Review of Cape Town Core Principles Jeffrey Wool Secretary General, AWG

1. Review of Cape Town Core Principles Jeffrey WoolSecretary General, AWG Seminar on the Cape Town Convention and its Aircraft Protocol –Practicalities and Opportunities relating to Canadian Ratification Toronto, 29/30 April 2013

2. Review of Cape Town Core Principles - Topics • I. Background : past, present and future of the aviation industry and its financing and consequences for text • II. Historical development of the Cape Town Convention • III. Legal overview and assessment • IV. Implementation aspects: International Registry: relation with national law; and contract practices • V. Benefits analysis and comments in the Canadian context • herein, ‘C’ = convention, ‘P’ = aircraft protocol, and ‘CTC’ = C as modified by P

3. I. Past, present and future of the aviation industry / financing Phase 1: Statism State ownership/control/guarantee High degree of regulation Low probability of default Phase 2: Transition Advanced contracting practices Complex structures and reliance on favorable choice of law/forum Eroding phase 1 features Phase 3: Privatism Private ownership/control; less State guarantee Less regulation Increased probability of default

4. II. Past, present and future …Consequences for text The objective of the treaty is to reduce the risk of loss in transactions That depends on timely and predictable access to collateral Such widening is the basis of the economic benefits of the text Cape Town is based the core 'asset based financing principles‘ (1) prompt / predictable enforcement, including in insolvency, (2) clear and objective priority rules, and (3) on party autonomy, and reducing gap b/ contact and law Cape Town permits a set of declarations that produce such benefits Without the key declarations (below), and the proper implementation of the treaty, major risks are not reduced Canada has made such declarations and taken such implementation action

5. II. Past, present and future …Consequences for text In other words: from the aviation perspective, Cape Town represents a ‘best practice treaty’ or a treaty which ‘facilitates a transaction type’, not a scientific attempt to ‘balance’ legal systems Comparative method is tool, but not the central vehicle Concepts created in the texts reflecting the transaction structure Compare recitals in (i) Cape Town, and (ii) the CISG Each provision, and the text generally, has been measured against this standard: does it increase the availability and reduce the cost of aviation finance For the aviation sector, the lex situs problem was not fundamental (addressed by the widely adopted Geneva Convention of 1948) Economic impact assessment, undertaken early in the process, dictated focus on major risk reduction (timing / insolvency / priorities), not 'transaction cost' or 'information theory' law and economics

6. II. Historical Development of the Cape Town Convention Unprecedented cooperation between governments and industry, a credit to Unidroit's approach to law reform AWG was formed, at the request of Unidroit, to contribute to the effort. AWG members sell and lease or finance a substantial majority of the world’s aircraft and engines. See next slide AWG (creditor) – IATA (debtor) alignment of interest and joint positions. Indication of ‘technical nature’ of Cape Town The realities behind the Convention plus Protocol approach The negotiating dynamics, all relating to the core purpose of the treaty: (a) law v. economics, (b) developing v. developed countries, (b) legal system tension, (c) rules v. standards (open v closed textured drafting), (d) the extensive use of declarations (the key aspect of compromise) and its implications (deferring decision-making to the time of ratification) Rapid adoption of Aircraft Protocol (51 countries (Convention – 57)), with ‘economic declarations’, initially driven by role of international export credit

7. Aviation Working Group - Membership

8. III. Legal Overview and Assessment • A. Basics • Connecting factors - state of registry (save engines) (Protocol) added to debtor location (liberal rule, makes sense regarding property interests) • New interests, not ‘pre-existing’ – no retroactivity • Creation – uniform criteria for creating interests in airframes / engines • Enforcement / remedies – prompt and contractually based; declaration on role of the court. (For ‘relief pending’, see part B) • Priority – first to file, based on an electronic International Registry • Insolvency – ‘validity’ . Meaning and limitations • Justiciability – choice of law (Protocol) / choice of forum (Convention), each party autonomy based

9. III. Legal Overview and Assessment • B. Key Points in the Aircraft Protocol • Extension to sales – deals with lex situs problem and permits a comprehensive priority regime (art III) • Engines as separate property – overrides national accession law (definitions) (cf. art XIV(3) with C, art 29(7)) • Extensive treatment of insolvency – hard v. soft options and their rationale. Insolvency cooperation (definitions and arts XI and XII) • Relief pending final determination – treaty-based form of court remedies, similar to but different from traditional interim remedies (art X; C, art 13) • Deregistration and export – innovative, creative concept (IDERA); relationship with public law (art IX and XIII) • Waiver of sovereign immunity – validity of waiver, not affirmative rule • Quiet possession system – unique, based on the international registry

10. III. Legal Overview and Assessment • C. Declaration system • Declarations - choices to be made at the time of ratification – provide flexibility yet have significant economic implications • Declarations are not permitted on basic conceptual elements (e.g., the elements of an ‘international interest’), as that would render the treaty unworkable in practice • Conscious decision was made to permit that flexibility and economic calibration rather the to impose uniformity • First reaction is often: ‘retention of current law’ v. ‘move to an international standard’ (the latter producing the economic benefits). That often evolves during the ratification process

11. III. Legal Overview and Assessment • OECD Qualifying Declarations / Key Economic Declarations • 1. Insolvency (Alt. A with up to a 60 day period) – P, Art. XI • 2. Method of exercising remedies: non-judicial remedies – C, Art. 54(2) and/or judicial timetables – P, Art. X (with up to 10 calendar days for conserving remedies (C, Art. 13(a)-(c)) and up to 30 calendar days for disposition remedies (C, Art. 13(d)-(e)) • 3. Deregistration and export – P, Art. XIII • 4. Choice of law – P, Art. VIII • Most States that have made a full set of declarations under Cape Town have selected the above. See next slide • Declarations not to be made in connection with the foregoing

12. Percentage of countries that have made each of the main qualifying declarations in the ASU Choice Of Law Insolvency Non-judicial Remedies ExpeditedRemedies Remedies or Non-judicialRemedies Deregistration and Export DRAFT

13. IV. Implementation Aspects: International Registry; Relationship with National Law; and Contract Practices • Registrations in the IR determine the priority of competing interests in aircraft objects • The system is ‘notice-based’, not documentary • ICAO is the Supervisory Authority, with the responsibilities set out in C, Art. 17(2). That role has been critical to the system • ICAO established a Commission of Experts of the Supervisory Authority of the IR (‘CESAIR’). CESAIR has met six times, ensuring that the Regulations and Procedures respond to issues that arise in practice • The IR has established an advisory board, to ensure the coordinated input of users of the system • More than half the world’s new transactions are now being registered • Generation 2 of the IR: fundamental redesign to enhance efficiency by (1) replicating a transaction closing, and (2) permitting entries of data application to multiple registration. Timing – phased in 2013 / 2014

14. IV. Implementation Aspects: International Registry; Relationship with National Law; and Contract Practices • Legal Hierarchy of rules relating to the IR • C: Chapters IV – VII (IR system; related matter; immunities; liabilities) • P: Chapters I and III; n.b.: overrides C (see C, Art. 49(1)(b)) • Regulations: As amended; basis: P, Art. 17(2)(d) • Procedures: As amended; basis: R, Sec. 15 • Schematic A: Overall structure / framework of the IR • Schematic B: Approval process • Schematic C: Registration process

15. 3 Assists Provisional Supervisory Authority Preparatory Commission Supervisory Authority ICAQ Commission of Experts Nominated by States Assigns Creates 4 5 Supervises 6 7 Selects Host State Ireland International Registry Registrar (Aviareto) Advice Advisory Board 8 Search Certificates Creates Searches 10 Entry Points Searching Person Registry Users 9 11 Schematic A: Description of the IR - Overall Notes: 1. The Preparatory Commission (PCIR) was established by Resolution 2 of the diplomatic conference to act (pending entry into force of the Convention/Protocol), under the guidance and supervision of the ICAO Council, as the 'Provisional Supervisory Authority'. Its main task was to set up the International Registry by entry into force of these instruments. 2. ICAO was invited by Resolution 2 (see also Protocol, Art. XVII(1)) to act as Supervisory Authority (SA). ICAO accepted that function. 3. See Protocol, Art. XVII(4). The group, ‘CESAIR’ first four times. Its recommendations are submitted for approved to the ICAO Council. 4. The selection occurred in May 2004. The initial and Regulations and Procedures were also approved by the PCIR. 5. See Convention Art. 17(2) for list of supervisory responsibilities. 6. Standard host state arrangements were put in place. 7. See Convention, Art. 17(5) for Registrar responsibilities. 8. AWG accepted an invitation to chair the Advisory Board. 9. Entry points may or shall be used where a declaration has been made by the State in which an aircraft (airframe) is registered for nationality purposes. 10. See Schematics on Approval Process and Registration Process for greater detail and more precise use of terminology. 11. Any person may search the International Registry upon payment of the applicable fee.

16. Approval Review Transacting User Entity International Registry Registrar 2 Registry User Entity Administrator (Largely Electronic) Professional User Entity Seeks Approval 3 Electronic Approval Transacting User Entity Registry User Professional User Entity Schematic B: Description of the IR – Approval Process1 Notes: • The result of the approval processes is the issuance of a digital certificate (and password). That is a necessary, but, except for an administrator, not a sufficient condition to accessing the International Registry (save for searches, where no approval is needed). The required additional step is 'authorisation'. See Schematic on Registration Process. • See Reg. 4.1 (registry user entity/administrator approval). There is a two part test: Registrar concludes (a) that the entity/administrator are who they assert they are, and (b) on the basis of information submitted, the administrator is entitled to act for the entity. • See Reg 4.2 (registry user electronic approval). This is an electronic procedure which, upon payment of the applicable fee, is automatic.

17. Initiating Party Authorising person/’named party’ #1’ Administrator of that ‘transacting user entity’ Authorised person or Administrator for ’named party’ #1’ (‘transacting user’ or ‘professional user’) Notice of Authorisation 2a 3 2 International Registry Registrar (Aviareto) Entry Point Notice of Authorisation 3 4 Responding Party 5 Authorising person/’named party’ #2’ Administrator of that ‘transacting user entity’ Authorised person or Administrator for ’named party’ (‘transacting user’ or ‘professional user’) Schematic C: Description of the IR – Registration Process1 • Notes: • 1. This chart applies to any 'registration' (as defined in Convention, Art. 16(3) to include amendments, extensions and discharges) where, both parties or the non-submitting party must consent thereto under Convention, Art. 20 (see also Convention, Art. 18(1)(a)) and Regulations 2.1.1 to 2.1.3 and 5. It applies equally to the ‘registration’ of a ‘pre-existing right or interest’. • 2. An initiating person must seek authorisation from the ‘named party’ on whose behalf the registration is being made. If there is no authorised person for the initiating party, only its administrator can so initiate. • 2a. If an entry point was designated, whether 'authorising' or 'direct', electronic consents to the International Registry are nonetheless required. See Regulation 5.11. • 3. The changes to Regulation 4.1 made at the 3rd meeting of the PCIR were intended to provide much flexibility to users by permitting a wide range of authorisations (i.e., to any person for one, many, or all objects, or to more than one person for one, many, or all objects, in each case where a company is a ‘named party’). • Upon receipt of the electronic consents from all other named parties, the registration is completed for purposes of Convention, Art. 19, is assigned a sequentially ordered file number, and becomes searchable - thus establishing its time for purposes of priority. • N.B.: Substantial practical changes will be effected in Generation 2 of the IR

18. IV. Implementation Aspects: International Registry; Relationship with National Law; and Contract Practices Effective implementation (Relationship with National law) • Basic requirements • 1. Force of law • 2. Priority over conflicting law • N.B.: Limits of Vienna Treaty on Treaties, 1969 • Need for legislation or not • Country assessment required; N.B.: AWG’s ‘Implementation Project’ • Role of legal advisers and legal opinions • Contract practices • AWG led effort to coordinate or inform contract practices (example: when is an amendment to a contract a new transaction) and opinions • Centerpiece: Practitioner’s Handbook (www.awg.aero)

19. V. Benefit analysis and comments in the Canadian context • Practicalities and limits of benefit assessment (confidentiality; limited precedent; question of pass through of risk reduction / saving) • Yet, with the proper declarations, CTC is in line with: • (a) the requirements of the international capital markets; • (b) the methodology of the rating agencies; • (c) the direction of capital requirements under BIS II and BIS III; • (d) lending credit committee approval processes; • (e) export credit rules under the OECD; and • (f) basic concepts of efficiency • Canada has the ideal profile to maximize the economic benefits from the CTC • Cape Town is already one of the most successful commercial law treaties, with even brighter future

20. Tracking Eligibility for OECD Discount Kazakhstan 21 JAN 09 Yet to be reviewed by OECD Eligible for OECD discount Qualifying declarations not adopted Qualifying declarations, but implementation issues Panama 28 JUL 03 Ethiopia 21 NOV 03 Afghanistan 25 JUL 06 Mongolia 19 OCT 06 South Africa 18 JAN 07 USA 28 OCT 04 Ireland 23 AUG 05 Nigeria 16 DEC 03 Pakistan 22 JAN 04 Cape Verde 26 SEPT 07 India 31 MAR 08 UAE 29 APR 08 Colombia 19 FEB 07 Mexico 31 JUL 07 Oman 12 MAR 05 Bangladesh 15 DEC 08 Tanzania 30 JAN 09 Malaysia 2 NOV 05 Albania 30 OCT 07 Saudi Arabia 7 JUN 08 Evaluated by ECA, underconsideration by OECD Togo 27 JAN 10 Jordan 31 AUG 10 Senegal 9 JAN 06 Angola 30 APR 06 China 3 FEB 09 Cuba 28 JAN 09 Aruba 17 MAY 10 Malta 11 OCT 10 Turkey 23 AUG 11 Indonesia 16 MAR 07 Luxembourg 27 JUN 08 Netherlands Antilles 17 MAY 10 Cameroon 8 JAN 11 Brazil 30 NOV 11 Kenya 13 OCT 06 Singapore 28 JAN 09 New Zealand 20 JUL10 Belarus 28 JUN 11 Latvia 8 FEB 11 Russia 1 AUG 13 Madagascar 1 AUG 13 Norway 20 DEC 10 Tajikistan 31 MAY 11 Canada 1 APR 13 Rwanda 28 JAN 10 Fiji 30 MAY 12 Proper declarations and implementation required