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108th Congress Exec. Rpt.
2nd Session 108-014
CONVENTION ON INTERNATIONAL INTERESTS IN MOBILE EQUIPMENT AND PROTOCOL
ON MATTERS SPECIFIC TO AIRCRAFT EQUIPMENT
July 16, 2004.--Ordered to be printed
Mr. Lugar from the Committee on Foreign Relations,
submitted the following
R E P O R T
[To accompany Treaty Doc. 108-10]
The Committee on Foreign Relations, to which was referred
the Convention on International Interests in Mobile Equipment
and Protocol on Matters Specific to Aircraft Equipment (Treaty
Doc. 108-10) (hereafter ``Convention'' and ``Protocol''),
signed at Cape Town on November 16, 2001, having considered the
same, reports favorably thereon and recommends that the Senate
give its advice and consent to ratification thereof, as set
forth in this report and the accompanying resolution of
III. Summary of Key Provisions of the Convention and Protocol.........2
IV. Implementing Legislation.........................................3
V. Committee Action.................................................4
VI. Committee Recommendation and Comments............................4
VII. Text of Resolution of Ratification...............................5
VIII.Appendix--Hearing entitled ``Economic Treaties,'' Thursday, April
1, 2004, before the Committee on Foreign Relations...............7
The Convention and accompanying Protocol establish an
international legal framework for the creation, priority, and
enforcement of security and leasing interests in mobile
equipment--specifically high value aircraft equipment
(airframes, aircraft engines, and helicopters)--and create a
worldwide international registry where such interests can be
The Convention and Protocol were negotiated over a five-
year period under the auspices of the International Institute
for the Unification of Private Law (UNIDROIT) and the
International Civil Aviation Organization (ICAO). Work on the
Convention was completed in November 2001, and the documents
were opened for signature at a Diplomatic Conference held at
Cape Town, South Africa, on November 16, 2001. The United
States signed the Convention in Rome on May 9, 2003.
The Convention is designed to promote the use modern
financing practices in international transactions for the sale
and lease of high-value mobile equipment. The Convention
contains rules for establishing recognized rights associated
with international financing and leasing transactions that are
similar to the rules and rights commonly used in the United
States under certain articles of the Uniform Commercial Code.
The Convention also provides for a central, international
registry through which various rights and priorities in covered
property may be determined. Provisions with respect to remedies
and procedures for enforcing rights further add to the
predictability of international transactions and to the
autonomy of the parties to them. The Convention does not affect
U.S. export and technology controls or regulatory procedures
relating to national security that may apply to items at issue
in such transactions.
While the Convention creates a framework for transactions
in three categories of equipment--aircraft equipment, railway
rolling stock, and space assets--the Convention does not come
into force with respect to any specific category absent a
separate protocol dealing with that category. To this end, the
Convention is accompanied by the Aircraft Protocol, which
contains rules particular to financing practice for airframes,
aircraft engines, and helicopters.
By facilitating international transactions in modern
equipment, the Convention is expected to lead to broad and
mutual economic benefits for all interested parties and to the
expanded use of newer, safer technologies.
III. Summary of Key Provisions of the Convention and Protocol
A detailed article-by-article discussion of the Convention
and Protocol may be found in the Letter of Submittal from the
Secretary of State to the President, which is reprinted in full
in Treaty Document 108-10. A summary of the key provisions of
the Convention and Protocol is set forth below.
Creation and Registration of Interests
The Convention establishes rules that would apply to
transactions for the financing of large mobile equipment
between creditors and debtors in countries that are party to
the Convention. Articles 2 and 7 provide for the creation of an
international interest held by a creditor in an item of large
mobile equipment. Such interests are used to provide security
to creditors lending money to finance the purchase or lease of
equipment. Article 16 establishes an International Registry
where such interests, and transactions related to such
interests (such as assignments or subordinations), may be
registered. Chapter V of the Convention addresses other issues
related to the registration system, including requirements for
registration of international interests, validity of
registrations, and provisions for the public to search
information relating to registered interests.
Creditors' Remedies for Default
The Convention establishes remedies available to creditors
in the event of a default on an agreement covered by the
Convention. Under Article 8, subject to any agreement between
the parties to the transaction, these remedies may include
taking possession of the item in which the creditor has an
interest, selling or granting a lease of the item, and
collecting or receiving any income or profits arising from the
management or use of the object. Such remedies must be
exercised in a commercially reasonable manner. Article 13
provides for additional remedies to preserve the interests of a
creditor who adduces evidence of a default by a debtor, pending
a final determination of the creditor's claim.
Priority and Assignment
Article 29 of the Convention contains rules to establish
priorities among multiple interests in the same item. Articles
31 and 32 establish requirements for the assignment of
interests under the Convention and the effect of such
The Aircraft Protocol provides for the Convention's
application to transactions related to airframes, aircraft
engines, and helicopters. It provides additional remedies to
creditors in the event of default beyond those contained in the
Convention, including the right to procure de-registration of
an aircraft by relevant aviation regulation authorities, and
the right to procure the physical transfer of an aircraft from
the territory in which it is situated. It also contains
additional provisions for remedies in the event of a debtor's
VI. Implementing Legislation
No implementing legislation is required for the Convention
or Protocol, except for technical amendments to certain
authorities of the Federal Aviation Administration relating to
the filing of interests in registries through the FAA. The
Administration submitted proposed legislation on November 18,
2003, and this legislation is currently under consideration in
both the Senate and the House of Representatives.
As noted in the Administration's response to a question for
the record from Senator Biden, the Convention and Protocol
provide for private rights of action based on their provisions
in the courts of States parties to them.
V. Committee Action
The Committee on Foreign Relations held a public hearing on
the Convention and Protocol on April 1, 2004 at which it heard
testimony from the Departments of State and Transportation (a
transcript of this hearing and questions and answers for the
record may be found in the appendix to this report). On June
22, 2004, the Committee considered the Convention and Protocol
and ordered them favorably reported by a voice vote, with the
recommendation that the Senate give its advice and consent to
their ratification, subject to declarations contained in the
resolution of advice and consent.
VI. Committee Recommendation and Comments
On balance, the Committee on Foreign Relations believes
that the proposed Convention and Protocol are in the interest
of the United States and urges that the Senate act promptly to
give advice and consent to their ratification, subject to the
declarations contained in the resolution of advice and consent
to ratification. The Committee notes the support for the
Convention and Protocol expressed by the U.S. aircraft
manufacturing industry, financial services entities involved in
aircraft financing, the American Bar Association, and the Air
The proposed declarations to the Convention are designed to
preserve current U.S. practices with respect to priority of
non-consensual rights arising by law, to preserve the ability
of the U.S. Government and other specified entities to detain
aircraft in order to secure amounts owing in connection with
the provision of certain public services, and to permit the
exercise of certain remedies without the leave of the court,
consistent with U.S. law. The first three proposed declarations
to the Protocol provide that the United States will apply
provisions of the Protocol addressing contractual choice of
law, insolvency case assistance, and requests for the
deregistration and export of aircraft. The fourth declaration
provides for the designation of the Federal Aviation
Administration as the exclusive entry point in the United
States entitled to authorize electronic registrations under the
Protocol relating to airframes pertaining to U.S. registered
aircraft and helicopters, and as the non-exclusive point
authorizing electronic registrations relating to engines.
VII. Text of Resolution of Ratification
Resolved (two-thirds of the Senators present concurring
SECTION 1. SENATE ADVICE AND CONSENT SUBJECT TO DECLARATIONS.
The Senate advises and consents to the ratification of the
Convention on International Interests in Mobile Equipment
(hereafter in this resolution referred to as the
``Convention'') and the Protocol to the Convention on
International Interests in Mobile Equipment on Matters Specific
to Aircraft Equipment (hereafter in this resolution referred to
as the ``Protocol''), concluded at Cape Town, South Africa,
November 16, 2001 (T. Doc. 108- 10), subject to the
declarations of section 2 and section 3.
SEC. 2. DECLARATIONS RELATIVE TO THE CONVENTION.
The advice and consent of the Senate under section 1 is
subject to the following declarations relative to the
(1) Pursuant to Article 39 of the Convention--
(A) all categories of non-consensual rights
or interests which under United States law have
and will in the future have priority over an
interest in an object equivalent to that of the
holder of a registered international interest
shall to that extent have priority over a
registered international interest, whether in
or outside insolvency proceedings; and
(B) nothing in the Convention shall affect
the right of the United States or that of any
entity thereof, any intergovernmental
organization in which the United States is a
member State, or other private provider of
public services in the United States to arrest
or detain an aircraft object under United
States law for payment of amounts owed to any
such entity, organization, or provider directly
relating to the services provided by it in
respect of that object or another object.
(2) Pursuant to Article 54 of the Convention, all
remedies available to the creditor under the Convention
or Protocol which are not expressed under the relevant
provision thereof to require application to the court
may be exercised, in accordance with United States law,
without leave of the court.
SEC. 3. DECLARATIONS RELATIVE TO THE PROTOCOL.
The advice and consent of the Senate under section 1 is
subject to the following declarations relative to the Protocol:
(1) Pursuant to Article XXX of the Protocol--
(A) the United States will apply Article VIII
of the Protocol;
(B) the United States will apply Article XII
of the Protocol; and
(C) the United States will apply Article XIII
of the Protocol.
(2)(A) Pursuant to Article XIX of the Protocol--
(i) the Federal Aviation Administration,
acting through its Aircraft Registry, FAA
Aeronautical Center, 6400 South MacArthur
Boulevard, Oklahoma City, Oklahoma 73125, shall
be the entry point at which information
required for registration in respect of
airframes or helicopters pertaining to civil
aircraft of the United States or aircraft to
become a civil aircraft of the United States
shall be transmitted, and in respect of
aircraft engines may be transmitted, to the
International Registry; and
(ii) the requirements of chapter 441 of title
49, United States Code, and part 49 of title
14, Code of Federal Regulations, shall be fully
complied with before such information is
transmitted at the Federal Aviation
Administration to the International Registry.
(B) For purposes of the designation in subparagraph
(A)(i) and the requirements in subparagraph (A)(ii),
information is transmitted at the Federal Aviation
Administration in accordance with procedures
established under United States law.
(C) In this paragraph, the term ``civil aircraft of
the United States'' has the meaning given that term in
section 40102(17) of title 49, United States Code.
Aviation Working Group, letter with appendices, to Chairman
Richard G. Lugar, stating support for the Cape Town Convention
and the Aircraft Protocol, dated March 29, 2004............... 31
Donnelly, Hon. Shaun E., Acting Assistant Secretary of State,
Bureau of Economic and Business Affairs, U.S. Department of
State, Washington, DC......................................... 9
Prepared statement............................................ 11
Response to an additional question for the record from Senator
Responses to additional questions for the record from Senator
General Electric Company, GE Aircraft Engines, statement submitted
for the record by David L. Calhoun, president and chief
executive officer, dated March 29, 2004....................... 32
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening
Pratt & Whitney, a United Technologies Company, letter to Chairman
Richard G. Lugar, stating support for the Cape Town Convention
and the Aircraft Protocol, dated March 30, 2004............... 33
Rosen, Hon. Jeffrey, General Counsel, U.S. Department of
Transportation, Washington, DC................................ 17
Prepared statement............................................ 18
THURSDAY, APRIL 1, 2004
Committee on Foreign Relations,
The committee met, pursuant to notice, at 9:30 a.m. in Room
SD-419, Dirksen Senate Office Building, Hon. Richard G. Lugar
(chairman of the committee), presiding.
Present: Senator Lugar.
OPENING STATEMENT OF SENATOR RICHARD G. LUGAR, CHAIRMAN
The Chairman. This hearing of the Senate Foreign Relations
Committee is called to order. Today, the Foreign Relations
Committee will review various economic treaties, including the
Convention on International Interests in Mobile Equipment and
the Protocol on Matters Specific to Aircraft Equipment. These
agreements are better known as the Cape Town Convention,
because they were negotiated in Cape Town, South Africa in
In addition, we will address protocols amending United
States Bilateral Investment Treaties with eight Eastern
European nations. All of the agreements pending before us today
are significant in that they promote trade and economic
Economic treaties and investment agreements are important
tools in generating new commercial opportunities for United
States businesses and in advancing United States foreign
policy. Cooperation on the commercial front enhances our
ability to work with other nations on security and political
matters. Our committee is committed to reviewing expeditiously
the economic agreements negotiated by the administration.
The Cape Town Convention will facilitate purchasing and
leasing of large commercial aircraft and aircraft engines by
foreign entities that otherwise might be unable to arrange
sufficient financing. Aircraft customers in foreign countries
that implement the Convention will be eligible for lower cost
loans from the United States Export-Import Bank when they seek
to buy or to lease United States commercial aircraft. These
incentives to foreign customers will help open new markets to
United States aircraft manufacturers.
Simultaneously, the Convention creates internationally
recognized finance rights and enforceable remedies that will
improve the security of aircraft financing. This is essential
in many developing markets where conducting large commercial
transactions is risky, and where obtaining adequate security
for United States financiers is otherwise difficult.
The Cape Town Convention was negotiated to be consistent
with United States commercial and insolvency laws, and it
reaffirms existing obligations under these bodies of United
States law. Ratification of the Convention by the United States
likely will stimulate other nations to ratify it, as well.
Expanding the list of nations that participate in the
Convention would provide a needed boost to our aircraft
industry and to the broader goal of promoting commerce with
In addition to the Cape Town Convention, today we will
review protocols that amend existing Bilateral Investment
Treaties, or BITs, with eight Eastern European countries. Six
of the eight nations, the Czech Republic, Estonia, Latvia,
Lithuania, Poland, and the Slovak Republic, are expected to
join the European Union on May 1, 2004, a month from now.
Bulgaria and Romania are expected to join the EU in 2007.
Each of the Protocols is based on a similar understanding
reached between the United States, the European Commission, and
the subject countries. The goal of these understandings is to
preserve the effect and intent of existing Bilateral Investment
Treaties between the United States and each of the subject
countries after their accession to the European Union. The
protocols create a legal framework and enhanced consultation
for avoiding inconsistencies between the BIT obligations of the
eight nations and their European Union membership.
The United States supports the enlargement of the European
Union. At the same time, we believe that the continued
existence of Bilateral Investment Treaties with countries
poised to join that body will be mutually beneficial to
investors on both sides of the Atlantic. We want to encourage
economic growth in these nations, which is a key to solidifying
their young democratic institutions.
We also want to encourage the growth of new capital markets
that can provide United States firms with productive business
partners. It is a pleasure to welcome our panel of witnesses.
Shaun Donnelly is Acting Assistant Secretary of the State
Department's Bureau of Economic and Business Affairs, and Jeff
Rosen is General Counsel of the U.S. Department of
Transportation. We look forward to your insights on these
important economic treaties.
And gentlemen, I would just say parenthetically that the
committee has been pleased to have success on the floor
following similar hearings. Your labors today hopefully will be
productive in the same way. We are very pleased that our
colleagues have in fact passed on the Senate floor the United
States-Japanese tax treaty, and likewise the tax treaty with
Sri Lanka in recent days. The former of these treaties was
especially important because of action that needed to be taken
by the Japanese Diet in a timely way so that tax years
coinciding in Japan and the United States made possible very
substantial savings for a large number of American firms.
That is often the case with tax treaties, but this
particular one was large in its impact because of the size of
the Japanese economy, as well as the number of ties that we
have. Furthermore, although this is not a tax or commercial
treaty, I am pleased to announce for the benefit of members and
staff that last night, fairly late last night, on the floor of
the Senate, the IAEA protocol was passed. This is the
International Atomic Energy Protocol, which the President
specifically asked for in his speech on non-proliferation at
the National Defense University, just a short time ago.
I was present for the speech, in the front row, and the
President looked at me and indicated that the Senate ought to
take action promptly. We had been taking action, but it
prompted me to reply respectfully that within the President's
administration people needed to get their act together and to
find a common theme, which they did. And so all's well that
The process moved along swiftly, and it's very important
that the IAEA deals, and is dealing, now with Iran, with Libya,
and with other situations that are not hypotheticals, but that
in the real world are extremely important. I mention these as
successes, not just for the committee but also for the Senate,
for the country. We are working with the administration, just
as we seek to do with you gentlemen today.
We are very, very pleased that you are here, and I would
like to call upon you, Mr. Donnelly to testify first, and then
Mr. Rosen. Let me say at the onset that your full statement to
the committee will be made a part of the record, in full. You
may proceed in any way you wish.
STATEMENT OF HON. SHAUN E. DONNELLY, ACTING ASSISTANT SECRETARY
OF STATE, BUREAU OF ECONOMIC AND BUSINESS AFFAIRS, U.S.
DEPARTMENT OF STATE
Mr. Donnelly. Thank you very much, Mr. Chairman, before I
say anything about the business, I want to thank you on behalf
of Secretary Powell and the administration for the leadership
you've been showing on the efforts you just mentioned, the
Japan and Sri Lanka tax treaties. I was the former U.S.
Ambassador in Sri Lanka, so I have a particular interest in
that one, but the timely action on the Japan treaty is very
important and also on the IAEA Protocol.
Mr. Chairman, I very much appreciate the opportunity to
appear here today to recommend on behalf of the administration
favorable action on the Cape Town Convention on International
Interests in Mobile Equipment, and the protocols amending eight
Bilaterial Investment Treaties pending before the committee.
I'd add parenthetically that as a fellow Hoosier, I
particularly appreciate the opportunity to appear before you,
The Chairman. Very nice to have you here.
Mr. Donnelly. Well, thank you, sir. I'm accompanied by my
college from the Department of Transportation, General Counsel
Jeff Rosen, representatives from the Export-Import Bank, the
Federal Aviation Administration, and industry representatives.
We appreciate very much the committee's interest in these
treaties as demonstrated by the prompt scheduling of this
As you know, Mr. Chairman, the administration is dedicated
to facilitating trade and the expansion of commerce across all
borders. And the treaties we're considering today will promote
expanded trade and investment, support American companies,
create American jobs, and advance our economic interests.
Mr. Chairman, the Cape Town Convention on International
Interest in Mobile Equipment and the related protocol on
Aircraft Equipment will extend modern commercial finance laws
already in place in the U.S., to international transactions
involving high value mobile equipment. This treaty will make
available the benefits of these finance laws to our trading
partners all over the world resulting in lower risks, and an
expanded array of credit services, thereby increasing business
transactions, manufacturing activity, and employment growth.
The Convention and Protocol are fully supported by the U.S.
industry, and the key government agencies involved, and the
negotiating process has really been a model of public, private
partnership. All Federal agencies with interest in this treaty,
the Departments of State, Transportation, Commerce, the FAA,
and the U.S. Export-Import Bank worked very closely with the
affected private sector to ensure that U.S. positions were in
line with the needed results.
Mr. Chairman, we respectively request Senate ratification
of this Convention and Protocol. These instruments represent a
positive step forward in international commercial law and in
our economic and commercial interests. Early Senate approval
will reaffirm U.S. leadership in this key area.
Mr. Chairman, I'd now like to turn to the second item of
business before the committee today, as you summarized, our
Bilateral Investment Treaties with acceding and candidate
countries to the European Union. Bilateral Investment Treaties
or BITs are a key part of the framework for U.S. investment in
eight of the countries that are now seeking membership in the
EU, the Czech Republic, Estonia, Latvia, Lithuania, Poland, and
the Slovak Republic, all of which will join the EU on May 1, as
well as Bulgaria, and Romania which are candidates, as you
said, for accession in 2007.
During the last 2 years BITs have afforded important
protections to U.S. investors in these countries. U.S.
investors in turn have played an important role in those
countries' economic transformation. U.S. investment in the
region will benefit even more once these countries accede to
the EU, as enlargement fosters stronger regional economic
integration and expanded economic opportunities.
However, certain aspects of the Bilateral Investment
Treaties may conflict with obligations these countries will
take on upon entry into the European Union. Under EU law member
states are required to bring their commitments under
preexisting international agreements into conformity with EU
law. In addition, the acts of accession of these countries
acceding on May 1 require that prior to that time they either
eliminate any such incompatibilities or withdraw from such
Therefore, to the extent necessary to maintain
compatibility with EU legal obligations, we were willing to
make adjustments in certain provisions of these BITs in a form
compatible with EU obligations in order to preserve the vital
protections that these treaties otherwise provide for U.S.
In addition, we also obtained important assurances from the
European Commission about the protection of existing U.S.
investors in these countries, and the right under the E.C.
treaty of U.S. investors, once they are established in one EU
member state, to invest onward without hindrance in other
members of the EU. When viewed together with the benefits of
enlargement, these steps actually represent a significant gain
for U.S. investors.
Mr. Chairman, in closing, I would say again that the
Protocols amending the Bilateral Investment Treaties and the
Cape Town Convention under consideration today will help grow
the American economy, produce new jobs, and strengthen economic
relations with new and existing trading partners. We believe
that expanding markets overseas is good for American
entrepreneurs and American workers. The amendments to the BITs
will support continued U.S. investment and growth in a large
European Union. And the Cape Town Convention will facilitate
financing the sale of major American products to the four
corners of the globe, particularly in the developing world.
We urge your committee to take prompt and favorable action
on these treaties. I thank the committee and you, Mr. Chairman,
for its continuing interest in these matters. And the members
and staff for devoting the time and attention to review these
treaties so promptly. I'd be very happy to try and answer any
questions that you may have. Thank you.
[The prepared statement of Mr. Donnelly follows:]
Prepared Statement of Hon. Shaun E. Donnelly
Mr. Chairman and distinguished Members of the Committee, I
appreciate the opportunity to appear today at this hearing to
recommend, on behalf of the Administration, favorable action on the
Cape Town Convention on International Interests in Mobile Equipment and
on the Protocols amending eight Bilateral Investment Treaties that are
pending before this Committee. We appreciate the Committee's interest
in these treaties as demonstrated by the scheduling of this hearing.
The Administration is dedicated to facilitating trade and the
expansion of commerce across all borders. We seek to accomplish this
through a number of means. We recently concluded negotiating free trade
agreements with our neighbors in Central America and the Dominican
Republic, as well as with Morocco and Australia and certainly hope
these agreements will receive favorable consideration from the
Congress. The treaties we are considering today will also promote
expanded trade and investment, support American companies and advance
our economic interests.
Mr. Chairman, the Cape Town Convention on International Interests
in Mobile Equipment, and the related Protocol on Aircraft Equipment,
will extend modern commercial finance laws, already in place in the
U.S., to international transactions involving high value mobile
equipment. This treaty will make available the benefits of these
finance laws to our trading partners all over the world, resulting in
lower risks and making available an expanded array of credit services.
This, in turn, will increase business transactions, manufacturing
activity and growth in employment.
The eight Bilateral Investment Treaties, or BITS as they are
frequently called, are a key part of the machinery that established a
framework for U.S. investment in countries that are now seeking
membership in the European Union. U.S. investors have played an
important role in the economic transformation of the Czech Republic,
Estonia, Latvia, Lithuania, Poland, and the Slovak Republic, which will
join the European Union (EU) on May 1--as well as with Bulgaria and
Romania, which are candidates for EU accession in 2007. During the last
few years, these BITs have provided a stable framework for investment
and afforded important protections to U.S. investors in these
countries. U.S. investment in the region, in turn, will benefit even
more once these countries accede to the EU, as enlargement fosters
stronger regional economic integration and expanded economic
opportunities. However, certain aspects of these treaties may conflict
with obligations these counties will take on upon entry into the
European Union. Following lengthy and productive negotiations with the
European Commission and with the acceding and candidate countries, we
are submitting for your consideration, Protocols to amend our BITs with
these nations, which will preserve many of the benefits of the original
treaties in a form compatible with their accession to the EU.
CAPE TOWN CONVENTION--WHAT IS IT?
Mr. Chairman, the President transmitted the Cape Town Convention
and the related Protocol on Aircraft Equipment to the Senate on
November 5, 2003. There is a detailed explanation of the Convention and
Protocol as well as a chapter-by-chapter analysis in the Report by the
Secretary of State, attached to the President's transmittal of the
Convention. While it is not summarized here we will be happy to respond
to any questions the Committee may have.
The Convention and Protocol will extend modern commercial finance
laws, already in place in the United States, to international
transactions in other countries. These laws are a proven quantity and
have worked well in our capital markets and in international
transactions involving high value mobile equipment--including aircraft
and related equipment--the specific concern of this Protocol. This
Convention will increase for many other countries the availability of
credit and lower the risks of commercial credit, thereby expanding
business activity in sectors affected by this treaty. This treaty will
directly support increased manufacturing and employment in aircraft
frame production, avionics, aircraft engines, aircraft parts, supplies
and services. This treaty will have a marked impact on the markets for
these products and services in developing and emerging countries, where
the greatest expansion in sales is expected to occur over the next 10
to 20 years. This treaty will make asset-based financing available in
these emerging countries where today such commercial law and the
associated credit may not be adequate and where credit and country risk
The Cape Town Convention does this by adopting modern asset-based
financing and assignment of payment rights financing concepts. These
principles are reflected in the U.S. Uniform Commercial Code (UCC),
which grants enhanced legal rights in the aircraft (or other mobile
items) rather than relying on company or country risk. This permits the
lender to compensate for other factors that would drive risk and credit
cost up or sharply limit credit altogether and has fueled commercial
finance in the United States, in particular aircraft finance. As a
result the U.S. is the preferred finance market for aviation in the
The Convention and Protocol are fully supported by industry and the
key government agencies involved. The negotiation process can be seen
as a model for public-private sector partnership. All federal agencies
concerned with this treaty: the Departments of State, Transportation,
Commerce, and the Federal Aviation Administration (FAA) and U.S.
Export-Import Bank, worked closely with the affected private sector.
These included manufacturers, suppliers, secured lenders, financial
lessors, aircraft leasing organizations, credit rating organizations,
aircraft registry interests and others. This was done in order to be
sure that U.S. positions were in line with needed results. Key
associations such as the Air Transportation Association (ATA), the
Aircraft Working Group (AWG), the Aircraft Title Lawyers Association
(ATLA) and others have also supported this Convention.
The Convention will come into force April 1, 2004, (coincidentally
the date of this Hearing) with three ratifying States. However, the
Convention will not apply to aircraft until the Protocol also comes
into force, which requires ratification by eight States. Currently,
four countries have ratified the Convention and Protocol. We expect
that four additional ratifications are likely to occur by the fall, and
the Protocol is expected to come into force by the end of calendar year
why do we need it?--the importance of u.s. commercial leadership
Mr. Chairman, the U.S. is widely recognized as the leader of this
effort and the timing of Senate action and early U.S. ratification will
be a powerful signal of our strong support for the Convention and
Protocol. Early ratification will position the U.S. to fully protect
the considerable interests our industries have in assuring that the
early stages of implementation are handled correctly. U.S.
manufacturing and financing interests have placed strong importance on
early ratification in order to provide a boost in sales in aircraft
frames and engines. With a sharp and severe downturn in aircraft and
aircraft engine sales in the last several years, reviving this market
has taken on much greater importance. The treaty will facilitate the
acquisition of newer, safer aircraft and help developing countries
without private capital. The prospect that this new treaty will be in
place in the near future has already been reflected in the U.S. Export-
Import Bank's preferential exposure fee terms for borrowers from
countries that ratify and implement the Convention and Protocol.
Several major sales of U.S. equipment have been made or will be made
based on the expectation of other countries that the U.S. will ratify
Mr. Chairman, there are other aspects to the Convention that should
be noted. First the negotiation of this Convention was a part of a
multi-year effort by the Department of State, with other agencies and
the private sector, to conclude new agreements reflecting modern
commercial law already in place in the U.S. The purpose is not to
export our laws, but rather to export market-tested financing concepts,
which can serve to increase economic capacity in States at all levels
of development. We have been joined in that effort by a number of
international financial institutions. This has led to the completion
also in 2001 of the new United Nations Commission on International
Trade Law (UNCITRAL) Convention on accounts receivable financing,
negotiated in parallel with the Cape Town Convention and which the
United States signed on December 30, 2003; the 2002 Organization of
American States (OAS) new Model Inter-American Law on secured Finance,
and the 2002 Hague Conference Convention on Securities Intermediaries.
We believe that adoption of these instruments can significantly
increase economic capacity, especially in developing countries.
Finally, Mr. Chairman there is the significance of holding the
diplomatic conference itself in South Africa. As stated by South
African officials at the outset of the Cape Town Conference in October
2001, ``this marks the first time that a multilateral negotiation has
taken place on complex commercial law in the sub-Saharan region.'' The
decision to do that was taken by the cohosts of the Conference,
UNIDROIT and the International Civil Aviation Organization (ICAO), with
the support of the U.S. government. The State Department hopes this
will be a precedent that will lead to more active participation by
major developing countries in commercial law reform.
PROCEDURAL AND IMPLEMENTATION ISSUES
To obtain the full benefits of the Convention and Protocol, the
U.S. needs to ratify both. To fully implement the Protocol, the U.S.
must also enact technical amendments to FAA authority concerning
registry functions under the Protocol. These amendments were
transmitted last November to Congress by Secretary of Transportation
Norm Mineta. They have been vetted through the Departments of
Transportation, State, and Commerce and are supported by aircraft and
engine manufactures, air finance interests, and other key associates.
We are hopeful for timely action on these amendments, but if they are
not enacted by the time the Senate acts on the Treaty, the U.S. could
deposit the instrument of ratification to the Convention itself, but
postpone depositing the instrument for the Protocol until the
amendments are enacted.
The fmancing provisions on secured interests do not require any
implementing legislation, state or federal, since the basic concepts of
the Convention and Protocol were drawn from the uniform state law in
the U.S. (Uniform Commercial Code Article 9 on secure finance). To
assure coordination, experts from the National Conference of
Commissioners on Uniform State Laws and the American Bar Association's
(ABA) Business Law Committee have been closely involved at all stages
during the development of this legislation. The ABA's House of
Delegates has endorsed early ratification of the new treaty system.
There are no budget implications or appropriations required. There
is no cost to the government for implementation of the private
transactional financing provisions and we anticipate only minor cost to
set up the FAA interface to the new registry system, which will be
absorbed in the FAA's regular operating budget for the Monroney Center
at Oklahoma City.
The Convention and Protocol permit optional declarations; several
are recommended for the United States upon ratification and are listed
in the Report transmitted to Congress. These optional declarations
preserve our existing fmancing system and designate the FAA as the
entry point for the U.S. filings in a new international registry.
The Convention and Protocol have specific provisions that intersect
with certain other conventions. But neither will have any effect on
U.S. export and technology controls or regulatory procedures relating
to national security that would otherwise apply to such a transaction.
Mr. Chairman, we respectfully request Senate ratification of the
Convention and Protocol. These instruments represent a positive step
forward in international commercial law and are in our economic and
commercial interest. Early Senate approval will reaffirm U.S.
leadership in this area.
U.S. BITS WITH EU ACCEDING AND CANDIDATE COUNTRIES
Mr. Chairman, I would like to now turn to the second item of
business before the Committee today, our bilateral investment treaties
with EU acceding and candidate countries. U.S. investors have played an
important role in the economic transformation of Eastern Europe. U.S.
bilateral investment treaties (or BITs) with six acceding countries,
the Czech Republic, Estonia, Latvia, Lithuania, Poland, and the Slovak
Republic, and two candidate countries, Bulgaria and Romania, have
provided a stable framework for investment and afforded important
protections to U.S. investors. It is for this reason we intend to
preserve these treaties as these countries become new members of the
European Union. U.S. investors in the region, in turn, will benefit
from these countries' accession to the EU, as enlargement will foster
regional economic integration and expand the markets for U.S.-owned
Member States of the European Union, however, are required under EU
law, including the Treaty Establishing the European Community (the EC
Treaty), to take steps to bring their commitments under pre-existing
international agreements into conformity with their obligations as
members of the EU. In particular, the Acts of Accession of the
countries that will become members of the EU on May 1 of this year
require that, prior to that time, they either eliminate any
incompatibilities between pre-existing international agreements and
obligations of EU membership, or withdraw from such agreements.
As a result of discussions that began in early 2002, a political
understanding was reached on September 22, 2003, among the United
States, the European Commission and the six acceding and two EU
candidate countries. It provides a roadmap for avoiding
incompatibilities between these countries' obligations as EU Member
States and their obligations under their BITs with the United States.
The understanding not only sets forth how the BITs should be amended,
but, as described later in this testimony, it also secures in the
context of future EU measures acknowledgments from the European
Commission regarding continued consultations and the protection of
existing investments, which could be of significant importance to the
United States and to U.S. investors.
The specific aspects of the U.S. BITs that raised issues of
first, the non-discrimination provisions (national
treatment, most-favored-nation treatment, and the exception to
nondiscrimination obligations for benefits accorded investors
of other countries under obligations arising from a BIT party's
membership in a customs unions or free trade area);
second, the disciplines on the use of performance
third, the obligation not to restrict capital movements.
By our willingness to make certain adjustments and political
commitments in these areas, we can preserve the vital protections that
these treaties otherwise provide for U.S. investors (for example,
protections regarding expropriation, fair and equitable treatment and
full protection and security, temporary entry of key personnel, and
binding international arbitration). Moreover, we also obtained
important assurances from the European Commission about the protection
of U.S. investors in these countries in two key contexts: first, where
U.S. investors seek to invest onward throughout the rest of Europe, and
second, with regard to the Commission's readiness to consult with us
when the Commission is considering proposals that might affect the
rights of U.S. investors not only in these countries but throughout
THE BITS' NON-DISCRIMINATION PROVISIONS
U.S. BITs include a broad commitment to afford covered investments
the better of national treatment and most-favored-nation (MFN)
treatment. However, they permit the Parties to take exceptions to these
obligations in specific sectors, and with respect to specific matters,
provided the Parties identify them in an annex to the treaty. In these
particular BITs, the United States took annex exceptions to national
treatment, and in some cases to MFN, for such sectors as air transport;
ocean and coastal shipping; energy and power production; radio,
television and communications; satellite ownership; ownership of real
property; provision of telephone and telegraph services; mining on the
public domain; maritime and maritime-related services; and primary
dealership in U.S. Government securities.
In contrast, however, these acceding and candidates countries for
EU membership typically listed few, if any, sectors or matters as
excepted from national treatment or MFN treatment in their respective
annexes. For example, the Czech and Slovak BITs only list ownership of
real property and insurance as sectors where measures that do not
conform with the national treatment obligation may be taken by these
countries. They list no sectors as excepted from the MFN obligation.
Our discussions with the European Commission, and the acceding and
candidate countries, revealed a number of areas where EU requirements
could conflict with the BITs' national treatment and/or MFN
obligations. Thus, the amendments to these BITs identify additional
sectors or matters with respect to which exceptions will be allowed for
the new EU Member States. However, they are explicit in stating that
exceptions are allowed only to the extent necessary to meet EU legal
obligations. The sectors in which these new exceptions are allowed are,
with regard to national treatment: agriculture, audio-visual,
securities, insurance and other financial services, fisheries,
hydrocarbons, subsidies, air transport, inland waterways transport, and
maritime transport. New exceptions are also allowed with regard to MFN
for agriculture, audio-visual and hydrocarbons.
Another important aspect of the amendments is that they carve out
from these new exceptions existing investments of U.S. firms for a
period of either ten years from the date of the relevant measure, or
twenty years after the entry into force of the BIT, whichever is later.
In addition, the amendments provide that no exception applies to the
extent that it would require, in whole or in part, divestment of an
In addition to concerns in these areas, the European Commission was
concerned about measures that might create advantages for firms
established in EU and non-EU countries as a result of liberalization
within the EU or between the EU and other countries that might not be
available to U.S.-owned investments. In particular, the Commission was
concerned that the acceding and candidates countries--once they become
Member States--may be obligated under EU law to accord preferential
treatment to investors from other EU members or from non-EU countries
that have a special relationship with the EU, but not to U.S.-owned
enterprises. Moreover, the Commission thought additional uncertainty
arose because Article 48 of the EC Treaty operates to entitle any firm,
once established in accordance with the law of a Member State, to be
treated in other EU members as a national of a Member State for
purposes of the EU Treaty's guarantees on the right of establishment in
any EU Member State.
Thus, because of the Commission's concerns and its desire to avoid
uncertainty in this area, we also agreed to address the BIT provision
called the ``free trade area/customs union exception.'' This provision
provides that the BITs' non-discrimination obligations do not apply to
advantages accorded by a BIT party to third countries by virtue of that
party's obligations deriving from membership in a free trade area or
customs union. We thus included in the Protocols an acknowledgement
that the exception applies to obligations that derive from an economic
integration agreement that includes a free trade area or customs union,
such as the European Union, and also that it applies to advantages
accorded to nationals or companies of any third country by virtue of
By acknowledging this, we also created the opportunity to obtain
from the European Commission, as part or our political understanding, a
clarification of its understanding of the meaning of Article 48 of the
EC Treaty: a clarification of the application of Article 48 to foreign-
owned companies that will be beneficial to any U.S. firm that meets its
conditions and wishes to use an investment in one EU Member State as a
platform for investment onward in other EU Member States. The
Commission's clarification of this provision affirms that such firms
will be free of restrictions on establishment elsewhere in the EU.
THE BITS' PERFORMANCE REQUIREMENTS PROVISIONS
The U.S. BITs with these countries contain a provision that
prohibits the imposition of performance requirements upon an investor
as a condition to establish, expand, or maintain an investment.
Performance requirements typically take the form of requirements that
goods be exported, or that goods or services be purchased locally, but
similar requirements would also be prohibited. Because EU law includes
certain requirements in the agriculture or audio-visual sectors that
might be construed to be prohibited performance requirements, the
amendments provide that the relevant provision of each BIT will not
limit the ability of our BIT partners to impose performance
requirements in these sectors, to the extent they are necessary to
comply with EU law.
TREATMENT OF CAPITAL MOVEMENTS
Each of the BITs with the acceding and candidate countries
obligates the BIT parties to allow capital and other investment-related
transfers to be made freely, and without delay, into and out of their
respective territories. The EC Treaty, however, provides authority for
the EU Council of Ministers to restrict capital movements either by
adopting temporary safeguards in exceptional circumstances involving
serious difficulties in the operation of the economic or monetary
union, or by imposing financial sanctions as a result of a common
position or joint action in relation to a common foreign or security
policy. The European Commission was thus concerned that the obligations
in the BITs would impinge on EU authorities in this regard and create
complications should it ever become necessary to exercise this
authority. Because the EU has never exercised this authority, we were
unwilling to make any amendments to our BITs to address this concern.
However, we acknowledged in the political understanding that the
general exception addressing essential security interests in our BITs
preserves the right of a party to apply measures that it considers
necessary to protect its own essential security interests, and that
good faith reliance on it would afford the BIT parties protection. We
also acknowledged that essential security interests may include those
deriving from membership in the EU.
Finally, given the sensitivity of this issue for the European
Commission, we expressed our willingness in the political understanding
to continue consultations on this issue in the context of ongoing
discussions between the Commission and Member States that have
international agreements with other third countries that include
provisions similar to those contained in these U.S. BITs.
FUTURE DEVELOPMENTS IN EU LAW
Finally, the European Commission was concerned that, as the process
of harmonization within the EU continues and extends to other sectors,
EU measures might be enacted in the future that raise questions of
compatibility with respect to obligations of our BITs. In response to
this concern, we agreed on an amendment to the BITs that provides that
the BIT parties agree to consult promptly whenever either party
believes that steps are necessary to ensure compatibility between the
BIT and the EC Treaty. In addition, in the context of the political
understanding, the United States and the Commission expressed their
willingness to consult through established means when new EU measures
affecting foreign investment are under consideration and raise
questions of compatibility with pre-existing international agreements
between the United States and EU Member States.
The understanding also acknowledges the importance of protecting
existing investment in this context and expresses the intent that,
whenever the accession of new Member States raises questions regarding
the implementation or application of EU measures that would affect U.S.
investments, or the imposition of new measures restricting foreign
investment within the EU generally raises questions with respect to the
impact on existing investments, consultations would be undertaken with
the objective of protecting existing investment.
To sum up, as a result of our willingness to address European
Commission concerns by making these few but important amendments to our
BITs, we have preserved the broader benefits these treaties afford U.S.
investors. The amendments do not go beyond what, upon accession, will
be legally required of our BIT partners under EU law. In addition, we
have exempted existing U.S. investments from the application of new
exceptions to national treatment and MFN under these BITs for at least
ten years, and proscribed the application of any measure that would
require divestiture in whole or part of a U.S. investment. We have
secured Commission acknowledgment of the principle of protecting
existing U.S. investments generally when new EU measures are under
consideration, and established a basis for consultations when new EU
measures are under consideration that may affect U.S. investors. And
finally, we have obtained an important clarification from the European
Commission on the EC Treaty's protection of the right of U.S.
investors, once they are established in one EU Member State, to invest
onward without hindrance in other members of the EU. When viewed in
combination with the benefits U.S. investors will realize when these
countries become members of the EU, and being mindful that the
Commission initially sought termination of our BITs, the steps we have
taken actually represent a significant gain for U.S. investors.
Mr. Chairman, in closing, I end my testimony much as I opened it.
The Protocols for the eight Bilateral Investment Treaties under
consideration today and the Cape Town Convention support the
Administration's policy to expand trade and investment globally. We
believe that expanding markets overseas is good for America and
American workers. The amendments to our BITs will support continued
U.S. investment and growth in an expanding Europe. The Cape Town
Convention will facilitate financing the sales of major American
products to the four corners of the globe, particularly in developing
countries, which are looking to the U.S. for leadership.
We urge the Committee to take prompt and favorable action on the
treaties before you today. Such action will help grow the American
economy and produce new jobs, and strengthen economic relations with
new and existing trading partners. I thank the Committee for its
continuing interest in these matters and the Members and staff for
devoting the time and attention to the review of these treaties. I
would be happy to try and answer any questions the Members may have.
The Chairman. Mr. Rosen.
STATEMENT OF HON. JEFFREY ROSEN, GENERAL COUNSEL, U.S.
DEPARTMENT OF TRANSPORTATION
Mr. Rosen. I have provided a written statement and I thank
you for accepting that in the record of today's hearing. In my
oral remarks, I would like to highlight two aspects of the Cape
Town Convention and the process that brought it to fruition.
The first of these is the broad array of benefits that this
Convention will produce, both here at home, and abroad.
For countries such as the United States, which manufacture
airframes, aircraft engines, and helicopters, there will be
increased exports as the number of orders for this equipment
increases. Increased exports will boost the economy and
translate into more jobs. This job stimulus will be felt not
just by the major manufactures, such as Boeing, GE, and United
Technologies, but also by smaller companies that make the parts
and provide services for these companies.
In addition, the Convention and Aircraft Protocol will
benefit the companies that provide the capital that finance the
sale of such equipment around the world. U.S. financial
institutions are of course major players in aircraft financing.
The creditor protections provided for by the Convention and
Protocol will benefit them by significantly reducing the risk
they now incur when financing aircraft into countries whose
laws do not meaningfully protect creditors in the event of
default or insolvency.
It is this risk reduction in turn which will bring
significant benefits to many countries and airlines in the
world. These benefits take the form of lower financing charges,
and are fresh sources of capital for aircraft financing. And
this is particularly of benefit to developing countries whose
carriers have had to pay high interest rates, or who have not
been able to access the commercial credit markets at all
because of their risk.
In addition, in terms of the benefits, the world's skies
will become safer and cleaner as newer equipment is acquired
and brought into service. Many countries' airlines are
operating older, less sophisticated aircraft. The full
implementation of this Convention and Protocol should hasten
the replacement of this equipment with state-of-the-art
Now, the second item that I want to highlight is the
extraordinary collaborative nature of this project since its
inception. It is an example of what a government industry
partnership can produce when done well. At each step of the
negotiations, the State Department, the Transportation
Department, the U.S. Export-Import Bank, along with U.S.
commercial law financing experts, worked closely with
representatives from industry, financiers, and aircraft
In addition, at all major stages of the process, the U.S.
position on issues was coordinated through the interagency
group on international aviation, whose membership in addition
to those agencies I mentioned includes the Departments of
Commerce and Defense, as well as airport, general aviation, and
commercial aviation trade associations.
Furthermore, the U.S. negotiators maintained an ongoing
dialog with the state law commissioners, the Aircraft Title
Lawyers Association, the Air Transport Association, and
representatives of the American Bar Association section of
business law. So it is easy to understand why the product of
all this effort and coordination has produced a Convention and
aircraft Protocol with so many benefits and with no apparent
opposition to its ratification.
In sum we believe the merits of the Convention and Protocol
are compelling and the process that brought it about was a
model collaboration between U.S. Government agencies,
international organizations, private sector stake holders, and
sovereign governments worldwide. Prompt ratification by the
United States will enable us to begin to achieve its benefits.
So I thank the committee for its interest and you
personally, Mr. Chairman, for the attention that has been given
to these matters and I would be pleased to answer any questions
you may have.
[The prepared statement of Mr. Rosen follows:]
Prepared Statement of Hon. Jeffrey Rosen
the 2001 cape town convention on international interests in mobile
equipment and protocol on matters specific to aircraft equipment
Chairman Lugar and Members of the Committee:
It is with great pleasure that I appear before you today, along
with Shaun Donnelly, Acting Assistant Secretary of State for Economic
and Business Affairs, to urge, on behalf of the Administration, that
this Committee recommend that the Senate give its advice and consent to
ratification of the Cape Town Convention and the Protocol on Matters
Specific to Aircraft Equipment.
CAPE TOWN CONVENTION OF 2001
The Cape Town Convention and Aircraft Protocol, when fully
implemented, will bring great economic benefits to a variety of U.S.
constituencies while helping to facilitate the modernization of airline
fleets around the world. The benefits will be truly global. Developing
countries and their airlines will be able to upgrade their fleets at
reduced financing costs. The world's skies will be safer and cleaner as
newer, state-of-the-art aircraft are acquired and brought into service.
And for countries that manufacture aircraft there will be increased
exports as the number of aircraft orders increases. Increased exports
will also mean more jobs for exporter countries such as the United
The Cape Town Convention and Aircraft Protocol were negotiated
under the auspices of the International Institute for the Unification
of Private Law (UNIDROIT), an intergovernmental organization focused on
harmonizing the commercial law of nations, and the International Civil
Aviation Organization (ICAO), the United Nations body responsible for
international aviation. It was concluded in November 2001 at a
Diplomatic Conference at Cape Town, South Africa, and has been signed
by 28 states, including the United States. The Convention,
coincidentally, enters into force today, April 1. We expect that the
Aircraft Protocol will come into force late this year.
The Convention is designed flexibly so to be able to operate in
conjunction with protocols covering different types of high value
mobile equipment. The Convention itself sets out the basic terms and
provisions that underlie the regime. However, it is not equipment
specific and in fact needs a protocol particular to a given type of
equipment in order to operate. The Protocol before you today applies to
airframes, aircraft engines and helicopters above a minimum size or
power threshold. In addition to this Aircraft protocol, the Convention
specifically contemplates that there will also be protocols governing
railway rolling stock and space assets. Negotiations are at an advanced
stage with respect to a protocol on railroad equipment and it is
anticipated that a diplomatic conference will be held in 2005 to adopt
such a protocol. Negotiations are at an earlier stage with respect to
space assets. Left open is the possibility that additional protocols
covering other types of high value mobile equipment, may be negotiated
in the future.
FEATURES OF THE CAPE TOWN CONVENTION
As a general matter, the Convention adopts the asset-based
financing practices already widely used in the United States and weaves
them into an international agreement. Specifically, the Convention
establishes an ``international interest'', which is a secured credit or
leasing interest with defined rights in a piece of equipment. These
rights consist primarily of 1) the ability to repossess or sell or
lease the equipment in case of default; and 2) the holding of a
transparent finance priority in the equipment.
Priority will be established when a creditor files, on a first-in-
time basis, a notice of its security interest, in a new high-technology
international registry. Once an international interest has been filed
by a creditor and becomes searchable at the international registry,
that creditor's interest will have priority over all subsequent
registered interests and all unregistered interests, with a few
exceptions. The Federal Aviation Administration (FAA), which currently
operates an aircraft registry, will serve as the authorized entry point
into the International Registry. This will allow the aircraft financing
practices in the United States, among the most efficient in the world,
to continue undisturbed. The International Registry will be searchable
on a 24 hour, 7 day a week basis. Fees will be charged for filing a
security interest in the International Registry and for other services
connected to use of the International Registry. Such fees are expected
to be very small because of the electronic nature of the registry. Last
fall, Secretary Mineta sent Congress a set of proposed technical
amendments to the FAA's registration authority that are necessary for
the FAA to implement its functions under the Convention and Protocol.
That legislation is now pending before the House and Senate
transportation authorizing committees.
The rights and enforceable remedies created by the Convention and
Aircraft Protocol are designed to reduce the risk assumed by creditors
in financing transactions in many parts of the world. In many
countries, the risk factor is significant because local laws either do
not protect lenders in the event of default or bankruptcy, or are
highly unpredictable. With respect to aircraft, this uncertainty is
compounded by the fact that aircraft can and do move readily between
countries. It is this uncertainty that drives up the cost of aircraft
financing in many countries, which is reflected in the interest rate
the financier charges the debtor.
The Convention seeks to reduce this risk in a number of ways. For
example, it provides financiers with a number of key rights with
respect to an aircraft financed to an airline of a country that has
ratified this Convention and Protocol. These include the right, upon
default of a debtor, to deregister the aircraft and procure its export;
to take possession or control of the aircraft, or sell or grant a lease
in the aircraft; and to collect or receive income or profits arising
from the management or use of the aircraft. The extent of these rights
and the speed with which they can be exercised will be a function of
the declarations a country files at the time it deposits its instrument
of ratification. These declarations set out which remedies that state
will allow and the means by which the remedies can be implemented. It
can be expected that the greater the remedies a state chooses to
recognize in its declarations, the greater will be its benefits.
These benefits will take the form of lower financing charges and
fresh sources of capital for aircraft financing. This will particularly
benefit developing countries whose carriers have had to pay high
interest rates or who have not been able to access the commercial
credit markets at all because of their credit risk. For those countries
that have historically financed aircraft acquisitions through the use
of sovereign guarantees, the ability to make use of asset-based
financing will allow such guarantees to instead be used for other
ICAO will supervise the International Registry. A Preparatory
Commission, established by the diplomatic conference and comprising 20
countries including the United States, has been doing the groundwork
needed to get a registry system in place. In particular, working with
ICAO, the Preparatory Commission prepared a request for proposals so to
select an entity to administer the registry. The Request went out
earlier this year and a selection by the Preparatory Commission will
likely be made next month. It is expected that the International
Registry will be operational in the latter part of 2004.
In conclusion, I would like to underscore the importance of prompt
ratification. Ratification by the United States will spur other
countries to ratify, thus accelerating the entry into force of the
agreements and hasten the realization of benefits to our economy, our
exporters, the economic recovery of international aviation, the
developing world, and the safety of aviation. I thank the Committee for
its interest and attention to these matters and would be pleased to
answer any questions you may have.
The Chairman. I thank both of you for that testimony. I
would just note, Mr. Donnelly, that in your testimony you point
out that the Conventions are coming into force April 1, 2004,
which you note coincidently is the date of this hearing. With
only three ratifying states aboard, however, you point out that
the Convention will not apply to aircraft until the Protocol
also comes into force, so both are necessary.
That requires ratification by eight states. Currently, four
countries have ratified the Convention and the Protocol. We
expect that the four additional ratifications are likely to
occur by the fall, and that the Protocol is expected to come
into force by the end of calendar year 2004.
I compliment both of you and your staffs, as well as our
staff of the Foreign Relations Committee on both sides of the
aisle for alertness to the possibilities of leadership. One
reason for taking this action, or having this hearing now in
the midst of everything else that is going on in the world, is
that, as you have mentioned, by acting in a timely way, we
encourage other countries to do so.
From the United States standpoint, we think that you and
the administration have negotiated an excellent treaty that is
a benefit to the aircraft industry and perhaps to others that
you have noted. Yet all of that good work would come for naught
if we fail to act. Our dragging our feet might make other
countries drag their feet, or at least make them more reticent
to step up to the plate. I thank you for the special efforts
that have come about to prepare for this hearing, and for the
body of work that you perform.
If we were in any forum other than this body, that is the
U.S. Senate, or the House of Representatives, we would be
talking about jobs. We would be talking about how to employ
more Americans in good paying jobs, and in sophisticated
industries in which we are very competitive.
Sometimes people ask, why in the Senate Foreign Relations
Committee are you involved in such mundane matters as jobs, and
American industry? Well, this is a major foreign policy issue.
It's a major domestic issue. It's an issue for all Americans.
What we're talking about today is expediting the
possibilities that, as you pointed out, Mr. Rosen, the skies
will be safer if there are new aircraft with state-of-the-art
safety mechanisms and abilities to handle take-offs and
landings at will. So that will be a safety factor for us and
for the world.
To get to that point someone must produce these aircraft
and this equipment. We're very hopeful that it will be American
workers in American plants. We believe, because we are state-
of-the-art and competitive, that there is a very good
possibility that that will be the case.
Having said all that, let me ask these technical questions
of you for the benefit of filling out our record today. First
of all, Mr. Donnelly, will revision of the Bilateral Investment
Treaty, as you and I have both called the BITs, affect
obligations under any other agreements to which the United
States, or the eight countries we're considering today, or the
EU, are a party?
In other words, are there side effects, other effects that
we should take into consideration in our action on these
Mr. Donnelly. Thank you, Mr. Chairman. First let me just
endorse all of the comments that you have just made about the
importance of timing and U.S. leadership on this. We really
think that as a major producer of aircraft and helicopters, the
United States is going to be a major player in this, and it's
very important that we be at the table from the very start. And
we think that our being in a position to ratify early will help
spur, as you said, Mr. Chairman, other countries joining it.
On your specific question about, if I can call it corollary
effects of this, we do not believe that there will be any.
There has been similar issues raised by a few of the Eastern
European countries regarding other agreements totally separate,
outside of this area, more in the trade agreements area, and
whether their accession to the EU requires some adaptation in
those agreements. And there's a separate process underway
within the administration involving the State Department, the
U.S. Trade Representatives Office. But as far as any directly
related effects that would flow from these amendments, we do
not believe there are any, and it's been very carefully
reviewed by the interagency experts, sir.
The Chairman. Let me followup with a more specific question
about the EU itself. Will these amendments to the BITs result
in increased consultation requirements by the EU? If so, how
would this benefit American industry doing business in the
relevant countries? Has a formal consultation procedure been
established at all at this point?
Mr. Donnelly. Mr. Chairman, can I take that question and
get an answer----
The Chairman. Yes.
Mr. Donnelly [continuing]. For you for the record. I don't
want to speak in an ad hoc way and mislead the committee.
The Chairman. It would be preferable to research the issue
and come back to us.
Mr. Donnelly. Yes, sir. We will get you a thorough answer
to that question.
[The following response was subsequently supplied.]
As reflected in the understanding negotiated at the same time as
the amendments, the United States and the European Commission made a
political commitment to consult whenever new EU measures affecting
foreign investment are under consideration and raise questions of
compatibility between U.S. law and pre-existing international
agreements between a Member State and the U.S. We further acknowledged
that such consultation would take place through existing channels, for
example, through informal contacts between the Commission and U.S.
officials responsible for investment, diplomatic channels, and the
U.S.-EU Senior Level Coordinating Group. The political understanding
reached by the U.S. and the Commission also calls for a mutual good-
faith effort to take into account the views of countries with
international agreements with the U.S.--they may be new candidates for
accession or Member States--that may be affected by the contemplated
We believe these consultations should have a salutary effect on
U.S. business interests in the region, because they provide a means by
which to head off any problems before they materialize.
Separately, in the Protocols amending the BITs that are before the
committee, the United States and each of its BIT partners agree to
consult promptly whenever either party to the BIT believes that steps
are necessary to assure compatibility between the BITs and the EC
Treaty. In such a case, traditional diplomatic channels would be
utilized. Given that both the understanding and amendments contemplate
only established channels for these new consultation commitments, we do
not contemplate creating new ones to address related issues.
The Chairman. In addition to affecting the ability of
United States firms to do business in the BIT countries, will
the amendments to the BIT benefit their ability to do business
throughout the region?
Mr. Donnelly. Yes, sir. That is one of the important
benefits that we see in this package that we have been able to
negotiate. We have gotten a clear understanding in writing from
the European Commission that U.S. businesses established in one
of these six acceding countries will have the full benefits.
Whether they are previously established or to be established
companies, that they will be able to take the full benefit of
being able to operate from that base and be able to carry
forward into the broader European market, which as you know,
Mr. Chairman, is a large and rapidly expanding effort.
That was a very important issue for our business community
and one that we were able, we believe, to find a solution that
represents a clear step forward for our companies.
The Chairman. Has there been a framework developed, Mr.
Donnelly, for modifying existing agreements that we have with
countries that are poised to join the EU?
Mr. Donnelly. Mr. Chairman, we believe the process we have
gone through in this effort provides a framework. As you
pointed out, six of the countries are acceding in the very
short term, two others are on a somewhat slower path to accede
in 2007. But the European Union has broader plans to continue
expansion as countries qualify and step forward to express
And we believe that the process that we've gone through,
the model that we have developed here will provide a framework
for us to use if this same issue should arise as other
countries that we have Bilateral Investment Treaties with come
forward in the accession process.
The Chairman. Presumably, we'll be closely following EU
accession efforts. These go on for quite awhile, and so would
not be a surprise. On the other hand, during some other Foreign
Relations Committee hearing at some stage, other countries may
come on the horizon. I raise the question simply as a matter of
precedent. Having proceeded in this way with these eight
countries almost in routine fashion we wish to move ahead with
others as they come in line.
Mr. Donnelly. You know, we obviously will have to deal
with--Mr. Chairman, the EU does have an ambitious expansion
plan in mind. The time table will obviously be worked out
between those countries and Europe. The United States has long
been on record as supporting the process of European
integration, we believe it is in our political interest, it's
in our economic interest, and we want to support it.
At the same time we want to make sure that our interests,
particularly our economic interests are protected. So we will
carry forward, I believe, a very similar process as the
accession process moves forward, and I would think that you're
quite correct that over the coming years you may see very
similar packages coming back.
Obviously, we'll have to study carefully each individual
Bilateral Investment Treaty and each individual country
situation to make sure that we are finding the right package
that fits each particular situation, but we believe that the
general model that we have been able to work out here will work
in similar situations.
Obviously, the European Commission will be a major player
in that process, they have been the third party in this
negotiation as we've negotiated with each of these eight
acceding countries individually. We've also had the European
Commission fully involved in that process, and they would be a
major player as other accession candidates come forward. So I
think we will be building on this model, sir.
The Chairman. Without being too confusing, let me skip back
to the Cape Town Convention Protocol for just a moment and
highlight a paragraph in your testimony that I thought was
helpful for the understanding of our members.
You've pointed out that the treaty will facilitate the
acquisition of newer, safer aircraft and help developing
countries without private capital. The proposal that this new
treaty will be in place in the near future has already been
reflected in the United States Export-Import Bank preferential
exposure fee terms for borrowers from countries that ratify and
implement the Cape Town Convention and Protocol.
Several major sales of U.S. equipment have been made or
will be made based on the expectation of other countries. The
United States will ratify the treaty.
I point at the very practical basic dollars and cents issue
frequently, even though the countries that we're talking about
that might be interested in ratifying this and that may now
come in because the United States is involved, may do so for
these reasons. An entity such as our Export-Import Bank
suddenly becomes available to them on very favorable terms to
loan them money, if there happened to be capital shortages for
these large investments in aircraft in the countries.
I mention that because frequently these treaties sort of
float by. It's thought well and good that we were all visiting
with each other, but in this case there is a very, very
practical side to this, and it involves American institutions
and specifically EX-IM Bank, and perhaps others as the case may
be. As we've already pointed out, it doesn't come into force,
at least in the second instance, until eight countries are
aboard. As the United States comes aboard, that might make
number 4 and number 5, so the need for leadership here is once
Let me ask, Mr. Rosen, these technical questions of you.
The Convention and Protocol specifically indicate consistency
with the United States bankruptcy law. They are not intended to
affect a state's existing insolvency system. There is no
reference to the provisions of U.S. law, which specifically
deals with aircraft equipment and vessels. How, if at all, do
the Convention and the Protocol interact with those provisions?
What are the potential effects of this interaction?
Mr. Rosen. Well, thank you, Mr. Chairman, for giving me the
opportunity to address that, because one of the real positives
of this Convention is that it's so consistent with the existing
Uniform Commercial Code that we have in the United States, in
our various States. And so as a practical matter there will not
really be inconsistencies, they'll be one new aspect in terms
of the registration, that they'll be a single port of
registration through the FAA into the international registry,
but in terms of the basic terms, this is part of why the United
States has so few declarations that will be needed.
The basic law is extremely similar to that that already
exists under Article 9 of the Uniform Commercial Code, and so
in some instances there's new terminology, let's say of
international interest as opposed to security interest, but the
concepts are fundamentally the same.
And so in terms of U.S. law while this would augment and
supplement it, it really will not be a significant change in
terms of what we're already doing, but it will produce
efficiencies through the consistency that will be available in
an international context to have the kinds of rights and
remedies, and the transparent priorities available for people
to identify what interests exist. And the ability to have
prompt relief in the event of insolvencies that those
efficiencies, from having a clear law akin to what already
exists in the United States, will enable benefits to take place
in an international sale context.
The Chairman. I appreciate your answer, which encompasses
the Uniform Commercial Code. I also appreciate the fact that it
has been adopted by all 50 of our States, and has fairly well
developed case law background now. The coincidence of the
treaties that we're discussing today with our own Uniform
Commercial Code is especially important. I thank you for
Let me ask this question. The Convention and Protocol
provide that the FAA will have heightened responsibilities,
with respect to these additional international obligations. Is
the FAA presently equipped to handle this new responsibility.
If not, what is required to provide it with the ability to take
on these new tasks?
Mr. Rosen. Well, Mr. Chairman, let me say that while there
are some new tasks for the FAA, I don't think that they are
major or substantial burdens, in terms of what will be
required. Primarily, the most important aspect is the operation
of the entry from the United States standpoint, of the notice
filings of the interest in the registry. And for that the FAA
will need to participate and we have asked for--the
administration has asked for some amendments to the--some
technical amendments, really, to the FAA legislation or
statutes, I should say, to enable that.
But I think that the FAA is prepared, and the FAA has been
a participant at every phase of the process and the
negotiations leading up to this and is quite ready to take on
the responsibilities that would be entailed by ratification of
the Convention and Protocol.
The Chairman. Let me ask now if there are any additional
items that either of you would like to highlight for the
benefit of the record. We have your testimony in full. You have
summarized your comments. Hence, I have gone back, Mr.
Donnelly, to some of your testimony, which I felt was
especially pertinent in a practical way, in illustrating the
relevance of the treaty.
For the sake of the record, do either one of you, or both,
have some final comment that you would like to make about these
Mr. Donnelly. Mr. Chairman, thank you. I would like to just
pick up on the point that you raised about the practical effect
on the Export-Import Bank. The Export-Import Bank at a very
senior level, one of their vice presidents, Robert Morin who is
here with us today has been a full member of the negotiating
team and they have been intimately involved every step of the
So we think this is a case where, although this is a formal
legal treaty, it is very much grounded in the practicalities of
the business world and actual deals. And I believe the Export-
Import Bank is on record as having said they are reducing their
exposure fee by 33 percent, from 3 percent to 2 percent for
airlines that purchase equipment through the EX-IM Bank in
countries that have signed on to this treaty.
So I think it does have the effects that you were pointing
out about really being able to provide an impetus of increased
sales, newer aircraft, safer aircraft. This is really very much
a treaty that can have very practical benefits for us and for
all the countries of the world, and we appreciate the prompt
efforts of the committee to look at it and try to help us move
it forward. Thank you very much.
The Chairman. Mr. Morin, would you identify yourself? Thank
you for attending the hearing. Mr. Donnelly, are there others
who are here today who have been especially important in the
formation of this work that should be recognized?
Mr. Donnelly. Well, I believe--and perhaps my colleague
could do a better job, but we do have two senior FAA
representatives who have been full members of the delegation,
Jeff Klang and I believe Joe Standell, one from headquarters
and one from the Oklahoma City office which is the center of
this aviation effort, and they have been key members.
We also have Jeffrey Wool and representatives of the
aircraft group--aviation group in the private sector and
members of some of the leading companies I see in the crowd as
well here today. So I think we are--it's a very clear
indication of the broad support and the collaboration that has
been behind this effort and part of that has obviously been the
consultation process with members of your staff, Mr. Chairman.
The Chairman. Well, we appreciate the attendance of each of
these public and private officials today. Putting heavier
credentials to work is what we are about.
Mr. Rosen. Thank you, Mr. Chairman. I think the one
additional thing that I would like to underscore is what a win,
win proposition this particular Convention and Protocol are,
because it has the benefits of--by virtue of being an
efficiency enhancement of providing benefits simultaneously to
the sellers and the workers of the companies who are making and
selling the products and to the borrowers who are the
purchasers of the equipment at issue.
And so it's truly one of these win, win situations, and I
think it's in part for that reason that another important
aspect of the Convention, that the aircraft Protocol is set up
to be the first of what would be several available Protocols.
So the Convention is an equipment Convention that can
accommodate future Protocols, and in that regard there are
already processes underway for potential Protocols in the
future that might deal with railway rolling stock and drill
equipment, possibility space equipment, and perhaps in the
future high value mobile agricultural or construction
And so the structure of this particular Convention is one
that, because it is a win, win kind of set up, an efficiency
enhancing setup is one that I think is of great interest in a
number of contexts. But this is a terrific place to begin and
to demonstrate the benefits, and as you underscored the
practical benefits that are already being realized through the
reduction of exposure fees and credit costs.
And so I welcome you and your committee's readiness to take
this up so promptly and with so much attention, and hope that
what I've been able to provide here today provides some help to
The Chairman. Let me just say that the comment that you
have made is especially interesting. You had mentioned some
very important industries that might use the same framework,
with, I suppose, slight modifications of language pertinent to
those industries. Where in the grist of the mill process are
these agreements? Are they well along? How could you describe
Mr. Rosen. Well, I think it's fair to say that they're at
different stages, that some of them are more inchoate than
others, that the ones with regard to the rail stock and rail
equipment is perhaps underway, but that these are, I think the
subject of continuing negotiation processes and are something
that will continue.
But in part, the success of the aircraft Protocol if
countries are able to move ahead and ratify it and take
advantage of it's benefits will prove a model of how these
things might be done.
The Chairman. I appreciate that. I'm sure that all
Americans who are listening to this record will appreciate
this, because each of these industries, for the same reasons
we're discussing the aircraft industry, have vital employment
opportunities. They offer new jobs for Americans, and new
possibilities, utilizing our basic institutions.
We wish you and your colleagues well as you all help these
procedures move ahead. Let me mention that we'll keep the
record of the hearing open for the rest of the day in the event
that members who were not able to attend the hearing have
questions that they may wish to submit. We hope that you would
respond quickly to such questions, as well as to the one
question that you reserved, Mr. Donnelly, earlier on, so that
our record will be complete.
I want to consult closely with Ranking Member Senator Biden
to put this on the agenda of our next mark up. It is
problematic simply because of the schedule of the Senate. We
want to make certain that we are all here, and that we have
some reasonable chance of getting a quorum.
It is a high priority for our committee's activity. We
would hope to get the treaty to the Senate floor so that our
colleagues, all of them, could consider its merits. We thank
both of you for coming, as well as your staffs, and those who
have supported you. Likewise, we thank staff on both sides of
the aisle here who have made this hearing very successful.
Having said that, the hearing is adjourned.
Mr. Donnelly. Thank you, sir.
Mr. Rosen. Thank you, sir.
[Whereupon, at 10:23 a.m., the committee adjourned, to
reconvene subject to the call of the Chair.]
Additional Questions Submitted for the Record
Response of Hon. Shaun Donnelly to an Additional Question for the
Record Submitted by Senator Richard G. Lugar
Question. The testimony describes a process for consultations to
take place between the U.S. and the European Commission to address
certain issues that may arise in the future. Would such consultations
be in addition to the procedures that already exist or would new
channels need to be created for such consultations to take place?
What, if any, effect would such consultations have on U.S. business
interests in the region?
Answer. As reflected in the understanding negotiated at the same
time as the amendments, the United States and the European Commission
made a political commitment to consult whenever new EU measures
affecting foreign investment are under consideration and raise
questions of compatibility between U.S. law and pre-existing
international agreements between a Member State and the U.S. We further
acknowledged that such consultation would take place through existing
channels, for example, through informal contacts between the Commission
and U.S. officials responsible for investment, diplomatic channels, and
the U.S.-EU Senior Level Coordinating Group. The political
understanding reached by the U.S. and the Commission also calls for a
mutual good-faith effort to take into account the views of countries
with international agreements with the U.S.--they may be new candidates
for accession or Member States--that may be affected by the
We believe these consultations should have a salutary effect on
U.S. business interests in the region, because they provide a means by
which to head off any problems before they materialize.
Separately, in the Protocols amending the BITs that are before the
Committee, the United States and each of its BIT partners agree to
consult promptly whenever either party to the BIT believes that steps
are necessary to assure compatibility between the BITs and the EC
Treaty. In such a case, traditional diplomatic channels would be
utilized. Given that both the understanding and amendments contemplate
only established channels for these new consultation commitments, we do
not contemplate creating new ones to address related issues.
Responses of Hon. Shaun Donnelly to Additional Questions for the Record
Submitted by Senator Joseph R. Biden, Jr.
Question 1. Are there any related exchange of notes, official
communications, or statements of the U.S. negotiating delegation not
submitted to the Senate with regard to the Convention and the Protocol,
which would provide additional clarification of the meaning of the
terms of the Convention and the Protocol? If so, please provide them.
Answer. There were no exchange of notes or official communications
with regard to the meaning of the terms of the Convention and the
Protocol. With regard to statements of the U.S. negotiating delegation,
an official record of the deliberations of the Diplomatic Conference
has not been issued, although we have requested an unofficial copy from
the Secretariat and we will provide that to the committee when
received. We believe that the record of the meetings will not
contribute to the meaning of terms, beyond what has already been set
forth in the Official Commentary.
Question 2. What is the view of the executive branch with regard to
the authoritative nature of the Official Commentary issued by UNIDROIT?
Answer. The Official Commentary of the Convention and the Protocol,
issued by UNIDROIT in September 2002, is an interpretive aid. The
Commentary was authorized to be issued by a formal Resolution of the
Diplomatic Conference. It was produced by the appointed Rapporteur,
together with the chairs of each committee of the Conference and in
close collaboration with key participating States. The United States
delegation and U.S. industry representatives reviewed every provision
of the Commentary, and are satisfied with its accuracy.
Question 3. Does the executive branch regard the Convention and the
Protocol as self-executing? Are there any provisions of either which
are not self-executing? Please be specific.
Answer. The financing and other basic provisions of the Convention
and Protocol on secured interests, transactional remedies, etc., do not
require any implementing legislation, state or federal, and to that
extent are self-executing. The basic concepts of the Convention and
Protocol were drawn from the uniform state law in the United States
(Uniform Commercial Code, Article 9 on secured finance) and the
transaction results are consistent with that law, so that there is no
need for further legislation to have its provisions implemented by
The exception to the above relates only to the Federal Aviation
Administration's (FAA) role in the new finance-registry system. All key
participants, government and industry, in the United States have agreed
that, both for overall effectiveness of aircraft finance and
maintaining the effectiveness of the FAA's current role in
registrations for aircraft interests, the FAA should be the single
point of entry for authorization for filings under the Convention for
U.S. registered aircraft, which would occur at the FAA's main registry
facility in Oklahoma City. In order for that to operate properly,
technical amendments to the FAA's current authority have been submitted
to Congress by the Department of Transportation.
The technical amendments essentially do three things: first, they
update the FAA's statutes by adding references to the new Convention
registry and provide that the FAA will be designated as the ``entry
point'' for registration of U.S. aircraft and engines for filings under
the new system. Secondly, they provide that deregistration and filing
authorization follow the Convention's requirements as to consent of
affected parties. Thirdly, they provide for filings of prospective
interests, a modem approach followed by the Uniform Commercial Code and
standard in such financings, but not included in FAA standards set in
the 1950s. There is no known opposition to these amendments, they track
modem aircraft finance, and they have been supported by all key
participants in the air-finance sector.
The effect of the foregoing is that transacting parties may bring
actions based on the provisions of the Convention and the aircraft
finance Protocol in the courts of a State party to the Convention. As a
general matter, the Convention establishes certain financing interests
in covered transactions, and transacting parties can seek enforcement
thereof without requiring prior approval or action of governmental
authorities with regard to claims brought under the Convention or
Protocol. The Convention and Protocol do not however supercede
otherwise applicable law, except to the extent a matter is resolved by
those treaty texts. Thus transacting parties in the U.S. could also
cite grounds for action under the Uniform Commercial Code or other
applicable law, but would not need to do so; in the case of conflict,
the provisions of the Convention would prevail.
Question 4. Your testimony describes extensive consultation with
other federal agencies and interested parties in the private sector.
During the course of the negotiations, were there any consultations
with this committee? If not, why not?
Answer. During the course of negotiations, the State Department did
not brief the Senate Foreign Relations Committee (the SFRC), but rather
relied upon aviation industry representatives who had contact with
members of the SFRC from time to time. In briefings done by industry
representatives, materials that were provided to staff, had been
discussed with and approved by the federal agencies working on the
Convention and the Protocol.
I understand this question as reflecting a desire by the SFRC to be
kept better informed by the State Department during the course of
negotiations. My colleagues and I take note of that desire and will
certainly endeavor to be more proactive in the future.
Question 5. Article 5(3) of the Convention states that
``[r]eferences to the applicable law are to the domestic rules of the
law applicable by virtue of the rules of private international law of
the forum State.'' The term ``applicable law'' is not defined in
Article 1. Does the meaning of ``applicable law'' as set forth in
Article 5(3) apply to the same term when used elsewhere in the
Convention (e.g., the term ``applicable law'' is found in several other
articles, such as Articles 12, 30(2) and 50(3))?
Answer. The definition provided in Article 5(3) is the commonly
applied definition of that term in private international law
conventions, such as the United Nations Convention on Contracts for the
International Sale of Goods (Article 7) and the United Nations
Convention on the Recognition and Enforcement of Foreign Arbitral
Awards (Article 5). The common definition of ``applicable law'' set
forth in article 5(3) is intended to applywhenever the term is used in
Question 6. In the proposed declaration for Convention Article
39(1)(b), does the term ``any entity thereof'' include states and
Answer. Yes, the term ``any entity thereof'' is intended to include
states, municipalities and other political subdivisions.
Question 7. What is the purpose of Convention Article 40, in
contrast to Article 39(1)(a)? That is, Article 39 does not require a
non-consensual right to be registered, and Article 40 does. Why is this
distinction made in the Convention?
Answer. Article 39 applies to certain non-consensual rights or
liens, which by domestic law in a particular jurisdiction may have
priority without registration. Article 40 permits a State to require
that those non-consensual rights, as well as other non-consensual
rights that may not have priority by virtue of their domestic law, will
nevertheless acquire such priority pursuant to the Convention upon
registration on a first to file basis. For developing countries that
wish to enhance their credit capacity under this Convention system it
will be important to maximize the application of Article 40 with
respect to such rights or liens, rather than rely on Article 39, since
the requirement to register such liens in order to obtain priority will
have a significant effect on ensuring predictability for creditors. By
way of contrast, since the United States already has a well functioning
aircraft-finance market, declarations recommended for the United States
in the Secretary of State's Report transmitted to the Senate by the
President, Senate Treaty Doc. 108-10, cover only Article 39, and would
therefore preserve intact existing practices in the United States.
Question 8. Article XIII of the Protocol provides a procedure for a
debtor to issue an irrevocable deregistration and export request
authorization. The Secretary of State's letter, and the Official
Commentary, indicate that this process is subject to related aviation
safety laws and regulations. Is the export of aircraft in this manner
also subject to any applicable export control laws and regulations in
the United States? Please elaborate.
Answer. Absent express provisions to the contrary, neither the
Capetown Convention nor the Protocol would have any affect on export
control laws or regulations. The only regulatory matter affected by an
express provision in the Protocol relates to aviation safety
procedures. Thus, the Convention and the Protocol will have no effect
on export and national security law or regulations and will provide no
limitation on the exercise of those constraints by the relevant
additional protocols with eu acceding countries or candidate countries
Question 1A. Each protocol contains an exchange of letters
regarding the ``essential security interests'' clause in each of the
Was the discussion with the European Commission and with the
Acceding Countries and the Candidate Countries about the possible
applicability of the ``essential security interests'' clause limited to
the issue of possible restrictions on capital movements?
Answer. The issue of ``essential security interests'' arose in
discussions with the European Commission and the Acceding and Candidate
Countries only in the context of the existing EU authority under the EC
treaty to impose restrictions on capital movements in limited
circumstances and actions that Acceding and Candidate Countries might
need to take to comply. However, the provision in our BITs is not
limited to this context.
Question 1B. Do you envision that the countries might be compelled
by their EU obligations to invoke the ``essential security interests''
clause in other contexts?
Answer. Although we are not aware of circumstances where the
``essential security interests'' clause has been invoked by a Party to
a U.S. BIT to defend actions otherwise inconsistent with BIT
obligations, the possibility that it might be invoked in the future in
relation to EU obligations in contexts other than capital movements can
not be excluded entirely. It is difficult to envision under what
circumstances this might occur. Measures permitted by the provision on
the protection of a Party's essential security interests would include
security-related actions taken in time of war or national emergency.
Actions not arising from a state of war or national emergency must have
a clear and direct relationship to the essential security interest of
the Party involved. We view measures to protect a Party's essential
security interests as self-judging in nature, although each Party would
expect the provisions to be applied by the other in good faith.
Question 1C. Was it understood that the ``essential security
interests'' clause should only be invoked in extraordinary
Answer. Yes. During our discussions with the European Commission
and Acceding and Candidate Countries, we discussed the meaning and
purpose of this clause.
Question 1D. Has the ``essential security interests'' clause been
invoked under the current BITs with any of the Acceding Countries or
Answer. Although the United States has never been a party to an
investor-State dispute under any of our Bilateral Investment Treaties,
U.S. investors have invoked the dispute settlement provisions of our
BITs against several of our treaty partners, including some of the
Acceding and Candidate Countries. We are not aware, however, of any
instance in which the ``essential security interests'' clause has been
invoked in any of those cases.
Question 2. If the United States does not ratify these protocols,
is it the view of the Department that the Acceding Countries and
Candidate Countries would likely decide to terminate the Bilateral
Answer. Yes. Although we cannot be certain of the actions that
individual countries would take, our assessment is that, if it became
evident that the U.S. did not intend to ratify these protocols, the
European Commission would renew its efforts to encourage these
countries to terminate their BITs with the U.S. by, among other things,
threatening infringement proceedings. We believe that given the
Acceding Countries' commitments in their Acts of Accession to address
incompatibilities or withdraw from their international agreements with
third countries, the Accession Countries would be likely to provide
notice of termination of their BITs with the U.S. Candidate Countries
would also be likely to do so, although the more distant date of their
actual accession might affect the timing of their decision.
STATEMENTS SUBMITTED FOR THE RECORD
Aviation Working Group,
March 29, 2004.
Senator Richard G. Lugar, Chairman,
Senator Joseph R. Biden, Ranking Member,
Committee on Foreign Relations,
Re: Cape Town Convention and the Aircraft Protocol
Dear Senators Lugar and Biden,
I write to you as Secretary of the Aviation Working Group (AWG), a
non-profit entity whose members are the major aerospace manufacturers
and financial institutions set forth in annex 1 hereto.
I write to underscore the firm support of the AWG and its members
for the Cape Town Convention and the Aircraft Protocol, and to express
appreciation for the Committee's decision to take action on these
instruments this term. We have also been authorized to pass to the
Committee a letter of support from the Air Transport Association, and
attach that letter as annex 2 hereto.
AWG has actively participated in the development and negotiation of
the Cape Town instruments for a number of years, working in close
coordination with the U.S. government negotiating team among others.
We believe that prompt and widespread ratification of the Cape Town
instruments will significantly promote a wide range of aerospace
interests, starting with increased aerospace exports and job creation.
We also believe the texts will advance broader governmental interests,
including adoption of commercially-oriented rules of law in cross-
Please do not hesitate to call on us to provide any assistance as
advice and consent to ratification is considered over the coming
Aviation Working Group/AWG
awg structure and membership
AWG is a not-for-profit legal entity whose members are:
The Boeing Company
Boullioun Aviation Services, Inc.
DVB Bank Aktiengesellschaft.
E M B R A E R--Empresa Brasileira de Aeronautica S.A.
GE Capital Aviation Services Inc.
General Electric Company
Indosuez Air Finance S.A.
International Lease Finance Corporation
JPMorgan Securities Inc.
Morgan Stanley & Co. Incorporated
Singapore Aircraft Leasing Enterprise Pte. Ltd.
United Technologies Corporation (Pratt & Whitney Division)
Air Transport Association,
1301 Pennsylvania Ave., Suite 1100,
Washington, DC, June 13, 2004.
Mr. Jeffrey Wool, Secretary
Aviation Working Group
c/o Perkins Coie
607 14th Street, 8th Fl.
Washmgton. DC, 20005
Re: Cape Town Convention and its Aircraft Protocol
As you know, ATA has followed the development of the Cape Town
Convention and its Aircraft Protocol (the ``Convention'') inc1uding the
recent U.S. signature thereof and efforts now underway to seek prompt
ratification of these instruments.
We are also aware of the active role played by the Aviation Working
Group within the framework of a broad U.S. effort to develop and
promote these instruments.
While we have not felt it necessary to play an active role
regarding the Convention, ATA does support its ratification. That
support stems, in part, from the fact that the U.S., through its
permitted declarations to the treaty, will ensure the continuation of
current recordation procedures and priorities via use of the Federal
Aviation Administration as the interface with the new international
registry created under the Cape Town Convention.
Please feel at liberty to pass this letter to others involved in
the ratification process. I would be happy to respond to any questions
regarding this matter.
James L. Casey,
President & Deputy General Counsel.
General Electric Company,
One Neumann Way,
Cincinnati, OH, March 29, 2004.
Honorable Richard G. Lugar, Chairman,
U.S. Senate Committee on Foreign Relations,
Dirksen Senate Office Building,
Honorable Joseph R. Biden, Ranking Member,
U.S. Senate Committee on Foreign Relations,
Dirksen Senate Office Building,
Re: Cape Town Convention and its Aircraft Protocol
Dear Senators Lugar and Biden,
I write to you to underscore our firm support for the Cape Town
Convention and its Aircraft Protocol, and to express General Electric's
sincere appreciation for the Committee's decision to take action on
these instruments this term.
GE's Aircraft Engines component has actively supported the
development of Cape Town for a number of years, working in close
coordination with the U.S. government negotiating team.
The ability to protect the interests of U.S.-based manufacturers in
cross-border transactions is vitally important to us. We believe that
prompt ratification of the Cape Town Convention will help to promote a
wide range of U.S. interests and should provide a much needed boost for
aerospace exports and job creation. We also believe the Convention will
advance broader U.S. interests, including adoption of commercially
oriented rules of law in cross-border trade.
Please do not hesitate to call on us to provide any assistance as
advise and consent to ratification is considered over the coming
David L. Calhoun,
President and Chief Executive Officer,
GE Aircraft Engines.
Pratt & Whitney,
400 Main Street,
East Hartford, CT, March 30, 2004.
The Honorable Richard G. Lugar,
Chairman, Committee on Foreign Relations,
United States Senate,
Dear Mr. Chairman:
I write to reiterate the strong support of Pratt & Whitney and
United Technologies Corporation for the Cape Town Convention and its
Aircraft Protocol. Prompt ratification of Cape Town is crucial and we
appreciate the Committee's decision to take action early this year.
We have actively worked to support the development, negotiation and
now ratification of the Cape Town Convention for a number of years.
This convention will significantly promote a wide range of U.S.
interests, including the health of the aerospace industry and the
creation ofjobs. Moreover, Cape Town will promote the adoption of
commercially oriented rules of law in cross-border trade, which
benefits us all.
We hope that the Senate Foreign Relations Committee will continue
to move expeditiously with its consideration of the Cape Town
Convention. Prompt ratification by the United States will certainly
serve as incentive for other countries to ratify, opening up additional
markets for U.S. exports.
Please do not hesitate to call on us to provide any assistance that
may be required as the Senate moves forward with advice and consent of
the Cape Town Convention over the coming months.
Louis R. Chenevert,