On November 16 2017 the Superior Court of Justice recognised the validity of a foreign ship mortgage in Brazil. The decision reversed previous rulings issued by the Sao Paulo State Court.
In 2016 the Sao Paulo Court of Appeals affirmed that a ship mortgage registered abroad was invalid in Brazil. The mortgage was over a floating production storage and offloading vessel owned by a company incorporated in the Netherlands and registered in Liberia (the flag state). The purchase of the vessel was financed on the Norwegian capital market and a Norwegian debt manager registered the first mortgage on the vessel in Liberia.
After its construction, the ship went to Brazil, where it was contracted to operate for a period of 20 years. A national financing institution filed a claim for the seizure of the vessel before the Sao Paulo State Court in order to execute a debt incurred against the owner. With the deferral of the request, the administrator of the Norwegian debt securities intervened in the proceedings, protesting for her preference due to the ship mortgage duly established abroad.
No similar judgments had been issued in Brazil.
The lower court's decision did not recognise the foreign mortgage because it was not recorded before the Brazilian Admiralty Court. However, since the law provides for the registration of mortgages on national flagged vessels only, the court of appeals went on to analyse the context of international conventions on vessel mortgages ratified by Brazil (ie, the Brussels Convention 1926 and the Havana Convention 1929 (the Bustamante Code)). Since Liberia is not a party to those conventions, the court found that the foreign mortgage could not be given legal effect in Brazil.
The decision was appealed to the Superior Court of Justice and the outcome of the case was long awaited by the maritime industry.
The Superior Court of Justice unanimously reversed the lower court's decision and recognised the validity of the foreign ship mortgage in Brazil. The court considered several provisions of the law and found that the legislature had been careful not to set out any device that would oppose international conventions signed by Brazil and remove the legal certainty of parties holding rights over a vessel.
The court highlighted its respect for the acts of sovereignty of the countries where vessels are registered, pursuant to the United Nations Convention on the Law of the Sea and the economic importance of acknowledging ship mortgages of foreign states.
The decision emphasised that large vessels must be registered in their flag states and that these registrations have extraterritorial effects. Further, it held that denying such effects would cause legal uncertainty to the parties involved, as well as restrictions on and increased costs for charter parties for vessels in Brazil.
The ruling puts an end to doubts that have emerged regarding the future of ship mortgages in Brazil, secures foreign investment and preserves Brazil's international relations.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
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