Norway proposes to allow bare boat registration – ship-mortgage uncertainty remains

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Norwegian shipowners will be satisfied with Norway’s recent proposal to allow bare boat charter parties to be registered in and out of the Norwegian International Shipping Register (NIS). The proposal is released for open hearing until 6 March 2018, with the shipping community likely to embrace the proposal. However, the uncertainty remains for the enforcement of mortgages registered in NIS on a vessel being employed in jurisdictions with no mortgage treaty with Norway. 

By: Mads Ribe (LL.M.|MBA), attorney-at-law. The article was originally published in Tradewinds.

Bare boat registration

The concept of bare boat registration entitles a bare boat charterer to register the chartered vessel in the register of the state where it is employed (the bare boat state), while allowing the shipowner to maintain the vessel’s registration in its home domicile (the primary register). This requires both states to have regulations on bare boat registration and to grant approval in each particular case. 

The vessel will fly the flag of the bare boat state, meaning it will subject to its regulations on safety, environment, crew and other topics. The primary register will, however, maintain the ownership and security registration over the vessel. Thus, the power of enforcement of such securities will rely on the primary jurisdiction, while the actual enforcement will require the ability to arrest the vessel in the bare boat state. As explained in this article, this might be a challenge not mitigated through the bare boat proposal.

Why is bare boat registration needed?

The Norwegian shipping community has called for rules on bare boat registration to increase the competitiveness of, in particular, Norwegian offshore vessels operating in states that require locally registered vessels, such as Brazil and some African countries.

Norway hopes that the ability to register the vessel for a limited period of time in the bare boat state will encourage shipowners to retain the NIS registration, while competing under the flag where the vessel is seeking employment.

The pitfall of foreign registered mortgages

The bare boat proposal refers to the 1993 Geneva International Convention on Maritime Liens and Mortgages. This Convention is signed but not ratified by the large shipping states. These, including Brazil where many Norwegian offshore vessels are employed, mainly rely on the 1926 Brussels Convention on Maritime Liens and Mortgages. This were problematic in the recent OSX 3 case in Brazil, where a Liberian registered $530 million ship mortgage held by the Nordic Trustee was deemed to be unenforceable due to i) the mortgage not being recorded in Brazil (as for bare boat registered vessels), and ii) Liberia not being party to the 1926 Convention.

Shipowners and creditors were relieved when the Brazilian Superior Court, on the 16th November 2017, overturned the decision of the lower courts and recognized the validity of the mortgage. The decision found its grounds in the sovereignty principles of the United Nations Convention on the Law of the Sea (UNCLOS), in which registered mortgages in foreign jurisdictions should be respected.

The bare boat proposal does, however, not mitigate the risk caused by the lack of harmonized international rules in force on maritime mortgages. Shipowners and their creditors should be aware of the enforcement risk before allowing bare boat registration in a foreign jurisdiction, while maintaining ship mortgages registered in Norway.