Tuesday, July 20, 2021

RIGHTS IN REM RELATING TO THE SHIP AND THEIR ENFORCEMENT


Apart from the ship, rights in rem related to the ship have to be entered into a registry. Such right in rem include agreements inter vivos, voluntary acts (gratuitous or for consideration), judgments which are final. In general, all acts having as their object to set up, transfer, declare, modify or extinguish a right in rem in a registered ship shall be registered. Such acts take effect only as of the date of entry into the Register (Art. 50, Mar. Code).

 

MARITIME LIENS AND MORTGAGES

 

Both maritime lien and ship mortgage are security rights over things (e.g. ships, fright and cargo), although the former is created by law. Mortgage is created by a written contract which must be registered before it takes effect. The enforcement of these two security rights is discussed following a look at the details of (1) maritime lien and (2) ship mortgage.

 

A. Maritime Liens

 

The expression “maritime lien” has been used in Common Law countries, in particular in England, since 19th century and is expressly or implicitly recognized by legislation in most maritime nations. It is also recognized by international treaties: for example, the 1952 International Convention Relating to the Arrest of Seagoing Ships and the 1967 International Convention for the Unification of Certain Rules Relating to Maritime Liens and Mortgages. Before embarking on the Ethiopian laws on maritime liens, let’s first direct our attention to the definition, nature and characteristic of maritime lien in general.

            

Though widely utilized and recognized, maritime lien’s definition can hardly be traced in either international laws or domestic legislations of maritime nations. Judicial and scholarly definitions of maritime lien in common law countries place too much emphasis on procedure. In the USA and Civil Law countries, however, maritime liens have long been regarded as substantive right rather than as procedural remedies. Accordingly, R. Force and A. Yiannopoulos, authors of Admiralty and Maritime Law, define maritime lien as:

 

            “…a secured right peculiar to maritime law. A lien is a charge on property for the payment of a debt, and a maritime lien is a special property right in a vessel given to a creditor by law as security for a debt or claim arising from some service rendered to the ship to facilitate her use in navigation or from an injury caused by the vessel in …waters.”

 

This formulation embodies that maritime lien is a right. It is created to protect the interests of the creditor/lienholder and is thus essentially a right or interest. More specifically, it is a right in rem – in a thing. The maritime lien is, as a right, held by a creditor and established in a vessel. So it is a kind of “property right.” The subject matter of such a property right is, however, specified and is limited only to maritime property. “Maritime property” refers to a ship, its appurtenances, the cargo on the ship and/or freight. Finally, the definition also reflects maritime lien is something more than a mere right in rem – a right of property serving as a security for a maritime claim.

 

One fact the definition does not take into account is that maritime lien is a right which can be executed only by judicial process. It is not self-executing. In order to satisfy his claim, the only thing a lien holder can do is bring a lawsuit before a court. The court may then arrest and subsequently sell the arrested ship to enforce the maritime lien when the owner of the ship concerned refuses to furnish sufficient bail or other dependable security. Thus, a maritime lien is not actually a lien (i.e. a right of detention) in the sense of either the Common Law or the civil law parallel. The major characteristics of maritime lien are further discussed by Wu Huanning in his article China and Maritime Law. Excerpts:

 

Wu Huanning, China and Maritime Law, 5 MLAANZ Journal (1988), pp.19 ff.

 

As a property, a maritime lien has retroactivity. It is not influenced by transfer of title or possession. No matter how many times the property may change hands, the maritime liens remains in the hands of the lienholder.

 

As a property right, a maritime lien may generally be assigned, although some early American cases denied such an assignment.… [A] maritime lien is secret in nature. A maritime lien comes into existence automatically without antecedent formality. It is created only by statute or by historically acknowledged situation in the general maritime law. No maritime lien can be conferred on a claim by agreement between parties concerned, nor by a court, even one having admiralty jurisdiction. No record and no registration of it is required. It exists only at law. Therefore, a maritime lien may well be unknown to creditors other than the lienholder. Thus the maritime lien may operate to the prejudice of such creditors including mortgagees and every innocent purchasers without notice of the lien. So, one who wants to buy a second-hand vessel must be very careful to find out whether there is a maritime lien attached to the vessel.…A maritime lien is an “accessory” or “secondary” right or interest. A maritime lien is not independent, but secondary and subordinate, in nature. Because it is created to provide a security for a principal claim (credit), it belongs to the realm of accessory rights. In other words, a maritime lien created secondary to the creation of a principal maritime claim and it is extinguished when the maritime claim secured by such a lien is extinguished (say, when the claim is satisfied)…A maritime lien is a “preferential” right. The creditor who is entitled to a maritime lien on the vessel of the debtor enjoys a higher priority than other creditors in receiving payment. The priority, however, is relative in nature. It arises only in the case where the proceeds of the sale of an arrested vessel are insufficient to satisfy all maritime claims made on the same debtor, specifically, on the shipowner, including those secured by various other competing liens. Only in this situation will the holder of a maritime lien enjoy priority over other claimants, even over the claimant under a secured mortgage. Otherwise, the priority of a maritime lien will not assume crucial importance.

 

A maritime lien is an “inedible” right. By virtue of the fact that a maritime lien travels with the property into whoever’s hands the property may pass, the right in the nature of a maritime lien is frequently described as an indelible right…Here the word “inedible” is used in a relative. I mean that a maritime lien cannot be expunged until the original debt is cleared up or the period stipulated by law has expired, or the arrested vessel has been sold an Admiralty Court.

 

To sum up, it can safely be said that the maritime lien is assort of special, extraordinary legal system peculiar to maritime law.

 

Laws relating to maritime lien are an area where uniformity is sought. The need for uniformity and the unsatisfactory results so far achieved were noticed by M. Huang:

 

M. Huang, Maritime Liens in the Republic of China, 8 J.Mar.L. & Com. (1976-77)

 

Cases involving maritime liens…are apt to posses more international elements than most other maritime disputes. With respect to one and the same ship, the lienors…may each have a different natonality. Liekewise, liens may each have accrued in a different country. The Comite’ Maritime International, therefore, attempted to promote international uniformity by drafting model rules which resulted in the Brussels Convention of 1926 for the Unification of Certain Rules of Law Relating to Mortgages and Liens. A new Convention was also concluded in 1967. Unfortunately these Conventions failed to achieve ratification by the signatory nations required to accomplish the desired result. Chance continues to play a very important role in determining rights in a vessel, whether arising out of contract claims, tort claims, or security interests. With laws of nations differing so widely on the creation and enforcement of maritime liens, a lienor may have his claim substantially satisfied or entirely shut out, depending upon the jurisdiction in which the vessel is attempted to be seized and sold.

     

Maritime lien – “special legal system peculiar to maritime law” –is made part of Maritime Code of 1960. In regard to the types of transactions giving rise to a lien, it is provided by Article 15 of the Code that the preferential claims listed below are entitled to maritime lien right in the order stated:

 

  • Legal costs and other expenses incurred in the common interest of the creditors, in order to preserve the ship and to procure her sale; tonnage, dues, light or harbour dues and other public taxes and charges of the same nature; pilotage dues and the cost of watching and preservation from time of entry of the ship into her last port;  

 

  • Claims arising out of the articles of agreement of the master, the crew and other persons engaged in the service of the ship;

 

  • Remuneration due for assistance and salvage and the contribution of the ship in general average;

 

  • Indemnities in respect of collision and other accidents of navigation, as well as for damage caused to works forming part of harbours, docks and navigable waterways, and the cost of removal of objects obstructing navigation, due to the acts of the ship, indemnities for bodily injury to passengers and crew and indemnities for loss of or damage to cargo and baggage;

 

  • Claims arising out of contracts entered into or acts done by the master outside the home port within the scope of his authority where such contracts or acts are necessary for the preservation of the ship or the continuation of the voyage, whether or not the master is at the same time owner of the ship and whether or not the claim is his or that of the chandlers, repairers, lenders or other contractual creditors;

 

  • Resulting damages due to charterers;

 

  • The amounts of premium for insurance taken out on the hull of the ship and the fittings and equipment of the ship due for the last voyage insured in the case of a voyage policy or  for the last period insured in the case of a time policy, but not exceeding one year’s   premium in both events;

 

  • Any claim based upon an inaccurate or incomplete statement in a bill of lading.

 

Under Ethiopian law, it is only the above enumerated claims that are secured by lien in their order of priority. One should note that the order is of importance only when competing liens claims are not satisfied by the total assets of the ship to which the liens is attached. The sale of the ship generates a fund out of which claimants share. Where this fund, or a comparable security posted by the shipowner to secure the vessel’s release (Art. 54(2)), is insufficient to satisfy all valid liens and claims, the priority of the different categories of claims plays a role in specifying who first enjoys the share from the insufficient fund. The ranking of maritime lien claims depends upon whether there is more than one voyage. As per Art. 17, claims arising out of the same voyage rank in the order listed above. However, if claims arise out of different voyages, claims secured by lien in the last   voyage of whatever priority shall be preferred to those of previous voyages except when they relate to crew’s articles (Art.16, Mar. Code).  Thus under Ethiopian law, like in many other maritime nations and the 1926 Brussels Convention, time is the governing consideration. The liens should be arrayed according to voyages, and class rank would then operate only within each voyage. Maritime liens pertaining to the same voyage rank according to the order set forth in Article 15. The maritime liens from classes (1) to (5) inclusive take precedence over ship mortgages (Art. 20) which will be further treated in the forthcoming sub-heading. In the event that there are several claims within the same group, they are indemnified concurrently and rateably (Art. 17 (2)). However, in the event that under sub-paragraph 3(i.e. assistance) or sub-paragraph 5(i.e. ship’s stores and repairs) of Article 15, there are two or more claims pertaining to one and the same kind, the one arising later is to be paid in priority order (Art.17 (3)).

 

There might arise several claims from a single accident. For instance, collision, salvage and general average may take place simultaneously at a time. But, it is sometimes, quite hard to prove timing in such an emergency. In order to avoid the difficulty of proof, therefore, Article 18 provides that: “Claims arising out of the same maritime incident shall be deemed to have come into being at the same time.” Thus, they are paid pro rata without precedence.

 

Properties to which maritime liens attach are provided in Article 21. Accordingly, the ship, the freight and ship’s accessories are properties to which lien right attach. For this purpose, the Code defines ship’s accessories and freight under Article 22-23. Lien rights attached to the hull of the ship follow the ship into whatever hands she may pass (Art. 25, Mar. Code) unlike liens on freight and ship’s accessories which subsist only for so long as the freight/accessories has not been paid or so long as the amount thereof is held by the master or by the owner’s agent.

 

Maritime liens may be extinguished in several ways. The following modes of extinction are common to all liens, maritime and non-maritime, as well as mortgages: payment of the debt, renunciation, acquisition of ownership of the property by the claimant/s, total destruction of the property, and waiver of lien right. Apart from these, period of limitation plays an important role. According to Article 26 of the Maritime Code, maritime liens shall cease to exist at the expiration of one year; provided that the lien referred to in Art.15 (5) cease at the expiration of six months. It is desirable, in order to protect the third party, to prevent a secret accumulation of privileges on the vessel by providing for the rapid extinction of the right of preference. The law does not prefer those “who sleep on their rights”. The period of limitation reduces the status those favored but dilatory claimants to the rank of an ordinary claimant.

 

The dates starting from which the period of limitation run for different claims secured by lien are provided under sub articles 2 and 3. Though the duration of maritime lien is, in principle, limited to one year, sub-article 5 provides for the suspension of the period of limitation in the event it “has not been possible to arrest the ship in the territorial waters of [Ethiopia]… provided the period of limitation shall not in such event exceed three years from the time when the claim originated. This seems a very good compromise for the interests of lienors who might have been prevented from arresting the vessel by circumstances beyond their control and might have suffered extinction of their liens on the one hand and the certainty that would be brought for third parties and owners by the definite period of limitation on the other.

 

B. Ships Mortgages 

         

Ships of two tonnages and above may be mortgaged under an agreement between parties (the mortgagor/shipowner and the mortgagee/creditor). Unlike mortgage of immovables (see Art. 3041 ff., Civil Code), ship mortgages may not result from the law (Art. 30, Mar. Code).

 

A ship under construction can be the object of a mortgage as can be a ship which is complete (Art. 33, Mar. Code). Ship mortgages may be created only by the shipowner or by the person who is specially authorized by the shipowner (Art. 31, Mar. Code).

 

Ship mortgages attach principally to the hull of the ship. It is not attached, unlike maritime liens, to the freight. Nor is it attached to Government bounties and insurance compensation (See Art. 32, Mar. Code). In addition, ship mortgages, to get effect, have to be created by a written contract which must be registered in the Register at the port office where the ship is registered. Registration preserves the mortgage for a period of five years from the date thereof (Compare this with effect of registration of a mortgage on immovables under Art. 3058, Civil Code). The mortgage cease to have effect where not renewed before the expiry of five years (Art. 37 (1), Mar. Code).

 

In the event a mortgagor defaults on its obligation secured by a ship mortgage, the mortgagee may enforce the mortgage through a court action. If two mortgage rights co-exist, their relative priority becomes relevant. The Maritime Code, under Art. 38 (1), spells out the respective priority between plural mortgagees. The article states: “Claims secured by registered mortgage of a ship or a share thereof may follow the ship into whatever hands she may pass in order to be classed and paid in the order of registration.” This is comparable with the rules relating to “plurality of mortgagees” in the Civil Code.

 

In connection with our discussion on maritime lien priorities, we did see that maritime liens from classes (1) to (5) inclusive (of Art. 15, Mar. Code) take precedence over ship mortgages. The respective priority between the lien for damages caused to charterers (Art. 15 (6)) and the ship mortgage is, however, unclear. The scholarly views in other maritime nations vary. These views include:

 

  1. Both are paid pro rata without precedence.
  2. First in time, first in right.
  3. Ship mortgage is paid first.

 

The third view has gained the sympathy of those scholars who consider the secretiveness of maritime lien as inequitable and those who believe maritime law should provide mortgages with protection sufficient to insure the viability of this important financing device.

 

Finally, a mortgagee’s rights in the vessel are protected against seizure in a foreign port. A valid mortgage encumbering an Ethiopian vessel which is arrested and sold at auction in a foreign port survives the foreign sale as well unless the mortgagee has been duly notified of the foreign proceeding and been given an opportunity to exercise his rights in the proceeds of sale ( Art. 44, Mar. Code).[1]



[1] Note that the term “mortgagor” is incorrectly employed under Article 44 of the Maritime Code.

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