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United Nations Convention on the International Effects of Judicial Sales of Ships. Judicial Sale of Ships on Course to Legal Certainty.

By Peter Laurijssen FICS(*)

On 7 December 2022, the General Assembly of the United Nations adopted the Convention on the International Effects of Judicial Sales of Ships. The Convention, thenceforth known as the Beijing Convention, was signed on 5 September 2023 in Beijing by the following 15 States: China, Burkina Faso, Comoros, El Salvador, Kiribati, Grenada, Honduras, Liberia, Sao Tome and Principe, Saudi Arabia, Senegal, Sierra Leone, Singapore, Switzerland and Syria. Tanzania signed on 21 September 2023 and Ecuador on 17 November 2023. The European Union and Belgium signed on 14 March 2024 with Luxembourg following suit on 25 April. The latest signatories are Malta, Poland, Cyprus, Croatia, Spain, Antigua and Barbuda and Ghana, all of which signed on 19 June 2024 and more states are expected to follow shortly. With 27 signatories and 1 ratification (El Salvador), the Beijing Convention is really gaining traction. This is a true success story for the Comité Maritime International (CMI) and the United Nations Commission on International Trade Law (UNCITRAL).

It is indeed the culmination of a process that started in 2007 when Professor Henry Li of the China Maritime Law Association presented a paper to the Executive Council of the CMI drawing attention to problems arising around the world from the failure in recognising the free and unencumbered title given to purchasers of vessels in judicial sales and proposing that an International Working Group (IWG) within the CMI conduct a preliminary study of the issues in relation to the Judicial Sale of Ships. The proceedings of the CMI’s IWG on judicial sales eventually led to the adoption of so-called Beijing Draft by the general assembly of the CMI in 2014. UNCITRAL was approached to pick up the gauntlet and turn the Beijing Draft into an international instrument, as UNCITRAL was considered to be the most appropriate forum to resolve issues involving pernicious effects on cross-border trade posed by the lack of uniformity surrounding the international effects of judicial sales of ships.

It is a fact indeed that the lack of uniformity and the ensuing legal uncertainty give rise to obstacles in international trade. The absence of an international instrument dealing with the transborder effects of judicial sales leads to uncertainty in relation to the clean title which a judicial sale is supposed to confer upon the purchaser of a vessel in a judicial sale. This often leads to issues or even to deadlock situations when purchasers are trying to deregister the ship in its original flag state or to register it in the register of their choice. Moreover, purchasers risk facing claims or even the arrest of the ship for claims predating the judicial sale if states fail to give proper effect to the free and unencumbered title conferred by the state of judicial sale, which would have sold the vessel clean of all pre-existing encumbrances and liens. These obstacles, risks and the resulting losses and costs create substantial uncertainty and loss of confidence by potential buyers and their financiers in the judicial sale market and lead to reduced sale proceeds for such ships to the detriment of the vessel’s creditors, including the crew, shipping financiers and suppliers of maritime services. Widely publicised disputes and litigation predating the CMI and UNCITRAL projects, demonstrate that the aforementioned obstacles to international trade are not merely theoretical. UNCITRAL’s Beijing Convention will therefore clearly fill a lacuna in international shipping and global trade.

The Convention has become a truly balanced and unbiased document, respecting the rights of due process of the defaulting shipowner as well as those or mortgagees and lien holders, ensuring that the purchasing shipowner acquires clean title and is able to deregister and reregister the vessel and commercially trade the vessel freely, whilst aiming to maximise the auction revenue for creditors. As the Convention focuses on the international effects of judicial sales of ships rather than the sale procedure itself or the distribution of the sale proceeds, it leaves substantive and procedural aspects of the actual sale to a large extent to domestic law. So, the Convention provides the harmonisation, legal certainty and fairness that the stakeholders have sought, whilst at the same time retaining State sovereignty over the conduct of judicial sales in their territories. As the Honourable Neil McKerracher KC, said of the Convention: "… it does not seek or purport to erode any signatory State's sovereignty. To the contrary it leaves both the substantive and procedural elements in the hands of the country effecting it to do so in accordance with its own laws and procedures”.

In the light of the above it shouldn’t come as a surprise that the most important provisions of the Convention are those dealing with due process, actions by the registrar, clean title, no arrest of the ship, and avoidance and suspension of judicial sales.

The due process requirements are mainly enshrined in Article 4 setting out the requirements which the notice of judicial sale must satisfy for the sale to qualify for a certificate of judicial sale. The certificate of judicial sale is the document that requires a State Party to issue a deletion certificate in respect of the prior registration of the ship or to reregister the ship at the purchaser’s request. At the same time, the certificate of judicial sale is the document on the face of which courts in a state party are to refuse to grant an order for the arrest of a ship as security for claims predating the judicial sale or to order the release of a ship should it have been arrested for such claims. Considering the far-reaching effects of the certificate of judicial sale, Article 4 meticulously lists all the categories of persons the notice of judicial sale is to be given to whilst Annex I to the Convention provides for a model notice with the information which, as a minimum, is to be given to its addressees. In terms of publicity of the notice, the typical domestic publication requirements have been retained but an interesting novelty has been introduced, requiring that the notice of judicial sale is to be transmitted to the IMO, who is acting as repository under Article 11 of the Convention and who will enter the notice into its Global Integrated Shipping Information System (GISIS), which the public has open and free access to.

Clearly, the certificate of judicial sale is the key to the Beijing Convention as it certifies the clean title that has been conferred by a judicial sale conducted in accordance with the provisions of the Convention and, where applicable, the law of the state of the judicial sale. Pursuant to Article 6, the judicial sale for which a certificate of judicial sale has been issued under the Convention, shall have effect in every other State Party. Thus, it could be said that the certificate acts as a passport for the ship to trade freely in all parties to the Convention.

Gone are the issues of the past, where ship registries refused to recognize the validity, or the international effects of a judicial sale conducted in another state and consequently refused to deregister the ship from its old register. Gone are the complications when flag states refuse to enter a ship in its new registry at the request of a purchaser in a judicial sale saying that they don’t recognize the clean title conferred by the court in the state of the judicial sale. Article 7 sets out the actions to be taken by ship registries in State Parties, be it the ship’s old or new register or, as the case may be, any bareboat register, upon production of the certificate of judicial sale by the purchaser. Article 7 together with Article 8, which provides that, upon production of the certificate of judicial sale, applications brought before a court in a State Party to arrest a ship for a claim arising prior to a judicial sale shall be dismissed and that, if a ship is arrested for such a claim, the ship shall be released, constitute the very core and as a matter of fact the raison d’être of the Convention.

It is therefore that the jurisdiction to hear any claim or application for the avoidance or suspension of a judicial sale has been reserved by Article 9 exclusively to the courts of the state of the judicial sale whilst the courts of any other State Party shall decline jurisdiction. For the same reason, the grounds on which a judicial sale can be denied international effect have been limited by Article 10 strictly to those cases where the effect would be manifestly contrary to the public order of that State Party. Using the criterion of manifest contrariety to public policy, the draftsmen intentionally wished to set a very high threshold, which reflects recent treaty practice.

With the broad international acceptance of the Beijing Convention, we are now reaching the finishing line of what can be considered a well-drafted, broadly acceptable and legally sound international instrument. Considering that pursuant to Article 21 only three ratifications are required for the Convention’s entry into force, it is expected that the judicial sale of ships is on course to legal certainty and that the Convention will see a bright future.