Background

Section 309(2) of the Maritime Act of the Marshall Islands has been amended recently to provide important clarifications on what indebtedness may be secured by a so-called “pursuant to agreement” mortgage as described further below.

What was the issue?

The general rule under the Maritime Act is that a ship mortgage may not secure future indebtedness that has yet to be incurred at the time of the mortgage recording. Two notable exceptions are: (1) future indebtedness to be incurred pursuant to commitment by a lender existing at the time of the mortgage recording (such as a revolving credit facility) and (2) such indebtedness to be incurred pursuant to agreement by the mortgagor and the mortgagee at the time of the mortgage recording. There has been, however, some debate among the Marshall Islands legal practitioners as to whether the “pursuant to agreement” mortgage can secure amounts that may be outstanding in respect of a hedging transaction that was not committed at the time of the mortgage recording.

What does the amendment do?

Amendments to Section 309 are intended to provide that a mortgagor and a mortgagee can agree to secure in advance future indebtedness to be incurred (such as hedging transactions that may be entered in the future) even if there is no commitment or requirement to do so at the time of the mortgage recording. Such agreement need not be a commitment to lend or extend other credit and can secure all obligations arising or that may arise between the debtor and creditor as a result of transactions the nature of which are subject to or contemplated by the provisions of the mortgage.

What are the implications to the shipowners and lenders?

With this clarification, lenders and borrowers can secure obligations that may arise in the future from hedging transactions relating to the loan facility in accordance with the requirements of Section 309, even if there is no present requirement or commitment to enter into such transaction at the time of the mortgage recording.