The law of the sea

by George L. Canfield; J. Y. Brinton; George W. Dalzell

2. Bottomry Bonds.—

The name of this class of security on the ship arose from the fact that the bottom or keel of the ship was figuratively used to express the whole and to indicate that the entire vessel secured the loan. The repayment of money borrowed on bottomry depends on the safe arrival of the ship; if she is lost the loan is lost with her. The money is at the risk of the lender. Under an ordinary mortgage, the borrower must pay at all events and his personal liability survives the loss of his vessel. Under bottomry, the risk is shifted. In consideration of this risk, the lender is permitted to charge a high rate of interest without violating the law of usury. Rates of interest as high as 25 per cent. and higher have been upheld, and while in some cases the courts have ordered a reduction in the rate when it was regarded as clearly extortionate, the strong inclination of the courts is to carry out the bargain as made by the parties. The bond must be in writing. No particular form is essential but it must rest on the assumption of maritime risks by the lender or it will be no bottomry. It may be expressed after the precedent of a common-law bond, with a recital of the circumstances, provisions showing that the usual risks are on account of the obligee; and stipulations providing that the condition of performance or discharge is the safe arrival of the ship at her designated haven. The lender may secure himself against loss by taking out insurance. Such bonds may be made by the owner, in the home port, although this is not usual. He may, of course, make them anywhere. The master, however, can only do so as in cases of great necessity and the absence of the owner. His power, in this respect, is like his power to sell. His first duty is to obtain funds on the personal credit of the owner. The duty of the master to communicate with the owner, if possible, before giving a bottomry bond is the same as his duty to communicate before selling the vessel (Chapters II, § 14; IV, § 9). For this reason and in view of modern facilities for communication the giving or making of bottomry bonds by masters has, like the sale of a vessel by her master, become rare in modern times.

A good illustration of a bottomry bond is found in the case of the Grapeshot, 9 Wall. 129. There the libel recited that the Grapeshot was at Rio de Janeiro in April, 1858, was in great need of reparation, provisions and other necessaries to render her fit and capable of proceeding to New Orleans, the master having no funds or credit in Rio de Janeiro, and the owner not residing there and having no funds or credit there, the libellants at the request of the master loaned him $9,767.40, on the bottomry and hypothecation of the bark at the rate of 19½ cents, maritime interest; that the master did expend the sum borrowed for repairing, victualing and manning the bark to enable her to proceed to New Orleans and that she could not possibly have proceeded with safety without such repairs and other necessary expenses attending the refitting of her. Chief Justice Chase described the general characteristics of a bottomry bond as follows:

A bottomry bond is an obligation, executed generally, in a foreign port, by the master of a vessel for repayment of advances to supply the necessities of the ship, together with such interest as may be agreed on; which bond creates a lien on the ship, which may be enforced in admiralty in case of her safe arrival at the port of destination; but becomes absolutely void and of no effect in case of her loss before arrival.

Such a bond carries usually a very high rate of interest, to cover the risk of loss of the ship as well as a liberal indemnity for other risks and for the use of the money, and will bind the ship only where the necessity for supplies and repairs, in order to the performance of a contemplated voyage, is a real necessity, and neither the master nor the owners have funds or credit available to meet the wants of the vessel.

The Court also quoted with approval the decision in the old case of the Aurora, 1 Wheat. 96, in which it was said:

To make a bottomry bond, executed by the master, a valid hypothecation, it must be shown by the creditor that the master acted within the scope of his authority; or, in other words, that the advances were made for repairs or supplies necessary for effecting the objects of the voyage, or the safety and security of the ship. And no presumption should arise in the case that such repairs or supplies could be procured on reasonable terms with the credit of the owner, independent of such hypothecation.

And in summarizing the conclusion reached in the case it was said:

To support hypothecation by bottomry, evidence of actual necessity for repairs and supplies is required and, if the fact of necessity be left unproved, evidence is also required, of due inquiry and of reasonable grounds of belief that the necessity was real and exigent.

These bonds are not required to be placed on record but great diligence should be employed in enforcing them so that the rights of innocent purchasers or subsequent lienors may not be impaired.