Escalating tensions in the Gulf: Part II - Seizure and detention of ships by state powers

My first briefing, Part I - Escalating Tensions in the Gulf – Implications for Shipping, considered some of the issues arising in light of the tanker attacks occurring in May and June.

This second briefing - Part II - outlines common instances of state-backed ship detentions, the practical implications arising and suggests some ways of reducing or managing the associated risks, as well as looking at current trends.

Part III – will consider the legal implications arising under time charters.

Introduction

Since time immemorial, detention or seizure of a ship by state authorities is one of the many risks of operating an asset via the relative freedom of the high seas between the territorial seas of different states.

Detentions may arise without any obvious fault on the part of the shipowner / operator, but instead due to the political machinations of the local jurisdiction, or due to geopolitical tensions. Historical examples date back to 1585 when English merchant ships were seized in Spanish harbours, marking the start of the Anglo-Spanish war. In other cases, a ship operator may be culpable, the ship failing to meet the increasingly high standards regulating the quality and control of shipping.

This briefing considers some of the situations in which state-backed detentions might occur, the practical implications and also some considerations for reducing or managing the risks.

Examples of state-backed vessel detentions

These are multiple and can include the following:

• Port State Control (“PSC”): detentions arising out of the Paris Memorandum of Understanding (“MOU”) adopted in 1982, aimed at improving the quality and monitoring of the state of ships. 
• Violations of MARPOL / oil pollution: these are treated seriously. For example, a violation may be classed as a felony in the US under the Act to Prevent Pollution from Ships. The US also incentivises whistle-blowers to tip-off authorities on suspected infringements by the giving of large rewards. Crew prosecution, fines and ship detention may arise. 
• Infringement of customs or export controls: these range from not having in place the correct paperwork, such as phytosanitary certificates, to non-payment of duties, to more serious instances involving the importation or exportation of illegal cargoes, such as drugs. The MSC GAYANE was recently detained for approximately one month after paying USD50m in bail following the reported discovery of 20 tonnes of cocaine hidden in containers.
• Breach of sanctions: navigating sanctions are very difficult for the shipping industry and the consequences of infringement severe. In May, the US Government seized the North Korean Bulk carrier HONEST WISE, alleging that it had been used to ship coal from, and to deliver heavy machinery to, the Democratic People’s Republic of Korea in breach of sanctions. Documents lodged in the New York courts indicate that the vessel is subject to seizure and forfeiture.
• Non-compliance with local law: local legislation may allow for the detention, fining or seizure of a ship in specified circumstances. For example, if permission is not obtained before dropping anchor in territorial waters, this may result in fines or detention. Local knowledge and due diligence to ensure compliance with local legislation is key.
• Criminal investigations: a ship may be detained by authorities as part of criminal investigations. In the case of the ENRICA LEXIE the alleged shooting in 2012 of fishermen by armed guards on board the ship led to it being detained for some 80 days in Kerala, India.  

Practical implications of detentions

As Benjamin Franklin reputedly stated "Time is Money" - this is never more appropriate than in shipping. Any downtime due to a detention inevitably results in an expensive asset burning through cash without being able to generate income through trading. This, as well as a number of practical implications arises from detentions, including the following in varying degrees of severity:

1. The welfare and well-being of detained crew - these in addition to the need to replenish basic stores for subsistence due to delays and payment of additional wages. Crew repatriation costs may arise in extreme cases, as well as the costs of armed guards if onboard at the time of the detention.
2. Expenses - including associated port expenses, local legal fees, agency fees and fuel consumption for ship’s generators whilst detained.
3. Deteriorating cargo and ship condition - whilst remaining at anchorage, with the latter exposing it to excessive marine hull growth risk in tropical waters.
4. Negative impact upon finances and financing arrangements - upon an Owner, Charterer, Shipper and Receiver, whilst the vessel, cargo and crew are detained and daily running expenses will continue to accrue.
5. Management time - spent trying to procure a ship’s release, possibly requiring the involvement of a Flag State or diplomatic channels, as well as dealing with the media interest and publicity in high profile cases.
6. The parties’ relationships - possibly resulting in legal disputes, as they try to allocate responsibility and compensation for the losses or liabilities arising.
7. The possible need to put up security - in order to secure the release of the vessel and obtain countersecurity.
8. Increased insurance premiums - as well as possible disputed claims under insurance policies.
9. The confiscation and sale of the ship - in extreme cases as well as possible fines.
10. Significant delays to cargo shipments - impacting on shippers and receivers, as well as the factories and customers they might supply.

Practical steps - what can be done to reduce or manage risk?

Points for consideration, relevant to either an Owner / Charterer, or both, could include:

•  Trading limits - risks will be more prevalent at some locations than others. The starting point from an Owners’ perspective will be to ensure that it has an understanding of the risks involved at certain ports and locations (see below) and the contractual trading limits are tailored accordingly.
• Local knowledge is key – local correspondents and Club circulars with updates regarding changes in port legislation and risks are excellent sources of information. Keeping up to date port guides and information onboard is also important.
• Documentary compliance – increasing scrutiny of PSC of the management of onboard waste, maintenance and fuel emissions, means that maintaining accurate and up to date records is essential.
• Knowledge of the contractual chain / cargo origin / destination and ownership of cargo – without detailed knowledge there is a risk of being caught be sanctions. STS operations where the origin or destination of the cargo is not clearly or easily identified may be risky.
• Insurance – war risks clauses may be relevant in case of a detention, but what are the exclusions and when would these operate? Is additional insurance appropriate? Specialist additional insurances are available to cover the loss of the vessel and the loss of hire and are worth considering. It is essential that an owner understands all of the insurances available and the circumstances in which they would respond. 
• Preparation – having advance arrangements already in place in case of an unexpected detention may ensure that Owners / Charterers are able to minimise periods of detention. Such contingency plans and checklists will need to be assessed on a case by case basis, but may include:

1. Ensuring the Master has a list of appropriate steps to take following a detention, such as issuing notes of protest where appropriate and collating / saving documents and ensuring the crew are alerted not to admit liability or share information externally, including on social media.
2. Informing the P&I Club
3. Having to hand details of local lawyers and correspondents
4. An advance list of questions to put to the local lawyers, including enquiries as to the form of security required to ensure release if the vessel is arrested
5. If a PSC detention, ensuring Class is alerted locally, and inform the Flag state – noting the Code 30 items (grounds for detention)
6. Ensuring sufficient emergency stores of consumables, provisions for maintenance and medical supplies that might not always be readily available are onboard and inventories monitored regularly

• Allocation of risk and responsibility – assess at the outset in the terms of the charterparty the agreed allocation of responsibility between the parties in case there is a detention or seizure by state authorities. There are a number of relevant considerations and standard clauses that might be applicable subject to the intended trading of the vessel. BIMCO have prepared a number of tailored clauses for specific countries, such as the US Anti-Drug Abuse Act 1986 clause for time charterparties. Clauses clearly identifying which party is to put up security for the release of the vessel following a detention may also be important. 

Detentions on the increase?

The general sense is that state-backed detentions in shipping may be on the rise. The recent high-profile examples of the STENA IMPERO and GRACE I, although undoubtedly unique, are the tip of the iceberg in a global shipping environment in which detentions are a regular occurrence.

A future driving factor will be the implementation and enforcement of the 2020 Low Sulphur Regulations, on 1 January 2020 (“Regulations”). Last year there were 17,952 Port State Control inspections under the Paris MOU resulting in 566 detentions. This number is likely to increase in 2020 as both ship operators and local authorities come to terms with the new Regulations.

The continued use and enforcement of sanctions is also a consideration. In a climate of geopolitical tension fuelled by the impulsive Tweets of the world’s superpowers, sanctions continue to be an effective economic pressure point. Sanctions look set to stay for the foreseeable future. The China / US trade war is also gathering momentum, setting the stage for future potential issues that may also impact upon the global movement of ships.

Rory Grout, Stephenson Harwood - September 2019

The allocation of responsibility and legal implications of seizure and detention under time charters will be the focus in Part III of this series of briefings.

None of the above is to be construed or relied upon as the giving of legal advice and all legal and / or practical steps and considerations mentioned should be checked with your legal advisors.