Cape Town: Rail Just Around the Bend, Satellites Just over the Horizon

The goal of the Cape Town Convention is to establish greater protections and certainty for creditors leasing and financing certain high-value mobile equipment, which, in turn, it is hoped, will reduce the cost of financing such equipment in countries where creditors' rights, particularly the rights of foreign creditors, may not be so favorable or certain. In the case of aircraft finance, ratification of the Convention and the Aircraft Protocol has already yielded tangible results. The Export-Import Bank of the United States has agreed, for a limited time (presently through March 31, 2007), to reduce its exposure fee by one-third for new U.S.-manufactured large commercial aircraft financed for airlines located in countries that have ratified the Convention and the Aircraft Protocol provided that certain elections are made under the Aircraft Protocol at the time of ratification.

Since the adoption and ratification of a protocol governing the leasing and financing of rolling stock may soon be upon us and later followed by the adoption and ratification of a protocol for space assets, companies and financial institutions involved in rail transportation and space satellites should consider how the Cape Town Convention may affect their business, particularly their leasing and financing transactions.

One of the most prominent features of the Cape Town Convention is the establishment of a public, international electronic registry for registering interests in the subject equipment. As is the case with the aircraft international registry, each of the rail international registry and the space asset international registry will be a one-stop 'location' open 24 hours a day, 365 days a year, readily accessible to anyone with access to the Internet. As presently contemplated, these international registries would permit lessors, conditional sellers, and mortgagees to record and perfect by way of the Internet their interests in leased equipment, equipment sold under a conditional sale or title retention agreement, and mortgaged equipment. No longer may it be necessary to register leases or liens against rail cars in each country in which the cars may be located. Filings with the Registrar General of Canada and the U.S. Surface Transportation Board for rolling stock used in North America may some day be replaced with a single electronic filing with the rail international registry. I stress the use of the word 'may' because, for example, adoption of the Aircraft Protocol in the United States did not eliminate the need to record aircraft leases and mortgages with the FAA in order to perfect interests in U.S. registered aircraft; leases and mortgages on U.S. registered aircraft must now be registered with both the FAA and the Aircraft International Registry.

As in the case of the registration of interests, parties will not have to rely on local counsel to search for pre-existing leases, conditional sale agreements, and liens registered on the rail international registry. Anyone with access to the Internet will be able to do so.

As of yet, no organization has been appointed to supervise or operate a rolling stock international registry. The aircraft international registry, which has been up and running since March 1, 2006, is supervised by the ICAO (International Civil Aviation Organization) and is operated by Aviareto, a joint venture between SITA SC and the Irish government.

In addition to the establishment of international registries, the Cape Town Convention may change debtor and creditor rights and remedies in the countries that ratify it and any of the corresponding equipment protocols. For example, the Convention contains, and possibly the final rolling stock and satellite protocols will also contain, new laws concerning the remedies of lessors and secured lenders following a lessee or debtor default or bankruptcy, particularly with respect to repossession of the equipment at issue. The Convention also establishes priorities among multiple creditors, much in the way that the Uniform Commercial Code does, validates and makes enforceable sovereign immunity waivers and choice of law provisions, and legislates the requirements for making assignments of leases and mortgages enforceable against lessees and mortgagors. At the time of ratification, each country may, however, elect to opt in or out of as well as select among multiple options in a limited number of the provisions of the Convention and the equipment specific protocols. Thus, when analyzing the rights and remedies of parties within a particular Cape Town Convention country, it is important to check that country's declaration of adoption for variations to or elections made under the Convention and related protocol.

In its current draft form, the rail protocol would cover all 'railway vehicles' and all related operating and technical data. Railway vehicles are defined as 'vehicles moveable on or directly above a fixed railway track or guideway, or fixed superstructures or racks installed or designed to be installed on such vehicles, including all traction systems, engines, brakes, axles, bogies, and pantographs, and in each case including accessories and other components, equipment and parts installed or incorporated therein or attached thereto.' Interests covered by the Cape Town Convention would be those granted in railway equipment by persons or companies situated in a ratifying country, regardless of the location of the equipment or the jurisdiction of the party receiving the interest. If the rail equipment is, nonetheless, located in a non-Cape Town country, the party receiving the interest therein may very well want to perfect its interests under the laws of such non-Cape Town jurisdiction if there is any risk that it would have to rely on the courts or laws of that jurisdiction to enforce its rights in the equipment.

Unidroit is being assisted in its efforts with regard to the rail protocol by the Rail Working Group. The Rail Working Group's members include HSBC Rail (UK) Limited, Bombardier Transportation, and HSH Nordbank. The diplomatic convention to adopt the rail protocol is scheduled for Feb. 12-23, 2007. As presently drafted, the rolling stock protocol would become effective three months after the third country ratifies it. It took two years after adoption for the first three countries to ratify the Cape Town Convention and the Aircraft Protocol. Assuming such ratifications have helped pave the way for ratification of a rail protocol, it is possible that the Convention could be applicable to rolling stock transactions as early as some time in 2008 or 2009.

Given the possibility of ratification of a rail protocol in the relatively near future, the rolling stock leasing and financing industry should take into consideration the effects of any future application of the Cape Town Convention to current deals. In ratifying the rail protocol, individual countries will have the option of having certain of the provisions relating to perfection and priority applied retroactively to pre-existing transactions. In anticipation of such, lessors, sellers in conditional sale/title retention deals, and secured lenders should make sure that the deals they are presently closing contain further assurance clauses that would obligate their counterparties to make whatever international registry registrations may be necessary to maintain such lessor's, seller's, or secured lender's interests and priorities should the Convention be applied retroactively. It is notable, however, that none of the countries that have ratified the Aircraft Protocol have opted for retroactive application. Nonetheless, the possibility of such in any future ratifications should be addressed in the transactions being documented today.

The protocol for space assets lags behind that for rolling stock. It is being studied and drafted by a committee of governmental experts and is not yet ready for presentation to a diplomatic conference for adoption. At least one more working session of the government experts is anticipated, the dates for which have not yet been set by Unidroit. Unidroit is awaiting additional responses to a questionnaire that it sent out to its member governments on the issue of creditor remedies in the case of space assets performing a governmental or public service. Unidroit is also seeking to engage members of the space asset financial community in the development of the space asset protocol and space international registry. To that end, Unidroit organized a one-day forum held last April and hosted by the Royal Bank of Scotland. Assisting in these efforts is the Space Working Group, whose sponsors and contributing members include Alcatel Alenia Space France, Alcatel Alenia Space Italia, BNP Paribas Bank, The Boeing Company, The Royal Bank of Scotland, Telespazio S.p.A., Baker & McKenzie, Lovells, Milbank, Tweed, Hadley & McCloy, LLP and White & Case LLP.

The current, preliminary draft of the space protocol describes space assets rather broadly as:

(i) any identifiable asset that is intended to be launched and placed in space or that is in space;

(ii) any identifiable asset assembled or manufactured in space;

(iii) any identifiable launch vehicle that is expendable or can be reused to transport persons or goods to and from space; and

(iv) any separately identifiable component forming part of an asset referred to in the preceding sub-paragraphs or attached to or contained within such asset.

The scope of what constitutes a 'space asset' as well as creditors' rights in repossessing satellites being used for governmental or public purposes are likely to be the subjects of further study and discussion by both the committee of governmental experts and the Space Working Group.

Unidroit is considering the feasibility of developing additional protocols under the Cape Town Convention to cover agricultural, mining, and construction/civil engineering equipment. To that end, the Unidroit Governing Counsel has requested the Unidroit Secretariat to undertake preliminary research, including the collection of information from member and non-member countries about those types of equipment and the methods by which they are financed. It is expected that the results of this survey will be presented to the Governing Counsel of Unidroit at its meeting in April 2007.

Unidroit is an independent intergovernmental organization located in Rome and supported by its 50 member countries. Its purpose is 'to study needs and methods for modernizing, harmonizing and coordinating private and, in particular, commercial law' as between countries and groups of countries. For more information on Unidroit, the Cape Town Convention, the Aircraft Protocol, and the various other equipment leasing and financing protocols in the works, visit Unidroit's Web site at http://www.unidroit.org/. The full text of the Cape Town Convention and the current drafts of the Rail and Space Protocols can be found at that site.

James R. Cairns is a partner in the Los Angeles office of White & Case LLP, where his practice has an emphasis on leasing and equipment finance. He has represented and advised lessors, lessees, lenders, intermediaries, and equity interests in a wide variety of equipment leasing transactions. He can be reached at [email protected].

For the last nine months, participants in the aircraft leasing and finance industry have been dealing with the newly formed international registry for the registration of interests in aircraft and the changes in substantive law governing aircraft sale, lease, and finance transactions brought about by the ratification of the Cape Town Convention on International Interests in Mobile Equipment and the related Aircraft Protocol. The Convention and Aircraft Protocol were developed and are being promoted by Unidroit and the Aircraft Working Group, an organization whose members include Boeing, Airbus, General Electric, and Citibank. So far, 11 countries, including the United States, have ratified both the Convention and the Aircraft Protocol. Next up for the Cape Town Convention is its application to rolling stock and possibly later satellites and other space assets.

Unidroit and the Intergovernmental Organisation for International Carriage by Rail have scheduled for this February in Luxembourg a diplomatic conference for the finalization and adoption by Unidroit's member countries of a rail protocol that would make the Cape Town Convention applicable to the leasing and financing of rolling stock. The Cape Town Convention and the rail protocol would then govern rolling stock leasing and financing transactions in each country that later ratifies them.

What is the Cape Town Convention? It is an international convention governing the rights of parties in certain mobile equipment through the use of international registries and the enactment of substantive laws governing the rights of secured lenders, lessors, and others in such equipment. The Convention was adopted by 21 of Unidroit's member countries at a diplomatic conference in Cape Town, South Africa in November 2001. Its signatories include the United States, Canada, France, Germany, and the United Kingdom. The Convention alone, however, does not apply to any particular equipment. It is designed so that particular types of mobile equipment become subject to its provisions by way of adoption and ratification of individual 'protocols,' the first of which being the Aircraft Protocol adopted at the same time as the Convention. The Aircraft Protocol first became effective in seven countries, including the United States and Ireland, on March 1, 2006 and is now effective in 11 countries.

The goal of the Cape Town Convention is to establish greater protections and certainty for creditors leasing and financing certain high-value mobile equipment, which, in turn, it is hoped, will reduce the cost of financing such equipment in countries where creditors' rights, particularly the rights of foreign creditors, may not be so favorable or certain. In the case of aircraft finance, ratification of the Convention and the Aircraft Protocol has already yielded tangible results. The Export-Import Bank of the United States has agreed, for a limited time (presently through March 31, 2007), to reduce its exposure fee by one-third for new U.S.-manufactured large commercial aircraft financed for airlines located in countries that have ratified the Convention and the Aircraft Protocol provided that certain elections are made under the Aircraft Protocol at the time of ratification.

Since the adoption and ratification of a protocol governing the leasing and financing of rolling stock may soon be upon us and later followed by the adoption and ratification of a protocol for space assets, companies and financial institutions involved in rail transportation and space satellites should consider how the Cape Town Convention may affect their business, particularly their leasing and financing transactions.

One of the most prominent features of the Cape Town Convention is the establishment of a public, international electronic registry for registering interests in the subject equipment. As is the case with the aircraft international registry, each of the rail international registry and the space asset international registry will be a one-stop 'location' open 24 hours a day, 365 days a year, readily accessible to anyone with access to the Internet. As presently contemplated, these international registries would permit lessors, conditional sellers, and mortgagees to record and perfect by way of the Internet their interests in leased equipment, equipment sold under a conditional sale or title retention agreement, and mortgaged equipment. No longer may it be necessary to register leases or liens against rail cars in each country in which the cars may be located. Filings with the Registrar General of Canada and the U.S. Surface Transportation Board for rolling stock used in North America may some day be replaced with a single electronic filing with the rail international registry. I stress the use of the word 'may' because, for example, adoption of the Aircraft Protocol in the United States did not eliminate the need to record aircraft leases and mortgages with the FAA in order to perfect interests in U.S. registered aircraft; leases and mortgages on U.S. registered aircraft must now be registered with both the FAA and the Aircraft International Registry.

As in the case of the registration of interests, parties will not have to rely on local counsel to search for pre-existing leases, conditional sale agreements, and liens registered on the rail international registry. Anyone with access to the Internet will be able to do so.

As of yet, no organization has been appointed to supervise or operate a rolling stock international registry. The aircraft international registry, which has been up and running since March 1, 2006, is supervised by the ICAO (International Civil Aviation Organization) and is operated by Aviareto, a joint venture between SITA SC and the Irish government.

In addition to the establishment of international registries, the Cape Town Convention may change debtor and creditor rights and remedies in the countries that ratify it and any of the corresponding equipment protocols. For example, the Convention contains, and possibly the final rolling stock and satellite protocols will also contain, new laws concerning the remedies of lessors and secured lenders following a lessee or debtor default or bankruptcy, particularly with respect to repossession of the equipment at issue. The Convention also establishes priorities among multiple creditors, much in the way that the Uniform Commercial Code does, validates and makes enforceable sovereign immunity waivers and choice of law provisions, and legislates the requirements for making assignments of leases and mortgages enforceable against lessees and mortgagors. At the time of ratification, each country may, however, elect to opt in or out of as well as select among multiple options in a limited number of the provisions of the Convention and the equipment specific protocols. Thus, when analyzing the rights and remedies of parties within a particular Cape Town Convention country, it is important to check that country's declaration of adoption for variations to or elections made under the Convention and related protocol.

In its current draft form, the rail protocol would cover all 'railway vehicles' and all related operating and technical data. Railway vehicles are defined as 'vehicles moveable on or directly above a fixed railway track or guideway, or fixed superstructures or racks installed or designed to be installed on such vehicles, including all traction systems, engines, brakes, axles, bogies, and pantographs, and in each case including accessories and other components, equipment and parts installed or incorporated therein or attached thereto.' Interests covered by the Cape Town Convention would be those granted in railway equipment by persons or companies situated in a ratifying country, regardless of the location of the equipment or the jurisdiction of the party receiving the interest. If the rail equipment is, nonetheless, located in a non-Cape Town country, the party receiving the interest therein may very well want to perfect its interests under the laws of such non-Cape Town jurisdiction if there is any risk that it would have to rely on the courts or laws of that jurisdiction to enforce its rights in the equipment.

Unidroit is being assisted in its efforts with regard to the rail protocol by the Rail Working Group. The Rail Working Group's members include HSBC Rail (UK) Limited, Bombardier Transportation, and HSH Nordbank. The diplomatic convention to adopt the rail protocol is scheduled for Feb. 12-23, 2007. As presently drafted, the rolling stock protocol would become effective three months after the third country ratifies it. It took two years after adoption for the first three countries to ratify the Cape Town Convention and the Aircraft Protocol. Assuming such ratifications have helped pave the way for ratification of a rail protocol, it is possible that the Convention could be applicable to rolling stock transactions as early as some time in 2008 or 2009.

Given the possibility of ratification of a rail protocol in the relatively near future, the rolling stock leasing and financing industry should take into consideration the effects of any future application of the Cape Town Convention to current deals. In ratifying the rail protocol, individual countries will have the option of having certain of the provisions relating to perfection and priority applied retroactively to pre-existing transactions. In anticipation of such, lessors, sellers in conditional sale/title retention deals, and secured lenders should make sure that the deals they are presently closing contain further assurance clauses that would obligate their counterparties to make whatever international registry registrations may be necessary to maintain such lessor's, seller's, or secured lender's interests and priorities should the Convention be applied retroactively. It is notable, however, that none of the countries that have ratified the Aircraft Protocol have opted for retroactive application. Nonetheless, the possibility of such in any future ratifications should be addressed in the transactions being documented today.

The protocol for space assets lags behind that for rolling stock. It is being studied and drafted by a committee of governmental experts and is not yet ready for presentation to a diplomatic conference for adoption. At least one more working session of the government experts is anticipated, the dates for which have not yet been set by Unidroit. Unidroit is awaiting additional responses to a questionnaire that it sent out to its member governments on the issue of creditor remedies in the case of space assets performing a governmental or public service. Unidroit is also seeking to engage members of the space asset financial community in the development of the space asset protocol and space international registry. To that end, Unidroit organized a one-day forum held last April and hosted by the Royal Bank of Scotland. Assisting in these efforts is the Space Working Group, whose sponsors and contributing members include Alcatel Alenia Space France, Alcatel Alenia Space Italia, BNP Paribas Bank, The Boeing Company, The Royal Bank of Scotland, Telespazio S.p.A., Baker & McKenzie, Lovells, Milbank, Tweed, Hadley & McCloy, LLP and White & Case LLP.

The current, preliminary draft of the space protocol describes space assets rather broadly as:

(i) any identifiable asset that is intended to be launched and placed in space or that is in space;

(ii) any identifiable asset assembled or manufactured in space;

(iii) any identifiable launch vehicle that is expendable or can be reused to transport persons or goods to and from space; and

(iv) any separately identifiable component forming part of an asset referred to in the preceding sub-paragraphs or attached to or contained within such asset.

The scope of what constitutes a 'space asset' as well as creditors' rights in repossessing satellites being used for governmental or public purposes are likely to be the subjects of further study and discussion by both the committee of governmental experts and the Space Working Group.

Unidroit is considering the feasibility of developing additional protocols under the Cape Town Convention to cover agricultural, mining, and construction/civil engineering equipment. To that end, the Unidroit Governing Counsel has requested the Unidroit Secretariat to undertake preliminary research, including the collection of information from member and non-member countries about those types of equipment and the methods by which they are financed. It is expected that the results of this survey will be presented to the Governing Counsel of Unidroit at its meeting in April 2007.

Unidroit is an independent intergovernmental organization located in Rome and supported by its 50 member countries. Its purpose is 'to study needs and methods for modernizing, harmonizing and coordinating private and, in particular, commercial law' as between countries and groups of countries. For more information on Unidroit, the Cape Town Convention, the Aircraft Protocol, and the various other equipment leasing and financing protocols in the works, visit Unidroit's Web site at http://www.unidroit.org/. The full text of the Cape Town Convention and the current drafts of the Rail and Space Protocols can be found at that site.

James R. Cairns is a partner in the Los Angeles office of White & Case LLP, where his practice has an emphasis on leasing and equipment finance. He has represented and advised lessors, lessees, lenders, intermediaries, and equity interests in a wide variety of equipment leasing transactions. He can be reached at [email protected].