Loans on Bottomry and Respondentia

DEFINITION

Article 719 of the Code of Commerce states that: A loan in which under any condition
whatever, the repayment of the sum loaned and of the premium stipulated depends upon the
safe arrival in port of the goods on which it is made, or of the price they may receive in case
of accident, shall be considered a loan on bottomry or respondentia.

Respondentia is a loan secured by the owner of the cargo payable upon safe arrival of cargo at
destination.

LOAN ON LOAN ON
BOTTOMRY RESPONDENTIA
DEFINITION Loan made by the Loan taken on security
shipowner or ship of the cargo laden on
agent guaranteed by vessel and repayable
vessel itself and upon safe arrival of
repayable upon arrival cargo at destination
of vessel at
destination

Note: No LOB may be

made in any case on
the salaries of the
crew, nor the profits
which may be
expected
WHO MAY Shipowner or ship Only the owner of the
CONTRACT agent cargo

Outside the residence

of the owners the
captain
COMMON 1. Exposure of security to marine peril
ELEMENTS 2. Obligation of the debtor conditions only
upon safe arrival of the security at the
point of destination
FORMS 1. Public instrument
2. Policy signed by contracting parties and
the broker taking part therein
3. Private instrument

PARTIES

1 Ship owner or ship agent

2 Owner of the cargo
 3 Lender

FORMALITIES

Article 720 of the Code of Commerce states that: Loans on bottomry or respondentia
may be executed:

1. By means of a public instrument;

2. By means of a policy signed by the contracting parties and the broker taking part therein;
3. By means of a private instrument.

Under whichever of these forms the contract is executed, it shall be entered in the certificate
of the registry of the vessel and shall be recorded in the registry of vessels, without which
requisites the credits of this kind shall not have, with regard to other credits, the preference
which, according to their nature, they should have, although the obligation shall be valid
between the contracting parties.

Formal Requirements:

a. By means of public instrument

b. Policy signed by the contracting parties and the broker taking part therein;
c. by means of private instrument.

AUTHORITY TO CONSTITUTE LOAN ON REPONDENTIA

The cargo owner shall have the right to enter into a loan on respondentia involving his cargo.
The captain, being a mere agent of the ship owner and not of the cargo owner, may not contract
a loan on respondentia, and if he does so, such a loan would be void and the principal, interest,
and costs of the contract shall be chargeable to his private account, and he may be even be
discharged altogether as ship captain by the shipowner.

CASES WHERE THE LOAN ON BOTTOMRY/ LOAN ON RESPONDENTIA IS REGARDED AS SIMPLE

LOAN

Article 726 of the Code of Commerce states that: If the lender should prove that he loaned
as amount larger than the value of the object liable for the bottomry loan, on account of
fraudulent measures employed by the borrower, the loan shall be valid only for the amount at
which said object is appraised by experts. The surplus principal shall be returned with legal
interests for the entire time required for repayment.

Article 727 of the Code of Commerce states that: If the full amount of the loan contracted
in order to load the vessel should not be used for the cargo, the balance shall be returned
before clearing. The same procedure shall be observed with regard to the goods taken as
loan, if they were not loaded.

Article 729 of the Code of Commerce provides that: Should the goods on which money is
taken not be subjected to risk, the contract shall be considered a simple loan, with the
obligation on the part of the borrower to return the principal and interest at the legal rate, if
that agreed upon should not be lower.
 a Lender obtained an amount larger than the valie of the object due to fraudulent means
employed by the borrower (CODE OF COMMERCE, Art. 726);
b Full amount of the loan is not used for the cargo or given on the goods if all of them could
not have been loaded, the balance will be considered a simple loan (CODE OF
COMMERCE, Art. 727); and
c If the effects on which the money is taken is not subjected to any risk (CODE OF
COMMERCE, Art. 729)

CONSEQUENCES OF THE LOSS OF EFFECTS OF THE LOANS

Article 731 of the Code of Commerce states that: The actions pertaining to the lender shall
be extinguished by the absolute loss of the goods on which the loan was made, if it arose
from an accident of the sea at the time and during the voyage designated in the contract, and
it is proven that the cargo was on board; but this shall not take place if the loss was caused
by the inherent defect of the thing, or through the fault or malice of the borrower, or barratry
on the part of the captain, or if it was caused by damages suffered by the vessel as a
consequence of being engaged in contraband, or if it arose from having loaded the
merchandise on a vessel different from that designated in the contract, unless this change
should have been made by reason of force majeure. Proof of the loss as well as of the
existence of the vessel of the goods declared to the lender as the object of the loan is
incumbent upon him who received the loan.

General Rule: The obligation of the borrower to pay the loan is extinguished if the goods given as
security are absolutely lost by reason of an accident of the sea, during the voyage designated, and if it is
proven that the goods were on board.

Exceptions:

1. Loss due to inherent defect of the thing;

2. Loss due to the fault or malice of the borrower;
3. Loss due to the barratry on the part of the captain;
4. The vessel was engaged in contraband; and
5. The cargo loaded on the vessel is different in from that agreed upon.

Article 732 of the Code of Commerce states that: Lenders on bottomry or respondentia
shall suffer, in proportion to their respective interest, the general average which may take
place in the goods on which the loan is made.

In particular averages, in the absence of an express agreement between the parties, the
lender on bottomry or respondentia shall also contribute in proportion to his respective
interest, should it not belong to the kind of risks expected in the Article 731.

Article 734 of the Code of Commerce states that: In case of shipwreck, the amount liable
for the payment of the loan shall be reduced to the proceeds of the goods saved, after
deducting the costs of the salvage.

If the loan should be on the vessel or any of its parts, the freightage earned during the voyage
for which said loan was contracted shall also be liable for its payment, as far as it may reach.
 Article 735 of the Code of Commerce states that: If the same vessel or cargo should be
the object of a loan on bottomry or respondentia and marine insurance, the value of what may
be saved in case of shipwreck shall be divided between the lender and the insurer, in
proportion to the legitimate interest of each one, taking into consideration, for this purpose
only, the principal with respect to the loan, and without prejudice to the right of preference of
other creditors in accordance with Article 580.

ORDER OF PREFERENCE

Article 730 of the Code of Commerce states that: Loans made during the voyage shall
have preference over those made before the clearing of the vessel, and they shall be
graduated in the inverse order of their dates.

The loans for the last voyage shall have preference over the prior ones.

Should several loans have been made at the same port of arrival under stress and for the
same purpose, all of them shall be paid pro rata.

RULE 1: Loans made during the voyage shall have preference over those made before the clearing of the
vessel, and they shall be graduated in the inverse order of their dates.

RULE 2: The loans for the last voyage shall have preference over the prior ones

RULE 3: Should several loans have been made at the same port of arrival under stress and for the same
purpose, all of them shall be paid pro rata.