United Arab Emirates: Jurisdiction of a Vessel - The Flag State (Part 1)

Last Updated: 22 July 2010
Article by Corin Ricketts

Recent events have shown the significance of identifying the appropriate jurisdiction to be imposed in respect of acts or incidents on board vessels in international waters.

Every sea going vessel must have a nationality. This nationality is conferred by registering the vessel at the Ship Registry of a country or state which, usually, provides for the vessel to fly the flag of that country or state.

This registration brings the vessel and those onboard under the exclusive jurisdiction of the so-called "flag state" and subject to its laws and regulations for the duration of the marine venture. In principle, the state of the vessel's nationality has the exclusive right to exercise legislative and enforcement jurisdictions over persons and events taken place on board the vessel and prevails over any concurrent jurisdiction from other states.

The flag state will, amongst other things, exercise regulatory control over the vessel involving inspection, certification and issuance of safety and pollution prevention documents.

There are three distinct types of state vessel registry:

National registries
These impose restrictions upon the nationality of the owner and (usually) of all or certain crew members.

For example: US and UAE

Open registries or "Flags of Convenience" (FOCs)
These accept vessels from almost any nationality of owner and do not impose restrictions on crew nationality.

For example: Panama, Liberia, Bahamas, Malta and Cyprus

International registries and "Quasi-FOCs"
International registries are usually a secondary registry of a state, offering tax incentives and a less restrictive set of requirements to owners than the primary national registry of the state but with trading limitations.

For example: Norwegian International Ship Registry (NIS)

Quasi-FOCs allow foreign ownership of vessels but in more restricted and controlled circumstances while retaining many of the benefits of an FOC.

For example: Singapore

National registries, such as the UAE, mainly cater to ship owners and other vessel interests who already pre-exist within the state territory.

Regional or international individuals or companies are often discouraged to register their vessels with a national register by a variety of factors, including:

  • The formalities and the practical and financial implications of incorporating a local company to own the vessel
  • The perceived loss of control in allowing for the majority beneficial ownership of the owning company to be locally owned
  • The application of national laws and regulations, which may be too restrictive or underdeveloped in maritime affairs
  • Restrictions on employment

Because of this, certain states developed as open registries, also referred to as "flags of convenience", to deliberately service the particular needs and requirements of international and multinational ship owning companies and individuals.

These FOCs either made direct foreign ownership of registered vessels permissible or the incorporation of a local holding company (beneficially owned by a foreign company or individual) cheap, simple and fast.

More than half of the world's merchant ship tonnage is registered under FOCs and the three largest ship registries are all open registers, namely Panama, Liberia and the Bahamas.

Reasons for creating a Ship Registry
Historically, ship registries were established by naval powers and maritime nations, such as the UK, Norway and the US, in order to cater for the vessels or merchant fleets owned by their nationals.

However, a diverse range of other countries (including those that are land-locked or have no established maritime industry) have also established registries and have done so for the following reasons:

  • To provide a much needed income source and source of hard currency.
    This was the incentive for countries such as Liberia, Panama and the Marshall Islands.
  • To expand or enhance the state economy by creating services that attract ship owners, managers and maritime support services to operate there.

The establishment of a ship registry and presence of ship owners has proven to likewise encourage all aspects of the maritime industry and attract associated businesses such as ship broking, chartering, marine insurance, ship finance, maritime education, ship repair facilities and other maritime related enterprises.

Cyprus became an open registry to develop itself as a maritime hub, whereas Norway established an international registry to retain and regain its historic position as a maritime centre.

Criteria for a successful Ship Registry
Increasingly stringent international regulations, tighter port state controls, not to mention the increasing number and variety of flag states available to a ship owner, has made the choice of a flag state both more important and more competitive.

A flag state has to offer services, standards and practices which will appeal to ship owners, shipbuilders, charterers, financing institutions and lenders and insurance underwriters who all, in turn, have their own concerns.

However, for a ship owner, the primary concern will be the confidence and acceptance that international lending institutions and insurance underwriters have in a particular flag state.

A bank will not be willing to finance a vessel if the vessel registration and mortgage recordation systems and/ or legal system of the flag state present obstacles to the maintenance and enforcement of the lender's security.

Further, lenders and insurance underwriters will review a flag state's enforcement of international safety and environmental standards, its casualty record, and its compliance with international rules and regulations. If the standards are low, the risk of exposure to liability for environmental pollution, casualty or port state detention is correspondingly high.

The increasing enforcement of international regulations and standards and onerous inspection practices by ports, Class and other relevant maritime authorities have had a significant impact on operational costs: additional maintenance requirements, regular and persistent inspections and port state detentions all incur costs for the owner and time off-hire. This, ultimately, affects the owner's ability to repay the institutional lenders.

Therefore, it pays for an owner to choose a registry carefully and, in particular, one that is not targeted on the basis of poor safety, maintenance or environmental reputation.

The next edition of Law Update issue 231 continues the article with the necessary qualities in a flag state.

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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