Arrested development

UNDER Norwegian law, the arrest of a vessel based on a claim against a demise charter is excluded unless the claim is also secured by a maritime lien. However, an arrest may be granted if the debtor is in fact the real owner of the vessel.

In 1993, Norway ratified the 1952 International Convention Relating to the Arrest of Sea-Going Ships and shortly thereafter incorporated its provisions into the Norwegian Maritime Code. Under Section 93 of the code, a vessel arrest will only be granted for the enforcement of a claim in accordance with the general rules of the Enforcement Act 1992.

While the Enforcement Act requires that the debtor be the owner of the arrested vessel, claims secured by a maritime lien are an important exception as these may be enforced with an arrest, regardless of who owns the vessel. While some have questioned whether this rule contradicts Article 3 of the 1952 convention, several other signatory states, including Sweden and Denmark, have implemented similar rules. So, can a vessel arrest be based on a claim against a party other than the vessel's registered owner, despite Section 93 of the code?

One way in which owners can reduce the risk of their vessel being arrested is by registering it in their own name and then bareboat chartering it to an operator or manager. However, according to Section 7(14) of the Enforcement Act, an execution lien and, therefore, an arrest, can be granted against assets registered in the name of a third party if it is probable that the debtor is the real owner of the asset. This rule is not an exception from Section 93 of the code but a rule of evidence concerning ownership of the vessel.

It is therefore possible to arrest a vessel under Norwegian law based on a claim against a party other than the registered owner, but it must be proven that the debtor should be regarded as the actual owner. The burden of proof is on the claimant.

One increasingly common situation in which a demise charterer could be regarded as the actual owner of a vessel is under a so-called financial lease contract. These contracts vary in form and detail, but most have the common feature of a charterer, paying charter hire roughly equivalent to the loan instalments, becoming the registered owner of the vessel once the loan is repaid.

Such arrangements are popular, for example, with the owners of new Russian fishing vessels bought for operation in the Barents Sea and the North Atlantic. As many of these new owners are non-Russian, the vessels are purchased through single-purpose companies, which become the registered owner and mortgagor. Both the company and the mortgaged vessel are then respectively registered in a jurisdiction and ship registry approved by the banks financing the purchase. The vessels are then bareboat chartered to a Russian company, enabling the Russian charterers to bareboat register the vessels under the Russian flag and obtain fishing quotas from the Russian government. The charter party also includes a clause under which the charterer has an essentially consideration-free option to purchase the vessels once the loan is repaid.

The contract arrangements may vary with respect to the rights of the contracting parties to cancel the charter party agreement and their rights to sell, mortgage, repair and rebuild the vessel. They may also vary with respect to:

• the charter hire amount relative to the instalments on the loan;
• the right of the registered owner to sell the vessel;
• whether the demise charterer must make any additional payment in order to exercise its purchase option.

Provided the financial lease agreement transfers the majority of the owner's basic rights to the demise charterer, it is arguable that the demise charterer is the actual owner, and that maritime claims against it can be the basis for an arrest. But if the registered owner still possesses a right to sell or mortgage the vessel, or the right to cancel the charter party, it will be difficult to argue that the demise charterer is the real owner.

In some cases, lower courts have apparently accepted these arguments and permitted the arrest of a vessel for a claim against a demise charterer found to be the actual owner. But Norwegian appellate courts do not appear to have considered this issue. As a result, some financing banks have expressed concern at the risk of having these vessels arrested for claims against Russian bareboat charterers.