case for a commercial orientation to the proposed Unidroit Convention as applied to aircraft equipment, The

Law and Policy in International Business, Fall 1999 by Wool, Jeffrey

The intergovernmental negotiations relating to the proposed Unidroit Convention (Convention1), as applied2 by the Aircraft Protocol,3 have reached a critical juncture. This is because States are now focusing on this central question: to what extent should the final instrument remain commercial in orientation?

This project started4 under the auspices of the International Institute for the Unification of Private Law (Unidroit).5 The International Civil Aviation Organization (ICAO) subsequently became involved in the process.6 These two organizations have co-sponsored the recent negotiations through joint sessions of the Unidroit Committee of Governmental Experts and a subcommittee of the ICAO Legal Committee.

The project, as it relates to aircraft, aims to facilitate the extension and reduce the cost of aviation credit. The structure of the treaty instruments consists of a base Convention that applies to certain categories of high-value mobile equipment. The Convention affects a particular category of mobile equipment through the entry into force of a protocol covering that particular type of object.7 It applies only between contracting States to that protocol8 and is subject to the terms of that protocol.9 The Convention essentially provides a general conceptual framework, but the specific protocols control. The Aircraft Protocol covers transactions involving a specifically identifiable "aircraft object"10 that sophisticated parties are likely to finance and that will be used internationally.

The treaty instruments set out rules for the creation, perfection, priority and enforcement of an international interest. An international interest is a proprietary interest in mobile equipment created by complying with the requirements of the Convention/Aircraft Protocol.11 The interest is "autonomous" in the sense that it is not derived from or dependent upon any particular national law.12 An interest created under the provisions of the Convention/Aircraft Protocol will have status and be enforceable, as implemented, as a matter of international law, and, where required, by national legal instruments.13

This article will make the case for maintaining a highly commercial approach to the proposed treaty instruments.14 Part I will argue generally that in this context and through use of the reservation mechanism, commercial and diplomatic objectives are complementary Next, Part II will consider the relationship between the structure of the instruments and the commercial imperative. Part III will then consider the particularly important provisions in the Aircraft Protocol viewed from a commercial vantage point.15 Finally, the article will conclude by suggesting possible steps to promote the commercial approach.

1. COMPLEMENTARITY OF COMMERCIAL AND DIPLOMATIC OBJECTIVES

A. Preliminary Objectives and the Need for Guiding First Principles

The proposed Convention and the Aircraft Protocol have gained support from the aviation sector16 as a direct function of their potential to produce commercial and economic benefits.17 Abstract law harmonization objectives have played a very limited role to date, partially because of extant international aviation law that addresses the lex sites problem in the aviation context.81

States are now sharpening their individual and collective focus on the texts. Not surprisingly, they are inevitably facing the difficult issues associated with complex, multilateral law reform, including legal system balance.19 States would be greatly assisted by a clearly articulated, overarching objective-a source of guiding first principles. General acceptance of such principles may limit and even provide solutions to drafting and negotiating difficulties.

What are the basic objectives of the Convention/Aircraft Protocol? Are they complementary, and, if so, is it possible to formulate an overarching objective capable of generating useful first principles?

There are two basic objectives of the Convention/Aircraft Protocol. First, the final instruments should facilitate the asset based financing and leasing of aircraft equipment, increasing the availability and reducing the cost of aviation credit.20 This goal is its commercial objective. Second, the final instruments must generate a high level of international consensus, particularly among States with significant objective interests in the sale and financing of aircraft equipment.21 This goal is the project's diplomatic objective.

B. The Commercial Objective. Facilitating Asset-Based Financing and Leasing of Aircraft Equipment

As noted in the Economic Impact Assessment, "[a] sset-based financing and leasing are efficient forms of credit extension in which prompt recourse to the value of underlying assets (e.g., aircraft equipment) is a central feature in the analysis of overall risk in transactions."22 In the simplest commercial terms, by virtue of the asset value, the "risk of loss" to a financier is lower than the "risk of default" by its counterparty.23 All other things being equal, lower risk results in lower cost.