Australia: Shipping News

Last Updated: 27 October 2008
Article by Ralph Ayling

This brief update on recent developments and items of interest in the shipping world includes:

  • Extension of Australia's exclusive economic zone
  • New Bill affects registrations of finance interests in ships
  • Refund guarantees for financing shipbuilding in China


Extension of Australia's exclusive economic zone

Following requests by Australia to increase the size of its exclusive economic zone (EEZ), the United Nations found that Australia's territory be extended by 2.5 million square kilometres, an area 20 times the size of the United Kingdom or twice the size of New South Wales.

International law recognises that Australia as a sovereign state has jurisdiction over its territorial sea from the low water mark of its coastline to the 200 nautical mile limit of its EEZ.

The extent of the Commonwealth's jurisdiction is largely defined by international conventions which have been enacted into Commonwealth law. The Commonwealth has power (under the external affairs power of the Australian Constitution) to enact legislation giving effect to any international convention. For example, the Seas and Submerged Lands Act 1973 (Cth) which enacted parts of the United Nations Convention on the Law of the Sea 1982 (UNCLOS), confers jurisdiction on the Commonwealth from the three nautical mile State/Territory limit to the 200 nautical mile limit of the EEZ (s.10A of the Act). States and territories have jurisdiction out to the three nautical mile limit and over vessels on intrastate voyages.

The Commonwealth's jurisdiction from the outer limits of Australia's territorial sea (12 nautical miles) to the end of the EEZ is restricted by the provisions of UNCLOS. Articles 56 and 60 provide that a coastal state has exclusive jurisdiction in its EEZ over 'artificial islands, installations and structures', including jurisdiction over 'customs, fiscal, health, safety and immigration laws and regulations'. As such, the Commonwealth has exclusive jurisdiction over foreign and Australian facilities located within its EEZ.

Australia has the third largest EEZ after France and the United States and maintains the right to exploit natural resources within it. Recently there has been increased financing of floating production storage and offtake facilities (FPSOs) - essentially a hybrid of a ship and an oil rig - which operate within the EEZ. FPSOs have the benefit over oil rigs in that they are more manoeuvrable in extreme weather conditions.

Even though the potential of oil and gas reserves in Australia's newly added 2.5 million square kilometres is unknown, it may well lead to increases in resource development in the future and the need for the financing of more FPSOs.


PPS to affect registrations of finance interests in ships

The draft Personal Property Securities Bill 2008 (Cth) (PPS), under which ships are designated as personal property, could cause inconvenience to potential purchasers or financiers.

Registration of Australian ships is governed by the Shipping Registration Act 1981 (Cth). A register established under the Act is maintained by the Australian Maritime Safety Authority (AMSA). The Act meets Australia's obligations under the United Nations Convention on the Law of the Sea and provides that every Australian-owned ship shall be registered under the Act. However, certain vessels are exempt including vessels under 24 metres in length, Government ships, fishing vessels and pleasure craft, although those vessels can still be registered with AMSA if desired. The Act also permits the registration of mortgages over registered vessels.

In the draft Personal Property Securities Bill 2008 (Cth) (PPS), ships would constitute personal property. As ships are not treated as an exception under the Bill, security interests over ships would only be registrable on the new PPS register. This could cause inconvenience for a potential purchaser or financier of a vessel who will be required to search two registers: the AMSA register to ascertain the registered owner of the ship and the PPS register to determine whether any security interests exist over that ship. To alleviate the inconvenience the PPS register could provide a link directly to the AMSA register but it remains to be seen whether this occurs.

Presently, only mortgages and caveats over ships can be registered on the AMSA register. The proposed PPS Bill prescribes other forms of registrable interests (eg. leases for more than 12 months). The duration of registration is some cause for concern for financiers as the AMSA register does not impose a time limit upon registrations made on the register. It is uncertain at this stage whether the PPS Bill will, when it is implemented, impose a time limit on registration such that a financier will be required to renew registration of its security interest in a ship during the life of a transaction.


Refund guarantees for financing shipbuilding in China

During the construction phase a purchaser will usually have the benefit of a refund guarantee from the shipbuilder's financier securing the shipbuilder's obligation to repay instalments of the purchase price. Typically, the refund guarantee will not secure other obligations of the shipbuilder under the construction contract (eg. the payment of liquidated damages for delay). In financing the construction of a vessel, a financier would usually take security over the purchaser's rights under the refund guarantee.

According to the Financial Times, China has overtaken South Korea as the world's largest shipbuilder in terms of deadweight tonnage. In transactions involving Chinese shipyards, the refund guarantee may either be governed by English law (for international orders) or, on occasion, by Chinese law. Where governed by Chinese law, refund guarantees fall into two types: general guarantees, where the purchaser must successfully sue the shipbuilder but be unable to enforce judgement against the shipbuilder before a claim can be made under the refund guarantee; and joint liability guarantees, where the guarantor assumes joint liability with the shipbuilder, entitling the purchaser to enforce directly against the guarantor without needing to take action against the shipbuilder. The latter being the preferred choice for a purchaser and its financier.

Under Chinese law a guarantee is presumed to run for six months from the date the principal debt falls due, unless otherwise stated. Where the guarantee states it will expire on or before the date when the principal debt is due and payable, the duration will be deemed to run for six months from the date when the principal debt is due and payable. If the guarantee states that the guarantor shall not be released from its liability until the principal debt has been repaid, under Chinese law the guarantee will be deemed to run for two years.

Branch offices of banks do not have legal person status under Chinese law and are not permitted to issue foreign guarantees without authorisation from their head office. There may also be requirements for consent to be obtained from State Administration of Foreign Exchange before a refund guarantee can be issued by Chinese banks.

Care needs to be taken when accepting refund guarantees from Chinese banks and advice should be obtained from Chinese counsel.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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