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Danish accession to the Cape Town Convention

The Cape Town Convention

The Convention on International Interests in Mobile Equipment, 2001 ("Cape Town Convention") as supplemented with respect to aircraft equipment by the Protocol on Matters Specific to Aircraft Equipment, 2001 (the 'Protocol', and the Cape Town Convention is jointly with the Protocol referred to as the "Convention") is playing a key role in the aircraft finance and leasing industry. The Convention was expressly designed to reduce transaction risk, to enhance commercial predictability, facilitating, and reducing the cost, of aviation credit.

In order to address the wide range of differences which exist in the different legal systems (e.g. common law system versus civil law systems), as well as factual issues, the accession approach taken by the Convention provides for a certain degree of flexibility and optionality: A "candidate state" shall decide whether to make a number of declarations to opt-in or opt-out of certain aspects of the Convention. While some declarations are purely of technical nature, certain "core declarations" will inevitably determine whether a ratification of a specific Contracting State is measured by the industry as 'valuable' or 'neutral' in terms of enhancing the legal environment in such Contracting State.

The OECD ASU 2011

In order to implement a standard process to assess the quality of a Contracting State's ratification, the OECD developed a matrix for such a quality test under the Sector Understanding on Export Credits for Civil Aircraft ("ASU 2011") , a gentlemen's agreement entered into between Australia, Brazil, Canada, the EU, Japan, South Korea, New Zealand, Switzerland and the United States. The results of this quality test are used by export credit agencies in order to, inter alia, determine if the country having ratified the Convention the premium (or "risk price") to be charged for providing export credit support in aircraft finance transactions.

The ASU 2011 provides for certain minimum premium rates which can be reduced by up to 10 % if the Convention state borrower in question qualifies to be listed in the "Cape Town List". In order to be so listed, the following two conditions must be satisfied besides the basic requirement that such country must be a Convention state:

  1. The country must have "implemented the Cape Town Convention, including the qualifying declarations, in its laws and regulations, as required, in such a way that the Cape Town Convention commitments are appropriately translated into national law"; and
  2. the country must have made the "qualifying declarations". The OECD matrix identifies certain "core declarations" ('qualifying declarations') which are required to be made – or not to be made – in order to qualify for a discount in the export credit agency's premium, the more important relating to remedies, insolvency, the use of IDERAS, freedom of choice of law, and easy access to enforcement.

Denmark's accession

Denmark acceded to the Convention with effect from 1 February 2016.

Generally, the implementation appears to have ensured that the Convention will prevail if ever in conflict with national law. In order to avoid conflict with existing legislation, the act on the implementation of the Convention amends certain other acts with the stipulation that said acts should only apply to the extent that the Convention does not. That applies for instance to the former registration regime in respect of rights over Danish registered aircraft.

As a peculiarity, while being an EU member state, the accession of the Convention by the EU does not apply to Denmark which is due to the Danish opt-out of the Home and Justice Affairs of the EU under Edinburgh Agreement of 1992. Denmark has therefore made (or refrained from making) the declarations in respect of the matters otherwise covered by the EU's accession.

Denmark has made the Alternative A-declaration with a waiting period of 60 days, the IDERA-declaration and the leave-of-court declaration, each as required under the ASU 2011. Similar to the rest of the EU member states, the choice of law-declaration has not been made. In respect of Denmark, it follows from the 1980 Rome Convention on the Law Applicable to Contractual Obligations. For the other EU member states it follows from the Rome I Regulation in respect of the EU member states.

Denmark has not made the declaration for timely remedies (Art. X), but due to the Art. 54 (2)-declaration the timely remedies declaration is not required by ASU 2011.

The Brussels Regulation (Recast) applies in Denmark under a special agreement between Denmark and the EU. Denmark has therefore, in line with the EU's accession and the ASU 2011, declared not to apply Art. 13 and 43 to the extent that would be incompatible with the Brussels Regulation (Recast). As required by the ASU 2011, the declarations on the 1933 Rome Convention and lease remedy have not been made.

In its ratification process, Denmark has gone for the ASU 2011 recommendations, but it is yet to be determined whether the Danish declarations are deemed to fulfil the recommendations and qualify for the Cape Town List although it seems to be likely. Whereas Denmark no doubt meets the objective of the ASU 2011 qualifying declarations, the peculiarities around non-applicability of EU's accession in Denmark and Denmark's certain position in respect of the Rome I Convention and the Brussels Regulation (Recast), the determination is complicated to reach.

Other Danish special features

What seems to be a unique feature of the Danish implementation, is that it is no longer possible to register (new) rights (international interests) covered by the Cape Town Convention in the Danish Rights Registry (based on the Geneva Convention). Such international interests may only be registered in the International Registry. It seems that Convention countries (of which we are aware) still allow for rights to be registered in parallel with the domestic rights registry.

Consequently, the Danish Registry will need to verify whether a particular aircraft object is found in the International Registry and whether the object fulfils the definitions in the Protocol. Also, it has proved difficult in practice to handle certain transactions involving pre-existing rights registered with the Danish Rights Registry (which retains its priority under Danish law) as it is to be determined whether an amendment is to be treated as a new international interest (to be registered in the International Registry) or as an amendment to a pre-existing right (to be registered in the Danish Rights Registry). There is no firm guidance on this issue in the Convention, nor in the Danish act.

Denmark's accession does not formally cover the Faroe Islands and Greenland, both being autonomous areas within the Kingdom of Denmark. These areas are treated as separate territory units under the Convention. As Greenland and the Faroe islands do not have their own aircraft registries – they use the Danish National Registry – the Convention will still apply under Art. IV (1) of the Protocol to such aircraft (registered in a Contracting State). This extends to airframes only, not aircraft engines, making the application of the rules somewhat asymmetric.