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Foreign Ship Mortgages in Brazil: Brazil’s Superior Court of Justice Recognises a Mortgage Registered in the Flag State

09/12/2023 /

In a landmark ruling, Brazil’s Superior Court of Justice held that a ship mortgage registered in the vessel’s flag state is valid and enforceable in Brazil, offering greater legal certainty to foreign lenders, shipowners and investors financing vessels that operate in Brazilian waters.

Large vessels, such as merchant ships and offshore oil platforms, are usually financed through substantial loans, often raised on international capital markets. To protect the lenders, the vessel itself is commonly pledged as security by means of a ship mortgage. This raises an important practical question: if a vessel flies a foreign flag and its mortgage is registered abroad, will that security be recognised in Brazil?

In 2017, Brazil’s Superior Court of Justice (Superior Tribunal de Justiça, or STJ), the highest court for non-constitutional matters in the country, answered this question in the affirmative. This article explains what happened, what the Court decided and on what grounds.

The case at a glance

  • Case: Special Appeal (Recurso Especial) No. 1,705,222/SP
  • Court: Superior Court of Justice (STJ), Fourth Panel
  • Judgment: 16 November 2017 (published on 1 February 2018)
  • Outcome: unanimous decision recognising the foreign ship mortgage

What happened

The dispute concerned an offshore oil platform known as an FPSO (Floating Production, Storage and Offloading unit). The key facts were as follows:

  • The platform was owned by a company based in the Netherlands, which belonged to a Brazilian business group.
  • Its purchase was financed through a US$ 500 million bond issue on the Norwegian capital market.
  • The platform was registered in Liberia, whose flag it flew, and was mortgaged in that register in favour of the bondholders’ trustee.
  • After being built in Singapore, the platform sailed directly to Brazil, where it was expected to remain for around 20 years producing oil.
  • A Brazilian bank, owed roughly US$ 27 million by the owner, brought enforcement proceedings in Brazil and had the platform seized.
  • The bondholders’ trustee then asked the court to recognise its mortgage, so that it would be paid first from the proceeds of any sale of the platform.

How the lower courts ruled

Both lower courts refused to give priority to the foreign mortgage. The first-instance judge held that the mortgage should have been registered with Brazil’s Maritime Court, rather than only with the Liberian maritime authority.

The São Paulo Court of Appeal reached the same result for a different reason. It accepted that a mortgage created abroad could, in principle, be valid in Brazil, but concluded that this was not possible here, because Liberia has not signed the international conventions on ship mortgages to which Brazil is a party.

What the Superior Court of Justice decided

The STJ reversed these decisions and recognised that the mortgage registered in Liberia is fully effective in Brazil. The enforcement proceedings were allowed to continue on that basis, meaning that the mortgagee’s priority over the platform had to be respected.

The grounds for the decision

1. The platform is a ship

The Court first confirmed that a floating oil platform is a ship, both technically and legally, as Brazilian law expressly includes floating platforms within the definition of a vessel. Consequently, the rules on ship mortgages apply to it.

2. The “law of the flag” governs the mortgage

Under international maritime law, a ship has the nationality of the state whose flag it flies, and that state’s law (the “law of the flag”) governs matters such as ownership and registration. The STJ applied this principle, relying chiefly on the Bustamante Code, a 1928 private international law convention adopted by Brazil, which has the force of ordinary law in the country. Its Article 278 provides that ship mortgages created in accordance with the law of the flag have effect abroad, even in countries whose own laws do not recognise or regulate such mortgages.

The Court also referred to the 1926 Brussels Convention on maritime liens and mortgages and to the United Nations Convention on the Law of the Sea, which gives the flag state jurisdiction over the administrative matters of its ships, including registration.

3. Registration in Brazil was impossible

Brazilian law only allows ships owned by Brazilian residents or by entities subject to Brazilian law to be registered in Brazil. As the owner was a foreign company, the mortgage could not have been registered with the Brazilian Maritime Court. Requiring such registration would therefore have meant demanding something legally impossible.

4. Registration is a sovereign act of the flag state

Finally, the Court stressed that registering a ship mortgage is a sovereign act of the flag state, and that it produces effects beyond that state’s borders, including in Brazil. The Court also noted that refusing to recognise such mortgages would undermine legal certainty and could make it harder and more expensive to charter foreign vessels for use in Brazil.

Points to bear in mind

Although the ruling provides greater certainty for the financing of vessels operating in Brazil, several aspects call for caution:

  • The question of reciprocity remains open to debate: the lower court’s main objection was that Liberia is not a party to the relevant conventions. The STJ resolved the case by applying the Bustamante Code as part of Brazilian law, without addressing this objection in detail. The issue may therefore be raised again in future cases.
  • The ruling is not binding: the decision was handed down by one of the STJ’s panels. It is an influential precedent that guides other Brazilian courts, but it does not bind them, and each case will be assessed on its own facts.
  • Proper registration in the flag state is decisive: recognition depends on the mortgage having been validly created and registered under the law of the flag state. Evidence of that registration will be required in Brazilian proceedings, together with a sworn translation into Portuguese (tradução juramentada).
  • Risks should be assessed when the deal is structured: in this case, the Brazilian bank argued that the bond prospectus had already warned investors that the mortgage might not be enforceable in Brazil. This illustrates the importance of considering, from the outset, how the security will be treated in each country where the vessel is expected to operate.

Final remarks

This ruling is a significant precedent for maritime law and private international law in Brazil. By recognising that a ship mortgage registered in the flag state is effective within Brazilian territory, the STJ reinforced the application of international conventions adopted by Brazil and the long-standing principle that a ship’s home register is the cornerstone of maritime security worldwide.

For foreign lenders, shipowners, charterers and investors involved with vessels operating in Brazilian waters, the decision indicates that the proper registration of the mortgage in the flag state is the key factor in protecting their security.

Should you require guidance on the recognition in Brazil of security interests created abroad, or have any questions about cross-border legal matters involving foreign assets and contracts, please contact our office for a specialised consultation. We would be pleased to assist you at every stage of the process.

Contact us: contato@indianaraduarte.com | +55 48 3249-4208