The Law of Ship Mortgages

David Osborne, Graeme Bowtle, Charles Buss

• Publisher: Informa Law from Routledge
• Year: 2016
• ISBN:
  9781317660422
• Edition: 2
• Topic: Jura
• Subtopic: Seerecht

Thought to be the most comprehensive guide to English law relating to ship mortgages, the second edition of The Law of Ship Mortgages has been highly anticipated. This fully-updated and complete explanation provides practitioners with a practical, commercially-based, and definitive guide to the English law of ship mortgages as well as important related areas such as conflict of laws and insolvency.

The authors, being seasoned practitioners themselves, bring their practical experience to bear on a number of difficult and developing areas of the law, such as: mortgagees' duties, liability to charterers, conflicts of laws, work-outs and cross border insolvency.

New to this edition:

• 
  
  

• In-depth analysis of noteworthy cases such as The WD Fairway litigation, PK Airfinance v Alpstream, and Tropical Reefer and Anton Durbeck v DNB

• 
  
  

• Enhanced coverage of issues such as security interests in ships, priority, and third party involvement

• 
  
  

• Completely revised and reordered content, to better reflect practitioner needs

Written with practitioners in mind, this new edition will be extremely useful to legal professionals working in any jurisdiction that is involved in international ship finance, as well as post-graduate students and academics.

Chapter 1
Historical introduction

1.1 Background

1.1.1 Coote on Mortgages¹ says of ship mortgages: ‘No species of mortgage security requires greater circumspection than that we are about to consider.’ The objective of this book is to set out circumspectly the modern law of ship mortgages. The risks of lending against the security of ships were noted in a nineteenth century Scottish case:²

… the mortgagee of a ship holds a security over a floating subject which in the very act of use is liable to be withdrawn from the jurisdiction of the courts of the country in which the right of the mortgagee is constituted, and which also in the act of use is exposed to the perils of the sea.

The features of lending against the security of ships reflected by this last remark show themselves in a number of legal issues touched upon in this book which arguably make ship mortgages different in certain respects from mortgages over other property (both real and personal), including: the nature and extent of the mortgagee’s duties to the mortgagor on enforcement;³ liabilities to charterers and cargo interests;⁴ issues relating to priority;⁵ the application of the equitable doctrine of marshalling;⁶ and the effect of liens.⁷

1.1.2 Security interests in property developed in the legal systems of many early civilisations⁸ and in particular in Roman law.⁹ In England the use of property as security was known to the common law from the earliest of times. Initially mortgages were limited to land¹⁰ but mortgages could also be granted on chattels.¹¹ In summary a mortgage was a transfer by the owner of its legal title in property to the mortgagee on condition that the legal ownership would be retransferred to the owner on payment of the mortgage debt: the owner retained possession of the property and its income unless and until it defaulted in repayment of the debt when the mortgagee could foreclose on the mortgage and take possession of the property. In the seventeenth century equity had intervened to protect the owner by requiring the mortgagee to retransfer the legal title in the property to the owner on payment of the debt notwithstanding that the legal date for repayment had passed. In G&C Kreglinger v New Patagonia Meat & Cold Storage Company Ltd¹² Lord Parker described the intervention of equity as follows:

Taking the simple case of a mortgage by way of conveyance with a proviso for reconveyance on payment of a sum of money upon a specified date, two events might happen. The mortgagor might pay the money on the specified date, in which case equity would specifically perform the contract for reconveyance. On the other hand the mortgagor might fail to pay the money on the date specified for that purpose. In this case the property became at law an absolute interest in the mortgagee. Equity, however, did not treat time as the essence of the transaction, and hence on failure to exercise what may be called the contractual right to redeem there arose an equity to redeem notwithstanding the specified date had passed… The equity to redeem which arises on the failure to exercise the contractual right of redemption, must be carefully distinguished from the equitable estate, which, from the first remains in the mortgagor and is sometimes referred to as an equity of redemption.

1.1.3 Although a species of chattel,¹³ ships, or at least registered ships, are not like ordinary chattels.¹⁴ The registration regime for ships has both a public law function and private law consequences.¹⁵ The private law consequences mainly manifest themselves in the conflict of laws treatment of the transfer of proprietary interests¹⁶ and in the ousting of certain doctrines of equity by the statutory regime for the registration of title and mortgages.¹⁷ Further indicators of the differences between ships and other chattels are: the potential availability of specific performance in respect of a contract for the sale of a ship;¹⁸ the exclusion of ships from the application of the Bills of Sale Acts;¹⁹ and the long-standing exemption of transfers of ships from stamp duty.²⁰

1.2 Maritime law and ship mortgages

1.2.1 Maritime law, as law crossing national boundaries, has an ancient history, which can be traced as far back as the Rhodian law of the eighth or ninth centuries BC.²¹ The special nature of maritime law was reflected in England by its being subject to the jurisdiction of a separate court, the High Court of Admiralty, whose practitioners and judges were Doctors of Civil Law and members of Doctors’ Commons. Maritime law was thus a distinct specialism, set apart from the law practised and developed by the courts of common law and equity. There was long-running rivalry between those courts and the High Court of Admiralty, with competition for influence and jurisdiction, going back to Tudor times and beyond, and with the High Court of Admiralty generally losing.²² The High Court of Admiralty underwent a resurgence of influence, however, under William Scott, Lord Stowell between 1798 and 1827, which continued during the tenure of Dr Stephen Lushington as Admiralty Judge between 1838 and 1867.²³ The High Court of Admiralty ceased to exist in the massive reorganisation that took place by the Supreme Court of Judicature Act 1873²⁴ but re-emerged in that reorganisation as the Probate, Divorce and Admiralty Division, one of the five divisions of the new High Court of Justice. The Probate, Divorce and Admiralty Division was abolished by the Administration of Justice Act 1970,²⁵ which constituted the Admiralty Court as part of the Queen’s Bench Division of the High Court.

1.2.2 The ship mortgage is, however, not derived from the lineage of ancient, civil law-influenced maritime law. The jurisdiction of the High Court of Admiralty traditionally extended to the ancient institution of bottomry, i.e. hypothecation of a ship’s hull to secure expenses and to ensure the safe continuation of a voyage,²⁶ but not to mortgages, until that jurisdiction was conferred by the Admiralty Court Act 1840.²⁷ Ship mortgages originally fell under the jurisdiction of the courts of common law and equity, reflecting that they were the extension into a maritime context of a land-based concept, i.e. the chattel mortgage. There appears to have been some latitude granted to mortgagees by the courts before 1840, at least to intervene in, if not initiate, proceedings. In The Dowthorpe²⁸ Dr Lushington observed shortly after the passing of the 1840 Act and referring to an earlier case:

A mortgagee, undoubtedly, at that time, could not initiate proceedings in the Court of Admiralty; but it is quite a different question, whether he could not intervene to protect his interest when a suit was already exercised by parties competent to do so… Now the evident consequence of that judgment,²⁹ if carried to its full extent, would result in this: that supposing the law of this Court, with respect to mortgagees, remained unaltered, in no case could the mortgagee of a ship (and mortgagees of ships are of everyday occurrence) appear in a suit to protect his interest. The question is now set at rest by the late Act of Parliament; but I am inclined to think that, although previous to the passing of the Act 3 & 4 Victoria, a mortgagee could not have initiated a suit in this Court, yet he might have intervened for the protection of his interest.

The effect of the jurisdictional division is dramatically illustrated by The Portsea³⁰ in 1827 where a ship mortgage was not recognised by the High Court of Admiralty.³¹

1.2.3 In the seventeenth and eighteenth centuries, in order to raise finance for businesses, partnerships or in some cases joint stock companies were often formed. However it would appear that shipowning was financed on a different basis because it tended to be part of the business of a merchant and not a separate business.³² Ships were divided into a number of shares and these shares were usually distributed between several merchants so that a merchant might hold a few shares in a number of ships. Ships were thus owned through special shipowning ‘partnerships’. Certainly, until the end of the eighteenth century the means by which ships were owned and financed did not seem to require extensive use of mortgages.³³ A voyage or venture might have been financed by a bottomry bond, usually as a matter of unforeseen necessity, but this was not a method suitable for the financing of the ship itself.³⁴

1.2.4 The Navigation Act 1660³⁵ had introduced a system of registration of ownership of foreign-built ships and this system was extended in 1696³⁶ to all English-built ships.³⁷ Therefore if an owner wanted to grant a legal mortgage on a registered British ship it had to execute a bill of sale transferring legal ownership in the ship to the mortgagee and the mortgagee could register the bill of sale in the register book as owner; on redemption of the mortgage there would be a re-transfer of legal ownership to the owner by the mortgagee.³⁸ The risk in this arrangement was that the transferee would purport to be the outright owner and refus...