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conyersdill.com
April 2011
A Year Later: the Practical
Consequences of Blue Sky One Limited
The judgment in the case of Blue Sky One Limited and Others v Mahan Air and Another [2010] EWHC631 (Comm) (“Blue Sky”) was released on 25 March, 2010. It immediately received the attention of all airfinance practitioners as it questioned the effectiveness of English law as the stated governing law of an aircraft mortgage in certain circumstances. In a nutshell, the judgment provided that one has to look at the domestic law of the lex situs of the aircraft (excluding its conflict of law rules) at the time the mortgage is created to determine if the mortgage is valid rather than the contractually agreed governing law. Although the case will be familiar to most readers, for those whom it is not, the court held that although the parties had contractually agreed that the governing law of the aircraft mortgage was English law, because the aircraft was physically situated in the Netherlands at the time the mortgage in question was created, it was Dutch domestic law that determined whether the mortgage was valid. Unfortunately for the mortgagee, Dutch domestic law did not recognise the mortgage. If the lex situs domestic laws recognise the English law concept of a mortgage with an equity right of redemption, then an English law mortgage should be valid. Unfortunately most civil law jurisdictions (such as France and Germany where Airbus has manufacturing and delivery bases) do not recognise such a concept of conditional transfer of ownership. As such, under their domestic laws, there is no transfer and the mortgage would be viewed as invalid. Considering that the legal effectiveness of the aircraft mortgage is central to all aircraft financings, how have parties dealt with this hurdle? As legal advisers to the special purpose vehicles incorporated in smaller financial centres such as Bermuda and the Cayman Islands to act as borrowers in finance transactions, we have had to A Year Later: The Practical Consequences of Blue Sky One Limited
consider the practical issues. Where is the aircraft situate at the relevant time? Is it in a civil or common law jurisdiction? Will the aircraft be registered in our jurisdiction? In addition to Blue Sky, there is also the guidance of Dicey, Morris & Collins – The Conflicts of Law, 14th ed (2006) ‐ Rule 120, Exception 2 that a civil aircraft may be deemed to be situate in its country of registration if the aircraft is “either over the high seas or over or on territory which is not under the sovereignty of any State” at the time the mortgage is created (the “Dicey Morris exception”). Applying these two authorities, the most likely options for ensuring the effectiveness of an aircraft mortgage for an aircraft with a Bermuda or Cayman ownership or registration link are as follows:‐ 1. have the mortgage governed by English law and have the aircraft in English airspace at the time the mortgage is created1; 2. have the mortgage governed by Bermuda or Cayman law (as the case may be) and have the aircraft in English airspace at the time the mortgage is created2; 3. where the aircraft is registered on the Bermuda register, have the mortgage governed by Bermuda law and have the aircraft in international airspace at the time the mortgage is created (thus relying on the Dicey Morris exception); or 4. where the aircraft is registered on the Cayman Islands register, have the mortgage governed by Cayman Islands law and have the aircraft in international airspace at the time the mortgage is created (thus relying on the Dicey Morris exception). Our experience has been that Option 1 is the preferred route as often the aircraft is located somewhere in Europe making it the most palatable option amongst complicated choices to arrange for it to be in English airspace at the relevant time. Although the Blue Sky judgement mentioned the Dicey Morris exception, the court did not elaborate. As there is no Bermuda, Cayman Islands or English case law specifically on this point, options 3 and 4 are not without risk. It should be noted that although the Cayman Islands has their Cape Town Convention Law 2009 which was intended to give domestic effect to the Convention on International Interests in Mobile Equipment and Protocol thereto on Matters Specific to Aircraft Equipment (the “Cape Town Convention”), such domestic legislation would only affect priority The jurisdictions of Bermuda and Cayman would each recognize an English law mortgage created in this way. 2 This option presumes that English domestic law would recognize the Bermuda or Cayman law mortgage. 1
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A Year Later: The Practical Consequences of Blue Sky One Limited
in the Cayman Islands and would not be relevant as to the actual effectiveness of the aircraft mortgage. When looking at the choice of governing law for aircraft financings, it is normally more straight‐forward for financiers based in the United States using New York state law. Although it is possible that courts in New York would follow a similar line of reasoning as the judges in Blue Sky, the United States has ratified the Cape Town Convention. As such, provided all relevant registration criteria can be met, the mortgage would simply be registered on the International Registry and the domestic laws of the lex situs of the aircraft would not be relevant. The United Kingdom has been considering ratifying the Cape Town Convention but has not done so yet. If it does indeed ratify and extend the ratification to its overseas territories, then the uncertainty surrounding the legal effectiveness of such aircraft mortgages from the Bermuda and Cayman perspective will simply disappear into the blue sky…. Julie McLean
Director
+1 (441) 299 4925
[email protected]
This advisory is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only
and is intended to merely provide a brief overview and give general information.
About Conyers Dill & Pearman
Conyers Dill & Pearman advises on the laws of Bermuda, British Virgin Islands, Cayman Islands, Cyprus and
Mauritius. Conyers’ lawyers specialise in company and commercial law, commercial litigation and private
client matters. Conyers’ structure, culture and expertise enable responsive, timely and thorough service.
Conyers provides clients with the highest quality legal advice from strategic global locations including
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For more information please contact:
Naomi Little
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[email protected]
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