This was a special appeal by Nordic Trustee ASA (Nordic) against a decision of the 29th Civil Court of the Central Court of the District of São Paulo refusing to recognise its registered mortgage over the Liberian-flagged Floating Production Storage and Offloading (FPSO) installation OSX-3. Nordic had loaned OSX 3 Leasing BV, a Dutch company, USD 500 million to acquire the FPSO, and had registered a ship mortgage over the FPSO on the Liberian maritime registry to guarantee repayment of its loan.

Banco BTG Pactual SA (Banco BTG) brought an enforcement claim against the FPSO for USD 27,391,594.01. Nordic applied to the Court below for recognition of its preferred ship mortgage. The Court held that it was not possible to recognise the validity in Brazil of Nordic's ship mortgage registered under Liberian law, imposed on a vessel flying the Liberian flag, for the purpose of guaranteeing Nordic preference over the proceeds from the sale of the vessel seized in an execution filed by Banco BTG, since Liberia was not a signatory to the international treaties and Conventions in this regard to which Brazil has adhered, and there was no existence of international custom in this regard.

Nordic brought a special appeal to the Superior Court of Justice.

Held: Special appeal partially granted.

There is no doubt that the FPSO is a ship in both the legal and technical sense. All large vessels must bear the flag of the State of their nationality, with the exception of ships flying the flag of the United Nations, in its service, its specialised agencies, and the International Atomic Energy Agency.

According to arts 91, 92, and 94 of UNCLOS - Decree no 99.165/1990 - ships have the nationality of the State whose flag they are authorised to fly, and every State must establish the necessary requirements for the attribution of its nationality to ships, for the registration of ships in its territory and for the right to fly the relevant flag; effectively exercise its jurisdiction and control in administrative, technical, and social matters over ships flying its flag; maintain a ship register containing the names and characteristics of the ships flying its flag, with the exception of those that, due to their small size, are excluded from generally accepted international regulations; and exercise its jurisdiction in accordance with its domestic law over any ship flying its flag and over the captain, officers and crew, in administrative, technical, and social matters relating to the ship. Furthermore, the same Convention provides that the requirements necessary for the loss of a vessel's nationality must be provided for internally in the legislation of the State that granted the vessel's registration, as this is an issue related to the autonomy and sovereignty of each State.

The Havana Convention on Private International Law (the Bustamante Code) provides in arts 277 and 278 - Decree no 18.871/1929 - that the rights of creditors after the sale of a ship, as well as their extinction, are regulated by the law of the flag. Maritime hypotheques, liens, and securities of a real nature, constituted in accordance with the law of the flag, have extraterritorial effects, even in countries whose legislation does not recognise or regulate these hypotheques or liens.

Articles 1 and 8 of the MLM Convention 1926 - Decree no 351/1935 - provide as follows:

1. Mortgages, hypothecations, and other similar charges upon vessels, duly effected in accordance with the law of the Contracting State to which the vessel belongs, and registered in a public register either at the port of the vessel’s registry or at a central office, shall be regarded as valid and respected in all the other contracting countries. ...

8. Claims secured by a lien follow the vessel into whatever hands it may pass.

Thus, even if the clarity of art 278 of the Bustamante Code were insufficient, art 1 of the MLM Convention 1926, in the same vein, also provides that ship mortgages regularly established in accordance with the laws of the Contracting State to whose jurisdiction the ship belongs, and registered in a public register, whether belonging to the jurisdiction of the port of registration or a central office, will be considered valid and accepted in all other contracting States.

With the greatest respect, the finding reached by the first instance Court regarding the possibility of registering a mortgage over a vessel flying the flag of another country, and belonging to a foreign business company, in Brazil, is not valid.

Articles 3 and 6 of Law no 7,652/1988, which governs the registration of maritime property, provide that Brazilian vessels, except those of the Navy, will be registered with the Port Authority or subordinate body, in whose jurisdiction the owner or shipowner is domiciled or where the vessel will operate. Registration of vessel ownership will be granted, except in the cases provided for in this Law, to an individual resident domiciled in Brazil or to a public or private entity subject to Brazilian laws. According to art 8 of the same Law, a foreigner who is not resident and domiciled in Brazil may only be granted registration of a vessel classified for sporting or recreational activities.

Furthermore, as seen above, UNCLOS establishes that ship registration is an act of State sovereignty, and that it is up to States to establish the necessary requirements for the attribution of their nationality to ships, exercising their jurisdiction accordingly under their respective domestic laws on the administrative, technical, and social issues regarding ships flying their flag.

Therefore, the appealed decision must be reformed. The special appeal must be partially granted to recognise the effectiveness, at the national level, of a mortgage registered in the State of the vessel's nationality (the flag State), with execution continuing as per the law.