Carlos Costa e Silva May 6 2015 Madeira shipping register – legal innovation regarding mortgages and mortgagee rights Barrocas Advogados | Shipping & Transport - Portugal Carlos Costa e Silva Shipping & Transport IntroductionGrowing popularityInnovation regarding mortgages and mortgagee rightsTemporary bareboat charter systemIntroductionThe International Shipping Register of Madeira (MAR) is a white-list shipping register with an international focus based in Madeira – a Portuguese autonomous territory. MAR is a special shipping register associated with the Madeira Free Trade Zone and is independent from the Portuguese conventional shipping register.MAR has its own specific rules, which are contained in Decree-Law 96/1989 (the MAR Registration Act) and Ordinance 715/1989 (the MAR Regulation Ordinance). However, Portuguese standard rules on ship registration are applicable on a subsidiary basis and vessels registered with MAR fly the Portuguese flag.Growing popularityMAR recently passed the figure of 200 registered vessels. This is a significant achievement considering that less than 20 vessels are registered with the Portuguese conventional register and that MAR is a white-list shipping register.From a business perspective, MAR's popularity has been built around four key advantages:Flexible crew nationality requirements – the captain and 50% of the safe-manning crew of the ship must be European citizens or citizens of Portuguese-speaking countries. This requirement may be eliminated whenever it is duly justified.A competitive social security regime – crew members and their respective employers are not obliged to contribute to the Portuguese social security system, although some form of insurance must be guaranteed.The company which owns the vessel need not be licensed within the framework of the Madeira Free Trade Zone Authority. Instead, it can be based abroad provided that it appoints a local representative.Vessels registered with MAR are, for all purposes, vessels registered in the European Union with total access to continental and island cabotage within the framework of the European Union.Innovation regarding mortgages and mortgagee rightsPossibility to choose foreign lawMAR's creators focused on the principle that the choice of location for the registration of a vessel would rely heavily on the will of the banks that finance it. Thus, MAR's rules are explicitly focused on providing the best possible comfort to banks, especially where their rights as mortgagees are concerned. The practical approach which inspired MAR's regulations was that ship finance banks would be mostly northern European entities accustomed to a standard set of rules and principles applied to their mortgages, and that a competitive effect would be obtained if they were allowed to keep those rules and principles intact, instead of being subject to Portuguese law.MAR's regulations establish the possibility of choosing a foreign law to govern a mortgage. The relevant provision reads: "The parties may choose the law applicable to the mortgage or equivalent right, without prejudice of the international conventions which were signed by the Portuguese state." This provision has no parallel in Portuguese law or in other legal systems and may produce debate as it defies one of the most basic principles of shipping law (ie, that a ship mortgage is governed by the lex loci rei sitæ (law of the place where the property is situated) – a principle which is observed almost worldwide).This provision is not a simple manifestation of the freedom-of-choice rule contained in Article 3 of EU Regulation 593/2008 on the law applicable to contractual obligations. Rather, it is a special rule which creates an exceptional regime that deviates from the lex loci rei sitæ principle. The main effect of this conclusion is that the limitations and restrictions on the choice of law contained in EU Regulation 593/2008 are not observed.Little to no effect results from the reservation "without prejudice of the international conventions which were signed by the Portuguese state". In 2012 Portugal withdrew from the International Convention for the Unification of Certain Rules of Law Relating to Maritime Liens and Mortgages 1926, which eliminated any interference with the choice of foreign law to be made by MAR regarding international conventional law. This withdrawal was dictated by the aim of fostering MAR's competitive features and illustrates how aggressively lawmakers are pursuing them.In principle, the other possible barrier to the efficiency of this choice – the public policy reservation – would cause no substantive problems to the application of the option to choose a foreign law. Under Portuguese law, no conflict may result in the application of a foreign law which offends public policy. If such a situation arises, the first solution is to apply the most appropriate (alternative) rules of competent foreign law which do not offend the reservation or, in its absence, Portuguese law. The concept of public policy is fluid by nature. The Supreme Court once defined it as "a relative and contingent concept, to be analysed on a case by case basis which is modified with the passage of time and the evolution of traditions and practical morals".Thus, it must be remembered that, as a matter of principle, all solutions under the appointed foreign law are ultimately subject to be examined in relation to the public policy reservation. However, although this shall be analysed on a case by case basis, the vast majority of solutions adopted by the elected foreign law will be insufficiently different from the essential core of Portuguese traditions and practical morals to be considered a violation of that reservation, especially if they correspond to the standard solutions adopted worldwide on ship mortgage law.Mortgagee rightsPortugal withdrew from the International Convention for the Unification of Certain Rules of Law Relating to Maritime Liens and Mortgages, signed in Brussels in 2012. This followed an alteration to the Commercial Code in 2009, which upgraded mortgagee claims to third place in the ranking of liens in an attempt to make the Portuguese flag more attractive for banks engaged in shipping finance.However, due to a constitutional rule which establishes the priority of international conventional law over domestic law, the ranking established in the International Convention for the Unification of Certain Rules of Law Relating to Maritime Liens and Mortgages continued to prevail over the new 2009 domestic ranking, thus diluting the effect of the mortgage upgrade. As a result, the government decided to denounce the convention.The applicable ranking of liens places mortgagee rights in third place, as follows:first – judicial costs and expenses borne in the common interest of the creditors;second – salvage and assistance salaries;third – mortgages and pledges over the vessel;fourth – expenses in respect of pilotage and towage on entering port;fifth – port taxes, including (but not limited to) tonnage, lighthouse, anchorage and public health;sixth – expenses for the custody of the vessel and the storage of its equipment;seventh – master and crew salaries;eighth – vessel repair costs;ninth – reimbursement of the cargo which the master needed to sell; andtenth – insurance premiums.Temporary bareboat charter systemThe most recent statistics show that banks and shipowners are opting to flag their ships through MAR using the temporary bareboat charter system. This possibility is considered in Article 15(2) of the MAR Registration Act. The popularity of this option could be linked to the fact that it bypasses the issue of mortgage and liens governing law by preserving the application of the law of permanent registration.From a legal perspective, the temporary (parallel) registration of bareboat charters by MAR raises the typical issues and problems associated with these types of temporary, parallel and dual registration around the world, which the international shipping community has not yet solved through the adoption of an international convention that would eventually clarify some of these issues.However, although there are no explicit provisions that permit straightforward certainty regarding which model of temporary registration exists, MAR's rules suggest that its qualification as a parallel registration requires no deletion of the permanent registration kept in another registry. Thus, within MAR's regime, permanent foreign registration is kept and respected and a bareboat flagged-in vessel will navigate under dual registration – with the permanent ownership abroad and the temporary bareboat charter with MAR. Under this solution – once again, subject to the reservation that no explicit provision exists that addresses the matter – the best conclusion is that the law of the place of permanent registration will continue to apply to mortgages and similar liens.Nonetheless, the vessel will have the right to fly the Portuguese flag and to have its call sign and other rights and duties associated with permanently registered vessels. It will also be subject, in terms of nautical and technical issues (ie, technical requirements, inspections, port state control and navigation) to the same legal framework applicable to permanently registered vessels. This 'best of two worlds' effect – the benefits of a foreign flag with the comfort of local law on mortgages and liens – is working to the benefit of MAR's rising popularity as a competitive shipping register.For further information on this topic please contact Carlos Costa e Silva at Barrocas Advogados by telephone (+351 21 384 3300) or email ([email protected]). The Barrocas Advogados website can be accessed at www.barrocas.com.pt.