I COMMERCIAL OVERVIEW OF THE SHIPPING INDUSTRY
The Republic of the Marshall Islands is home to one of the world’s largest registries of ocean-going vessels, mobile drilling units, floating production platforms and other vessels. More than 3,000 such vessels are registered under the Marshall Islands flag, making up more than 102 million gross registered tonnage (GRT), having recently become the world’s second-largest ship registry. The Marshall Islands is considered an ‘open’ or ‘international’ registry, meaning that it is possible for entities not resident in the Marshall Islands to own Marshall Islands-registered vessels.
The Marshall Islands fleet has grown rapidly since its inception in 1990. Pursuant to a joint venture agreement between the government of the Marshall Islands and International Registries Inc (IRI), IRI – acting as maritime administrator – administers both the maritime and corporate programmes of the Marshall Islands. IRI’s headquarters is in the United States (in Reston, Virginia, near Washington, DC) although it has offices to assist in corporate formation, vessel registration, port state control and mortgage recording throughout the world.2
The Republic of the Marshall Islands is an independent nation comprising atolls and islands in the middle of the Pacific Ocean with fewer than 70,000 inhabitants, but is party to a Compact of Free Association with the United States, pursuant to which the United States provides defence, funding grants and certain social services. As such, although the Marshall Islands has no significant domestic shipping industry of its own, the location of the management of its corporate and shipping programmes in the United States and the political stability derived from its relationship with the United States has allowed its registry to continue to grow without the setbacks that have beset nations supporting other popular open registries.
II GENERAL OVERVIEW OF THE LEGISLATIVE FRAMEWORK
The principal legislation for shipping is the Maritime Act 1990, as amended (Maritime Act). The Maritime Act comprises legislation covering, inter alia, vessel registration, mortgages, financing leases, maritime liens, rules of navigation, the carriage of goods and passengers, liability rules for oil pollution, duties of a master and rights of seafarers, though most practitioners are concerned principally with vessel registration and mortgages.
As noted above, the Marshall Islands flag fleet comprises principally ocean-going tonnage owned by parties not resident in the Marshall Islands. While it is valuable to know that Chapter 6 of the Maritime Act adopts the CLC Convention and that the Marshall Islands is a party to SOLAS and has ratified the Maritime Labour Convention 2006 (MLC), it is equally important to understand that much of Marshall Islands law has its roots in US law.
Indeed, much of the Maritime Act, at least as adopted in its original form in 1990, was based on similar legislation in the Republic of Liberia, which was in turn modelled on US law. In particular, Chapter 3 of the Maritime Act on ship mortgages can be traced back to the US Ship Mortgage Act, 1920 (subsequently amended and recodified). Moreover, Section 113 of the Maritime Act provides that insofar as it does not conflict with any other law of the Marshall Islands, the non-statutory general maritime law of the United States is adopted as the general maritime law of the Marshall Islands. This has the benefit of affording practitioners a deep body of American jurisprudence from which they can draw in analysing legal questions arising under Marshall Islands maritime law.
III FORUM AND JURISDICTION
All causes of action arising under the Maritime Act fall within the jurisdiction of the High Court of the Marshall Islands, sitting in Admiralty, but Section 116 of the Maritime Act specifically provides that nothing in the Maritime Act will be deemed to deprive other courts of jurisdiction to enforce causes of action. Hence, mortgage foreclosures, as is customary in marine practice, continue to be conducted in the courts of the jurisdiction in which the relevant vessel is found at the time of foreclosure and other commercial arbitration, and litigation in commercial matters continues to be pursued in the jurisdictions and before the tribunals to which the parties have submitted. Marshall Islands law generally respects the parties’ choice of law and forum. Indeed, the most recent notable cases somewhat related to international shipping that have been litigated in the Marshall Islands involve shareholder-derivative suits brought by dissident shareholders of Marshall Islands companies that are publicly traded in the United States. Decisions are appealed from the High Court to the Supreme Court of the Marshall Islands. The Supreme Court consists of a chief justice and two associate justices. Historically, the associate justices are pro tempore judges from other jurisdictions (e.g., the United States Ninth Circuit Court, the Republic of Palau, the Commonwealth of the Northern Mariana Islands and Canada).
That said, the Marshall Islands did adopt the Admiralty Jurisdiction Act 1986. That Act separately vested the High Court with jurisdiction in respect of suits involving a claim:
- to the possession or ownership of a ship or the ownership of any share therein;
- arising between co-owners of a ship as to possession, employment or earnings of that ship;
- with respect to a mortgage of or charge on a ship or any share therein;
- for damage received by a ship;
- for damage done by a ship;
- for loss of life or personal injury sustained in consequence of:
- any defect in a ship or in its apparel or equipment; or
- the wrongful act, neglect or default of the owners, charterers or persons in possession or control of a ship or of the master or crew thereof or of any other person for whose wrongful act, neglect or default the owners, charterers or persons in possession or control of a ship are responsible, being an act, neglect or default in the navigation or management of the ship, in the loading, carriage or discharge of goods on, in or from the ship or in the embarkation, carrying or disembarkation of persons in or from the ship;
- for loss of or damage to goods carried in a ship;
- arising out of any agreement relating to the carriage of goods in a ship or to the use or hire of a ship;
- in the nature of salvage;
- in the nature of towage or pilotage with respect to a ship;
- with respect to goods or materials supplied, or services rendered, to a ship for its operation or maintenance;
- with respect to the construction, repair or equipment of a ship, or dock charges or dues;
- by a master or member of the crew of a ship for wages and any claim by or with respect to a master or member of the crew of the ship for any money or property which under any law in force for the time being is recoverable as wages;
- by a master, shipper, charterer or agent with respect to disbursements made on account of a ship;
- arising out of bottomry; or
- for the forfeiture or condemnation of a ship or of goods that are being or have been carried or have been attempted to be carried in a ship, or for the restoration of a ship or any such goods after seizure, or for jetsam, flotsam, lagan and derelict found in or on the sea, the shores of the sea or any tidal water, or for property found in the possession of convicted pirates.
ii Arbitration and ADR
Neither arbitration nor alternative dispute resolution customarily occurs in the Marshall Islands for commercial disputes between non-residents, which includes ‘non-resident domestic’ entities, which are entities formed under the laws of the Marshall Islands, be they corporations, limited liability companies, partnerships or other entities, but that do not do business in the Marshall Islands. Such entities are not deemed resident in the Marshall Islands merely because they register vessels under the Marshall Islands flag or maintain a resident agent there as required by the Marshall Islands Associations Law.
The Marshall Islands is a party to the New York Convention.
iii Enforcement of foreign judgments and arbitral awards
Generally, to the extent that enforcement would be sought in the Marshall Islands (an unlikely occurrence given that non-resident domestic entities are unlikely to have assets in the territory of the Marshall Islands), a foreign judgment may be enforced in the Marshall Islands without a retrial on the merits of the matter provided that (1) the judgment was for a sum of money and was final in the jurisdiction granting the judgment, (2) the court granting the judgment had jurisdiction under the laws of the place where it sat and the judgment did not offend the principles of the Republic of the Marshall Islands as to due process, propriety or public policy, and (3) the defendant was actually present in person or by duly appointed representative and the judgment did not constitute in effect a default judgment.
IV SHIPPING CONTRACTS
The Marshall Islands does not have an active shipbuilding industry for commercial vessels.
ii Contracts of carriage
Chapter 4, Part 1 of the Maritime Act (also cited as the Carriage by Sea Act) governs the carriage of goods. However, consistent with the approach taken generally by the Marshall Islands as an open or international registry, the Carriage by Sea Act, insofar as it relates to the carriage of goods by sea, is only applicable if the goods are carried on Marshall Islands vessels in foreign trade or on other vessels to or from ports of the Marshall Islands in foreign trade. Section 402(f) of the Maritime Act defines ‘foreign trade’ as the transportation of goods between the Marshall Islands and foreign countries or between foreign countries. Therefore, as a practical matter it is principally relevant with respect to Marshall Islands-flagged vessels in international commerce. No similar rules are adopted purely for cabotage trades and there are no rules limiting cabotage trades to Marshall Islands-flagged vessels.
The Marshall Islands has not adopted either the Hamburg Rules or Rotterdam Rules.
iii Cargo claims
A carrier is obliged to make the ship on which the goods are to be carried seaworthy, to properly man, equip and supply the same and to make the holds fit and safe for the reception, carriage and preservation of cargo. While disputes can be submitted to the courts of the Marshall Islands, little, if any, litigation or arbitration occurs within the Marshall Islands over these claims. As noted above, the Marshall Islands generally respects the choice of law and forum by the parties to a contract.
iv Limitation of liability
Similar to the US Carriage of Goods by Sea Act (COGSA), the Carriage by Sea Act contains a ‘package limitation’, although the package limitation under the Carriage by Sea Act provides that unless the shipper has declared the value of the goods prior to shipment, the carrier’s and the vessel’s limit of liability is 666.67 special drawing rights (SDRs) per package or 2 SDRs per kilogram of gross weight of the goods lost or damaged.
Marshall Islands law also provides for the customary exemptions from liability not caused by the carrier’s want of due diligence or for those matters customarily covered by a shipper’s insurance.
The Marshall Islands has adopted the LLMC Convention 1976 as Chapter 5 of the Maritime Act. Pursuant to Chapter 5, various parties are entitled to limit their liability in respect of certain claims but unable to claim the same limitations to others. For example, many claims are limited to an amount equivalent to a variable number of units (as described above in respect of certain cargo claims) following the formula for (1) 1 million SDRs, plus (2) 400 SDRs for each tonne between 2,001 and 30,000, plus (3) 300 SDRs for each tonne between 30,001 and 70,000, plus (4) 200 SDRs for each tonne in excess of 70,000.
i Ship arrest
Marshall Islands ship mortgage law (Chapter 3 of the Maritime Act) is extremely important in the world of vessel finance as so much of the world’s merchant fleet is registered there. Nonetheless, as a small nation comprising thousands of small islands, very few significant carriers trade there. As a consequence, there is no history of vessel arrests on which to draw. More relevant is a brief synopsis of Marshall Islands mortgage law as it relates to enforceability elsewhere and what lien priorities exist by statute to the extent that other jurisdictions follow the laws of the flag state.
As alluded to above, the Maritime Act permits any ‘citizen’, ‘national’ or ‘foreign maritime entity’ to register any seagoing vessel engaged in foreign trade (subject to certain age restrictions and matters of technical compliance described below). For these purposes, this includes any entity formed within the Marshall Islands, regardless of whether legally or beneficially owned by residents of the Marshall Islands, and entities formed elsewhere as long as they register and meet the limited qualifications of a foreign maritime entity.
Once a vessel is registered, a mortgage may be recorded against the vessel. Any such mortgage (which, like Liberia, Panama, Vanuatu and others, follows the American form and not the English-style mortgage form accompanied by a deed of covenants) must identify the owner, the vessel, the amount of the direct or contingent obligations secured by the mortgage and must cover the ‘whole of the vessel’: one cannot grant a mortgage covering a limited interest in the vessel. There are certain formalities required with respect to number of copies, notarisation or legalisation and related items but these are not unduly complicated – more complicated is the nature of the obligations that can be secured.
Unlike English-law-type ‘account current’ mortgages or security interest filings under the Uniform Commercial Code in the various states of the United States, Marshall Islands mortgages are intended to secure specific, identified debts to provide, inter alia, notice to third-party vendors who might be supplying credit to the vessel. This requirement sometimes leads to complications when the parties desire the mortgage to secure obligations that may not be extant or where the amount to be secured is unliquidated (e.g., obligations under a derivatives contract). Traditionally, Marshall Islands mortgages secured debt obligations (loans and other extensions of credit), but changes in the law have made it possible to secure contingent obligations, including revolving credits, letters of credit reimbursement obligations and certain other obligations that are the subject of commitments or agreements subject to certain additional formalities in the language of the mortgage instrument.
Assuming the mortgage instrument has been properly drafted and meets the formal requirements for recording, it has a high priority. Specifically, the lien of the mortgage up to the amount of the outstanding indebtedness secured thereby will have priority over all claims against the vessel in rem except for liens arising before the recordation of the mortgage and:
- maritime liens arising out of tort;
- tonnage taxes and other fees owing to the Marshall Islands;
- maritime liens for the crew’s wages;
- maritime liens for general average;
- maritime liens for salvage; and
- expenses and fees allowed and taxed by the court sitting in foreclosure.
In addition to the preferred maritime liens referenced above, whoever furnishes repairs, supplies, towage, use of dry dock or marine railway, or other necessaries, may have a maritime lien on the relevant vessel. Based on US case law, ‘other necessaries’ can comprise a large variety of other claims but the case law is too extensive to discuss in this context. Again, as noted above, US case law is relevant because of its incorporation into Marshall Islands law.
Notwithstanding that the Marshall Islands is not a prominent jurisdiction for vessel arrests, the Admiralty Jurisdiction Act 1986 does contain rules governing the arrest of vessels. Where an action in rem has been commenced, and the court is satisfied that the vessel to which the action relates will be removed from the jurisdiction of the court before the plaintiff’s claim is satisfied, the court may issue a warrant for the arrest and detention of that vessel, provided, however, that no warrant will be issued if the defendant, or any person who has entered an appearance, in the action:
- pays into court the amount claimed in the action or an amount equal to the appraised value of the vessel or the property to which the action relates; or
- gives bail, guarantee or other security, to the satisfaction of the plaintiff to the action, for the payment of such amount.
Where any vessel or property has been arrested and detained in pursuance of a warrant, the court may, on an application by the defendant or any other person who has entered an appearance in the action relating to the vessel or property, make an order releasing the vessel or property if the defendant or other person subsequently:
- pays into court the amount claimed in the action or an amount equal to the appraised value of the vessel or property that has been arrested or detained; or
- gives bail, guarantee or other security, to the satisfaction of the plaintiff to the action, for the payment of such amount.
ii Court orders for sale of a vessel
As noted above, very few (if any) foreclosures of commercial vessels have taken place in the Marshall Islands. The Maritime Act confers jurisdiction with respect to foreclosures of mortgages on the High Court of the Marshall Islands. And, in accordance with the Admiralty Jurisdiction Act, when the Court determines an arrested vessel is subject to ‘speedy decay’, the Court may, on an application made by the Chief of Revenue of the Marshall Islands, direct that the vessel be sold and the proceeds deposited in court, pending the determination of the action. Hence, Marshall Islands procedure is much like the Anglo-American procedure permitting the interlocutory sale of a vessel.
The Office of the Maritime Administrator discusses the safety regime in the Marshall Islands as follows:
The Marshall Islands is a sovereign nation that has been a full member of the United Nations (UN) since 1991 and its maritime agency, the IMO, since 1998. ... [It] is an active participant in the deliberations of the IMO and is one of the original sponsors of the concept of the Member State Audit Scheme. ...
Pursuant to Section 155 of the Maritime Act, the international conventions and agreements to which the Marshall Islands is or may become a state party, shall be complied with by all vessels documented under the laws of the [Marshall Islands] that are engaged in foreign trade. ...
The Maritime Administrator is committed to providing the highest quality ship registry and flag state administration found anywhere in the world. The premise of this commitment is the Maritime Administrator’s understanding of the need to balance timely and effective compliance with the provisions of UNCLOS, all international conventions, regulations, procedures and practices contained in IMO instruments (such as SOLAS, MARPOL, the STCW Convention, Load Lines Convention, the Tonnage Convention, the COLREGs and the MLC), and other mandatory instruments to which the [Marshall Islands] is a party, with the professional knowledge of, and pragmatic appreciation for, the complexities of conducting international trade in today’s world without unnecessary interference.3
ii Port state control
The Marshall Islands is not a major hub of commercial shipping activity and as such there is little to say about port state control. The Marshall Islands is better known for the responsible exercise of its authority as a flag state. The Marshall Islands’ record as a flag state under white lists for both the Paris MOU and the Tokyo MOU, and its holding Qualship 21 status with the United States Coast Guard for 14 consecutive years, has been exemplary for an open registry with comparatively few detentions or bannings by port states of Marshall Islands-flagged vessels.
iii Registration and classification
Any seagoing vessel engaged in foreign trade, wherever built, owned by a citizen or national of the Marshall Islands, or a foreign maritime entity qualified in the Marshall Islands, may be registered under the Marshall Islands flag. In addition, the following vessels may be registered if owned by such a party:
- any decked commercial fishing vessel of 24 metres or more in length, engaged in foreign trade, wherever built;
- any commercial yacht of 24 metres or more in length;
- any private yacht of 12 metres or more in length; and
- any vessel under construction, provided that a vessel under construction may only be registered in the name of the party making the application for registration.
Generally, vessels may not be registered under the Marshall Islands flag if they are more than 20 years old; however, both the minimum length restrictions referred to and the 20-year maximum age limitation may be waived at the discretion of the Maritime Administrator.
In addition, almost as an historical footnote to political crises that have plagued other jurisdictions, for vessels newly entering the flag, the Maritime Administrator may, for good cause shown, including but not limited to cases of international, civil, political or military crisis, temporarily suspend or modify certain requirements of registration, and allow such vessels to be registered.
iv Environmental regulation
The Marshall Islands is a contracting state to SOLAS, including the Protocols of 1978 and 1988. It is also a party to the COLREGs, as amended, as well as the INMARSAT Convention and other significant conventions related to the safe operation of vessels. The Marshall Islands is a participating member of the IMO and has implemented the International Safety Management Code, the International Life-Saving Appliance Code (LSA Code), the International Code for Fire Safety Systems and all other SOLAS, MARPOL and STCW-mandated international codes and IMO maritime safety Resolutions and Conventions. Pursuant to Section 155 of the Maritime Act, all vessels registered under the Marshall Islands flag are required to comply with the terms of all the aforementioned conventions and codes.
v Collisions, salvage and wrecks
As in the case of the safety regulations discussed above, the Marshall Islands is a party to, or has implemented, all the major conventions and codes relevant to environmental regulation, including MARPOL (73/78), the OPRC Convention, as well as regional agreements such as the Convention for the Protection of the Natural Resources and Environment of the South Pacific Region.
vi Passengers’ rights
Part II of the Carriage by Sea Act provides for certain protections and rights of passengers that apply to the international carriage of passengers (and luggage) but only if the contract for carriage has been made in a state that is party to the Athens Convention, as amended, and the place of departure or destination is in such a state. Moreover, the statute is inapplicable in the event that the applicable carriage is mandatorily the subject of a civil liability regime under another convention. This statute also contains a limitation of liability regime not unlike that contained in the law relating to the carriage of cargo.
vii Seafarers’ rights
The Marshall Islands has adopted a Merchant Seaman Act, which codifies and expands on the older Seamen’s Protection Act. These Acts provide for, inter alia, prohibitions against unjustifiable discharge, overtime pay, repatriation rights and similar provisions. In addition, the Marshall Islands has acceded to the MLC.
The Marshall Islands has recently amended the Maritime Act in two areas pertinent to ship financing.
First, it has introduced the concept of the recording of a ‘financing charter’ in respect of a vessel. In light of the recent spate of bankruptcies in shipping that have resulted in serious questions as to the nature of the interest that a vessel owner had under a lease, when that lease was intended (or could be construed) as an alternative financing structure, the Marshall Islands permits the recording of a financing charter on a vessel. Previously, in a US bankruptcy court, such a lease was re-characterised as a financing contract; since the lease was not recorded anywhere, the vessel could be considered an asset of the lessee (charterer) and the owner as nothing more than an unsecured creditor of the lessee. The intent of this new legislation is to provide a basis for the owner to assert its status as a secured creditor in such a bankruptcy, a secured creditor having a considerably more favourable position in such a proceeding.
Second, the Marshall Islands has amended the Maritime Act to permit the registration of a vessel under construction and the recording of a mortgage against such a vessel. The value of the latter amendment is likely to be limited to those circumstances wherein certain export subsidy programmes assist in the provision of construction finance but which, by their terms, require a mortgage as security. Previously, it was not possible to convey a security interest in a vessel under construction by way of a mortgage.
1 Lawrence Rutkowski is a partner at Seward & Kissel LLP.
2 IRI currently maintains offices in Baltimore, Fort Lauderdale, Houston, Long Beach, New York and Reston in the United States, and in Dalian, Dubai, Geneva, Hamburg, Hong Kong, Istanbul, London, Mumbai, Piraeus, Rio de Janeiro, Roosendaal, Seoul, Shanghai, Singapore, Tokyo, Taipei and Zurich.
3 Office of the Maritime Administrator, Marine Notice No. 1-000-4 Rev. 11/13.