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.