instance, one of the largest engines and aircraft lease compa- nies[9] expresses its concern in an important financial document. This paper explicitly refers to European Netherlands, Finland, Greece and Jamaica. Consequently, the accession doctrine had a devastating impact on the global aviation practice. See particularly the unjustifiable consequences of the Danish Court case Cimber Sterling (2013).[10] To a large extent, the ruling was based on the wrongful interpretation of article XVI of the Geneva Convention. This is because the litigating parties had pleaded that the treaty would, somehow, dictate the accession doctrine to aircraft engines. The Danish case has seriously impacted the worldwide aviation finance and lease market. Also in the United States the application of the Geneva Convention in respect to the engines issue has led to confusion in the Federal Bankruptcy Courts.

5

The present publication reiterates that the Geneva Convention does not provide a uniform substantive aviation property law regime in general and that it does not cover the accession of engines problem in particular.

The Cape Town Convention endorses the international opinio iuris communis that engines are distinct aircraft objects. The international aviation industry regards aircraft engines as objects which can be financed and leased separately from the aircraft (airframe). Regardless whether these objects are attached to the aircraft. The prevailing legal opinion of the international aviation community is based on the views of the international organisations which supported the realisation of the Cape Town Convention. These institutions are the International Civil Aviation Organization (ICAO representing states), International Institute for the Unification of Private Law (UNIDROIT representing states) and International Air Transport Association (IATA representing airlines). In addition, as is stated in Sect. 21.4, supra, the Aviation Working Group represents the interests of the international aviation finance and lease sector. This group played an important role in the realisation of the treaty. The international prevailing legal opinion submits that the possibility that under all circumstances the ownership of an engine may be involuntarily transferred to another party is a major economic risk. This is because these objects are very expensive. Furthermore, engines are extremely mobile units, which are often financed and leased apart from the airframe. Besides, they are very often interchanged within an airline’s fleet of aircraft. In addition, at present groups of airlines have concluded engine pooling agreements which have direct contacts with the problem-states where the accession doctrine is allegedly applicable.

Therefore, the Protocol clarifies:

“Ownership or another right or interest in an aircraft engine shall not be effected by its installation on or removal from an aircraft” (article XIV(3) Protocol-Modification of Priority Provisions).”

It is concluded that the engine mechanism envisioned by the Cape Town Convention considers airframes and engines to be distinct aircraft objects which can be financed and leased separately. Accordingly, distinct international interests can be created in the engines. Moreover, these international interests can be registered at the International Registry. After registration, the international interest in an engine can be enforced (by the offered remedies including repossession) against third-parties in the insolvency of the debtor. The Cape Town Convention supersedes the Geneva Convention where the latter treaty relates to aircraft as defined in the Protocol, and to aircraft objects. However, with respect to rights or interests not covered or affected by the former instrument, the latter is not superseded (article XXIII Protocol).

In the European Netherlands the doctrine of accession is not applicable to engines.[11] Nonetheless, some local lawyers seem to argue conversely.[12] Just for the sake of argumentation, it is assumed that the accession theory would apply in this jurisdiction. The issue arises here that the Cape Town Convention is only not applicable in the European Netherlands. On the other hand, it does apply in all the other territorial units of the Kingdom of the Netherlands since 1 September, 2010.[13] To circumvent the alleged engine-related problems the certain aircraft can be registered as to nationality in the Caribbean Netherlands (particularly the jurisdiction Bonaire) where the Cape Town Convention applies.[14] Since 10 October, 2010, jointly the Caribbean Netherlands and the European Netherlands form the jurisdiction ‘the Netherlands’. This means that the aircraft obtains the flag (ICAO Prefix ‘PH’) of the Netherlands. Besides, under the laws of the European Union[15] this aircraft can be operated permanently in all the other Member States of the European Union. In this scenario, the doctrine of accession would definitely not create engine finance and lease problems in the European Netherlands.

  • [1] 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, 31 October, 1931, pp. 40-41. e
  • [2] See for example G. Elbing, Sind Triebwerke wesentliche Bestandteile von Flugzeugen?, ZLW,1995, p. 387, V. Sagaert,De UNIDROIT Conventiebetreffende international zakelijke rechten oproerend uitrustingsmaterieel, 2002-1; De UNIDROIT Conventie, Een laatste strohalm voor deBelgische luchtvaartindustrie, Rechtskundig Weekblad, 2002, 1367.H. Schlegel, Eigentumserwerb,1938, pp. 60-64. See also the Court ruling Urteil des Hanseatischen Oberlandesgericht, Hamburg,8 October 1931, Zivilsenat Bf. II 299/31.
  • [3] See for example the special legal regime covering the possibility of accession of the parts to thecertain aircraft, which is provided by Article 8:3a(2) of the Civil Code of all the territorial units ofthe Kingdom of the Netherlands. This provision dictates that no accession of engines takes placeand that they are not component parts of the (particular) aircraft. Nevertheless, a few practitionersin the European Netherlands keep insisting the opposite while their view clearly hinders thefinance and lease of aircraft engines. See further below.
  • [4] N. Matteesco-Matte, Treatise on Air-Aeronautical law, 1981, p. 566 (emphasis added).
  • [5] “The Contracting States undertake to recognise: (a) rights of property in aircraft; (b) rights toacquire aircraft by purchase coupled with possession of the aircraft; (c) rights of possession ofaircraft under leases of six months or more; (d) mortgages, hypotheques and similar rights in aircraft which are contractually created as security for payment of an indebtness” (article I (1) (a-d)Geneva Convention).
  • [6] “Article XVI of the Geneva Convention describes the aircraft as follows: “For the purpose of thisConvention the term ‘aircraft’ shall include the airframe, engines, propellers, radio apparatus, andall other articles intended for use in the aircraft whether installed therein or temporarily separatedthere from”. It is noted that this is not a legal definition.
  • [7] B.P. Honnebier and A.P. Berkhout, TPIR, 2014-10, p. 30; 2012-6, 15; JLR, 2012-2, 38.Honnebier, Clarifying the alleged issues concerning the financing of aircraft engines, ZLW, 20073, 383; A. van de Velde, TVR, 2005, 44.
  • [8] See minutes and documents of the ICAO Legal Committee regarding the realisation of theGeneva Convention, ICAO Doc, 4635, March 1948, pp. 35-37 119-120.
  • [9] See Blade engine securitization, Private placement memorandum, p. 30, December 2006.It isnoted that this document also refers to some other jurisdictions. However, these countries haveadopted the Cape Town Convention which means that the aircraft engines dispute no longer existsthere. See also Irish Stock Exchange, 2006.
  • [10] The Cimber Sterling ruling by the Bankruptcy Court of S0nderborg in Denmark, cases BS SKSk-1292/2012, 1301/2012, 1302/2012, 1303/2012, 1304/2012 and 1306/2012. The Danish Courtwrongfully applied article XVI Geneva Convention. Its ruling had a devastating impact on theglobal aviation community. See B.P. Honnebier, JLR, 2014-3, p. 61. It is noted that Denmark hasadopted the Cape Town Convention in 2015. See the UNIDROIT website. However, this instrument does not govern the mortgage, lease and other agreements which were entered into before itentered intio force in this country.
  • [11] In the Kingdom of the Netherlands there should be no issue concerning the question whetheraircraft engines are component parts of the certain aircraft. All the Courts, special aviation financelaws and prevailing legal opinion as formulated by the Legal Department of KLM conclude thatthere is no accession of aircraft engines. See the Supreme Court of the Netherlands (Hoge Raad),26 March, 1936, Nederlandse Jurisprudence (NJ), 1936, 757; Supreme Court of the Netherlands,NDS Provider, C06/082, 2008, 177; AAR Aircraft & Engine Group/Aerowings, Court of AppealsDen Bosch 2003-56; Volvo Aero Leasing/AVIA Air, Court of First Instance of Aruba, 25 June,2003, no. 121. www.rechtspraak.nl The view of the combined Courts of First Instance of theEuropean Netherlands is stated in their ‘Handbook for precautionary arrests’ (Beslagsyllabus),January 2016: no accession of engines occurs! This book is written by and for the judges and theirview creates uniformity in cases concerning the dispute whether engines can be precautionaryattached. See also B.P. Honnebier, TVR, ZLW, 2007-3, pp. 383-390; J.W. Wichers, 2002, pp. 13,36, 37, 38, 48, 78, 102, 103, 104; C.H. Sieburgh, Toerekening van een onrechtmatige daad, 2000,pp. 202, 208; R.J.C. Flach, Scheepsvoorrechten, 2001, p. 206; B.G.P. Rogmans, Verkeersopvattingen,2007, pp. 22, 28, 46; F.A. van Zoest, TVR 2002-6, pp. 183 and188; een fout van de wetgever?,TVR 2002-6, pp. 183 and188; E.B. Rank-Berenschot, Het luchtvaartuig als object van het vermo-gensrecht, WPNR, no. 6198, 1995, pp. 691, 695.
  • [12] M.H. ten Wolde and H.B. Reehuis, Zekerheid in de wolken?, Liber Amicorum Wim Reehuis,2014, p. 489.
  • [13] For a more detailed analysis of the former and present different territorial units of the Kingdomof the Netherlands and the application therein of the Cape Town Convention, see the contributionto this book by S. van Erp. See also the documents which were lodged by the Kingdom of theNetherlands and deposited at the Secretariat of UNIDROIT. www.unidroit.org/nationalinfo-2001capetown
  • [14] B.P. Honnebier and A.P Berkhout, TPIR, 2012-6, p. 15; JLR, 2012-2, p. 38.
  • [15] J. Balfour and R. Ricketts, Aircraft use, registration and leasing in the EC, ASL, 1993-1, p. 25.
 
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