The OSX 3 decision: A sea change for offshore asset ... · • The FPSO was to operate under charter ‘in Brazil’ for 20 years and should not be treated as a ‘mobile’ asset

The OSX 3 decision: A sea change for offshore asset security in Brazil?

Andrew Nimmo, Partner

Watson Farley & Williams 2015

Introduction

• No – it isn’t anything to do with Apple

• This is not Brazilian law legal advice

Slide 2


What happened?

• A São Paulo state appellate court in February 2016

upheld a lower court decision refusing to enforce a Liberian mortgage against FPSO OSX 3, which is operating on a long-term charter offshore Brazil.

• Unexpected (and unwelcome!) result – potentially serious consequences for owners, charterers and financiers of vessels operating in Brazil, and (perhaps) even trading to Brazilian ports.

São Paulo court - surprise decision

Slide 3


So what’s the big deal?

• At the risk of over-generalising, recognition of law of a ship’s register as governing mortgage creation / validity is usually acknowledged as the international norm

• English law cases spanning a century consistently recognise mortgages of foreign-registered ships, without reference to conflicts of laws issues – i.e. the mortgage is recognised in accordance with the flag register, without reference to physical location (contrast other chattels) - ships are ‘special’

• Consistent with principles of international comity and spirit of the 1982 UN Convention on the Law of the Sea, Articles 90 and 91 & other international conventions (including Bustamante and Brussels)

• Fundamental to the security package on which huge numbers of projects have been structured / financed

• But the court had other ideas…

Why was it so unexpected?

Slide 4


Judicial creativity?

Slide 5


The Facts

• FPSO Owned by OSX 3 Leasing BV, vessel registered in Liberia

• US$500 million bond placed in Norwegian market

• Mortgage in favour of Nordic Trustee ASA / bondholders

• Mortgage governed by Liberian law and registered in Liberia

• Nordic Trustee ASA registered the mortgage with the Registry of Titles and Documents in Rio de Janeiro

• Mortgage not registered with the Port Authority or the Maritime Tribunal in Brazil (not possible)

OSX 3 case details

Slide 6


The Facts (2)

• Owner and charterer subject to insolvency proceedings

• Brazilian unsecured creditor Banco BTG Pactual S/A - guarantee in relation to FPSO construction agreements

• BTG asserted an unsecured claim of US$27 million against owner and applied for an attachment of the FPSO

• Nordic Trustee ASA applied for the dismissal of BTG’s attachment asserting the priority of its mortgage

• Lower court made a declaration in 2015 that Banco BTG’s attachment had priority

• Nordic Trustee ASA appealed • Appeal dismissed in February 2016

OSX 3 case details

Slide 7


BTG position

The unsecured creditor claimed that the ship mortgage was not valid in Brazil because: • Liberia should be seen as a “flag of convenience” and

subject to Brazilian law risk on enforcement (a risk the creditor knew of)

• Liberia is not a party to the 1926 Brussels Convention or the 1928 Bustamante Code (Brazil is party to both), which make ship mortgages registered in one contracting state valid in another

• Ship mortgages must be registered with the Brazilian Maritime Tribunal to be valid.

OSX 3 case details

Slide 8


Nordic Trustee position

The secured trustee creditor responded that: • The Brazilian Maritime Tribunal only registers ship mortgages

of Brazilan vessels and Port Authority registration only open to Brazilian companies

• Ship mortgages are governed by the law of the flag, and it is ingrained in international custom that they be deemed valid and enforceable in the country where the vessel is located

• The fact that Liberia is a flag of convenience does not mean per se that it is fraudulent

• Brazil is a party to the 1926 Brussels Convention and to the

1928 Bustamante Code and the principle behind them (recognition in line with flag) should apply

OSX 3 case details

Slide 9


The Decision

The Court decided in favour of BTG as unsecured creditor, holding: • Fact that Liberia is flag of convenience and that it’s impossible to

register a mortgage with the Brazilian Maritime Tribunal is irrelevant

• Must be an international treaty between Brazil and the other country for foreign mortgage interest to be valid

• Insufficient evidence of international customary norm of recognition of foreign ship mortgages

• The FPSO was to operate under charter ‘in Brazil’ for 20 years and should not be treated as a ‘mobile’ asset and the law of the site where the FPSO is located should apply (new form of lex situs)

• Motion to reconsider decision dismissed in June 2016. Appeal to Superior Court of Justice in Brasilia is pending.

OSX 3 case details

Slide 10


Some context:

• Ongoing low oil price environment continues to apply stress across the industry, and FPSO contracts are no exception

• 636 foreign vessels operating in Brazil. 525 of them are operating under flags of convenience and 50 of them under Liberian flag, with 80% of these vessels mortgaged. [Source: Kincaid Mendes Vianna Advogados]

• Several very large new FPSO projects in the offing in Brazil

• The issues raised in OSX 3 are pressing, and will continue to impact the way existing and new projects are structured

• Places further pressure on availability of financing

Current situation in Brazil

Slide 11


So what do we do now?

• Owners and financiers to revisit existing projects and re-evaluate in light of the new position

• Security position? (for financiers/lessors)

• Am I in breach? (for owners/lease chain parties) – including prepayment / default / reps. etc.

• Other provisions – change of law, force majeure etc.?

• Reflag? Potentially helpful, but not a panacea it seems

• Type and location of asset to be re-evaluated – consider potential impact on ships in fleet/portfolio too (and possibly other Latin/Central American Bustamante states?)

• Term and type of employment contract is now critical

• Documentary DD/bankability assessments to be revisited?

• Costs of restructuring; required consents/waivers/approval

Assessing potential risks

Slide 12


What next?

• The case is under further appeal – watch this space…

• The decision is evidence-specific and it is not certain that the same result would be reached in any future case

• Brazilian law has not fully developed a precedent based

system and so Courts not bound to follow previous case law rigidly (also opens new variables though – e.g. Blue Sky discussion on location at time of mortgage etc.)

• What type of asset is it? What is a ‘ship’? (internationally trading / short term contract – different treatment?)

• Important policy issues–industry players and lawyers involved

• Cape Town for Ships? (2001 Cape Town Convention on International Interests in Mobile Equipment)

The future

Slide 13


How can we deal with this in the meantime?

• Be careful with content of info. memo / prospectus for investors…

• Increase protections from information covenants / representations etc. – particularly on competing claims that can give rights in rem

• Additional due diligence and pre-planning for the mechanics of export of asset and methods of dealing with relevant consents/approvals

• Choose a Bustamante/Brussels convention signatory as flag state, and ideally don’t use a flag of convenience (mutually exclusive?!)

• Alternative security options?

• Self-help remedies and cooperation of counterparty back in focus

• Political risks angle? (difficult)

• Structuring options around contract length/terminology? (also difficult)

• Where is the field located? (note OSX decision problem though)

Potential solutions/mitigants

Slide 14


ANDREW NIMMO Partner Singapore Tel: +65 6551 9127 Email: [email protected]

Andrew is a Partner based in the Singapore office. He acts for a wide variety of contractors, sponsors, owners and operators as well as for financiers (comprising international banks, private equity funds and other financial institutions) in relation to offshore production, storage and drilling assets, support vessels and other offshore oil & gas and shipping assets. Andrew advises on project and asset financings, leasing transactions and joint venture structures and also on a wide variety of commercial oil & gas and shipping documentation. Andrew is ranked in the Projects, Infrastructure & Energy and Shipping sections of Chambers & Partners in which sources have previously cited his “eye for detail” and that he has "a very commercial approach and knows exactly what we are interested in as clients.”. Andrew is well-known in the market for his expertise on offshore projects and has been selected by his peers for four consecutive years from 2013 to 2017 for inclusion in “The Best Lawyers in Singapore©” for Maritime Law.

Slide 15

All references to ‘Watson Farley & Williams’ and ‘the firm’ in this presentation mean Watson Farley & Williams LLP and/or its Affiliated Undertakings. Any reference to a ‘partner’ means a member of Watson Farley & Williams LLP, or a member or partner in a WFW Affiliated Entity, or an employee or consultant with equivalent standing and qualification. This presentation constitutes attorney advertising.

© Watson Farley & Williams 2016

wfw.com

ATHENS BANGKOK DUBAI FRANKFURT HAMBURG HONG KONG LONDON MADRID MILAN MUNICH NEW YORK PARIS ROME SINGAPORE

Slide 16