FOG AND uncertain weather conditions are all traits associated with South Africa’s Mother City, Cape Town. Unfortunately, these attributes have also attached to South Africa’s implementation of an international aviation treaty that is named after the city, the Cape Town Convention.
This fog and uncertainty over whether South Africa has correctly implemented the Cape Town Convention comes at the very time when many South African airlines are negotiating with aircraft manufacturers and financing houses to purchase new aircraft and are desperate to secure certain exposure discounts associated with the convention implementation.
However, if it is established that the Cape Town Convention has not been properly implemented into South African law in a manner acceptable to the foreign financiers, the country’s airlines will probably lose out on these substantial discounts. Much of the uncertainty surrounding South Africa’s implementation of the convention is due to the fact that few people in South Africa, as well as internationally, understand how it should work and be implemented into domestic law.
The origins of this confused saga date back to November 2001 when Cape Town hosted a diplomatic conference that gave rise to this international aviation treaty. Since then, the convention and its
associated Aircraft Equipment Protocol have been open for ratification and implementation by any country wishing to establish a unique set of laws that provide special legal security to the financiers
and lessors of aircraft.
For many years, one of the greatest problems facing international financiers and aircraft leasing companies was their inability to quickly and easily recover financed or leased aircraft when the other parties
defaulted on their obligations. This was especially the case where aircraft were sold or leased to operators in developing countries. Over the years, many aircraft financiers and lessors suffered severe financial loss, as a result of aircraft either being stranded for years in some foreign territory or even worse, never being recovered. To solve this problem, an organisation called UNIDROIT, took on the complex
task of developing a system of rules that would, firstly, secure an owner’s title in an aircraft by enabling the registration of an international interest in the asset, and, secondly, provide an owner with an incontestable set of “default remedies” that would either allow for the compulsory de-registration and repatriation of an
aircraft, or require an “insolvency administrator” to continue with the payment of lease rental or finance instalments, in the event of the debtor becoming insolvent.
This already difficult task was made even more so by the fact that any rules that were developed had to be compatible with the differing principles and concepts contained in the variety of legal systems in existence throughout the world. In order to solve this “compatibility” problem, UNIDROIT decided to incorporate into the convention and protocol a series of “options” that would allow each signatory State to select only those remedies that were compatible with its legal system and discard those that were not. The idea was that these choices would be announced by each signatory State by way of “declarations” made at the time of ratification of both the convention and the protocol.
After years of development and consultation, UNIDROIT presented the draft convention and protocol to the conference assembled in Cape Town in 2001, for adoption. As the mechanisms contained in the convention were for the benefit of aviation businesses in developed countries, the carrot used to persuade developing countries to sign the convention was the promise that their airlines would qualify for better financing or lease rates. It was touted that institutions such as the Exim Bank, of the United States, would allow up to a one third reduction in its “exposure” fee to the airlines of states that had implemented the convention in an “acceptable” manner.
As South Africa had hosted the diplomatic conference that adopted the convention, the Government felt obliged to be among the first to ratify and implement the convention and protocol into domestic law. In 2006, South Africa lodged its Instruments of Ratification containing its declarations for both the convention and protocol – unfortunately, without any apparent thought as to whether the “options” selected in the declarations were compatible with the South African Constitution and other existing legislation.
Shortly thereafter, the SA Parliament passed the Convention on International Interests in Mobile Equipment Act into law, seemingly also without a proper assessment as to whether the legislation adopted properly implemented the requirements of the convention and whether such requirements were compatible with existing South African law.
Over the next four years, those interested in such matters noticed that countries such as New Zealand and Canada which took their time in ratifying and implementing the convention and protocol, first conducted thorough legal compatibility assessments of the convention and their other laws. Thereafter, these countries proceeded to make declarations and pass a variety of legislation which identified the optional declarations that each had made, as well as amending other pieces of legislation, such as their company laws and insolvency legislation which conflicted with the requirements of the convention.
Those watching the processes followed suit and legislation implemented by these other countries, formed the opinion that South Africa’s implementation of the convention was deficient in various respects. In order to clarify the position, one of the international aircraft financing houses recently obtained legal opinion on the subject from one of South Africa’s top law firms. This legal opinion confirms that some of the convention options selected by South Africa are unconstitutional and also that certain of the default remedies in convention conflict with the Business Rescue provisions contained in the new Companies Act, 2008.
However, despite, the existence of this legal opinion, there remains doubt in some quarters as to the correctness of the opinion. This has resulted in one of the larger South African airlines commissioning a second legal opinion on the subject which will only become available early next year.
So while the lawyers continue to scratch their heads over this matter during the holiday period, the fog and uncertainty regarding South Africa’s implementation of the Cape Town Convention and whether any South African airline will qualify for aircraft financing discounts in terms of the Convention, continues to swirl.
