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What is a Ship?
What is a ship? How
elementary a question? Perhaps not if we consider that
today many “things” float on our seas and inland waters
that are not exactly “ships” in the image of the
Titanic. From a commercial viewpoint many transactions
look to answer this question to find a bearing in
structuring the mode of purchase, financing,
registration, and securitization - the rules applicable
to a non-ship structure are very different from that of
a ship. The reality is that for purposes of legal
recognition and registration of assets it is a
fundamental question.
How do legislations define
a ship?
Nigeria’s
Merchant Shipping Act (‘MSA’)
defines a ship as: any vessel other than (a) a
vessel propelled by oars or paddles or (b) a vessel
which has generally or partially exempted by the
Minister under S95 of the Act.” The same act then
defines a vessel as “anything constructed or used for
the carriage on, through or under water of persons or
property and includes a hovercraft” (Underlining are
mine)
The MSA has a rather windy
definition. Extreme legalese! S 26 (1) of the
Admiralty Jurisdiction Decree 1991 (“AJD”) - a more
recent legislation - sort to do a better job and it
defines a ship as: “a vessel of any kind used or
constructed for use in navigation by water, however
it is propelled or moved and includes (a) a barge,
lighter or other floating vessel including a drilling
rig (b) a hovercraft (c) an offshore industry mobile (d)
a vessel that has sunk or is stranded and remains a
vessel, but does not include a vessel under
construction that has not been launched” (Underlining
are mine).
What
are the key issues arising from these 2 definitions?
1. Mention of
specific assets
The AJD definition has
brought some clarity and modernity by identifying
several assets from contemporary business environment
and declaring them to be ships. These are: (i) barges
(ii) lighters (iii) drilling rigs (iv) hovercrafts (v)
offshore industry mobile. By the rules of legal
interpretation the use of the words “and includes”
before the mention of these items raises a presumption
that these items mentioned are just a few examples of
ships by definition. Kindly note that the AJD definition
uses the phrase -“a vessel of any kind”- which
connotes that the categories of ships are quite open.
The reality for
purchasers (and their financiers) of any piece of metal
or plastic that navigates the sea or inland waters is
that defining what it is (a ship or not) is a matter of
fact and law that determines the transaction structure
and legal requirements.
2. Contradiction
as to how it is propelled.
It should be noted that
the MSA excludes “vessels propelled by oars or paddles”
whilst the AJD includes all vessels “however it is
propelled or moved”. The MSA being an older legislation
(1962) may have sought to exclude paddled canoes, whilst
the AJD seeks to safely capture modern technology with
the knowledge that the options for propelling a vessel
may never be closed. It follows that however propelled
or moved, the utility and commercial value of the item
would weigh heavily as parties decide whether an item
should be defined as a ship or not.
3. A ship under
construction is not a ship
The AJD clearly excludes
in its definition “any vessel under construction that
has not been launched”. This is in line with the
state of the law in England and several jurisdictions.
It means a ship under construction cannot be subject to
a legal mortgage. Until construction is completed it is
not a ship – properly so called. The dilemma a financier
faces therefore in financing the building of a new ship
is this: How can we secure our advances to the Ship
builder (on behalf of our customer) since we cannot take
a mortgage on the ship until after construction? Here
are some suggestions:
a)
Be a third
party (“the Financier”) to the ship building contract to
establish privity with the ship builder
b)
Take
specific warranties from the ship builder in the ship
building contract
c)
Establish
monetary penalties for delays commensurate with the
projected additional financing cost that may be incurred
daily if builder delays in completion/delivery.
d)
State in the
ship building contract that the title in the ship passes
to the owner (your customer) on a block-on-block basis.
i.e the title passes as construction progresses rather
than on completion or delivery. This allows the
financier where necessary to take possession of an
uncompleted structure which can be sold to mitigate loss
if the need arises.
e)
Note that
where title passes on a block-on-block basis (4 above)
the risk passes as well. Which means anything that
happens to the ship in construction passes a loss to the
title owner. It is therefore advisable to take out a
Lender’s Interest Insurance to cover any adverse
possibilities whilst the ship-in-construction is in the
ship builders’ yard.
f)
Get an
Assignment from the borrower (ship owner to be) in
favour of the lender of all current or future rights
arising from the ship building contract or any other
legal or equitable remedy that may ordinarily avail the
borrower in the circumstance.
By way of
comparative analysis the UK Merchant Shipping Act 1995
has similar definitions as our legislations and the
English courts have no consistent approach to defining a
ship. It is a matter of fact and law - very
circumstantial. In Global Marine Drilling Co. v
Triton Holdings U.K (2001) 1 Lloyds Rep. 60 a mobile
drilling unit was held to be a ship for purpose of the
1952 Arrest Convention; A backhoe dredger registered in
Sweden has also been held to be a ship –
The Von Rocks (1998) 2 Lloyds Rep 198
Conclusion
Back to the question -
What is a Ship? Can we hazard a classic definition? We
need not! What is needful is insight to navigate the
rubrics of each circumstance - arriving at an informed
conclusion that a particular asset is (or ought to be) a
ship. That would suffice! The next relevant issue (which
would be treated in a follow up article) are the
practicalities of due diligence in a ship finance
transaction.
Ayuli Jemide, is a Partner
with DETAIL. |
