United States: Financing Risks Of Vessel Modification Outside The United States

Last Updated: September 25 2017
Article by Han Deng

Recent developments

Whilst there is much in the news at the moment about the relaxing of the Jones Act in the aftermath of the recent (and on-going) hurricanes, we consider the financing risks of vessel modification outside the United States:

The United States Jones Act limits the transportation of merchandise by water between points in the United States in vessels built in the United States, documented under the U.S. laws, and owned by the U.S. citizens. Any vessel which is later rebuilt outside the United States will lose its coastwise trade endorsement.

A vessel is deemed to be built in the U.S. only if all major components of the hull and superstructure are fabricated in the U.S. and the vessel is entirely assembled in the U.S. (46 CFR 67.97). Prior to any work being performed on a U.S. flag vessel eligible for coastwise trading, a vessel owner must submit an application to the U.S. Coast Guard National Vessel Documentation Center (the "NVDC") seeking determination whether the proposed work would jeopardize the vessel's coastwise trade eligibility. NVDC regulations at 46 C.F.R. § 67.177 set out a comprehensive scheme for determining whether work done abroad constitutes foreign rebuilding, namely, the two-pronged test – the "major component test" (46 C.F.R. § 67.177(a)) and the "considerable part test" (46 C.F.R. § 67.177(b)). Under a recent Foreign Rebuild Determination Letter by the NVDC, a third element – the "cumulative effect test" – has been added to the other two tests.

Major component test

Under the "major component test" (46 C.F.R. § 67.177(a)), "a vessel is deemed rebuilt foreign when a major component of the hull or superstructure not built in the United States is added to the vessel." Although "major component" is not defined by statute, the U.S. Coast Guard has traditionally found that objects weighing in excess of 1.5% of the vessel's discounted lightship weight are "major" components. The U.S. Coast Guard has consistently held that items not integral to the hull or superstructure, such as propulsion machinery, consoles, wiring harnesses and other outfitting that has no bearing on a U.S. build determination, may be foreign built without compromising the vessel's coastwise eligibility. In Shipbuilders Council v. U.S. Coast Guard (2009), the U.S. Court of Appeals for the Fourth Circuit reinstated the determination of the U.S. Coast Guard that the proposed modification to the subject vessel would not constitute a foreign rebuilding or a foreign installation of segregated ballast tanks. In that case, the owner proposed to install an "inner hull" throughout the vessel's cargo block and to reconfigure the vessel's existing ballast tanks in order to meet the "double hull" standard required by Oil Pollution Act 1990. The Coast Guard ruled that the installation of the steel to form the inner hull did not constitute a "separable" component of the tanker so it did not fall foul of the "major component test."

Considerable part test

A proposed vessel modification constitutes a "considerable part" of the hull or superstructure, pursuant to 46 C.F.R. § 67.177(b) as follows:

"For a vessel of which the hull and superstructure is constructed of steel or aluminum—

(1) A vessel is deemed rebuilt when work performed on its hull or superstructure constitutes more than 10 percent of the vessel's steelweight, prior to the work, also known as discounted lightship weight.

(2) A vessel may be considered rebuilt when work performed on its hull or superstructure constitutes more than 7.5 percent but not more than 10 percent of the vessel's steelweight prior to the work.

(3) A vessel is not considered rebuilt when work performed on its hull or superstructure constitutes 7.5 percent or less of the vessel's steelweight prior to the work . . . "

Cumulative effect test

On May 25, 2017 the NVDC issued a Foreign Rebuild Determination Letter concerning proposed modifications to be made in a foreign shipyard to the vessels HORIZON ENTERPRISE and HORIZON PACIFIC, C8 class sister ships built in 1980 and 1979, respectively (the "Vessels"). Before applying the "major component test" and the "considerable part test" to the proposed work, the NVDC found the Vessels were the subject of a 2013 application resulting in a favorable determination. The NVDC stated that, to be consistent with the intent of the Jones Act mandate, there is cumulative effect of multiple foreign rebuilding and the associated applications for determinations seeking approval of that work. In other words, the "major component test" and the "considerable part test" apply not to each application separately, but to the cumulative effect of foreign modifications to the vessel. The NVDC further stated that, in determining whether the "considerable part test" and the "major component test" have been met, the steelweight limits under the "considerable part test" for the current application should be reduced by the cumulative steelweight changes and the "major component test" should be based on the original discounted steelweight, not the steelweight reflected in the current application.

Even though in the Foreign Rebuild Determination Letter issued by the NVDC on May 25, 2017 the owner received a favorable determination from the NVDC confirming that the performance of the proposed work to the Vessels outside the U.S. would not adversely affect the Vessels' coastwise trade eligibility, the NVDC sent a clear signal that whether a vessel has done multiple foreign rebuilds is a new factor to be considered when applying the tests, and that both tests require an analysis of the vessel's full foreign rebuild history.

Final Thoughts

As things currently stand, therefore, and subject to the present relaxation of the rules, coastwise endorsement is a necessary prerequisite to entry into the coastwise trade in the United States. Therefore, the Coast Guard's interpretation of the standards for determining foreign rebuilding helps the vessel owners and operators make better business plans and decisions regarding work to be performed on their vessels. As the NVDC posts U.S. build determination letters and preliminary and final rebuild determination letters on its website, vessel owners and operators may borrow others' experience for reference. After this determination, vessel owners and operators must now take into account this new "cumulative effect" test and make plans in advance based on the vessel's rebuild history.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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