What Is Bottomry
Bottomry, referring to the ship's bottom or keel, is a maritime transaction, where the owner of a vessel borrows money and uses the ship itself as collateral. However, if an accident should happen during the voyage, the creditor will lose out on the loan because the guaranteed security no longer exists, or exists in a damaged fashion. Should the vessel survive the journey intact and whole, then the lender will receive the return of the loaned principal plus interest. Bottomry transactions are mostly obsolete, in modern-day maritime activity. The interest received by the lender on a bottomry loan is known as maritime interest and may be more than the legal rate of interest.
Borrowing Through the Use of Bottomry
In conventional financing, through credit, the borrower is liable for the debt at all times. With bottomry contracts, the lender assumes responsibility because the repayment of money only happens if the voyage is a success. These now obsolete financing schemes typically occurred when a sailing vessel was in dire need of paying for an urgent repair, or during other emergencies which came up during the long voyages.
Where the ship's owner pledged the vessel as collateral as securing the debt, the deal was known as a bottomry bond. When both boat and cargo became promised it was known as respondentia. In the second case, it was a personal obligation of the owner who borrowed the money to complete the journey. Bottomry bonds are relatively low priority loans when compared to other liens against the ship and continually declined in usage as shipping improved during the 19th century.
Consequently, the subject of bottomry remains mainly of interest to historians, as a nostalgic practice from past years. Greek biographer and essayist, Lucius Mestrius Plutarchus, famously called bottomry "the most disreputable form of money lending.
Authors and historians Michael Kaplan and Ellen Kaplan explored bottomry in their book, Chances Are–Adventures in Probability (Penguin Books, Reprint 2007). Bottomry, they wrote, "is easy to describe but difficult to characterize. [It is] not a pure loan, because the lender accepts part of the risk [and] not a partnership because the money repaid is specified." Further, they wrote the practice was not insurance since it did not "specifically secure the risk to the merchant's goods." In the end, they decided the practice was best described as a futures contract because the lender was betting on an event happening at a future date.
Real World Example
Today, there are seldom any practical applications for bottomry in shipping. However, even in its heyday, bottomry often saw fraudulent use. The trial of Henry T. Rahming vs. The Brigantine Northern Light litigated a famous 1864 dispute. Here, the master and part owner of a vessel executed the bottomry bond. The deal was to secure the payment of $4,228.24 in gold–including the 15% maritime interest. But, after the ship arrived in New York, payment was refused, and action followed.