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Offshore Winds

A Legal Barometer for Marine and Energy Business

Legal Definition of a Vessel: That Certain Unnamed Gray, Two-Story Vessel Before S.C.O.T.U.S. — Part 1

By Joseph A. Devall, Jr. on Posted in Ports & Cargo Shipping

A feisty dachsund and its owner, Fane Lozman, have stirred up troubled waters regarding the definition of a “vessel” in City of Riviera Beach v. That Certain Unnamed Gray, Two-Story Vessel Approximately Fifty-Seven Feet in Length, 649 F. 3d 1259 (11th Cir. 2011). That case, which is now before the 2012–2013 session of the United States Supreme Court, started out with the City of Riviera Beach, Florida, attempting to evict Mr. Lozman and his floating home from the city’s marina because, among other things, he refused to keep his dog—a small Dachshund—muzzled.

The case may have far reaching implications. It has attracted interest and amicus briefs from the federal government, numerous floating home owners and their associations, lawyers, law professors, the Marine Bankers Association, carpenters, and owners and operators of riverboat casinos, all of whom claim they will be affected by the Supreme Court’s decision. In a two-part blog post, Offshore Winds will look at both sides of this argument over the definition of “vessel.”

The City of Riviera Beach claims Mr. Lozman’s structure is a vessel and brought an in rem proceeding against it. Mr. Lozman disputed that claim. The position of Mr. Lozman, along with the American Gaming Association, the carpenters, certain lawyers, and the floating homeowners, was that in determining whether a structure was a “vessel” under Section 3 of the Rules of Construction Act, 1 U.S.C. §3, the Court must take into account practical considerations such as historical use, its current use, and its reasonable intended use for the future. The matter is being watched closely within the Fifth and Eleventh Circuits, where employees of semi-permanently moored riverboat casinos are subject to workmen’s compensation laws, not federal maritime law. Additionally, floating homeowners argue that expanding the definition of vessel to include their floating homes would subject them to new federal laws, including maritime liens, which would frustrate certain local regulations. They argue that practically their homes are a mere extension of the land, and should be treated as such in the courts.

The United States Court of Appeals for the Eleventh Circuit agreed with the City of Riviera, disagreeing with jurisprudence from the Fifth and Seventh Circuits defining what is a vessel. In Part 2, we will look at why that Court held Mr. Lozman’s floating home was a vessel.

Oil Spill Case Shows Need to Screen Chartered Vessels & Operators

By Robert J. Stefani on Posted in Marine Pollution, Maritime Accidents
Oil Spill on the Mississippi River


The Coast Guard patrols a safety zone around a partially sunken barge. The motor vessel Tintomara and the tugboat Mel Oliver collided in the Mississippi River in New Orleans spilling approximately 419,286 gals.of number six fuel oil. 

 

(AP Photo/U.S. Coast Guard – Petty Officer 2nd Class Thomas M. Blue)

A judge’s recent decision on where legal liability lies for a maritime accident which released thousands of gallons of oil into the Mississippi River illustrates the benefits of being proactive in vetting operator quality when chartering vessels. The case involved a July 2008 collision near New Orleans between an oil barge and the vessel TINTOMARA. The collision damaged the ship and resulted in the barge splitting, sinking and spilling 282,000 gallons of oil into the river. The oil barge and her tug were both owned by American Commercial Lines (ACL). However, ACL had bareboat chartered its tug to DRD Towing, who in turn time chartered the tug back to ACL.

In Gabarick, et al. v. Laurin Maritime (America) Inc., et al., Case No. 08-04007, the U.S. District Court for the Eastern District of Louisiana found that the collision was caused solely by the negligence and statutory violations of the tug, for which DRD was liable. The owners of the TINTOMARA argued that ACL also was at fault because it failed to exercise proper control over DRD, which allegedly had a bad safety record. While the Court suggested that ACL’s liability could be premised on proof that ACL knowingly placed an unsafe vessel into the hands of an unsafe operator and such placement caused the collision, the Court found that the shipowner failed to meet its burden of proof on this issue.

Instead, the Court found that ACL’s vetting of DRD’s licensing, accident history and compliance with the Federal 12-hour watch rule, while imperfect, was nonetheless reasonable. There was evidence that DRD was involved in 17 accidents in the 18 months leading up to the collision and that ACL reviewed the accidents involving its vessels in order to determine the need for corrective action. ACL’s oversight also included a management audit of DRD, as well as quarterly meetings. These actions never revealed evidence that DRD was either using unlicensed operators or working crews in violation of the 12-hour watch rule.  However, the Court specifically found evidence that DRD concealed this information from ACL, and held that ACL was not accountable for such concealment. Based on these findings, the Court dismissed the TINTOMARA’s claims against ACL, and ordered DRD to pay ACL all of its stipulated recoverable damages, plus interest and costs.

Screening Critical
The case serves as a reminder that screening chartered vessels and their operators for quality and safety, and including and adhering to quality and safety standards in time charters, can reap benefits both in protecting against accidents and defending the charterer from legal liability if accidents occur.

BOEM Finding Advances Development of Mid-Atlantic Offshore Wind Farm; But Tailwinds are Behind Faster Moving Gulf Coast Projects in State Waters

By Robert J. Stefani on Posted in Energy, Offshore Wind

Middelgrunden Wind Plant (HC Sorensen, Middelgrunden Wind Turbine Cooperative, NREL/Pix 17855

On May 14, 2012, the Bureau of Ocean Energy Management (BOEM) announced a finding of “no competitive interest” with regard to a proposed right-of-way grant area off the Mid-Atlantic coast for construction of an offshore wind energy transmission line. While BOEM’s decision represents a key step forward for this federal offshore wind farming project, two fast-moving projects off the coast of Texas suggest that development in waters under state jurisdiction may well have the inside track over federal projects, due to a more streamlined regulatory process. In addition, offshore wind projects along the Gulf Coast benefit from a general population more welcoming to offshore industry, as well as a high concentration of marine and offshore industrial fabricators and service companies that give the Gulf Coast a competitive advantage with lower construction, operation, transportation and maintenance costs.

The Coastal Point Energy project has been licensed for testing by the Texas General Land Office and contemplates installation (planned for the end of 2011 but apparently delayed) of a test wind turbine on a platform in shallow Texas waters of the Gulf of Mexico. Ultimately, Coastal Point plans to spend $720,000,000 on a 300 megawatt wind farm 8.5 miles off Galveston on 12,350 leased acres.  Additionally, the Army Corps of Engineers is developing an environmental impact statement, anticipated to be completed in 2014, for a second project under development by Baryonyx Corporation, Inc.  Baryonyx holds leases in Gulf of Mexico state waters, offshore Willacy and Cameron Counties, and proposes to construct an approximately 300-turbine wind farm.

As the Gulf Coast offshore wind industry continues to develop, it brings with it supply chain manufacturing and related job growth.  An example of the potential for such economic development is the manufacturing facility established by UK-based Blade Dynamics at the Michoud Assembly Facility in New Orleans East.  Incentivized by state tax credits and worldwide demand for wind turbine parts, the company is hiring hundreds of workers. This type of green energy industrial development bodes well for the economic future of a region whose prospects were severely compromised by the Obama Administration’s drilling post-BP spill drilling moratorium and general hostility to the oil and gas industry that traditionally has been the backbone of the area economy.

11th Circuit Approves Pro Rata Apportionment to Plaintiff and Intervenors of Attachment Costs

By James D. Bercaw on Posted in Marine Services, Maritime Contracts, Ports & Cargo Shipping

In the unpublished opinion of  Adams Offshore, Ltd. v. Blake Marine Group, No. 11-12753 (11th Cir. Apr. 27, 2012), the Eleventh Circuit Court of Appeals adopted the Fifth Circuit’s suggestion in Beauregard, Inc. v. Sword Servs., L.L.C., 107 F.3d 351, 353 n. 8 (5th Cir. 1997), and affirmed the district court’s allocation of costs to each unsuccessful attaching party in proportion to the value that each party alleged was owed them by Oceanografia to the alleged value of all claims asserted against Oceanografia.  This decision addressed the infrequent scenario when significant expenses are incurred by a party in initially arresting/attaching the property, other creditors intervene in that suit, but the arrest/attachment of the property is subsequently vacated, resulting in there being no fund for which to pay the expenses of arrest/attachment and preservation of the property, more commonly referred to as custodia legis, literally expenses incurred “in the custody of the law.”

Oceanografia owned a modular diving system that had been installed on a vessel engaged in oil field work off the coast of Mexico.  Seizing on the opportunity to assert its claims against Oceanografia while the vessel and Oceanografia’s diving system were in Mobile, Alabama, Adams Offshore filed suit against Oceanografia and requested the attachment of the diving system under Rule B as security for its claims, alleged to be worth $7 million.  Thereafter, similarly situated creditors, Blake Marine and Cashman Equipment, intervened in Adams’ action, and asserted their respective claims of roughly $61 million and $1.7 million against Oceanografia.  Over one year after Adams had the diving system attached, the district court vacated the attachments of Adams, Blake and Cashman for equitable reasons.

During the time Oceanografia’s diving system was in the custody of the court, more than $200,000 in costs and expenses had accrued, including the Marshall’s fees, dockage, expenses to clear the diving system through customs, expenses to survey, oversee and remove the diving system from the vessel, storage and insurance, all of which had been initially borne by Adams as the first attaching creditor.  However, because the maritime attachments were vacated, there was no fund generated by the sale of Oceanografia’s property to pay the costs of attachment, much less the underlying claims of Adams, Blake and Cashman.

Local Admiralty Rule 6(c) for the Southern District of Alabama provided as follows:  “Intervenors under this rule shall be liable for costs together with the party originally effecting seizure on any reasonable basis determined by the court.”  S.D. Ala. Loc. Adm. R. 6(c).  The district court concluded that it was reasonable to assess the attachment costs against Adams, Blake and Cashman in proportion to the value that their respective claims bore towards the total of all claims asserted in the pleadings:  Adams – 10%, Blake – 87.5% and Cashman – 2.5%.  On appeal, the Eleventh Circuit affirmed the district court’s assessment of costs, concluding that allocating costs based on the respective value of the parties’ claims was reasonable.  Id. at 5 (citing Beauregard, supra.)

The Adams Offshore decision provides several lessons.  First, it is reasonable to share the costs of an unsuccessful attachment among all unsuccessful maritime claimants, not just the claimant that filed suit first.  Second, the days of a “costs free lunch” appear to be ending for creditors who subsequently intervene in another party’s action after the arrest/attachment of the property has been initially perfected.  Third, attorneys should avoid the temptation to “overstate” the value of their clients’ claims in cases of maritime arrest/attachment because the amount alleged is one basis a court could utilize in apportioning the costs of an unsuccessful maritime arrest or attachment.

What’s done cannot be undone: The perils of e-mail confirmations of payments for vessel necessaries

By James D. Bercaw on Posted in Marine Services, Maritime Contracts, Ports & Cargo Shipping

Most contracts for the sale of goods and services contain a standard provision regarding the application of payments on overdue accounts, such as:  “When more than one invoice is past due at the same time, Seller shall be entitled, at its sole discretion, to specify the particular invoice to which any subsequent payment shall be applied.”  Additionally, those contracts also may contain a provision that payments on overdue invoices shall first be applied to any accrued interest, and thereafter to any amounts outstanding.

The U.S. Fifth Circuit recently concluded that a seller’s confirmation of payment of an invoice in full precluded “reallocation of that payment in a different manner at a different time.”   World Fuel Services, Inc. v. MAGDALENA GREEN M\V, No. 11 – 30722 (5th Cir. Mar. 14, 2012).  As a result, a bunkers supplier’s arrest of a vessel for alleged late payment of an invoice for fuel was properly vacated because the seller had acknowledged the underlying debt had been paid in full.

SESL executed a general bunkers contract with WFS, which contained the payment allocation provisions mentioned supra.  SESL subsequently time chartered the MAGDALENA GREEN and another vessel, the UTA, and thereafter purchased approximately $245,000 in bunkers from WFS for both vessels.  After WFS demanded payment in full for fuel supplied to both vessels, SESL forwarded an e-mail:  “Please find the attached remittance slips.  All payments are made.  Please re-confirm thanks.”  WFS replied, “Thanks – confirmed all paid.”

Six months later, WFS filed suit against the MAGDALENA GREEN for SELS’s untimely payment for fuel, and the vessel was arrested.  In response to the owners’ defense that the invoice for the bunkers provided to the vessel had been paid in full, WFS argued that the provisions of its contract allowed it to apply payments to accrued contractual interest and fees from older invoices, presumably from other vessels, leaving the invoice for the bunkers provided to the MAGDALENA GREEN outstanding after receipt of the $245,000 payment from SESL.  The Fifth Circuit affirmed the district court’s dismissal of WFS’s suit.

The court noted the payment allocation provisions of WFS’s contract.  However, the court concluded WFS’s unconditional acceptance of that payment as “all paid” nullified those payment allocation provisions.

By confirming “MAGDALENA GREEN paid today,” WFS exercised its discretion to specify the invoice to which SESL’s payment would be applied.  WFS has the contractual right to allocate payments when they are made, but it does not have the right to then allocate those payments in a different manner at a later time.

Id. at 4.  Once the MAGDALENA GREEN’s debt to WFS had been paid, its liability and WFS’s maritime lien were extinguished.

In order for ship suppliers to take advantage of the payment allocation provisions of their contracts, they need to first decide how they are going to allocate such payments.  If they allocate the payment first to older invoices and/or to interest, prudent practice suggests that they advise their purchasers within a reasonable time after payment is received as to how the payment has been applied to the overdue account.  As the Fifth Circuit concluded, much like Lady Macbeth’s lament, once the seller tells the purchaser that an invoice is “all paid,” it cannot undo what’s been done.

If in Doubt, File the Complaint for Limitation of Liability

By James D. Bercaw on Posted in Jones Act, Marine Services, Maritime Contracts, Ports & Cargo Shipping

One of the recurring issues in handling maritime wrongful death and personal injury claims is determining what information is sufficient to start the vessel owner’s six-month deadline to file a complaint seeking exoneration or limitation of liability under the Shipowners’ Limitation of Liability Act, 46 U.S.C. § 30501 et seq. from that claim.  It is clear that a written demand for payment/settlement before suit is filed which exceeds the value of the vessel will start the running of the six-month period.  Additionally, when the petition alleges recovery of damages in excess of the value of the vessel, the vessel owner’s receipt of that petition will start the clock.  However, it is less certain when the written notice of the claim is via service of a state court petition in which the plaintiff has not alleged a specific damages amount, as is generally the case in Louisiana and Texas state courts, but thereafter makes an initial settlement demand that exceeds the vessel’s value.

The U.S. Fifth Circuit, in In re Eckstein Marine Service L.L.C., No. 10 – 20600 (Feb. 22, 2012), recently examined this issue.  Jackson, a Jones Act seaman employed by Eckstein, filed suit in Texas state court.  Eight months after it was served with Jackson’s state court suit, Eckstein filed a limitation proceeding in Texas federal court.  The Fifth Circuit affirmed the federal court’s judgment dismissing Eckstein’s limitation proceeding for lack of subject matter jurisdiction, concluding that the limitation proceeding had been filed too late.  Although Jackson’s state court petition was silent on the quantum of damages, the Fifth Circuit concluded that pleading revealed a reasonable possibility that Jackson’s claim would exceed the value of Eckstein’s vessel, and therefore the clock started running for Eckstein to file a limitation suit upon its receipt of service of the state court petition.

Jackson’s state court petition had alleged that on February 28, 2009, Jackson had sustained serious and debilitating injuries on Eckstein’s M/V ST. ANDREW when his left leg became entangled in a line and was thereafter pulled into a mooring bit, causing him to suffer serious and debilitating injuries of a permanent nature.  The petition also alleged the standard laundry list of damages categories:  past loss of earnings, future loss of earnings capacity, past and future disability, past and future disfigurement, past and future medical and hospital expenses, past and future pain and mental anguish and maintenance and cure.  Moreover, as part of Eckstein’s cure obligation, it monitored Jackson’s medical treatment, which revealed multiple surgeries during Jackson’s initial two-week hospitalization to insert hardware to treat his bone fractures, as well as to perform debridement and skin graft procedures.  Based on the foregoing information, the Fifth Circuit concluded that the service of Jackson’s petition on April 28, 2009 started the six-month period for Eckstein to file its limitation complaint.

Eckstein, who filed the limitation complaint on January 18, 2010, argued that the six-month period should have started on December 2, 2009, when Jackson made his initial settlement demand for $3 million.  Under that theory, Eckstein’s limitation complaint clearly would have been timely.

The Fifth Circuit affirmed the federal district court, concluding that service of the Texas state court complaint on April 28, 2009, coupled with Eckstein’s knowledge of Jackson’s initial two – week medical treatment, raised a “reasonable possibility” that Jackson’s damages would exceed the value of the M/V ST. ANDREW.  As the Fifth Circuit explained:

Once a reasonable possibility has been raised, it becomes the vessel owner’s responsibility to initiate a prompt investigation and determine whether to file a limitation action.  The Limitation Act provides generous statutory protections to the vessel owners who reap all of its benefits.  When there is uncertainty as to whether a claim will exceed the vessel’s value, the reasonable possibility standard places the risk and the burdens associated with that risk on the owner.  In other words, if doubt exists as to the total amount of the claims or as to whether they will exceed the value of the ship the owner will not be excused from satisfying the statutory time bar since he may institute a limitation proceeding even when the total amount claimed is uncertain.

Id. at p. 9.  Accordingly, the Fifth Circuit concluded Eckstein’s limitation complaint should have been filed by October 28, 2009 and not on January 18, 2010.

Vessel owners – as the title suggests, when in doubt, file the limitation complaint.

Costa Concordia – Lessons Learned and Path Forward

By Andrew J. Quackenbos on Posted in Marine Services, Maritime Contracts, Ports & Cargo Shipping

Photo via ABC News

When the Costa Concordia ran aground on a reef off Giglio Island near the Tuscan coast of Italy last month, owners and insurers of vessels certainly paid attention.  How could they not?  The incident was the most noteworthy shipping casualty since the Exxon Valdez disaster, and it is now being called the biggest ever shipping loss for insurers.

While the investigation into the causes of the incident is ongoing, early indications are that it could have been avoided.  And even if it was unavoidable, the management of the ensuing emergency by the captain and the crew of the Costa Concordia apparently left a lot to be desired.  The fallout has been immense, and a magnifying glass has been placed over many issues relating to proper navigational practices and emergency management.  Environmental concerns have arisen amid reports of spilling oil and fuel  from the Costa Concordia’s hull.  And, now, the ship’s owner is faced with determining whether it should salvage, cut or sink it, a decision that should have major financial, logistical, and environmental risks and ramifications.

In short, the current and potential issues associated with the incident are limitless.  Thus, marine companies should view the matter as motivation to shore up their own policies and procedures.  As suggested by Kevin Gilheany of Maritime Compliance International, marine companies should take this opportunity to review their own navigation standards, as navigational error by the captain of the Costa Concordia is widely regarded as the main cause of the entire incident.  It also would be beneficial to use this incident to refresh both captain and crew with those navigation standards and to drive home the need to be vigilant at all times.  Marine companies also should ensure that their crew knows their emergency and evacuation protocol.  Moreover, if passenger vessels are in their fleet, they should ensure captain and crew understand that, in emergency evacuation scenarios, there is a responsibility on their part to evacuate the passengers first.  By taking such steps, vessel operators will improve their chances of avoiding a casualty of their own and certainly be in a better position to handle such a casualty in the event that one occurs.

When No Privity of Contract Qualifies as “Any Contractual Relationship” under OPA

By James D. Bercaw on Posted in Marine Services, Maritime Contracts

Transactions to procure supplies for vessels engaged in international trade typically involve numerous international and local brokers, agents and contractors.  The vessel operator or charterer will place an order for supplies with a broker.  The broker locates a seller with the best price and reputation in the vicinity of the vessel.  The seller makes arrangements with one or more contractors to deliver the supplies to the vessel.  At the agreed time and place, the vessel thereafter pays the broker, who ensures that the seller is paid in full less any broker’s commission.  The seller then compensates the delivery contractor at their agreed rate.  (Of course, failure to timely pay by the vessel interests potentially gives rise to maritime liens against the vessel in favor of the suppliers.)

Under the foregoing arrangements, it is clear that there is no direct contract between the vessel interests and the delivery contractor.  However, for purposes of the Oil Pollution Act, the U.S. Fifth Circuit has concluded that the typical arrangements for the sale and delivery of bunker fuel to ships can qualify as a “contractual relationship”, with the result that the vessel could not avoid strict liability for clean-up costs under OPA for a fuel spill resulting from the collision the vessel and a barge, hired by the fuel seller to deliver the fuel to that vessel. Buffalo Marine Servs. Inc. v. United States, No. 10-41108 (5th Cir. Nov. 22, 2011). In so holding, the Court approved the government’s broad definition of “contractual relationship,” which correspondingly resulted in a very limited scope of one of OPA’s affirmative defenses.

The operators/charterers of the TORM MARY had purchased fuel from Bominflot through LQM, a fuel broker.  Bominflot hired Buffalo Marine, the owner/operator of a tug and barge, to deliver the fuel to the TORM MARY.  As Buffalo Marine’s tug was maneuvering the barge alongside the TORM MARY, the barge collided with the TORM MARY, holing the her hull and fuel tank and resulting in a spill of 27,000 gallons of heavy fuel oil into the Neches River.  The fuel was never transferred from the barge to the TORM MARY.

Under OPA, the TORM MARY, as the responsible party, was strictly liable for the removal costs and damages resulting from the spill unless it established, by a preponderance of the evidence, that the spill was caused solely by an act or omission of a third party, other than a third party whose act or omission occurs in connection with any contractual relationship with the responsible party.  33 U.S.C. § 2703(a)(3).  The National Pollution Funds Center (“NPFC”) denied the claim of the vessel owners and insurers for reimbursement of certain clean – up expenses, concluding that they had failed to establish as part of their affirmative defense that Buffalo Marine’s acts were not in connection with any contractual relationship with the TORM MARY interests.  The NPFC had interpreted the phrase “any contractual relationship” in OPA as not being limited to contractual relationships where there is direct privity of contract.  Instead, “any contractual relationship” also included indirect contractual relationships in connection with the commercial sale and delivery of fuel via a chain of agents and contracts between the TORM MARY interests – the fuel purchasers, and Buffalo Marine – the seller’s delivery agent.  According to the NPFC, the mere fact that the bunkers were not ultimately delivered did not affect the contractual nature of the relationship between the TORM MARY interests and Buffalo Marine.

Accordingly, Buffalo Marine’s acts or omissions in causing the collision were by a third party who had a contractual relationship with the TORM MARY interests.  As a result, the NPFC rejected the TORM MARY’s affirmative defense under OPA that the spill was solely caused by Buffalo Marine.

The district court denied via summary judgment Buffalo Marine’s suit for agency review under the Administrative Procedure Act.  On appeal, the Fifth Circuit concluded that the NPFC’s interpretation of OPA, more particularly, the phrase “any contractual relationship with the responsible party” was entitled to substantial deference, and was a permissible construction of the statute.  Additionally, the NPFC’s interpretation was consistent with a similar affirmative defense appearing in the Comprehensive Environmental Response, Compensation and Liability Act.  Lastly, the Fifth Court concluded that there was substantial evidence to support the NPFC’s denial of the claim.  Accordingly, the Fifth Circuit affirmed the district court’s summary judgment in favor of the NPFC.

A Checklist: What to Expect When Financing Vessel Construction

By Robert J. Stefani on Posted in Marine Services, Maritime Contracts, Ports & Cargo Shipping

When seeking construction financing for a proposed newbuilding, shipowners should understand and be prepared to address the particular concerns that lenders have in assessing risk and documenting vessel construction projects.

When deciding whether to approve a construction financing loan, lenders focus on certain key factors:

  • Does the shipyard have the requisite experience, manpower and financial wherewithal to complete the project?  To address this concern, shipowners should deal only with established builders with proven records of successfully completing vessel construction projects, preferably involving the type of vessel to be financed.
  • What is the credit strength of the shipowner?  If the lender will not be financing the entire cost of construction, the shipowner must be able to show that it can fund any unfinanced portion of the cost as well as any owner furnished equipment.  As with any loan, the financial strength and operating experience of the shipowner also will be important to the lender’s assessment of the shipowner’s ability to operate the vessel profitably and make debt service payments.
  • Is the shipowner overpaying for the vessel?  Shipowners should be prepared to demonstrate that the construction cost is in line with vessels of similar type. Prudent lenders consult with appraisers to help them evaluate the cost.
  • How strong will the market demand for the vessel be?  As with any business loan, the lender will want to see realistic and verifiable projections of the vessel’s earning potential after construction.  In optimal cases, a ship is constructed for a specific customer of the shipowner and committed under long-term services agreements or charters with firm competitive terms.

Once the lender has agreed to go forward with financing, it is a best practice to involve the lender in the negotiation of the construction contract so that issues that will be important to the lender can be addressed up front.   Nonetheless, in many instances, the shipbuilding contract already has been signed before the shipowner seeks financing.  In those cases, lenders will want to review the contract and may requests amendments to protect the lender’s interests.  Items of particular concern to lenders include:

  • when title passes to the shipowner;
  • the shipbuilder’s obligation to certify as to completion of milestones;
  • the scope of the shipbuilder warranties;
  • the progress payment schedule;
  • provisions relating to documentation of the vessel;
  • builder indemnities against lien claims of subcontractors as well personal injury, property damage and pollution claims arising during construction;
  • the adequacy of insurance coverage during construction; and
  • assignability of the contract as security for the loan.

In the typical construction loan transaction, the lender will take an assignment of the construction contract to secure repayment of the loan.  Under this assignment, if the shipowner defaults in repayment of the loan during construction, the lender will be entitled to take title to the vessel upon completion and sell the vessel to cover its loses on the loan.   The lender will also require that the builder consent to this assignment and agree to subordinate any lien it has in the vessel to the mortgage and other security interests taken by the lender.

As construction progresses, the lender will make advances for progress payments, which are usually repaid on an interest-only basis, until the vessel is completed.  To make these interim advances, lenders usually require supporting documentation that may include:

  • a shipbuilder’ certification that the milestone for which the progress payment is being made has been achieved;
  • invoices of the shipbuilder and other vendors or subcontractors for labor, material and equipment covered by such milestone;
  • releases of any liens in favor of any vendors, materialmen, or subcontractors the cost of whose services, work, equipment or materials is included in the advance;
  • a shipowner-certified advance request;
  • surveys, appraisals, certifications or other documents that a lender may require to establish that the advance is for a purpose authorized under the loan documents;
  • if an advance is made to reimburse the shipowner for owner-furnished equipment, proof of payment of the expenditures for which reimbursement is sought,

Once the vessel is completed, the construction-phase interim loan will convert to permanent term financing secured by a preferred ship mortgage on the vessel.  This conversion usually occurs in connection with the payment of the final milestone payment under the contract and delivery of the vessel.  At that time, the lender will require delivery of:

  • a term promissory note executed by the shipowner;
  • an Application for Documentation [form CG-1258];
  • Builder’s Certification and First Transfer of Title Document [form CG-1261] signed by the builder;
  • a Warranty Bill of Sale executed by the builder;
  • a Delivery and Acceptance Certificate, evidencing physical delivery of the vessel to the shipowner;
  • a preferred ship mortgage executed by the shipowner in favor of the lender; and
  • a certificate of insurance evidencing the coverages [hull and machinery, P&I, mortgagee’s interest] required by the preferred mortgage.

Depending on the structure of the deal, the lender may require other security documents such as a security agreement, assignment of charter hire and earnings and/or assignment of insurance policies.  The lender will require that the shipowner and shipbuilder coordinate the documentation of the vessel with the Coast Guard with the lender’s contemporaneous filing of its preferred ship mortgage, so that mortgage interest attaches at the time of documentation.

 

Supreme Court Extends the Scope of the Outer Continental Shelf Lands Act Landward

By James D. Bercaw on Posted in Marine Services, Maritime Contracts, Offshore Oil, Ports & Cargo Shipping

The United States Supreme Court, in Pacific Operators Offshore, LLP v. Valladolid, concluded that the widow of an employee who suffered fatal injuries on shore may still recover LHWCA benefits pursuant to OCSLA if her husband’s death had a “substantial nexus” to his employer’s oil and gas operations on the OCS.  This is an unexpected decision based upon loose Congressional language in 43 U.S.C. § 1333(b), which adopts the LHWCA as the workers’ compensation scheme for the “disability or death of an employee resulting from any injury occurring as the result of operations conducted on the outer Continental Shelf” for the purpose of extracting its natural resources.

The Court disagreed with the Third Circuit’s test which was based on a “but for” standard.  The Court also rejected the Solicitor General’s proposal to adopt a Chandris-esque test that the employee have a substantial relation in duration and nature to OCS operations in order to qualify for LHWCA benefits under OCSLA.

Moreover, the Court discarded the en banc Fifth Circuit’s test for coverage that had focused solely on whether the incident occurred on an OCS situs.  The Court consigned to dicta inferences or statements to the contrary in its earlier decisions of Herb’s Welding, Inc. v. Gray and Offshore Logistics, Inc. v. Tallentire that had been interpreted to focus on the situs of the underlying accident as determining whether the employee was entitled to LWHCA benefits pursuant to OCSLA.

Rather, the Court agreed with the Ninth Circuit’s “substantial nexus” test in determining LHWCA coverage for OCSLA purposes.  Although the accident giving rise to this claim occurred on shore, 98% of Valladolid’s work activities were based on platforms and other oil and gas production structures affixed to the OCS.  Accordingly, Valladolid’s widow could recover LHWCA death benefits, pursuant to OCSLA.

Unlike the 30% test set forth in by the Court in Chandris, Inc. v. Latsis, the Supreme Court in Vallalodid left it to the lower courts to develop the boundaries of the “substantial nexus” criteria.  As Justice Scalia pointed out in his concurrence that agreed a “causation-like” standard was appropriate, but disagreed with the “substantial nexus” standard adopted by the Court – “What a tangled web we weave.”