Aircraft Mortgages and the English Conflict of Laws Rules

Financiers of large commercial aircraft often structure deals so they may repossess the aircraft as:

its mortgagee;
chargee of the shares in the SPV they have funded to own and lease the aircraft; and
assignee of the SPV’s rights under a lease of the aircraft to its operator.

Most repossessions under this structure are via the lease and assignment. As well as providing security, a key function of the mortgage is preventing the aircraft’s deregistration from the country from which it operates. To fulfil these functions, the mortgage should be registrable in that country and valid under the law a court enforcing the mortgage would say governs its creation. Matthew Harvey and Alexander Hewitt consider a recent case that should make it easier to establish which law an English court will apply to decide whether an aircraft mortgage is valid.

Lex situs

Blue Sky One v. Mahan Air decides that, under English conflict of laws rules, the domestic law of the place where an aircraft was situated on execution of the mortgage governs the validity of a mortgage over that aircraft. This is the lex situs rule.

Another English case also adopts the lex situs rule for mortgages and other transfers of title to aircraft – Air Foyle v. Center Capital.

Whether the lex situs rule will become the English conflict of laws rule is unclear, as neither case binds all English courts.

No renvoi

The French term “renvoi” means “sending back”. Renvoi is a conflict of laws doctrine. It comes into play when:

the conflict of laws rules of one jurisdiction (for example, France) say an issue should be decided by reference to the laws of a second jurisdiction (for example, Germany);
under those French conflict of laws rules, that reference to German law includes Germany’s own conflict of laws rules; and
those German conflict of laws rules would themselves refer (or “send back”) the matter to be decided under French law or the laws of another country.

Blue Sky One decides that, when an English court applies the lex situs rule to an aircraft mortgage’s validity:

the English court looks to the domestic law of the situs;
it does not look to the conflict of laws rules of the situs;
there is no return to sender.

Example transaction

An airline wants to borrow on the security of an aircraft mortgage. The aircraft:

is, and after completion will be, registered at the UK Civil Aviation Authority (UK CAA); but
will be in Holland on completion.

Dutch legal advice suggests that if the aircraft is in Holland on execution:

as the Dutch conflict of laws rule looks to English law (the law of the aircraft registry), Dutch law will recognise an English law mortgage over the aircraft; but
an English law mortgage does not meet the requirements of a Dutch law pledge, which is the only way to create security over an aircraft under Dutch domestic law.

Would the customer be correct if it claimed that this means an English court would regard an English law mortgage of the aircraft as valid? No.

An English court would:

apply Dutch domestic law, as the lex situs, to find an English law mortgage invalid; and
treat the advice that Dutch conflicts would apply English law as irrelevant. In applying the lex situs the English court would not use renvoi to apply the Dutch conflict of laws rule. The lex situs is Dutch domestic law only.

Bizarrely, in our example, an English court would only recognise Dutch security, while a Dutch court would only recognise English security. So, while the aircraft is in Holland, the bank might take an English mortgage (as well as a Dutch pledge). Then, if the aircraft:

were grounded in Holland; and
its ownership were in dispute before the Dutch courts,

the bank’s English law mortgage could be valid under the Dutch conflicts rule – that the law of the registry (the UK CAA) governs validity.

What are the conflict of laws rules if an aircraft is in international airspace on execution of a mortgage?

There is no decision on this issue in a case that involves an aircraft or truly analogous asset.

Commentators and practitioners are divided on whether the law of registry, or the law chosen in the mortgage, applies.

Example revisited

If the aircraft were in international airspace when the mortgage was created, an English court would rule on validity by applying English law:

as the law of the registry; or
if chosen in the mortgage.

This gives the bank the option to have the customer sign an English law mortgage while the aircraft is in Holland and agree to the bank dating that document when the aircraft:

reaches international airspace – to produce an English law mortgage enforceable before the English courts and registrable at the UK CAA; or
is in Holland (if the aircraft is or may be grounded in Dutch proceedings) – to produce an English law mortgage that may be valid under Dutch conflict of laws rules.

This note barely touches the tip of the iceberg of the excruciating legal niceties involved in taking an aircraft mortgage. So it is no surprise financiers of large commercial aircraft seldom look to their mortgage as their primary route to repossession. It is usually far simpler to enforce their security over the rights of the SPV lessor – in particular to repossess the aircraft under its lease.

For more information, please contact:
matthew.harvey@snrdenton.com or
alexander.hewitt@snrdenton.com