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30 August 2006
An increasingly common trend among Norwegian shipyards is to build hulls in low-cost countries such as Poland and Romania. Once complete, the hull is towed to the Norwegian yard where the rest of the building process takes place (which often includes the installation of engines, propellers, radars and other equipment).
Customarily, a bank provides construction financing to the Norwegian yard throughout the building process. The bank usually requires as security a mortgage on the vessel under construction for the same period. During the construction of the vessel at the foreign yard, the mortgage is usually registered in the local shipbuilding register. Upon completion of the hull, the registration is transferred to the Norwegian Shipbuilding Register.
However, problems may arise from the fact that a mortgage registered in the Shipbuilding Register is not effective until the hull is brought to the Norwegian yard's premises.(1) Therefore, the bank does not have a perfected mortgage in the hull during the towing period, which is unacceptable for the bank.
During the towing period, there are two main alternatives to registering a mortgage in the Shipbuilding Register.
First, the hull may be registered in the Ordinary Norwegian Ship Register as a 'ship' by classifying it as a 'barge'. Perfection of the mortgage during towage is thus obtained, but at a high cost. The disadvantages involved include the following:
In light of these disadvantages, banks may use the second alternative and request that the yard pledge the hull to the bank during the towing period. In order to deprive the yard of possession of the hull (and thereby obtain perfection of the pledge pursuant to Section 3(2) of the Mortgage Act), the towing company agrees to take instructions from the bank regarding delivery of the hull. However, pledging the hull gives rise to difficult legal issues, such as the perfection of the pledge and the bank's legal position against the yard, the towing company, third parties and the relevant insurers in case of casualty during the towing period.
Under Norwegian law, a chattel can be pledged only if it is impossible to register it in an assets register.(3) As it is possible to register the hull in the Shipbuilding Register or the Ship Register (which are both assets registers) during the towing period, the issue is whether this prevents a pledge in the hull from having legal protection.
The purpose of Section 41 of the code and Section 3(2) of the act is to prevent securities in a chattel from having the same priority as that obtained by pledge and registered mortgage. As it is impossible to obtain perfection of the mortgage during the towing period by registration in the Shipbuilding Register, a pledge will thus not be contrary to such purpose. Therefore, the wording of the legislation should be interpreted restrictively, so that the possibility of registration in the Shipbuilding Register does not prevent the pledge from having legal protection.
Under Section 11(5) of the code, it is impossible to register a hull in the Ship Register as a ship until the vessel is completed. However, in practice the Ship Register allows a hull to be registered as a barge (and thus as a ship). As this is contrary to the registration rules (the hull will never become a barge), the yard and the bank should not be forced to perfect the security in accordance with erroneous practices at the Ship Register. Arguably, the possibility of registration in the Ship Register does not prevent perfection of the pledge in the hull pursuant to Section 41 of the code and Section 3(2) of the act.
The bank will be liable to the yard for damage to the hull in accordance with ordinary bailment rules if it acts negligently (eg, by instructing the towing company to deliver the hull to an unsafe port).
In its capacity as mortgagee, the bank will usually not be liable to third parties for damage caused by navigation of the mortgaged vessel. However, if the bank forecloses on the pledge and gives instructions to the towing company, it will likely be considered as having such possession and control over the hull that it qualifies as shipowner for the purposes of the liability and limitation rules under the code.
Financing banks should consider carefully the relevant insurances taken out by the yard. For example, builder's risk insurance according to the Norwegian Marine Insurance Plan does not cover the towing period, unless specifically agreed. Furthermore, protection and indemnity insurance usually terminates when the mortgagee takes possession of the vessel (ie, upon the bank's foreclosure of the pledge, unless otherwise agreed). Banks should consider taking out separate insurances for their interests in the hull and assess their potential liability if instructing the towing company.
For further information please contact Herman Steen or Gaute Gjelsten or Trond Eilertsen at Wikborg, Rein & Co by telephone (+47 22 82 75 00) or by fax (+47 22 82 75 01) or by email (email@example.com or firstname.lastname@example.org or email@example.com).
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