International Judicial Monitor
Published by the International judicial Academy of the International Law Institute, Washington, D.C.
with circulation assistance from the American Society of International Law

Fall 2017 Issue

Significant Case Report


Brazilian Appellate Decision Renews Interest in Bustamante Code

By: Jeannette Tramhel and Luiz Marcelo Azevedo, Department of International Law, Organization of American States

A decision in 2016 by the Court of Appeals of São Paulo that a Liberian ship mortgage was invalid in Brazil has prompted closer examination of the international rules that govern maritime mortgages and inspired renewed interest in the Bustamante Code, which was acceded to by The Bahamas soon afterwards. (Editor’s Note: the Bustamante Code is a “set of rules which seek to regulate the legal relations” relating to foreign trade among the American states that established it through a treaty that went into force in 1928, although some American countries did not sign it. It contains common rules for private international law in the Americas.”)

The case – a complex one and greatly simplified here - involves The OSX-3, which is referred to in the shipping industry as an “FPSO”, a floating production storage and offloading vessel. It is owned by OSX-3 Leasing BV, a Netherlands-based subsidiary of the Brazilian parent, OSX Brazil SA. Both the parent company and the subsidiary have been under bankruptcy or creditor protection. The OSX-3 was registered in Liberia and installed in the exclusive economic zone of Brazil to operate for twenty years as a platform for deepwater oil exploration and extraction.

A dispute arose between two creditors: “Nordic”, the trustee for holders of a $500 million mortgage that had been registered in Liberia against The OSX-3 and “BTG”, an unsecured Brazilian creditor of the Dutch owner. BTG successfully obtained a lien in Brazil against the vessel in the amount of its claim for $27 million. When Nordic moved to have the lien set aside on the basis of its priority rights, BTG claimed the Liberian mortgage was not valid in Brazil. The São Paulo state appellate court agreed.

To determine the validity of the foreign mortgage in Brazil, arguments were made as to which law should apply (that of Liberia, Brazil or the Netherlands). The following three findings of the Court are particularly noteworthy.

First, BTG argued that as Liberia is not a party to the 1926 Brussels Convention on Maritime Liens and Mortgages (under which a ship mortgage registered in one state becomes valid in other states) the foreign mortgage is not valid. Nordic responded that as Brazil is party to both the Brussels Convention and the 1928 Convention on Private International Law (“Bustamante Code”), which also grants effects to foreign ship mortgages, the principle should apply. The Court found that in order for a foreign ship mortgage to be valid in Brazil, there has to be an international treaty between Brazil and the foreign state; as Liberia is not party to either treaty, the principle could not be applied. 

Notwithstanding, argued Nordic, it is customary international law that a ship mortgage is governed by the law of the flag and deemed valid and enforceable wherever the vessel is located. The Court, however, was not satisfied that such custom had been evidenced.


Nordic also argued that as the vessel is a moveable asset, the law of the domicile of the owner of the asset (i.e., the Netherlands) should apply, pursuant to which the foreign mortgage would be valid in Brazil. The Court found that as The OSX-3 has been installed as a platform that is intended to be operational for 20 years, application of Dutch law would not be appropriate; instead, it applied lex situs. The Court noted that even if The OSX-3 were considered a movable asset, Dutch law would not be applicable because the Dutch owner is a subsidiary of a Brazilian business group; by piercing the corporate veil, the subsidiary would actually be considered Brazilian since its main economic activity is within Brazilian territory. 

The Court found as irrelevant arguments that had been made by both parties regarding “flag of convenience” and impossibility of registration of the mortgage in Brazil; another argument was barred for procedural reasons. The Superior Court of Justice, which is the highest court in Brazil for such matters, has agreed to hear Nordic’s appeal on November 16, 2017. 

In the meantime, the São Paulo appellate decision of June 1, 2016 has created uncertainty for the shipping industry. Many foreign vessels operating in Brazil are registered in countries such as Liberia, largely due to less restrictive regulations and taxation. Most are mortgaged. Interestingly, The Commonwealth of The Bahamas deposited its instrument of accession to the Bustamante Code on January 23, 2017, with express reservations to Articles 1 through 273 and articles 295 through 437. The remaining articles, comprising Title Three on Maritime and Aerial Commerce, entered into force for this Caribbean state 30 days afterwards. Of particular relevance is Article 278, which states that maritime mortgages, “constituted in accordance with the law of the flag, have extraterritorial effect, even in those countries the legislation of which does not recognize nor regulate such hypothecation.”

The case illustrates the importance of judicial decisions in the field of private international law and their implications for trade and commerce. The rest of the story is worth watching!

The original decisions are available in Portuguese at the links that follow below. 

  • Feb. 3, 2016: Agravo de Instrumento nº 2153991-40.2015.8.26.0000
  • June 1st, 2016: Embargos de Declaração nº 2153991-40.2015.8.26.0000/50000;jsessionid=

  • Sept 18, 2017: Agravo em Recurso Especial Nº 1.074.507 - SP (2017/0065899-5)

REsp 1705222(2017/0065899-5 - 27/09/2017) - Decisão Monocrática- Ministro LUIS FELIPE SALOMÃO

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© 2017 – The International Judicial Academy
with assistance from the American Society of International Law.

Editor: James G. Apple.
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