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AB - Abstract The elaboration of a fourth Protocol to the 2001 Unidroit Convention on International Interests in Mobile Equipment (Cape Town Convention) on matters specific to mining, agricultural, and construction equipment (MAC Protocol) represents the first step beyond the original material borders of the Cape Town Convention—aircraft equipment, railway rolling stock, and space assets—and, accordingly, provides a valuable opportunity to test the soundness and flexibility of the Cape Town system and the feasibility of a sector-by-sector expansion of the uniform legal framework. Article 51(1) lays the basis for extending the application of the Convention to other categories of objects and defines the ‘control variables’ to keep the expansion consistent with the Cape Town Convention’s philosophy: high-value, mobile, and uniquely identifiable equipment. The MAC Protocol project poses relevant challenges in the application of the Article 51(1) criteria and offers very original and innovative solutions to deal with old problems in the new context as well as some new ones. The aim of this contribution is to map the process of elaboration of the MAC Protocol, identify the main challenges that the project has encountered throughout its development, and analyse selected innovative solutions adopted in the draft Protocol. These solutions preserve the Cape Town system’s fundamental tenets and consistency with the uniform system and, at the same time, effectively face intricacies and ensure the suitability of Protocol rules for facilitating the financing and the leasing of high-value, mobile, and uniquely identifiable mining, agricultural, and construction equipment. Particular attention is given to a selection of key topics: scope of application, treaty design, immovable-associated equipment, and inventory financing. It is concluded that the MAC Protocol’s experience gives the opportunity to reflect on the merits of an original and effective bottom-to-top harmonization strategy: a modular, sector-by-sector harmonization of secured transactions by expanding the success of the Cape Town Convention to other sectors. I. Mapping the Cape Town Convention system and its expansion potential The 2001 Unidroit Convention on International Interests in Mobile Equipment (Cape Town Convention or CTC) is regarded as being one of the most successful international conventions on private law. Since entering into force in March 2006,1 the number of ratifications to the Cape Town Convention has rapidly increased depicting today a worldwide map of Contracting States2 that reflects different legal traditions, levels of economic development, and regional presence. It embodies a high level of global consensus to facilitate financing for the acquisition and the use of high-value mobile equipment with the establishment of a sound and clear international legal framework for asset-based secured transactions in regard to such equipment. With an original two-tier architecture combining an umbrella Convention and sector-specific Protocols, the CTC system enables the application and necessary adaptation of the uniform Convention rules to different categories of equipment.3 Many practical advantages in the drafting process and in the application stage derive from that original structure. As a result, the sector needs could be more properly met, negotiations and adoption processes might progress at a different pace, and the long-term benefits of formulating uniform general rules for all of the categories of equipment were not compromised by a multi-centred negotiation. Likewise, the Convention/Protocol architecture lays the foundation for the expansion potential of the Cape Town system, as per Article 51 of the CTC, to other sectors. The Convention/Protocol design operates according to several criteria that confer upon the Protocol a significant controlling role. Thus, the Protocol does not merely elaborate on the Convention provisions, but it also adapts them to each sector’s particularities, controls the coming into force of the Convention in relation to the corresponding category of mobile equipment, and specifies the material scope of the latter in each case. Article 6(1) of the CTC on interpretation rules, Article 6(2) confirming the prevalence of the Protocol over the Convention in case of discrepancy, and, especially, Article 49(1) controlling the entry into force underpin the important role of the Protocol. As a matter of law, the Convention cannot work independently. As a matter of fact, the Convention entered into force on 1 March 2006, along with the Aircraft Protocol (Article XXVIII). Neither the Luxembourg Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Railway Rolling Stock (Rail Protocol),4 which was adopted on 23 February 2007, nor the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Space Assets (Space Protocol),5 which was adopted in Berlin in March 2012 have entered into force yet. Accordingly, the CTC provisions have not become effective in regard to railway rolling stock and space assets. The CTC philosophy is essentially based on a set of tenets and fundamental elements:6 an autonomous concept of international interest,7 a selection of clear rules on creation, priority, default remedies, and insolvency, and a notice-filing electronic international registry system. These key tenets and elements are strongly conditioned by, and masterly adapted to, the characteristics of the equipment falling under the uniform system.8 In that regard, the CTC material scope is defined by three fundamental features of equipment: high value, mobile, and uniquely identifiable. Indeed, the unsuitability of the res-sitae conflict-of-laws rule and the resultant imperative need of harmonization basically root into the inherent mobility of equipment, its identifiability on a unique basis for the purposes of asset-based registration, and the separate finance practice of high-value equipment in capital-intensive sectors with sophisticated Contracting parties. These defining factors also play a fundamental role in delimiting the scope of application of the CTC in relation to domestic laws on security rights and other international/regional harmonizing instruments on secured transactions and prevent overlaps or conflicts accordingly. The tracing of the history of the CTC might also invite the conclusion that its rules have been conceived and formulated and are indeed especially well-tailored solutions for the aircraft sector. That perception has two readings. On the one hand, the Aircraft Protocol embodies a pure and perfect example of the CTC philosophy. Furthermore, the extraordinary success of the Aircraft Protocol has been an impetus to consider the expansion of the CTC system to other sectors that were not originally covered by the Convention. In particular, the MAC Protocol project has received strong support by private industries involved in the manufacturing and the financing of mining, agricultural, and construction equipment. On the other hand, since other sectors’ finance practices, market structure, or types of equipment differ, the decision to expand the CTC system to other categories of equipment may entail that some rules should be reconsidered as new challenges arise and adaptive solutions are needed. The preparation of the Protocols in regard to space assets and railway rolling stock, expressly contemplated in the original text of the Convention, did already require some adaptations. Nonetheless, the expansion to agricultural, construction, and mining equipment certainly gave rise to further challenging issues. The elaboration of the MAC Protocol represents the first step beyond the original material borders of the CTC and, accordingly, a valuable opportunity to test the soundness and flexibility of the CTC system and the feasibility of a sector-by-sector expansion of the uniform legal framework. Article 51(1) of the CTC lays the basis for extending the application of the Convention to other categories of objects and defines the ‘control variables’ to keep the expansion consistent with the CTC philosophy: high-value, mobile, uniquely identifiable equipment. To that end, as per that provision: the Depositary may create working groups, in co-operation with such relevant non-governmental organizations as the Depositary considers appropriate, to assess the feasibility of extending the application of this Convention, through one or more Protocols, to objects of any category of high-value mobile equipment, other than a category referred to in Article 2(3), each member of which is uniquely identifiable, and associated rights relating to such objects. Accordingly, in 2014, the International Institute for the Unification of Private Law (Unidroit) created a Study Group9 to assess the feasibility of developing a fourth Protocol to the Convention aimed at extending the benefits of the CTC to mining, agricultural, and construction equipment.10 The Study Group discussed a variety of challenges and issues posed by the project, devised innovative solutions to deal with them, and worked on the elaboration of a preliminary draft over four sessions between November 2014 and March 2016. The draft instrument was presented to, and approved by, the Unidroit Governing Council at its ninety-fifth session in May 2016. Subsequently, the draft MAC Protocol has been considered by a Committee of Governmental Experts in two sessions held in Rome in March (CGE-1) and in October (CGE-2) 2017. The CGE-2 concluded that the text was prepared for a Diplomatic Conference.11 The MAC Protocol project poses relevant challenges that test the application of the ‘control variables’ to other sectors and offers very original and innovative solutions to deal with old problems in the new context as well as some new ones. The aim of this article is to map the process of elaboration of the MAC Protocol, identify the main challenges that the project has encountered throughout its development, and analyse selected innovative solutions adopted in the draft Protocol, which preserve CTC fundamental tenets and consistency with the uniform system, while, at the same time, effectively facing intricacies and ensuring the suitability of Protocol rules for facilitating the financing and the leasing of high-value, mobile, uniquely identifiable mining, agricultural, and construction equipment. To that end, attention will be focused on a selection of key topics: scope of application, treaty design, immovable-associated equipment, and inventory financing. Hence, the article is structured as follows. Section II discusses some considerations arising from the decision to elaborate a single instrument to cover three sectors, as a previous structural policy decision that defines the angles of the project and originates some of its complexities. Section III deals with the most challenging issues pertaining to the delimitation of the scope of application within the coordinates marked by the Article 51(1) criteria and the definition of MAC equipment on a clear and predictable basis. In section IV, the original scope-delimiting solution based on the use of codes under the Harmonized Commodity Description and Coding System (Harmonized System or HS) in lists annexed to the Protocol is explained. The implications of that innovative solution are critically discussed there: first, the definition of objects under the Protocol and the relation with parts and components and, second, the amendment procedure to adapt the scope of the Protocol to changes and updates in the Harmonized System and to technological innovations in those sectorial activities. Sections V and VI are, respectively, devoted to outline two issues that have been newly treated in the new Protocol departing from the previous ones: immovable-associated equipment and inventory financing. Section VII concludes that lessons from the MAC Protocol’s experience reveal the soundness as well as the adaptability of the CTC system to expand to other sectors and reinforces the conviction that its expansion potential can effectively promote a modular sector-based bottom-to-top international harmonization of secured transactions rules. II. The merits of a three-sector instrument: technical and political considerations Unlike previous Protocols, the draft MAC Protocol results from the decision to cover in a single instrument three different sectorial categories of objects. Such a policy decision had to ponder several considerations. Some considerations of a technical nature had to be considered. First, the convenience of merging under the same instrument equipment associated to three different sectors. Second, the viability of any effort to effectively coordinate in a single instrument rules suitable for each category of objects without creating inconsistencies. Moreover, political reasons were also relevant. States’ interests in each of the sectors may differ depending on the domestic economic model, involved groups and stakeholders, or other social or strategical causes. Therefore, a unified text could complicate negotiations, dilute States’ interests, or even create internal contradictions. Despite the above-referred considerations, in the decision for the unitary approach, economic, efficiency, and celerity considerations prevailed.12 Hence, the adoption of a unitary instrument was softened by the concurrent implementation of a flexibility formula aimed at ensuring maximum consensus. Although the draft MAC Protocol covers on a unitary basis three categories of objects (mining, agricultural, and construction equipment), Contracting States may, at the time of ratification, acceptance, approval of, or accession to the Protocol, declare that they will limit the application of the Protocol to solely one or two categories of equipment (Article II(3) of the preliminary draft of the MAC Protocol).13 Technically, due to the particular mechanism adopted for the delimitation of the scope, as further explained below, the declaration of a Contracting State will limit the application of the Protocol to ‘the equipment comprised in one or two of the Annexes’. Then, the application of the Protocol will be to the ‘entirety of the equipment comprised’ in the selected Annexes. Likewise, the Contracting States may subsequently declare that the Protocol does not apply to one or more categories of objects (Annexes) and, thus, denounce partially the Protocol in relation to such equipment as per Article XXXII(4). Nevertheless, the flexibility formula does not apply to the whole declarations system. Where contracting States may make declarations to apply or exclude the application of a Protocol provision (opt-in or opt-out declarations) or choose one of the alternatives in Articles VII and X, such a declaration will apply to the Protocol as applied in the declaring Contracting State in its entirety. In sum, a Contracting State is not allowed to make different declarations or choose different Alternatives, where the text provides them, for each category of objects.14 As further explained below (section IV), under the particular technique implemented for delimiting the scope, the possibility of making different declarations for each category of equipment will create uncertainties in application and cause undesirable overlapping among the Annexes. III. Defining equipment and delimiting the MAC Protocol’s scope of application: intricacies Since the decision to expand the CTC to mining, agricultural, and construction equipment and throughout the elaboration of the draft,15 the delimitation of the scope of application of the future Protocol systematically gave rise to concerns and posed difficulties in terms of drafting, treaty design, and policy issues. The expansion of the CTC logic to those new sectors implies complexities and raises challenging issues that require innovative solutions. A set of original proposals intended for facing the complexities arising from the characteristics of the equipment covered without deviating from CTC philosophy makes the MAC Protocol project a singular component of the uniform system. Primary concerns were related to the fulfilment of the CTC guiding criteria (high value, mobility, unique identifiability) (section III.1), the production of definitions of covered equipment on a predictable and clear basis, and the establishment of certain descriptive factors to control the interaction with previous Protocols (section III.2). The main difficulties were associated with the formulation of adequate solutions to deal with all of the challenges and their effective implementation in the draft instrument. An innovative solution based on the use of HS codes for the delimitation of the scope has been devised (section IV). 1. High-value, mobility, and unique identifiability criteria in the MAC Protocol Once the decision to cover the three categories of objects was adopted, one of the most complex tasks along the elaboration process has been to devise an adequate formula for the delimitation of the scope. In the design of such formula, two interests,16 which sometimes, in practice, act in opposite directions, had to be reconciled. On the one hand, the preservation of the logic of the Cape Town Convention system as an international instrument applies to certain categories of high-value mobile equipment, each member of which is uniquely identifiable (Article 51(1) of the CTC). The CTC is not meant to be a general instrument governing international secured transactions. Consequently, the system should be extended only to those objects likely to meet the high-value, mobility, and unique identifiability criteria. On the other hand, the aspiration to ensure the maximum benefit to those States willing to ratify the future Protocol with the widest and most comprehensive scope of application. The Article 51(1) criteria paved the way for considering the scope of the preliminary draft MAC Protocol.17 Nevertheless, attempts to deploy such a criteria-guided approach in the delimitation of the scope proved to be extremely complex and unsuccessful. The broad diversity of equipment employed for mining, agricultural, and construction activities and the disparities in sectorial financing praxis hindered the consistent application of the delimiting criteria. In the target sectors, neither high value, mobility, and identifiability could be deemed inherent to the characteristics of the objects, as it occurs with equipment covered by previous Protocols, nor the establishment of bespoke thresholds, parameters, or factors specific for the new equipment to verify the meeting of the delimiting criteria offered feasible and satisfactory solutions. Whereas a stringent application of the delimiting criteria seemed to excessively reduce the potential scope of application and, consequently, to deflate the expected benefits of the project, a too generous interpretation of such criteria, aiming to expand the natural scope, could entail a departure from CTC system. Observing mining, agricultural, and construction equipment through the lens of the Article 51(1) criteria and the consolidated experience of previous Protocols proved a challenging task. A. High value First, unlike other Protocols, where the very selection of covered objects naturally implied high value, the range of prices/value in MAC equipment is immense. Without the implementation of a delimiting factor, the future MAC Protocol would take the risk of applying to very low-value equipment. Although that situation may occur under the Rail Protocol as well, its relevance is limited. The most obvious solution of setting a minimum unit value sales price threshold was refused for a number of reasons. Apart from deviating from previous Protocols, such a technique is inadequate for used equipment sales in the secondary market and, more importantly, can distort pricing decisions by encouraging parties to increase prices to fall under the sphere of application of the Protocol. Additionally, any effort to define high value poses the very initial question of whether high value can be defined on an absolute basis or, on the contrary, is a relative and evolving element that has to take into account sectorial, economic, social, or other concurrent circumstances. Thus, a formula based on the quantification of the high-value criteria has been discarded. As further expounded, the meeting of the criterion will be achieved indirectly through the selection of codes and the requirement of unique identification. B. Mobility Second, whereas mobility is easily presumed inherent to aircraft objects and space assets, and also widely to railway rolling stock, the fulfilment of this requirement by MAC equipment was questioned from the outset. Actual mobility is neither defined nor verified in each specific transaction. The mobility criterion does not have a purely formalistic value, but, on the contrary, it exerts a substantial impact on the legitimacy of the international instrument and its interaction with domestic laws and other harmonizing texts. Importantly, the internationality assumption of the CTC scope orbits the mobility criterion. Without providing a definition of internationality, the CTC anchors the international character of the covered transactions into the natural mobility of equipment, being either actual or potential. As a consequence, CTC provisions apply equally to domestic and transnational transactions. To temper such an extensive application, States may exclude internal transactions by way of the declaration laid down in Article 50 of the CTC.18 The observation of MAC sectors revealed that not only an actual cross-border element was dubious, but even the very fact that some equipment could be deemed mobile.19 As the negotiations of the Rail Protocol have demonstrated, a solution was very hard to identify. If MAC equipment cannot be reasonably considered mobile, the internationality assumption may be greatly debilitated. Then, as a result of a weak internationality along with an uncertain high value, overlaps with domestic rules on security rights in those assets, or possible collision with the aims of other harmonizing instruments—such as the recently adopted UNCITRAL Model Law on Secured Transactions—could materialize. In the preliminary draft MAC Protocol, a solution based on providing a definition of mobility was finally eluded. In the process of selection of HS codes, as explained below, the mobility criterion is taken into account to minimize the deviation from the CTC system’s logic. Therefore, as in case of the high-value criterion, mobility considerations were not treated separately but integrated in the configuration of the lists of HS codes aimed to delimit the scope of the new Protocol. Thus, those HS codes selected to be included in the list should cover equipment more likely to meet the mobility criterion. Besides, the mobility issue has to be linked to another distinctive innovation of the MAC Protocol in relation to immovable-associated equipment (section V). In contrast to the assumption of natural mobility of aircraft equipment, space assets, and railway rolling stock, MAC equipment does not only reveal a less visible mobile character, but it may also be affixable to immovable property. Association to immovable property reinforces, first, the image of equipment stationary in its operation and, more interestingly, second, claims to provide a totally new legal solution with no guidance in previous Protocols. The characteristics of MAC equipment and its operation make possible and, in relation to certain assets, even more certain, an association of the movable asset with immovable property to such an extent that the movable asset is treated as immovable and the interest in that immovable-associated equipment ceases to exist or it becomes subordinated to any other rights. Hence, that possible factual scenario touches the core of the CTC system as a legal framework for movable equipment and aims to govern asset-based financing transactions. Furthermore, immovable-related issues raise appreciable policy sensitivities and sovereignty concerns that explain a very limited international harmonization and hinder the formulation of a common rule for immovable-associated equipment.20 C. Unique identifiability Third, unique identification, based on a manufacturer’s serial number or other identifier, for the purposes of registration, was treated as an effective element to indirectly reaffirm the high-value requirement. It is more unlikely that low-value equipment, parts, or components are individually serialized by manufacturers. Nonetheless, as explained below in more detail, parts and components can be deemed objects for the purposes of constituting international interests under the draft MAC Protocol. An additional provision contemplating the creation and affixation of unique serial numbers, based on the Rail Protocol approach, was deemed unnecessary and removed from the preliminary draft. Essentially, after discussion,21 the unique individual manufacturer-issued serial number for identification purposes has prevailed.22 To ensure uniqueness, the serial number may be complemented by additional information as specified by the Regulations. The CGE-2 accepted the revised text for Article XVII (previously, Article XVI) as proposed by the Intersessional Working Group as follows: A description of equipment that contains its manufacturer’s serial number and such additional information as required to ensure uniqueness is necessary and sufficient to identify the object for the purposes of Article 18(1)(a) of the Convention. The Regulations shall specify the format of the manufacturer’s serial number and provide what additional information is required to ensure uniqueness. Likewise, as per Article XVIII(1), the search criterion for an equipment shall be the manufacturer’s serial number. Even if certain proposals to include other search criteria were put forward, the consistency with an asset-based registry required to avoid criteria other than the serial number—in particular, the debtor’s name—would contradict the asset-centered philosophy of the CTC system. 2. Defining MAC equipment without functional terms The innovative mechanism adopted for the delimitation of scope of the future MAC Protocol—the HS code-based method, as further explained below (section IV)—avoids and replaces a highly complex task of defining and classifying MAC equipment to be covered by the instrument. All attempts to describe target equipment on the basis of actual or intended use, purpose, design, or effective employment in mining, agricultural, or construction activities led to vague, uncertain, and notably ambiguous results. None of those criteria resisted the test of certainty, consistency, and soundness. Actual use, purpose, or intended design fail to offer objective and invariable factors to delimit the scope, and, consequently, undermine predictability expectations in market transactions. Therefore, there is no mention of actual or potential end use in the definitions of the preliminary draft, except in Article XXXIII, which, in paragraph 4, provides a mechanism to determine whether changes to the HS codes should be treated as a change that affects the material scope of the Annexes to the preliminary draft Protocol (see section IV.2).23 At the CGE-2, one delegation proposed the addition of a clarifying sentence in Article II(1) to remark that the Protocol shall apply in regard to HS codes listed in the Annexes regardless of the actual or intended use of the equipment. That clarification, finally included in the text, albeit unnecessary, serves as an expression of the underlying policy and simply reinforces the irrelevance of such functional factors in the delimitation of the scope. Likewise, a purpose/end use-based definition raises the problem of multiple purpose equipment or equipment of general nature and intensifies the risk of overlapping with previous protocols. On the one hand, the inclusion of multiple purposes equipment (for example, trucks) would entail an undesired and uncontrolled expansion of the scope of the draft MAC Protocol beyond the three target sectors. Since actual or potential use, design, or effective employment in certain activities are not relevant factors, multiple purpose equipment loses any connection with the expected sectorial sphere of the draft instrument. Furthermore, the application of the uniform instrument in such cases (as well as in low-cost equipment) could be unexpected and unpredictable for parties involved in the transaction, bring about conflicts with domestic laws, or even encourage intentional actions of parties to manipulate the transactional circumstances (use, design, situation) in order to avoid the application of the Protocol or force its application instead. Therefore, the decision, in light of the proposed scope-delimiting formula, has been not to include HS codes describing general purpose equipment in the Annexes. Then, once an object falls under a listed code, a potential or actual general use is irrelevant and will have no effect on the application of the Protocol. On the other hand, a broad and imprecise scope of the draft MAC Protocol could riskily overlap previous Protocols. Even if any conflicting HS code were excluded, the disparities in the defining factors employed in the adopted and ongoing Protocols create areas of potential conflict. Whereas a collision with the Aircraft Protocol and the Space Protocol may be less probable, the wide and inclusive24 definition of railway rolling stock in the Rail Protocol announces a high likeliness of overlapping. Certainly, albeit barely likely, a helicopter could be used for construction activities or a satellite devoted to modern agricultural production. But the operational description of railway rolling stock in the Rail Protocol as ‘vehicle movable on a fixed railway track or directly on, above or below a guideway’ could expose more area of the scope to the risk of an overlap between the new MAC Protocol and the Rail Protocol, especially, but not exclusively, in the context of mining equipment. The effect of an overlap is not merely a conceptual issue, it may create uncertainty, cause problems related to priority, or lead to duplication in registration. A delimitation solution could be configured as a matter of scope or articulated as a priority issue.25 It was decided26 that the interaction between the draft MAC Protocol and the previous Protocols should be dealt with as a matter of scope and to include the following Article II(4) in the preliminary draft MAC Protocol: This Protocol does not apply to objects falling within the definition of ‘aircraft objects’ under the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment, ‘railway rolling stock’ under the Luxembourg Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Railway Rolling Stock or ‘space assets’ under the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Space Assets. Hence, as the use or purpose is irrelevant for the delimitating of the scope, the assets covered by previous Protocols will limit the expansion of the draft MAC Protocol. With the implementation of a singular mechanism (section IV) for delimiting the scope of the future Protocol, the above-traced complexities associated with the characteristics of the MAC equipment, the interactions with previous Protocols, and the fulfilment of the guiding criteria were reasonably overcome, although they represented an appreciable challenge in drafting and Treaty design. IV. The innovative resort to HS codes as a scope-delimiting mechanism: problems and solutions Efforts made to manage the complexities arising from the delimitation of the future Protocol scope led to the proposal of a very original and unique approach in the context of the CTC system. After pondering several alternatives, at the Issues Dialogue held in 2014,27 it was submitted for consideration the possibility of using the Harmonized System developed by the World Customs Organization (WCO) as a multipurpose international nomenclature to classify products and goods in the world trade. The HS comprises six-digit codes identifying 5,000 commodity groups. The system is widely used for different purposes such as the application of custom tariffs or the collection of data for statistics. According to the WCO, the HS covers 98 per cent of international trade.28 The resort to the HS as a mechanism to demarcate the scope of the draft Protocol represents an effective, reliable, and useful tool to select and define categories of objects susceptible of being covered by the future instrument on the basis of purely objective, uniform, and external factors. Actual or potential use, purpose in design, or other factual elements are discarded and remain totally irrelevant in the delimitation of the scope. The Protocol would apply only to objects falling under the HS codes selected and listed therein. Although, in the process of selecting adequate codes in consultations with the industry, the Article 51(1) criteria were taken into consideration, no further test of mobility, high value, or unique identification is required once an object is comprised by a listed HS code. From a drafting perspective, the proposed mechanism was articulated into two components: a conceptual component embodied in the definition of MAC equipment and a design decision by enclosing Annexes. Regarding the definition of terms, unlike previous Protocols, the preliminary draft MAC Protocol does not define the categories of objects falling under the new instrument. Article I(a), (b), and (k) describe agricultural, construction, and mining equipment simply as an ‘object that falls under a Harmonized System code listed’, respectively in Annex 2, 3, or 1 to the Protocol. Thus, the definition entirely and directly refers to a list of HS codes included in an Annex to the Protocol with not even a mention of a potential use in the target sectors, the characteristics of the object, its mobility, its value, or any other descriptor. The aim is to prevent difficulties in interpretation, ambiguity on the scope, and any need to verify factual or operational elements to classify an object as effectively covered by the new Protocol. Should any of these references be included in the definition, the objectivity achieved by the use of HS codes is diluted. The drafting decision in relation to the definition of terms led to another singular outcome in terms of Treaty design. The lists of HS codes comprising those categories of objects falling under the scope of application of the draft MAC Protocol are enclosed in the Protocol’s three Annexes. Thus, the extension of the scope is determined by the Annexes that the Contracting State declares to apply in case a limiting declaration under Article II(3) is made. The HS-based solution overcomes difficulties in defining equipment and addresses the main challenges posed by the particularities of the involved sectors to delimit the scope. Nonetheless, such a singular scope-delimiting solution brings about additional complexities and gives rise to delicate policy concerns that have to be carefully tackled. Main difficulties and concerns on the implications of the HS-based solution can be grouped into three problems. First, some HS codes selected to be listed into the attached Annexes comprise parts and components (section IV.1). Second, changes in the HS system, likely to affect HS codes listed in the Annexes to the Protocol, can be carried out by the WCO, excluding, adding, splitting, or modifying the description of covered items. Third, and as a consequence of the foregoing, the scope of application of the future Protocol may need to be amended to be realigned with periodical changes in the HS, incorporate technological developments, or adjust to the evolution in mining, agricultural, and construction world trade practices (section IV.2). As a result, the scope of the MAC Protocol can be widened (or limited as well as a result of the deletion of codes). Important considerations are raised by the possibility of an international instrument with a changing and imprecise scope of application. On the one hand, Contracting States may be subjected to changes in the Protocol beyond their control. On the other hand, such subsequent changes in the scope could extend the Protocol to objects failing to fulfil the Article 51(1) criteria. 1. Objects under the MAC Protocol: equipment, parts, and components Upon the selection, in consultation with the industry, of the HS codes more suitable for being included in the Annexes attached to the preliminary draft Protocol, it was noticed that certain codes comprise not only complete equipment but also parts and components. Those HS codes entirely covering parts, accessories, or components could be completely excluded, if so decided, but in such cases where the same HS code comprises types of complete equipment as well as parts, a more elaborated solution was required. The inclusion of parts, accessories, or components under the scope of the future MAC Protocol gives rise to several problematic issues. Should HS codes comprise, either totally or partially, parts, components, or accessories, they become objects under the Protocol and an international interest can be created in them accordingly. Such an outcome is undesired and inconsistent with the CTC system for the following reasons. First, since parts, components, and accessories are typically lower-value assets compared to the complete equipment value, it may entail that the CTC expands to cover low-value assets. Second, if HS codes comprise parts, components, or accessories that, in market practice, are not separately financeable, their treatment as an object under the Protocol is not aligned with financing practices. Likewise, the departure from the accession principle, as the Aircraft Protocol does in relation to aircraft engines, should be based on separate financing practices, relevance in the market, substantial value, or other commercial factors. Third, insofar as parts, components, and accessories are not usually serialized, identification on a unique basis for the purposes of registration in the International Registry would be difficult. To preserve the rationale behind the CTC system, a double-threshold assessment is conducted: on the one hand, to confirm whether those items (parts or components), other than complete equipment, are in practice separately financeable and, on the other hand, to check whether it is likely that such items meet the Article 51 delimiting criteria. In particular, for the purposes of registration in the International Registry, sufficient identification will be needed. Should a manufacturer-issued serial-number approach (solely or in conjunction with other identifiers) be finally adopted for Article XVII, the uniqueness in the identification would definitively distinguish between the following situations: those parts to be covered and treated as objects as they fall under a separate HS code; those that should be referred to Article 29(7)(a) of the CTC as items other than objects; and those covered by the definition of object under Article I(2) of the preliminary draft Protocol.29 Then, the combined application of separate financiability and serial number-based identification would indirectly ensure the exclusion of low-value items that are not normally serialized and rarely separately financed. Nonetheless, unlike previous Protocols,30 the preliminary draft MAC Protocol presented to the first session of the CGE did not offer a clarifying solution, insofar as the definition of the three categories of objects covered by the future Protocol—Article I(2)(a), (b), and (h) [now (k)] of the text then under discussion31—was limited to a referral to the listed HS codes without contemplating either installed, incorporated or attached accessories, components and parts, or data, manuals, and records relating thereto. This absence could have been filled by interpretation; nevertheless, an express wording was considered highly desirable in order to avoid uncertainties and frustrated expectations on the material extension of the international interest and the treatment of parts. Hence, at the first session of the CGE, the following sentence was added to the concise definition of MAC equipment: ‘all installed, incorporated or attached accessories, components and parts which do not fall within a separate Harmonized System code listed in that Annex, and all data, manuals and records relating thereto’.32 The added wording slightly differs from previous Protocols to adapt to the peculiar scope-delimiting mechanism implemented in the preliminary draft MAC Protocol. Parts, accessories, or components will be treated as a separate object if they fall within a listed HS code, but they will be included in the object they are installed, incorporated, or attached to otherwise. At the CGE-2, there were no further amendments to the above-transcribed sentence added at the CGE-1 regarding accessories, components, and parts. 2. Mechanism of amendment and treaty design The drafting and structural option adopted to implement the scope-delimiting mechanism in the preliminary draft MAC Protocol displays a visible outcome on Treaty design. Article I does not provide a complete definition of mining, agricultural, or construction equipment independent from the listed HS codes. The intimate relationship between the definition provisions and the Annexes is so close that the legal definitions cannot operate without the help of the Annexes. Additionally, the HS codes are developed, managed, and periodically modified by an organization other than Unidroit. These structural and operational circumstances are likely to give rise to policy issues for the Contracting States. First, it should be agreed that the use of the Harmonized System as a scoping device is acceptable. The acceptance of this first premise is critical as it supports the viability of the main policy decision to delimit the MAC Protocol’s scope. At the CGE meetings, however, concerns related to international treaty law were raised. In particular, as further discussed below, reserved views on this issue were related to further amendments of HS codes due to changes in the HS. Second, it should be assumed that the Annexes to the Protocol form an integral part of the international instrument itself. A Contracting State is entitled only to declare, under Article II(3), that it will limit the application of the Protocol to one or two Annexes or subsequently denounce the application in relation to certain Annexes. Beyond that, States cannot modify, partially ratify, access, or adhere to the Annexes, or make a declaration in that respect, other than what Articles II(3) and XXXII(4) allow. Third, and more importantly, as the HS is a ‘living system’ that evolves and may change beyond the control of Unidroit and the Contracting States, it is critical to assess how the future Protocol should interact with those eventualities. The lists annexed to the Protocol could become ossified and remain unaltered to any subsequent modification, or a mechanism of amendment to internalize such changes undertaken in the HS system should be deployed. Technological developments, changes in financing practices, and evolution in equipment and models advise against an immobilist stance. Therefore, the configuration of a mechanism of amendment ensuring the control of States and sufficient flexibility in the adaptation and innovation of the scope is indispensable. Using an HS code as a means for narrowing the definition of the MAC equipment has the advantage of offering a broad, but finite, list so as to make clear that this Protocol applies only to certain equipment. Thus, there is no room for treating the list as illustrative and open-ended. This leads to a new challenge of finding ways to incorporate and adapt to the changes that occur to the Harmonized System. Article XXXIII sets out the machinery for the review of the MAC Protocol and the procedures for the amendment of the Protocol and the Annexes. The discussion of draft Article XXXIII (then Article XXXII)33 at the first session of the CGE revealed that, although there was consensus on the general procedure for the amendment of the Protocol provisions, the revision procedure of the Annexes did not reach sufficient consensus and raised some legal and policy concerns. Due to the singularity of the scope-delimiting solution proposed for the draft MAC Protocol, it was decided that devising an adequate procedure of amendment that ensures a balance between sufficient flexibility and celerity, and State control over the revision of the scope of application in conformity with acceptable treaty practice required a further analysis and the proposing of alternatives to the original draft provision. Then, the issue was referred to a Working Group on Amendment provisions (Amendment WG). The discussions of the Amendment WG developed under two main undisputed policy decisions: (i) that the scope of the MAC Protocol should be determined solely by the HS codes contained in the Annexes to the Protocol and (ii) that the selection of HS codes for inclusion in the Annexes should be conducted with reference to the Article 51 criteria of high value, mobility, and unique identifiability. Departing from this policy framework, the Amendment WG identified three issues that required consideration: (i) changes in the Harmonized System made by the WCO could affect the scope of the MAC Protocol; (ii) Contracting States should hold sufficient control over changes to the HS codes likely to affect the scope of the Protocol; and (iii) Article XXXII (now Article XXXIII) as initially drafted allowed for the expansion of the scope of the MAC Protocol adding new codes that might cover equipment that may not satisfy the Article 51 criteria of high value, mobility, and unique identifiability. The proposal of the Amendment WG was limited to paragraphs 4 and 5 of draft Article XXXII (apart from removing letter e) from paragraph 2) (now Article XXXIII) that deal with the revision of the Annexes. The newly devised procedure draws a distinction between those changes to the Harmonized System that affect the HS codes listed in the Annex that may entail the change in the scope of the Annexes (paragraph 4) (or the inclusion of any additional codes covering uniquely identifiable, high-value, mobile equipment of a type that is used in the agricultural, mining, or construction sector that may warrant inclusion of such equipment in the Annexes) and those changes that do not imply any change in the scope of the Annexes (paragraph 5). It might be well worth reverting here to the actual-or-intended-use standard in the definition of equipment. As it has been mentioned before (section III.2), although the reference to use or purpose criteria have been avoided in the preliminary draft, paragraph 4 of Article XXXII (now Article XXXIII) covers a situation that refers to the use of equipment: ‘[T]he inclusion of any additional codes covering uniquely identifiable high value mobile equipment of a type that is used in the agricultural, mining, or construction sector that may warrant inclusion of such equipment in the Annexes’ (emphasis added). Nevertheless, it has to be noted that the need to refer in this article to the use of the types of equipment in mining, agricultural, or construction activities to consider the inclusion in the Annexes is justified. This provision, in its current drafting after the CGE-2 (Article XXXIII), sets out a procedure (under current paragraph 4) to include new types of equipment in the Annexes. Therefore, in regard to this particular situation (the inclusion of new types of equipment), which differs from the amendments triggered by changes in the Harmonized System, the process is indeed replicating the initial selection of codes to be covered in the elaboration of the draft Protocol prior to its adoption. Hence, the use of the equipment in the relevant sectors is a necessary element to verify whether these types of equipment may warrant inclusion in the MAC Protocol. Both amendments would be considered at a meeting of Contracting States convened by the Depositary, after consultation with the Supervisory Authority, after each revision of the Harmonized System, or such other times as the circumstances may require. In both cases, each amendment shall be approved by at least a two-thirds majority of States participating in the meeting. The procedures under paragraph 4 and paragraph 5 differ in the next step after the approval. As amendments under paragraph 5 are deemed technical or non-substantial in the meaning that they do not imply any change in the scope, disparities in the version in force in the different Contracting States would lead to undesirable inconsistency of the system and raise unnecessary complexities. Therefore, should the amendment be approved by the indicated majority, it will become effective for all Contracting States in the stated period without opt-out possibilities. Contrariwise, the control of States over the paragraph 4 amendments, insofar as they entail a change in the sphere of application of a Protocol already ratified with a different scope, is imperative. Accordingly, paragraph 4 sets out an opt-out mechanism during a 12-month period subsequent to the approval of the amendment at the Conference and fixes an additional threshold (to be determined) of Contracting States objecting that would make the previously approved amendment ineffective. In sum, paragraph 4 amendments would be effective only for those Contracting States not opting out during the 12-month period, provided that the Contracting States have notified the Depositary that they do not accept beinging bound represents X per cent or less. The opt-out mechanism alleviates the policy issues related to the possibility of binding States without their sufficient control, in line with acceptable treaty practice, but opens a possible mosaic panorama. Although a proposal to amend this Article was discussed at the CGE-2, the Committee decided to retain the current drafting (in brackets) for further consideration.34 The joint drafting proposal submitted for discussion at the CGE-2 aimed to highlight certain weak points in the existing draft Article XXXII (current Article XXXIII) and propose several alternative approaches to solve the existing issues in the text. The proposed changes in the text of the provision were intended to improve the functioning of the amendment procedures under Article XXXII (now Article XXXIII) and mitigate several possible undesired effects of the current drafting. First, it aimed to more clearly distinguish technical changes to the HS codes and substantive changes and adjust the Protocol amendment procedures accordingly. Second, it alerted and addressed the risk of a mosaic-like effect in the application of the Protocol as a result of the exercise of the right to opt out of a change to the HS codes by Contracting States. Third, it tried to limit the need for convening meetings of the Contracting States for purely technical changes. Fourth, it aimed to reduce the complexity in the application of the amendment procedures and alleviate the burden on the Depositary to manage future changes in the scope. The proposal was discussed at the CGE-2, but no consensus was reached on how the provision should be amended. A number of delegations expressed that insofar as the joint proposal raised important issues that merited further discussion, the proposed alternative drafting options could not simply replace the existing wording without further consideration. Therefore, the existing text was retained and placed in square brackets for further analysis and discussion. V. Immovable-associated equipment The particular characteristics of the categories of equipment to be covered under the MAC Protocol and its operation in relation to an immovable property confronted the project to a singular new challenge. It is likely that mining, agricultural, and construction equipment will be located, placed, installed, operating on, attached, affixed, or anyhow associated to immovable property in its course of operation. It was then clearly perceived that the relationship between the uniform rules on security rights in movable property (equipment) and domestic immovable property law had become relevant. A harmonized treatment of such situations raises complexities. National sensitivities and legal disparities in concepts and rules have laid the foundation for a complicated scenario in comparative law.35 In the context of the CTC, two scenarios must be considered: on the one hand, whether an international interest can be created or provided in immovable-associated equipment (post-association creation), insofar as domestic law may treat the associated movable as an immovable, extends the interest in the immovable over the movable or anyhow affects the power to dispose of the immovable-associated equipment, and, on the other hand, whether an international interest previously created in the equipment (pre-association creation) continues or ceases to exist upon the association to the immovable and how to manage conflicts arising between international interests in the equipment and interests in the immovable property.36 The preliminary draft MAC Protocol departs from previous protocols and articulates another significant innovation. At the first CGE in Rome,37 an inter-sessional consultation on immovable-associated equipment was proposed. After deliberations, proposals were newly discussed at the CGE-2 in October 2017, and a significant change in drafting was undertaken that will be further explained and analysed. The first complex issue that had to be tackled was the conceptual task of identifying relevant situations and formulating a uniform descriptive term, given the lack of a consistent use of terminology in legal texts to describe the range of situations where the movable asset is attached or otherwise connected to the immovable property. A comparative law analysis conducted by the Unidroit Secretariat revealed that, although some domestic legal systems required a physical affixation of the asset to the immovable, even adding the requirement of the ease of removal (for example, whether the detachment and separation of the attachment are likely to damage the property), certain jurisdictions permit interests in immovable property to extend to mobile equipment on the basis of functional destination of the asset for economic exploitation of the immovable property, even without physical connection between the equipment and the immovable property.38 Not only do national approaches differ in the determination of the relevant factors assessing attachment and in the legal consequences thereof, but they also differ in the used terms. Such a terminological diversity does not merely reflect disparity in the description and the material apprehension of socio-economic situations. Differing legal terms may embody divergences in legal conception and entail the application of diverse factors revealing connection. Hence, a prior acknowledgement of such a terminological diversity and a conscious use of legal concepts turned out to be essential to conduct the further analysis. A comparative analysis immediately provides a variety of terms with a varied scope and diverse legal effects: ‘fixture’, ‘attachment’, ‘component part’, ‘essential part’, ‘integral part’, ‘fixed accessory’, ‘immovable by accession’, ‘immovable by destination’, ‘fittings’, or ‘attachment to immovable property’. Likewise, there is no uniformity in national legislation for the terms used to describe the action resulting in an association of the movable asset with immovable property so as to imply a loss of identity, to affect the continuation of a security right in the asset, or to provide certain rights in the movable asset to those with an interest in the immovable property.39 Whereas a strong physical connection between the movable asset and the immovable property is required in some jurisdictions, other legal systems resort to functional links or finality-based criteria to prove attachment and acknowledge certain legal effects. According to the latter ones, whether the functionality of the immovable property is affected by the equipment, or the equipment is devoted to the use or exploitation of the immovable or engaged in a commercial activity carried out in relation to the immovable, or the equipment is considered an essential part are relevant criteria to prove sufficient connection between the equipment and the immovable and possible factors to determine the effect on the existing interests in equipment upon association. Therefore, special attention had to be paid to terminological consistency and autonomy (or neutrality) of concept in a uniform instrument. Cleverly, it was decided to avoid the use of any existing term that domestic legislations might be familiar with and craft a descriptive uniform concept. Hence, the preliminary draft uses the term ‘immovable-associated equipment’ defined, as per Article I(h), as ‘agricultural, construction or mining equipment that is so associated with immovable property that an interest in the immovable property extends to the equipment under the law of the State in which the immovable property is situated’. The defining formula adopted refers to the law of the State where the immovable is situated to assess whether an interest in the immovable property extends to the equipment, under which conditions, and which relevant criteria determines the association of the equipment for such purposes. Although the term is uniform and neutral, it needs to operate the referral to domestic legislation. Once the term has been defined, draft Article VII addresses the issue of the association with immovable property and its consequences for the international interest. The provision is structured to offer three alternative approaches (A, B, and C). Contracting States shall declare which alternative applies to international interests in immovable-associated equipment that is situated in the Contracting State. If the immovable property is situated in a non-Contracting State, the Protocol will not apply; applicable (domestic) legislation will apply instead. The alternatives range from the most international interest-friendly option (Alternative A) to the prevalence of domestic law (Alternative C) in determining whether an international interest in immovable-associated equipment ceases to exist, is subordinated to any other rights or interests in the immovable-associated equipment, or is otherwise affected by the association of the equipment with immovable property. Alternative B provides an equidistant solution based on the loss-of-individual-legal-identity criterion. In the text submitted to the CGE-2 in October 2017,40 the drafting of Alternative A in the provision was clearly limited to deal with issues arising from a pre-association existing international interest in an object that subsequently becomes an immovable-associated equipment. The wording visibly reveals that phenomenological limitation: ‘[W]hether an international interest in the immovable-associated equipment ceases to exist, is subordinated to any other rights or interests in the immovable-associated equipment, or is otherwise affected by the association of the equipment with immovable property.’ Yet no rule on the post-association creation of an international interest in the immovable-associated equipment was provided for. At the CGE-2, a significant redrafting of Alternative A was undertaken. With an elegantly condensed formula, new Alternative A enables a Contracting State to declare that if an immovable-associated equipment is removable in certain conditions, the association of the equipment with the immovable property does not affect its status as equipment under this Protocol. Consequently, regardless of any legal effects of the association to the immovable provided for by domestic law, all Protocol provisions apply to immovable-associated equipment. Hence, with this formula, Alternative A does not only deal with pre-association international interests but also provide for a clear rule for post-association creation. In relation to the former, an international interest in agricultural, construction, or mining equipment is not affected by the association of the equipment with the immovable property and continues to exist and retain its priority against any rights or interests in the immovable-associated equipment. In regard to the latter, being an immovable-associated equipment under the Protocol, an international interest can be constituted under Article 7 of the CTC in that equipment. Neither the power to dispose of the chargor, the lessor, or the conditional seller of the immovable-associated equipment nor the very nature of the object as a movable are anyhow affected by the association to the immovable. Alternative A only applies where the immovable-associated equipment is removable in circumstances where the physical removal of the equipment would not have a detrimental effect on the immovable. The test has still to be defined in the text. Various views were discussed on the most appropriate standard: irreparability, substantiality, severity, reasonableness, and feasibility. The formulation of a uniform standard represents not only a drafting but also conceptual challenge. As standards used by domestic legislations differ, there is a lack of consistency in terminology and conceptualization. Unlike Alternative B, Alternative A should be based on a uniform factual test, whereas the loss of individual legal identity is a legal test that will defined by domestic law. Hence, the formulation of the standard in Alternative A has to avoid to the maximum extent possible the use of domestic legal concepts that might endanger the uniformity and autonomous interpretation of the Protocol standard. Alternative B is based on the criterion of ‘individual legal identity’. Should the immovable-associated equipment lose its individual legal identity upon the association, the laws of the State where the immovable property is situated apply to determine the existence of the international interest, the subordination or any other effect of the association. The loss-of-individual-legal-identity criterion is a legal standard that will be applicable in accordance with the law of that State where the immovable is situated. Paragraph 3 of Alternative B does then refer to the applicable domestic law of the pre-association international interest in immovable-associated equipment, provided that the equipment loses its individual legal identity. Subsequently, paragraph 4 under Alternative B addresses the post-association situation. Where an immovable-associated equipment has not lost its individual legal identity, paragraph 4 sets out the conditions that must be fulfilled for an interest in the immovable property extending over the equipment to have priority over the registered international interest in the equipment. Two conditions have to be met. First, the interest in the immovable property was registered prior to the registration of the international interest in the equipment. In this case, whereas the registration of the international interest in the equipment will be under the Protocol in the International Registry, the registration of the interest in the immovable equipment will be in accordance with the requirements of the domestic law. Second, the registration of the international interest in the equipment was registered after the association with the immovable property. Hence, the paragraph is clearly dealing with a post-association registration of the international interest in the equipment. Alternative C embodies a domestic law-prevailing option. It enables a Contracting State to decide that the laws of the State where the immovable property is situated will determine whether an international interest in immovable-associated equipment ceases to exist, is subordinated to any other rights or interests in the immovable-associated equipment, or is otherwise affected by the association of the equipment with immovable property. VI. Inventory-related issues Finance practices and market structure in mining, agricultural, and construction sectors have also required deploying specific solutions to deal with such transactional particularities. Unlike aircraft, space, and rail industries, MAC equipment can be financed as part of the inventory held by a dealer for sale or leasing in the ordinary course of its business. Inventory-related issues were not addressed in previous protocols since, due to the nature of the assets covered there, it was very unlikely that those items were kept as inventories for sale by dealers.41 The Study Group considered the question whether the Protocol should include additional provisions dealing with the financing of equipment being held as inventory by a dealer. However, it was decided that no distinction should be made between equipment and inventory since that would require incorporating in the analysis an ‘actual-or-intended-use’ test in the delimitation of the scope of application.42 In principle, equipment kept by a dealer as part of the inventory should be treated as equipment for the purposes of the Protocol, so that international interests could be created in such equipment and registered in the International Registry accordingly. Even in the case of unfinished equipment held by the manufacturer, international interests can be constituted therein and registered in the International Registry, provided that the piece of equipment is at a stage of the manufacturing process where it is uniquely identifiable in conformity with the Protocol and the provisions of the Regulations. Therefore, the Study Group did not propose the inclusion of additional provisions in the preliminary draft Protocol covering inventory. Nonetheless, inventory financing practices differ among national jurisdictions and give rise to specific complexities, due to the conflict of rights between the secured creditor financing the inventory and the buyer (conditional buyer or lessee) acquiring an item of the inventory in the ordinary course of business.43 Finally, this issue claimed the attention of the draft Protocol. On the one hand, it has been noted that, for the purposes of secured financing, inventory, even if it is composed of serialized items, is described and identified in bulk to facilitate the inventory rotation without requiring a continuous replacement of secured transactions in the items moving in and out of the inventory. Likewise, insofar as it is described as a whole, asset-based registration is neither possible nor desired. Under the Cape Town system, international interests in equipment held as inventory should be registered or de-registered for every single transaction in contrast with the rationale of inventory financing as an all-embracing arrangement related to a ‘floating’ (naturally changing) object. Therefore, registration in a general registry system, operating under a debtor-based model, is preferred or, simply, the only feasible one. Moreover, such reasoning would reveal a likely scope distribution between the CTC system and domestic legislation on security rights and other harmonizing instruments—namely, the UNCITRAL Model Law on Secured Transactions. In sum, a decision to exclude inventory financing from the MAC Protocol would prevent a potential overlap between the international system and the domestic legislation. On the other hand, it was advised that the practice of inventory financing functions efficiently in some jurisdictions, whereas in other jurisdictions inventory financing is not feasible due to the lack of specificity or is not widely developed. In absence of additional provisions in the text, it was argued that the MAC Protocol would disregard and unnecessarily disrupt well-established laws and practices pertaining to inventory financing.44 Nevertheless, as inventory-related financing rules and practices widely differ among States, a decision to exclude in its entirety equipment held in inventory from the category of objects covered by the MAC Protocol would be an evident source of uncertainty and dramatically impact on the value and the uniformity potential of the new instrument. Therefore, the delimitation of the situations to be excluded, the mechanism to disapply the Protocol provisions and the extension of such disapplication should be very carefully defined. At the CGE-2, a proposal to include additional provisions on inventory was intensely discussed. Given the significant disparities in domestic laws and practices related to inventory financing and considering the potential repercussion on the applicability of the new instrument, the general support was to devise an opt-out mechanism enabling States to continue applying domestic legislation to such arrangements and disapplying the Protocol provisions accordingly. Accordingly, the Drafting Committee came up with the following package of additional provisions to the preliminary draft MAC Protocol. First, definitions of dealer and inventory are included in Article I(1)(c) and (j). Essentially, both definitions pivot around the element of the ‘ordinary course of business’. Thus, dealer means ‘a person that sells or leases equipment in the ordinary course of its business’. And inventory means ‘equipment held by a dealer for sale or lease in the ordinary course of its business’. No specific reference to acting in one’s own name and on one’s own behalf or, contrariwise, on behalf of a principal, was included to define a dealer. Second, an opt-in provision enables States to exclude the application of the MAC Protocol to interests created in equipment held by a dealer (as a debtor) as inventory.45 A declaration has to be made by a State and will apply to all dealers who have their ‘place of business’ (or principal place of business in case of having more than one), as the relevant connecting factor, in such a State. Where a Contracting State has made the declaration, an international interest created or provided by an agreement under which the dealer is the debtor is not an international interest.46 Hence, those interests would be subject to, and registered under, national law. The material scope of the declaration is clearly demarcated by the relevant factor that the arrangements covered by the declaration are those where the dealer is the debtor. Additionally, if a declaration is made, it is established that, notwithstanding Article 29(3)(b) and (4)(b), respectively, a buyer of inventory, and a conditional buyer or lessee of inventory, acquires its interests in or rights over that inventory free from any unregistered interest as to which the dealer is the debtor. In both cases, such modification applies ‘unless the applicable law otherwise provides’. Therefore, the opt-in regime implies a modification of the priority rules as provided for by Article 29 of the CTC to the extent that the applicable law so provides. Otherwise, the general priority rule of the CTC is preserved. In short, the opt-in regime makes the modification of the priority rule subject to anything provided to the contrary under the applicable law. Third, new provisions modify the priority rules of the CTC in relation to inventory that applies irrespective of the opt-in declaration explained above (Article XII(1) and (2)). Unless the applicable law otherwise provides, and notwithstanding Article 29(3)(a) and (4)(a) respectively, a buyer of inventory and a conditional buyer or lessee of inventory acquires their interests in, or rights over, that inventory free from any registered interest as to which the dealer is the debtor. Priority rules are altered to protect the buyer, conditional buyer, and lessee acquiring MAC equipment held by a dealer as inventory in the ordinary course of business. Against the general priority rule of the CTC that subjects the interest of the buyer, the conditional buyer, and the lessee to an interest previously registered (at the time of the acquisition or of the registration respectively), the new provisions free the interest or the right of the buyer, the conditional buyer, or the lessee from any registered interest as to which dealer is the debtor, unless the applicable law otherwise applied. In sum, the modification of the priority rules is made conditional upon the concurrence of two elements: on the one hand, that the dealer is the debtor in the referred registered interest and, on the other hand, that the applicable law does not provide otherwise. Unlike the opt-in regime that preserves the general rule of priority unless the applicable law provides for a different regime, the new priority rule departs from the general priority regimes unless the applicable law provides otherwise. In sum, the referral to applicable law operates in a different direction in the new general priority rules for inventory acquisition and in the specific priority rules only applicable where the declaration is made. After considering other drafting alternatives, it was finally decided to prepare a new provision in Chapter II dealing with all inventory-related issues (Article XII), including the modification of priority rules (paragraph 1 and 2) and the opt-in regime (paragraphs 3 to 7). VII. Testing the soundness and adaptability of Cape Town Convention tenets: lessons from the MAC Protocol’s experience The elaboration of a fourth Protocol to the Cape Town Convention in relation to mining, agricultural, and construction equipment provides valuable lessons about the adaptability of the uniform system without compromising the soundness of its successful solutions. The MAC Protocol project represents the first complete experience beyond the boundaries of the original material scope of the CTC. As per Article 51(1), the Cape Town system has tested its ability to expand to other sectors and enlarge the realm of the uniform legal framework. The experience has proved that, despite the intricacies associated with the characteristics of the equipment, and the financing peculiarities of each sector, the system is flexible enough to give effective responses to these complexities, preserving the rationale and the soundness of its key tenets. The expansion to mining, agricultural, and construction equipment has raised a variety of legal complexities, policy concerns, and challenging drafting issues. Innovations have been required to adapt existing solutions to the new categories of equipment, such as the delimitation of the scope or the priority rules as well as the formulation of rules addressing completely new issues, which were non-existent in previous protocols, notably regarding immovable-associated equipment and inventory-related regimes. In particular, the mechanism developed to demarcate the scope of application within the logic of the Article 51(1) criteria (mobility, high value, unique identifiability), which operate as ‘control variables’ of the expansion potential of the international system, constitutes a remarkable achievement. Indeed, it anticipates an unexpected expandability of the CTC system, removing conceptual obstacles that are likely to derive from an excessively rigorous interpretation of the mobility test, the factual application of high-value thresholds, and the identification of equipment on a unique basis for the purposes of registration. Besides the appreciation of the innovative solutions developed by the MAC Protocol project to effectively manage the complexities arising from the expansion to other sectors, it entails a decisive step forward that reaffirms the soundness of the wise solutions of the CTC, the success of the system, and the powerfulness of its expansion potential. The MAC Protocol’s experience provides the opportunity to reflect on the merits of an original and effective bottom-to-top harmonization strategy: a modular sector-by-sector harmonization of secured transactions by expanding the success of the CTC system to other sectors. This article was prepared in the framework of the Research Project Reform of Spanish Laws of Security Rights in an International Context (DER2016-77695-P) during the visit as a Chair of Excellence at the University of Oxford (Commercial Law Center, Harris Manchester College), reciprocal with Louise Gullifer (University of Oxford) at the Universidad Carlos III de Madrid in the framework of the UC3M-Santander Chair of Excellence program. The author would like to acknowledge Universidad Carlos III of Madrid and Santander bank for the granting of the Chair of Excellence and Harris Manchester College for the warm reception. Footnotes 1 The Convention on International Interests in Mobile Equipment was adopted on 16 November 2001 by a Diplomatic Conference that was held in Cape Town, South Africa, under the auspices of Unidroit (International Institute for the Unification of Private Law / Institut international pour l’unification du droit privé) and ICAO (International Civil Aviation Organization). Pursuant to Art. 49(1) CTC, the Convention entered into force on 1 March 2006 together with the Protocol thereto on matters specific to aircraft equipment (hereinafter, Aircraft Protocol). 2 In April 2018, there were 76 Contracting States, together with the European Union as a regional economic integration organisation (Art. 48 CTC). See updated information on status, Contracting States, and a list of declarations at http://www.unidroit.org/status-2001capetown (accessed 26 April 2018). 3 Mark Sundahl, ‘The “Cape Town Approach”: A New Method of Making International Law’, 44 (2006) Columbia Journal of Transnational Law, pp. 339–76. 4 The Luxembourg Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Railway Rolling Stock, http://www.unidroit.org/instruments/security-interests/rail-protocol (accessed 26 April 2018 will enter into force in accordance with its Art. XXIII. 5 The Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Space Assets, http://www.unidroit.org/instruments/security-interests/space-protocol (accessed 26 April 2018), will enter into force as per its Art. XXXVIII. 6 See generally the Official Commentaries to the three Protocols under the Cape Town Convention, Roy Goode, Official Commentary on the Convention on International Interests in Mobile Equipment and the Protocol thereto on Matters Specific to Aircraft Equipment (2013; third edition); Official Commentary on the Convention on International Interests in Mobile Equipment and the Luxembourg Protocol thereto on Matters Specific to Railway Rolling Stock (2008); Official Commentary on the Convention on International Interests in Mobile Equipment and the Protocol thereto on Matters Specific to Space Assets (2013); all of them published by Unidroit, Rome (Italy). 7 Roy Goode, ‘The International Interest as an Autonomous Property Interest’, 12 (2004) European Review of Private Law, pp. 18–25. 8 For a more thorough analysis of the CTC and the Aircraft Protocol’s solutions and their adequacy in light of the characteristics of other categories of equipment, see Teresa Rodríguez de las Heras Ballell, Las garantías mobiliarias sobre equipo aeronáutico en el comercio internacional: El Convenio de Ciudad del Cabo y su Protocolo (Madrid, Marcial Pons, 2012). 9 Study Group members: Michel Deschamps, Partner, McCarthy Tetrault (Canada); Charles Mooney, University of Pennsylvania (USA); Jean-François Riffard, Université de Clermont-Ferrand (France); Teresa Rodríguez de las Heras Ballell, Universidad Carlos III de Madrid (Spain), and Benjamin von Bodungen, Counsel at Bird and Bird LLP (Germany). 10 The status of the project, milestones of its progress, and relevant documents are accessible at http://www.unidroit.org/work-in-progress/mac-protocol (accessed 26 April 2018). 11 Unidroit 2017 – Study 72K – CGE2 – W.P. 14, par. 22: ‘The Committee recommended that the Unidroit Governing Council approve the convening of a diplomatic Conference to finalize and adopt the MAC Protocol’. 12 According to the consultation launched in 2008, although some States were inclined towards the elaboration of three separate instruments, arguments of efficiency in time and resources endorsed the unitary approach. Unidroit 2014 – Study 72K – SG1 – Doc. 2, p. 7. 13 All references to Protocol provisions, unless otherwise indicated, will be to the version of the Text of the revised preliminary draft Protocol to the Convention on international interests in mobile equipment on matters specific to mining, agricultural and construction equipment as amended by the Unidroit Committee of Governmental Experts for the preparation of a draft Protocol to the Cape Town Convention on Matters specific to Mining, Agricultural and Construction Equipment at its second session, held in Rome from 2-6 October 2017, Unidroit 2017 – Study 72K – CGE2 – Report – Appendix III. As new provisions were included at this meeting in October, some provisions of the previous text of the Preliminary Draft Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Agricultural, Construction and Mining Equipment prepared for the second session of the Committee of Governmental Experts in October 2017, set out in Unidroit 2017 – Study 72K – CGE2 – Doc. 2, have been renumbered, even if the drafting has remained unchanged. 14 Unidroit 2017 – Study 72K – CGE1 – Report, par. 69, p. 8. 15 Unidroit 2006 – C.D. (85) 19, p. 10; Unidroit 2009 – C.D. (88) 17, pars. 143–7; Unidroit 2010 – C.D. (89) 17; pars. 33–7; Unidroit 2011 – C.D. (90) 18, pars. 68–70; Unidroit 2012 – C.D. (91) 15, pars. 46–7; Unidroit 2013 – C.D. (92) 17, pars. 44–8; Unidroit 2014 – C.D. (93) 14, pars. 34–8. 16 Unidroit 2014 – Study 72K – SG1 – Doc. 2. 17 Unidroit 2016 – Study 72K – CGE1 – Doc. 4, pp. 8 and ff. 18 Roy Goode, Official Commentary on the Convention on International Interests in Mobile Equipment and the Protocol thereto on Matters Specific to Aircraft Equipment (2013; third edition), Unidroit, Rome, par. 2.57 and par. 4.318. The risk of a possible dilution effect on the potential scope of the CTC has been significantly contained, as the number of Contracting States making declarations under Art. 50 CTC is limited (as per status data valid on 15 December 2017, only five Contracting States have made such a declaration). 19 Such a difficulty arising from a dubious mobility was perceived and to a certain extent minimized at the 85th session of the Unidroit Governing Council. Unidroit 2006 – C.D. (85) 7(c). The following extract from paragraphs 7 and 8 is revealing: ‘Thus, although originally the idea was to cover only equipment which moved from one country to another in the course of its operation … the possibility of adopting additional protocols covering other types of equipment is left open … . Considering that such high-value equipment would often be bought in a country different from the one in which it is intended to be operated, an element of internationality can in such cases be considered to exist, in that an international contract of sale under retention of title or an international lease or other secured transaction will be entered into and the equipment transported from one country to another … If the characteristic of the equipment being movable is no longer strict, then the fact that it should be high-value is perhaps the main characteristic still to be required.’ 20 Teresa Rodríguez de las Heras Ballell, ‘Right of Accession, Ownership of Property, and Extension of Security Interests: Concepts, Conflicts, and Rules’, III (2016) Philippines Journal of Legal Education, pp. 1–30. 21 At the first Committee of Governmental Experts, an Intersessional Working Group on identification criteria was set up. Results and proposals were presented at the second Committee of Governmental Experts in October 2017. Unidroit 2017 – Study 72K – CGE2 – Doc. 11. 22 Unidroit 2017 – Study 72K – CGE2 – W.P. 13. 23 ‘any amendments to the Annexes that reflect changes to the Harmonised System that have affected the Harmonised System codes listed in the Annexes, or the inclusion of any additional codes covering uniquely identifiable high value mobile equipment of a type that is used in the agricultural, mining or construction sector that may warrant inclusion of such equipment in the Annexes’ (emphasis added). 24 The definition of covered equipment is deliberately broad and comprehensive to include any railway rolling stock regardless of size, capacity, velocity, purpose, or territorial scope. See Howard Rosen, ‘The Luxembourg Rail Protocol: A Major Advance for the Railway Industry’, 12 (2007) Uniform Law Review, pp. 427–48, at pp. 430–1. Howard Rosen, ‘Creating an International Security Structure for Railway Rolling Stock: An Idea ahead of Its Time?’, 4 (1999) Uniform Law Review, pp. 313–22, at p. 319. 25 Unidroit 2016 – Study 72K – CGE1 – Doc. 4, par. 50, p. 12. 26 Unidroit 2016 – Study 72K – CGE1 – Doc. 4, par. 46, p. 11. 27 Second Issues Dialogue celebrated in January 2014. Unidroit 2014 – Study 72K – SG1 – Doc. 2, p. 3. 28http://www.wcoomd.org/en/topics/nomenclature/overview/what-is-the-harmonized-system.aspx (accessed 26 April 2018). 29 Art. I(2)(a), as well as with identical wording (b) and (k): ‘... including all installed, incorporated or attached accessories, components and parts which do not fall within a separate Harmonised System code listed in that Annex.’ 30 Art. I(2) of the Rail Protocol provides: (e) ‘railway rolling stock’ means vehicles movable on a fixed railway track or directly on, above or below a guideway, together with traction systems, engines, brakes, axles, bogies, pantographs, accessories and other components, equipment and parts, in each case installed on or incorporated in the vehicles, and together with all data, manuals and records relating thereto. Art. I(2) of the Space Protocol defines ‘space asset’ adding: ‘... together with all installed, incorporated or attached accessories, parts and equipment and all data, manuals and records relating thereto’. Art. I(2) of the Aircraft Protocol provides three different definitions for airframes, helicopters, and aircraft engines, comprising in all cases: all modules and other installed, incorporated or attached accessories, parts and equipment and all data, manuals and records relating thereto. 31 Unidroit 2017 – Study 72K – CGE1 – Doc. 2 corr. 32 Unidroit 2017 – Study 72K – CGE2 – Doc. 2. 33 Unidroit 2017 – Study 72K – CGE1 – Doc. 2 corr. 34 Unidroit 2017 – Study 72K – CGE2 – Report, pars. 157–63. 35 As explained in Paragraph 41 of the United Nations Commission on International Trade Law (UNCITRAL) Legislative Guide on Secured Transactions (UNCITRAL Legislative Guide), in most legal systems, attachments to immovable property (that is, tangible assets that are physically attached to immovable property without losing their separate identity) are themselves treated as immovable property. In other legal systems, as long as tangible assets attached to immovable property retain their separate identity, they are not considered to be immovable property. The UNCITRAL Legislative Guide is available at http://www.uncitral.org/uncitral/en/uncitral_texts/security/Guide_securedtrans.html (accessed 26 April 2018). As an example of disparate domestic approaches, in Canada, as a general rule, when equipment becomes incorporated to the immovable property so as to lose its individuality, then the equipment becomes part of the immovable property and the law on security interests in movable property does not apply; in Japan, a comprehensive evaluation of facts is required in order to determine whether mobile equipment is a fixture to immovable property including not only physical affixation but also the socioeconomic disadvantages of detachment; in Mexico, equipment is defined as immovable when it is permanently united with immovable property, detachment of which would be detrimental either to the principal immovable property or to the structure as a whole; in Spain, immovable property comprises, along with lands, buildings, roads, and anything which is affixed to the ground, also other assets anyhow related to an immovable property that are deemed ‘immovable by destination’ under the criteria of fixed attachment, intention, purpose, or function; similarly, in Turkey, integral parts, whose detachment would inevitably destroy or damage the property or change its character, are distinguished from accessories, that are permanently destined for the principal property’s use, enjoyment, or preservation; in the United States of America, the Uniform Commercial Code provides for two distinct set of definitions on ‘accession’, i.e. ‘goods that are physically united with other goods in such a manner that the identity of the original goods is not lost’, and ‘fixtures’, i.e. ‘goods that have become so related to particular real property that an interest in them arises under real property law’. 36 The MAC Protocol Study Group considered such possible conflicts: ‘Conflicts between national immovable property law and the rules of the Protocol on an international interest in movable equipment may not only occur where the piece of equipment concerned has become a fixture to immovable property so as to lose its unique and individual identity. Other conflicts between national immovable property law and the rules of the Protocol can arise where the piece of equipment is an asset that is an accessory to the immovable and national immovable property law provides that — even though the asset concerned retains its separate legal status as a movable asset—security rights over the immovable extend to the movable asset’. Legal Analysis Prepared by the Unidroit Secretariat, Unidroit 2017 – Study 72K – CGE1 – Doc. 2 corr. 37 Unidroit 2017 – Study 72K – CGE1 – Doc. 2 corr. 38 Unidroit 2016 – Study 72K – CGE1 – Doc. 4, Appendix III – Research on Association with Immovable Property; and Appendix IV – Jurisdictional analysis on association with immovable property. 39Ibid. Unidroit 2016 – Study 72K – CGE1 – Doc. 4, Appendix III – Research on Association with Immovable Property; and Appendix IV – Jurisdictional analysis on association with immovable property. 40 Unidroit 2017 – Study 72K – CGE2 – Doc. 2. 41 Unidroit 2017 – Study 72K – CGE1 –W.P. 6, pars. 23–36. 42 Unidroit 2016 – Study 72K – CGE1 – Doc. 4, pars. 64–8. 43 Jean François Riffard, ‘Sûretés mobilières et stocks: ou l’art et la manière de résoudre la quadrature du cercle’, in Spyridon Bazinas and Orkun Akseli (eds.), International and Comparative Secured Transactions Law: Essays in Honour of Roderick A Macdonald (Hart Publishing, 2017), Chapter 9. 44 Unidroit 2017 – Study 72K – CGE2 – W.P. 13, par. 35. 45 New Art. XII(3): ‘Paragraphs 4 to 7 apply only where a Contracting State has made a declaration pursuant to Article XXVII(4)’. 46 New Art. XII(4) and (5): ‘4. An interest in inventory created or provided for by an agreement under which the dealer is the debtor is not an international interest if the dealer is situated in a Contracting State referred to in paragraph 3 at the time the interest is created or arises. 5. For the purposes of this Article a dealer is situated in a State where it has its place of business or, if it has more than one place of business in different States, its principal place of business’. © The Author(s) (2018). Published by Oxford University Press on behalf of Unidroit. All rights reserved. For permissions, please email journals.permissions@oup.com This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices)
TI - Complexities arising from the expansion of the Cape Town Convention to other sectors: the MAC Protocol’s challenges and innovative solutions
JF - Uniform Law Review/Revue De Droit Uniforme
DO - 10.1093/ulr/uny017
DA - 2018-05-04
UR - https://www.deepdyve.com/lp/oxford-university-press/complexities-arising-from-the-expansion-of-the-cape-town-convention-to-ayt0SPIZn1
SP - 1
EP - 241
VL - Advance Article
IS - 2
DP - DeepDyve
ER -