Validity of foreign ship mortgages upheld by Brazilian Supreme Court

Standard Club has noted that Brazil Superior Court of Justice has recognised a Liberian ship mortgage, reversing a lower appeal court decision. On November 16th, SCJ, which is Brazil’s highest court in respect of non-constitutional claims, recognized a Liberian ship mortgage involving a floating, production, storage and offloading vessel (FPSO) located offshore from Brazil.

The SCJ reversed the Appeals’ Court decision, which had adopted a narrower approach and refused to recognize the validity of the Liberian mortgage on the grounds that:

(1)  It had not been registered with the Brazilian Maritime Registry

(2)  Liberia is not a signatory to any international convention pursuant to which Brazil was obligated to recognise the Liberian mortgage.

Standard Club welcomed the decision of the SCJ, stating that it provided legal certainty surrounding the enforcement of foreign law mortgages over ships trading in Brazil. The decision also allayed the concerns of parties involved in secured lending transactions, particularly in relation to offshore oil and gas assets.

The Club noted that the decision of the SCJ, whilst not binding, was persuasive. It said that a further appeal to the constitutional court was technically possible but unlikely.

Legal firm Norton Rose Fulbright observed that the long running case involved FPSO OSX3. In 2015 and 2016 the lower courts in Brazil had caused concern amongst those involved in secured lending transactions for offshore oil and gas assets, by casting doubt on the validity of foreign law mortgages recorded against assets in Brazilian waters.

In the case of the OSX3 Unit, a Liberian preferred ship mortgage had been granted over the FPSO in favour of Nordic Trustee. Following a challenge by an unsecured creditor (BTG Pactual S/A – Cayman Branch) the first instance court and then the Appeals Court in Sao Paulo refused to recognize the Liberian preferred ship mortgage.

The Appeals Court said that it need only recognize a foreign mortgage

(i) where the mortgage is registered with the Brazilian Maritime Registry (BMR) (it only being possible to register a mortgage with the BMR over a ship registered under the Brazilian flag)

(ii) to give effect to Brazil’s international obligations. As the Republic of Liberia was neither a signatory to the Brussels Convention of 1926 for the unification of certain rules relating to a maritime liens and mortgage nor to the Bustamante Code of 1928, the Brazilian court refused to recognize the Liberian mortgage over the OSX3 Unit.

When the decision was appealed to the SCJ the Liberian Registry also sought permission to intervene and make submissions as an interested party.

Although the full SCJ decision was not yet available when Norton Rose Fulbright wrote its comment, it noted that the SCJ unanimously held that the Liberian mortgage, and, by extrapolation, foreign law mortgages generally, should be recognized. The court noted not only the need to give effect to the international conventions cited by the Appeals Court, but also cited the importance of avoiding legal uncertainty surrounding the enforcement of foreign law mortgages over ships trading in Brazil, which could have economic as well as legal consequences.