In May 2016, we reported the decision of the São Paulo Court of Appeals to refuse to recognise a Liberian mortgage taken on behalf of bond investors over a Liberian-flagged FPSO, on the grounds that Liberia was not party to either the Convention on Private International Law signed on 20 February 1928 (also known as the Código de Derecho Internacional Privado or the Bustamante Code) or the International Convention for the Unification of Certain Rules relating to Maritime Liens and Mortgages 1926, also known as the 1926 Brussels Convention. Furthermore, the São Paulo Court of Appeals held that the FPSO was not a moveable asset because it would remain off the Brazilian coast for over 20 years.

That decision was troubling for investors and financiers with exposure to, and involvement in the Brazilian offshore oil and gas industry.

The Superior Court of Justice has now reviewed the case and has overruled the São Paulo Court of Appeals’ prior decision, stating that the Liberian law mortgage is valid and should be accepted in Brazil. The Superior Court of Justice stated that Brazil would recognize the flag state rules and procedures for mortgages regardless of whether such state was a signatory of the Bustamante Code or the Brussels Convention. Therefore, even though this decision is not binding on future cases, it sets an important precedent and provides comfort that Brazilian courts will recognise ship mortgages granted under the laws of the ship’s flag state and that the United Nations Convention on the Laws of the Sea will thus be respected.

The decision also included several other important rulings: that the FPSO was a vessel and a movable asset, and that it was unnecessary and impossible to register the foreign mortgage in Brazil. The court also stated that there were sound economic reasons for accepting the mortgage as valid because registration of the vessel at a specific location provided security for a person providing finance to a vessel owner against the risk of the vessel changing its location.

The decision of the Superior Court of Justice is very welcome; although it is not binding on other cases, it provides a good degree of certainty about the effectiveness of ship mortgages in Brazil and should give confidence to international investors in Brazil’s offshore oil and gas industry.