Both the Marshall Islands and Liberia, two of the three largest open ship registries in the world, recently enacted certain important amendments to their respective maritime laws that bring clarity to common questions surrounding vessel mortgages.  In part, the amendments to the Liberian Maritime Law, which went into effect in August 2022, clarify to some extent that one need not attach evidence of the obligations secured by Liberian vessel mortgages to these mortgages and clarify the circumstances under which mortgages must be amended following modifications to underlying secured obligations.^[1]  In 2023 the Maritime Act 1990 of the Republic of the Marshall Islands was amended to clarify what may constitute written proof or evidence of the amounts and dates of any documents or evidence of mortgage debt to be submitted with or included in vessel mortgages, among other amendments affecting vessel registration and operation.[2]  Both nations’ recent maritime law amendments also included other important amendments that are relevant for both shipowners and financiers alike, including amendments (in both Liberia and the Marshall Islands) that made permanent the ability for instruments to be filed electronically,[3] continuing a practice that was born out of the need to eliminate in-person filings during the COVID-19 pandemic.

The recent amendments to Liberian maritime law have made clear that, to be enforceable under Liberian law, a vessel mortgage must recite, among other things, “the instrument or instruments which evidence the direct and/or contingent obligations secured by such mortgage … including the date of each such instrument and the parties thereto,” but is not required “to … annex any copies or summaries of the instrument(s) which evidence the direct and/or contingent obligations secured thereby, or … any copies or summaries of any agreement or other document that is incorporated by reference into the mortgage….”^[4]  Similarly, the Marshall Islands law that had already required the submission of “written proof … of the amounts and dates of any documents or evidence of debts in support” of a vessel mortgage was amended to provide that such “written proof or evidence of debt may be satisfied by attaching to the mortgage the documents evidencing such debt (whether in whole, in part or with or without redactions), or by describing the terms of the debt in the mortgage, including the total amount.”^[5]  While the amendments eliminate the previous uncertainty around attaching underlying instruments to Liberian and Marshall Islands vessel mortgages as a matter of Liberian and Marshall Islands law, secured lenders and their counsel may still wish to attach to a mortgage all of the documents setting forth the obligations secured even if the amendments appear to eliminate the need to do so.  It remains somewhat uncertain whether another jurisdiction in which a Liberian or Marshall Islands vessel mortgage is enforced might still require the attachment of these documents as a matter of local law.

These amendments are notable for maritime vessel financings, where parties often face the question of whether (and which) underlying debt instruments should be attached to a vessel mortgage as evidence of the underlying mortgage debt secured.  This issue is of particular concern in jurisdictions whose maritime law is based on U.S. law, including Liberia and the Marshall Islands, where entire vessel mortgages are typically filed with all these attachments, as opposed to the statutory mortgage filings in so-called “Red Ensign” jurisdictions – British Commonwealth countries and territories.  However, these recent amendments to the Liberian and Marshall Islands maritime laws[6] signal an effort to clear up the sometimes muddy waters around attaching debt instruments to vessel mortgages.

Entire texts could be (and have been) written on the development of ship finance, and in particular the ship mortgage as a financing instrument. After legislative attempts to create a preferred mortgage by the U.S. Congress in the late nineteenth century eventually led to enactment of the Ship Mortgage Act of 1920,[7] the concept of a chattel mortgage was elevated to that of a maritime lien, requiring a mortgage to meet a short list of additional requirements as to form, content and filing.  To create a maritime lien, a “preferred mortgage” must state, among other things, the amount secured, the date the indebtedness matures, the name and official number of the vessel, and the names and addresses of the mortgagor and mortgagee, and be filed in substantial compliance with U.S. federal law.[8] Importantly, in Liberia and the Marshall Islands, maritime legislation and regulatory provisions generally adopt the non-statutory general maritime law of the United States.[9]

The requirements of ship mortgages are also tied to the varying jurisdictions and national registries that regulate them.  The second half of the twentieth century saw the growth of open registries at the expense of national or “closed registries”[10] including Liberia and the Marshall Islands.  Open registries are commonly understood to be ship registries that permit registration of vessels under the flag of a nation where the registered owner is not a citizen or resident.  As the United Nations Conference on Trade and Development’s (“UNCTAD”) statistics reveal, closed registry fleets have declined every year in modern memory while the overall inventory of vessels in international trade has expanded.  As of 2008, three open registries—Panama, Liberia, and the Marshall Islands—accounted for approximately 42% of the global fleet,[11] which has since increased to over 43% as of 2023.[12]

The growth in the number of vessels registered with the Marshall Islands and Liberian registries, and the size and number of mortgages being filed on these vessels, demonstrate how important those jurisdictions have become in international ship finance, prompting some to call for clarity as to whether underlying instruments evidencing mortgage debt must be annexed to a vessel mortgage in order for it to be enforceable and in what circumstances a mortgage must be amended.  While there is no express requirement under U.S. law[13] (or previously under Marshall Islands law[14] and Liberian law[15]) that any instruments be (or need not be) annexed, the requirement of stating the particular terms of the underlying obligations secured has led to differing perspectives on how much specificity is required in describing the underlying obligations. Common practice has been to attach copies of the relevant instruments to evidence the obligations secured and the amount of such obligations.  This has led to several concerns, including the disclosure of confidential information in the underlying documents attached to recorded mortgages.

Though the amendments to Liberian and Marshall Islands maritime law address the attachment of credit documents to vessel mortgages, there were other notable amendments to each.  The amendments to the Liberian Maritime Law also brought an answer to another common mortgage financing question by clarifying that a mortgage will continue to secure obligations notwithstanding certain modifications to these obligations, including changes to the interest rate and payment terms, decreases in the total amount secured or changes to the maturity date (other than an extension of the maturity date stated in the mortgage).[16]  The amendments to the Marshall Islands Maritime Act clarify that a mortgage may secure an agreed-upon maximum amount representing all debts or obligations arising or that may arise between the debtor and the creditor within a specified period, “whether or not such debt or obligations arise pursuant to commitments under the relevant agreement between the debtor and the creditor existing at the time the [m]ortgage is recorded.”[17] 

These amendments, and any similar subsequent amendments to the maritime law of other jurisdictions with respect to vessel mortgage requirements, then bring into question two issues that will likely continue to evolve.  First, there is the question of whether the law of the vessel’s flag state requires (or does not necessarily require, as is now clear in Liberia and the Marshall Islands) annexation of the underlying instruments.  Second, there is a question of whether the law of the jurisdiction in which a vessel may be arrested requires such annexation for a mortgage on that vessel to be enforceable in that jurisdiction.  At this time, it does not appear there have been any cases of vessel arrest that might result in any interpretation of these amendments to Liberian or Marshall Islands law.