Definition of Ownership
To understand the ownership of property, one must be familiar with both Common Law Ownership and Equitable Ownership. The term property refers to everything that a person owns. Property can be divided into two categories:
1- Real Property
2- Personal Property
In early law, Real Property was considered “real” because the courts could restore the actual property to a dispossessed owner, rather than simply providing compensation for its loss. Personal Property, on the other hand, was not specifically recoverable, and a dispossessed owner could only bring a personal action that gave the dispossessor the choice of either returning the property or paying the original owner its value. For example, the land is considered Real Property because it can be physically restored to the owner. In contrast, a ship is Personal Property because it cannot be physically restored, and compensation must be provided for its loss. Understanding the differences between Real Property and Personal Property is essential in determining ownership rights and legal remedies in property disputes.
When we refer to a person’s property in goods, we are talking about that person’s legal ownership at common law. The Sale of Goods Act 1979, which applies to all contracts of sale, defines a contract of sale as one where the seller transfers or agrees to transfer the property in goods to the buyer. This means that the legal title of the goods is transferred to the buyer. Ships are considered goods under the Sale of Goods Act 1979, although their sale is not governed solely by this act. Due to the complexity involved in the sale and purchase of ships, additional statutory rules must be followed to ensure that the title effectively passes from the seller to the buyer. The basic rules of contract law apply to the regulatory provisions of the sale of goods legislation. The relevant acts in England are:
1- The Sale of Goods Act 1979
2- The Supply of Goods (Implied Terms) Act 1973
3- The Sale and Supply of Goods Act 1994
However, the specific nature of ship sales can make it challenging to apply general legislation. In these cases, provisions of the merchant shipping legislation are likely to apply.
When discussing property ownership, whether it is land or other types of property, we are usually referring to Legal Title. However, it is important to note that there may also be Equitable Ownership of the property in addition to Legal Ownership. Therefore, the term ownership may have a broader meaning than just legal title, and it is essential to understand the nature of both legal and equitable ownership. Legal Title in property refers to the recognized title that exists under Common Law, also known as “at law.” This is distinct from Equitable Ownership, which exists “in equity”. In common law, any recognized right or liability is referred to as a right “at law.” A person is typically entitled to enforce their rights or liabilities at law. This means that Legal Title in property is the ownership recognized by Common Law. The person who holds the Legal Title is the owner of the property and has the right to exercise control over it.
The Equitable Title (Equitable Interest in Property) is a form of ownership that equity grants based on the principles of “fairness and good conscience”. The Chancery Court was empowered to provide relief based on the principles of “fairness” when it was deemed unjust to allow a party to be defeated by strict common law principles. This led to the development of the Law of Equity. Equitable relief is entirely at the court’s discretion and is only applied when the court believes that it is fair and just to do so, and when any common law remedy is insufficient. At times, the court may determine that although one person is the legal owner of the property, another person should be given ownership rights over the property. This is often accomplished through a “constructive trust,” where the court will rule that the person holding the legal title holds part or all of the property as if on trust for the equitable owner. Establishing an equitable interest in the property is not a simple matter, as it involves depriving the common law owner of their legal title to the property. The court will require strong evidence that it was intended for the property to be owned in this way before imposing an equitable interest. The phrase “beneficial ownership” may be used as an alternative term for “equitable interest.”
Ship Ownership Types
Co-ownership of a Ship
Co-ownership of a Ship refers to a situation where two or more individuals share ownership of a vessel. This is a common practice in the shipping industry, as the cost of purchasing and operating a ship can be quite high. Co-ownership allows multiple parties to share these costs and reap the benefits of ship ownership. Each co-owner holds an undivided share in the ship, meaning that they have an ownership interest in the entire vessel, rather than just a specific portion of it. Co-owners may agree to divide the use of the ship among themselves in a variety of ways, such as by time, usage, or cargo. When a property, such as a ship, is co-owned by multiple parties, it becomes imperative to ascertain the modality of their ownership. The most effective way to comprehend this is by drawing parallels with the domain of real estate
Joint Owners (Joint Tenants): The property’s ownership is jointly vested with unity of title and without any differentiation of interest. Hence, no joint tenant possesses any particular share in the property individually. Amongst themselves, the joint tenants maintain a joint “right of survivorship”, meaning that upon the death of a joint tenant, their interest automatically transfers to the remaining joint tenants. Ultimately, the exclusive interest will belong to the last surviving tenant. This is the key characteristic of a joint tenancy – the right of survivorship takes priority over any disposition made by a joint tenant’s will.
Tenants in Common (Part Owners): A tenancy in common must be distinguished unequivocally from a joint tenancy. Tenants in common hold “undivided shares,” meaning each tenant has a distinct and separate share in the property. There is no right of survivorship, and when a tenant in common passes away, their undivided share will be distributed according to their will or intestacy. The co-owners relations among themselves are usually regulated by express agreement. In the absence of such an agreement, however, their rights inter se are governed by the principle that the ‘will of the majority’ must prevail in English law. This is subject to the caveat that the dissenting minority’s interest must be appropriately safeguarded. The court has the power of sale, though it will do so reluctantly against the wishes of the dissenting minority of co-owners.
A British vessel is conceptually divided into 64 units or shares, as stipulated in Section 5 of The Merchant Shipping Act 1894. While an individual may possess all the shares, multiple individuals can hold them jointly or as tenants in common. In cases where more than one party – be it an individual or a corporation – owns a single share, they must be recognized as joint tenants of the undivided interest and may not possess ownership of separate fractions. Registration of British ship ownership is mandatory. It is customary in commercial dealings for co-owners to establish a limited liability company under whose name the ship ownership will be registered. As a result, only the corporation’s name will be listed in the registry. The concept of limited liability creates a “corporate veil” that separates the company’s liability from the actual individuals who own it. This, indeed, is the fundamental premise of corporate liability. Without the notion of limited liability conferred by incorporation, there would be little incentive for capital ventures.
It is occasionally feasible to convince the judiciary to disregard the “corporate veil” and assign culpability to the actual individuals who possess the limited corporation, in situations where the corporate entity is impotent to satisfy its liability. The “corporate veil” shall be lifted in cases where the corporation was established as a counterfeit and with the exclusive intention of evading liability, or where substantial proof of deceit exists. It is important to bear in mind that the courts will solely be swayed to lift the “corporate veil” in extraordinary circumstances. Today, the relevant legislation which provides for the division of 64 shares is the Merchant Shipping (Registration of Ships) Regulations 1993. The Merchant Shipping Acts’ previous versions have been consolidated by the Merchant Shipping Act 1995. Minor amendments to the 1993 Regulations were made by the Merchant Shipping (Registration of Ships) (Amendment) Regulations 1994. In addition to a commercial transaction, a vessel may undergo a change of ownership due to legal proceedings. The Merchant Shipping Act 1995 features a Schedule 1 titled “Private Law Provisions for Registered Ships”. This Schedule pertains to the ownership rights associated with registered ships. Paragraph 2(1) of Schedule 1 within the Merchant Shipping Act 1995 states that the transfer of a registered ship or any share in the said ship must be accomplished through a bill of sale that fulfills the prescribed requirements, except in situations where the transfer would cause the ship to lose its connection with Britain.
The leading authority regarding the lifting of the “corporate veil” stems from company law, specifically the case of Saloman v Salomon (1897). The House of Lords acknowledged that if a company’s structure was compliant with the law, the courts should not investigate its underlying substance. Lord MacNaughten declared that to do otherwise would be based on a misunderstanding of the reach and implications of the Companies Act 1862. One of the primary reasons why people establish private companies is to avoid the risks associated with bankruptcy and to acquire easier access to borrowed funds. By utilizing a private company, a business can operate with limited liability, and the individuals behind the “corporate veil” will not be exposed to the severe consequences of bankruptcy law in the event of failure. The majority of cases where the “corporate veil” has been lifted by the courts involve shareholders using the company, either intentionally or unintentionally, as a means of obtaining particular benefits or evading obligations. It is challenging to establish precisely when the courts will deem the company to be a mere facade or pretense. Lord Denning MR was a prominent proponent of lifting the “corporate veil,” but it is now evident that the judiciary has reverted to a more conservative approach and is less inclined to permit the lifting of the “corporate veil.”
The Ship Manager is a co-owner who is designated to act on behalf of the other co-owners concerning the ship’s operations and trading, as well as the collection of freight. The Ship Manager is commonly known as the “Managing Owner,” although this is a commercial term and not a legal one. It’s important to note that the ship’s managing owner is separate from the ship’s husband.
The Ship’s Husband is an individual who is not a co-owner of the ship. Rather, the Ship’s Husband is specifically chosen to oversee the management of the vessel on behalf of the owner. Therefore, it is clear that the Ship’s Husband differs from the Managing Owner, who is undoubtedly one of the co-owners. Both the Managing Owner and Ship’s Husband have a legal duty, as outlined in Section 59 of the Merchant Shipping Act 1894, to register their names at the Customs House located in the UK port where the ship is registered. According to Section 59(2) of the Merchant Shipping Act 1894, when a Ship’s Husband is registered, they bear the same responsibilities and are subject to the same legal obligations as the Managing Owner.
The Managing Owner does not have the authority to arrange insurance without explicit permission from their co-owners, nor can Managing Owner pledge the ship as collateral for a loan without such authorization. While the Managing Owner can enter into reasonable charter party agreements, Managing Owner cannot cancel or significantly alter a charter without the consent of their co-owners.
Why are Ships Registered?
The primary objective of ship registration is to establish proof of ownership and to identify the individual or company that owns the vessel. Additionally, ship registration provides the ship with a “home” nation or port, offering a place of ultimate refuge if required, and access to the benefits and protection afforded by that nation’s domestic laws. Governments also derive benefits from ship registration, such as revenue or taxes obtained through the registration process, as well as the ability to requisition the ship during times of war.
Flags of Convenience (FOC)
Some countries provide their national flag to ships of other nations, allowing them to register under their laws without any stipulations regarding beneficial ownership or control, aside from the requirement to establish a nominal owning company for registration purposes. Flags of Convenience (FOC) countries do not require or expect a genuine link between the nation of registration and the actual country of ownership. The initial incentive for shipowners to register their vessels under foreign flags was to circumvent the high taxes and stringent regulations imposed by their home country’s laws. The Flags of Convenience (FOC) system has grown in popularity since World War II, as the unsubsidized fleets of Western nations struggled to compete with state-owned or state-controlled fleets in global markets.
Crewing costs have always been a significant expense for shipowners, and in certain instances, may exceed the financial means of an average shipowner. This is especially true if the shipowners are obliged, under their own country’s domestic law, to crew their vessel solely with seafarers of their own nationality. Some countries still enforce strict nationalistic policies in this regard. Panama, Liberia, and the Marshall Islands are the primary examples of Flags of Convenience (FOC) countries.
The Flags of Convenience (FOC) system will persist as long as international law acknowledges the authority of each independent state to independently determine the conditions under which it will grant its nationality/flag to foreign-owned commercial vessels, free from external interference.
It’s worth noting that during times of war, the actual ownership of a vessel is one of the key factors in determining its enemy character. As a result, ships registered under Flags of Convenience (FOC) that have real ownership in a belligerent state will be deemed enemy ships by other belligerent parties. Consequently, the international rule that the country of registration has the authority to protect its registered vessels through control or requisitioning can be altered by allowing the state of genuine ownership to exercise these protection rights, rather than the Flag State. There is significant international pressure on Flags of Convenience (FOC) countries to enforce robust jurisdiction and control over vessels registered under their flags. This is particularly true in terms of maintaining high standards for safety regulations and other requirements to be followed by such ships. Since the late 1980s, the conventional Open Registries have faced competition from other types of ship registries, such as the Offshore Flag, which is exemplified by the Isle of Man, located near the United Kingdom. Offshore Flag registries attempt to attract foreign-registered tonnage by offering crews at rates prevailing in their home countries and providing tax incentives for national crews. This poses a threat to both established and emerging independent ship registries.
International Transport Workers Federation (ITF)
The International Transport Workers Federation (ITF) has taken a militant stance against Flags of Convenience (FOC) for many years. The International Transport Workers Federation (ITF) is an international trade union that aims to protect the interests of seafarers, particularly those who work on ships belonging to foreign countries and whose interests are not represented by powerful national unions. To this end, the International Transport Workers Federation (ITF) has unilaterally created a crew agreement intended to establish fair wages for crew members, regardless of their nationality, and has sought to impose this agreement on owners who employ foreign or mixed crews. There have been significant industrial relations disputes and instances where the International Transport Workers Federation (ITF) has blacklisted certain vessels.
Flags of Convenience (FOC) have become a topic of increasing international concern, with the International Transport Workers Federation (ITF) leading the campaign against them. Although ITF agreements may only apply to approximately one-sixth of all vessels registered under Flags of Convenience (FOC), the union believes they have effectively brought attention to an issue that they believe will worsen and become irreparable if left unaddressed.
There are advantages and disadvantages associated with the Flags of Convenience (FOC) system. One crucial point to consider is that merely flying a convenience flag does not automatically make a ship a sub-standard vessel, despite claims by the International Transport Workers Federation (ITF). The International Transport Workers Federation (ITF) has a tendency to label most Flags of Convenience (FOC) ships as “coffin ships”, implying that they are more likely to be involved in fatal accidents than non-FOC vessels. However, this sweeping statement may not necessarily reflect the true state of affairs. It is important to note that Open Registries are not necessarily indicative of sub-standard ships. The Paris Memorandum of Understanding (PMU) and the United Nations Convention on Conditions for Registration of Ships were established to address such issues and ensure that proper standards are maintained across all vessels, regardless of their flag. Flags of Convenience (FOC) are undoubtedly here to stay as long as competition in the shipping industry continues to be intense. However, ships may still operate under any national identification provided that they comply with the standards set by the international registry body. Port State Controls (PSC) are implemented to ensure that these standards are met.
Shipowners often seek to secure financing for their vessels through the creation of a mortgage. This involves the mortgagor, who wishes to borrow money, granting a charge or encumbrance on their ship in favor of the mortgagee, who provides the loan. In the global shipping industry, ship purchases are typically financed through large loans from banks and other financial institutions. When a bank provides a large loan to one or more shipowning companies, it often takes a mortgage on the ship as security. In the case of time-chartered ships, the bank may also require an assignment of the time charter to benefit from the charter’s earnings and reduce the mortgage debt. This process is common in the international shipping market, where ship purchases are often financed through loans from banks and other financial institutions. As long as the shipowner does not endanger the ship and the bank’s position, they are free to operate and trade the vessel as a profit-making asset. However, if the mortgagee has not taken possession of the mortgaged ship, they do not have an absolute right to the freight earned by the ship and cannot compel its payment by giving notice to the party liable for payment.
When the bank (mortgagee) takes actual or constructive possession of the ship, it becomes entitled to all the freight that the ship is earning, whether under an express contract or under a quantum meruit principle (i.e. as much as has been earned), if no express contract exists. However, the mortgagee is not entitled to any freight that became due before taking possession of the ship but remained unpaid at that time. If the mortgagor (shipowner) acts in a way that impairs the mortgagee’s (bank’s) security, such as entering into a charter that does not benefit the mortgagee, the mortgagee has the right to take possession of the ship without the need for legal proceedings, even if there has been no actual default under the mortgage. The mortgagee (bank) may also sell the ship and apply the proceeds to pay off the debt owed under the mortgage.
Ship registration offers a benefit to a lender of money as the mortgage interest in the ship can be registered. According to English law, the mortgage must be a legal mortgage to be registered. The legal mortgage must be made on the statutory form:
The Merchant Shipping Act 1894 (Sections 31-46) provides the statutory form for a legal mortgage on a ship, which is capable of registration. Any mortgage that does not follow this prescribed form, such as a foreign mortgage, is not capable of registration and is considered an equitable mortgage rather than a legal mortgage under English law.
An Equitable Mortgage is created when the mortgagee receives only an equitable interest in the ship. This type of mortgage can be created in several cases, including:
1- on an unregistered British ship or a share in such a ship
2- on foreign vessels
3- on unfinished vessels.
Unlike legal mortgages, equitable mortgages cannot be registered under the Merchant Shipping Act 1894, and therefore do not provide the same level of security for the mortgagee. An Equitable Mortgage can be established in several ways, such as by depositing the legal deeds of a ship or entering into an agreement to create a legal mortgage in exchange for a loan. In either case, the mortgagee has an equitable interest in the ship, but this interest is not capable of registration.
An Equitable Mortgage is a mortgage where the mortgagee has received only an equitable interest. When it comes to priority, equitable mortgages rank among themselves according to the order of their creation. However, they always give way to statutory registered mortgages, even if they were created after the equitable mortgage. If a purchaser of a ship takes possession without notice of an equitable mortgage, it is not enforceable against them. On the other hand, registered mortgages are always valid against purchasers, even if the purchaser was unaware of the mortgage.
Registering a mortgage is not mandatory, but doing so can provide a significant benefit to the mortgagee (bank). By registering the mortgage, the mortgagee (bank) can ensure that their mortgage ranks for priority in front of other mortgages or debentures. This includes unregistered mortgages created earlier or later, unregistered debentures created earlier, and additional advances on a mortgage that was registered earlier. This means that if the ship is sold, the mortgagee (bank) will be paid before any other creditors who do not have a priority claim.
It is crucial to note that the registration date sets the order of priorities, rather than the date when the mortgage was created. Failure to register a mortgage does not invalidate it, but it obliges the lender to yield to later registered encumbrances. Registration serves as a notice to all parties concerned and offers the benefit of ranking for priority in front of earlier unregistered mortgages, later registered or unregistered mortgages, unregistered debentures created earlier, and additional advances on a mortgage registered earlier under whose agreement present and future advances by the lender were covered. The Merchant Shipping Act 1995 ( Section 16 Schedule 1) outlines provisions for the registration and title of mortgages on ships. Additionally, the Merchant Shipping (Registration of Ships) Regulations 1993 contain provisions for mortgage registration and title. The mortgage must be in a form that has been approved by the Registrar at the Central Registry of Shipping and Seamen.
There is no legal obligation to register a mortgage, however, registering a mortgage can provide benefits such as priority and the advantages available under the legislation. It’s important to note that failure to register a mortgage does not render it invalid, and an unregistered mortgage can still be enforced against a buyer even if they had no notice of it. The Merchant Shipping Act 1995 (Paragraphs 11 – 12 of Schedule 1) and Merchant Shipping (Registration of Ships) Regulations 1993 (Regulations 60 – 61) deal with the transfer and transmission of registered mortgages.
A ship mortgagor (shipowner) has the right to enter into contracts for the use of the vessel, such as charter parties, and these contracts are valid and can be enforced. If a mortgagee (bank) interferes with a charter party that the mortgagor (shipowner) has entered into, the mortgagee (bank) can be restrained by an injunction.
The owner of a mortgaged vessel, or the mortgagor, has the obligation to maintain full insurance coverage for the vessel, which is usually stated in the mortgage agreement. The insurance proceeds are used to repair or replace the vessel in the event of damage or loss. The mortgagee, or the lender, has a vested interest in the vessel as collateral and therefore has a financial stake in ensuring that the vessel remains insured.
If a mortgagor (shipowner) sells the vessel to another person, the new owner takes the ship subject to any existing mortgages. However, if the ship is sold by order of the court and the new owner is an innocent purchaser for value, they take the ship free of all encumbrances. In this case, the mortgagee’s (shipowner’s) recourse will be limited to the proceeds of the sale.
Right of Redemption
The mortgagor (shipowner) has the right to redeem the property from the mortgage at any time after the time for redemption has elapsed. This is commonly known as the Right of Redemption. The mortgagor (shipowner) can pay off the outstanding mortgage balance and have the mortgage discharged, thereby regaining full ownership of the property. However, if the mortgagor (shipowner) fails to exercise this right, the mortgagee may take possession of the property and sell it to recover the debt owed. The mortgagee (bank) has the right to receive repayment of the principal sum lent along with the interest charged. The mortgagee (bank) also has the right to insure the security, but this must be specifically stated in the mortgage deed. If the mortgagor (shipowner) fails to keep the ship insured, the mortgagee has the right to insure the ship and add the cost of the insurance to the amount secured by the mortgage.