The Turkish Commercial Code No. 6102 (TTK) contains no self-contained chapter devoted to the types of ship mortgage. The classification has emerged from reading the provisions scattered through the Code together with the scholarly literature and the case law. At one end of that classification stand the liens arising by operation of law; at the other stand the contractual forms of mortgage created by the will of the parties.
The first of the rights of statutory character is the maritime lien, governed by TTK Arts. 1320-1327. Although it is not a type of mortgage in the technical sense, it confers on the creditor a lien arising by operation of law, and it does not require the ship to be entered in the register in order to come into existence. The second is the shipyard owner’s right under TTK Art. 1013: a shipyard owner holding a construction or repair claim arising out of a shipbuilding or ship repair contract, which is a contract for work, may demand that a mortgage be created over the ship or the structure. To these must be added the mortgage over a ship under construction provided for in TTK Arts. 1054-1057; in view of the high cost of shipbuilding, and in order to facilitate the raising of credit during the building stage, a mortgage may be created over the structure from the moment the keel is laid, provided that the vessel will exceed 18 gross tons upon completion.
With contractual mortgages, the distinction is drawn according to the registration of the mortgage, the type of claim secured and the manner in which the amount is determined. This group comprises the joint ship mortgage, the maximum-amount ship mortgage, the ship mortgage denominated in foreign currency, the fixed-value ship mortgage and the ship mortgage securing a claim embodied in a negotiable instrument. The subject matter of the mortgage may be a completed ship entered in the register, but it may equally be a hull still under construction.
The Shipyard Owner’s Mortgage
As a rule, a ship mortgage comes into existence only where the owner and the creditor agree to that effect. The Code has nonetheless granted certain creditors the possibility of demanding a mortgage unilaterally. Under TTK Art. 1013, the shipyard owner may request the registration of a mortgage over the structure or the ship in respect of claims arising from the building and repair of that ship. Arts. 895 and 897 of the Turkish Civil Code No. 4721 (TMK), which govern the mortgage rights of craftsmen and contractors, apply to a mortgage to be created in favour of the shipyard owner.
Two rights must be kept apart at this point. The power to demand registration arises directly from the Code; the mortgage right itself, by contrast, comes into existence only upon registration, as it does with a contractual mortgage. The shipyard owner therefore does not acquire the mortgage right, which is a right in rem, until registration has taken place.
The scope of the right to demand is likewise limited. The shipyard owner may exercise this power only in respect of construction and repair claims arising out of a shipbuilding or ship repair contract that qualifies as a contract for work; it may not request the registration of a mortgage for any other claim. The right to demand is conferred on the shipyard owner who has undertaken the building or repair of the ship under a contract for work. A waiver of this right given in advance is not valid.
As to timing, the shipyard owner may apply for registration and have the mortgage registered from the moment the building or repair contract is concluded. Registration must have been effected by the end of the three months following completion of the building or repair work; failing that, the right to demand a ship mortgage lapses.
An annotation may be entered in the ship register or the register of ships under construction in order to secure the right to demand. Where the building or repair has not yet been completed, the creation of a security mortgage may be requested for that portion of the price corresponding to the work completed and for expenses not covered by the price.
Mortgages over Ships under Construction
Several conditions must be satisfied together before a mortgage may be created over a hull that is not yet complete. Where the structure will exceed 18 gross tons upon completion, it may become the subject of a mortgage from the moment it is made clearly and permanently identifiable by a name and number inscribed in a visible place, at any point in the process running from the laying of the keel to the launching from the slipway.
The mortgage is created by an agreement to that effect between the owner of the structure and the creditor and by the registration of the mortgage in the register kept specifically for ships under construction. The agreement creating the mortgage must be made in writing and the signatures must be certified by a notary; if the parties so wish, the agreement may also be drawn up at the ship registry office.
The scope of the mortgage covers every stage of the building work. Parts that have not yet passed into the ownership of the owner of the structure fall outside that scope, but components located at the shipyard which have been set aside for use in the building work and marked for that purpose are also covered by the mortgage. Once the building work is complete, the mortgage over the structure continues over the ship, retaining the rank it held, and is entered in the ship register.
The Ship Creditor’s Lien Arising by Operation of Law
The maritime lien is a lien that arises automatically over the ship and its appurtenances upon the accrual of one of the claims listed in the Code. Neither registration nor a transfer of possession of the ship is required for it to arise. The most important respect in which it differs from a contractual mortgage is that it is also available in respect of ships not entered in the register. This lien secures, in the same manner, not only the principal but also interest and the costs of enforcement and of the proceedings, and it may be asserted against anyone in possession of the ship.
Provided that they have arisen against the owner, the charterer, the manager or the operator of the ship, the following claims confer a maritime lien on their holders:
- a) Claims in respect of wages and other sums payable to the seafarers by reason of their employment on board the ship; the costs of their repatriation and the social insurance contributions payable on their behalf also fall within this scope.
- b) Claims arising from loss of life or other personal injury occurring on land or on water in direct connection with the operation of the ship.
- c) Claims arising from salvage reward.
- d) Dues payable in respect of ports, canals, other waterways, quarantine and pilotage.
- e) Claims in tort based on physical loss of or damage to property arising from the operation of the ship; loss of or damage to the goods carried on board, to containers and to the passengers’ effects is excluded from this scope.
- f) Claims for general average contribution.
These claims do not occupy the same position in terms of ranking. The lien arising by operation of law of the creditors falling under points a) to e) above ranks ahead of all liens arising by operation of law and all contractual liens, whether or not registered against the ship, and ahead of all charges in rem. That priority is itself subject to one exception: where a ship that has run aground or sunk is removed by public authorities in the interests of the safety of navigation or the protection of the marine environment, the costs of removal are paid before all claims against the ship. By contrast, the lien of the creditors holding claims for general average contribution under point f) ranks after all other liens arising by operation of law and all other contractual liens, whether or not registered, and after all charges in rem.
Special Types of Contractual Ship Mortgage
The Joint Ship Mortgage
TTK Art. 1020(1) permits a single claim to be secured by mortgages created over more than one ship or ship share; this is known as a joint ship mortgage. The ships subject to the mortgage need not belong to the same owner. The validity of the mortgages does, however, depend on each shipowner having signed the mortgage agreement. In a joint mortgage, the other mortgaged ships are also noted in the register entry of each ship.
The rule is that each ship and each ship share is liable for the whole of the debt. The parties may nonetheless agree on the portion of the claim for which a given ship or share is to be liable. For such an arrangement to take effect, it must appear in the mortgage agreement and be entered in the register.
The Maximum-Amount Ship Mortgage
Where the amount of the claim is not definitely established or is liable to change over time, a maximum sum that the mortgage is to cover may be fixed and entered in the ship register. This method is known as a maximum-amount mortgage and constitutes the exception to the rule that the claim secured by a ship mortgage must be determinate. Its purpose is to establish in advance the ceiling recoverable when enforcement is commenced by way of realisation of the mortgage.
Even where the amount of the claim is uncertain, the legal relationship on which the mortgage rests must be determinate. In practice, this type of mortgage is most frequently resorted to in credit facilities for shipbuilding and ship repair where the building or repair price cannot be fixed definitively at the outset.
The Ship Mortgage Denominated in Foreign Currency
A mortgage may be created in foreign currency for a claim that is to be performed in foreign currency on the date of payment. This possibility is not, however, available for every currency. The foreign currencies in which a ship mortgage may be created are determined by the Undersecretariat of the Treasury; a mortgage may not be created in a currency falling outside that determination. Moreover, only a single currency may be used for a mortgage of any given rank.
The Fixed-Value Ship Mortgage
For debts payable in Turkish currency, the amount of the claim that the mortgaged ship is to cover may be linked to a measure of gold or foreign currency. This method is used in long-term credit facilities to guard against the risk that the value represented by the security will be eroded as the currency loses value. The foreign currency chosen as the measure must be one of the currencies accepted by the Undersecretariat of the Treasury.
The difference between the two types lies in the debt itself: with a foreign currency mortgage there is a debt denominated in foreign currency, whereas with a fixed-value mortgage the debt is in Turkish Lira and the foreign currency serves merely as a measure.
The Ship Mortgage Securing a Claim Embodied in a Negotiable Instrument
The rule is the same where claims arising from negotiable instruments — principally promissory notes, cheques and bills of exchange — are secured by a ship mortgage: an agreement between the parties and registration are mandatory. Where, on the other hand, what is at stake is security for a claim embodied in a bearer instrument, a declaration by the owner to the registry office together with registration is regarded as sufficient.
A further entry is required in the case of ship mortgages created in order to secure claims arising from a bill of exchange, a bearer instrument or another instrument transferable by endorsement. A representative may be appointed to carry out certain acts of disposition over the mortgage for and against subsequent transferees of the claim and to represent the creditor in enforcement proceedings for the realisation of the mortgage, and that representative must also be entered in the register. As regards the powers of that representative, reference may be made to the application for registration.
The Independent Legal Assessment
The distinction between the types is not an exercise in theoretical classification; which type is in issue determines the moment at which the security arises, the claims it will rank ahead of and the sum that will be recovered on enforcement. Indeed, the rank of the holder of a contractual mortgage may fall behind maritime liens arising by operation of law, notwithstanding that it rests on a registered right. Another point frequently overlooked concerns the time limits and formal requirements: missing the three-month registration period for the shipyard owner’s mortgage, or failing to satisfy the identifiability requirement for a ship under construction, may leave the security as nothing more than a paper right.
When a security structure is being designed, we recommend that the following matters be settled in advance:
- Whether the amount of the claim can be determined at the outset; if it cannot, the maximum-amount mortgage should be preferred
- Resolving the relationship between the currency of the debt and the currency of the mortgage, so as to determine whether a foreign currency mortgage or a fixed-value mortgage is to be created
- Where more than one ship is to be given as security, ensuring that each owner has signed the mortgage agreement and that the allocation of liability is reflected in the register
- Including in the risk analysis the maritime liens that rank ahead of the mortgage over the ship and any wreck removal costs that may arise
- Documenting, before registration, the keel, tonnage and identifiability requirements for a ship under construction
- Completing the entry of the representative together with the application for registration where claims are embodied in negotiable instruments
Independent Legal advises on and conducts litigation concerning the creation of ship mortgages, the handling of registry procedures and disputes over the realisation of the security.