VEDDERPRICE ® Client Bulletin September 2008 EQUIPMENT FINANCE GROUP Commercial Aircraft Finance Team Model Equipment Leasing Law Draft In Final Stages Background A number of meetings have taken place, suffi ciently clear or accurately represents Drafting of a Model Law on Commercial several drafts have been circulated and market practice in the allocation of risk Leasing (“MLL”) began in 2004 under UNIDROIT is aiming for fi nal approval between lessors and lessees of the auspices of UNIDROIT.1 This effort in November 2008. In addition to those commercial aircraft and engines.7 These has been supported by governmental mentioned in the endnotes, two major same parties are pressing for express and private organizations alike, and is issues remain open which may delay exclusion of transactions, which are or intended primarily for use in developing the process: the scope of the model could be covered by the Cape Town. 4 countries and those transitioning to a law’s coverage and lessor liability. Two major issues market economy (e.g., countries in remain open, which Africa, Eastern Europe and certain parts Scope of Coverage may delay the process: of Asia). It is highly unlikely the MLL Draft Article 3 of the MLL specifi cally the scope of the would be considered in jurisdictions excludes certain (but not all) of the model law’s coverage with established bodies of commercial following: and lessor liability law such as the US, Canada or members (a) secured transactions; of the European Community. (b) transactions involving real A principal objective of the MLL is to property; and promote international trade through the The goal of the MLL (c) transactions involving aircraft, creation of a predictable set of laws. If is to agree upon vessels, rolling stock or space any leasing arrangement with respect to a series of assets to the extent they are “aircraft objects” is excluded from the principles covering covered by existing law or MLL, this could have far reaching effect commercial fi nance international agreement. and, perhaps, some unintended and operating leases Signifi cant concerns have been consequences for equipment lessors in On the other hand, countries such as expressed that the exclusion in the aviation sector. Brazil and China might well look Article 3, clause (c), relating to “aircraft” For example, where neither the Cape favorably on such legislation. This does not go far enough to isolate assets Town Treaty and Protocol nor the MLL Client Bulletin will be of particular covered by the Aircraft Equipment are in effect, the parties could be left interest to lessors and lessees of Protocol to the Cape Town Treaty.5 without a well–developed body of aircraft. Those who object stress the fact that commercial law, and lessors would be The MLL is comprised of a series of the Cape Town Treaty and Aircraft no more (or less) comfortable leasing principles covering commercial (but not Protocol constitute a comprehensive high–value aircraft objects into such a consumer) fi nance and operating framework for the fi nancing and leasing jurisdiction than they are today. Such a leases.2 A wide variety of assets are of “aircraft objects.”6 For countries that situation would frustrate a principle intended to be covered—everything have yet to ratify Cape Town, there are purpose of the MLL. from capital goods to unborn animals.3 reservations as to whether the MLL is Client Bulletin Q September 2008 In jurisdictions that will adopt the MLL forded an “owner” lead one to favor http://www.unidroit.org/english/workprogramme/ study059a/overview.pdf The current only, a strange result could occur with a secured loan vs. a lease? Doesn’t discussion draft of the MLL can be found at respect to assets just coming into the that create tax and accounting http://www.vedderprice.com/model.pdf. Note marketplace, in the form of so-called problems and defeat a signifi cant that the defi nition of lease is broad enough to include more than “true” leases and will cover “Very Light Jets.” The MLL might cover goal of the MLL: to promote rational certain types of loan transactions as well. VLJ airframes, but not the engines.8 economic development? 3 The defi nition of asset can include software in The uncertainty created by having two This particular issue fi nds certain civil certain instances. There may be a “deal buster” perhaps confl icting legal regimes cover disagreement between certain South American law and common law jurisdictions at countries as to whether the term asset covers the whole of one asset would likely make polar opposites. In addition, the apparent only embedded software or extends to all software. Certain countries strongly support the prudent lessors pause, or even refrain open door to owner liability is contrary to “embedded” concept. If the latter interpretation altogether, from agreeing to lease an 11 existing US law. prevails, stakeholders from the international asset like a VLJ into such a jurisdiction. intellectual property community are likely to Finally, with respect to the “scope” voice strenuous objections and may seek Conclusion wholesale changes to the entire protocol. issues, it is unclear whether, and to what Despite best efforts to create a sensible 4 Other areas of disagreement include: specifi c extent, rolling stock and space assets set of common legal principles for use limitations on the freedom to contract covered by the Cape Town Treaty’s (Article 5); enforceability viz. insolvency laws by developing nations and those with recently enacted Rail Protocol and its (Article 6); “deemed” contractual relationship transitioning economies, a number of between a vendor/supplier/manufacturer and contemplated Space Protocol would be signifi cant and fundamental issues are the lessee (Article 7); and limitations on parties’ subject to the MLL.9 ability to negotiate covenants of quiet enjoyment very much open. Lessors of high value (Article 16). assets should carefully monitor the Liability of a 5 References to the “Aircraft Protocol” or formative process of the UNIDROIT 10 “Protocol” are to “Protocol to the Convention Lessor under the MLL Model Leasing Law. Now is the time to on International Interests in Mobile Equipment Article 9 of the current draft of the MLL on Matters Specifi c to Aircraft Equipment make one’s views known so they can be (Johannesburg, 2001).” The offi cial text of the now reads as follows: considered prior to the scheduled fi nal Cape Town Treaty and the Aircraft Protocol “In a fi nancial lease, the lessor consideration of the MLL by the can be found at http://www.unidroit.org/english/ shall not, in its capacity of lessor, conventions/mobile-equipment/main.htm and UNIDROIT General Assembly in http://www.unidroit.org/english/conventions/ be liable to the lessee or third November 2008. mobile-equipment/main.htm#NR2, respectively. parties for death, personal injury 6 The term “aircraft objects” is defi ned in Article I, or damage to property caused by clause 2(c) in the Aircraft Protocol. the asset or the use of the asset.” 7 For further information, please contact For example, MLL Article 7 creates a “deemed” As one can imagine, a number of relationship between the manufacturer and the Douglas Ochs Adler +1-202-312-3325 lessee. This relationship would extend beyond questions have arisen concerning [email protected] the usual and customary agreement which is this provision, and they are currently limited to equipment warranties. the subject of vigorous debate. For 8 Aircraft engines such as the Williams FJ-33 and PWC 600 probably qualify for Cape Town example: 1 UNIDROIT is an independent intergovernmental Treaty and Protocol coverage, but the airframes - Is there different treatment under an organization headquartered in Rome. One of its on the Eclipse 400 or the Hondajet might not. purposes is to study and propose modernization operating vs. a fi nancial lease? Is http://www.eclipseaviation.com/eclipse400/ of commercial law. The end product can take operation/specifi cations.php; http://hondajet. an operating lessor automatically the form of an international convention or treaty honda.com/specifi cations/index.aspx?bhcp=1 open to third–party liability claims? (2001 Cape Town Convention on International Interests in Mobile Equipment (the “Cape 9 See “Protocol to the Convention on International - Notwithstanding the limitation on Town Treaty”)); a model law (Model Franchise Interests in Mobile Equipment on Matters liability in its capacity as “lessor,” is Disclosure Law); or a legislative guide (Guide Specifi c to Railway Rolling Stock” (Luxembourg, to International Franchise Agreements). The 2007) http://www.unidroit.org/english/ it contemplated that the same party offi cial website for UNIDROIT is conventions/mobile-equipment/main.htm#NR3. might still be liable as the “owner?” http://www.unidroit.org. Initial discussions have taken place on the Space Protocol, but no text has been published 2 See UNIDROIT statement Preparation of - In the policy context, could the to date. Comments from interested rail and a Model Law on Commercial Leasing at narrow nature of limited liability af- space asset stakeholders have been solicited regarding coverage of the MLL. 2 Client Bulletin Q September 2008 10 For a recent discussion on the issue of lessor For more information please visit: 2nd Annual Business Aviation Seminar and lender liability in the aviation area, see http://www.aviationfi nancesummit.com November 12, 2008 the Vedder Price client bulletin at: http://www. vedderprice.com/docs/pub/8e6960cc-8d28- Standard Club, Chicago, IL 4366-a1c0-9b8d6c271283_document.PDF Annual Conference on Aircraft Finance Hosted by Vedder Price Please contact David Hernandez for 11 49 U.S.C. §44112 and Aircraft Lessor and December 8–10, 2008 more information: 202.312.3340 Lender Liability Bulletin. The position is also Westin Times Square, New York City inconsistent with discussions underway with respect to the draft ICAO Treaty on Third–Party Speakers: Jonathan Bogaard, Ronald Project & Infrastructure Finance Damages.