In a landmark judgment rendered on 16 November 2017, the Superior Court of Justice of Brazil reversed a polemic decision from the Court of Appeal of São Paulo that had denied validity and enforceability in Brazil to a foreign mortgage over the Liberian flagged FPSO OSX 3, which has been causing great concerns in the maritime industry.
In summary, the controversy deals with an enforcement action as a result of a performance guarantee granted by the Cayman branch of a Brazilian bank. After being called to honor the guarantee, the bank started the action against the Dutch owner and the Court seized the FPSO, which was operating on a long-term charter in the Brazilian exclusive economic zone.
A mortgage had been registered with the New York Office of the Deputy Commissioner for Maritime Matters of the Liberian Republic, the flag state. The mortgagees, who were foreign bondholders, appeared in Court to protect their interests, but, surprisingly, the lower court of São Paulo held the Liberian mortgage as invalid and unenforceable in Brazil.
Such decision was upheld by the local Court of Appeal mainly on the following grounds: (i) lack of registration of the foreign mortgage at the Maritime Register in Brazil; (ii) the FPSO has never sailed to Liberia waters and so the Liberian flag was deemed as a mere ‘convenience flag’; (iii) Liberia is not a signatory of the international treaties on maritime mortgages to which Brazil is a party (namely the Bustamante Code and the 1926 Brussels Convention); and (iv) the bondholders were supposed to be aware of the risk related to the foreign mortgage once operating in another jurisdiction.
In the appeal tried on 16 November the Superior Court of Justice has unanimously reversed such decision and the validity and enforceability of the foreign mortgage has been confirmed. The text of the judgment is not yet publically available, but, during trial, the reporting judge mentioned the Brazilian and international legal tradition of enforcing foreign mortgages registered in the flag state, which is supported in Brazil by Law 7,652/88, the Bustamante Code and Brussels Convention.
If you have any doubts or need further information, Castro, Barros, Sobral, Gomes is at your disposal.
Mariana Soares Heinen