What is UNIDROIT and why are satellite operators saying such bad things about it?

UNIDROIT is the International Institute for the Unification of Private Law, based in Rome. It traces its history back to 1926 and says its purpose is to “study needs and methods for modernizing, harmonizing 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.” Translated, it sets up uniform legal rules that countries can adopt for their own.

At the end of 2010, UNDROIT had 63 member States. It has established numerous model laws and conventions for items ranging from the international sale of goods, to rules for security interests in mobile equipment that cross national borders. That last topic got UNIDROIT interested in security interests for space assets. It started efforts on a space assets protocol more than a decade ago. That work has been rolling on ever since and has resulted in a preliminary document that “governmental experts” have prepared.

The preliminary draft protocol is said to be in sufficiently stable shape to go to a diplomatic conference that will be hosted by Germany Feb. 27 to March 9, 2012. A diplomatic conference is normally a final stage in preparation of an international agreement. Final issues are supposed to be hammered out at such an event, so the governments involved can agree to the document and take it back for ratification.

This has the satellite operators deeply unhappy. The draft, they say, is not helpful, not needed and not based on their input.

The International Institute of Space Commerce (IISC) took a look at this in December 2009 and came up with some harsh conclusions. IISC, an independent think tank, undertook a questionnaire to find out what level of support there was for the protocol. Apparently the only full support for the draft at that time was from academia. Industry representatives were said to believe that the entire exercise was “purely academic” and that “the majority of drafters are individuals that are [not] expert in the satellite business or space financing.”

Satellite operators responded to the IISC survey, saying that the protocol “is attempting to provide a solution where there is no problem, and even if there were problems when UNIDROIT first began deliberating the utility of the Protocol, those problems have long since been diffused.”

The conclusion that the IISC study reached, based on its survey results, was that “the benefits of the proposed new regime seem slight.” Respondents to the survey were concerned that the protocol could increase risk related to financing, make it more difficult to find lenders willing to assume these risks and add uncertainty and expense.

That was almost two years ago and there have been subsequent UNIDROIT meetings. Have matters improved? The short answer seems to be no.

We have seen a letter circulating among the satellite industry that urges UNIDROIT and its representatives to reconsider the adoption of the current draft Space Assets Protocol. That letter says that the protocol “would introduce new and unnecessary regulation for the financing of satellites,” it would lead to “serious negative consequences” and is “inconsistent with the market practices of commercial space financing.” The letter argues that the protocol “incorporates numerous impractical features that would deter potential investors in the satellite industry, and would add increased costs to our businesses, such as higher insurance premiums and other transactional costs.”

Perhaps most damning is the charge that UNIDROIT essentially has “consistently disregarded” the views of operators, manufacturers and financiers in the satellite industry in its meetings and drafting.

One element of the protocol is that satellites (space objects) should be listed on a new international registry in order to create a form of security interest. Operators say this would add another new “supra-national layer.” According to industry, the new system would be “unnecessary, confusing and cumbersome” if adopted.

In sum, the satellite industry is deeply concerned about the shape of the UNIDROIT protocol. There seems to be major opposition, so why is UNIDROIT forging ahead?

Gerry Oberst is a partner in the Hogan Lovells Brussels office.