Following on from our article in last month's Law Update (issue 230) regarding the significance of identifying the appropriate jurisdiction in shipping matters, this is the second part in a series of articles which will set out the qualities a ship owner should consider when choosing a flag state.
Ship owners will look for the following necessary qualities in a flag state:
Duties and Responsibilities
The responsibilities of a flag state have been defined through various international conventions and regulations, the most important of which are generated by the IMO and include: the International Convention for the Prevention of Pollution from Ships (MARPOL), the International Convention for the Safety of Life at Sea (SOLAS), the International Convention on Standards of Training, Certification and Watchkeeping for Seafarers (STCW 78/95), the Convention on International Regulations for Preventing Collisions at Sea (COLREG), the International Convention on Load Lines (LL) and the United National Convention on the Law of the Sea (UNCLOS).
These conventions detail the scope of the state's obligations in respect of supervision and administration, technical assistance and enforcement of safety issues of their flagged vessels and it would be expected that any flag state would be signatory to and have ratified these conventions (and any amendments thereto) at the very least.
The flag state should also participate effectively and actively in the ongoing work of international organisations, such as the IMO, and disseminate efficiently and comprehensively any pertinent information (regulations, interpretations, technical guidelines) from these organisations and other regulatory authorities to ship owners.
In considering the quality of a flag state's maritime administration, a ship owner and lender must consider many factors, including:
A flag state should provide an adequate maritime infrastructure to service clients efficiently and effectively both at home and abroad: for example, representative offices located in major maritime ports or maritime administration desks in their consulates and/ or embassies.
A lender, in particular, will look to see if a flag state permits the registration and recordation of a mortgage in its representative offices worldwide.
Owners will consider how established the administration of the flag state's maritime program is, the quality and qualifications of its staff and employees (including surveyors and marine specialists) and its reputation in the regional and global market.
The flag state needs to have appropriately trained staff to
carry out inspections and accident investigations and offer
technical assistance and advice to owners specific to their type of
A competent flag state may also have ISO accreditation, showing that its management operations and administrative functions have been audited and approved by internationally recognised independent third parties.
The flag state should have a simple and efficient registration process. Ideally, the state should develop application procedures that are predominantly on-line and easily accessible and understandable.
It should also provide a 24 hour, seven days a week, communication system to handle any emergency response situation.
Further, it will need to develop a suitable emergency response procedure to give an owner assistance and advice and carry out any investigation in the event of an accident.
Political stability is essential to ensure continuity in rule of law and administration in the flag state. Instability may lead to international sanctions that can effect a flag state's reputation and the ability of its vessels to trade.
Further, the flag state must have a recognised and respected legal system and an adequately developed and evolving body of maritime law and jurisprudence that owners, lenders and insurers can rely on.
The most successful flag states have adopted legal systems and maritime law from the US or UK as they are the most widely recognised and respected, with a satisfactory body of maritime legal precedent and inherent flexibility to accommodate changing trading and financing arrangements.
Safety and Environmental Record
As discussed, increasing safety and environmental demands render it potentially costly for owners to register their vessels with a flag state that fails to enforce uniformly adequate and international recognised safety standards.
The IMO have introduced Port State Control (PSC) inspections and records to combat sub standard ships which has had a major effect on the maintenance of vessels to increasingly higher standards and adherence to international conventions.
Based on a regular system of ship inspections by qualified inspectors in participating states' ports, PSC is governed on a regional basis by a series of Memoranda of Undertakings including: Paris MOU (the most influential and a consortium of 22 EU countries plus the Russian Federation, Norway, Iceland, Canada and Croatia), Tokyo MOU and GCC (or Riyadh) MOU.
Each entity produces an annual report which lists flag states on the basis of their vessel assessments and detentions on either White, Grey or Black lists. The best performing registries are on the White List. Mid-ranking registries are grouped on the Grey List. The poorest performing registries are placed on the Black List.
A flag state's record in respect of PSC detentions will be viewed with great importance. Flag state vessels on the Grey or Black lists are susceptible to more frequent and rigorous inspections at port, thereby causing delays and likely detentions, which owners and charterers will be keen to avoid.
Likewise, ship financiers and insurers take great interest in these lists and will avoid vessels registered with flag states with a poor PSC record.
It should be noted that the registries of both Saudi Arabia and Kuwait appear on the Paris MOU "White List", though the UAE does not as only a few PSC inspections have taken place in Paris MOU participating countries.
The worst detention per inspection rates under the Paris MOU include: 36.84% North Korea; 16.67% Syria; 15.38% Lebanon; and 13.04% Egypt.
Mortgage Recordation System
It is imperative that a flag state has a fast, simple and user-friendly mortgage registration system in a public registry with clearly defined legal protections for the lender.
The relevant procedure should permit easy deletion and/ or transfer of the mortgage out of the flag state, while protecting the mortgagee's interests, if it becomes necessary for an owner to change flags. It should also require the formal consent of the mortgagee for the transfer of ownership or change of name of the vessel.
Preferably, the mortgage should be able to be recorded in a language understood by the lender, instead of having to be translated before recordation.Further, the law of the state should include satisfactory statutory provisions covering ranking of priority rights or liens, including that of a mortgage, in the event of a judicial sale or auction in admiralty.
Tax and fiscal incentives
Many flag states have set themselves up as tax havens or offer significant tax rebates to attract ship owners.
Registration and Tonnage Tax Fees
A flag state's fees for initial or annual registration and tonnage tax are important to both a ship owner and a lender.
These fees should be competitive but also transparent, taking into account the additional cost of marine safety and inspection systems and infrastructure and document translation expenses or legal fees from a local law firm within the state's jurisdiction.
Many owners consider the freedom to choose the nationality of ship's officers and crew as an absolute necessity.
Transparency of legal and beneficial ownership, or rather a lack of it, has become a contentious issue of late (partly due to the role of the Panama and Liberian registries in liability issues arising out of the sinking of the "Prestige").
It is generally considered preferable to have a clear policy on providing sufficient details of ownership, legal and beneficial, to allow for accountability while avoiding complete transparency that might discourage owners.
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.