A banker asked us: Does the Cape Town Convention affect pre-existing rights and interests or their priorities in Canada?

Q: We've heard about the expiration of the "grandfather clause" (in French, clause grand-père) in the Cape Town Convention, whereby pre-existing rights and interests or their priorities in a State before the effective date of the Cape Town Convention in that State shall not be affected by the Cape Town Convention. We would like to know more details about:

1. Which article in the Cape Town Convention prescribes this rule?
2. Is this rule applicable in Canada?
3. Are there any exceptions to this rule?

A: Article 60, paragraph 1 of the Convention on International Interests in Mobile Equipment (commonly known as Cape Town Convention) sets out the fundamental rule that the Cape Town Convention does not affect pre-existing rights and interests or their priorities. This paragraph reads as follows:

Unless otherwise declared by a Contracting State at any time, the Convention does not apply to a pre-existing right or interest, which retains the priority it enjoyed under the applicable law before the effective date of this Convention.

In other words, the Cape Town regime does not apply retrospectively unless otherwise declared by a Contracting State.

The Government of Canada adopted International Interests in Mobile Equipment (aircraft equipment) Act^[1] (the "Act") in December 2012 that ratified the Cape Town Convention and Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (commonly known as the Aircraft Protocol). Pursuant to article 19 of the Act, the Cape Town Convention and Aircraft Protocol entered into force in Canada as of April 1^st, 2013. As a result, the fundamental rule is also applicable in Canada, whereby pre-existing rights and interests or their priorities in Canada before April 1^st, 2013 shall not be affected by the Cape Town Convention, subject to certain exceptions.

As stipulated in Article 60, paragraph 1 of the Cape Town Convention, States ratifying the Cape Town Convention can derogate from the fundamental rule by declaring that the priority of rights arising under pre-existing transactions will be subject to the Cape Town Convention. However, the declaration of a State to apply the Cape Town Convention retrospectively needs to be made at least three years in advance of doing so, as required under Article 60, paragraph 3 of the Cape Town Convention.

The Government of Canada made certain declarations^[2] at the time of the deposit of its instrument of ratification and subsequently, including in particular, the following:

The Government of Canada also declares, in accordance with Article 60 of the Convention, that the Convention will apply to a pre-existing right or interest governed by Sections 426 to 436 of the Bank Act for the purpose of determining priority, including the protection of any existing priority, five years after the day on which the Aircraft Protocol comes into force for Canada. Until that time, that right or interest will remain governed by those Sections.

As a result, the Cape Town Convention will apply to a pre-existing right or interest governed by Sections 426 to 436 of the Bank Act as of April 1, 2018, which is, five years after the day on which the Aircraft Protocol came into force for Canada.

As for other pre-existing rights or interests or their priorities, since Canada did not make any specific declarations in that regard, the fundamental rule of the Cape Town Convention (the non-retroactive effect) will continue to apply.