Alberta Court of Appeal Overturns Injunction and Confirms Application of Cape Town Convention and Aircraft Protocol in Canada

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 more information, please contact:

Iris Antonios                +1-416-863-3349
Jason MacIntyre         +1-416-863-2507
Randell Trombley       +1-403-260-9729

or any other member of our Litigation & Dispute Resolution or Aviation & Aerospace groups.