One of the issues on which the court was asked to adjudicate was whether the mortgage was sufficient to create a proprietary interest over the aircraft in favour of PK. The court heard expert evidence as to whether the English law mortgage would be upheld under the domestic laws of each relevant jurisdiction and decided that the mortgage would be:
- valid if the laws of England or Armenia were the proper laws applicable to it; but
- invalid if the laws of the Netherlands were the applicable proper laws because a Dutch court will only recognise a mortgage created under the laws of the state of registration (i.e. Armenia).
The Court then considered what English law would treat as being the mortgage’s proper law.
Some commentators have in the past suggested that aircraft should be treated differently from other tangible moveable assets on account of their international nature and their possibly rather arbitrary location at any relevant time. The argument has been that property rights over them should be accepted if constituted under the laws of their state of registration. The court, however, did not accept this argument, refusing to distinguish aircraft from other chattels and applying the pure lex situs rule. Mr Justice Beatson therefore held that the validity of the mortgage would be determined by Dutch law because the aircraft was physically situated in the Netherlands at the time that the mortgage was created.
The court continued to consider the validity of the mortgage under Dutch law. If it had taken account of the principles of Dutch private international law, then the court might have held that:
- Dutch law required the mortgage to be valid under the laws of the state of registration, that is Armenia; and
- an Armenian court would uphold the choice of English law to govern the mortgage;
- so, using the legal referral system known as renvoi, an English court should also uphold this choice of law.
However, the court actually held that, when deciding on the validity of the mortgage under its proper law, it was necessary to look only to the domestic law of the lex situs jurisdiction and ignore its conflict of laws rules. It held that the concept of renvoi did not apply when considering the proper law for the creation of property rights over tangible moveable assets. As the mortgage would be invalid under domestic Dutch law, the English court would not give effect to it, even though a Dutch court would uphold it under its own conflict rules.
The only exceptions to this rule are:
- where the location of the asset is genuinely unascertainable (as was the case with one of the other aircraft the subject of the litigation), in which case the court held that the parties have freedom to choose the law to govern these matters (and so upheld the validity of an English law mortgage over that aircraft); and
- where an aircraft is in flight in international airspace, in which event authority suggests that it may be deemed to be situated in its state of registration (Dicey and Morris, Rule 120, Exception 2).
This decision, insofar as it relates specifically to aircraft, is not consistent with the rules set out in the two principal international conventions in this field. The Geneva Convention privileges the law of the State of Registration for perfecting property rights over aircraft and the Cape Town Convention by its terms sets out how these may be created without reference to any national legal system. However, the judgment will have persuasive authority in several jurisdictions (including many tax havens commonly used in aircraft finance) which have not ratified either convention.