An ocean-going yacht, the Blaze, was designed and built in New Zealand. The Blaze was registered in the US. The owner (Mr Bishop) registered a mortgage over the Blaze to KeyBank National Association (Keybank). This had the effect of KeyBank taking title rather than a mere charge over the Blaze.

On 2 July 2002, the Blaze arrived in New Zealand. In January 2003, Mr Bishop’s mortgage payments were in arrears. KeyBank learned at that time that the Blaze was moored in Auckland and was being offered for sale. In July 2003, Mr Bishop sold the Blaze to Mr Walters in New Zealand. Mr Walters then sold Blaze to his company, Barrington Charters Ltd (Barrington).

Two years later, on 1 September 2005, Mr Bishop made his final repayment under the mortgage and filed in bankruptcy under Ch 11 of the US Federal Bankruptcy Code. On 10 February 2006, KeyBank was granted relief from the Ch 11 stay to enforce its mortgage over the Blaze. On 28 April 2006, KeyBank arrested the Blaze. On 23 May 2006, Mr Walters and Barrington registered financing statements on the Personal Property Securities Register. Three days later, KeyBank registered its own financing statement.

Mr Walters argued that his claim had priority under the Personal Property Securities Act 1999 (NZ) (the PPSA) which provides that a buyer takes personal property free of a security interest unless the interest has been perfected by registration of a financing statement. Further, he argued that the PPSA applied to collateral situated in New Zealand; the PPSA only excluded a transfer, assignment, mortgage, or assignment of a mortgage within the Ship Registration Act 1992 (NZ) (the SRA) of a ship exceeding 24 m registered length; and if KeyBank had priority, such priority was lost because Mr Bishop transferred his interest in the Blaze with KeyBank's knowledge.

KeyBank argued that it had priority under s 70 of the SRA which provided that registered instruments creating securities and charges in respect of a ship registered under the law of a foreign country had the same effect and priority as a mortgage registered under the PPSA.

Held: Applications for summary judgment dismissed.

The PPSA does not apply to securities falling directly or indirectly within the SRA, in conformity with New Zealand’s international obligations.

A ship may only have one nationality and fly only one flag. Foreign-registered ships are not entitled to be registered on the New Zealand Register of Ships. In accordance with UNCLOS, steps must be taken to close the registration on the foreign registry before a vessel can be registered on the New Zealand Register. Registration under Part B of the Register is voluntary. Registration is compulsory for New Zealand-owned pleasure vessels or New Zealand-owned ships that do not exceed 24 m register length and which proceed on an overseas voyage. For New Zealand-owned ships of registered length of 24 m or more, registration in Part A is compulsory save for (a) pleasure vessels; (b) ships engaged solely in New Zealand inland waters; and (c) barges used solely for voyages on coastal waters.

The International Convention on Tonnage Measurement of Ships 1969 sought 'to establish uniform rules with respect to the determination of tonnage of ships engaged in international voyages'. Vessels less than 24 m in length and those solely navigating certain inland waters were expressly excluded.

Vessels exceeding 24 m in register length are excluded from the PPSA. Mr Walters argued that the exclusion of vessels exceeding 24 m imports the inclusion of vessels of lesser length, such as the Blaze. Accordingly, the failure by KeyBank to register the Blaze means that Mr Walters' title to the vessel had been perfected. Since the Blaze was in New Zealand at the time of perfection of Mr Walters' security, the case fell within the plain language of s 26 of the PPSA.

The Court is reluctant to accept a construction that would infringe New Zealand's international obligations. In Sellers v Maritime Safety Inspector [1999] 2 NZLR 44, 46-47, the Court of Appeal referred to:

the principle of the freedom of the high seas. That freedom, including the freedom of navigation, is one of the longest and best-established principles of international law. An essential feature of the freedom is that the state of nationality of a ship (the flag state) has exclusive jurisdiction over the ship when it is on the high seas. That proposition, to be found in art 92 of the 1982 United Nations Convention on the Law of the Sea (UNCLOS) to which New Zealand is party and which in this respect is considered to be declaratory of customary international law, is subject only to 'exceptional cases expressly provided for in international treaties' (1982 Int Leg Mat 1261). ... [As recognised] in art 87(2) ... the freedoms of the high seas are to be exercised by all states with due regard for the interests of other states in their exercise of the freedoms.

The protection conferred by the State of the ship’s flag is a potent reason for registering a vessel. It is a symbol of the State and is entitled to commensurate respect from other States. That protection must in principle extend to property rights created under the law of the flag State. The principle of comity which underlies UNCLOS and much else of public international law should apply no less to the development of private international law and extend to securities of the kind to which KeyBank is entitled. They are items of property created by the law of such States and in the context of the conflict of laws the ship's flag is a potent connecting factor for determining what legal system should govern competing rights.

Many foreign-flagged yachts visit New Zealand and may be subject to securities created under the law of their flag States. On the construction of the PPSA supported by KeyBank those securities are protected, and New Zealand is acting in conformity with its international obligations.