2007 Luxembourg Protocol on International Rail Equipment Concluded at Luxembourg February 23, 2007

TO BE PRINTED IN INTERNATIONAL LEGAL MATERIALS (ILM) BY THE AMERICAN SOCIETY OF INTERNATIONAL LAW 2007 Luxembourg Protocol on international rail equipment concluded at Luxembourg February 23, 2007. By Harold S. Burman i Overview The “Luxembourg Protocol” on international finance of railroad equipment was concluded at a Diplomatic Conference in February 2007ii as the second Protocol to the 2001 Cape Town Convention on mobile equipment financeiii. The Conference was organized by UNIDROIT, the Rome-based intergovernmental bodyiv which initiated the Cape Town treaty system for the new concept of “international interests” (contractually created liens or security interests) in high- value mobile equipment, and OTIF, the Intergovernmental Organization for International Carriage by Rail, based in Berne, Switzerlandv. By validating the new concept of international secured interests in railway rolling stock (mobile assets such as locomotives, freight cars, passenger cars and other equipment) and providing for the registration of such interests in a new global computer system, the Luxembourg Protocol can have a significant effect on lowering costs and increasing exports of rail equipment, prompting regional cross-border transportation, and modernizing commercial law in various parts of the world. Background The underlying treaty framework is the Cape Town Convention, which entered into force on April 1, 2004, and the Aircraft Protocol which entered into force March 1, 2006vi (the U.S. is a party to both the Convention and the Protocol). Until the mid-1990’s, it had been accepted wisdom that harmonization of secured finance laws was unachievable. By that time however globalization had set in motion several international projects aimed at modernizing commercial finance, including concurrent negotiations on draft conventions covering secured financing of equipment at UNIDROIT and assignments of receivables at UNCITRAL, both of which were concluded toward the end of 2001.vii Regionally, during the same period of time an OAS Model Law on Inter-American secured 1 financeviii following the same basic approach as UNIDROIT and UNCITRAL was adopted in spring 2002, and the European Bank for Reconstruction and Development (EBRD) has moved along a somewhat similar path.ix The Cape Town Convention sets up the world’s first international legal structure for security interests. It rests on the concepts of asset-based finance and non-possessory liens that were introduced into the Uniform Commercial Code in the 1960’s and seen by a number of countries until recently as a too radical departure form accepted constraints of traditional property and collateral law. Each category of equipment requires a separate negotiated protocol to the Convention, to reflect the financing practices and international dynamics particular to that sector. Approximately 40 States participated in the Luxembourg conference, capping a three year process, representing all regions, plus the World Bank, the Hague Conference, the Southern African Development Community (SADAC), the European Investment Bank, the European Commission, and industry-based NGO’s including the UNIDROIT-sponsored Rail Working Group (RWG), the International Rail Transport Committee, the International Union of Railways, and the International Union of Combined Road- Rail Transport Companies (private commercial law negotiations differ from public international law in several respects, including the prominent role played by industry representatives, often through NGOs). The U. S. signed the Final Act but has not yet signed the Protocol. While the Protocol provides that four ratifying states are needed to bring it into force, the Protocol defers entry into force until OTIF has also certified that the registry system is operational, which includes a determination that a sufficient volume of rail transactions would be represented by the ratifying states so as to make the registry system economical to operate (Articles XII(6) and XXIII(1)). Principal objectives The final text of the Protocol satisfies the principal USG objectives for the international railroad finance treaty system: 2 (1) expansion of exports and imports of rail equipment and spin-off effects on track development and rail services, by increasing availability of rail finance and lowering cost through adoption of market-tested concepts already in US, Canadian, and a limited number of other countries’ commercial laws. This was accomplished by reaffirming the basic approach of the Cape Town Convention, including concepts of asset-based finance. (2) promoting infrastructure of developing and emerging states through acquisition of modern rail equipment and, where possible by virtue of geographical and political factors, development of subregional rail systems which can be a focal point for future economic development. (3) promoting capacity building in developing countries through law reform, since adoption of the Cape Town Convention and one or more of the Protocols would move legal and finance systems toward modern concepts of commercial law. These changes can mean economic progress for developing countries in advance of achieving general progress on upgrading of judicial systems, since capital markets can self-correct for failures to uphold rights under these Protocols. (4) protection of the existing North American system for registering and recording interests in rail rolling stock, so that no changes to that system can result from future participation in the Protocol system without prior agreement of US railroads and other US rail interests. Conference dynamics The United States was an active participant in the Conference and its preparatory meetings and was represented on all key committees. US views were closely coordinated with Canada and Mexico, since all three operate rail transportation under a largely integrated North American system.x The dynamics surrounding agreement on the substantive finance law concepts, i.e., acceptance of UCC concepts of asset- based financing, were controversial and a major part of the negotiations resulting in the Cape Town Convention and Aircraft Protocol (2001). By the time of the Rail Protocol, however, acceptance of the concepts was much less of an issue, perhaps 3 because since March 2006 already over half the world’s transactions on major commercial aircraft were subject to the Cape Town regime. The dynamics of bringing the Rail Protocol into force also are likely to differ from those of the Aircraft Protocol. The economics of aircraft finance meant that without early US participation, the new aircraft registry system might not for some time have had sufficient volume to be viable, whereas in rail finance early participation by some EU states and/or large developing country markets can provide the needed volume. EU states have had a track record in post-WWII years of more significant public investment in rail infrastructure than has been the case in the US. With the growth of integrated markets under the EU system, EU states are seeking to further integrate EU rail systems and rail finance, an integration that has already been largely accomplished in North America. Also relevant was the fact that while rail equipment exporters, including US manufacturers, can benefit from the Protocol, rail operators, unlike airline companies, are often more territorially focused. This plus the fact that rail car equipment involves tens of thousands of pieces of equipment will pose challenges for a future interface between existing US and North American registry practices and those that may be required for a new international system. On the other hand, the Rail Protocol offers an opportunity for a number of regions to further integrate their rail services, which may become one of the significant results of the Protocol. Establishing the treaty framework for implementation of the Aircraft Protocol drew substantially on the lead role of the International Civil Aviation Organization (ICAO), established by the 1944 Chicago Convention and headquartered in Montreal, which operates as a specialized UN agency.xi No comparable intergovernmental rail body exists. Organizational rail interests at the Conference revolved around OTIF, which is largely European based (none of the NAFTA states are a party), with some member states coming from the Near East and North Africa,xii although membership might be expected to increase as a result of its role on the Luxembourg Protocol. The Government of Luxembourg, host state of the Conference and an important financial center for rail finance, will be the host state of the new international finance registry for rail equipment.xiii, 4 Basic provisions The Protocol must be read together with the underlying Cape Town Convention; the provisions of the Convention apply unless modified by a protocol. “International interests”: The Convention (Article 2 et seq) establishes for the first time in multilateral treaty practice an “international interest” (i.e., a treaty-based security interest) in high value mobile equipment. International registry: The Convention (Chapters IV-VIII) and Rail Protocol (Chapter III) provide for the establishment of a world- wide, electronically accessible, treaty-based, computer registry of international interests in rail equipment. A registered international interest will have priority over subsequently registered international interests and, with limited exceptions, over other rights that may exist under national laws of contracting States. Oversight by States of the international

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