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Alberta Court Of Appeal Overturns Injunction And Confirms Application Of Cape Town Convention And Aircraft Protocol In Canada – Aviation


On July 20, 2022, the Alberta Court of Appeal (Court) released
its decision in Avmax Aircraft Leasing Inc. v. Air X Charter
Limited
, one of the few Canadian decisions to
consider the application of the Cape Town Convention and
Aircraft Protocol (together, the Convention). The
Convention is an international treaty ratified by Canada
governing the registration and enforcement of security interests in
aircraft. The Court held that where a debtor has executed an
irrevocable deregistration and export request authorization (IDERA)
for an aircraft in favour of a creditor as provided for in the
Convention, the debtor cannot then circumvent this by
seeking an injunction from the courts.

FACTUAL BACKGROUND

The appeal concerned aircraft owned by the Calgary-based
Appellant, Avmax, and leased to the Maltese Respondents, Air X, who
operate a private charter business. The aircraft were subject to
security interests under the contract between the parties and
registered pursuant to the Convention. In particular, Air
X had provided an IDERA for each aircraft, exercisable in the event
of default under the leases, without the need for a court order.
The IDERA remedy under the Convention allows the named
beneficiary to deregister an aircraft from the relevant country of
registration (effectively preventing the debtor from further
operating the aircraft) and is intended to provide aircraft
financiers with custody and control of the aircraft in the event of
a debtor default, pending final determination of such
financiers’ claims against the debtor.

Air X faced business challenges due to the COVID-19 pandemic and
had fallen into arrears under the Avmax lease agreements. The
parties negotiated a Memorandum of Understanding (MOU) that, if
formalized, would have provided certain concessions to Air X while
it secured financing to maintain operations. Air X then fell into
arrears under the MOU, leading Avmax to issue notices of default
and termination of the leases and take initial steps pursuant to
the IDERA to deregister the aircraft in Malta.

Air X, however, applied for and obtained an interim injunction
in Alberta that prohibited Avmax from taking any steps to
deregister the aircraft in Malta, and required Avmax to continue to
lease the aircraft to Air X. Among other things, in the reasons for
issuing the injunction the chambers judge held that the
Convention had no “legal and binding effect” in
Alberta. Avmax appealed the order.

Export Development Canada (EDC) applied for and was granted
leave to intervene in the appeal. EDC financed the purchase of the
aircraft and had a security interest in them. EDC also had an
interest in the proper interpretation of the Convention
and the Court accepted its evidence on the unique nature of
aircraft financing and impact of the Convention on such
financing.

THE COURT’S DECISION

The Court found that the chambers judge erred in holding that
the Convention did not have legal and binding effect,
reasoning that the Convention was ratified by Canada and
adopted into domestic law by federal and provincial implementing
legislation.

The Court then reviewed the default remedies available under the
Convention and noted that both Canada and Malta had
declared that extra-judicial relief under the Convention
including the IDERA remedy was available in their respective
territories. The Court went on to note the importance of speedy
relief under the Convention and accepted EDC’s
submission that the IDERA remedy may be exercised pending final
determination of a claim of default. It accepted that if the remedy
had to await final determination of default, such as a final
decision in the underlying action, the value of the aircraft in the
possession of the distressed debtor may be lost and the aircraft
could be moved beyond the reach of the creditor. The Court
acknowledged that the Convention provides a mechanism for
creditors to control, and preserve the value of, aircraft while
disputes between debtors and creditors regarding events of default
are resolved, in order to facilitate affordable financing in the
airline sector by reducing a creditor’s risk.

The Court held that “[i]f injunctive relief is ever
available in these circumstances”, the first step of the test
for injunctive relief required Air X to demonstrate there was a
serious issue to be tried that the IDERAs did not apply. As there
was no dispute in the case before it that the IDERAs were valid and
had not been revoked, Air X did not meet the first branch of the
test for injunctive relief.

The Court then considered whether Air X would suffer irreparable
harm without the injunction. It disagreed with the chambers judge
that the possible harm to Air X was “irreparable”, since
by issuing the IDERAs Air X had agreed to extra-judicial seizure of
the aircraft pending a final determination of default, and in so
doing had agreed that its remedy, if any, would be damages.

Finally, the Court considered the balance of convenience between
Air X and Avmax. While there was a likelihood that Air X would
suffer serious harm to its business in the absence of injunctive
relief, the Court held that this was outweighed by the harm that
Avmax would suffer if denied the right to exercise the IDERAs, and
the harm to creditors who rely on the Convention
generally. It accepted the evidence that aircraft are susceptible
to significant and irreversible depreciation if not properly
maintained, that the cost to creditors to bring the aircraft into
compliance with maintenance standards after a period of
noncompliance can be prohibitive, and that this created a safety
risk. The Court also found that there is a public interest in an
economically viable airline sector that would be harmed as a result
of an “erosion of certainty and confidence in mobile
asset-based transactions”, and that this harm weighed heavily
against the injunctive relief sought by the Respondents. As a
result, the Court overturned the injunction.

The decision stands as clear appellate-level guidance on the
proper interpretation of extra-judicial enforcement remedies
available under the Convention, and the important policies
underpinning it.

Blakes acted for the Intervenor on the Appeal, Export
Development Canada.

For permission to reprint articles, please contact the
Blakes
Marketing Department.

© 2020 Blake, Cassels & Graydon LLP.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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