10—SHIP MORTGAGES

16 Oct, 2015 MARITIME LAW 0

10.1 Ships are chattels and questions relating to their ownership are decided according to the principles applicable under the law of personal property, in particular the provisions as to passing of property and conveying of title contained in the Sale of Goods Act 1979, but as a general rule title to a ship will not pass by delivery, nor will it be proven by possession. The classic statement of this proposition is to be found in the judgment of Turner LJ in Hooper v Gumm¹ where he said²:

“A ship is not like an ordinary personal chattel; it does not pass by delivery, nor does the possession of it prove the title to it. There is no market overt for ships . . . In ordinary cases of purchases of property not purchased in market overt the purchasers are bound to inquire into the title of the property purchased by them. They cannot shut their eyes and ears and claim the benefit of want of notice; and if they think proper to buy without inquiring into the title of the person from whom they buy, they must be held to be affected with notice of what would have appeared if the inquiry had been made.”

British ships

10.2 In order for a ship to be considered as a British ship for the purposes of the Merchant Shipping Act 1995, she must fall within one or other of the classes of British ships defined by section 1 of that Act which provides:

“(1) A ship is a British ship if—

(a) the ship is registered in the United Kingdom under Part II; or
(b) the ship is, as a Government ship, registered in the United Kingdom in pursuance of an Order in Council under section 308; or
(c) the ship is registered under the law of a relevant British possession; or
(d) the ship is a small ship³ other than a fishing vessel and—
- (i) is not registered under Part II, but
- (ii) is wholly owned by qualified owners,⁴ and
- (iii) is not registered under the law of a country outside the United Kingdom.”

Registration

10.3 Before considering in detail the provisions of the Merchant Shipping Act 1995 as to registration, it should be noted that the register does not, nor is it intended to, provide a comprehensive scheme of registration of interests in ships in the way that the Land Registration Acts are intended to provide such a scheme in relation to registered land. The register provides only prima facie evidence of title. In Baumvoll Manufactur Von Carl Scheibler v Furness⁵ Lord Herschell LC said⁶:

“Although the Legislature has now taken greater security to see that the person registered as owner is properly registered than it had done before, all it has done is to make the register prima facie evidence of ownership. In fact it assumes that anybody may displace altogether the statutory effect which has been given to it, by proving what the facts really are.”

Moreover, regulation 6 of the Merchant Shipping (Registration of Ships) Regulations 1993⁷ (“the Regulations”) expressly provides that:

“(1) Subject to paragraph (2) no trust, express, implied, or constructive may be registered by the Registrar.

(2) Where, on the bankruptcy (or in Scotland, sequestration) of a registered owner or mortgagee his title is transmitted to his trustee in bankruptcy (or in Scotland, his permanent trustee), that person, if a qualified person, may be registered as the owner or mortgagee of a British ship or share in a ship.”

Nevertheless, such interests are not abolished by the Act as is made clear by paragraph 1(1)–(2) of Schedule 1 to the 1995 Act which provides:

“(1) Subject to any rights and powers appearing from the register to be vested in any other person, the registered owner of a ship or of a share in a ship shall have power absolutely to dispose of it provided the disposal is made in accordance with this Schedule and registration regulations.

(2) Sub-paragraph (1) above does not imply that interests arising under contract or other equitable interests cannot subsist in relation to a ship or a share in a ship; and such interests may be enforced by or against owners and mortgagees of ships in respect of their interest in the ship or share in the same manner as in respect of any other personal property.”

Thus in The “Venture”⁸ a resulting trust in favour of a person who had advanced part of the purchase money for a ship was enforced by the court according to the usual equitable principles.

10.4 This provision⁹ was necessitated by the decision in Liverpool Borough Bank v Turner¹⁰ which decided that under the former statutory provisions the court had no power to enforce equities where the formality provisions of the 1854 Act had not been complied with. Although the actual decision in that case has been reversed by this provision, in the course of his judgment Wood V-C summarised the purposes behind the statutory scheme of registration of ships in the following words¹¹:

“There are two points of public policy which may be suggested in these Acts relating to shipping: the one policy regarding the interests of the nation at large, relating to the question who shall be entitled to the privileges of the British flag—a question of deep import to the nation; involving the question whether or not the whole country may be exposed to the calamities of war in respect of the protection which at all times must be afforded to the British flag; the other policy being similar to that which gave rise to the acts for registration of titles to land,he object being to determine what should be a proper evidence of title in those who deal with the property in question.”

10.5 A separate register of British fishing vessels is provided for by Part II of the Register.

Entitlement to registration

10.6 Regulations 7 and 8 of the Regulations set out the categories of persons who are qualified to be owners of British ships, following the divisions of British nationality introduced by the British Nationality Act 1981. These include British citizens; non-United Kingdom nationals exercising their right of freedom of movement of workers or right of establishment in the United Kingdom; British overseas territories citizens; British overseas citizens and British subjects under the 1981 Act. Also included in the class of qualified persons is the category of British national (overseas) arising out of the return of Hong Kong to the People’s Republic of China. EU and EEA companies¹² are also qualified persons for these purposes. A person not qualified to own a British ship may nevertheless be one of her owners, provided a majority interest¹³ is owned by qualified persons and the ship is registered accordingly.¹⁴

10.7 It should be observed that the scheme of the Act provides that where the majority interest is not resident in the United Kingdom, a representative person has to be appointed in relation to the ship.¹⁵ The representative person must either be an individual resident in the United Kingdom or a company incorporated in a Member State and having a place of business in the United Kingdom.¹⁶ Regulation 36(4) gives the Registrar power to refuse registration in circumstances where he is not satisfied that the ship is entitled to be registered and by Regulation 36(5) where, although the ship is entitled to be registered, he is satisfied that it would be inappropriate for the ship to be registered having regard to her condition or the welfare of persons employed or engaged on board her.

Bareboat registration

10.8 The Regulations also provide a scheme of bareboat registration where persons qualified to own a British ship charter a ship on bareboat terms.¹⁷

Certificate of registry

10.9 Upon completion of Registry, the Registrar issues a certificate of registry comprising the particulars respecting her entered in the register¹⁸ and registration lasts for five years¹⁹ but may be renewed.²⁰ The certificate of registry is prima facie evidence that the ship in respect of which it is issued is a British ship, but this presumption can be rebutted by evidence that the vessel is in fact owned by a person not qualified to own a British ship: see R v Bjornsen.²¹

10.10 The certificate of registry is an important document, and although it is evidence of title, it is not a document of title. In this respect it is of course different from a land certificate issued to an owner of registered land. It is by section 13 of the 1995 Act to be used: “only for the lawful navigation of the ship, and shall not be subject to detention to ‘‘only for the lawful navigation of the ship, and shall not be subject to detention by r”oon ‘‘only for the lawful navigation of the ship, and shall not be subject to detention by reason of any title, lien, charge or interest whatever had or claimed by any owner, mortgagee, or other person to, on, or in th”ship’’. By regulation 109(2) a person who refuses without reasonable cause to deliver up the certificate of registry to the person entitled to custody of it for the purposes of the lawful navigation of the ship, or to the Registrar, or an officer of customs or any other person entitled by law to demand such delivery on request shall be guilty of an offence.

10.11 The High Court in the exercise of its jurisdiction under section 20(2)(a) of the Senior Courts Act 1981 also has jurisdiction to order the delivery up of a certificate of registry to the owners of a ship or to the court itself. Thus in Wiley v Crawford & Fenwick²² the claimant was the owner and master of the ship Pacific which was about to sail to Spain and the defendant, who had a claim in respect of another ship, threatened to arrest. The claimant agreed to deposit the certificate of registry for five days in order to secure the ship not sailing. Before the five days had elapsed the claimant demanded the return of the certificate of registry, which the defendant refused. In a claim by the claimant for its return, the court held that as a certificate of registry may not be pledged or used for any purpose other than the navigation of the ship, the deposit was illegal and void and the defendant was not therefore entitled to detain the certificate.

10.12 Similarly, in The “Barbara” ²³ a person who detained the certificate of registry was ordered to deliver it up to the court which was selling the ship in a bottomry action. In The “Frances”²⁴ it was held that the court will not interfere in order to give possession of the certificate of registry to a person whose title to be considered as the registered owner is subject to doubt. In Gibson v Ingo²⁵ it was held that a master who was dismissed had no lien on the certificate of registry for wages or disbursements (although he would of course have a maritime lien on the ship herself). This is the case whether or not the master is also a co-owner: The “St Olaf “.²⁶ Neither does a shipbroker have a lien on the certificate of registry for advances to the owner.²⁷

10.13 A vendor of a ship with a covenant for title retains after sale such interest in the certificate of registry as will enable him to sustain a suit for delivery against a party unlawfully detaining it, in order to fulfil his contract and defend himself in an action brought against him on the covenant.²⁸ In Arkle v Henzell²⁹ the majority owner of shares in a ship had management of her and required the master, who was also a part-owner, to give up the certificate of registry of the ship. He gave no reason and the ship was at that time lying in the port of discharge without having completed discharging. It was held that in refusing to give up the certificate of registry the master had reasonable cause as he had not been told he was to be dismissed and while he continued to be master he was the proper person to have custody of it.

Transfer of ownership

10.14 It is necessary in considering the question of the transfer of ownership in ships to distinguish between registered ships and unregistered ships. Whereas no special form is necessary to transfer ownership in an unregistered ship, a registered ship has to be transferred by bill of sale which has itself to be registered. As stated above, a ship is “goods” within the meaning of the sale of goods legislation, and it is therefore necessary to see how the provisions of the Sale of Goods Act 1979 relating to the transfer of property and title apply to the sale of a ship, before turning to consider the further requirements of the Merchant Shipping Act.

The Sale of Goods Act 1979

Unregistered ships

10.15 Property in an unregistered ship is transferred by any legal means of transferring property in a chattel. A transfer or assignment of any ship or vessel or share therein is not a bill of sale within the meaning of the Bills of Sale Acts 1878 and 1882, and therefore does not have to be registered under those Acts.³⁰ An agreement to sell a vessel may be enforced by specific performance in an appropriate case.³¹

Registered ships

10.16 Where the ship is a registered vessel, although it is possible that property in the ship may pass under section 18(1) of the Sale of Goods Act 1979 upon signing a Memorandum of Agreement and payment of the deposit, before formal title is transferred by execution of the bill of sale, the normal rule is that the parties intend property to pass upon execution of the bill of sale, payment of the balance of the price and physical delivery of the ship.

10.17 In Naamlooze Vennootschap Stoomvaart Maatschappij Vredobert v European Shipping Co³² the House of Lords held that where five British ships were being sold to foreigners, no property passed to the purchasers upon execution of the contract, property being intended to pass when the ships had been taken off the British register and put onto the register of the foreign flag and the fact that the contract stated the purchasers “to buy now” did not indicate that the contract was a “sale” as opposed to an “agreement to sell” within the meaning of the Sale of Goods Act. That decision was followed and applied to a Norwegian Saleform contract by the High Court of Kenya in The “Despina Pontikos”.³³

New buildings

10.18 The governing rule in relation to new buildings, as much as to ships already built, is that property passes when it is intended to pass: see section 17 of the Sale of Goods Act 1979. As far as the ship herself is concerned, although the general rule is that property will remain in the builder until the ship has been completed³⁴ nevertheless, it will often be the case that property will be intended to pass before completion when the construction has reached a particular stage. In each case it will be a question of fact whether the stage of completion has been reached at which the parties intended property to pass.

10.19 Thus in Wood v Bell³⁵ property was held to have passed where the purchaser’s name was stamped on a plate on the keel, but in Laing v Barclay, Curle & Co Ltd³⁶ it was held that a provision in the contract that delivery was not considered completed until trials prevented property from passing. In Seath v Moore³⁷ Lord Watson said³⁸:

” . .. where it appears to be the intention, or in other words the agreement, of the parties to a contract for building a ship, that at a particular stage of its construction, the vessel, so far as then finished, shall be appropriated to the contract of sale, the property of the vessel as soon as it has reached that stage of completion will pass to the purchaser, and subsequent additions made to the chattel thus vested in the purchaser will, accessione, become his property.”

Having considered a number of relevant authorities³⁹ he said⁴⁰:

“It also appears to me to be the result of these decisions that such an intention or agreement ought (in the absence of any circumstances pointing to a different conclusion) to be inferred from a provision in the contract to the effect that an instalment of the price shall be paid at a particular stage, coupled with the fact that the instalment has been duly paid, and that until the vessel reached that stage the execution of the work was regularly inspected by the purchaser, or someone on his behalf. I do not think it is indispensable in order to sustain that inference, that there shall be a stipulation for payment of an instalment in the original contract, or that the stipulated payment shall have been actually paid. The absence of these considerations, which are, in themselves, of great importance, might, in my opinion, be supplied by other circumstances.”

Later he said⁴¹:

“There is another principle which appears to me to be deducible from these authorities and to be in itself sound, and that is, that materials provided by the builder and portions of the fabric, whether wholly or partly finished, although intended to be used in the execution of the contract, cannot be regarded as appropriated to the contract, or as ‘sold’, unless they had been affixed to or in a reasonable sense made part of the corpus.”

10.20 In Re Blyth Shipbuilding & Dry Docks Co Ltd⁴² a question arose as to whether material in a yard which had been approved by a surveyor, but not yet incorporated into the ship had passed to the purchaser. In holding that it had not, Sargant LJ said⁴³: “For appropriation I think there must be some definite act, such as the affixing of the property to the vessel itself, or some definite agreement between the parties which amounts to an assent to the property in the materials passing from the builders to the purchasers.” Similarly in Reid v MacBeth & Gray⁴⁴ where a contract provided that materials were to become the property of the purchaser when brought into the shipyard, it was held that although certain material had been designated by Lloyd’s inspection certificates as intended for a particular ship, property in them did not pass to the purchaser as they had not yet entered the yard.

The Merchant Shipping Act 1995

Transfer by bill of sale

10.21 Where a ship is registered under the Merchant Shipping Act 1995, a transfer of the ship or any share in a ship shall be effected by a bill of sale satisfying the prescribed requirements unless the transfer will result in the ship ceasing to have a British connection.⁴⁵

Failure or irregularity of registration

10.22 It is to be observed that the Act requires both the transfer to be by way of bill of sale and for the transfer to be registered. Full legal title to a registered ship will not pass to the transferee unless and until both of these requirements have been satisfied. Nevertheless, as between the transferor and the transferee, it is the execution of the instrument of transfer that operates to pass property in the ship. The distinction was discussed by Dr Lushington in The “Spirit of the Ocean”⁴⁶ in which he said:

“The duty to register the transfer of ownership rests with the vendee, the bill of sale entirely divests title of the vendor. Immediately upon execution of the bill of sale, the vendee becomes entitled to all the benefits of ownership and takes with him all concurrent liabilities. Registration is a record of a fact done—a record of the sale and not the sale itself.”

10.23 Thus in Stapleton v Haymen⁴⁷ where the assignee in bankruptcy of the vendor sought to retake possession of a ship from the purchaser who had been refused registration being an infant, it was held that as between the vendor and his assignees and the vendee, property in a ship passes by bill of sale. Although the transfer is not registered, equitable title passes. Similarly, in Sutton v Buck⁴⁸ it was held that possession of a ship under a transfer which was void for non-registration was sufficient title to maintain an action in trover against a stranger.

10.24 Such title, being only equitable, is liable to be defeated by a bona fide purchaser for value taking a legal title by registration of a subsequent transfer or mortgage from the registered owner. Thus in The “Horlock”⁴⁹ although the vendor had obtained his title by fraud, the purchaser from him (who had registered his title) had no notice of any fraud and the court refused to look behind the register for the purposes of dispossessing the innocent purchaser of his registered title. Similarly in The “Eastern Belle”⁵⁰ a shipowner sold certain shares in a ship, but the purchaser neglected to register the sale. The shipowner subsequently mortgaged the whole of the ship to a third party who had no knowledge of the previous sale of the shares. The mortgage was to secure a balance in excess of the value of the ship. When the purchaser of the shares came to register them he discovered the mortgage and commenced an action against his co-owner seeking an account and a sale of the ship. The mortgagee intervened seeking release of the ship. The court held that he was entitled to the release of the ship.

10.25 The equitable title will also be subject to any prior equities affecting the title of the vendor. Thus in The “Venture”⁵¹ a resulting trust in favour of a person who had advanced part of the purchase money for a ship was enforced.

10.26 On the other hand, where the registration of a vessel has been made or procured by fraud, the court can look behind the register in order to ascertain the true facts. This is illustrated in three Canadian cases⁵² decided under the provisions of the English Merchant Shipping Acts which applied in Canada at the time they were decided.

10.27 In McLean v Grant⁵³ an unregistered vessel was sold by her builder but because part of the consideration could not be performed the sale was cancelled and the transfer documents destroyed by agreement between the vendor and the purchaser. However, the purchaser, who had remained in possession of the vessel, proceeded to register her. The court held that the registry having been obtained by fraud was null and void and title remained in the builder.

10.28 In Gibson v Gill⁵⁴ there was a sale and mortgage back to the vendor of an unregistered steam ferry. The purchaser partially rebuilt the vessel and then registered her without mention of the mortgage. The court held that title in the vessel at the time of registration was in the mortgagee and that the registration was therefore fraudulent and void as against him.

10.29 In Robillard v The St Roch and Charland⁵⁵ the court went one stage further and held that a purchaser who had been registered as owner but who had knowledge that the vendor, although himself registered as owner, in fact held the vessel for another and had no right to sell her, was not the owner of the vessel, having obtained his title by fraud.

10.30 It is not only in cases of fraud that the court will look behind the register in order to ascertain the true position. In The “Bineta”,⁵⁶ although a vessel had been sold and the purchaser duly registered as owner, possession was retained by the vendor pending payment of the purchase price. When the purchaser failed to pay the purchase price, the vendor in the exercise of his unpaid seller’s lien sold the vessel to a third party. It was held that the third party was entitled to be registered as the owner and the register was ordered to be corrected accordingly. Similarly, although a person may continue to be named on the register as registered owner, this alone will not be sufficient to make him liable to third parties as owner, where a transfer has in fact taken place. The Bineta was considered subsequently in The “Ocean Enterprise”.⁵⁷ In that case it was held that the Admiralty Court retained an inherent jurisdiction to expunge an entry in the British Register of Ships, at least in cases in which there had been no transfer of title to a bona fide purchaser for value without notice.

10.31 In Young v Brander & Dunbar⁵⁸ owing to the delay of the vendees in producing the necessary documents to the registrar, the legal title remained in the vendors for a period of one month after the sale, during which time repairs to the ship had been ordered by the master under the direction of the vendee. It was held that the vendors were not liable for the repairs, the vendees being strangers to the legal owners with no authority express or implied to bind them. Again in M’Iver v Humble, Holland & Williams⁵⁹ a partner defectively conveyed his share in a ship and as a consequence his name remained on the register. Nevertheless, the court held that he was not a partner in fact and was not liable for goods sold and delivered to the ship.

10.32 Where the first purchaser fails to register the bill of sale, nevertheless this failure will not defeat the title of a bona fide purchaser from him.⁶⁰

Mortgages

10.33 A mortgage is a security transaction and is a form of “real”⁶¹ security. At common law the mortgage of a chattel transfers to the mortgagee all the property of the mortgagor by way of security and subject to redemption on repayment of the amount due from the mortgagor to the mortgagee in respect of which the mortgage was granted. A traditional definition of a mortgage would be ” a transfer of property by way of security”.⁶² A modern definition was provided by Lord Templeman in Downsview v First City Corporation⁶³:

“A mortgage, whether legal or equitable, is security for repayment of a debt. The security may be constituted by a conveyance, assignment or demise or by a charge on any interest in real or personal property. An equitable mortgage is a contract which creates a charge on property but does not pass a legal estate to the creditor. Its operation is that of an executory assurance, which, as between the parties, and so far as equitable rights and remedies are concerned, is equivalent to an actual assurance, and is enforceable under the equitable jurisdiction of the court. All this is well settled law and is to be found in more detail in the textbooks on the subject and also in Halsbury’s Laws of England, 4th ed., vol. 32 (1980), p. 187, paras. 401 et seq. The security for a debt incurred by a company may take the form of a fixed charge on property or the form of a floating charge which becomes a fixed charge on the assets comprised in the security when the debt becomes due and payable. A security issued by a company is called a debenture but for present purposes there is no material difference between a mortgage, a charge and a debenture. Each creates a security for the repayment of a debt.”

10.34 The purpose of the mortgagee taking the property is so as not to be left only with a personal remedy against the debtor, but to have a right against property of the debtor independent of the debtor’s continuing solvency. Thus the effect of the mortgage is to appropriate the property mortgaged to meet the debt or obligation of the mortgagor in respect of which the mortgage was executed.

10.35 The essential feature of a mortgage is that as it is only a security transaction, the property which is subject to the mortgage is redeemable by the mortgagor upon satisfaction of the debt which it secures, but on the other hand the property is realisable by the mortgagee if it is not. From the standpoint of the mortgagee he acquires a right to the property in a certain event, namely, on default of payment of principal and interest. From the standpoint of the mortgagor, whereas every mortgage implies a right of redemption so too does it imply a debt, and a personal obligation to repay it: see King v King and Ennis.⁶⁴

Mortgage distinguished from absolute transfer

10.36 The difference between an outright disposition and a mortgage is that the latter is by way of security only. What may appear on its face to be an absolute transfer of property may be proved by extrinsic evidence to have been intended as a security transaction and will be treated as a mortgage only. The courts will always look to the substance of the transaction⁶⁵ and will, where necessary, admit parol evidence to establish the true nature of any transaction. The burden of proof will be upon the person alleging that a transaction which appears upon its face to be an absolute disposition is, in fact, a security transaction.

Mortgage distinguished from pledge or pawn

10.37 In the case of personal property, it is important to distinguish a mortgage from a pledge or pawn. Where property is pledged or pawned by way of security, the transaction is one in which the possession of the chattel is delivered to the creditor and no property in the goods passes under the transaction. It is a bailment of the goods to the creditor to be retained by him until the debtor has discharged his obligation and is an incomplete transaction without the delivery of goods, actual or constructive, to the creditor. It is generally said that where goods are pledged the pledgee obtains a “special property” in the goods, although the general property remains in the pledgor. However, in The “Odessa”⁶⁶ Lord Mersey stated⁶⁷ that this so-called special property was in truth no property at all.

10.38 The essence of the distinction is therefore that in a pledge the pledgee’s security is dependent upon possession and an ancillary power of sale, whereas in a mortgage the mortgagee actually has title to the goods, subject to the mortgagor’s right of redemption.

Mortgage distinguished from lien

10.39 A lien is technically a right given by law to retain the possession of property until a debt is discharged. For example a repairer’s lien or an unpaid vendor’s lien. It is also used to describe such a right conferred by contract. There may not necessarily be an ancillary power of sale to a lien and unlike a mortgage no title is vested in the lienee.

Mortgage distinguished from charge

10.40 Although the phrase “charge by way of legal mortgage” is used in the Law of Property Act 1925 in relation to mortgages of land,⁶⁸ at common law a charge is a different species of security transaction from either a mortgage or a pledge or a pawn. If property is subject to a charge, it is appropriated to meet a debt or obligation, but its efficacy is not dependent upon possession (as in the case of a pledge or a pawn) nor does any property pass to the chargee. In the event the debt is not discharged, the creditor may enforce his security by means of judicial process. The process when applied to goods is called hypothecation. In times past, hypothecation was an important transaction in maritime law being effected by bottomry (of a ship) or respondentia (of cargo). Such transactions are now obsolete.

Mortgage of chattels

10.41 Mortgages of personal property need not generally be in writing, subject to certain provisions in the Consumer Credit Act 1974 relating to “regulated agreements” under that Act which require writing. The Bills of Sale Acts do not require writing, but make provision for the form and registration of certain agreements which are made in writing. Mortgages of ships fall outside the scope of the Bills of Sale Acts⁶⁹ and those Acts will not be considered further in this work.

Mortgages of choses in action

10.42 Things in action, such as stocks and shares, book debts, insurance policies, freight and hire charges can be mortgaged, and unless by some particular statute a specific method is prescribed this will be done by way of assignment. The Bills of Sale Acts do not apply to mortgages of things in action.⁷⁰ However, because the rule at common law⁷¹ was that a chose in action was incapable of assignment without the consent, express or implied, of the holder of the fund to apply it in accordance with the assignment, mortgages of choses in action were equitable only prior to the passing of section 25(6) of the Judicature Act 1873, now section 136(1) of the Law of Property Act 1925 which provides:

“Any absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal thing in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to

claim such debt or thing in action, is effectual in law (subject to equities having priority over the right of the assignee) to pass and transfer from the date of such notice—

(a) the legal right to such debt or thing in action;
(b) all legal and other remedies for the same; and
(c) the power to give a good discharge for the same without the concurrence of the assignor;

Provided that if the debtor, trustee or other person liable in respect of such debt or thing in action has notice—

(a) that the assignment is disputed by the assignor or any person claiming under him; or
(b) of any other opposing or conflicting claims to such debt or thing in action;

he may, if he thinks fit, either call upon the persons making the claims thereto to interplead concerning the same, or pay the debt or other thing in action into court under the provisions of the Trustee Act 1925.”

Mortgage of a ship

10.43 In Keith v Burrows⁷² the Court of Common Pleas considered in detail the nature of a mortgage of a ship as it was then perceived to be⁷³:

“The mortgage to the plaintiffs was in the statutory form, and by it the ship was ‘mortgaged’ to them. The word ‘mortgage’ is a well-known word, and signifies a transfer of property by way of security: see 2 Bl. Com. 158; Termes de la Ley, Mortgage. A mortgage is a transfer of all the mortgagor’s interest in the thing mortgaged: but such transfer is not absolute; it is made only by way of security; or, in other words, it is subject to redemption. Unless, therefore, there is any statutory enactment to the contrary, and so far as there is no enactment to the contrary, the plaintiffs in this case acquired by their mortgage the whole of the mortgagor’s interest in the ship, or, in other words, the legal title to the ship as a security.

Such is prima facie the effect of the instrument of mortgage. But the statutes relating to ships must be examined with a view to determine what the consequences of registering or not registering may be.

Under the older statutes relating to merchant shipping, all transfers and mortgages were made by a bill of sale; and such bill of sale had no effect whatever, either at law or in equity, until registration: see the cases collected in Liverpool Borough Bank v Turner; Maclachlan on Shipping, 2nd ed. p. 39.

The Merchant Shipping Acts now in force, however, make a marked distinction between transfers of ships (otherwise than by way of security) and mortgages: and there are different groups of sections with distinct headings applicable to these two different subjects: see 17 & 18 Vict. c. 104, ss. 55–65, which relate to transfers and transmissions, and ss. 66–75, which relate to mortgages. Amongst other distinctions between these two modes of dealing with ships, the following are the most note-worthy:—A transfer (otherwise than by way of mortgage) must be by a bill of sale (s. 55), and must be produced to the registrar for registration (s. 57); and the transferee (if not a corporation) must make a declaration that he is a natural-born subject: see s. 56, and Sched. F.

On the other hand, a mortgage must be by a different kind of instrument (s. 66); and there is no enactment requiring such instrument to be produced to the registrar (compare s. 66 with s. 57); and the mortgagee is not required to make any declaration as to his nationality.

It is true that, in the Liverpool Borough Bank v Turner, V-C Wood and Lord Campbell held that an unregistered equitable mortgage of a ship could not be enforced; but, in consequence of this decision, the 25 & 26 Vict. c. 63, s. 3,⁷⁴ was passed; and the validity of an unregistered mortgage, as against all persons except registered transferees or mortgagees (see ss. 43 and 69 of the Merchant Shipping Act, 1854), can hardly now be disputed: see Stapleton v Haymen. It appears from the Merchant Shipping Act, 1854, itself that a mortgagee has an interest in the ship capable of transmission by bankruptcy, death, or marriage (s. 74); and that on payment off of the debt secured by a registered mortgage, and entry of payment in the registry, the estate if any which passed to the mortgagee vests in the person in whom the same would have vested if the mortgage had not been made: s. 68.

The mortgagee, however, is not to be deemed the owner of the ship, except so far as may be necessary for making her a security for the mortgage debt (s. 70). This section was inserted for his protection against liabilities which might have attached to him by reason of his interest in the ship; see Dickinson v Kitchen; and would have been quite unnecessary if the mortgage transferred no interest in the sense of ownership in her to him; or, in other words, if it created a mere charge on her in his favour.

Sect. 72, which protects registered mortgagees of ships from the operation of the reputed ownership clauses of the Bankruptcy Acts,⁷⁵ would also be unnecessary if a mortgagee had not such an interest in the ship as might render him her true owner within the meaning of those clauses.

Again, the right of a first registered mortgagee to take possession of the ship is too well settled to be capable of dispute; but the statute confers no such right in express terms; and it only exists by reason of the ownership transferred to the mortgagee by the mortgage itself. A mere charge would confer no such right: see Fisher on Mortgages, 197. But, as a mortgagee, unless in possession, would have no power of sale if it were not expressly conferred upon him, and as the statutory form of mortgage contains no such power, the statute itself expressly confers it on registered mortgagees: s. 71. This, however, affords no argument against the view that the mortgage itself confers on the mortgagee an interest in the sense of ownership in the ship herself.

The conclusion, then, to be drawn from the mortgage and the statute, is, that the mortgagee of a ship, like the mortgagee of any other property, acquires an ownership in the ship, viz. such ownership as the mortgagor has to give. A first mortgagee will thus acquire the whole ownership in the ship, but only of course as a security for his money. Second and other mortgagees will only acquire the interest left in the mortgagor, or, in other words, his right to redeem. That right will be legal or equitable, according as the time for paying off the first mortgage has not yet arrived or has passed.

That this is the true nature of a mortgage of a ship appears not only from the above observations, but also from the following decisions,—Dickinson v Kitchen and Liverpool Marine Credit Co v Wilson.”

10.44 As an incident of his mortgage and the ownership transferred thereunder, a first mortgagee has a right at common law to take possession of the mortgaged ship for the purpose of making his security available. A second and subsequent mortgagee is not entitled to take possession of the ship as against the first or any other prior mortgagee, but he nevertheless has as against all other persons the right to take possession which he can enforce by the appointment of a receiver. The right to enter into possession does not however arise until the mortgage debt is due or before then if the mortgagor is dealing with the mortgaged property in such a way as to impair the security.

10.45 Unless and until he exercises this right to enter into possession, the mortgagee is not treated either according to general principles or under the Merchant Shipping Acts as the owner of the ship. Accordingly he is not to be considered as a co-owner and he does not have the rights of a co-owner, for example, to bring a claim of restraint.⁷⁶ It follows that the mortgagor retains all the rights and powers of ownership and his contracts with regard to the ship will be valid, provided that his dealings do not materially impair the security of the mortgagee.⁷⁷

10.46 The above analysis of a ship mortgage is no longer appropriate to a registered statutory mortgage under the 1995 Act which allows the registration of second and subsequent mortgages and gives them the same legal consequences as a first registered mortgage. A registered ship mortgage is better regarded a sui generis form of statutory security perfected by registration more in the nature of a statutory charge.⁷⁸ Thus second and subsequent registered mortgages will be legal mortgages and only unregistered mortgages will be equitable.

Legal and equitable mortgages

10.47 Mortgages may be legal or equitable. A legal mortgage of personalty is a conditional assignment to the mortgagee of the mortgagor’s legal interest in the property. An equitable mortgage may according to general principles be created in two ways:

(i) An agreement to make a legal mortgage

10.48 Notwithstanding the lack of proper formality sufficient to create a legal mortgage, such an agreement will be enforced in equity according to the maxim “equity treats as having been done that which ought to have been done” .

10.49 The common method of creating an equitable mortgage of real property by the deposit of title deeds is not appropriate in the case of chattels, where there will rarely, if ever, be a document of title to deposit. In the case of registered ships, where it might otherwise be thought that the deposit of the registration certificate would be sufficient to create an equitable mortgage, section 13 of the Merchant Shipping Act 1995⁷⁹ rules this out, and any pledge of the certificate is null and void.⁸⁰ However, in Ex. parte Hodgkin, Re. Softley⁸¹ the deposit of a builder’s certificate of an unfinished ship was held to create an equitable mortgage. In Lacon v Liffen⁸² the deposit of a mortgage of a registered ship was held to amount to an equitable sub-mortgage.

(ii) The mortgage of an equitable interest

10.50 This needs little further elaboration, but it should be noted that section 53(1)(c) of the Law of Property Act 1925 provides:

“a disposition of an equitable interest or trust subsisting at the time of the disposition, must be in writing signed by the person disposing of the same, or by his agent thereunto lawfully authorised in writing or by will.”

Registered Mortgages under the Merchant Shipping Act 1995

10.51 The Merchant Shipping Act 1995 provides for a scheme for registration of mortgages. Where a registered ship or share therein is mortgaged or charged, in order that the mortgagee may acquire a legal interest and the protection afforded by the 1995 Act, such mortgage or charge must be in the form prescribed by the Act and it must furthermore be registered in accordance with the provisions of the Act. Outside the scheme of the Act however, a British ship may be mortgaged or charged (just as it may be sold) by any method recognised by the law of personal property as effective for such purpose.

10.52 It should also be observed, that in the same way as the register of ownership provides only prima facie evidence of title, so too, the register of mortgages is not conclusive as to the existence or validity of the mortgage and the court will, where necessary look behind the register in order to establish the true state of affairs.

10.53 In The “Innisfallen” ⁸³ a claim for restraint was brought by the claimants claiming to be a co-owner. The court held that he was in fact a mortgagee and refused to grant the order. Dr Lushington said⁸⁴:

“The Plaintiff swears that the arrangement was that, until payment, the vessel should continue the absolute property of his firm, and that the arrangement was insisted upon in lieu of a mortgage, in order that the Plaintiff should, as actual part-owner, exercise control over the movements of the vessel, to which, as mortgagee, he would not be entitled. The result of the Plaintiff’s contention would be, that he was not exactly an absolute owner, not exactly a mortgagee, but that for some purposes he was an absolute owner, and for others a mortgagee. Now, without going the length of saying that the Court would in no case recognise such an agreement, so involved, as it were, wheel within wheel, I shall hold that the Court will not recognise it unless it is clearly proved, and definite, and complete in all its parts.”

10.54 So too in The “Keroula”⁸⁵ shares in a ship were transferred as security for a loan and upon the loan not being repaid, the holders of the shares applied for an order of restraint claiming to be co-owners. The court held that it was entitled to look behind the register to the true nature of the transaction, which it held to be a mortgage of shares and accordingly refused to grant the order.

10.55 In Burgis v Constantine⁸⁶ a mortgage had been executed in blank by the registered owners and then subsequently completed by the mortgagees who had registered it. The court held that the document was a nullity and the registration was therefore void.

10.56 The opposite situation arose in a Canadian case⁸⁷ Grady v White⁸⁸ where one of two joint purchasers of a vessel was not entitled to be registered as the owner of a British ship (being an American citizen) and he therefore registered a mortgage of 32/64th shares. In a claim upon the mortgage the court held that the true nature of the transaction was not a mortgage but a joint purchase and ordered the transfer of 32/64th shares instead notwithstanding that this could lead to a claim by the Crown for forfeiture.

Registered Ships

10.57 Paragraph 7 of Schedule 1 to the 1995 Act provides a straightforward scheme as follows:

“(1) A registered ship, or a share in a registered ship, may be made a security for the repayment of a loan or the discharge of any other obligation.

(2) The instrument creating any such security (referred to in the following provisions of this Schedule as a ‘mortgage’) shall be in the form prescribed by or approved under registration regulations.⁸⁹

(3) Where a mortgage executed in accordance with subparagraph (2) above is produced to the registrar, he shall register the mortgage in the prescribed manner.⁹⁰

(4) Mortgages shall be registered in the order in which they are produced to the registrar for the purposes of registration.”

10.58 However although the formal mortgage document must be in the prescribed form for the purposes of registration under the Act, it is standard practice for the detailed stipulations concerning the mortgage to be set out in a separate collateral deed of covenants.

10.59 In The “Benwell Tower”⁹¹ the question arose as to the validity of this approach. In the course of giving judgment Bruce J said:

“It has consequently been the practice for a long series of years, in cases where ships have been mortgaged, for the detailed stipulations of the mortgage to be contained in a separate instrument . . . . I cannot regard the circumstance that the terms regulating the advances were contained in a collateral agreement as unusual in transactions of this kind, or as invalidating the stipulations contained in the collateral agreement. It is true that the directions in the printed note of the form of mortgage issued by the Board of Trade have not been followed, and possibly the Registrar of Shipping might on that ground have refused to register the mortgage, but I cannot treat the mortgage as invalid. I must treat it as mortgage to secure the account referred to in the registered instrument, and in order to ascertain what items may be properly included in that account, I must have regard to the terms of the letter constituting the collateral agreement.”

10.60 In spite of the fact that the court permitted reference to the terms of the collateral deed in The “Benwell Tower” notwithstanding that no reference thereto was noted in the registered mortgage instrument, it is preferable so as to avoid a court holding that a person dealing with the mortgagor had no notice of the terms of the collateral deed for express reference to be made in the registered mortgage to the collateral deed.

Mistakes as to name or description

10.61 Notwithstanding the provision of regulation 30(3) of the Merchant Shipping (Registration of Ships) Regulations 1993⁹² that “A ship shall not be described by any name other than its registered name”, provided the identity of the ship is ascertained, it is not fatal that the name or description of the ship contained in the mortgage deed does not correspond exactly with the registered name.

10.62 In Bell v Bank of London⁹³ the owner and builder of an unfinished ship executed a mortgage in the name of The City of Bruxelles whereby 64/64th shares were mortgaged to the bank. Upon completion of the ship she was registered in the name of The City of Brussels and on the following day the mortgage was registered. The owner subsequently became bankrupt. In a claim by his assignees against the bank, it was held that if prior to registration an owner executes an instrument which if it were executed after registration would pass an interest, then it is sufficient that it is in fact registered. Furthermore, as the mortgage deed was prior to registration the name of the ship in it was irrelevant because her identity was not in dispute.

Failure to register

10.63 Where the formal requirements of registration have not been complied with, nevertheless as between the mortgagor and the mortgagee the instrument will be effective. As against third parties however, the instrument will not provide the mortgagee with the priority afforded by the Act to registered mortgages.

Effective date of the mortgage

10.64 A mortgage is valid from the date that it is granted not from the date of registration which only determines priority in relation to other mortgages.⁹⁴ Regulation 59 of the Merchant Shipping (Registration of Ships) Regulations 1993 provides for a scheme of priority notices for intending mortgagees whereby an intending mortgagee may register his intention to register a mortgage and if he subsequently does register such a mortgage within the period of validity⁹⁵ of the priority notice it is deemed to have been registered at the date of entry of the priority notice rather than the date of actual registration for the purposes of determining priority between registered mortgages.

Mortgage from an unregistered owner of a registered ship

10.65 Where, although the ship is registered, the mortgagor is the beneficial owner, but not the registered owner, the mortgage cannot be registered even though it is in the prescribed form.⁹⁶

Unregistered ships

10.66 A mortgage of an unregistered ship cannot be registered under the Merchant Shipping Acts and need not be registered under the Bills of Sale Acts. It need not therefore be in any particular form. In The “Shizelle”⁹⁷ it was held that an unregistered mortgage of an unregistered ship was a legal mortgage at common law and thus enforceable against a bona fide purchaser for value without notice of the unregistered mortgage. The reason for this lacuna in the law whereby an undiscoverable security interest may bind an innocent purchaser is because of the exclusion of all ships from the scope of the Bills of Sales Acts and not just registered ships.⁹⁸

Corporations

10.67 Mortgages of ships require registration under section 860 of the Companies Act 2006 which provides as follows:

“(1) A company that creates a charge⁹⁹ to which this section applies¹⁰⁰ must deliver the prescribed particulars of the charge, together with the instrument (if any) by which the charge is created or evidenced, to the registrar for registration before the end of the period allowed for registration.”

Scope of the Mortgage

10.68 The scope of the mortgage in statutory form was considered in Coltman v Chamberlain¹⁰¹ where it was held that a mortgage of a ship passed to the mortgagee under the word “ship”: “all articles necessary to the navigation of the ship or to the prosecution of the adventure, and without which no prudent person would sail, which were on board at the date of the mortgage and articles brought on board in substitution for them subsequently to the mortgage.” In order to be covered by the mortgage the articles must have been specifically appropriated to the ship.¹⁰²

“Appurtenances”

10.69 In The “Humorous”, The “Mabel Vera”¹⁰³ there was a mortgage of two fishing vessels and “their appurtenances”. At the time of the mortgage, one fishing vessel had nets appropriated to it, but the other fishing vessel had not. It was held in a claim by the mortgagee who had entered into possession, that the nets on board the latter vessel at the time when he entered into possession did not pass under the mortgage as no nets had been appropriated to her at the time of the mortgage.

10.70 The word “appurtenances” was considered in The “Dundee”¹⁰⁴ where it was held to include anything belonging to the owner which is on board the ship for the accomplishment of the voyage and adventure on which she is engaged. Lord Stowell said¹⁰⁵:

“”The word ‘appurtenances’ must not be construed with a mere reference to the abstract naked idea of a ship; for that which would be an encumbrance to a ship one way employed, would be an indispensable equipment in anothe.”’

In Gale v Laurie,¹⁰⁶ Abbott CJ said¹⁰⁷:

“The fishing stores were not carried on board the ship as merchandise, but for the accomplishment of the objects of the voyage; and we think, that whatever is on board a ship for the objects of the voyage and adventure on which she is engaged, belonging to the owners, constitutes a part of the ship and her appurtenances within the meaning of this Act, whether the object be warfare, the conveyances of passengers, or goods, or the fishery.”

10.71 In The Hull Ropes Company v Adams¹⁰⁸ a trawl warp was purchased by the mortgagor after the date of the mortgage on hire purchase and put on board the ship. Subsequently the mortgagee entered into possession. It was held that the trawl warp was covered by the mortgage and that property in it had passed to the mortgagee, notwithstanding the hire purchase agreement. Under section 9 of the Factors Act the mortgagor was a “buyer in possession” and the addition of the warp to the equipment of the mortgaged ship was held constitute sufficient “disposition” under the Act, being a delivery or transfer under the mortgage, so as to pass property to the mortgagee.

Bunkers

10.73 The question whether bunkers formed part of the security created by the mortgage was considered by Sheen J in The “Eurostar”.¹⁰⁹ He said¹¹⁰:

“I now turn to the question: was the fuel oil part of the security? The property mortgaged was— . . . sixty-four sixty-fourth shares of which the Owners in the Ship above particularly described and in her boats, guns, ammunition small arms and appurtenances.

The word ‘ship’ does not in its ordinary meaning include fuel. It is common practice for the fuel to be the property of charterers. The only word which arguably covers fuel is ‘appurtenances’. The ordinary meaning of ‘appurtenances’ is a mechanical accessory or some apparatus or gear which appertains or belongs to the ship. Fuel oil cannot be an appurtenance in this sense. In The ‘Honshu Gloria’ [1988] 2 Lloyd’s Rep 67 I held that the word ‘appurtenances’ did not include the fuel on board the ship. In The ‘Pan Oak’ [1992] 2 Lloyd’s Rep 36 I had to consider identical words in a Bahamian mortgage. I gave my reasons for holding that the bunkers were not part of the security provided by the defendants to the plaintiff for the loan facilities. In that case there was evidence of Bahamian law, as to which I said: ‘There is not a word in that opinion which suggests that the property mortgaged as security for the loan included the bunkers.’ “

However in the context of a charterparty dispute, it has been held that coal bunkers were part of the equipment of a ship.¹¹¹ For the right of charterers to apply to the Court for relief in relation to their interest in the operation of a mortgaged ship or any item on board (such as bunkers) see section 10.220 below.

Cargo

10.74 The cargo carried on board a ship is not covered by a mortgage of a ship even where it is actually owned by the mortgagor. Nor is it an appurtenance.¹¹²

Freight

10.75 Freight is not covered by a mortgage of a ship without more. The basic rule is that, in the absence of a separate assignment of freight, unless and until a mortgagee enters into possession he has no right to freight earned.

Transfer

10.76 The transfer of a mortgage may take place by agreement or by operation of law.

Transfer by agreement

10.77 Paragraph 11 of Schedule 1 to the Merchant Shipping Act 1995 provides:

“(1) A registered mortgage may be transferred by an instrument made in the form prescribed by or approved under registration regulations.¹¹³

(2) Where any such instrument is produced to the registrar, the registrar shall register the transferee in the prescribed manner.”¹¹⁴

10.78 Where the instrument of transfer is not registered, nevertheless it is valid and effective as between the transferor and the transferee to pass all the rights under the mortgage.¹¹⁵ Moreover, the court will enforce equities as between the owner of the ship and an unregistered transferee of the mortgage.¹¹⁶ Under Paragraph 1(2) of Schedule 1 to the Merchant Shipping Act 1995, the court can also enforce an agreement to transfer a mortgage, applying the maxim “equity treats as done that which ought to have been done”.

Transfer by operation of law

10.79 Paragraph 12 of Schedule 1 to the Merchant Shipping Act 1995 provides:

“Where the interest of a mortgagee in a registered mortgage is transmitted to any person by any lawful means other than by a transfer under paragraph 11 above, the registrar shall, on production of the prescribed evidence,¹¹⁷ cause the name of that person to be entered in the register as mortgagee of the ship or share in question.”

The words “by any lawful means other than a transfer under paragraph 11 above” were held in Chasteauneuf v Capeyron¹¹⁸ (as regards the equivalent words appearing in the 1854 Act) to be restricted to transfers by operation of law unconnected with any direct act of the transferee, the Act making a clear distinction between “transfers” and “transmissions”. It therefore appears that if a transferee is unable to bring himself within paragraph 12, he will be unable to obtain registration as mortgagee merely by his own declaration, and will need to obtain a transfer in the prescribed form so as to enable registration to be effected under paragraph 11. This will require execution of the transfer by the transferor.

10.80 The alternative is to make an application to the Admiralty Court, preferably by means of a claim in rem, or possibly by the CPR Part 8 procedure, for appropriate declaratory relief in the same manner as an application for a declaration of ownership.

Discharge

10.81 A mortgage may be discharged upon satisfaction of the mortgage debt. Paragraph 13 of Schedule 1 to the Merchant Shipping Act 1995 provides:

“Where a registered mortgage has been discharged, the registrar shall, on production of the mortgage deed and such evidence of the discharge of the mortgage as may be prescribed,¹¹⁹ cause an entry to be made in the register to the effect that the mortgage has been discharged.”

10.82 The obligation of the Registrar upon discharge is thus to make an entry to that effect in the register. The Registrar has no authority under the Act to erase the entry of a mortgage upon its being discharged.¹²⁰ However, in The “Yolanda Barbara”¹²¹ Hewson J granted a mortgagee who had redeemed by paying off the mortgage debt a declaration, inter alia, that he was entitled to have the entry of the mortgage removed and/or expunged from the register, and an order that the same be done. It is submitted that the relief sought in that case was probably incorrect to the extent that the order provided for the entry of the mortgage actually to be expunged as opposed to an entry being made to the effect that the mortgage had been discharged. Regulation 62(2) of the Merchant Shipping (Registration of Ships) Regulations 1993 provides that “if for good reason the registered mortgage cannot be produced to the Registrar, he may, on being satisfied that the mortgage has been properly discharged, record in the Register that the mortgage has been discharged.”

10.83 It is appropriate to order an entry in the register to be expunged where a mortgage has been registered by a person fraudulently representing himself to be a mortgagee¹²²; or where the mortgage was not executed by the mortgagee.¹²³ These are obviously cases where no entry of a mortgage should ever have appeared in the register rather than the situation in The “Yolanda Barbara”¹²⁴ where the original entry of the mortgage was perfectly proper.

10.84 Where an entry of discharge has been made in the register by mistake, it has nevertheless been held to discharge the mortgage, and all subsequent entries relating to the mortgage were void. The mortgage could not be revived by a memorandum on the register that the discharge had been entered by mistake.¹²⁵

10.85 On the other hand, where an entry of discharge was made by mistake and bill of sale executed by a mortgagee, the court will direct registration of the purchaser as owner. In The “Rose”,¹²⁶ the mortgagor died intestate and insolvent and shortly afterwards the mortgagee sold the ship, executing a bill of sale and indorsing a discharge on the original mortgage believing this necessary to complete title. The mortgage indorsed with the discharge was produced to the Registrar in error and he accordingly recorded it in the register. When the purchaser produced his bill of sale to the Registrar he refused to register it, as the mortgagee by whom it had been executed no longer had any title according to the register. The court nevertheless granted a declaration that he was the owner of the ship and was entitled to be registered as owner.¹²⁷

10.86 The situation must in each case depend upon whether anyone relying upon the register will be prejudiced by the incorrect entry. If not the court may order the entry to be rectified, but it will not do so to the detriment of an innocent third party who has acted in reliance upon the entries in the register.

Termination of Registration

10.87 Regulation 63 of the Merchant Shipping (Registration of Ships) Regulations 1993 provides that:

“Where the registration of a ship terminates by virtue of any of these Regulations, that termination shall not affect any entry in the Register of any undischarged registered mortgage of that ship or any share in it.”

The Rights and Liabilities of the Mortgagor and the Mortgagee

Introduction

10.88 The essence of the mortgage is that it is a transfer of property as security for a debt. At common law a legal mortgage passed the mortgagor’s interest in the mortgaged property to the mortgagee subject only to the mortgagor’s right to redeem his property by paying off the mortgage debt in full, together with interest, at any time on or before the date specified in the mortgage as the date for repayment, or after that date provided always that the mortgage had not previously been foreclosed, or the property sold. The mortgagor’s right to redeem after the date for repayment was referred to as his “equity of redemption”.

10.89 The mortgage remained as an encumbrance upon the property made security for the mortgage debt until it was discharged. A mortgage could be discharged upon satisfaction of the mortgage debt. This could be achieved in three ways:

(i) upon redemption by the mortgagor or by any other person interested in the equity of redemption;
(ii) upon sale by the mortgagee or by the court, and the satisfaction of the mortgaged debt out of the proceeds of sale;
(iii) by foreclosure.

However, provided the mortgagor was not in default and did not in any way imperil the security of the mortgagee, he was entitled to all the benefits of ownership and to the use and profits of the ship.

10.90 Although the common law and equitable principles which evolved provide the general background against which the relationship of mortgagor and mortgagee must be examined, in the vast majority of cases the relationship will be regulated more specifically by the provisions of the deed of covenants and the rights of the parties will be determined according to the proper construction of such express contractual provisions.¹²⁸

10.91 The deed of covenants may, according to the circumstances surrounding the grant of the mortgage make provision for collateral advantages in favour of the mortgagee. The rule as to their validity was summarised by Lord Parker in Kreglinger v New Patagonia Meat and Cold Storage Company¹²⁹ where he said¹³⁰:

“There is now no rule in equity which precludes a mortgagee, whether the mortgage be made upon the occasion of a loan or otherwise, from stipulating for any collateral advantage, provided such collateral advantage is not either (1) unfair and unconscionable, or (2) in the nature of a penalty clogging the equity of redemption, or (3) inconsistent with or repugnant to the contractual or equitable right to redeem.”

10.92 It is against this framework that the respective rights and liabilities of the mortgagor and the mortgagee are to be considered. Although it is necessary for the sake of convenience and clarity to treat the position of the mortgagor and the mortgagee separately, it should always be borne in mind that the position of each exists only in relation to the other.

The mortgagor

The right to redeem

10.93 The right of the mortgagor to repay the loan and redeem his property is central to the nature of a mortgage and because of the possibility of a mortgagee exploiting his bargaining strength at the time the mortgage is entered into, the court will jealously guard the right of redemption. The equitable rule is that there must be “no clogs or fetters” on the equity of redemption.

10.94 The rule was described by Lord Bramwell in Salt v Marquess of Northampton¹³¹ as follows¹³²:

“But there is a further equitable rule which seems to be this: that this right of redemption shall not even by bargain between the creditor and debtor be made more burdensome to the debtor than the original debt, except so far as additional interest and expenses consequent on the debt not having been paid at the time appointed may have occurred or arisen: that any agreement making such right of redemption more burdensome is void.”

10.95 A provision attempting to exclude altogether the right to redeem is clearly an abuse and will not be enforceable. Similarly, where at the time the mortgage is entered into the mortgagor grants to the mortgagee an option to purchase the mortgaged property, thus effectively enabling the mortgagee to abrogate the mortgagor’s right to redeem by the exercise of that option, this too will be held unenforceable.¹³³ However, where the option is granted after the execution of the mortgage, provided the two transactions are genuinely separate and independent, the option will be enforceable.¹³⁴ But not if in truth they are part and parcel of the same transaction.¹³⁵

10.96 An alternative possibility is that the mortgage may provide for the exercise of the right to redeem to be postponed. In Fairclough v Swan Brewery¹³⁶ a postponement of the right to redeem to an extent which rendered the right illusory (in that case to very shortly before the expiry of the lease comprising the mortgaged property) the Privy Council held to be unenforceable. But a postponement which did not have that effect will not necessarily be struck down.¹³⁷

Repayment

10.97 The deed of covenants will invariably contain an express covenant to repay the mortgage debt, but even if such a provision were to be missing, the covenant to repay will be implied.¹³⁸ The mortgagee will thus always have a right of action against the mortgagor on the covenant to repay, although such a right will only be in personam, and therefore of no particular value where the mortgagor is unable, as opposed to being merely unwilling, to repay the advance.

Interest

10.98 Likewise there will invariably be a covenant to pay interest upon the debt, such interest to continue to run after the date specified for repayment until repayment is actually made. A clause providing that the rate of interest is to be increased upon a failure to make repayment upon the due date may be struck down as a penalty.¹³⁹ The issue was considered by Colman J in Lordsvale Finance v Bank of Zambia¹⁴⁰ in which the following was said (at p. 762):

“Certainly, in Wallingford v Mutual Society (1880) 5 App. Cas. 685, 702 Lord Hatherley repeated as settled law the rule that, at least in mortgages, an increase in the rate of interest upon default was treated as a penalty and therefore unenforceable, whereas the practice was to avoid the effect of that rule by provisions for the abatement of the rate of interest upon prompt payment which had long been held to be enforceable. Although the early cases on this point do all appear to be mortgage cases, it has to be said that the refusal of the Court of Chancery to enforce the increased rate was expressed to be because it was of a penal nature and not because it would operate as a clog on the equity of redemption. The rule would therefore appear to be of general application and not confined to mortgage debts.”

10.99 Colman J went on to hold that there was no reason in principle why a contractual provision the effect of which was to increase the consideration payable under an executory contract upon the happening of a default should be struck down as a penalty if the increase could in the circumstances be explained as commercially justifiable, provided its dominant purpose was not to deter the other party from breach; that if an increased rate of interest applied only from the date of default or thereafter, provision for a modest increase in the rate would not be struck down as a penalty; that the rate of 1 per cent could not be said to be in terrorem but was consistent only with an increase in the consideration for the loan by reason of the increased credit risk represented by a borrower in default; and that, accordingly, the default interest provision would be fully enforced.¹⁴¹

10.100 An increased rate of interest might constitute a valid clause in certain circumstances where such an increase still represented a genuine pre-estimate of the damage suffered. However the 5 per cent per week considered in the Jeancharm Ltd v Barnet FC case represented a yearly interest rate of 260 per cent. Such a sum did not amount to a genuine pre-estimate but was a penalty clause in the Dunlop sense and consequently unenforceable.

10.101 If there is no express provision for interest to be paid after the date for repayment has passed, nevertheless if the mortgagor fails to repay upon the due date, the mortgagee will be entitled to damages against the mortgagor for breach of his covenant to repay. Such damages will be assessed as interest at a commercial rate.

10.102 In some instances, interest will be expressed in the mortgage to be payable in advance. For example half-yearly or quarterly in advance on certain dates. In these circumstances, if repayment or recovery through enforcement of the security occurs after the date specified for the advance payment to be made, nevertheless the mortgagee is only entitled to interest that has actually accrued for the period of the delay in receiving repayment, and not to the whole amount of the advance payment provided for.

10.103 In Banner v Berridge¹⁴² interest was payable half-yearly in advance on certain dates. The mortgagee sold the ship and received the proceeds of sale three days after one of the half-yearly dates, and the court held that he was entitled to only three days’ interest. It was held that the claim for six months’ interest was inequitable and would not be allowed either as interest due under the mortgage or as six months’ interest in lieu of notice to redeem. The court considered that a distinction was to be drawn between a case where the mortgagor seeks to redeem and the mortgage provides for six months’ interest to be paid in lieu of notice, and the case where the vessel is sold by the mortgagee to realise his security.

Redemption

10.104 The right to redeem may be enforced by a claim for redemption if tender of the mortgage debt is refused by the mortgagee.¹⁴³ The mortgagor is entitled to redeem the mortgaged property upon payment of the mortgage debt, together with any interest and the expenses incurred by the mortgagee in taking or holding possession or otherwise protecting his security.

10.105 In order to exercise the right to redeem, the mortgagor, or other person seeking to exercise the right, must tender the exact sum due either to the mortgagee, or to some other person duly authorised to receive payment.

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