The Blue Sky
Decision
Stormy Skies for Aircraft
Financings
William J. Glaister and Julian
Acratopulo
Wednesday 5th September 2012
Cape Town Convention
Academic Conference,
Oxford University
Executive Summary
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Introduction
Aviation financing transactions
Review of Blue Sky litigation
Commercial impact of Blue Sky decision
Cape Town Convention as the solution and the case for UK
ratification
 Proposed UK Aviation Provisions: Discussion
CTC ACADEMIC CONFERENCE - BLUE SKY PRESENTATION
Aviation Financing Transactions
• Asset based lending
• Clear and certain rights and
remedies
• Operational requirements
• Cost-effectiveness
• Finance lease/direct loan
• Mortgage agreement
governed by English law
(“ELM”)
• Bankruptcy-remote SPV
owner; share security
• “Local law” mortgage
• Lease assignment
• Location of parties
• Location of aircraft
• State of registration
• Aircraft operations vs.
funding/closing
timetable
Commercial
expectations
of parties
Cross-border
nature of
transactions
Secured
financing
Primacy of
English law
• Chosen law of loan and
lease
• Other aviation financing
centres – e.g. Cayman
Islands and other common
law systems e.g. Singapore
CTC ACADEMIC CONFERENCE - BLUE SKY PRESENTATION
Blue Sky Litigation - Facts
 Parties
 Balli Group plc (UK co.) and the Alaghbands
– Controlled 3 English SPVs – Blue Sky One, Blue Sky Two, Blue Sky Three
 Blue Airways LLC (Armenian co.) – wound up
 Mahan Air – Iranian private airline
 PK Airfinance US Inc.
 Aircraft
 Blue Sky SPVs each acquired 1 B747 “Package 1” aircraft – and leased them to
Blue Airways, who chartered them to Mahan
 PK provided finance for 3 additional “Package 2” aircraft – mortgage granted by
Blue Sky Two and Blue Sky Three over Package 1 aircraft as additional collateral
 US sanctions against Iran
 2008 TDO issued by BIS against Balli, Mahan, Alaghbands and Blue Airways
 Aircraft de-registered from Armenian register
 Mahan purported to transfer title to aircraft to themselves under Option
Agreement
CTC ACADEMIC CONFERENCE - BLUE SKY PRESENTATION
Blue Sky Litigation – Mortgagee Claim
 SPVs acknowledged obligation to deliver up to PK
 Mahan asserting trust against SPVs
 Separate Mortgagee - Claim Applicable law:
 Question for the court: which law applies to govern validity of mortgage as a
security interest over aircraft?
 Mortgages expressed to be governed by English law
 English law decides as a first step which law to apply, according to its choice of
law rules
CTC ACADEMIC CONFERENCE - BLUE SKY PRESENTATION
Blue Sky Litigation – Decision
 Lex situs
 Law of the place where the aircraft is physically located at the time mortgage is
created (or is effective, if subject to conditions)
– Lex situs as the orthodox conflict rule for tangible movables
 Exclusion of doctrine of renvoi
 Domestic law of lex situs
 “without reference to its private international law/choice of law rules”
 Application to the Blue Sky mortgages
 Second aircraft – Armenian registered, location unknown
– “In absence of proof of any other law”, English law applied and mortgage
was valid
– Burden of proof on Mahan to establish situs – evidence unsatisfactory
 Third aircraft – UK registered, location Netherlands
– Applying Dutch domestic law, mortgage would not create a valid mortgage
(hypotek) under Dutch law, therefore mortgage was held to be invalid
– Outcome at odds with Dutch law: Dutch court would hold mortgage to be
valid as would apply lex registri (England) at the time mortgage created.
CTC ACADEMIC CONFERENCE - BLUE SKY PRESENTATION
Blue Sky Litigation – Observations
 Lex Situs
 Court rejected PK submission that applicable law to govern validity of
transfer of property interests in aircraft should be lex registri
 Court sympathetic to Miliet J (Macmillan v Bishopgate) view that the
objective of achieving uniformity of result was a task for international
conventions rather than common law
 Renvoi
 Commercial clients struggle to reconcile outcome: Dutch example
 English choice of law policy driver difficult to justify
 Practical difficulties: Court focussed on problem of doubtful or conflicting
evidence of the private international law rules of the situs. How is that
different from ascertaining domestic law?
 Concern that conflict of law rules should be easy to apply: Court mindful
of transactional context
CTC ACADEMIC CONFERENCE - BLUE SKY PRESENTATION
Blue Sky Decision – Commercial Impact
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Valid ELM as a security interest requires aircraft to be located in England (including English
airspace) at relevant time
 Commercial impracticality – e.g. operational restrictions, regulatory and tax concerns
 Cost implications
 Location of aircraft in international airspace - lack of a situs jurisdiction
Otherwise, assess whether a security interest has been validly created under the domestic law of
the lex situs
 Parties must accept that scope of the “ELM”, including exact rights and remedies, will be
determined by the domestic law of the lex situs
 Requires analysis of lex situs on a case by case basis, depending on aircraft location at
relevant time (and assuming aircraft is not in international airspace)
 Acceptable security interest may not be available
Limitations of lex situs advice
 Our experience is that local counsel’s response frequently imports a choice of law
determination, notwithstanding the direction to exclude the applicable private international
law rules in that jurisdiction
 Courts in other states may be bound by Blue Sky decision (e.g. Cayman Islands) or find it
persuasive
Effect on parties’ selection of English law to govern transaction
 Shift to other competing legal systems
 In particular, New York law and other Cape Town Contracting States, e.g. Ireland
CTC ACADEMIC CONFERENCE - BLUE SKY PRESENTATION
Cape Town Convention and Aircraft
Protocol
 Connecting factors
 Debtor location
 Airframe registration
 International interest
 Articles 2 and 7 of Convention
 No reference to national law requirements for creation of interests
 Right in rem
 Creditors’ rights and remedies under the treaty, including insolvency regime
(subject to Contracting State “opt-in” declaration)
 Choice of law?
 Article VIII of Aircraft Protocol – choice of law governing contractual interests
(subject to Contracting State “opt-in” declaration)
 No express choice of law rule regarding proprietary interests
 References to applicable law, including characterisation of agreements creating
international interests
 Application of Cape Town to Blue Sky scenario, if the UK had ratified prior to creation
of relevant English law mortgages?
CTC ACADEMIC CONFERENCE - BLUE SKY PRESENTATION
UK Aviation Provisions - Discussion
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Aircraft objects, including engines
Outright title transfers – i.e. sales
UK Aviation Charge
Express choice of law rule
 Proper law
 Lex registri – entire law
 Lex situs – entire law
CTC ACADEMIC CONFERENCE - BLUE SKY PRESENTATION
Further Discussion
Lex situs
Lex registri
Proper law
Inadequacy of rule for
aircraft and other mobile
equipment
Other treaties and
legislation; case law
treatment; shipping
analogy
Engines would be
covered
Limited degree or
absence of control of
situs jurisdiction
State of Registration’s
control over aircraft
regarding safety etc.
New York law example
Analysis of lex registri
would still be required
International airspace
exception ; disputed or
unknown location
Engines would not be
covered; nor would
unregistered aircraft
Impact on third parties’
rights
CTC ACADEMIC CONFERENCE - BLUE SKY PRESENTATION
The Blue Sky
Decision – Stormy
Skies for Aircraft
Financings
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