DEFINITION of Bottomry
Bottomry is a maritime transaction, where the owner of a ship borrows money, and uses the ship itself (referring to the ship's bottom or keel) as collateral. If the ship is lost during the course of the voyage, then the creditor will lose on the loan. But if the ship survives the journey, then the lender will receive the principal plus interest. Bottomry transactions are largely obsolete, in modern-day maritime activity.
BREAKING DOWN Bottomry
The interest received by the lender on a bottomry loan is referred to as "maritime interest", and can be higher than the legal rate of interest. Unlike a typical loan in which the borrower is liable for the debt at all times, a bottomry contract makes the lender liable for the loan because it will not receive money if the ship is lost.
Bottomry deals often happen when a sailing vessel is in dire need of an urgent repair, or other emergency situations arise during a long the voyage.
Where the ship is hypothecated (where a debtor pledges collateral to secure a debt) the bond is called a bottomry bond. Where both the ship and its cargo are hypothecated, the relationship is called “respondentia”.
Because bottomry bond's are treated a relatively low priority instruments, compared to other liens in the event of a libel against the ship, the use of bottomry bonds has radically declined during the 19th century. Consequently, the subject of bottomry mainly of interest only to legal historians, as a nostalgic practice from years gone by. However, Greek biographer and essayist Lucius Mestrius Plutarchus famously called bottomry "the most disreputable form of money-lending. And in their textbook Changes Are...Adventures in Probability", historians Michael Kaplan and Ellen Kaplan, wrote: “[Bottomry] is an arrangement that is easy to describe but difficult to characterize: not a pure loan, because the lender accepts part of the risk; not a partnership, because the money to be repaid is specified; not pure insurance, because it does not specifically secure the risk to the merchant's goods. It is perhaps best considered as a futures contract: the insurer has bought an option on the venture's final value.”