Abstract
In a world where 90% of the volume of the total trade is seaborne trade, the need to ascertain the risks connected with the carriage by ships is more than obvious. In 2017, the number of merchant ships navigating across the globe was 93.161. These vessels are crossing the rough oceans not for charitable reasons but for the purpose of generating income for privately owned companies, in which, almost invariably, they are the most valuable assets. It is the risks inherent in shipping (e.g., rough weather conditions that can frustrate the expedition, volatile freight market, unpredictable asset values, etc.), which make the particular business worth pursuing for profit making. At the same time, the materialization of the risk depends on many factors, like the condition, maintenance and safe navigation of the ship, the encounter of adverse weather conditions, the competency of the seafarers as well as that of the onshore personnel, and the prevailing market conditions, which also dictate the mode of operation and exploitation of the ship. But how likely is the materialization of the risk? What impact will the severity of the consequences have to the company’s trading continuation? During the last years, it has become increasingly common for ship-owning companies to devise business plans based on risk analysis and risk management. There are many ways to tackle the problem of risks. One option may be that the risk is borne by the company itself with the expectation that the damage/loss would be compensated with legal recourse against the person who caused it. However, such choice may prove futile for many reasons (e.g., third party becoming insolvent, inability to entertain recovery proceedings abroad). Another approach is to reduce the risk, either by reducing the frequency of occurrence or by minimizing the consequences. Risk reduction measures are not taken once and for all—they need to be continuously assessed and repeatedly reassessed. However, regardless of all efforts to reduce them, some risks will remain. The risk, which still remains, can be transferred to another party, either by transferring the activity to a specialist (e.g., subcontracting) or by transferring the financial consequences. It is the last option, namely transfer of risk by insurance, that will be examined in the light of the shipowner’s unfettered right to elect registry for his ship.
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Notes
- 1.
Statistics from UNCTAD, Data Center, 2017 (http://unctadstat.unctad.org/wds/TableViewer/tableView.aspx).
- 2.
Managing risk in shipping: a practical guide issued by the Nautical Institute (1999). See also Kavussanos and Visvikis (2006).
- 3.
See the famous treatise by Grotius (1609).
- 4.
Art. 89 of the UN Convention on the Law of the Sea, 1982 (hereafter “UNCLOS”) “No State may validly purport to subject any part of the high seas to its sovereignty”.
- 5.
Despite the division of the sea into seven oceans, the ocean is really single, one unit (Tanaka 2012). On the other hand, the term high seas dos not refer to sea waters—as one might expect—but rather an area containing sea water outside the exclusive economic zone, where established by the coastal state, or the territorial seas (or internal waters) of all coastal states.
- 6.
See art. 2 of the Geneva Convention on the High Seas, 1958 (hereafter “High Seas Convention”) “…The high seas being open to all nations, no state may validly purport to subject any part of them to its sovereignty…” Similarly see UNCLOS art. 87 “The high seas are open to all States, whether coastal or land-locked…”.
- 7.
See art. 87 UNCLOS par. 1 “…It comprises, inter alia, both for coastal and land-locked States: (a) freedom of navigation; (b) freedom of overflight; (c) freedom to lay submarine cables and pipelines…”.
- 8.
The notion seems to be used interchangeably with that of “vessel” (see heading of art. 217 UNCLOS).
- 9.
Art. 90 “Every State… has the right to sail ships…” However, a logical question rises. What about other types of construction? Do they fall under this provision, so as to enjoy the freedom of navigation? If we were to accept that what is not explicitly prohibited is allowed, then any construction capable of navigating may qualify.
- 10.
As of 23.9.2016, UNCLOS had received ratification from 168 states, a feature which makes the particular instrument the central piece of international legislation in respect of the rights and duties provided for in it. Hence the present analysis focuses on UNCLOS provisions.
- 11.
Nordquist et al. (1995) argue that “…There is no analogy between the nationality of ships and the concept of nationality as applied to individuals or corporations”.
- 12.
E.g. nationality of a corporation.
- 13.
UNCLOS art. 91 has its origin in art. 5 par. 1 High Seas Convention, which provided in the relevant passage “…There must exist a genuine link between the State and the ship, in particular, the State must effectively exercise its jurisdiction and control in administration, technical and social matters over ships flying its flag…” This provision appeared in the text of the “Articles Concerning the Law of the Sea, 1956” (hereafter “Articles”), which was prepared by the International Law Commission. The text in art. 29 par. 1 read “…Nevertheless, for purposes of recognition of the national character of the ship by other States, there must exist a genuine link between the State and the ship.” What is remarkable is that the draft provision made recognition of a ship’s nationality by other states conditional upon the existence of a genuine link between the ship and the state of registration. By the time the draft provision became art. 5 of the High Seas Convention, this condition had been erased in exchange for elaborating on the genuine link, which was linked to effective jurisdiction and control of the ship by the flag state. However, in order to ascertain the reason for the inclusion of the concept “genuine link” in the draft provision one would need to refer back to the comments of the Articles. In 1896, the Institute of International Law adopted certain rules governing permission for ships to fly a flag. This initiative did not have the expected impact and it was abandoned by the International Law Commission at its 8th session, as it was considered that the adopted criteria could not satisfactorily cover the very divergent practices of states in respect of ship registration. More specifically, “…The Commission accordingly thought it best to confine itself to enunciating the guiding principle that, before the grant of nationality is generally recognized, there must be a genuine link between the ship and the State granting permission to fly its flag. The Commission does not consider it possible to state in any greater detail what form this link should take. This lack of precision made some members of the Commission question the advisability of inserting such a stipulation. But the majority of the Commission preferred a vague criterion to no criterion at all. While leaving States a wide latitude in this respect, the Commission wished to make it clear that the grant of its flag to a ship cannot be a mere administrative formality, with no accompanying guarantee that the ship possesses a real link with its new State. The jurisdiction of the State over ships, and the control it should exercise in conformity with article 34 of these articles, can only be effective where there exists in fact a relationship between the State and the ship other than mere registration or the mere grant of a certificate of registry” (Commentary on Articles, Article 29, Yearbook ILC, 1956, vol. II, 279).
- 14.
It is not the aim of this paper to throw light on the practices of international registers and those of the offshore registers/“second” registers. At this point it is sufficient to mention that, although both afford privileges and incentives to shipowners (e.g. lower tax, lower crewing cost, ease of access to the registry etc.), the latter still insist on substantial links with their jurisdiction, especially in respect of beneficial ownership and management of the ship (see the analysis and references in Coles and Watt ( 2009 ) par. 3.1 et seq. and 3.39 et seq.).
- 15.
See Commentary on Articles, Article 29, Yearbook ILC, 1956, vol. II, 278–279 “Each State lays down the conditions on which ships may fly its flag. Obviously, the State enjoys complete liberty in the case of ships owned by it or ships which are the property of a nationalized company. With regard to other ships, the State must accept certain restrictions. As in the case of the grant of nationality to persons, national legislation on the subject must not depart too far from the principles adopted by the majority of States, which may be regarded as forming part of international law. Only on that condition will the freedom granted to States not give rise to abuse and to friction with other States. With regard to the national element required for permission to fly the flag, a great many systems are possible, but there must be a minimum national element”.
- 16.
“Ships shall sail under the flag of one State only and…shall be subject to its exclusive jurisdiction on the high seas…”.
- 17.
UNCLOS art. 94 par. 5 “In taking the measures called for in paragraphs 3 and 4 each State is required to conform to generally accepted international regulations, procedures and practices and to take any steps which may be necessary to secure their observance”. With respect to the protection of the environment from marine pollution, see UNCLOS art. 217 par. 1, which provides: “States shall ensure compliance by vessels flying their flag or of their registry with applicable international rules and standards, established through the competent international organization…”.
- 18.
Known also as “flag of convenience” states, in which registration of a ship is permitted even to a foreign-owned or foreign-controlled company under conditions, which, for various reasons, are convenient and opportune for the company registering the ship (see Boczek 1962).
- 19.
At this point it should be recalled that the international community had not yet adopted the ISM Code (IMO Assembly Resolution A.741(18), 1993). An earlier attempt by UNCTAD in 1977 to define certain registers as “flags of convenience” by virtue of certain criteria did not bring the expected result (Report of the ad hoc Intergovernmental Working Group on the Economic Consequences of the Existence or Lack of a Genuine Link between the Vessel and Flag of Registry, TD/B/C.4/177).
- 20.
See the wording “The State Parties to this Convention….Recalling also that according to the 1958 Geneva Convention on the High Seas and the 1982 United Nations Convention on the Law of the Sea there must exist a genuine link between a ship and a flag State and conscious of the duties of the flag State to exercise effectively its jurisdiction and control over ships flying its flag in accordance with the principle of the genuine link… Reaffirming, without prejudice to this Convention, that each State shall fix the conditions for the grant of its nationality to ships, for the registration of ships in its territory and for the right to fly its flag… Considering that nothing in this Convention shall be deemed to prejudice any provisions in the national laws and regulations of the Contracting Parties to this Convention, which exceed the provisions contained herein…”
- 21.
See the wording of UNCLOS art. 8 par. 2 “…These laws and regulations should be sufficient to permit the flag State to exercise effectively its jurisdiction and control over ships flying its flag” and UNCLOS art. 94 par. 1 “Every State shall effectively exercise its jurisdiction and control in administrative, technical and social matters over ships flying its flag”.
- 22.
See art. 8 par. 2 “Subject to the provisions of article 7, in such laws and regulations the flag State shall include appropriate provisions for participation by that State or its nationals as owners of ships flying its flag or in the ownership of such ships and for the level of such participation…”
- 23.
See art. 7 “With respect to the provisions concerning manning and ownership of ships…. a State of registration has to comply either with the provisions of paragraphs 1 and 2 of article 8 or with the provisions of paragraph 1 to 3 of article 9, but may comply with both”.
- 24.
See art. 10 par. 1 and 2.
- 25.
See art. 10 par. 3.
- 26.
It has been argued that, despite the explicit wording, the relevant provisions leave for the states a lot of room to play in the implementation (Coles and Watt 2009, par. 2.18).
- 27.
ICGJ 336 (ITLOS 1999). See also similar approach in Commission v. Hellenic Republic [1997] ECR I-6725.
- 28.
ICGJ 453 (ITLOS 2012).
- 29.
See Gilman et al. (2016), p. 192.
- 30.
As per Lord Sumner in British & Foreign MI Co v Gaunt [1921] 2 AC 41, 47.
- 31.
See Gold (2002), p. 77.
- 32.
- 33.
Marine Insurance Act 1906, s.1.
- 34.
See, for example, Canada Shipping Act, 2001, sec. 46, New Zealand Ship Registration Act 1992, Swedish Maritime Code, Chapter 2, Finnish Maritime Code, Chapter 1:2.
- 35.
In case of bareboat charter see, for example, BARECON 2001, clauses 13 and 14.
- 36.
- 37.
“Erikson had to pay his crews as little as possible and he could not afford to insure ships, but he also had to maintain them at such a standard that they were rated 100 A1 at Lloyd’s ” in Newby E., The Last Grain Race, Secker & Warburg, 1956, London, as cited by Wikipedia (https://en.wikipedia.org/wiki/The_Last_Grain_Race, accessed 22 December 2016).
- 38.
Advanced Study Group Report 240, Marine Insurance in the Former Soviet Union, The Chartered Insurance Institute, 1999, London.
- 39.
Regarding the principles which apply in reinsurance, see Arnould’s Law of Marine Insurance & Average, op.cit., Chapter 33.
- 40.
The CLC has been revised by Protocols in 1976 and 1984. In 1992, a new instrument was drawn, commonly referred to as CLC 1992. The latter was further amended by IMO in 2000 under the tacit acceptance system.
- 41.
CLC 1992 has been ratified by 139 States, including Hong Kong, Macau and the Faroe Islands, which are associate members of IMO. In addition, there are nine States, which are only party to CLC 1969 (http://www.imo.org/en/About/Conventions/StatusOfConventions/Pages/Default.aspx, accessed 23 December 2016).
- 42.
See Gold (2006).
- 43.
International Convention on Civil Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea, 1996, which due to insufficient ratification has not entered into force yet.
- 44.
Convention Relating to Civil Liability in the Field of Maritime Carriage of Nuclear Material, 1971. This convention has been ratified by only 17 States, but it does cover almost 18% of the world tonnage (http://www.imo.org/en/About/Conventions/StatusOfConventions/Pages/Default.aspx, accessed 23 December 2016).
- 45.
International Convention on Civil Liability for Bunker Oil Pollution Damage, 2001. There are currently 85 States party to the Bunkers Convention 2001 covering more than 92% of the total world tonnage (http://www.imo.org/en/About/Conventions/StatusOfConventions/Pages/Default.aspx, accessed 23 December 2016).
- 46.
See Williams (2013), p. 277.
- 47.
Nairobi International Convention on the Removal of Wrecks, 2007, currently has 33 State parties (http://www.imo.org/en/About/Conventions/StatusOfConventions/Pages/Default.aspx, accessed 23 December 2016) covering over 60% of world tonnage.
- 48.
See Soyer (2002).
- 49.
Regulation (EC) No 392/2009 of the European Parliament and of the Council of 23 April 2009 on the liability of carriers of passengers by sea in the event of accidents.
- 50.
Council Decisions of 12 December 2011, 2012/22/EU and 2012/23/EU.
- 51.
See Røsæg (2013), 909 et seq.
- 52.
See Law on Accident Insurance (608/1948, as amended) in Finland. In Sweden and Norway occupational injury insurance is financed through levies paid by employers and administered as part of the national social security systems.
- 53.
International Convention on Maritime Liens and Mortgages 1993, Art. 4.
- 54.
18 January 2017.
- 55.
Directive 2009/20/EC of the European Parliament and the Council of 23 April 2009 on the insurance of shipowners for maritime claims.
- 56.
Evidence of that may be deduced from the drastic legislative changes brought in Malta, subsequent to the Erika accident. It was obvious that the Maltese Government introduced strict rules in respect of safety and environmental protection as well as the policing of these rules on ships, so as to avoid in the future, as much as possible, pictures of the Maltese flag flying on ships, which brought catastrophe and attracted global attention.
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Theocharidis, G., Donner, P. (2017). The Relationship Between Nationality of Ships, “Genuine Link,” and Marine Insurance. In: Visvikis, I., Panayides, P. (eds) Shipping Operations Management. WMU Studies in Maritime Affairs, vol 4. Springer, Cham. https://doi.org/10.1007/978-3-319-62365-8_10
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