Who is responsible for what?

EVER since the terrorist attacks on the US on September 11, 2001, the shipping industry has been challenged to come up with new ways to tighten the security of the world’s maritime transportation system. The US has been at the forefront of this effort with initiatives for ship, port facility and cargo security. While the major emphasis has been on the physical security of hard assets such as ships, terminals and containers, there have been a number of initiatives on the softer side of such targets.

One example is the US Container Security Initiative (CSI), which aims to push out the defensive perimeter of the US to the major foreign container ports where containers are loaded for transport to the US. CSI permits US Customs personnel to be stationed in foreign ports and inspect suspicious containers prior to loading.

Another new initiative is the twenty-four-hour notice required by US Customs prior to loading certain cargoes bound for the US. This enables Customs to perform a pre-loading security check of the cargo, and to prohibit loading of any suspicious cargo. Still another is the Customs-Trade Partnership Against Terrorism (C-TPAT) that establishes a fast-track inbound customs process for shippers and their supply chain partners who commit to more comprehensive supply-chain security vetting. The 96-hour notice required prior to arrival in the US is another important aspect of the new maritime security regime.

The herculean efforts undertaken by the US Coast Guard (USCG) in creating the template for the International Ship and Port Facility Security (ISPS) Code and developing the regulations under the US Maritime Transportation Security Act (MTSA) have been extremely successful in raising the awareness of the shipping industry to the new security thinking. What has not, as yet, been quantified - or even very widely considered - are the economic costs attendant on a failure to meet the deadline of July 1, 2004 for full implementation of the new security regime. What are those costs, how are they likely to arise, who will ultimately bear them, and what will be the cost to world economies of such failures, even if they do not result directly in a security incident?

There are a number of issues that lawyers will soon have to face and analyse on behalf of their clients. No serious shipowner or operator can claim ignorance of the new security regime in which its vessel must operate after July 1, 2004. Indeed, the very method that was used by the USCG to create the US maritime security regulations was specifically intended to engage as many elements of the maritime industry as possible in the process. The USCG held eleven public hearings at various locations around the US for the precise reason of enlisting the aid of the industry to develop regulations that were realistic and sensible. The USCG has also shared the results of those industry public meetings with IMO. As a result, the ISPS Code has also benefited from an unprecedented co-operative effort of industry and regulators worldwide.

For these reasons, it is not expected that many vessel owners will fail to meet the deadline for full implementation of the ISPS Code, despite the fact that it has recently been reported that only about three per cent of vessels worldwide are presently in compliance. However, the USCG has announced that about ninety per cent of US-flag vessel owners actually submitted their Ship Security Plans for approval by December 31, 2003, the US deadline for submission.

The real fear is that a substantial number of port facilities worldwide will not be in compliance by the deadline. How will the risks of non-compliance by ports or port facilities be apportioned between owners and charterers, and who will bear the costs of delay, detention or eviction from port? Clearly, these issues will be of great importance, and various approaches are being put forward by knowledgeable parties.

BIMCO issued its suggested clause regarding ISPS for time charters in December 2003, along with a separate clause for vessels calling in the US. In early March 2004 it issued its ISPS clause for voyage charter parties. At least one of the P&I clubs (Skuld) has also issued a form of charter party clause for charters of vessels to load cargo for the US with the caveat that the International Group of P&I Clubs may very well decide to draft such a clause which its member clubs can recommend to their members.

All of the clauses to date are based on the simple premise that the owner is responsible for vessel compliance and the charterer is responsible for everything else. Undoubtedly there will be a good deal of negotiation between owners and charterers over who will ultimately bear the cost of any security-related delay, detention or eviction. Indeed, many law firms and P&I clubs are warning that all agreements relating to maritime commerce, including crew recruitment, husbanding, provision of services to vessels and port facilities, bills of lading and charter parties, must be reviewed to determine what impact the new security regime will have on them, and which party will bear the associated risks and costs.

But what about existing charter parties and contracts of affreightment? Broadly speaking, if the vessel is not in compliance, the onus will fall on the owner/operator. However, when the vessel is in compliance, but the port or port facility is not, things become a great deal more uncertain. In such circumstances, one can argue that the act of ordering a vessel to a non-compliant port or port facility constitutes a breach of the safe berth/safe port clause of the charter party, putting the liability on the charterer.

A few possible scenarios to consider;

Scenario 1.

The vessel is in compliance with the ISPS Code by July 1, 2004, but a number of facilities at its ten previous ports of call are not

The vessel is required by the ISPS Code to maintain a record of its last ten ports of call and the level of security that was maintained at each such port. Part B of the ISPS Code provides that failure of any one of those ten previous ports of call or port facilities to be in compliance constitutes clear grounds for the port authorities at a subsequent port to consider that the vessel is not in compliance. Will the vessel be denied entry or delayed at ports after July 1 if any of its previous ten ports of call were not in compliance? If so, who will pay for the delay? Would such a technical vessel non-compliance be deemed sufficient to put the cost of any resultant delay on the vessel itself? The situation becomes even more complicated if the port authorities at the subsequent port consider that the level of security maintained by the vessel at such a non-compliant port or port facility was insufficient considering the security situation prevailing at that non-compliant port.

If we assume that the vessel owner has properly maintained the required list of the vessel’s previous ten ports of call, and has made that list available to the charterer during negotiations, the charterer will be charged with knowledge of the status of those ports. Under those circumstances, should not the risk of delay or denial of entry be on the charterer?

Scenario 2.

A compliant chartered vessel is directed to a terminal to load a cargo destined for the US, the vessel’s ten previous ports of call were compliant, but the loading terminal is not

US Customs and Border Protection (CBP) requires that this vessel gives twenty-four-hour notice of the details of the cargo prior to loading. If CBP does not issue a ‘Do Not Load’ order within twenty-four hours, the cargo may be loaded. Unfortunately, the mere fact that CBP does not respond is no guarantee that the vessel and its cargo will be permitted into the US without, at least, additional inspection. Moreover, the USCG can still refuse to let the vessel enter or can delay entry pending further investigation. In this scenario, the risks and costs of delay or denial of entry would be on the charterer as it was the charterer who directed the vessel to load that cargo at that non-compliant facility.

Scenario 3.

A compliant vessel loads containers at a compliant facility in a country which has signed the US CSI. All containers bound for ports in the US have been either inspected or otherwise cleared to the satisfaction of US Customs personnel at the load port. On arrival in the US, the vessel is denied entry or delayed because a ‘tip-off’ has been received regarding a container bound for the vessel’s next non-US port, which may not have been inspected by US Customs personnel at the load port

Assuming neither the owner nor the charterer has been culpable in this scenario, who, then, will bear the costs of such delay? What if an exhaustive and time-consuming investigation fails to uncover any security problem and the vessel is allowed to enter the US port and discharge its cargo? Who will pay the extra expenses caused by such delay? Will any party have any recourse against any other party or the authorities for wrongfully detaining the vessel in the first place? Would such a claim prevail against the government’s sovereign immunity defence, particularly when concern about national security precipitated the action?

Can the charterers put the vessel offhire when the authorities are acting on a tip-off regarding cargo the charterers directed the vessel to load in the first place? Will each party, then, be left to bear its own costs? What if there is substance to the tip-off and a security incident evolves? What if the vessel is not permitted to discharge in any US port, diverts to another port and transships the cargo destined for the US? What about the plight of the innocent holder of a freight pre-paid bill of lading?

Could the owners claim against the charterers for breach of the usual charter party provision that only lawful merchandise may be carried? The charter party may also have an indemnity provision sufficient to support the owners’ claim for all expenses and damages incurred for having complied with the charterers’ instructions to load a particular cargo at a particular port or facility. US COGSA Section 4 (6), which prohibits the carriage of dangerous cargo, might also support the owners’ claim.

Is there any insurance that could cover the extra expenses incurred? Might there be coverage in the nature of Trade Disruption or Drug Seize Insurance? There may actually be insurance cover available for the expense of delays caused by the scenarios discussed in this article, but the limits of cover, the exclusions, the amount of deductibles and, of course, the premium for such cover must be determined on a case-by-case basis.

Following discussions with numerous lawyers and insurance experts around the world, there don’t appear to be any clear answers to the questions posed above. Hopefully, once the important work of implementing the security requirements is complete, we can turn our attention to trying to determine how the rights and obligations of all the parties and stakeholders in the maritime industry will be affected by the new regime. One thing is certain - the issues that will arise under the maritime security regime will be the subject of much litigation and arbitration for many years to come.