Norway bareboat plan leaves ship mortgage question unanswered

Risks remain as new rules won’t harmonise international regulations governing the enforcement of maritime mortgages, writes Oslo-based EY Law attorney Mads Ribe

Norwegian shipowners are likely to welcome their country's recent proposal to allow bareboat charter parties to be registered in and out of the Norwegian International Shipping Register (NIS). The plans are out for public consultation until 6 March.

However, uncertainty will remain over the enforcement of mortgages on NIS-registered vessels that are employed in jurisdictions where there is no mortgage treaty with Norway.

The concept of bareboat registration entitles a charterer to register a vessel in a state where it is employed (the bareboat state), while allowing the owner to maintain the vessel’s registration in its home domicile (the primary register).

This requires both states to have regulations on bareboat registration, and to grant approval in each case. The vessel will fly the flag of the bareboat state, meaning it will be subject to its regulations on safety, environment, crew and other topics. However, the primary register will maintain the ownership and security registration over the vessel.

As such, the power of enforcement on such securities will rely on the primary jurisdiction, while the actual enforcement will require the ability to arrest the vessel in the bareboat state. This might be a challenge that is not mitigated by the bareboat proposal.

The Norwegian shipping community has called for rules on bareboat registration to increase the competitiveness of Norwegian offshore vessels operating in states that require locally registered vessels, such as Brazil and some African countries.

Norway hopes that the ability to register the vessel for a limited period of time in the bareboat state will encourage shipowners to retain the NIS registration, while competing under the flag where the vessel is seeking employment.

feff4ebc5ece68e1b47f3f8ba5a49bf5 The OSX-3 court case exposed the risks associated with ship mortgages Photo: Ogpar

The bareboat proposal refers to the 1993 Geneva International Convention on Maritime Liens and Mortgages. This convention is signed but not ratified by the large shipping states, where many Norwegian offshore vessels are employed, which rely on the 1926 Brussels Convention on Maritime Liens and Mortgages.

This was problematic in the recent OSX 3 case in Brazil, where a Liberian-registered, $530m ship mortgage held by Nordic Trustee was deemed to be unenforceable as Brazil did not record mortgages for bareboat-registered vessels and Liberia was not party to the 1926 Convention.

Court ruling

Shipowners and creditors were relieved in November last year when the Brazilian Superior Court overturned the decision of lower courts and recognised the validity of the mortgage.

The decision found its grounds in the sovereignty principles of the United Nations Convention on the Law of the Sea, under which registered mortgages in foreign jurisdictions should be respected.

Nonetheless, Norway's bareboat proposal does not mitigate the risk caused by the lack of harmonised international rules on maritime mortgages. Shipowners and their creditors should be aware of the enforcement risk before allowing bareboat registration in a foreign jurisdiction, while maintaining ship mortgages registered in Norway.