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Providing credibility around the world: effective devices of the Cape Town Convention

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Abstract

This paper analyzes the characteristics and effects of the Cape Town Convention, which provides legal protection for investors in relation to asset-based aircraft financing. Some countries lack credibility for investors, who believe that the protection level of creditor rights in the country differs before and after investment. This time inconsistency problem results in credit rationing. Airlines in such countries cannot access the credit market, particularly the international capital market. This paper first examines why developing countries have been suffering from a lack of credibility and from credit rationing, and then explores how the Convention resolves this problem. We focus on two devices: the white list system and the system of declarations. The former gives the contracting states incentive not to break the Convention. The latter is considered to promote the ratification of the Convention by potential contracting states. These devices enable the Convention to attract a number of states.

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Notes

  1. We provide legal remarks on the Convention in Sect. 2.

  2. For the survey, see La Porta et al. (2008). La Porta et al. (1998) build an index of creditor rights from a large sample of countries and indicate that legal origins have an important effect on creditor rights. La Porta et al. (1997) found that countries with weak creditor rights have significantly poorer local external financing.

  3. The institute aims to study the needs and methods of modernizing, harmonizing, and coordinating private law among countries. Its main task is to prepare uniform rules of private law. The institute is located in Rome, Italy, and has 63 member countries. The institute was set up in 1926 as an auxiliary organ of the League of Nations. After the Italian government left the League, the institute was separated from the League. The institute was re-established in 1940 on the basis of a multilateral agreement. See Unidroit’s website: http://www.unidroit.org/dynasite.cfm?dsmid=103283 (visited on April 4, 2011).

  4. The preamble of the Convention.

  5. For the status of each Unidroit convention, see Unidroit’s website: http://www.unidroit.org/english/implement/i-main.htm (visited on April 4, 2011).

  6. Art. 2 (3) of the Convention.

  7. The formal name of this protocol is the ‘Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Aircraft Equipment’. The number of contracting states of this protocol is 36.

  8. The formal name of this protocol is the ‘Luxembourg Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Railway Rolling Stock’. This protocol has no contracting state at present.

  9. Art. 6 (1) of the Convention.

  10. Art. 3 (1). In relation to helicopters or airframes, the Treaty is also applicable if they are registered in a contracting state in terms of nationality (Art. IV). See also Art. III.

  11. Art. 3 (2).

  12. Art. 2.

  13. See Aviareto’s website: http://www.aviareto.aero/ (visited on April 4, 2011).

  14. Roy Goode, Official Commentary on the Convention on International Interests in Mobile Equipment and the Protocol thereto on Matters Specific to Aircraft Equipment (revised ed.) (2008) [hereinafter Official Commentary], p. 117.

  15. The Chicago Convention provides that an aircraft take the nationality of the country in which it is registered (Article 17), and that ‘an aircraft cannot be validly registered in more than one state’ (Article 18). The formal name of the Chicago Convention is the ‘Convention on International Civil Aviation’, and the number of contracting states is 190. See ICAO’s website: http://www2.icao.int/en/leb/List%20of%20Parties/chicago_en.pdf (visited on April 4, 2011).

  16. Official Commentary, supra note 14, p. 319.

  17. See Pistor (2002), pp. 97–98.

  18. A series of studies by La Porta et al. found that the legal protection of investors in book law is stronger in common law countries than in civil law countries, using five elements as variables of the protection: no automatic stay on assets; secured creditors first paid; restrictions for going into reorganization; management does not stay in reorganization; and legal reserve required as a percentage of capital. See Id (1998, p. 1113). Moreover, they explored a causal link between the contents of book law and the scale and scope of the domestic capital market. See Id (1997, p. 1131).

  19. See Saunders et al. (1999, p. 317). The financier-friendly Treaty did not have an easy birth. Sato and Zasu (2010) reconstitutes the drafting process of a uniform commercial law convention as a drama of the conflict between the request of industry and that of states, and shows the significance of various unique devices of the Treaty in settling such a conflict.

  20. This issue is inspired by Pistor (2002, p. 110).

  21. The drafters explain that the Treaty is influenced especially by the North American legal systems. See, for example, Cuming (2002, p. 383).

  22. Official Commentary, supra note 14, p. 2.

  23. Other actions or inactions by local authorities include (d) a confiscation of the aircraft, and (e) the refusal or failure to permit a financier, following a compulsory sale of the aircraft, to obtain the proceeds in US dollars or another currency that is freely convertible into US dollars. All of the perils in an airline’s country can be insured by aircraft repossession insurance. For these perils, see Maule (1998, p. 329).

  24. The opportunism risk is a sort of political risk. In the context of international investment, political risk is defined as follows: ‘Political Risk is the probability that a host government will, by act or omission, reduce the investor’s ability to realize an expected return on his investment. Most commonly, political risk manifests itself by the host state directly or indirectly confiscating, interfering with, or destroying all or a portion of an investor’s property rights’ (Rubins and Kinsella 2005, p. 3).

  25. For this method and the results, see Bouma (1998, p. 218).

  26. Id pp. 217–218.

  27. Littlejohns (1998, pp. 286–287).

  28. For the reduction of exposure fee, see Ex-Im News Release of September 27, 2007: ‘Ex-Im Bank Extends Offer of Reduced Exposure Fee through December 2010 for Buyers in Countries Implementing the Cape Town Treaty’, http://www.exim.gov/pressrelease.cfm/4D2DABE3-F1FC-7074-73A179C6054BCE87/ (visited on April 4, 2011).

  29. Ex-Im News Release of September 19, 2008: ‘Ex-Im Bank Extends $548.6 Million in Loan Guarantees to Support Boeing Aircraft Exports to India’, http://www.exim.gov/pressrelease.cfm/7B830884-0F76-F06E-DCE9E37C5AA57F25/ (visited on April 4, 2011).

  30. ASU is available on OECD’s website: http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=TAD/PG(2011)3&docLanguage=En (visited on April 4, 2011). ASU forms an integral part of the Arrangement on Officially Supported Export Credits, and succeeds the version that came into effect in July 2007. See ASU, p. 5.

  31. Id, p. 5.

  32. Id, p. 4.

  33. Id, p. 28.

  34. Id, p. 29.

  35. Id, p. 29.

  36. We adopt the framework of the one shot game. In many studies of international law, in order to analyze the reputation mechanism, scholars are likely to use the repeated game. In the framework of the repeated game, a player can obtain reputation in equilibrium from the first period by using the appropriate strategy. However, in reality, as we stated in the introduction, building reputation is costly and highly time-consuming. We believe that it is relevant to use the one shot game rather than the repeated game in the analysis of the Cape Town Convention.

  37. Tirole (2003).

  38. Although some reader may be interested in the endogenous probability, the essential results of this paper do not change even if the probability of success is endogenous. This form of alternation just makes the results complicated. We use the exogenous probability for simplicity.

  39. Tirole analyzes the time inconsistency problem in the context of corporate finance and public investment (Tirole 2003). Our model in this section is based on Tirole’s model; however, we consider judicial inefficiency rather than public investment.

  40. ASU, p. 30.

  41. Id, p. 5.

  42. See OECD’s website: http://www.oecd.org/document/57/0,3746,en_2649_37431_41823481_1_1_1_37431,00.html (visited on April 4, 2011).

  43. This Discount started up based on the former 2007 version of ASU.

  44. See the Unidroit document: Unidroit (1996) Study LXXII-Doc. 23, p. 26.

  45. In this context, sanction or punishment is not costly for punishers. Therefore, the free-rider problem on sanctions has not occurred.

  46. Saunders, Srinivasan, and Walter simulate the economic impact of the Cape Town Convention and demonstrate that countries that have higher credit risk could benefit more if they ratify the Treaty.

  47. See also the Sect. 2.3 of this paper.

  48. In this subsection, we assume that the state chooses the same level of activity a either when it enters into the Treaty or when it chooses the reputation mechanism.

  49. See Unidroit’s website: http://www.unidroit.org/english/implement/i-2001-convention.pdf (visited on June 1, 2011).

  50. Art. 54 (2).

  51. Art. XIII.

  52. Art. XI and Art. XII. Other options are prepared in the following aspects: (4) whether or not to allow a chargee to lease the aircraft, instead of selling it, and to receive income arising from the lease (Art. 54 (1)), and (5) whether or not to ensure that a financier obtains from a court an interim relief pending the final determination of claim, within the given number of days specified by the state (Art. 55 and Art. X).

  53. For the design policy on the options in the Treaty, see Wool (1997).

  54. Fon and Paris (2007) analyze the effect of the various components, including coordination costs with the existing rules, on the optimal level of the specificity of legal rules in codification. Berkowitz et al. (2003a) develop a supposition that it is the manner in which a country receives a foreign formal law rather than the contents of the received law that determines the legality and economic growth in the country. Based on this supposition, they imply that when a legal reform is external rather than internal, such a reform will not take root easily in a country, because the country does not possess necessary legal institutions to uphold the imported rules (p. 189).

  55. It is true that the system of declarations results in a different set of Treaty’s obligations for each contracting state. However, it must be added that, in order to reduce information costs arising from the divergence on remedies among states, the international registry assembles and discloses the declarations by each state. Then, anyone can access the information on the Internet, in English, and at no cost. The service is called the ‘Contracting State Search’. See the website of the International Registry of Mobile Assets: <https://www.internationalregistry.aero/irWeb/pageflows/work/Search/contractingStateSearch.do> (visited on April 4, 2011).

  56. ASU, p. 29 and pp. 33–34.

  57. Id, p. 29.

  58. See OECD’s website: http://www.oecd.org/document/57/0,3746,en_2649_37431_41823481_1_1_1_37431,00.html (visited on April 4, 2011).

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Acknowledgments

The authors appreciate the valuable comments and suggestions of an anonymous referee, Hideo Murase, participants in the 2008 annual meetings of the Asian Law and Economics Association and the Japanese Law and Economics Association, and seminar participants at the Nagoya University and Province University. Moreover, the authors are grateful for the research support provided by Grant-in-Aid for Young Scientists (B) of Japan Society for the Promotion of Science.

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  1. Faculty of Economics, Kansai University, Yamate-cho 3-3-35, Suita-Shi, Osaka, Japan

    Yoshinobu Zasu

  2. Graduate School of Law, Kobe University, Rokkodai-cho 1-1, Nada-ku, Kobe-shi, Hyogo, Japan

    Ikumi Sato

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Zasu, Y., Sato, I. Providing credibility around the world: effective devices of the Cape Town Convention. Eur J Law Econ 33, 577–601 (2012). https://doi.org/10.1007/s10657-011-9257-4

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