OSV OutlookI attended an excellent conference on March 3, 2016, put on by WorkBoat® exploring the “OSV Capital Outlook for 2016 and Beyond”. The conference featured a diverse and highly experienced panel of speakers including investment and marketing analysts and consultants, vessel operators, shipyard executives and WorkBoat® editors. You may want to read WorkBoat’s® own blog post about the conference; my takeaways from attending are as follows:

  • Praveen Narra, a Raymond James analyst, indicated that while oil prices appear to have bottomed and are beginning to climb toward an expected range of $65 to $70 per barrel in 2017 and 2018, a sustainable turnaround in OSV day rates and utilization should not be expected until at least 2018.
  • Mr. Narra stated that actual rig tendering activity will likely continue to decline in 2016 with no substantial uptick in day rates until 2017.
  • Richard Sanchez, a marine analyst with IHS Energy-Petrodata MarineBase, cautioned that when drilling activity does resume, it is likely to first rebound onshore rather than offshore, as onshore projects can be brought to production much faster, more efficiently and at less cost than offshore projects.
  • Sanchez is seeing that the downturn in OSV utilization is affecting shallow water platform supply vessels more than large PSVs and anchor handling tugs, with day rates for shallow water PSVs at below break-even levels.
  • Matthew Rigdon, a senior executive with Jackson Offshore Operators, cited as one of the lingering effects of this downturn the loss of trained, certified and licensed labor to operate vessels when the rebound finally does occur. Many mariners will move to jobs in other industries. Additionally, U.S. Coast Guard certification requirements necessitate expensive periodic training and recertification, the cost of which is traditionally shared between OSV operators and the mariners. Many out-of-work mariners may not have the means or inclination to maintain these certifications, which will shrink the pool of qualified labor available when their services are needed.
  • Allen Brooks, managing director at PPHB, LP, cited as the “elephant” in the rig market the degree of debt-load of drilling companies. This also is a significant concern for OSV operators. High debt service obligation coupled with diminished cash flows due to low utilization and low day rates will lead to substantial destressed asset activity. However, the amount of this activity is unknown. It is also unknown when investors will begin to seize the opportunity to acquire these assets.

Armed with knowledge of the bleak outlook, OSV operators should be pro-active in making decisions regarding stacking of vessels, redeployment or laying off personnel, cost cutting and restructuring debt-loads. Bankers are traditionally hesitant to repossess OSVs. There is significant costs in storing and maintaining them pending resale and these costs could mount if, as is the case now, prospects for an advantageous resale are dim. It should be emphasized that the current downturn in the OSV market does not only affect the Gulf, but is a global phenomenon. Thus, there will be no buyers for these vessels until the market begins to rebound. This gives OSV operators leverage in restructuring negotiations. [On that note, see my post of November 23, 2015.]

Louisiana Governor John Bel Edwards’ proposal for short term fixes for the State’s fiscal problems includes a shot at already-hurting offshore supply vessel owners/operators. OSV operators/owners currently receive a refundable credit of 100% of the ad valorem taxes paid on vessels operating on the Outer Continental Shelf. The Governor’s plan would suspend these credits for 2016 and reduce them to 80% beginning in 2017.Offshore Supply Vessel Tax Credit

Governor Edwards made his pitch to the industry at a recent meeting of the Offshore Marine Service Association in New Orleans. He cited the need for all sectors of the Louisiana economy to share in addressing the State’s budget shortfall. However, the proposed suspension and reduction of the credit could not come at a worse time for OSV operators already finding it difficult to weather current stormy market conditions.

Vessel Purchase Agreements
Vessel sales are a constant in the marine industry, even during downturns in the market. In fact, some see adverse market conditions as an opportunity to find bargains on vessels and other marine equipment. Once the buyer has “kicked the tires” on a vessel and the parties have agreed on a price, there usually is great pressure from all sides to quickly sign a purchase and sale agreement and close the deal. However, signing an agreement that fails to or inadequately addresses a key issue can cause problems down the road.

Based on years of negotiating, drafting and reviewing vessel purchase and sale agreements for vessels large and small, here is a checklist of the key business and legal points that should normally be addressed in a vessel purchase agreement:

  1. Deposit – If there is to be a deposit, the parties should specify how much it will be and the condition under which it will be deemed forfeited.
  2. Inspection – These clauses vary widely depending on the circumstances. If the buyer has already inspected and is satisfied with the condition of the vessel, the contract may simply provide that the sale is outright and definite upon execution with no right of inspection. Usually, and especially with larger and/or classed vessels with specialized equipment, the buyer will want the right to inspect the vessel and its class records and have the ability to get out of the contract and receive back the deposit, or receive an adjustment in price, if dissatisfied with the condition of the vessel. If there is to be an inspection, the contract normally specifies the scope of the inspection and provides a strict timeline to accomplish it, and may also spell out the consequences for delaying or impeding inspection, insurance and indemnity for claims of inspectors, and allocation of inspection costs.
  3. Time and Place of Delivery – These clauses may include consequences, such as a right of cancellation and/or liability for damages, for failure to timely deliver the vessel.
  4. Total Loss Before Sale – These provisions normally give the buyer the right to cancel if the vessel becomes a total loss before delivery.
  5. Drydocking or Underwater Survey – Similar to inspection provisions, these clauses should address the circumstances under which the buyer may require drydocking or divers’ inspection and who pays for these inspections, which may depend on what is found during the inspection, and insurance and indemnity for claims arising during drydocking. These provisions may also address the buyer’s right to have the tail shaft or other vessel components surveyed during drydocking.
  6. Bunkers, Spares – These clauses typically address how and when bunkers are quantified and priced and paid for, delivery of spares and other items of vessel equipment and whether these are included in the price or paid for separately.
  7. Closing Documentation – The key issue on this point is that the buyer will want to ensure that the seller’s deliverables include all certificates and other documents necessary to meet the requirements of the registry the buyer plans to use. The contract should provide for these to be delivered as a condition of payment of the purchase price, so the buyer does not have to chase the seller after closing for a piece of paper needed to complete registration of the vessel in the buyer’s name.

Vessel purchase and sale agreements usually also have other customary provisions, such as those addressing:

  • Seller’s obligation to deliver the vessel free from all charters, encumbrances, mortgages and liens.
  • Seller’s indemnification for claims incurred prior to delivery that are asserted after delivery.
  • Allocation of responsibility for taxes, fees and expenses.
  • The required condition of the vessel and equipment upon delivery.
  • Default by the buyer or seller and the consequences of default.
  • Dispute resolution.

Numerous forms of vessel purchase and sale agreements are available publicly to use as templates in drafting agreements and specific clauses. However, when presented with any contract, whether based on an established template (e.g. BIMCO, Saleform) or drafted for the particular deal, you should never hesitate to negotiate what is important to you and revise the agreement accordingly.

I think this Workboat article outlined succinctly the challenges faced by debt-laden shipowners in the current market downturn. With adverse market conditions expected to continue for the long term in almost all shipping sectors, shipowners should be taking the following measures to keep their heads above water:
  • evaluate debt service obligations and ability to pay;
  • assess potential for financial covenant default;
  • reach out to lenders to obtain waivers/amendments to credit facilities; and 
  • identify assets that can be sold.

NOTE: This post was authored for the firm by Amanda James, a Loyola University New Orleans College of Law student who is spending part of her summer working at King, Krebs & Jurgens. — RJS

Contractual Best Effort in Maritime ContractsParties to maritime contracts frequently include requirements that one or the other party or both of them will use their “best efforts” to perform duties described in the contract. But they also frequently give little thought to what the phrase “best efforts” actually means to them and, perhaps more importantly, what a court will say it means should a dispute arise.

Our review of relevant case law indicates that if you want someone to be contractually obligated to use his “best efforts,” the contract should specifically state what the parties mean by this. Maritime courts often look to state contract law when interpreting the parties’ respective obligations under maritime contracts. While state law offers varying approaches to enforcing “best efforts” provisions, two predominate approaches are evident in the relevant case law:

  1. Certain courts will not enforce a “best efforts” provision at all if it lacks an explicit standard.
  2. Other courts will look to the contract and/or the particular circumstances of the dispute to determine whether a party used its “best efforts” to perform a duty.

The first approach is epitomized by the Fifth Circuit in Kevin M. Ehringer Enterprises, Inc. v. McData Services Corp., in which the court held that a “best efforts” provision must include guidelines in order to be enforceable. These guidelines do not have to be detailed. For example, “best efforts to prepare . . . as promptly as practicable” was good enough for the Fifth Circuit in Herrmann Holdings, Ltd. v. Lucent Techs., Inc. On the other hand, an agreement between a charterer and an owner to “use their best efforts and renew this charter in two year intervals . . . ,” was deemed too vague by the court in Orgeron Bros. Towing, LLC v. Higman Barge Lines. Requiring objective standards for enforceability appears to be a minority position, adopted only by the Fifth Circuit applying Texas law and by a Louisiana district court following the Fifth Circuit precedent in Kevin M. Ehringer Enterprises, Inc.

In the second approach, exemplified by the court in Ashokan Water Services, Inc. v. New Start, enforceability is not dependent upon the inclusion of explicit guidelines. Rather, the court is able to infer standards from other contract provisions. This seems to be the more popular position, affirmatively adopted by courts in Maryland, New York, and California. Courts may also determine whether or not a party used his “best efforts” by looking at the circumstances of the case. Under this approach, the court will engage in a fact-intensive inquiry into what a reasonable (read “average, prudent, comparable”) person would have done. To that end, courts will consider the party’s intent, experience, expertise, financial status, opportunities, abilities, goals, and basically anything else that might be relevant.

While this fact-intensive approach may make it difficult to predict an outcome, the California court in California Pines Property Owners Assn. v. Pedotti did delineate a few things that “best efforts” does not mean:

  • It does not mean you are a fiduciary;
  • It does not mean you have to make every conceivable effort;
  • It does not mean you have to ignore your own interests;
  • It does not mean you have to spend yourself into bankruptcy;
  • It does not mean you have to incur substantial losses; and
  • It is not the same thing as the implied covenant of good faith and fair dealing (but it might require you to act in good faith if you’re in Alabama, Louisiana, Maryland, or New York).

The bottom line is that including “best efforts” provisions in a maritime contract can be a good practice, but only if the contract includes guidelines as to what constitutes the party’s “best efforts.” Otherwise, if a dispute arises, the provision may be interpreted as having no meaning at all or in a manner that the parties did not intend.

Coffin v BlesseyOn November 13, 2014, the U.S. Fifth Circuit Court of Appeals held in Coffin v. Blessey Marine Services, Incorporated, Case No. 13-20144, that individuals who loaded and unloaded tank barges as part of their duties as crew of a unit tow were seamen exempt from the overtime requirements of the Fair Labor Standards Act (“FLSA”). The case is important insofar as it distinguished the Fifth Circuit’s previous ruling in Owens v. SeaRiver Maritime, Inc., 217 F.3d 698 (5th Cir. 2001), in which the Court held that a tankerman who was not a crewmember and not tied to a particular vessel was entitled to overtime under the FLSA. The plaintiffs in Coffin argued that the Owens decision foreclosed any factual inquiry into the nature and character of loading and unloading duties and compelled the conclusion that loading and unloading a vessel was in and of itself, without regard to attachment to a specific vessel as seamen for other purposes, non-seaman work as a matter of law.

Finding this reading of Owens to be erroneous, the Fifth Circuit found instead that Owens left open the question of loading and unloading duties for vessel-based employees, and expressly rejected a categorical rule such as that argued by the plaintiffs. Instead, the Court found its decision in Gale v. Union Bag & Paper Corp., 116 F.3d 27 (5th Cir. 1940), in which the Court recognized that vessel-based barge tenders who maintain and service a barge are exempt seamen under the FLSA, also controlled the situation in Coffin. The Court found to be of particular significance the undisputed facts that the plaintiffs ate, slept, lived and worked on the Blessey towboat that comprised a part of the unit tow; that they were members of the crew and worked at the direction of the captain; and that improper loading and unloading could compromise the seaworthiness of the barge. The Court stated: “Critically, the context in which work is done can affect whether it is seaman or non-seaman work.” The Court stated further:

Naturally, when an individual lives aboard the vessel that he or she loads or unloads, this living situation will affect the character of his or her duties. In Owens, the tankerman duties were divorced from the subsequent navigation of the barge. See 272 F.3rd at 704 (noting that the plaintiff did not move or moor the barge and only prepared it for navigation. By contrast, the Plaintiffs here recognized that their loading and unloading duties were integrated with their many other duties. Indeed, the plaintiff in Owens chose not to sue for the time he was a tankerman in navigation. Id. at 700.

In summation, the Court concluded that Blessey’s tankermen were seamen while loading and unloading the vessel because these duties were integrated within their many other duties. Accordingly, the Court saw no basis for distinguishing the tankermen’s loading and unloading duties from the many other duties the vessel-based barge tender performed in Gale.

With increasing frequency, parties to charters and other maritime contracts are including so-called Designated Entity Clauses or “OFAC” provisions. These clauses have the aim of complying with sanction programs such those administered by the U.S. Office of Foreign Assets Control (“OFAC”) or multi-national organizations such as the European Union or United Nations. But, do the provisions truly offer any protection?

Designated Entity Clauses typically include:

  • representations and warranties that the parties are not subject to sanctions and are not Designated Entities;
  • covenants not to subcharter the vessel to Designated Entities or otherwise involve the vessel in sanctioned activities;
  • covenants to comply with applicable law and orders or directives of competent authorities in the event that one party becomes aware that the other party (or a subcharterer or other person doing business with the vessel) is a Designated Entity or otherwise acting in violation of a sanctions program; and
  • the right of a non-breaching party to terminate the contract and direct the vessel to a safe port for offloading of cargo, equipment or personnel.

Earlier this year, BIMCO issued standard wording for this type of clause. Similar provisions now also routinely appear in marine financing documents. In some cases, including the BIMCO clause, they require indemnification of the non-breaching party for any fines, penalties, losses or damages suffered as a result of the breaching party’s violation. Despite their increasing use, however, these types of clauses have some inherent issues.

One clear difficulty of the indemnity provision is that if a party proves to be a Designated Entity, recovery of an indemnity claim from that entity likely would itself be precluded by the sanctions program. Also, irrespective of the terms of the contract, if a party deals with a Designated Entity, they are liable for penalties if they knew or should have known of that party’s status as a Designated Entity. For example, under OFAC regulations, when a person or entity is designated, then no person in the United States can deal with that Designated Entity without a license from OFAC. Prohibitions on dealing with Designated Entities encompass not only situations in which a person has direct knowledge that he is acting in violation of a sanction program, but also situations in which he has “reason to know” that is the case. [See e.g., Office of Foreign Assets Control, Iranian Transactions Regulation, Guidance on Transshipments to Iran] Whether one has a “reason to know” is determined from circumstantial evidence that may consist of the course of dealing, general knowledge of the industry or customer preferences, working relationships between the parties or other criteria. In this context, incorporating a designated entity clause may be viewed as a mitigating factor, but it does not shield the innocent party from liability.

Including Designated Entity provisions in maritime contracts is good practice insofar as it heightens the contracting parties’ awareness of their obligations to comply with sanctions programs. However, one should not believe that doing so will insulate them from liability to governmental authorities or from loss or damage. There is no substitute for conducting proper due diligence on the other contracting party. This includes searching sanction program databases as well as other online resources, and consulting with references and/or other persons who have or may have done business with the party. The bottom line remains the same: Know who you are dealing with before you sign the contract.

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.

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.

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.