A Year Later: the Practical Consequences of Blue Sky One Limited

Julie E. McLean • Posted 29/04/2011 • Under Articles

The judgment in the case of Blue Sky One Limited and Others v Mahan Air and Another [2010] EWHC631 (Comm) (“Blue Sky”) was released on 25 March, 2010. It immediately received the attention of all airfinance practitioners as it questioned the effectiveness of English law as the stated governing law of an aircraft mortgage in certain circumstances.

The judgment provided that one has to look at the domestic law of the lex situs of the aircraft (excluding its conflict of law rules) at the time the mortgage is created to determine if the mortgage is valid rather than the contractually agreed governing law.

If the lex situs domestic laws recognise the English law concept of a mortgage with an equity right of redemption, then an English law mortgage should be valid. Unfortunately most civil law jurisdictions (such as France and Germany, where Airbus has manufacturing and delivery bases) do not recognise such a concept of conditional transfer of ownership. As such, under their domestic laws, there is no transfer and the mortgage would be viewed as invalid.

Considering that the legal effectiveness of the aircraft mortgage is central to all aircraft financings, how have parties dealt with this hurdle? As legal advisers to the special purpose vehicles incorporated in smaller financial centres such as Bermuda and the Cayman Islands to act as borrowers in finance transactions, we have had to consider the practical issues. Where is the aircraft situate at the relevant time? Is it in a civil or common law jurisdiction? Will the aircraft be registered in our jurisdiction?

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