Legalflyer

Welcome to our March edition of Legalflyer. In February, we published our third transport survey looking (as in our previous two surveys) at the impact of the continuing global financial crisis on the aviation, rail and shipping sectors and the strategy of each sector for managing the impact of the crisis. In the first and second surveys, the mood amongst aviation respondents was quite subdued. In 2012 however, the overall mood is notably more upbeat and 2012 promises to be a year of opportunities as well as challenges for many in the aviation sector.

In other news for 2012, I am delighted to announce that on 1 January 2012 the formal merger of Canadian law firm Macleod Dixon with Norton Rose Canada took place. As a result of the merger, Norton Rose Canada will have close to 700 lawyers in their offices across the country and it will add 60 lawyers in Latin America, based in Caracas (Venezuela) and Bogotá (Colombia), a 13 lawyer office in Almaty (Kazakhstan) and a team of lawyers in Moscow to Norton Rose Group.

Returning to this edition of Legalflyer, we have chosen once again, what we hope readers will agree, are a series of topical and interesting issues relating to the aviation industry. In our lead article, Heather Wilmot, a Director with Norton Rose South Africa, seeks to demystify some of the misconceptions about passenger liability insurance. This week Heather together with aviation colleagues from across the aviation group will be hosting a special Africa aviation school for clients (details of which can be found on the link to the right of this edition).

In our second article, Patrick Farrell (Partner) and David Murphy (Trainee) in our aviation dispute resolution team in London discuss material adverse change clauses and the extent to which such clauses should be relied upon. The article is a follow up a recent aviation seminar in London on the same topic, one of a series of aviation seminars run by the dispute resolution team in London for our clients.

In our third article, Nino di Bartolomeo (Partner) and Helen Fielder (Know-how lawyer) both based in our Sydney office, take a look at the steps being taken by the Australian government to support the aviation industry, recognised as one of the fastest growing sectors of the economy. Moving to Canada, in our fourth article, Frederic Wilson, an Associate in our dispute resolution team in Montréal considers the extent to which airlines conducting business in Canada may find themselves subject to Canadian privacy laws.

In our fifth article, David Ward, a Senior associate in our London tax team provides an overview of the reforms proposed by the UK government to Air Passenger Duty. We then have a short update from Ian Giles, a Senior associate in the London competition team, on the EU's proposals to increase a more efficient and commercial approach to airport slot trading in European airports.

In our final article and staying with Europe, Carol Aitken (Senior associate in aviation finance in London) and Clemence Perrin (a Consultant with our Brussels competition team) consider the impact of a recent preliminary ruling on a case before the European Court of Justice in the context of ever growing international opposition to the EU ETS, most notably from the US and China.

As always, I hope that you will find our articles to be of interest and we would be delighted if our readers could provide any comments on the content (including editorial), or suggestions for future articles of Legalflyer, by using the feedback email. Likewise feel free to pass on the details of colleagues who may wish to receive Legalflyer.

Editor

Patrick Farrell, Partner

Norton Rose LLP, London

Aircraft passenger liability insurance is often misunderstood. As a consequence, the significant emotional and physical impact of an aircraft crash is compounded by uncertainty over whether insurance cover will be met.

There are two broad themes in aircraft passenger liability insurance, namely the difference between private and commercial operators, and the role of the policy of insurance. Complex legislation requires certain operators to hold minimum passenger liability insurance cover of R1million per seat. This insurance relates to claims of passengers or their dependants against the operator. In light of the increasing costs of medical treatment and the impact injuries may have upon a person’s earning capacity, R1million is not sufficient. Whilst this minimum cover is prescribed in the regulations to the two licensing Acts, not every operator in South Africa is required to carry this cover. Only commercial operators are under a legal obligation to carry this cover. Private or licensed operators who do not fly passengers for reward are not legally obliged to have passenger liability insurance cover, and often don’t. Passengers and their families should therefore be aware that when flying with an unlicensed operator at no cost, there is a possibility that there is no insurance cover aimed at covering passengers for injury or death.

An insurance policy is a contract between an insured (such as an operator) and its insurer. Any obligation on an insurer to indemnify or cover an operator is an obligation that is owed to the operator only. Generally, in the absence of insolvency, a passenger or their dependents have no right to claim directly against an insurer. The passenger liability cover is written as a benefit to the insured, not as a stipulatio in favour of a passenger. The rights of the passenger or their dependents are limited to making a claim against the direct wrongdoer, who may be the operator, pilot, maintenance organisation, etc. Once a passenger or their dependents make a claim against the wrongdoer, it is for the latter to then claim indemnity from their insurers.

Insurers grant cover to operators, including liability cover, on certain conditions. These are set out in the policy. As with any contract, these terms and conditions must be complied with before obligations detailed in the contract are created. If an operator fails to comply with any condition, an insurer may reject the claim for indemnity resulting in no payment being made by the insurer. In this instance, an operator will still be liable to a passenger or their dependents, but it will not have the benefit of insurance cover. One can liken the situation to a person who has caused damage to another person’s motor vehicle. The fact that the responsible person does not carry motor vehicle third party liability insurance does not vitiate the claim of the person whose car was damaged. The innocent party is however exposed somewhat in that the financial position of the uninsured person may not be sufficient to cover the claim.

Commonly, in terms of an insurance policy an operator would be obliged to comply with all air navigation and airworthiness orders, to give ongoing notice to their insurer of any change to their operations that may vary their risk profile, to give their insurer immediate notice of any event that may give rise to a claim and to operate only within set boundaries both geographical and with regard to the type of flights. If an operator breaches any condition of their insurance policy, the insurer may be entitled to reject the claim.

Passengers should also be aware of any ticket conditions which would form a contract between the passenger and the operator. Operators often seek to enforce limitations on their liability to a passenger or their dependants when issuing tickets. Most insurance policies require commercial operators to limit their liability to passengers to the equivalent of R100 500 (a limit prescribed in the Warsaw Convention). In South Africa, subject to provisions of the Consumer Protection Act being met, it is possible for parties to agree contractually to exclude or limit the claim of one party against another for domestic carriage. International carriage from South Africa is slightly different in that it is governed by a different set of rules set out in the Montreal Convention. Where tickets are issued or terms and conditions are agreed to online or otherwise, passengers must be aware of and look out for any limitation or exclusion of claims that they may make against the operator. Any insurance cover may also be adversely affected or limited where an operator fails to issue tickets limiting their liability towards passengers as required by the policy.

One last point worth mentioning is that where passenger liability cover is held by an operator, it is generally placed together with third party liability cover in what is called a combined single limit. The third parties in the third party liability cover would be persons whose property is damaged or who themselves are injured as a result of an aircraft accident, or any object falling from an aircraft. These parties would have a claim against the operator for the repair or replacement costs of their property, or medical expenditure, etc. related to their injuries. In the event that the operator carries third party liability insurance, they would look to their insurers to indemnify them for these types of claims. The result of the third party liability and passenger liability cover being placed as a combined single limit is that where an operator faces claims from both passengers and third parties, and looks to their insurer to indemnify them for these claims, there is only one pot from which these claims will be paid. This pot may not be sufficient to cover all the claims and will be paid on a first come first served basis. In the event that the pot is depleted by other claims by the time a party (be it a passenger, their dependents or a third party) makes a claim against the operator, the operator is essentially uninsured. The R1million per seat requirement on commercial operators does not ring fence liability cover placed on a combined single limit basis for the benefit of passengers only. Whilst it is possible that passengers may hold personal accident cover, many life, disability and heath policies exclude aviation events.

Passengers and others would be wise not to simply assume the existence of insurance coverage given the numerous factors impacting upon it. Steps such as negotiating conditions of carriage, and appreciating the category the flight and operator fall into are within the control of the passenger to consider. A better appreciation of the circumstances surrounding a particular flight and the role and interplay of insurance coverage in the event of any claim may alleviate the anxiety and frustration of a person facing the aftermath of a crash.

Article first appeared in African Pilot

Author

Heather Wilmot, Director

Norton Rose South Africa, Johannesburg

We have received an increasing amount of queries regarding Material Adverse Change (MAC) clauses over the last few months, which are a common feature of most facility agreements, leases and mandate letters.

However, these clauses begin to attract considerable interest from lenders (or lessors) and borrowers (or lessees) at specific times, such as during an economic downturn or when a particular political event occurs (for example, the current economic situation or the terrorist attacks in the United States of America on 11 September 2001).

The nature of the MAC clause gives rise to two main issues: the negotiation and drafting of the clause; and ensuring that sufficient grounds exist for a lender to invoke and rely upon the MAC clause correctly.

Drafting

Often the most negotiated part of any MAC clause is the actual definition of “Material Adverse Change”. The lender will usually want this to be drafted as widely as possible (and possibly to capture other entities such as the borrower’s group), with a subjective assessment of the material adverse change itself, i.e. that the event “in the Lender’s opinion” falls within the MAC definition.

On the other hand, the borrower will want to achieve the opposite: narrow the scope of the clause and replace the subjective test with an objective one. The borrower will likely also resist attempts to include ‘potential’ material adverse changes within the definition and instead insist on limiting the MAC clause to events which have had or definitely will have a material adverse affect.

As a general rule, the MAC clause is designed to capture unpredictable and unforeseen events or circumstances which would otherwise be difficult to cater for. It is important to identify, at the outset of a transaction, which events the MAC clause is designed to cover (or not to cover) - if there are any specific risks associated with the transaction or the borrower it is preferable to cater for these as ‘specific’ events of default within the document.

One of the major benefits of MAC clauses are that they can be used to cover a wide range of subjects, including:

• the business, operations, property, financial condition or prospects of a borrower or its group;
• the ability of a borrower, or a member of its group, to perform its (or their) obligations under the transaction documents; or
• the validity, enforceability, effectiveness or ranking of any security granted in connection with the transaction documents.

Unfortunately the main benefit of the MAC clause may also be its major drawback. MAC clauses may be drafted so widely that they become unworkable, and leave the parties exposed to an uncertain position when faced with a certain set of circumstances. This may lead to serious consequences if a MAC clause is invoked by a party, and the transaction terminated, without the grounds to do so.

Invoking the Material Adverse Change clause

One of the main questions we are asked (by both lenders and borrowers) is whether, on a particular set of facts, there are sufficient grounds to invoke a MAC clause?

This is not always a straightforward question to answer, and much will depend on the particular set of circumstances involved and the wording of the MAC clause. However, the following questions may form a useful guide at an early stage when considering the above:

• Wording - is the wording sufficiently broad in scope and subjective enough to cover the event that has occurred?
• Knowledge - does the party have any prior knowledge of the particular circumstance which they wish to use to invoke the MAC clause? If so, this may prevent that party from relying on the event for the purpose of claiming that a MAC has occurred or is occurring.
• Certainty and evidence - can the party support its allegations that a breach of the MAC clause has occurred?

Historically, (and possibly due to the factors discussed) MAC clauses are rarely called and there have been few instances of these coming before the English courts. It is difficult to predict how an English court would interpret them.

One of the few cases to come before the English courts to deal with a MAC clause has been the case of Levison v Farin¹. A purchase agreement included a MAC clause which included the wording:

“Save as disclosed the vendors hereby jointly and severally warrant to and undertake with the purchasers that between the balance sheet date and the completion date: (i) the overall financial position of the company will not have changed adversely in any material way allowing for normal trade fluctuations; (ii) there will have been no material adverse change in the overall value of the net assets of the company on the basis of a valuation adopted in the balance sheet allowing for normal trade fluctuations”

Following the purchase of the company, a 20 percent drop in the net asset value of the company was discovered. The court considered the wording of the MAC clause and the set of circumstances to determine whether the 20 percent drop could be considered as ‘material’. It was held in this case that the 20 percent drop was material and that the purchasers were correct to call upon the material adverse change clause.

Conclusion

Because of the issues associated with MAC clauses, they are rarely relied upon as a sole basis for terminating a loan agreement or a lease, as it is often difficult to be certain that a material adverse change has in fact occurred. Because of this, they are more often used in conjunction with other specific events of default which may have occurred (or are occurring) to give extra weight to a claim or to bring the parties back to the table to re-negotiate a deal on more favourable terms.

Author

Patrick Farrell, Partner
David Murphy, Trainee

Norton Rose LLP, London

Footnote

1. Levison v Farin [1978] 2 All ER 1149

Aviation has been recognised as one of the fastest growing sectors of the Australian economy. International scheduled passenger traffic in the year ending October 2011 was 27.946 million compared to 26.792 million in 2010, an increase of 5.5 per cent¹ and domestic passenger traffic in the year ending October 2011 was 54.75 million, an increase of 5.8 per cent². As a consequence it is expected that airline growth to accommodate the increasing passenger lists will grow exponentially over the next decade³.

The Australian Government has recently introduced far reaching legislation at a national level that will affect personal property, including aircraft. The Personal Property Securities Act 2009 (PPSA) was passed on 18 December 2009 with operational commencement on 30 January 2012. The Australian Government is also considering whether it should accede to the Convention on International Interests in Mobile Equipment (Convention) and the related Protocol on Matters Specific to Aircraft Equipment (Protocol) (together more commonly known as the CTC) that applies to “aircraft objects”. Should the government ratify the CTC, security interests in all aircraft objects (other than smaller aircraft objects falling outside of the CTC definition of aircraft objects) will be regulated by the CTC.

For aircraft registered in Australia, this will mean that Australian financiers and lessors will obtain significant benefits. Australia will at last be propelled into the international arena, when dealing with those other jurisdictions that have already ratified the CTC. Another benefit will be derived from the 2011 Sector Understanding on Export Credits for Civil Aviation (ASU) which took effect on 1 February 2011. On accession it will provide immediate discounts on minimum premium rates to borrowers in jurisdictions that have acceded to the CTC. In addition if Alternative A of the ASU qualifying declarations is made, there will be a reduction of risk associated with financing. Alternative A (which applies on insolvency) introduces legal predictability and eliminates risk of further delays and this in turn will reduce loss given default. At the same time, regulatory reserves under Basel II will be reduced (and when Basel III commences if reserve requirements are higher than Basel II the loss given default will become more valuable to financiers).

The CTC allows creditors to register international, national and prospective interests on the international register. Standard remedies will be available to all jurisdictions that have acceded to the CTC. As a consequence, financiers in the aviation industry will have confidence to provide risk capital, leading to a reduction in costs. Debtors will also gain an advantage by obtaining protection against seizure and detention of aircraft objects if they have maintained their financial obligations.

Under the PPSA¹ whilst a creditor has the right to seize and detain aircraft in the context of default and in the exercise of its enforcement remedies, there is no provision to assist the creditor with deregistration and export of the aircraft from the Civil Aviation Register. The CTC, on the other hand, establishes clear rules to enable the creditor to seek deregistration and export in the form of an irrevocable deregistration and export request authorisation once the applicable CTC declarations have been made.

The Australian Government recognises that aviation is central to its economy and has undertaken extensive consultation with stakeholders in the aviation industry. Support by aviation participants for accession to the CTC has been provided to the government which is currently working through the legislative changes required should it take that step. We expect the government to provide its response later this year.

Authors

Nino Di Bartolomeo, Partner

Helen Fielder, Knowledge lawyer

Norton Rose Australia, Sydney

Footnotes

1. International airline activity
2. Aviation - Domestic airline activity: Annual 2010 - 2011
3. Qantas has recently placed the biggest order in Australian history for 110 A320 Airbus carriers

The Office of the Privacy Commissioner of Canada (the Commissioner) recently issued an important report laying out the test to be used to determine whether it has jurisdiction to investigate a complaint based on the Personal Information Protection and Electronic Documents Act (PIPEDA) against a foreign airline which carry passengers to and from Canada.¹

The report was issued further to a complaint made in 2009 to the Commissioner against KLM Royal Dutch Airlines (KLM) by a former passenger (the Complainant) who flew on the airline on his way back to Canada four years before. The Complainant alleged that KLM breached its obligations under PIPEDA because it had failed to give him access to the passenger-information record pertaining to him and his family and to provide him with their policies and practices regarding the management of personal information.

The Commissioner found that even though KLM is headquartered in the Netherlands, it had jurisdiction to investigate this complaint since there was a “real and substantial connection” between the airline and Canada. The “real and substantial connection test” has principally been used to determine when a Canadian Court should take jurisdiction over a foreign defendant. It also served as the basis of the 2007 Federal Court decision Lawson v. Accusearch² which ruled that even though PIPEDA does not have extraterritorial effect, the Commissioner has the power to investigate complaints with a sufficient connection to Canada.

With respect to the complaint against KLM, the Commissioner found that there was a real and substantial connection for the following reasons: a) the Complainant is a Canadian resident; b) KLM offers services within Canada and has employees in several Canadian airports; c) KLM has a Canadian version of its website; d) KLM frequently operates non-stop flights to and from Canadian airports; e) the Complainant booked a flight from Toronto operated by KLM; and f) KLM has to collect personal data from its Canadian passengers in order to offer them services.

After conducting an investigation, the Commissioner concluded that KLM had taken an undue delay to respond to the Complainant’s request to access his personal information and that its on-line privacy policy did not provide sufficient information on its practices and policies with respect to the management of personal information. Because of the real and substantial connection with Canada, the Commissioner held that KLM’s policies and practices must therefore be modified to ensure compliance with PIPEDA‚ even though they already met the standards of the Dutch Personal Data Protection Act.

The Commissioner’s findings in this report is relevant to any passenger airline conducting significant business in Canada as PIPEDA governs the collection, use or disclosure of any personal information in the course of commercial activities. While the Commissioner does not have the power to impose fines on organizations whose policies breach PIDEDA, a complainant may nevertheless rely on a Commissioner’s report to apply subsequently to the Federal Court for damages.

Author

Frédéric Wilson, Associate

Norton Rose Canada LLP, Montréal

Footnotes

1. PIPEDA Report of Findings #2011-002
2. [2007] 4 R.C.F. 321

The coalition Government confirmed on 6 December 2011 that it will go ahead with the proposed extension of air passenger duty (APD) announced in the Autumn Statement. This will comprise the extension of APD to flights on private jets and smaller aircraft from April 2013.

From 1 April 2013, APD will be charged per passenger on flights on aircraft with an authorised take-off weight of more than 5.7 tonnes (currently the de minimis weight limit is 10 tonnes). The guidance accompanying the draft legislation explains that there was no ready definition of a private jet, so, in order to extend the scope of APD to private jets, the de minimis weight limit for APD would be reduced in order to bring smaller aircraft (including private jets) within the scope of the tax. To put this into context, some six to seven passenger jets (such as the Bombardier Learjet 40XR) would now be over the authorised take-off weight threshold. However, some smaller private jets with a similar passenger seating capacity (such as the Beechcraft Premier IA or the Cessna Citation CJ2+) will continue to be outside the scope of APD by virtue of falling below the revised de minimis weight limit. Changes will also be made to the definition of a passenger for APD purposes, to include passengers who are not carried for reward (as may be the case for passengers on a private jet).

The majority of passengers flying aboard private jets will pay APD at the same rates as passengers aboard commercial aircraft. However, the rate of APD will be doubled for private jets considered to be providing a premium service. This category of flights is defined by reference to a combination of the aircraft’s authorised take-off weight and seating capacity; applying to aircraft with a certified authorised take-off weight of 20 tonnes or more and an authorised seating capacity of not more than 18 (excluding members of the flight crew and cabin attendants).

This extension in the scope of APD to flights on private jets will follow an increase in the rates of APD. As announced in Budget 2011, from 1 April 2012, rates of APD will be increased by around 8 per cent. This is despite lobbying from the UK's travel industry for APD to be scrapped altogether or at least maintained at its current level. Airlines had argued that a higher rate of APD would have a detrimental effect on Britain's tourism industry and that the environmental effect of the aviation industry would be targeted by the expansion of the EU Emissions Trading Scheme to include aviation. However, it is clear from the Treasury’s explanation of the air passenger duty reforms released on 6 December 2011 that, above all, APD is a revenue-raising duty with only secondary environmental benefits. In March 2011, in its fiscal and economic outlook, the Office for Budget Responsibility forecasted that revenue from APD would bring in £2.8 billion in 2012-13. The extension of APD to all flights on aircraft over 5.7 tonnes is estimated to bring around 50,000 additional flights within the scope of APD, raising further revenue.

Author

David Ward, Senior associate

Norton Rose LLP, London

Ten years after the CAA recommended introducing a market-based mechanism for airport slot trading, the EU has published proposals to achieve just that. Recognising that EU airport capacity is stretched - with Gatwick, Heathrow, Dusseldorf, Frankfurt and Milan Linate at saturation already - the EU’s proposals aim to increase efficient use of airport slots by encouraging a market where slots will be owned by the highest bidder, and so used for the most commercially-attractive services.

A “grey market” has already developed in some EU states, such as the UK (where the practice has been endorsed by English courts), under which airlines have swapped peak slots for unused off-peak slots together with a monetary payment. However, secondary slot trading remains prohibited in other member states (such as Spain). The new proposals allow straightforward slot transactions between airlines, either through slot exchanges accompanied by a payment, or simply one airline selling a slot to another. However, the proposals do not allow slot ownership by non-airlines (e.g., banks) which would allow airlines to use the value of slots as security for financing (as occurs in the US).

The EU proposals also recognise the need to increase mobility in slot ownership. “New entrants”, which have advantageous access to unused “pool” slots, will now be allowed to hold up to ten per cent of slots at an airport (up from four per cent) increasing their ability to build an attractive slot portfolio. The proposals make it harder for airlines to retain existing slots (under “grandfather” rights) by increasing the minimum usage from 80 to 85 per cent under the “use it or lose it” principle.

With continued growth in air traffic forecast, these reforms will be welcomed by many, although a market value for slots may impact on the viability of less “valuable” regional routes as airlines will be able to maximise the value of those slots elsewhere. However, at congested hubs such as Heathrow, where 99 per cent of slots are already occupied, these changes will have limited impact. There are further reforms proposed around improved ground-handling to reduce turnaround times, which may increase efficiency - but the underlying issue of inadequate EU airport infrastructure for a growing market will remain.

Author

Ian Giles, Senior associate

Norton Rose LLP, London

On 21 December 2011 the European Court of Justice (the ECJ) delivered its preliminary ruling on the legal challenge by the Air Transport Association of America and certain US airlines to the validity of Directive 2008/101/EC (the Directive), the Directive which brings aviation activities within the scope of the EU ETS [2]. The ruling is significant in the context of ever growing international opposition to the EU ETS, most notably from the US and China.

In its ruling, the ECJ established which rules of international law (from those referenced by the High Court in England) could be relied upon for the purpose of assessing the validity of the Directive. Of note is its judgment that certain provisions of the Open Skies Agreement could be relied upon, but that the referenced articles of the Chicago Convention and the Kyoto Protocol could not. The ECJ also outlined certain principles of customary international law which could be relied upon for the more limited purpose of assessing whether, in adopting the Directive, the institutions of the EU made manifest errors of assessment concerning the conditions for applying those principles.

Critically, the ECJ went on to uphold the validity of the Directive, ruling that an examination of the Directive “disclosed no factor of such a kind as to affect its validity”.

Whilst the case has now been returned to the High Court in England for final decision, the ECJ ruling effectively extinguishes a principal line of argument against the measures implementing the Directive in the UK. The ruling will also provide welcome legal certainty for the European Commission in a period of intense international scrutiny of the Directive and the application of the EU ETS to aviation activities. It remains to be seen whether the ruling will be accepted by the wider international community. Press reports suggest that the Civil Aviation Administration of China has reinforced its position that the EU ETS breaches the principles set by the United Nations and ICAO in relation to climate change, and has directed Chinese airlines not to comply with the EU ETS without its approval. The possibility of further legal challenge, of international retaliatory action, and continued political pressure seem likely to dominate the debate over the coming months.

A more extensive update on this case and other developments regarding the EU ETS will appear in the next edition of Legalflyer. In the meantime, please contact us if you have any queries regarding the EU ETS and its impact on your business.

Key dates

• 1 January 2012: EU ETS applies to aviation activities
• 28 February 2012: free allowances for the coming year credited to each operator's registry account
• 31 March 2012: submission of each operator's verified annual report for the previous year to its administering Member State

Authors

Carol Aitken, Senior associate

Norton Rose LLP, London

Clemence Perrin, Consultant

Norton Rose LLP, Brussels

Footnotes

[1] Directive 2008/101/EC of the European Parliament and of the Council of 19 November 2008 amending Directive 2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the European Community

[2] Air Transport Association of America, American Airlines Inc., Continental Airlines Inc., United Airlines Inc. v Secretary of State for Energy and Climate Change.  Reference for a preliminary ruling: Case C-366/10. Please refer to the December 2010 and July 2011 editions of Legalflyer for more detail on this case