ship mortgage
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In a ship mortgage (
common law In law, common law (also known as judicial precedent, judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions."The common law is not a brooding omnipresen ...
) or ship
hypothec Hypothec (; german: Hypothek, french: hypothèque, pl, hipoteka, from Lat. ''hypotheca'', from Gk. : hypothēkē), sometimes tacit hypothec, is a term used in civil law systems (e.g. law of entire Continental Europe except Gibraltar) or mixed ...
( civil law term, covering also a
maritime lien The maritime lien is one of three ''in rem'' claims capable of being brought under UK Admiralty Law. Whilst being a common law instrument, it has been codified under s.21(3) of the Senior Courts Act 1981 along with s.21(2) and s.21(4), its statu ...
), a
shipowner A ship-owner is the owner of a merchant vessel (commercial ship) and is involved in the shipping industry. In the commercial sense of the term, a shipowner is someone who equips and exploits a ship, usually for delivering cargo at a certain frei ...
gives a lender (or mortgagee) a
security interest In finance, a security interest is a legal right granted by a debtor to a creditor over the debtor's property (usually referred to as the ''collateral'') which enables the creditor to have recourse to the property if the debtor defaults in makin ...
in a ship as
collateral Collateral may refer to: Business and finance * Collateral (finance), a borrower's pledge of specific property to a lender, to secure repayment of a loan * Marketing collateral, in marketing and sales Arts, entertainment, and media * ''Collate ...
for a
mortgage loan A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any p ...
. Similar to other types of mortgages, a ship mortgage legally consists of three parts: the mortgage loan, the mortgage document (deed) and the rights derived from the mortgage deed onto
money lender In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that de ...
. Ship mortgages differ from other types of mortgage in three ways. First, some privileged claims could have a higher ranking over that of mortgagee against the ship. Second, ships naturally move between jurisdictions. And third, a ship is always at risk of partial or total damages at sea. The use of ship mortgages emerged as a widely accepted practice in
shipping industry Maritime transport (or ocean transport) and hydraulic effluvial transport, or more generally waterborne transport, is the transport of people ( passengers) or goods (cargo) via waterways. Freight transport by sea has been widely used thro ...
in the 19th century as a major source of finance for ship owners.


Modern forms of statutory mortgages

In
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
, ship mortgages practice traces to the
Merchant Shipping Act 1894 A merchant is a person who trades in commodities produced by other people, especially one who trades with foreign countries. Historically, a merchant is anyone who is involved in business or trade. Merchants have operated for as long as indust ...
, the
Merchant Shipping Act 1988 The Merchant Shipping Act 1988 c.12 was an Act of Parliament of the United Kingdom. It aimed to prevent foreign fishing fleets from fishing in British territorial waters. In the Factortame case, its provisions in Parts I and II, Registration of ...
and subsequent amendments to the 1988 Act. Paragraph 21 of Schedule 1 to the Merchant Shipping Act 1988 provides that "a registered ship, or a share in any such ship, may be made a security for the repayment of a loan or the discharge of any other obligation; and on production of the instrument creating any such security (referred to in this Act as a mortgage), the registrar of the ship's port of registry shall record it in the register." In the Merchant Shipping Act 1894, it is provided that only registered ships can be subject to statutory legal mortgages; any other mortgage related to ships shall take effect as a purely equitable mortgage, which may emerge on unfinished vessels, foreign vessels, and others.


Registration of statutory mortgages

The registration of a ship mortgage is essential to have legal effects, though failure to register does not render the mortgage void: under Merchant Shipping Acts, any unregistered mortgagee cannot enjoy any benefits available. Even with the protection clause to the buyer in Norwegian Sales Form 1993, "the Sellers warrant that the Vessel, at the time of delivery, is free from all charters, encumbrances, mortgages and maritime liens or any other debts whatsoever." For buyers, registration of ships with mortgages is particularly important to avoid future litigation after sales due to claims related to unregistered mortgages.


Protection against other mortgagees

The most critical benefits of registration for the mortgagee is obtaining priority, with priority ranking solely decided by the date of registration. By giving a "notice to the world", the registered mortgagee could be protected from all later secured creditors of the mortgagor, who may seek further finance from other sources using the same ship as security. In UK, regulation 59 of the Merchant Shipping (Registration of Ships) Regulations 1993, mortgagees of a ship or a share in a registered British ship are allowed to give notice of their intended interests to and recorded by the Registrar. Once later executed or registered, the registered mortgagees will have priority over the other registered mortgages which may have been fully registered in the first place.


Priority rankings

Registration confers a mortgagee higher priority over the following scenarios but not limited to: # earlier unregistered mortgages, irrespective of knowledge of them; # later registered or unregistered mortgages; and # additional advances subsequently made under a prior registered mortgage where under the agreement was that mortgage should cover present and future advances by the mortgagee. However, a mortgagee does not have priority over the following scenarios but not limited to: # any mortgage registered earlier; # any claims in connection with which the vessel had already been arrested at the time when the mortgage was entered into; # any possessory lien of a ship repairer; and # maritime liens, whether earlier or later


Mortgage registration in China

According to Article 20, Chapter IV of Regulations of the People's Republic of China Governing the Registration of Ships, both the mortgagor and the mortgagee are required to submit three major documents first: # written application signed by both parties; # original Ship Ownership Registration Certificate; and # contract of ship mortgage


Collateral deed

As a basic statutory form of mortgage, a reference to a collateral deed containing detailed particulars should be included: # like the time for repayment of the principal sums; # the interest payable on the capital sum loaned; # the method of payment; # the party responsible for insuring the ship; # any restriction which the mortgage may take place on the manner in which the ship is to be used; and # conditions when default will be considered by the mortgagor, allowing the mortgage to re-possess and sell the mortgaged security


References

# Hill, C. (2003), Maritime Law, 6th ed, LLP Reference Publishing, London. # Ho, Li & Xu (2008), Transport, Shipping and Aviation: The shipping forecast. LegalWeek.com. Available from

#
Office of Public Sector Information The Office of Public Sector Information (OPSI) is the body responsible for the operation of His Majesty's Stationery Office (HMSO) and of other public information services of the United Kingdom. The OPSI is part of the National Archives of the Un ...
, &, Merchant Shipping Act 1988 (c. 12). Available from

# Office of Public Sector Information, &, Merchant Shipping Act 1894 (c. 60). Available from

# Office of Public Sector Information, &, The Merchant Shipping (Registration of Ships) Regulations 1993. Available from

# China Trade in Services, Regulations of the People's Republic of China Governing the Registration of Ships. Available from

# Maritime Law Center, Norwegian Sales Form. Available from


External links


The Ship Mortgage Crisis, Maritime Executive Magazine
{{DEFAULTSORT:Ship Mortgage Ship management Mortgage Admiralty law