By Camila Mendes Vianna Cardoso and Lívia Sanches Sancio

On 1 February 2018, the Superior Court of Justice of Brazil rendered a decision in a leading case on the validity of foreign maritime mortgages. The case was brought before the Superior Court of Justice as Special Appeal No 1.705.222/SP, allocated to the Fourth Panel of the Court and had Judge Salomão as reporting justice. The decision recognises the validity of foreign maritime mortgages in Brazil, reaffirming important concepts of international law, particularly with respect to the incorporation of international treaties in the Brazilian legal framework and the respect for acts of sovereignty of foreign states.

The background of the case

Prior to analysing the reasoning behind this significant decision, it is important to highlight the main facts behind what became the leading case in Brazil on foreign mortgages.

The case refers to an enforcement lawsuit of a debt of approximately BRL 30m brought by a Pactual bank, seeking the seizure of the FPSO OSX-3. The unit is registered under the Liberian flag and operates in Brazilian waters.

In the course of the proceedings, a mortgage creditor Nordic Trustee intervened, requesting the acknowledgement of the priority of its mortgage, registered with the flag state of the vessel.

In an unexpected decision, the fi instance judge of the 29th Civil Court of São Paulo determined that the foreign maritime mortgage was not valid as it was not registered before the Brazilian Admiralty Court. The mortgage registered in Liberia was said not to be valid as Liberia has not ratified the 1926 Brussels Convention for the Unification of Certain Rules Relating to Maritime Liens and Mortgages and the Bustamante Code that regulates the enforcement of mortgages in Brazil.

This was confirmed by the 13th Chamber of Private Law of the São Paulo State Court of Appeals, which asserted that it would require an existing international provision to recognise the application of the law of another state, and to recognise the extraterritorial effects of the mortgage. The judge’s understanding was mainly based on Law No 7.652/88, which regulates the registration of maritime property, and whose Article 12 determines that the registration of rights in rem for Brazilian vessels must be registered before the Admiralty Court. The judge also restated that the FPSO was operating in Brazilian waters.

The mortgage creditor presented an interlocutory appeal against said decision, expecting the Court of Appeals of São Paulo to correct the mistake. However, the 13th Chamber of the State Court decided to uphold the decision, endorsing the understanding of the first instance judge and deciding that, because the flag state of the FPSO was not a contracting party to conventions related to the recognition of mortgages, said mortgage registered in Liberia could not be recognised in Brazil.

The decision from the Superior Court of Justice

After the highly questioned decision of the Court of Appeals of São Paulo, the mortgage creditor presented a special appeal, claiming that the decision violated provisions of several laws and conventions, including the Procedural Code, the Brussels Convention and the Bustamante Code, among others. It claimed, in summary, that the decision was against the due process of law, the rights guaranteed by Brazilian law and international custom; that the law of the flag state regulates the maritime mortgage, as set by international conventions adopted by Brazil, which admits the extraterritorial effect of mortgages; and that it is not possible to register a mortgage before the Admiralty Court of Brazil for foreign vessels.

The decision of the São Paulo Court of Appeals was unanimously reversed by the Fourth Panel in an enlightening judgment.

First, the judgment brought attention to a concept of international law that had been undermined in the previous decisions of the case, that is:

‘the international treaties or conventions once regularly incorporated into the internal law, are in the Brazilian legal framework in the same levels of validity, efficacy, and authority in which the ordinary laws are positioned, consequently, there is among these and the acts of public international law a mere relationship of parity’.

Thus asserting that the FPSO should be considered a vessel, Justice Salomão points out that the United Nations Convention on the Law of the Sea determines that a vessel has the nationality of the state of its flag, and that such state ‘exercises its jurisdiction and its control in administrative, technical and social matters on ships flying its flag’.

The Superior Court of Justice restated that allowing the registry of mortgages is a national and international tradition, mentioning provisions of the Bustamante Code and of the 1926 Brussels Convention for the Unification of Certain Rules Relating to Maritime Liens and Mortgages to conclude that a maritime mortgage established according to the law of the flag has extraterritorial effects ‘including in countries whose legislation is not aware of or does not regulate’ the matter.

Moreover, the decision highlights that the Brazilian Admiralty Court is not able to register a mortgage in respect of a vessel flying a flag of another country, since registration is an act of sovereignty of the state of nationality of the vessel.

The Superior Court of Justice showed concern with the incorrect application of  the law, affirming that ‘by denying efficacy to the mortgage, with all due respect, the local court fails to observe several international conventions and causes legal uncertainty with possible restrictions and increased costs for the charter of vessels used in Brazil’.

Thus demonstrating an admirable concern for legal certainty towards owners and holders of rights on vessels, as well as for the correct applicability of international conventions, the Superior Court of Justice overturned the decision rendered by the Court of Appeals of São Paulo, recognising the validity, at a national level, of the foreign maritime mortgage registered with the flag state.

By means of such decision, the Superior Court of Justice of Brazil establishes a landmark decision for the validity of maritime mortgages that are registered over foreign vessels with their flag state.