Maritime Contracts

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After protracted and expensive litigation overseas, you obtain a judgment against the defendant. There remains one series of hurdles left to cross: the defendant refuses to pay that judgment and has no assets in the country where the litigation was conducted. However, the defendant (or possibly one or more of its numerous alter egos) has assets in the United States. What should you do to collect on the judgment? If the underlying claim would be considered a maritime claim under U.S. law, one option is filing an enforcement action in federal district court under its admiralty subject matter jurisdiction, 28 U.S.C. § 1333.

In D’Amico Dry Ltd. v. Primera Maritime (Hellas) Ltd., No. 11-3473-cv (2nd Cir. June 12, 2014), the Second Circuit concluded that U.S. district courts have admiralty subject matter jurisdiction over an action to enforce the judgment of a foreign tribunal where the underlying claim on which the judgment was rendered would be considered maritime under U.S. law. D’Amico and Primera executed a forward freight agreement (“FFA”), a futures contract (i.e., contractually enforceable wager) contingent upon the parties’ accurately predicting future market rates for the shipment of goods. Under the FFA, Primera was obligated to pay D’Amico and failed to do so. In accordance with the forum selection and choice of law provisions of the FFA, D’Amico filed suit in the Commercial Court of the Queen’s Bench Division of the English High Court of Justice, which rendered a substantial judgment against Primera.

When Primera failed to pay the English judgment, D’Amico filed suit to enforce that judgment in New York federal court under its admiralty jurisdiction. The district court granted Primera’s motion to dismiss for lack of subject matter jurisdiction because the English judgment was rendered by the Commercial Court and not the Admiralty Court and, additionally, English law would not consider D’Amico’s claim as being maritime.

On appeal, the Second Circuit concluded that the proper inquiry in an enforcement action brought under the district court’s admiralty jurisdiction was whether the underlying claim on which the judgment was based was a maritime claim under U.S. law. The Court recognized that many foreign tribunals do not have admiralty courts even though the foreign tribunals adjudicate maritime claims. Thus, whether a foreign judgment was rendered by a foreign admiralty court was of no moment. Additionally, after a review of various “theoretical and practical reasons”, the Second Circuit concluded that whether a claim is maritime should be determined under U.S. law and not the law of the foreign court that rendered the judgment that is the subject of the enforcement action.

PRACTICE NOTE:  The Second Circuit expressly distinguished its holding from the federal court’s subject matter jurisdiction over enforcement actions brought under the court’s “federal question” jurisdiction, 28 U.S.C. § 1331.  For enforcement suits based on “federal question” jurisdiction, the federal court must have a jurisdictional basis independent of the fact that the judgment was rendered by another federal court.

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.

Don’t forget to include insurers when negotiating members of indemnified groups in master service agreements.

How many insureds entering into a master service agreement (“MSA”) go to bat for their insurers when negotiating who will compromise the members of their respective indemnified “Groups?” Given a recent decision of the U.S. Court of Appeals for the Fifth Circuit (“Fifth Circuit”), Duval v. Northern Assurance Company of America, __ F.3d __, 2013 WL 3367483 (5th Cir. July 5, 2013) (“Duval”), parties to an MSA should add their insurers to the long list of third parties that make up the indemnified “Groups.” In Duval, the Fifth Circuit ruled that the insurers of a party to an MSA were not entitled to enforce their insured’s defense, indemnification, and/or insurance rights under indemnity provisions of the MSA at issue.

Duval arose from injuries sustained by Glenn Duval, an employee of Wood Group/Deepwater Specialists (“Wood Group”), during an offshore personnel basket transfer from a vessel owned by Deep Marine Technologies, Inc. (“Deep Marine”) to a tension-leg platform. Wood Group was a contractor of BHP Billiton Petroleum Deepwater, Inc. (“BHP”). The MSA between BHP and Deep Marine contained reciprocal indemnity obligations and required each party to support their respective indemnity obligations with liability insurance, self-insurance, or a combination thereof. Under the MSA at issue, BHP was the “Company” and Deep Marine was the “Contractor.” Plaintiff Duval filed suit against Deep Marine and others, but not BHP, in the U.S. District Court for the Western District of Louisiana (“District Court”).

After being served with the Complaint, Deep Marine sought defense, indemnity, and an additional insured status from BHP under the MSA. BHP accepted Deep Marine’s tender, as the Wood Group was a member of the “Company Group.” While the suit was pending, and more than one year after BHP accepted Deep Marine’s tender, Deep Marine filed a Chapter 11 Bankruptcy proceeding in the U.S. District Court for the Southern District of Texas. The plaintiff, Duval, moved to lift the automatic stay to proceed with his case against Deep Marine’s insurers, which was granted.  Plaintiff Duval amended the Complaint and named Deep Marine’s insurers as defendants under Louisiana’s Direct Action Statute. Deep Marine’s insurers then filed a Third-Party Complaint against BHP seeking defense, indemnity, and insurance coverage in accordance with the MSA. Cross-Motions for Summary Judgment were filed between Deep Marine’s insurers and BHP, and the District Court granted BHP’s Motion for Summary Judgment, and denied Deep Marine’s insurers’ Motion for Summary Judgment. The District Court ruled that BHP was not obligated under the MSA at issue to provide Deep Marine’s insurers with defense, indemnity, and insurance coverage because, among other reasons, Deep Marine’s insurers were not among the long list of parties compromising who was part of the “Contractor Group,” an indemnitee under the MSA at issue.

On appeal, Deep Marine’s insurers put forth several arguments in favor of their interpretation of the MSA at issue. The Fifth Circuit, however, did not find any of the insurers’ arguments compelling. The Fifth Circuit rejected each of the arguments advanced by Deep Marine’s insurers, and affirmed the judgment of the District Court, as follows:

  1. BHP did not waive defenses to Deep Marine insurers’ claims under the MSA by initially accepting Deep Marine’s tender prior to Deep Marine’s bankruptcy filing.
  2. Deep Marine’s insurers could not recover under the indemnity provisions of the MSA at issue because the Contractor Group did not include insurers. The Fifth Circuit reasoned that if the parties to the MSA at issue intended to include their insurers as beneficiaries of the indemnity provision of the MSA at issue, they could have expressly done so as other parties have done in other MSAs.
  3. Deep Marine insurers argued that they stepped into the shoes of the subrogor, Deep Marine, once payment is made. The Fifth Circuit disagreed because the insurers could not recover from BHP absent a loss by Deep Marine in Duval, and Plaintiff Duval’s claims against Deep Marine were stayed indefinitely due to the bankruptcy proceeding.
  4. Relying on Texas law, the Fifth Circuit also found that BHP’s primary million dollar “self-insurance” did not confer additional insured status to the insurers as “the term ‘self-insurance’ is a misnomer” because “in effect, a self-insurer does not provide insurance at all.”
  5. Although Deep Marine’s insurers were correct that Deep Marine’s bankruptcy does not discharge the debt of any third party, including BHP, as the Fifth Circuit noted, the Plaintiff Duval did not assert any liability against BHP.

The Fifth Circuit’s decision was based heavily on the language of the MSA at issue, and the posture of Duval. In order to attempt to avoid the same outcome, and to protect insurers, parties to an MSA need to include their insurers as members of the respective indemnified “Groups.” Parties drafting contracts should be familiar with Duval, so, during the negotiating phase, parties can support their rationale when drafting indemnity and insurance provisions of MSAs to include their insurers as members of the indemnified “Groups.”

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.

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.

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.

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.

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.

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.

 

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.”