Senior Consultant Hamburg
Judicial Sale of Ships on Course to Legal Certainty – The Beijing Convention31 May 2023
"General Assembly of the United Nations adopted the United Nations Convention on the International Effects of Judicial Sales of Ships."
On 7 December 2022, the General Assembly of the United Nations adopted the United Nations Convention on the International Effects of Judicial Sales of Ships (the “Convention”). The Convention was initially a project of the Comité Maritime International (“CMI”). The General Assembly of the CMI had approved a draft of the Convention in 2014 and thereafter sought to find it a suitable home with a worldwide reach. In 2018, a colloquium was held in Malta which convinced the representatives of the United Nations Commission on International Trade Law (“UNCITRAL”) to accept the Convention as an UNCITRAL project. UNCITRAL is the core legal body of the United Nations (“UN”) system, focussed on modernising and harmonising the rules for international business. Several meetings, held both in person and virtually between 2018 and 2022, led to the current iteration of the Convention that was adopted by the UN General Assembly on 7 December 2022. Since the UN authorised the signing ceremony for the Convention to be held in Beijing, as soon as practicable in 2023, it will be known as the Beijing Convention on the Judicial Sale of Ships.
What does the Convention do?
According to Article 1, the Convention “governs the international effects of a judicial sale of a ship that confers clean title on the purchaser”, thereby seeking to fill a gap in international law. The international legal uniformity sought by the Convention will substantially enhance legal certainty. Such legal certainty will contribute to better prices in judicial sales since the purchaser in a judicial sale can be sure to use the ship without the risk of arrest for claims and encumbrances having occurred prior to the judicial sale.
On one hand, this is intended to serve the defaulting ship owner as well as its financiers. On the other, financiers of the purchaser will be more interested and at ease to finance a ship acquired in a judicial sale. The Convention also sets formal standards and a framework for registrars and courts – all of which seek to serve transparency and fairness.
"Convention 'governs the international effects of a judicial sale of a ship that confers clean title on the purchaser'."
When does the Convention apply?
According to Article 3 of the Convention, it is only applicable if a judicial sale is conducted in a state party to the Convention (a “State Party”) and the ship is physically within the territory of the state of judicial sale at the time of sale. The Convention does “not apply to warships or naval auxiliaries or other vessels owned or operated by a State and used, immediately prior to the time of judicial sale only on government non-commercial service”. According to Article 2 (a) of the Convention, “judicial sale” means “any sale of a ship: (i) Which is ordered, approved or confirmed by a court or other public authority either by way of public auction or by private treaty carried out under the supervision and with the approval of a court; and (ii) For which the proceeds of sale are made available to the creditors”.
How does the Convention achieve its goals?
According to Article 4 paragraph 1, a judicial sale must be conducted in accordance with the law of the state of judicial sale, and such law shall also provide procedures for challenging the judicial sale. Article 4 paragraph 2 provides for a notice of judicial sale to be given, which is one precondition for the issuance of a certificate of judicial sale as per Article 5 of the Convention.
Article 4 in its following paragraphs also lists to whom, in what form and with which minimum content (see Annex I of the Convention) the notice of judicial sale is to be given. The list of addressees comprises essentially everyone who has or could have an interest in the ship and who is identifiable. In addition, the notice of judicial sale is to be given to the Secretary-General of the International Maritime Organization (“IMO”) or an institution named by UNCITRAL as repository. The repository shall make the notice available to the public in a timely manner (Article 11 of the Convention). For the time being, the notices of judicial sale (and the certificates of judicial sale; see immediately below) shall be registered with the IMO and will be accessible to every interested party.
"Convention bars the arrest of a ship in any State Party."
Article 5 of the Convention introduces a certificate of judicial sale and its minimum content and provides for a model certificate of judicial sale in Annex II of the Convention. The certificate of judicial sale is the core document on which the effects of the Convention hinge.
Consequently, Article 6 of the Convention provides that “a judicial sale for which a certificate of judicial sale referred to in article 5 has been issued shall have the effect in every other State Party of conferring clean title to the ship on the purchaser.” “Clean title” within the Convention means “title free and clear of any mortgage or hypothèque and of any charge.” (see Article 2 (c) of the Convention).
According to Article 7, the registry of a State Party – upon presentation of a certificate of judicial sale and request of the purchaser – shall delete from the register (i) any mortgage or hypothèque and registered charge attached to the ship and registered before completion of the judicial sale; (ii) the ship; and (iii) shall register the ship in the name of the purchaser, provided the purchaser meets the requirements of the law of the state of registration.
Furthermore, upon the a.m. requirements (i.e. presentation and request) the registry of a State Party on which the ship was granted bareboat charter registration shall delete the ship from the bareboat charter register. In all cases, the relevant registry shall thereupon issue a certificate of deletion. The registry related duties, as an exception, shall not apply if a court in the state of the registry determines that the effect of the judicial sale “would be manifestly contrary to the public policy of that state”. This wording is intended to set a very high bar and ensure exceptions are rare.
Article 8 of the Convention bars the arrest of a ship in any State Party for any and all claims that have arisen prior to the judicial sale of the ship. All the purchaser of the ship would have to do is present to the arresting court the certificate of judicial sale. The only exception is again if the court “determines that dismissing the application for arrest or ordering the release of the ship, as the case may be, would be manifestly contrary to the public law of that State”.
"Convention is expected to materially contribute to legal certainty to the advantage of all stakeholders involved in the ownership, use, financing and registration of ships."
Article 9 of the Convention prevents forum shopping in that it provides “the courts of the State of judicial sale shall have the exclusive jurisdiction to hear any claim or application to avoid a judicial sale of a ship conducted in that State that confers clean title to the ship or to suspend its effects, which shall extend to any claim or application to challenge the issuance of the certificate of judicial sale referred to in Article 5”.
According to Article 21, the “Convention shall enter into force 180 days after the date of the deposit of the third instrument of ratification, acceptance, approval or accession”. It is expected that a minimum of three states will accede to the Convention at its signing ceremony later this year. The EU Commission has found that the Convention addresses certain aspects also regulated under European law. However, since 90% of world trade is conducted by ships and the Convention fills in a gap that has contributed to uncertainty in the past, the European Commission has signaled support of the Convention. At a symposium held in Valletta, Malta, on 26 April 2023 with 180 attendees from 52 countries, the Director Justice Policies at the European Commission’s directorate general for justice and consumers stated by video message that the European Commission welcomed the Convention. The representative of the European Commission attending the symposium expressed cautious optimism that the Commission will, by the middle of this year – 2023 – permit EU member states to ratify the Convention.
The Convention, including its annexes, is a eleven page document. It is a comparably easy read and fills a gap in international law. It leaves the laws, rules and procedures of the states deciding to become a party to it largely unaffected. The Convention is expected to materially contribute to legal certainty to the advantage of all stakeholders involved in the ownership, use, financing and registration of ships. The Convention thus promotes that most valuable of economic assets, trust. The impact and value of the Convention hinges on many states worldwide opt into it. Motivating states to ratify the Convention will be the task for the CMI and stakeholders in shipping in the months to come.
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