Subject-matter jurisdiction over maritime disputes is held by the federal courts of the United States. State and federal courts have concurrent jurisdiction over many matters that are not specifically in admiralty, and personal injury claims are often brought in state court. However, certain claims such as vessel arrests, ship-mortgage foreclosures and attachment proceedings that present maritime disputes must be brought in federal courts. Just as there are no specialised first-instance courts specifically established for maritime matters, appeals of maritime matters in the federal system are handled by the Circuit Courts of Appeal, and (rarely and on a discretionary basis) the Supreme Court of the United States.
The United States Coast Guard is responsible for port state control and enforces compliance with regulations under the International Convention for the Safety of Life at Sea (SOLAS), the International Convention for the Prevention of Pollution from Ships (MARPOL), and the International Ship & Port Facility Security (ISPS) Code and other applicable laws and international conventions on vessels trading in US ports.
The Coast Guard is authorised to conduct examinations and enforce compliance with the laws and regulations within its ambit, and to detain or deny entry to the territorial waters of the United States for vessels operating outside of acceptable standards. The Coast Guard may issue civil penalties for deficiencies, and vessels subject to a detention may be required to post a bond or letter of undertaking covering the amount of the penalty to gain entry to a US port or obtain clearance to depart, or as security for possible fines.
The Coast Guard also functions as a law enforcement agency that may conduct criminal investigations separately or in co-ordination with other federal agencies, such as the Department of Justice and the Environmental Protection Agency, which may result in the issuance of fines or other sanctions, including in some circumstances criminal prosecution, for violations of security and environmental regulations.
The primary regulatory bodies for maritime activities in the United States include the US Coast Guard, the Maritime Administration, and US Customs and Border Protection.
Vessel registration, mortgage recordation, safety and technical inspections are primarily the responsibility of the US Coast Guard. Registration of vessels and recordation of mortgages are handled by the US Coast Guard through the National Vessel Documentation Center (NVDC). Vessels of five net tons or more used for fishing or cabotage trade must be documented with the NVDC.
Among other things, the Maritime Administration assists with government sealift programmes and manages a reserve sealift fleet, administers certain maritime grant programmes, and manages cargo preference activities. The Maritime Administration also administers certain Jones Act waiver programmes. Maritime Administration approval is required to transfer a US-flagged vessel to foreign ownership, flag or registry.
US Customs and Border Protection is the primary regulator responsible for enforcing the Jones Act restrictions on cabotage trade and providing determinations regarding cargo compliance with the Jones Act.
A US-flagged vessel must be owned by a US citizen to be documented with the NVDC. However, there are different levels of citizenship with respect to certain entities and for certain trades. By way of example, a corporation seeking to register a US-flagged vessel must be formed under the laws of the US or a state thereof, its chief executive officer must be a US citizen, and no more of its directors may be non-citizens than a minority of the number needed to constitute a quorum of the board. Additional citizenship requirements apply to vessels being used for fisheries or cabotage trade.
The Jones Act, among other things, regulates cabotage trade within the United States. The Jones Act requires that vessels used for cabotage trade be built in the United States, be at least 75% owned by US citizens, and be US-flagged. Additionally, the Jones Act requires that the Master, officers, and 75% of the remaining crew of a vessel used for cabotage trade be US citizens. The complete rules and procedures for determining compliance with the Jones Act cabotage trade restrictions are voluminous and each case must be looked at thoroughly and independently.
The laws of the United States do not permit the temporary registration of vessels, nor will they permit dual registrations.
With respect to US-flagged vessels, ship mortgages are required to be recorded with the NVDC. Perfection of security interests in certain other collateral common in ship finance transactions, such as certain assignments of earnings, may be accomplished by filing Uniform Commercial Code (UCC) financing statements in appropriate jurisdictions.
Potential creditors may request a Certificate of Ownership or Abstract of Title from the NVDC that evidences the existence of any liens that have been recorded against a US-flagged vessel. Generally, the only liens recorded with the NVDC are preferred mortgage liens, although US law also permits the filing of a notice of claim of lien by anyone asserting a lien against a US-flagged vessel. Note that, with the exception of ship mortgages, most maritime liens arise by operation of law and there is no requirement that they be recorded with the NVDC.
Potential creditors may also request a lien search from the relevant jurisdiction for recorded UCC financing statements relating to any potential debtors.
With respect to wreck removal, the United States has not adopted the Nairobi International Convention on the Removal of Wrecks (Wreck Removal Convention) 2007. Certain provisions of the Rivers and Harbors Act of 1899, also known as the Wreck Act, impose a duty of diligent removal upon the owner, lessee or operator of a vessel sunken in a navigable waterway. Failure to remove such a vessel subjects it to removal by the US government, and subjects the vessel owner, lessee or operator to reimburse the government for the cost of removal or destruction and disposal.
With respect to pollution, currently, the United States is a signatory to Annexes I, II, III, V and VI of the International Convention for the Prevention of Pollution from Ships (MARPOL). Annexes I, II, V and VI have been incorporated into US law by the Act to Prevent Pollution from Ships (APPS) and implemented within 33 USC 1901 and 33 CFR 151. The US incorporates Annex III by the Hazardous Materials Transportation Act (HMTA) implemented within 46 USC 2101 and 49 CFR 171 -174 and 176. The US has not ratified Annex IV, but has equivalent regulations under the Federal Water Pollution Control Act (FWPCA) (as amended by the Clean Water Act, 33 USC 1251 et seq, and implemented by 33 CFR 159) for treatment and discharge standards of shipboard sewage.
On 4 December 2018, the “Vessel Incidental Discharge Act” or VIDA was also signed into law, restructuring the way the EPA and US Coast Guard (USCG) regulate incidental discharges from commercial vessels. The VIDA requires the EPA and the USCG to develop standards of performance and implementing regulations, respectively, for these discharges. The EPA expects these new regulations to be effective in late 2022. In the interim, the existing EPA Vessel General Permit (VGP) and USCG ballast water regulations remain in full force and effect.
The US likewise has an extensive body of federal and state environmental laws and regulations concerning oil-pollution prevention and spill response including, for example, the Oil Pollution Act of 1990, 33 U.S.C. §2701, et seq.
The United States did not ratify the Brussels Collision Liability Convention of 1910, and has historically followed the general maritime law of the United States, only belatedly adopting principles of proportionate liability and comparative fault. The United States adheres to the International Regulations for Preventing Collisions at Sea 1972 (COLREGS). The US Departments of Defence and Commerce, as well as the Coast Guard within the Department of Homeland Security, publish regulations to ensure US compliance with COLREGS.
As for salvage, the United States has adopted the International Convention on Salvage, 1989. Courts have noted the parallels between the 1989 Salvage Convention and pre-existing general maritime law, and continue to look to applicable maritime law principles in those cases.
The US is not a party to the 1976 Convention on Limitation of Liability for Maritime Claims, and continues to apply the Limitation of Liability Act (the Limitation Act), passed in 1851 to encourage investment in shipping. The Limitation Act permits vessel-owners (including demise charterers) to limit their liability to the value of the vessel and pending freight in certain circumstances where the loss occurred without the privity or knowledge of the owner.
The Limitation Act may be applied to a wide variety of claims but is not generally favoured by the courts, and there are different limits in cases of personal injury and death, pollution liabilities, wage claims and others. Limitation also may apply to claims brought by the US government.
Procedurally, a vessel-owner’s action for limitation must be commenced within six months of the owner being given adequate written notice of a claim, whether or not a claimant has initiated a legal proceeding. Deposit of the fund is required and disputes may arise with respect to valuation (ie, whether the deposit represents the value of the vessel).
The US Carriage of Goods by Sea Act (COGSA) governs all contracts for carriage of goods by sea to or from ports of the United States in foreign trade (and bills of lading as evidence of such contracts). 46 U.S.C. § 30701, Note § 13. The COGSA governs the carrier’s liability to cargo interests whenever a bill of lading or similar document of title is the contract of carriage. The “carrier” is identified in the COGSA as “the owner, manager, charterer, agent, or Master” of a vessel and can include all owners or charterers involved with carrying the cargo.
The US applies a version of the Hague Rules through the Carriage of Goods by Sea Act as well as the Harter Act. The US has also signed the Rotterdam Rules, which are not yet ratified. The COGSA has been in place for generations and provides a reasonable and predictable cargo loss and damage liability regime.
With respect to the question who has title to sue on a bill of lading, such cargo claims are typically brought by cargo owners or their subrogated insurers.
Under the COGSA, a ship-owner may not be liable if it is not the contractual carrier. However, the vessel itself may be liable in rem in respect of it carrying the cargo and ratifying the terms of the bill of lading.
A claim for misdeclaration of cargo would be treated as a breach of contract claim under the governing bill of lading. Federal district courts have approved of such claims. See, eg, MSC Mediterranean Shipping Co v Metal Worldwide, Inc, 884 F. Supp. 2d 1269, 1275 (S.D. Fla. 2012) (granting summary judgment to the carrier for breach of contract arising from the shipper’s failure accurately to declare weight and contents of the subject containers); Mitsui O.S.K. Lines, Ltd. v CB Freight Int'l, Inc, No 4:16-cv-05002-KAW, 2016 US Dist. LEXIS 181186, at *16 (N.D. Cal. 16 December 2016) (granting default judgment upon numerous misdeclarations and misdescriptions of cargo over a period of years).
Cargo claims must be brought within one year from the date when the goods were delivered or should have been delivered, under Section 3(6) of COGSA. 46 U.S.C. § 30701 note (formerly codified at 46 U.S.C. § 1303(6)). That said, claims for indemnity or contribution typically will not accrue until liability is fixed by a judgment against or payment by the indemnitee.
The United States is not a signatory to international conventions that govern ship arrest. Rather, ship arrests are governed under substantive federal law and the Federal Rules of Civil Procedure.
With certain very limited exceptions, any person providing “necessaries” to a vessel on the order of the owner or a person authorised by its owner is entitled to a maritime lien claim enforceable by a civil action in rem in the federal courts. What comprises a necessary has been the subject of extensive litigation in the courts. Obvious necessaries are fuel oil and repairs, but particular contexts give rise to more esoteric issues. Litigation has taken place in the courts over whether a fish-finder on a fishing vessel is a necessary, whether a piano is a necessary on a cruise vessel and whether seismic equipment on an oil exploration vessel is a necessary. As in the case of other areas of the law, each asserted claim must be independently examined in the context in which it arises, but, as a general rule, the supplier of goods and services to a vessel essential for the operation and navigation of that vessel is likely to have a lien for the supply of necessaries. It is important to note that, in many circumstances, the US courts will look to the law of the jurisdiction in which the claim arose to determine the existence of the lien. Hence, notwithstanding the foregoing, if the jurisdiction where fuel oil was supplied to a vessel does not grant the supplier a lien under local law, the federal courts might not recognise it.
Other liens recognised under US law include:
The maritime liens listed above will have priority over a ship mortgage, as will expenses for a vessel while in possession of a court during a foreclosure proceeding. Additionally, a lien for necessaries supplied in the US has priority over the lien of a preferred mortgage on a foreign-flagged vessel.
There is no requirement of in personam owner or demise charter liability in order for a vessel to be arrested. Under the Commercial Instruments and Maritime Lien Act (46 U.S.C. § 31301 et seq), vessel arrests may proceed in rem against the vessel as long as necessaries are supplied on the order of the owner or a person authorised by the owner. Under the statute, charterers are generally presumed to have authority to procure necessaries for the vessel and suppliers of necessaries are also generally presumed to rely on the credit of the vessel and will typically be entitled to a maritime lien unless they have actual notice of a “no lien” clause in the charter. Vessels are routinely arrested to enforce necessaries liens and many ship mortgage foreclosures are commenced by such suppliers rather than mortgage banks.
Arrest proceedings commenced in rem against the vessel provide a vehicle for an unpaid supplier of bunkers — who provided necessaries on the order of the owner or a person authorised by the owner — to seek recovery of the reasonable value of the necessaries supplied. Under the Commercial Instruments and Maritime Lien Act (46 U.S.C. § 31301 et seq), charterers are typically presumed to have authority to procure necessaries for the vessel and suppliers of necessaries are also typically presumed to rely on the credit of the vessel and will generally be entitled to a maritime lien unless they have actual notice of a “no lien” clause in the charter. Vessels are often arrested to enforce necessaries liens and many ship mortgage foreclosures are commenced by such suppliers rather than mortgagee banks.
In a Rule B action, seeking in personam attachment or garnishment – which may include vessel seizures – the court requires a verified complaint by the plaintiff setting forth a prima facie valid admiralty claim at the time of the filing of the complaint, and an accompanying affidavit signed by the plaintiff or the plaintiff’s attorney stating that, to the affiant’s knowledge, or on information and belief, the defendant cannot be found within the district.
In a Rule C in rem arrest action, the court likewise requires a verified complaint that describes with reasonable particularity the property that is the subject of the action, and that the property is within the district or will be within the district while the action is pending.
Although arrest proceedings are more commonly brought against the vessel itself, Rule B attachment proceedings could encompass proceedings to arrest bunkers or freight as part of a maritime lien claim or proceeding in aid of arbitration. Rule B provides that “a verified complaint may contain a prayer for process to attach the defendant's tangible or intangible personal property — up to the amount sued for — in the hands of garnishees named in the process.” Bunkers and freight may therefore be seized insofar as they are “defendant’s tangible or intangible personal property.”
There is no associated or sister-ship arrest regime in the US. However, property of the defendant may be attached under Rule B of the Supplemental Rules and, where the defendant owns a vessel and if the requirements of Rule B are met, that vessel may be seized as part of a maritime attachment proceeding. Maritime attachment is available under Rule B where a plaintiff has a maritime claim (not necessarily a lien claim) and that plaintiff can attach property of the defendant, provided that the defendant is not found within the federal judicial district where the property is located for jurisdictional and service of process purposes. Some parties may also seek to “pierce the corporate veil” to reach associated vessels.
Apart from ship-arrest proceedings under Rule C, a Rule B attachment proceeding is the primary means by which pre-judgment security may be obtained. See also Response to 4.6 Arresting Bunkers and Freight, and 4.7 Sister-Ship Arrest.
The options available to an owner or other interested party to release an arrested vessel are set out under Rule E(5) of the Supplemental Rules. Rule E(5) allows the parties to post security in order to secure a vessel’s release, by stipulating to “the amount and nature of such security” by way of a special or general bond conditioned to answer the judgment of the court or of any appellate court. Accordingly, a Club LOU or other third-party surety bond may be acceptable, if the parties can agree.
In the absence of agreement between the parties, the court may direct that the principal sum of the bond be set at an amount sufficient to cover the plaintiff’s claim, fairly stated with accrued interest and costs, up to a maximum of the smaller of twice the amount of the plaintiff’s claim, or its value upon due appraisement, with interest upon that amount at 6% per annum. Motions to reduce or enhance the amount of security may subsequently be made for good cause shown under Rule E(6). The release of a vessel is likewise conditioned on the payment of all costs and charges of the court and of the US Marshal or other substitute custodian.
Any party to the action, the Marshal or a substitute custodian may apply for a sale of the vessel. In practice, it is usually the mortgagee bank or single largest creditor that moves to have the vessel sold.
In the event of an application for interlocutory sale, judicial input is limited to confirming that notice of the action and arrest of the vessel, as well as notice of the motion for sale, is in compliance with statutory authority and any applicable local rules of court. Although a broker may be involved or other procedures may be agreed pursuant to court order, judicial sales are otherwise conducted by the US Marshal. The Marshal will charge poundage in the amount of 3% of the first USD1,000 of proceeds and 1.5% of proceeds above that amount, and a brokerage commission may be paid if a broker is engaged for the sale. The proceeds of the sale of the vessel are paid into the registry of the court and distributed according to the rank and priority of liens subsequent to the confirmation of sale of the vessel, at which point the vessel is delivered to the buyer free and clear of liens. In general, challenges to vessel sales may proceed prior to confirmation upon grounds of fraud, collusion, or gross inadequacy of price.
In the United States, insolvency proceedings are governed by the United States Bankruptcy Code and heard by federal bankruptcy courts, including reorganisation proceedings under Chapter 11 of the Bankruptcy Code. Generally, the automatic stay applicable in all Chapter 11 cases under the Bankruptcy Code would act to prohibit or stop any arrest and judicial sale of a vessel owned by owners that are subject to Chapter 11 proceedings. However, courts in at least one US jurisdiction have held that the automatic stay does not prevent actions with respect to certain types of maritime liens and would allow a federal court sitting in admiralty to retain in rem jurisdiction over an arrested vessel and to conduct a judicial sale, provided that the action was commenced prior to the filing of the Chapter 11 proceeding.
Damages may be awarded against an arresting party under circumstances where that party has been found to have made a wrongful arrest. However, such a claim requires a showing that the arresting party has no bona fide claim, together with establishing bad faith, malice, or gross negligence.
The United States is not a party to the Athens Convention relating to the Carriage of Passengers and their Luggage by Sea, 1974. As such, passenger claims in the United States that involve personal injury or death will be governed by applicable contracts of carriage and the general maritime law of the United States. Although a ship-owner may not limit its liability for negligence to passengers under the Limitation Act, that act may provide limitation in respect of cargo loss, personal injury or death incurred “without the privity or knowledge of the owner.”
Unless modified by contact, the default limitations period for a claim of personal injury or death arising from a maritime tort is three years.
Other statutes also limit the scope of contractually modified limitations periods that may be agreed with respect to passenger claims. Contractual periods may be no less than one year to file suit running from the date of injury or death, and no less than six months to provide notice of, or file a claim for, personal injury or death, subject to tolling rules for claims involving a minor or mental incompetent or in the event of wrongful death, until the earlier of (i) the date that a legal representative is appointed or (ii) three years after the injury or death.
If a contract requires the claimant to provide notice of a claim, failure to provide notice may permit a defence to liability unless there is a finding that (i) the carrier knew of the injury or death and the vessel was not prejudiced by the failure; (ii) there was a satisfactory reason why notice could not have been given; or (iii) the owner failed to object to the failure to give notice.
Contracts for carriage of goods by sea must be construed in the same way as any other contracts: by their terms and consistent with the intent of the parties. As such, where parties clearly specify in their contractual agreement which law will apply, admiralty courts will generally give effect to that choice. The COGSA applies “tackle to tackle” by force of law, but the period it covers (eg, pre-loading and post-discharge or carriage between two non-US ports) frequently may be extended by clauses in bills of lading.
As a matter of contract interpretation, federal courts sitting in admiralty seek to interpret a contract “so as to give meaning to all of its terms — presuming that every provision was intended to accomplish some purpose, and that none are deemed superfluous.” For example, Foster Wheeler Energy Corp v An Ning Jiang MV, etc, 383 F.3d 349, 354 (5th Cir. 2004). Ambiguities can lead to disputes – for example, if a competing regime applies a higher limitation of liability than the COGSA’s USD500 per package limitation – and, as such, careful attention should be paid to the contract language including its choice-of-law and forum selection provisions. See id.
Forum selection, arbitration and choice of law clauses are enforced if they are properly incorporated into the bill of lading.
The terms of a charter party can be incorporated into a bill of lading, provided it is clearly done on the face of the bill of lading.
Foreign forum selection clauses and foreign arbitration clauses found in incorporated charter parties are enforced if the charter party is properly incorporated in the bill of lading. In order to enforce an arbitration clause against a third-party holder, a bill of lading should specifically identify the charter party and clearly incorporate the arbitration clause. A party seeking to avoid enforcement of a foreign arbitration or forum selection clause has the burden of proving a likelihood that “the substantive law to be applied will reduce the carrier’s obligations to the cargo owner below what COGSA guarantees.” Vimar Seguros Y Reaseguros v. M/V Sky Reefer, 515 U.S. 528, 539, 115 S. Ct. 2322, 2329 (1995).
The US is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), as implemented by the Federal Arbitration Act, 9 U.S.C. § 201 et seq (the FAA). The grounds to resist enforcement of the award are limited. As specified in the FAA, “[t]he court shall confirm the award unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the said Convention.” As such, the FAA incorporates only the limited enumerated exceptions or defences set forth in Article V of the New York Convention. In the absence of such a defence, a US court “shall confirm” the award.
Many states have laws allowing the courts to enforce foreign money judgments through adoption of versions of the Uniform Foreign-Country Money Judgments Recognition Act. The procedures and defences can vary from state to state and as such are beyond the scope of this summary. In the absence of a statutory scheme, states will rely on the common law primarily based on principles of international comity.
With respect to arbitral awards, the US is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), as implemented by the Federal Arbitration Act, 9 U.S.C. § 201 et seq (FAA). The grounds to resist enforcement of the award are limited. As specified in the FAA, “[t]he court shall confirm the award unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the said Convention.” As such, the FAA incorporates only the limited enumerated exceptions or defences set forth in Article V of the New York Convention. In the absence of such a defence, a US court “shall confirm” the award.
Arbitration and mediation are available as alternative sources of conflict resolution. The relevant arbitral body is the Society of Maritime Arbitrators (SMA) in New York. Houston and Miami also are looking to become centres of maritime arbitration. Many charters specifying arbitration in New York are ad hoc and do not require that arbitrators be selected from any specific arbitral body.
The SMA provides only limited administration of arbitrations, which generally proceed autonomously under the rules published by that body. The SMA is very active in promoting maritime arbitration in the US, maintaining its roster of arbitrators and in publishing panel awards, which are available on the LEXIS and Westlaw services. The SMA likewise publishes rules for confidential, voluntary and non-binding mediation proceedings, should circumstances warrant the use of that device.
A motion to compel arbitration or a motion to dismiss for lack of jurisdiction would be the typical first-line remedies for a situation where proceedings are commenced in breach of a foreign jurisdiction or arbitration clause.
Additional remedies to respond to proceedings commenced in breach of a valid and enforceable foreign jurisdiction or arbitration clause, such as seeking an award of sanctions or attorneys’ fees, would require an additional showing of clear evidence of bad-faith conduct, in order to place it outside the general rule in the US that each party pays its own attorneys’ fees.
The United States imposes a flat 4% tax on a non-US corporation’s US-sourced gross transportation income, which includes income from spot and time charters where the vessel carries cargo to or from a US port, to the extent such income is not considered Effectively Connected Income (ECI). A non-US corporation may be eligible for a statutory exemption from this tax if it is organised in a qualifying foreign jurisdiction and satisfies certain ownership and documentation requirements.
United States persons who own foreign corporations that own vessels may be subject to certain US federal income tax consequences and filing obligations. Beginning in 2018, shipping income that was previously excluded from subpart F income of a “United States shareholder” of a “controlled foreign corporation” was subject to US taxation as “global intangible low-taxed income,” or GILTI. In 2019, the Internal Revenue Service released guidance informing taxpayers that an election could be made with respect to GILTI, which may mitigate potentially adverse US federal income tax consequences of GILTI.
The inability of ship operators to conduct or facilitate crew changes as a result of the COVID-19 pandemic has created severe impacts on the health and wellbeing of seafarers around the world. In July 2020 a joint statement organised by the UK Department of Transport along with the governments of the United States and several other key shipping jurisdictions, encouraging all International Maritime Organization (IMO) states to designate seafarers as “key workers” providing an essential service and to co-ordinate and implement to the maximum extent possible standard protocols for ensuring safe ship crew changes and travel during the pandemic.
In the United States, the Coast Guard published Marine Safety Information Bulletin (MSIB) 02-20, setting out reporting and infection-control measures to maintain the safety of personnel on board vessels as well as within the port. In MSIB No 11-20, a variety of maritime transportation workers were identified as essential for sustaining the flow of maritime commerce and, in MSIB 13-20, the Coast Guard has noted that, although maritime transportation regulations remain in force related to issuance or renewal of transportation worker or merchant mariner credentials, it will show flexibility when compliance cannot reasonably be met as a result of COVID-19.
“Force majeure” is a concept recognised under US law and will in general be governed by the particular terms of the parties’ agreement as well as the governing law, which may be subject to variation from state to state. Intervening events such as impacts resulting from the coronavirus pandemic have recently been cited as possible force majeure events, though the outcome of any given dispute will, of course, turn on the facts, including the particular terms of the parties’ agreement as well as the governing law.
In the United States, the burden of demonstrating a force majeure event falls upon the non-performing party seeking to have its performance excused. That party must “demonstrate its efforts to perform its contractual duties despite the occurrence of the event that it claims constituted force majeure.” Phillips P.R. Core, Inc v Tradax Petroleum, Ltd, 782 F.2d 314, 319 (2d Cir. 1985). In one case involving a warranty contract to supply fuel on a daily basis, for example, the Third Circuit found that “the non-performing party must still prove how it tried to overcome the event and its effects.” Gulf Oil Corp v Fed Energy Regulatory Com., 706 F.2d 444, 452 (3d Cir. 1983). Under New York law where they are in play, these clauses are typically narrowly construed and “will generally only excuse a party’s non-performance if the event that caused the party’s non-performance is specifically identified. . . .[they] are aimed narrowly at events that neither party could foresee or guard against in the agreement.” In re Cablevision Consumer Litig., 864 F. Supp. 2d 258, 264 (E.D.N.Y. 2012). Force majeure clauses also do not typically protect against risks that are contemplated or obligations expressly assumed at the time of the contract.
Readers should take note of several items covered in the Trends & Developments section of our submission, which survey a number of additional issues currently of note with respect to US legal developments concerning the shipping industry. These include:
As we enter 2021, the impacts of the COVID-19 pandemic continue to be felt throughout the United States and the world. In the short term, the pandemic continues to exert pressure on international maritime trade, and has created obstacles for market participants such as supply chain disruptions or port restrictions on vessels and crew changes. However, the pandemic likewise underscores the crucial role of the shipping industry in the delivery of essential goods as markets continue to move toward the “new normal.”
Beyond COVID-19, there have been several developments in shipping law and regulation worth noting. We set out below several items of interest in our survey, including:
Sanctions Enforcement and Compliance
We have seen a notable increase in shipping companies seeking advice with respect to international sanctions, particularly with respect to Iran, China and Venezuela. This has been an active area of regulation and enforcement. Although the change in administration may cause a shift in priorities for the US Department of Treasury’s Office of Foreign Assets Control (OFAC), this focus is expected to continue.
With respect to encouraging best compliance practices in dealing with current and emerging sanctions trends, OFAC, along with the US Department of State and the US Coast Guard, in May 2020 announced a new advisory directed at the shipping industry, the “Guidance to Address Illicit Shipping and Sanctions Evasion Practices”. The shipping advisory cautions that it is critical that members of the shipping industry assess their sanctions risk appropriately, and as necessary, implement compliance controls to address gaps in their compliance programmes. The advisory recommends taking a risk-based approach, which is particularly important when companies and individuals are operating in or near high-risk jurisdictions. In addition, the advisory notes that entities and individuals involved in the supply chains of trade in the energy and metals sector should also exercise caution, including those that trade in crude oil, refined petroleum, petrochemicals, steel, iron, aluminum, copper, sand, and coal.
The advisory identifies and addresses the following deceptive shipping practices, noting that those in the industry must be vigilant when confronted with these risks and should consider heightened due diligence, as necessary, including: disabling or manipulating the automatic identification system (AIS) on vessels, physically altering vessel identification, falsifying cargo and vessel documents, ship-to-ship transfers, voyage irregularities, false flags and flag-hopping, or complex ownership and management. Best practices detailed in the advisory, in order to identify more effectively potential sanctions' evasion, include institutionalising sanctions compliance programmes, establishing AIS best practices and contractual requirements, monitoring ships throughout the entire transaction life cycle, know your customers (KYC) and counterparties, exercising supply chain due diligence, implementing appropriate contractual language, and information sharing within the industry (including between and amongst, for example, P&I clubs and vessel owners).
Environmental Regulation and Enforcement
On 4 December 2018, the “Vessel Incidental Discharge Act” or VIDA was signed into law, restructuring the way the Environmental Protection Agency (EPA) and the United States Coast Guard (USCG) regulate incidental discharges from commercial vessels. The VIDA requires the EPA and the USCG to develop standards of performance and implementing regulations, respectively, for these discharges. The EPA has estimated that 66,000 US- and 16,000 foreign-flagged vessels will need to comply with the proposed standards, once finalised. Most recently, on 26 October 2020, the EPA published its notice of proposed rule-making and received public comments on the rule. The EPA will need to address comments received from the public prior to publication of the final rule, after which the USCG is to develop corresponding implementing, monitoring, and enforcement regulations by late 2022.
Alter Ego Claims
Powerful pre-judgment remedies are available to creditors with maritime claims in a US federal court, including the attachment of a debtor’s assets or the arrest of its vessel. These remedies can provide significant leverage to a creditor seeking recovery on a maritime claim. From a ship-owner’s perspective, however, an unwarranted maritime claim asserted against its vessel can create a substantial unexpected burden on the vessel and severely disrupt the ship-owner’s business. These claims continue to be brought under increasingly complex theories.
Our maritime litigators have seen and successfully defended against complex “alter ego” claims under which vessels are arrested for the debt of an unrelated third party. In one case, the plaintiffs had alleged a complex theory that the ship managers, ship-owner and the underlying vessel were somehow each “alter egos” of one another. Plaintiffs argued that, because the ship managers were contractually obliged to perform all of the day-to-day management of the vessel, they “dominated and controlled” the ship-owner’s decisions as well. If their “domination and control” allegations were accepted, the ship-owner and its shareholders would have been made responsible for the obligations of a wholly unrelated third party.
Often, plaintiffs seek to establish “domination and control” by pointing to indicia such as common ownership, overlapping officers or directors, under-capitalisation, or the failure to follow corporate formalities. If these factors are established, a court might permit a claim to enter discovery, but these factors should be insufficient standing alone to prevail unless they are shown to be part of an abuse of the corporate form or a scheme to defraud third parties. In fact, courts may only find alter ego status under limited circumstances in an admiralty case, where the controlling entity used its subsidiary to perpetrate a fraud or where it was engaging in such a course of domination and control that it was using the controlled entity for its own personal business rather than any separate corporate function. This is based on a long-standing policy of limited corporate liability protection in the United States. As found by the Supreme Court, a corporate veil should only be pierced in the extraordinary circumstances where the corporate form is “misused to accomplish certain wrongful purposes, most notably fraud, on the shareholder’s behalf.” See United States v Bestfoods, 524 U.S. 51, 62 (1998). This is particularly important in the shipping industry where “overlapping ownership structure and management agreements are. . .common.” See Swaidan Trading Co, LLC v Dileton Mar. S.A., CV 18-994, 2018 WL 2017597, at *3 (E.D. La. 1 May 2018).
Force Majeure Events
The purpose of contractual “force majeure” clauses is in general to relieve a party from its contractual duties when its performance has been prevented by a force beyond its control or when the purpose of the contract has been frustrated, although the burden of showing the applicability of such a clause falls to the party seeking to have its performance excused. In addition, these clauses typically do not protect against risks contemplated or obligations expressly assumed at the time of contracting.
In the shipping and transportation industries, international market declines and asset price volatility may incentivise parties to seek relief under their contracts by using an intervening event such as COVID-19 as a tool to renegotiate unfavourable contract positions. For example, LNG cargoes due to land in China were at risk in the past year as certain customers had reportedly declared the emergence of the virus as a “force majeure” event. Although the question of the pandemic’s foreseeability is now largely in the past as a general matter, new variants of the virus emerging in the UK and South Africa or other similar developments continue to counsel in favour of a close review of existing or contemplated contractual clauses as to what unforeseen risks may fall within the scope of any force majeure or similar clause.
The London Interbank Offered Rate (LIBOR), which is commonly used as an index to determine the interest rate on financial contracts, is expected to be no longer available after 2021. While the exact timing may be delayed, the financial industry has been preparing itself for the eventual transition of LIBOR. For the maritime industry – being a capital-intensive one that has significant exposure to financial contracts tied to LIBOR – LIBOR’s transition could have an impact as the financial industry develops a consensus around how the existing financial contracts will need to be transitioned and the new reference rate will be incorporated. One of the latest developments in this regard is a legislative solution being proposed in the New York State Senate, that will minimise legal uncertainty among those legacy contracts that do not currently have a mechanism for a reference rate that will replace LIBOR.
Outer Continental Shelf Lands Act
The National Defense Authorization Act, passed in the United States Senate in late December 2020, has affirmed that the Outer Continental Shelf Lands Act applies to offshore wind and other renewable energy projects constructed on the US Outer Continental Shelf, which will mean that all US laws, including the Jones Act, will apply to offshore wind development. As it relates to the maritime industry, vessels that work on these offshore wind developments will need to comply with the Jones Act to the extent their activities are within the reach of that statute.