When the lower Brazilian courts passed their judgement stating that the first priority Liberian mortgage held by Nordic Trustee over the Liberian registered FPSO OSX 3 was invalid as a matter of Brazilian law, the ship finance community was taken by surprise.

Recognition of foreign mortgages

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Is Brazil’s OSX 3 case only Brazil-specific, or can we see similar challenges in upholding foreign mortgages in other jurisdictions?

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Local laws regulating recognition of foreign mortgages
Production units like FPSOs, FSRUs etc.
Bareboat registration
Need for a generally recognized international regime?

When the lower Brazilian courts passed their judgement stating that the first priority Liberian mortgage held by Nordic Trustee over the Liberian registered FPSO OSX 3 was invalid as a matter of Brazilian law, the ship finance community was taken by surprise. The appeal court of São Paulo upheld the judgement in 2016, but it was later set aside by the Superior Court of Justice in Brazil in November 2017 by a unanimous decision which recognized the Liberian mortgage. There seems to be a common opinion in the shipping community that the first two decisions were incorrect, and went against international practice by failing to recognize foreign-law governed security interest perfected as per the requirements in the relevant foreign flag state. However, there may very well be situations where we can have similar judgements in other jurisdictions, and Borrowers and Lenders should be aware of this to consider if special precautionary steps should be taken to protect their mortgage depending on the trade of their vessel.

Local laws regulating recognition of foreign mortgages

We do not need to go further than Norway to find an example. The Norwegian Maritime Act (NMA), Article 74, states the requirements for recognition of a foreign vessel mortgage in Norway. Among the requirements clearly stated in that NMA Article, the mortgage documentation and transcript of registry from the foreign jurisdiction must, among other requirements, state the amount secured by the mortgage. Many jurisdictions, such as UK, Bahamas, Singapore etc., operate with Account Current forms, securing any debt outstanding between the parties from time to time, but not stating a specific secured amount. Applying literal interpretation on the NMA provision, such foreign mortgages shall not be recognized in Norway. We have no examples of Norwegian courts having set aside a foreign mortgage on this basis, as that particular issue has so far not been tested by the courts (although the requirements have been mentioned in judgements on other parts of the same NMA Article). The question was, however, raised in a bankruptcy case, but was settled without court adjudication. Following this case, Norwegian law firms enquired with the relevant registries in whether secured amounts could be included in account current forms. Some of the jurisdictions which use “account current” forms, like Bahamas, allowed insertion of a maximum secured amount in their account current mortgage forms. Other flag jurisdictions, like UK, have not been willing to accept such amendments to their standard forms. As a consequence of this lack of uniformity, we often recommend when registering UK mortgages that the mortgagee registers both the customary “Account Current Form” as first priority mortgage, but also a second priority “Principal Amount” mortgage (stating the secured amount) on a  contingency basis, should the vessel be arrested in Norway, where a Norwegian court  might not to recognize the “account current”  mortgage. Interestingly, the background for the Norwegian requirement of stating the secured amount lies in Article 1 of the Brussels convention of 1967 on Unification of Certain Rules relating to Maritime Liens and Mortgages, which was never ratified by a sufficient number of national states, but was ratified by Norway and has been implemented domestically in the NMA. Similar requirement is also found in the 1993 Geneva convention on Maritime Liens and Mortgages, but with a reservation that stating a maximum amount is a requirement of the law of the state of mortgage registration. However, the Geneva convention is not ratified by Norway.

Production units like FPSOs, FSRUs etc.

While ordinary commercial vessels trade regularly world wide in multiple jurisdictions, certain offshore production or storage units like FPSOs, FLNGs etc. are designed to be placed permanently in one jurisdiction for a long period. Such units may be considered both an “installation” and a “ship”. The owner and the mortgagee of the unit may have registered their interests in a foreign registry, and may also be reluctant to accept a change of flag/mortgage jurisdiction over to the local laws and registry where the unit will be positioned. On the other hand, a country allowing the unit to be positioned on its own continental shelf/exclusive economic zone for a long period, may be reluctant to accept foreign jurisdiction over the unit and any foreign mortgages and enforcement against the unit. This was also an issue in the OSX 3 matter, where the lower courts argued that this was an installation constructed to be producing in Brazil for a long period over many years, and that the vessel and mortgages should then have been registered in Brazil. If such units are considered installations, specific local requirements for mortgaging installations may be applicable, such as  restricting recognition of mortgages to those made pursuant to local laws, together with relevant exploration licenses regardless of flag and underlying mortgages. Also, the mortgagee’s rights of taking possession of the unit, sell it and sail away may be in conflict with the costal state’s legal regime in relation to orderly decommissioning of unused installation. It may prove difficult or even impossible to enforce a mortgage while such unit is in production. A more in-debth description of these issues can be found in an ILO published article by SVW partner and expert on international oil & gas related regulations, Mr. Bjørn-Erik Leerberg.

Bareboat registration

Another challenge in respect of recognition of foreign mortgages is if a vessel is bareboat flagged or dual flagged. We see this particularly for offshore supply vessels and units when operating for longer periods on the continental shelf of one jurisdiction. Although the principle is that any mortgages should remain registered in the original underlying registry, we have seen that local laws and regulations of the jurisdiction where the vessel is temporarily bareboat flagged could cause issues in respect of recognition of foreign mortgages. We have experienced that China considers the vessel to be Chinese when bareboat flagged in China, and have received advice that Chinese courts will not then recognize a mortgage registered in another jurisdiction. In Turkmenistan we received advice that foreign mortgages over an asset registered in the local ship registry could be challenged, as assets registered in Turkmenistan could only be mortgaged pursuant to local laws and registered in the local registry. The issue in those jurisdictions was that only the charterer company (registering as disponent owner under the bareboat charter)  could register a mortgage in the local jurisdiction, which is a problem as that charterer was not the borrower nor the actual owner, to be able to act as the mortgagor. A possible solution could then be that the bareboat charterer guaranteed the loan and then mortgaged the vessel for the guaranteed obligations. In France we previously received advice that an additional French mortgage should be registered in addition to the mortgage registered in the underlying registry while the vessel was subject to French bareboat flag. As per more recent advice, this is no longer possible, but we still have received some conflicting advice in whether the foreign mortgage will be respected or not in France while a vessel is bareboat registered under French flag. Also, the new proposed legislation for bareboat registration in Norway could theoretically cause concerns due to conflict between the NMA which as per the proposed legislation will prohibit a registration of mortgage in Norway (as the mortgage should be registered in the underlying registry), while the Norwegian Pledge Act states that an asset which can be registered in an asset registry such as the Norwegian Ordinary or International Ship Registry should be perfected by registration in such registry.

Need for a generally recognized international regime?

The world of shipping has not managed to agree on one convention for recognition of mortgages that is generally ratified and applied across sufficient jurisdictions. The main challenge that transpired in the OSX 3 case and the decisions from the lower courts in Brazil was the lack of a convention or bilateral agreement between Liberia and Brazil for recognition of mortgages. Conversely, the Aviation industry has adopted the Cape Town Convention of 2001 which is generally implemented and recognized internationally in the aviation industry. Could the shipping industry pursue a similar uniform solution? See this article by Ms. Andrea Fleime Syversen.