Blue Sky Case: English Law Aircraft Mortgages vs Aruba Law Aircraft Mortgages

On 25 March 2010, the English High Court ruled on the matter of the validity of international aircraft financing transactions. The facts of the Blue Sky case clarify that England functioned an “off-shore aviation finance jurisdiction” as the aircraft involved were financed and leased by means of English Special Purpose Vehicles, while they were permanently operated in other jurisdictions. Moreover, the parties had “chosen” for English laws. Due to the application of inadequate English laws, more precisely the lex situs conflict of laws rule, a valid English mortgage which was created in an English nationality registered aircraft could not be enforced in English Courts. The reason for this decision was that the airplane was temporarily situated in Amsterdam at the time that the security interest was established. As a result of this case the financier’s claim of U.S. $ 43.1 million was not honored. The English ruling and the legal argumentation of the involved legal counsel have been heavily criticized. In addition, the outcome of Blue Sky had a devastating impact on the aviation industry at large. This is because it confirms that the prevailing commercial interests of the financiers and lessors are not guaranteed at the global level. More specifically, many mortgages, title transfers and other proprietary interests in aircraft which are validly established in one state may be useless in the other states where the aircraft are operated. This danger is particularly imminent where the aircraft is registered as to nationality in an off-shore financing jurisdiction like England and other (former) territories which are linked to this state. The reason for this is that these jurisdictions have not (yet) adopted the Cape Town Convention and Aircraft Equipment Protocol (2001). Considering the above-discussed pregnant legal issues, the proprietary interests of the lessor and mortgagee in an aircraft are possibly ineffective in all these jurisdictions. The Blue Sky case demonstrates that this grave result is not avoided by ‘choosing’ the applicable (English) property law. To ‘solve’ this matter, it has been proposed by some English lawyers that mortgages should be constituted while the aircraft have been flown to, and are temporarily located in, the state of registration as to nationality (England). While in practice this time consuming and extremely expensive procedure has already been undertaken, it does not guarantee a successful effect. For example, in a dispute the seized foreign Court may apply a differing conflict of laws rule, such as the lex debitoris, lex domicili, lex fori or any other rule. When the lex debitoris rule applies, it may refer to the substantive property laws of the debtor which is situated in yet another state. Alternatively, it may be uncertain where the debtor has its main place of business. The other references may be just as inadequate.

Under national Aruba property law a mortgage and the other proprietary rights are established once the aircraft is registered in the Title Registry of Aruba – in addition to the Aruba Nationality Registry – and the deed of an Aruba civil law notary is properly executed and recorded. Once these mandatory legal requirements are met, under Aruba law the mortgage has been duly established in the aircraft and the parties can rely on this security interest. More significantly, Aruba has adopted the Cape Town Convention and the Aircraft Equipment Protocol. These instruments apply in this country as from 1 September 2010. In essence, the main goal of the Convention and Protocol is to facilitate the asset-based financing and leasing of aircraft objects, to increase their availability and to reduce their costs. For this purpose, the treaty contains a set of substantive property laws. Furthermore, it has introduced rules in respect of the recognition, enforcement and priority status of the rights in aircraft objects (airframes, aircraft engines and helicopters). It provides for the creation of an autonomous international interest which includes Aruba mortgages and other Aruba property rights. Moreover, the Cape Town Convention establishes an International Registry at which an international interest may be registered. After the international registration the holder can exercise its international interest in any Contracting State, or any other jurisdiction applying this treaty, against every party who registered its interest later in time or who did not register it. This rule applies both in the case of and outside the insolvency of the debtor. The regime Cape Town Convention applies when the airframe pertaining to an aircraft or helicopter is registered as to nationality in a Contracting State, or the debtor of the agreement creating the international interest is situated in a Contracting State. Consequently, where the Cape Town Convention applies the financiers and lessors of aircraft that are registered as to nationality in Aruba are not confronted with the grave consequences which arose in the English Blue Sky case.