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.
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