Maritime Mortgages

• Author: Edgar Gold; Aldo Chircop; Hugh M. Kindred; William Moreira
• Pages: 332-359

332

CHA PTER 8

MAR ITIME MORTGAGES

A. INTRODUC TION

As a rule, a shipowner requires continuing f‌inancing to build, to operate,

and eventually to decommission a ship. In all likelihood, and especially

if the ship concerned is a commercial vessel, it will carry mortgages and

hypothecs. They are necessary not only to build or to buy the ship, but

also to f‌inance its operations and to upgrade it from time to time. The

mortgage constitutes a consensual security interest in the ship as mari-

time property given by the shipowner, as mortgagor, in return for a loan.

The security of the mortgage may be enhanced by the secured creditor,

or mortgagee, by registering it in a public register along with the ship

and its owner. Then other creditors or interested parties can discover

the existence of the mortgage by a search of the register and may act

towards the ship in light of it.

If a creditor forecloses on a mortgage, or the owner declares bank-

ruptcy, or the ship is unable to meet its obligations for any other reason,

the ship will be subject to an action in rem that will lead to a judicial sale

of the ship, and as a result the proceeds of the sale will be distributed

among the creditors.

This chapter will canvass the nature of maritime mortgages, includ-

ing their historical development, their form, and the statutory require-

ments for registration. Mortgages under both federal and provincial

legislation are contemplated. In both cases, the types of mortgages

and security are reviewed, canvassing the rights of mortgagor/debtor

Mariti me Mortgages 333

and the mortgagee/lender. The chapter closes with commentary on the

ranking of mortgages and the intersection of federal and provincial sec-

urity interests.

1) Ship Financing: Bottomry, Respondentia, and

Mortgages

A mortgage of a ship is a common way of f‌inancing its construction or

purchase. In essence a mortgage provides a creditor with security for

the repayment of a loan or the performance of some other obligation

by the acquisition of a proprietary interest in the ship. It may in fact

be used to secure any f‌inancial obligation involving the acquisition or

operation of a ship.

Historically, operational necessaries during a voyage were f‌inanced

by bottomry or respondentia bonds. In situations of unforeseen neces-

sity, the master of the ship could grant a bottomry bond over the ship or

a respondentia bond over the cargo as security for money borrowed to

enable the ship to continue the voyage. The bondholder thereby gained

an interest in the ship or the cargo and thus in the success of the voy-

age.1 If the ship was lost before its voyage was completed the bond was

void. A prerequisite to the grant of a bottomry bond, in addition to ne-

cessity, was the inability of the master to communicate with the owner

about the ship’s necessitous situation. Nowadays almost instantaneous

communication with ships worldwide is possible so the use of bottomry

and respondentia bonds have sunk into desuetude.

The use of ship mortgages expanded through the nineteenth cen-

tury at common law until they came to be regulated in the United King-

dom by merchant shipping legislation. This legislation, carried forward

in Canada by the Canada Shipping Act, enhances the security of a ship

mortgage by a statutory scheme of registration. However, a ship mort-

gage can never give a creditor complete security for repayment of a loan.

The ship may founder or may sail to ports whose courts may not enforce

the mortgage. In addition other maritime securities, such as liens, may

take priority over the mortgage. Hence, creditors usually look for addi-

tional security, such as a right to the proceeds of the insurance policies

on the ship and an assignment of any time charterparty or a charge on

the freight to be earned by the ship.

1 St George (The) (1926), 25 Ll LR 97 (Adm Ct). Technically bottomry and re-

spondentia are maritime liens. See Chapter 9.