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17 July 2013
It is becoming increasingly common for charterers to place their own specific equipment on board the vessels that they charter. For example, in the offshore sector, seismic and pipe-laying equipment is often owned by charterers. As this kind of equipment is valuable, it is important for charterers to protect their legal rights to the equipment.
This update considers the risk of such equipment being deemed to be a part of the vessel under Norwegian law and, as a consequence, being subject to the vessel mortgagee's rights in the case of enforcement. It also looks at how charterers can reduce this risk.
The issue is addressed in Section 45 of the Maritime Code:
"Mortgages and other encumbrances upon ships which have been or can be entered in the Register of Ships... shall also attach to each separate part of the ship, and to anything belonging to the ship which is on board or has been temporarily removed. No separate rights can be established to such parts or appurtenances. Provisions, fuel and other consumable stores shall be deemed not to be such appurtenances."
The issue is whether the relevant equipment will be held to be either a "separate part of the ship" or a part "belonging to the ship", and is "on board" or has been "temporarily removed" from the ship. If the equipment is considered as such appurtenances, then no separate mortgage rights can be established in the equipment and the equipment is deemed to be part of the vessel that is mortgaged. This is the case even if the equipment is not owned by the shipowner.
However, there is limited guidance as to which specific equipment is considered as an appurtenance to the vessel under the above provision. The commentary to the Maritime Code states that equipment such as engines, machinery, electronic equipment, anchors and lifeboats are examples of appurtenances under Section 45, whereas trawls, closing nets and other fishing gear are not considered as such.
The commentary is silent as to whether seismic or pipe-laying equipment is considered to be an appurtenance for the purpose of Section 45 and there is no case law considering this issue.
However, in legal literature emphasis is placed on the connection between the vessel and the equipment. To what degree and how permanently has the equipment been fitted to the vessel? Has the equipment been specifically made for the vessel? Is it required for the vessel's functionality? Is it practically and economically unreasonable to separate the equipment from the vessel? The more the equipment is connected to the vessel and related to the vessel's ordinary functions, the more likely it is to be considered to be an appurtenance of the vessel and consequently part of the mortgaged property. These questions must be considered in each particular case and in relation to each piece of equipment.
Sometimes 'quiet enjoyment' letters are given from the shipowner and/or the vessel mortgagee to the charterer or the equipment owner (if different from the charterer), in which it confirms that it has knowledge of the ownership to the equipment and that such rights will be respected. This quiet enjoyment right can also be combined with a right or obligation on the part of the charterer to remove the equipment at the end of the charter, and frequently the cost of removal in such circumstance is also addressed. In addition, the use of coordination or inter-creditor agreements between the vessel's owner/mortgagee on one side and the charterer/equipment owner on the other is becoming more frequent. Occasionally even the equipment financiers are also parties to such arrangements.
Although coordination agreements or quiet enjoyment letters may be in place, the charterer/equipment owner and its financiers may still have exposure towards other creditors of the shipowner which are not party to such arrangements and which may seek to enforce against the vessel. Alternatively, enforcement may take place in another jurisdiction where such arrangements are not upheld. To reduce such risk, it is sometimes agreed that the rights of the charterer or equipment owner be secured by registration of a second mortgage over the vessel. Such mortgage may, for example, secure the charterer's or equipment owner's claim for compensation for the value of the equipment in the event that its removal is denied or is simply not possible.
The bankruptcy estate of the shipowner will have the right, pursuant to Section 2(2) of the Satisfaction of Claims Act, to seize assets belonging to the shipowner at the time of the attachment. Therefore, as a starting point, the estate will not be entitled to seize equipment which is not owned by the shipowner, whether it is considered as an appurtenance or not. However, the position is not entirely clear – it may be argued that the rights of the bankruptcy estate should be equal to those of the mortgagee in this respect. It is difficult to predict the outcome if this question were submitted to a Norwegian court, and consequently there is also some uncertainty as to the rights of a bankruptcy estate to vessel equipment owned by charterers.
It appears only reasonable that expensive equipment belonging to charterers or other third parties should not become part of the vessel mortgagee's rights or the bankruptcy estate, as this equipment clearly has not been financed by the shipowner, its mortgagees or the shipowner's unsecured creditors. However, in view of the somewhat uncertain legal situation, the recommendation is clear: charterers and equipment owners should seek to protect their interests in order to avoid their equipment being considered as part of the mortgaged vessel or seized by other creditors of the shipowner.
For further information on this topic please contact Gaute Gjelsten, Geir Ove Røberg, Hågen Hansen or Herman Steen at Wikborg Rein by telephone (+47 22 82 75 00), fax (+47 22 82 75 01) or email (firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com).
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