The Berlin Space Protocol, marking a significant step forward in harmonizing and unifying the rules of national laws on the subject of asset-backed finance for mobile space equipment, seeks to extend the benefits of the Convention on International Interests in Mobile Equipment to “space assets”. The ongoing privatization and commercialization of today’s space industry creates more financial risks for private sector financiers, and the movable nature of space activities may cause legal uncertainties of the security interests.
The “space industry” can be defined as the economic and financial activities relating to the manufacturing, production, or provision of products and/or services that operate in, or beyond the Earth’s orbit, or the activities related to delivering these products or services to space and/or communicating with them.
Given such situation, the 2001 UNIDROIT Convention on International Interests in Mobile Equipment and the 2012 Protocol to the Cape Town Convention on Matters Specific to Space Assets marked a significant development in harmonizing and unifying the rules of asset-backed finance for mobile space equipment.
The Cape Town Convention on International Interests in Mobile Equipment
The Cape Town Convention on International Interests in Mobile Equipment, or Cape Town Treaty, which entered into force in April 2004 and resulted from a diplomatic conference (attended by sixty-eight countries and fourteen international organizations) held in Cape Town, South Africa in 2001, is an international treaty (an agreement under international law entered into by actors in international law, namely sovereign states and international organizations) intended to standardize transactions involving movable property.
Three protocols to the Cape Town Treaty, specific to three types of movable equipment, were enacted. The Aircraft Protocol in 2001, the Railway Protocol in 2007, and the Space Protocol, or Berlin Space Protocol, in 2012. A fourth protocol to the Cape Town Treaty on matters specific to Mining, Agricultural and Construction Equipment or MAC Protocol is currently being negotiated. Under the Cape Town Convention regime, each specified protocol shall be read and interpreted together with the convention as a single document. The Aircraft Protocol, applying specifically to aircraft and aircraft engines, entered into force in 2006, while the others are not in effect.
The treaty creates international standards (technical standards developed by international standards organizations; international standards are available for consideration and use worldwide) for registration of contracts of sale, security interests, leases and conditional sales contracts, and various legal remedies for default in financing agreements.
The Berlin Space Protocol
Accompanying the increasing privatization and commercialization of space activities, the development of the space industry requires huge investments, and except for governmental investment, today, more and more space equipment is financed by private entities such as banks, investment companies, insurance companies and other financial institutions.
Mobile equipment of high value or particular economic significance such as a satellite is highly movable by its very nature, and it may keep crossing national borders or operate outside sovereign territory during its lifetime. This movable nature may cause legal uncertainties when a security interest is created on a cross-border space equipment through asset-based financing, as which domestic law shall apply to regulate the security interest is questionable. Therefore, the concern is raised at an international level, in so far as there is no clear answer for whether the security interest created under the domestic laws of State A is still valid and enforceable in State B or other states.
In 2012, the “PROTOCOL TO THE CONVENTION ON INTERNATIONAL INTERESTS IN MOBILE EQUIPMENT ON MATTERS SPECIFIC TO SPACE ASSETS” or Berlin Space Protocol, aiming at helping bring much-needed financial resources to the New Space community, namely those small start-up companies that have emerged as a result of the booming commercial space sector, was concluded. It constitutes the third protocol to the Cape Town Convention on International Interests in Mobile Equipment.
Owing to the specificities of space-based objects, the negotiations were complex. UNIDROIT, the International Institute for the Unification of Private Law, an intergovernmental organization on harmonization of private international law (its projects include drafting of international conventions and production of model laws) based in Rome, Italy, has prepared the “PROTOCOL TO THE CONVENTION ON INTERNATIONAL INTERESTS IN MOBILE EQUIPMENT ON MATTERS SPECIFIC TO SPACE ASSETS”. Let’s recall that UNIDROIT’s remit is to “study needs and methods for modernising, harmonising and coordinating private and, in particular, commercial law as between States and groups of States and to formulate uniform law instruments, principles and rules to achieve those objectives”. Many experts have contributed to the preparation of the Berlin Space Protocol and have worked to find novel ways to achieve an instrument that meets the needs of both Governments and industries.
The transmission to Governments of a preliminary draft Protocol, prepared, at the invitation of UNIDROIT, by a working group the core membership of which was provided by manufacturers, financiers and users/operators of space property as well as the United Nations Office for Outer Space Affairs, the European Space Agency/European Centre for Space Law and the International Bar Association, was approved by the Governing Council of UNIDROIT at its 80th session, held in Rome in September 2001.
What are Space Assets?
The Berlin Space Protocol introduces the first international instrument for asset based financing specific to “space assets”. According to a law dictionary, “an asset is anything with a monetary value attached. Assets may be real or personal property, which may be used for payment of debts. Assets may also include intangibles, such as business good will, trademarks, and rights to market a product. Under accounting principles, current assets are those which can be readily converted to cash, such as securities, accounts receivable, finished goods, and inventories. Fixed assets are those which are used to produce other goods and services, such as plants, machinery, buildings, land, and mineral resources. Assets are shown in balance sheets of businesses and inventories of probate estates”.
According to another dictionary, a space asset is “any individual part of a space system as follows. Equipment that is or can be placed in space: a satellite or a launch vehicle. Terrestrially-based equipment that directly supports space activity: a satellite ground station”.
The Cape Town Convention mentioned the concept of Space Asset for the first time in Article 2(3)(c) without defining it, and it is the Space Protocol that provides the full definition of Space Asset. Pursuant to Article 1(2)(k) of the Space Protocol, the Space Asset is defined as “any man-made uniquely identifiable asset in space or designed to be launched into space, and comprising:
a) a spacecraft, such as a satellite, space station, space module, space capsule, space vehicle, or reusable launch vehicle (RLV), whether or not including a space asset falling within (b) or (c) below;
b) a payload (whether telecommunication, navigation, observation, scientific or otherwise) in respect to which a separate registration may be effected in accordance with the regulations; or
c) a part of a spacecraft or payload such as a transponder, in respect to which a separate registration may be effected in accordance with the regulations, together with all installed, incorporated or attached accessories, parts and equipment and all data, manuals and records relating thereto”.
Also, it is of great importance to mention that the Berlin Space Protocol shall not apply to objects falling within the definition of Aircraft Objects under the Aircraft Protocol, except where such objects are primarily designed for use in outer space, regardless of whether its actual position is in outer space or not. Moreover, the Berlin Space Protocol shall not apply to an Aircraft Object merely because it is designed to be temporarily in outer space.
The Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Space Assets represents the co-ordinated efforts of both Governments and the commercial space sector to render asset-based financing more accessible to an industry that is presently searching for innovative ways to obtain start-up capital for space-based services.
Such ventures are full of risk and uncertainty and, consequently, their financing is currently still prohibitively expensive. By introducing a uniform regime to govern the creation, perfection and enforcement of international interests in space assets, notably satellites, it is envisaged that the cost of financing will be reduced as a result of the increased level of transparency and predictability for financiers, thereby making financing more widely available to a greater number of players in the commercial space sector.
The Berlin Space Protocol’s main objectives are “to facilitate the acquisition and financing of economically important items of mobile equipment by providing for the creation of an international interest which will be recognised in all Contracting States; to provide the creditor with a range of basic default and insolvency-related remedies and, where there is evidence of default, a means of obtaining speedy relief pending final determination of its claim on the merits; to establish an electronic international registry for the registration of international interests which will give notice of their existence to third parties and enable the creditor to preserve its priority against subsequently registered interests and against unregistered interests and creditors in the debtor’s insolvency; to ensure through the relevant Protocol that the particular needs of the industry sector concerned are met; to grant Contracting States a degree of flexibility in adhering to the international regime, by allowing, to a well-defined and limited extent, policy choices through declarations, while preserving the basic uniformity of the legal regime; by these means to give intending creditors greater confidence in the decision to grant credit, enhance the credit rating of equipment receivables and reduce borrowing costs and credit insurance premiums to the advantage of all interested parties”.
It enhances legal predictability in financing transactions regarding high value, uniquely identifiable mobile equipment, reducing creditor’s risks and thereby lowering the cost of credit. This goal is achieved by allowing parties to a security agreement, a conditional sale or a leasing agreement to create autonomous interests on the equipment, which are internationally enforceable in States parties to the Convention and a relevant Protocol. Creditors may register their interest in an electronic international registry, which will give notice of their existence to third parties and enable the creditor to preserve its priority against subsequently registered interests and against unregistered interests and creditors in the debtor’s insolvency. The Convention and Protocols provide the creditor with a range of basic default and insolvency-related remedies and, where there is evidence of default, a means of obtaining speedy relief pending final determination of its claim on the merits.