Unidroit Convention on International Interests in Mobile Equipment

United Kingdom

Unidroit

Unidroit is the international institute for the unification of private law. It was set up to co-ordinate the private law of its 58 member states. The international conventions drawn up by Unidroit are designed to apply automatically in preference to a state's municipal law once that state has complied with all the requirements of its domestic law to bring the convention in to force.

Background

In 1988 the Canadian government asked Unidroit to prepare legal instruments regulating security and leasing of various categories of high-value mobile equipment. There were two main legal problems facing high-value mobile equipment. The first was that of the lex situs, where the location of a mobile asset will be used to determine the law governing security rights over that asset. The second problem is the wide range of legal regimes relating to security interests in personal property. Obtaining relief and self-help remedies may be much more difficult in some jurisdictions than in others. Together with the high-value of these assets, it was felt that an effective international regime was necessary to unify the laws in this area.

In 1997 a preliminary draft Unidroit Convention on International Interests in Mobile Equipment ("the Convention") was drafted. The Convention will provide for a new international interest in mobile equipment conditional upon the registration of that interest in an international register. The Convention is supplemented by various protocols for different categories of equipment. Each protocol will contain specific rules necessary to adapt the Convention to fit the particular financing matters in each category. A preliminary draft protocol on matters specific to aircraft equipment (the "Protocol") has also been drafted.

The Convention and Protocol contain certain mandatory provisions which will apply to all countries ratifying the convention. These provisions include the creation of the international registry system and regulatory framework. There will also be optional provisions which will apply where a particular state and the parties to the transaction so elect. These optional provisions consist of rules relating to a) insolvency; b) judicial remedies; c) non-judicial remedies; and d) choice of law. These optional provisions will enable contracting parties to have some freedom over the terms of their transactions.

The Convention

The Convention sets out the framework for the international regime of security interests for various types of mobile equipment. Each equipment-specific protocol will modify the Convention by containing provisions relating to the particular type of equipment.

The first chapter of the Convention concerns its sphere of application and some general provisions. An interest in mobile equipment is defined as an interest in an object which is a) granted by the chargor under a security agreement; b) vested in a person who is the seller under a conditional sale agreement; or c) vested in a person who is the lessor under a leasing agreement. The Convention is restricted to mobile equipment and is confined to equipment in existence at the time of the security agreement. There also needs to be a connection between the mobile equipment and one of the contracting states. Article 6 states that the parties may derogate from some of the provisions of the Convention by written agreement. There is also the possibility that a state may make a declaration altering or restricting some of the provisions of the Convention when signing up to it.

Article 8 states that an interest will be an international interest under the Convention where the Agreement for that interest:
a) is in writing;
b) relates to an object in respect of which the chargor, conditional seller or lessor has power to enter into the agreement;
c) enables the object to be identified in conformity with the applicable protocol; and
d) in the case of a security agreement, enables the secured obligations to be identified.

International interests derive solely from the Convention and are not dependent on national law.

Article 9 states that in the event of default in the performance of a secured obligation, the chargee may do any of the following:
a) take possessional control of the object;
b) sell or grant a lease of the object;
c) collect or receive any incoming profits arising from the management or use of any object; and
d) apply for a court order authorising or directing any of the above acts.

In the case of conditional sale and leasing agreements, the remedies specified are termination of the agreement and repossession.

The Convention requires that any default remedy is exercised in a commercially reasonable manner. Under Article 10 the chargee and all interested persons may agree, or the courts may order on the application of the chargee, that ownership of the object covered by the security interest shall vest in the chargee in satisfaction of the secured obligations. Under Article 12 the parties to the agreement may specify the type of default which will give rise to these remedies. If no type of default is specified they arise where there is a "substantial default". Any additional remedies permissible by law, including any other remedies agreed between the parties, may be exercised to the extent that they are not inconsistent with the Convention.

Articles 18-26 provide for an international registry to record international interests, prospective international interests, assignments and prospective assignments. There will also be a procedure to record the subordination of international interests.

Article 27 provides that any person who suffers loss by reason of any error caused by the international registry shall be entitled to compensatory damages for the loss incurred.

Article 28 provides that a registered interest will have priority over any interest subsequently registered as well as over any unregistered interests. This priority will still apply even if the registered interest was acquired or registered with actual knowledge of an earlier unregistered interest.

The buyer of an object will acquire their interest in that object subject to any registered interest but free from any unregistered interest, even if the buyer has actual knowledge of that unregistered interest. Article 29(1) states that an international interest will be valid against the debtor's trustee in bankruptcy if it has been registered in conformity with the Convention prior to the commencement of the bankruptcy.

Articles 30-38 provide for the assignment of international interests in accordance with the rules set down for the creation of an interest.

Provisional Articles 39 and 40 provide that a State may declare that categories of non-consensual interest should be registered as international interest and be treated as such for priority purposes.

There are also provisions concerning jurisdiction matters. A chapter regarding the relationship with other Conventions is yet to be drafted.

The Protocol

Article II of the Protocol states that the Convention and the Protocol should be read and interpreted together as one single instrument to be known as the Unidroit Convention on International Interests in Mobile Equipment as applied to aircraft objects.

The Protocol can also apply to a purely domestic transaction. There is also provision for the parties to agree in writing to derogate from or vary any of the provisions of certain Articles of the Protocol.

Article VIII provides that the parties to an agreement governed by the Protocol may agree on the law which is to govern their rights and obligations under the Convention, wholly or in part.

Chapter II of the Protocol outlines the default remedies and position on priorities and assignments in relation to aircraft. Under Article IX, in addition to the remedies in the Convention, there is also the possibility for the deregistration of the aircraft and the export and transfer of the aircraft from the territory in which it is situated. However, the obligee must have the prior written consent of the holder of any registered interest ranking in priority to exercise either of these default remedies. The Protocol also alters Article 9(2) of the Convention to provide that any remedy shall be exercised in a commercially reasonable manner, that any agreement between an obligor and an obligee shall be conclusive as to what is commercially reasonable, subject to the provision that an obligee may not take possessional control of an aircraft object in a manner which contravenes public order. It is also stated that the disruption of air transport shall not in itself be deemed to be a contravention of public order.

The Protocol goes into further detail in relation to remedies on insolvency and the modification of priority provisions. There are also provisions for the regulation and operation of the international registry, however these have not yet been finalised.

Adoption of the Convention and Protocol

The Convention and the Protocol have been submitted to a committee of governmental experts for discussion. It is expected that the Convention and Protocol will be ready to be adopted at the end of 1999. They will then need to be adopted by member states.