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[Senate Treaty Document 108-10]
[From the U.S. Government Publishing Office]

108th Congress                                              Treaty Doc.
 1st Session                                                     108-10








                          ON NOVEMBER 16, 2001

 November 5, 2003.--Treaty was read the first time, and together with 
the accompanying papers, referred to the Committee on Foreign Relations 
          and ordered to be printed for the use of the Senate
                         LETTER OF TRANSMITTAL


                                 The White House, November 5, 2003.

To the Senate of the United States:
    I transmit herewith, for Senate advice and consent to 
ratification, the Convention on International Interest in 
Mobile Equipment and the Protocol on Matters Specific to 
Aircraft Equipment, concluded at Cape Town, South Africa, on 
November 16, 2001. The report of the Department of State and a 
chapter-by-chapter analysis are enclosed for the information of 
the Senate in connection with its consideration.
    The essential features of the Convention and Aircraft 
Protocol are the establishment of an international legal 
framework for the creation, priority, and enforcement of 
security and leasing interests in mobile equipment, 
specifically high-value aircraft equipment (airframes, engines, 
and helicopters), and the creation of a worldwide International 
Registry where interests covered by the Convention can be 
registered. The Convention adopts ``asset-based financing'' 
rules, already in place in the United States, enhancing the 
availability of capital market financing for air carriers at 
lower cost. The Convention's and Protocol's finance provisions 
are consistent with the Uniform Commercial Code with regard to 
secured financing in the United States.
    This new international system can significantly reduce the 
risk of financing, thereby increasing the availability and 
reducing the costs of aviation credit. As a result, air 
commerce and air transportation can become safer and 
environmentally cleaner through the acquisition of modern 
equipment facilitated by these instruments. The new 
international system should increase aerospace sales and 
employment, and thereby stimulate the U.S. economy.
    Negotiation of the Convention and Protocol has involved 
close coordination between the key Federal agencies concerned 
with air transportation and export, including the Departments 
of State, Commerce, and Transportation, as well as the EXIM 
bank, and U.S. interests from manufacturing, finance, and 
export sectors.
    Ratification is in the best interests of the United States. 
I therefore urge the Senate to give early and favorable 
consideration to the Cape Town Convention and Aircraft 
Protocol, and that the Senate promptly give its advice and 
consent to ratification, subject to the seven declarations set 
out in the accompanying report of the Department of State.

                                                    George W. Bush.
                          LETTER OF SUBMITTAL


                                       Department of State,
                                     Washington, September 8, 2003.
The President,
The White House.
    The President: I have the honor to submit to you, with a 
view to its early transmittal to the Senate for advice and 
consent to ratification, the Convention on International 
Interests in Mobile Equipment and the Protocol on Matters 
Specific to Aircraft Equipment, concluded at Cape Town, South 
Africa on November 16, 2001 (the ``Cape Town Convention''). The 
Convention and the accompanying Protocol on aircraft equipment 
were signed by the United States in Rome on May 9, 2003 at the 
International Institute for the Unification of Private Law 
    The new treaty system will expand credit financing across 
the world for the acquisition of commercial aircraft, and 
eventually other types of equipment important to U.S. exports, 
by introducing modern commercial finance law already in place 
in the United States, which will directly benefit our 
manufacturers and other export interests.
    Enabling other countries to acquire newer aircraft will 
also upgrade aircraft safety around the world. By facilitating 
new sales and leasing transactions, the Convention will provide 
a needed boost for the industry, a critical factor given the 
effects of September 11 and more recent world events, as well 
as the general downturn in the air transportation market.
    The Cape Town Convention, when effectively implemented by 
other States, will bring about a substantial change in the 
secured transaction and leasing laws around the world. Many 
legal systems lack transparent priority systems of the sort in 
place in the United States, which will be remedied by the 
International Registry. Many legal systems require elaborate, 
time consuming and expensive enforcement procedures, which will 
be streamlined by the Convention's procedures. In sum, the 
Convention represents an opportunity for many States to quickly 
upgrade their legal infrastructure, thereby attracting capital 
to aircraft equipment, a major U.S. export and source of 
employment. Prompt and wide adoption of these instruments will 
also add momentum to other law reform initiatives that promote 
other U.S. trade objectives.


    The Convention and Protocol were negotiated over a five-
year period under the auspices of UNIDROIT, an international 
body dealing with private law conventions, and ICAO, the 
International Civil Aviation Organization. They were concluded 
in November 2001 at a Diplomatic Conference at Cape Town, South 
Africa, attended by 68 States and 14 international 
organizations, and involved the active participation at all 
stages of the Conference by private sector air transportation 
and finance interests. Negotiations were intended to track 
existing air finance practices in the major capital markets and 
thereby facilitate new transactions, especially in developing 
and emerging countries, which will be increasingly significant 
in coming decades.
    Analyses of the markets indicated that a treaty extending 
financing methods which are already in place in the United 
States through the Uniform Commercial Code (UCC) would benefit 
other countries as well as U.S. manufacturing, employment, 
finance and export interests.
    Key federal agencies concerned with civil aviation and U.S. 
exports, including the FAA, EXIM Bank, and the Departments of 
Transportation, Commerce and State were fully involved in 
negotiation of the Convention and in preparation for its 
implementation. U.S. signature and ratification was endorsed by 
these agencies in a recommendation made in October 2002 by the 
Interagency Group on International Aviation (IGIA), 
administered by the Federal Aviation Administration (FAA).


Major Provisions

    The Convention, which relates to air transportation and 
interstate and foreign commerce, provides for the creation of 
internationally recognized finance rights and enforceable 
remedies designed to give greater security to financiers of 
highly mobile equipment, particularly in markets where country 
or business risk would not otherwise support such transactions. 
This will boost transactions and directly benefit U.S. 
manufacturers and other export interests. Increased aircraft 
and engine sales, in turn, will contribute to more rapid use of 
newer and thus safer and environmentally cleaner aircraft and 
engines in all regions. In many cases, the use of asset-based 
financing under the Convention will reduce sovereign debt for 
developing States, and can assist them to attract capital 
generally to upgrade their transportation infrastructure.
    The Cape Town Convention can produce significant 
macroeconomic benefits in the United States, principally by 
enhancing (i) aerospace sales and increasing employment in the 
aerospace sector, (ii) risk reduction for U.S. private sector 
financial institutions, (iii) risk reduction to EXIM Bank, 
which has already evidenced its firm support by offering 
financing advantages to airlines located in States that ratify 
the Convention, and (iv) operational and fleet flexibility for 
airline operators with crossborder routes or interests. 
Importantly, U.S. leadership will bolster and significantly 
accelerate wide adoption of these instruments.
    The Convention is designed as a ``multi-equipment'' treaty 
system, an outcome strongly supported by the United States. The 
protocol being submitted is the Aircraft Protocol, which 
applies to airframes, aircraft engines and helicopters above a 
minimum size or power threshold. The establishment of such 
thresholds maximized the U.S. ability to achieve consensus on 
the fundamental issues addressed in the Convention. The 
Convention can apply to other categories of high-value mobile 
equipment defined in additional protocols adopted through 
diplomatic procedures and that would be subject in the United 
States to ratification. Such protocols to the Convention would 
most likely recognize specialized forms of financing applicable 
to the category of equipment covered. This would permit the 
development of best practices consistent with the needs of 
different sectors.

Key Financing Concepts

    The Cape Town Convention creates an international secured 
finance system that may be summarized by the following points:
    1. The Convention establishes an ``international 
interest'', that is, a secured credit or leasing interest with 
defined rights. Those rights consist principally of (a) the 
ability to repossess and sell or lease the equipment in the 
case of default by an airline operator (remedies), and (b) the 
holding of an objectively determined and transparent finance 
priority in the equipment, where competing claims are made 
against such equipment (priority).
    2. Quiet possession rights attached to an international 
interest will be enforced and recognized in all States party to 
the Convention and Protocol, thus assuring airline operators of 
continued rights of usage of the equipment absent default or 
contrary agreement.
    3. Priority of interests will be established through a 
``notice-based'' filing system, recorded in a high-technology 
international registry, which will determine the priority of 
competing interests on a first-in-time basis, subject to 
certain exceptions. Pursuant to a declaration recommended 
below, the FAA will serve as the authorizing entry point to the 
International Registry for aircraft having or intended to have 
U.S. nationality (this Convention does not deal with 
nationality of aircraft).
    4. Associated rights, such as future payment rights and 
receivables in aircraft financing arising under contracts 
directly related to the financing arising under contracts 
directly related to the financing of equipment, are subject to 
rules similar to those applicable to international interests.
    5. The Convention promotes predictable and timely remedies 
in the case of default, reflecting basic principles underlying 
asset-based financing and leasing. This permits reliance on the 
value of the asset to reduce overall transactional risk, 
thereby reducing the cost of credit. States are given a number 
of options, in the form of permitted declarations, which 
directly relate to the timing of remedies, both in and out of 
insolvency. These include certain basic concepts found in U.S. 
law, such as the availability of non-judicial remedies, the 
timing of remedies in the event of airline insolvency, and 
efficient deregistration and export of aircraft in the event of 
default, subject to national safety and airworthiness rules and 
    6. Transaction party autonomy, the ability of creditors and 
debtors to agree as among themselves on basic elements of their 
contract and its enforcement, is central to the Convention.
    7. The international finance Registry, a basic component of 
the Convention, is similar to notice filing systems in the 
United States and Canada. Unlike a documentary system, where 
transaction documents are vetted before filing, a notice system 
involves posting minimal information only, so that other 
potential financing interests can make inquiries of possible 
superior interests prior to financings.
    ICAO will supervise the International Registry. A 
Preparatory Commission, in which the United States is a very 
active member, will establish the requirements for and 
determine the initial host State of the Registry. The host 
State is expected to fund the creation of the International 
Registry and users will pay sustaining use fees, which are 
expected to be low since the system is wholly electronic. The 
feasibility of the system has already been tested by a 
prototype developed by a body affiliated with airline 

Effect on Other Treaties

    The relationship of the Cape Town Convention to existing 
aviation conventions was carefully worked out. The 1948 
Convention on the International Recognition of Rights in 
Aircraft (``Geneva Convention'') is the only convention in 
force for the United States to which the relationship rule will 
initially apply. As between parties to the Aircraft Protocol, 
the Cape Town Convention will supersede the Geneva Convention, 
to the extent matters are covered or affected by the new 
instrument. The Geneva Convention will continue to apply to 
matters not covered by the Cape Town Convention and will remain 
fully in force as between States party to it which are not 
parties to the Cape Town Convention.

Related International Developments

    The Cape Town Convention would represent a change in the 
financing laws for many other States. However, two new related 
international legal texts have recently been negotiated in 
other bodies, by some of the same States--one at UNCITRAL (a 
new Convention on Accounts Receivable Financing, approved by 
the UN General Assembly in December 2001), and the other at the 
Organization of American States (an Inter-American Model Law on 
Secured Financing, completed at an OAS Diplomatic Conference in 
February 2002). Both adopted an approach to secured financing 
similar to that in the Cape Town Convention.


    In order to allow States to tailor the Convention to 
particular economic needs, a number of declarations are 
provided for, consistent with practice in international private 
law conventions. Since the United States already has a well 
functioning capital market for air finance, only a limited 
number of declarations are needed for the United States. The 
situation differs for many other States, where the economic 
value of the Convention is linked to the making of declarations 
designed to substantially upgrade the substantive law in that 
State, especially where that is needed to lower country and 
credit risk.
    Seven declarations (three for the Convention and four for 
the Protocol) proposed for the United States were approved by 
the Departments of Transportation, Commerce, State and DOD 
through the FAA's Interagency Group on International Aviation 
(IGIA), as well as by EXIM Bank. Where possible, the 
declarations follow the recommended UNIDROIT form in order to 
promote uniformity. The Department of State recommends that the 
Senate give advice and consent to the Convention and the 
Protocol subject to the declarations that follow:

1. Declaration for Convention Article 39(1)(a):

        Priority of non-consensual rights and interests arising 
        by law

          Pursuant to Article 39(1)(a), the United States 
        declares that 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.

    Purpose: This declaration preserves current U.S. practice. 
Article 39(1)(a) allows States to identify non-consensual 
rights and interests arising by law that, having priority 
against consensual security interests without registration 
under national law, shall maintain such priority as against 
international interests registered under the Cape Town 
Convention. United States federal and state law contain a 
variety of such priorities which would be difficult to 
harmonize (e.g., liens in favor of repairers of equipment and 
taxing authorities). This declaration gives priority to all 
such rights.

2. Declaration for Convention Article 39(1)(b):

        Retention of Rights to Compensation for Public Services

          Pursuant to Article 39(1)(b), the United States 
        declares that nothing in the Convention shall affect 
        its right or that of any entity thereof, any 
        intergovernmental organization in which it 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.

    Purpose: This declaration allows a State to preserve rights 
of detention or arrest by State entities in order to secure 
amounts owing in connection with its provision of public 
services relating to objects covered by the Cape Town 
Convention, such as air navigation and landing charges for 
aircraft. This declaration will ensure the continuation in the 
United States of governmental rights; such rights, in addition 
to their inherent policy importance, have not been impediments 
to U.S. aircraft financing transactions.

3. Declaration for Convention Article 54(2):

        Procedure for exercise of remedies

          Pursuant to Article 54(2), the United States declares 
        that 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.

    Purpose: This declaration satisfies Article 54(2) which 
requires States to declare whether they will permit or prohibit 
the exercise of non-judicial remedies in the case of default by 
a debtor. A declaration permitting such remedies ensures 
consistency with the UCC, is fundamental to the continued 
efficiency of U.S. secured transactions law.
    The Department of State further recommends that the 
following four declarations to the Protocol be included in the 
U.S. instrument of ratification:

1. Declaration for Protocol Article VIII, as authorized by Protocol 
        Article XXX(1)

        Contractual choice of law

          The United States declares that it will apply Article 

    Purpose: This declaration provides that parties can agree 
as to the law governing their contractual rights and 
obligations, wholly or in part. This declaration is consistent 
with U.S. commercial law as applied to transactions of the type 
covered by the Convention, and is consistent with other recent 
Conventions on commercial law negotiated by the United States.

2. Declaration for Protocol Article XII, as authorized by Protocol 
        Article XXX(1):

        Insolvency case assistance

          The United States declares that it will apply Article 

    Purpose: This declaration supports cross-border judicial 
assistance in insolvency cases, a practice now followed by U.S. 
bankruptcy courts in appropriate cases. It addresses cases 
where multiple national bankruptcy courts and administrators 
may be involved in various proceedings involving the same 
debtor and/or the same property. It is a non-intrusive rule, 
only requiring maximum cooperation ``in accordance with the 
law'' of the declaring State. This declaration is an important 
signal for the United States to give other States, and will 
help promote broader U.S.objectives in the field of cross-
border insolvency cooperation.

3. Declaration for Protocol Article XIII, as authorized by Protocol 
        Article XXX(1):

        Deregistration and export requests

          The United States declares that it will apply Article 

    Purpose: This declaration recognizes the effect of the 
power-of-attorney annexed to the Aircraft Protocol, to procure, 
upon default, the timely deregistration of the aircraft for 
nationality purposes and its export. This process is fully 
subject to related aviation safety laws and regulations. It is 
already customarily employed in the United States for 
transactions covered by the Convention and Protocol, and will 
streamline the deregistration process by establishing a 
procedure for certifying interests of parties in the aircraft. 
This U.S. declaration can set an important example for some 
States where deregistration procedures have been used to block 
the effective exercise of remedies.

4. Declaration for Protocol Article XIX (1) and (2):

FAA Entry point to the International Registry

    1. Pursuant to Article XIX(1), the United States designated 
the Federal Aviation Administration, acting through its 
Aircraft Registry, FAA Aeronautical Center, 6400 South 
MacArthur Boulevard, Oklahoma City, Oklahoma 73125, as 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.
    2. Pursuant to Article XIX(2) of the Protocol, the United 
States hereby specifies that the requirements of Chapter 441 of 
title 49 of the United States Code and Part 49 of title 14 of 
the Code of Federal Regulations be fully complied with before 
such information is transmitted at the Federal Aviation 
Administration to the International Registry.
    3. For purposes of the designation in paragraph 1 and the 
requirements in paragraph 2.
          (a) information is transmitted at the Federal 
        Aviation Administration in accordance with procedures 
        established under United States law; and
          (b) the terms ``civil aircraft of the United States'' 
        and ``aircraft to become a civil aircraft of the United 
        States'' shall take their meanings from Chapters 401 
        and 441 of title 49 of the United States Code, 

    Purpose: This declaration establishes the FAA as the 
exclusive point in the United States entitled to authorize 
electronic registrations relating to airframes pertaining to 
U.S. registered aircraft and helicopters, and as the non-
exclusive point authorizing electronic registrations relating 
to engines. It also will ensure that all such registrations 
comply with 49 U.S.C. Ch. 441 and Part 49 of title 14 of the 
Code of Federal Regulations, as amended, in order to be valid. 
It will connect the FAA system and practices to the new 
electronic International Registry in a manner compatible with 
the existing FAA registry system.
    Proposed FAA technical legislative amendments are intended 
to integrate this arrangement into the FAA's existing 
registrysystem, and will be transmitted to the Congress separately. The 
FAA and DOT, together with U.S. air manufacturing and finance 
industries and associations which work closely with the FAA's 
registration facilities, collectively developed the draft legislation.

U.S. statements to be made at time of ratification

    Owing to the fact that in large measure the Convention and 
Protocol reflect existing U.S. law, the declarations made by 
the United States are expected to be different than those made 
by a number of other States. However, since the particular 
declarations made by other States may determine the extent of 
economic benefits under the treaty system, the Executive Branch 
intends to ask the Depositary to circulate three statements of 
a policy nature in order to bring to the attention of other 
States the importance that we attach to their declarations in 
the fields addressed. No Senate action is requested with 
respect to these statements.

          (1) The United States made no declaration regarding 
        Protocol Article XI, pursuant to Protocol Article 
        XXX(1), since existing United States law, specifically 
        11 U.S.C. Section 1110, will continue to apply, which 
        is substantially equivalent to Alternative A of 
        Protocol Article XI. However, the United States notes 
        the importance attached to declarations applying 
        Alternative A of Protocol Article XI in attracting 
        financing in aircraft transactions.
          (2) The United States notes the importance in terms 
        of credit enhancement of the declarations under the 
        Convention and Protocol that will ensure the timely 
        exercise of remedies, in particular both non-judicial 
        remedies to the extent so agreed by the debtor 
        (Convention Article 54(2)), and relief pending final 
        determination (Convention Article 13, as modified by 
        Protocol Article X).
          (3) The United States notes the importance of 
        circumscribing the extent of priorities for non-
        consensual rights and interests (Convention Article 
        39(1)(a)), since the absence of clear and certain 
        limits prior to financing of this preference category 
        may significantly restrict extensions of credit in many 

                        IMPLEMENTING LEGISLATION

    No implementing legislation is required, except for 
technical amendments to certain authorities of the FAA relating 
to the filing of interests in registries through the FAA, 
discussed below. Otherwise, the UCC will apply, and no changes 
to the Code are required.

Coordinating the International Registry with U.S. Practices; Technical 
        Amendments to FAA Statutes on the Registry System

    United States industry and finance sectors have recommended 
that the authorized entry point in the United States be through 
the FAA Aircraft Registry, acting through its existing 
facilities in Oklahoma City. FAA technical statutory amendments 
will be submitted to Congress for implementation of the 
registry provisions of the Convention. These amendments to 
Title 49 of the U.S. Code, Chapter 441 were prepared by DOT, 
FAA, and EXIM Bank, together with air finance and manufacturing 
industries. The technical amendments will clarify the effect of 
filings of financinginterests under the new computer-based 
system vis-a-vis filings under existing FAA procedures.
    The current FAA system would be merged seamlessly into the 
International Registry process by requiring registering parties 
to satisfy existing FAA requirements prior to making a 
registration with the International Registry. An additional 
filing would be added to those already recognized by the FAA 
system for ``prospective'' registrations which would require 
subsequent filing of full transaction documents. This approach, 
which is standard in commercial lending, including practices 
under the UCC, but not currently provided for under FAA's 
existing filing regulations, will permit the continuation of a 
well-established and efficient U.S. documentary system, while 
simultaneously linking that process to the International 
Registry. The FAA will assume no responsibility for the content 
of filings under a notice-based computer system.


    The Convention and Protocol will provide a needed boost to 
our aerospace industry and provide significant benefits to many 
other countries as well. It will promote modernization of 
commercial law based on tested market practices. United States 
ratification can have a significant effect on actions to be 
taken by other countries, and will assure a U.S. lead role in 
international implementation of the treaty system.
    As prior sections of the report suggested, ratification of 
the Convention and Protocol are supported by all affected 
private interests in the United States. The Interagency Group 
on International Aviation (IGIA) and the American Bar 
Association's House of Delegates have endorsed ratification of 
the Convention.
    The Departments of Transportation and Commerce, as well as 
EXIM Bank and the Federal Aviation Administration join the 
Department of State in requesting that the Convention on 
International Interests in Mobile Equipment and the Protocol on 
Matters Specific to Aircraft Equipment be submitted to the 
Senate for its advice and consent to ratification as soon as 
possible, subject to the declaration previously described.
    Respectfully submitted,
                                                   Colin L. Powell.