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May 1994
Vol. 5, No. 1
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of Contents
Contents
AN INTRODUCTION TO THE LAW OF COLLISION
Nicholas J. Healy and Joseph C. Sweeney*
This article is based on an extract from their forthcoming text on the Law of Collision.
A. HISTORICAL BACKGROUND
"Collision" (Latin collisio) is defined as a violent encounter of one moving body with another. [n. 1] In the maritime sphere this means the coming together of moving vessels, although the term is commonly used as well when a moving vessel comes into contact with one that is motionless. The term "allision" is more accurate in describing a contact between a moving vessel and a stationary one, or a bridge, a pier, a wharf or other fixed object, [n. 2] but such a contact is commonly described as a "collision."
The definitive history of the subject is David R. Owen's The Origins and Development of Marine Collision Law, [n. 3] a scholarly and exhaustive article to which readers are referred for a review of the early origins of collision law.
The most frequently cited early English collision decision was a sole fault case, The Woodrop - Sims, [n. 4] decided by Sir William Scott (later Lord Stowell). In dicta he stated four basic principles of collision law: (1) each vessel bears its own loss in cases of inevitable accident; (2) damages are divided equally when both vessels are to blame; (3) there is no right of recovery when the damaged vessel is alone to blame, and (4) the damaged vessel is entitled to a full recovery when the other is solely at fault. [n. 5] The first, third and fourth principles are universally true today; the second was abolished in England in 1911, when Parliament adopted in its place the comparative fault rule of the 1910 Brussels Collision Convention, [n. 6] and in the United States in 1975, when the Supreme Court adopted the same rule by its decision in United States v. Reliable Transfer Co. [n. 7]
Modern Anglo-American collision law was developed very largely by Dr. Stephen Lushington, Judge of the English High Court of Admiralty from 1838 to 1867. [n. 8] During this period collision cases became much more frequent - a phenomenon ascribed by Mr. Owen to the coincidence of a number of events, including, inter alia, the advent of steam, the promulgation of a set of Collision Regulations by Trinity House, and the enactment by the British Parliament of legislation greatly expanding the jurisdiction of the Admiralty Court, enabling it to hear and decide cases of collision in tidal waters. [n. 9]
Surprisingly, very few reported collision cases were decided by the vice-admiralty courts of the American colonies, although they exercised a wider jurisdiction than the English High Court of Admiralty exercised in the seventeenth and eighteenth centuries. As Mr. Owen states, the foundations of American collision law rest largely on the decisions of some of the leading federal district court judges of the nineteenth century, including Samuel Betts, Addison Brown, Henry Brown, Peleg Sprague and Ashur Ware. These judges were not innovators; their philosophy was to follow the general maritime law as enunciated in the English and Continental courts. [n. 10]
The Supreme Court decided no collision cases until 1840. [n. 11] Between that year and 1880 the volume gradually increased, and some of the Court's decisions were of considerable importance. In the 1880's the volume decreased steadily, and by the turn of the century the Court's concern with the subject had become minimal. As of 1994 the Court had decided 25 collision cases, including Reliable Transfer. [n. 12] That case actually involved a stranding, but it had a profound effect on the American (and Liberian) [n. 13] law of collision, since it replaced the old equal division of damages rule with the comparative negligence rule in both-to-blame collision cases, as well as in cases of strandings caused by the fault of two or more parties.
Until the nineteenth century, there were no statutory rules or regulations governing navigation, although certain customs, not all of which were consistent, were generally followed by mariners, [n. 14] and in England the Royal Navy had, for many years, used a set of standing sailing orders. The increase in both the number and the seriousness of marine collisions resulting from the introduction of steam as a means of propulsion prompted the promulgation of the Trinity House navigational rules in 1840. [n. 15]
The British Parliament enacted the first statute embodying a navigational rule - one requiring approaching steam vessels to keep to starboard - in 1846. [n. 16] The same statute authorized the Lords Commissioners of the Admiralty to prescribe the lights to be displayed by steamers, which they did in 1848. [n. 17] Additional statutory rules adopted in 1851, [n. 18] 1854 [n. 19] and 1858 [n. 20] applied only to British vessels, but an 1862 statute [n. 21] authorized the issuance of rules to which other countries would be encouraged to conform. Accordingly, the Board of Trade promulgated a relatively complete set of regulations in 1863. [n. 22] France agreed by a treaty with the United Kingdom to follow the regulations, [n. 23] and by 1868, 33 other countries had notified the United Kingdom that their vessels would be bound by them, even when outside British waters; [n. 24] the United States adopted them for inland waters as well as the high seas. [n. 25]
By an order in council [n. 26] new regulations were issued, prescribing "optional" whistle signals to indicate a vessel's movements - a system that had been observed by British masters to be working well in American waters. Most maritime countries then adhered to the system.
Meanwhile, the U.S. Congress enacted legislation relating to navigational lights in 1838 and 1849, [n. 27] and in 1851 [n. 28] the U.S. Navy, by regulation, required all U.S. steam vessels to display a white masthead light and red and green side lights. The following year Congress authorized a newly created body, the Supervising Inspectors, to issue "Pilot Rules" governing navigation of vessels in inland waters. [n. 29] A decisive move toward international uniformity was made in 1864, when Congress enacted a set of high seas rules almost identical to the British Regulations of 1863, and when the British rules were revised in 1884, Congress adopted the same rules the following year. [n. 30]
The first diplomatic conference on navigational rules was called by President Benjamin Harrison, and was held in Washington in 1889. [n. 31] This resulted in a set of rules that went into effect throughout the world in 1897. [n. 32] Relatively minor changes in the rules resulted from conferences held in Brussels in 1910 [n. 33] and in London in 1948 [n. 34] and 1960. [n. 35]
The navigational rules currently in force in international waters were adopted in 1972 at a diplomatic conference held in London, called by the Intergovernmental Maritime Consultative Organization (IMCO), the specialized agency of the United Nations now called the International Maritime Organization (IMO). [n. 36] The 1972 Rules, which became effective July 15, 1977, [n. 37] and are commonly called "COLREGS" (Collision Regulations) constitute a thorough revision of the earlier version. COLREGS amendments were effected in 1983 and 1989, [n. 38] but these were mainly technical in nature. COLREGS were the first rules adopted in the form of an international convention. [n. 39]
Most countries have enacted statutes making COLREGS applicable in local waters, although in some instances special rules have been added to govern particular local conditions. [n. 40] In the United States prior to December 24, 1981 there were three sets of statutory rules for inland waters: the "Inland Rules," [n. 41] the "Western River Rules" [n. 42] and the "Great Lakes Rules," [n. 43] and each set was supplemented by a corresponding set of "Pilot Rules," issued by the Commandant of the U.S. Coast Guard pursuant to statutory authority. [n. 44]
All three sets of statutory rules and the corresponding sets of pilot rules were replaced by a single set of Inland Rules, [n. 45] which became effective on the Western Rivers and other inland waters, except the Great Lakes, on December 24, 1981, [n. 46] and came into force on the Lakes on March 1, 1983. [n. 47] The current Inland Rules include a few provisions concerning special navigational problems encountered in navigating the Western Rivers [n. 48] and the Great Lakes, [n. 49] but otherwise the same rules apply on all United States waters not governed by COLREGS. [n. 50] Moreover, the Inland Rules are in most instances identical to the corresponding COLREGS; even the numbering system of COLREGS has been followed. [n. 51] The principal remaining difference is in the meaning of the sound signals to be exchanged by vessels approaching each other on "head-on," crossing, or overtaking courses. [n. 52] The dividing lines between waters governed by the Inland Rules and those where the International Rules apply have been established by Congress.
Despite the widespread use of radar, "ARPA," and other sophisticated navigational aids, the schooling of ship's officers in their proper use, and the adoption of traffic separation schemes in congested waterways, marine collisions continue to occur with surprising frequency. In 1990, the latest year for which statistics were available as of 1994, a total of 1367 collisions involving U.S. flag commercial vessels of all sizes, wherever occurring, and foreign vessels operating in U.S. waters, were reported to the Coast Guard. Of these, 67 resulted in total losses and 1300 in damage. [n. 53] During the year, 4 deaths and 46 injuries were caused by collision. [n. 54]
B. THE BASIS OF LIABILITY FOR COLLISION DAMAGES
1. Fault as the basis of liability. It is universally accepted that liability for collision damages is based upon fault. [n. 55] Indeed, there would seem to be no fair alternative to this concept. Thus, if strict liability, i.e., liability without fault, were the rule, a small fishing vessel whose navigation was completely blameless could be held fully responsible for the loss of a valuable tanker whose gross fault brought about a collision resulting in an explosion and the total loss of the tanker. Similarly, if the law required an equal division of the damages between two colliding vessels, regardless of fault, the owner of the innocent fishing vessel would, in the end, be responsible for half of the tanker owner's damages, less half of his own damages. [n. 56]
Finally, if there were no liability for collision damages, regardless of fault, and the collision resulted in the total loss of the innocent fishing vessel, the latter's owner would be left without recourse for a loss for which neither he nor his employees were in any way responsible. [n. 57]
2. The former "major-minor fault" rule. The rule of equal division of damages prevailing in the United States before the Reliable Transfer [n. 58] decision of 1975 frequently had very harsh results, as where the faults of one colliding vessel vastly outweighed those of the other. In an attempt to ameliorate the effects of the "divided damages" rule in such cases the courts devised the so-called "major-minor fault" rule. Under this rule, when the faults of one vessel were serious, and alone sufficient to account for the collision, the court was not required to hold the other vessel liable to pay half the total damages under the divided damages rule unless her contributory fault was clear and convincing. Instead, the court could assess full blame against the vessel guilty of the serious fault. However, one of the effects of the Reliable Transfer decision was the abolition of the "major-minor fault" rule as unnecessary, since in a case where there is a wide disparity between the faults of one vessel and those of the other the court may now take the disparity into account by apportioning blame on other than an equal basis. [n. 59] Thus, since Reliable Transfer the courts have had no hesitancy in apportioning fault on bases such as 80% - 20%, [n. 60] or even 90% - 10%. [n. 61]
3. Error in extremis. On occasion one vessel is guilty of serious fault, such as the violation of a basic navigational rule, and her conduct compels an approaching vessel to make a quick decision in an effort to avoid collision. If the effort does not succeed, it may appear, on calm reflection following the collision, that the avoiding action taken by the second vessel was not the preferable maneuver. Under the error in extremis doctrine the selection of such avoiding action will not be held actionable fault, but will be excused as action taken under the emergency conditions created by the first vessel's fault. [n. 62]
Unlike the "major-minor fault" rule, the error in extremis doctrine was not developed for the purpose of mitigating the harsh effects of the old divided damages rule, but is simply intended to require the court to judge by a more liberal standard of care the conduct of a vessel whose navigators are compelled to make a quick decision when suddenly faced with a dangerous situation created by the fault of an approaching vessel. [n. 63] Thus, the doctrine concerns the question whether any percentage of blame at all is properly chargeable to the second vessel, and not the proportion of fault attributable to each colliding vessel in a case where both of them are guilty of actionable fault; the in extremis doctrine has therefore not been affected by Reliable Transfer. [n. 64]
4. Last clear chance. The applicability of the last clear chance doctrine to collision cases has been questioned, and in any event the doctrine has been seldom invoked in such cases. [n. 65] It was apparently first applied in a collision case by Judge Learned Hand in another effort to ameliorate the effects of the former divided damages rule. [n. 66] Even before Reliable Transfer the doctrine had fallen into desuetude, but since that decision there has been no reason at all for its continued existence. In the words of Circuit Judge Altimari in Prudential Lines, Inc. v. McAllister Brothers, Inc., [n. 67] "The disease of divided damages having been destroyed, the balm of last clear chance has become superfluous. The last clear chance doctrine will not be permitted to continue out of sheer inertia." [n. 68]
5. Inevitable accident. On relatively rare occasions it is found that a collision was caused by pure accident, and that no navigational error, and no failure to use due diligence with respect to the seaworthiness of either vessel caused or contributed to the collision. Thus, a sudden squall might cause two small vessels meeting in restricted waters to collide. Another example would be the sudden failure of a vessel's steering gear, caused by an inherent defect in the casting of a metal part, which could not have been discovered by the vessel's owners by means of any test or inspection that might reasonably have been required. In cases of this kind, the collision is said to have been caused by "inevitable accident." [n. 69]
There was a time when in a case of inevitable accident the damages sustained by the two vessels were divided equally between their respective owners, but this rule was abrogated many years ago and it is now clear that in a case of "inevitable accident" the owner or operator of neither vessel is liable to the other; each bears his or her own damages. [n. 70]
6. Inscrutable fault. On still rarer occasions, a collision has been held caused by "inscrutable fault." The circumstances may have been such that the court concludes that the collision would never have occurred unless someone erred, but it is impossible to determine where the error lay. Thus, if two vessels were to collide on a clear night in fair weather, and the collision were to result in the deaths of all those on watch on each vessel, the court might conclude from the weather conditions that the loss was caused by the fault of one or both of the vessels, but could not determine where the fault lay; it was inscrutable. In such a case, as in the case of inevitable accident, the owner of neither vessel is entitled to recover from the other; the losses lie where they fall. Thus, the result of a finding of "inscrutable fault" is the same as that of a finding of "inevitable accident."
* Professor of Law, Fordham University.
This article is based on a longer article which first appeared in Il Dirito Maritimo and later, in revised form, in the Journal of Maritime Law and Commerce. The substance of that article will be the first chapter of the authors' text on the Law of Collision which is now nearing completion.
1 The revised fourth edition of Black's Law Dictionary defined the term "collision," as used in maritime law, as "The act of ships or vessels striking together," citing, inter alia, Wright v. Brown, 4 Ind. 95, 97 (1853), for the statement that "In its strict sense, collision means the impact of two vessels both moving, and is distinguished from allision, which designates the striking of a moving vessel against one that is stationary. But collision is used, in a broad sense, to include allision, and perhaps other species of encounters between vessels, and between a vessel and other floating, though non-navigable, objects." See, e.g., Matter of Exxon Shipping Co., 869 F.2d 943, 1989 AMC 1422 (5th Cir. 1989), where the court applied the term "collision" to a contact between a moving vessel and a wreck.
2 Defined in Black's Law Dictionary (5th ed.) as "The running of one vessel into or against another, as distinguished from a collision, i.e., the running of two vessels against each other. But this distinction is not very carefully observed."
Some courts use the term "allision" in a broader sense, to include the contacts of moving vessels not only with stationary vessels or other floating structures, but also with piers, wharves, bridges and other shoreside installations. See, e.g., Georgia Ports Authority v. The Atlantic Towing Co., 1985 AMC 332 (SD Ga. 1983).
3 51 Tul.L.Rev. 759 (1977) (Owen). The article is an enlargement of a paper presented at the Tulane Admiralty Law Institute's Symposium on the American Law of Collision, held at New Orleans in March 1977, while Mr. Owen was President of the Maritime Law Association of the United States.
4 2 Dods. 63, 165 Eng.Rep. 1422 (Adm. 1815).
5 The equal division rule in both-to-blame cases laid down in The Woodrop - Sims was approved by the House of Lords in Hay v. Le Neve, II Shaw's Rep. 395 (H. L. 1824). See Owen, 51 Tul.L.Rev. at 767, n.45.
6 International Convention for the Unification of Certain Rules of Law with Respect to Collisions between Vessels, Sept. 23, 1910, ("the 1910 Collision Convention"). The French text, which is the only official one, is reprinted in 212 Consol. Treaty Series, at 178. The Convention was implemented in the United Kingdom by the Maritime Conventions Act of 1911, 1 & 2 Geo. 5, c.57. See J. Griffin, The American Law of Collision 852 (1949) (Griffin).
7 421 U.S. 397, 1975 AMC 541 (1975).
13 Since § 30 of the Liberian Maritime Law adopts the general maritime law of the United States as the general maritime law of Liberia, the effect of Reliable Transfer was to make the proportional fault rule part of the general maritime law of that country.
14 See R. Marsden, Collisions at Sea 424-425 (11th ed., K. McGuffie, editor, 1961; 4 British Shipping Laws) (Marsden); Owen, 51 Tul.L.Rev. at 769-770.
15 Trinity House Regulations, reprinted in 166 Eng.Rep. 654-656 (1924). See Owen, 51 Tul.L.Rev. at 783 and n.133. The issuance of the 1840 Regulations appears to have been prompted by the decision of Sir John Nichol in The Perth, (1838) 3 Hag. Adm. 414. See F. Wiswall, Uniformity in Maritime Law, 57 Tulane L.Rev. 1208, 1215-16 (1983).
16 9 & 10 Vict., c.100, §§ 9, 13, 36 (1846). See Owen, 51 Tul.L.Rev. at 784.
18 14 & 15 Vict., c.79, §§ 27, 48 (1851).
19 17 & 18 Vict., c.104, §§ 4, 296-297.
20 Admiralty Notice Respecting Lights and Fog Signals, reprinted at 166 Eng.Rep. 1252 (1924), Swab. App. vi (1860). See Owen, 51 Tul.L.Rev. at 784.
22 The Merchant Shipping Act of 1862, 25 & 26 Vict. c.63, Table C (1862).
23 Owen, 51 Tul.L.Rev. at 784.
26 Regulations for Preventing Collisions at Sea, 4 P.Div. 241 (1879), modified, 9 P.Div. 247 (1884). See Owen, 51 Tul.L.Rev. at 785.
27 Act of July 7, 1958, ch.191, § 10, 5 Stat. 306; Act of Mar. 3, 1849, ch.105, § 5, 9 Stat. 382. See Owen, 51 Tul.L.Rev. at 785.
28 Id., n.155, citing Jones v. The Hanover, 13 F.Cas. 971, 973 n.1 (No. 7,466) (SDNY 1851).
29 Act of Aug. 30, 1852, ch.191, § 18, 10 Stat. 70. See Owen, 51 Tul.L.Rev. at 785.
30 Act of Apr. 29, 1864, Ch.69, Arts. 1-20, 13 Stat. 58. See Owen, 51 Tul.L.Rev. at 785-786.
31 Owen, 51 Tul.L.Rev. at 786.
37 The Rules are embodied in the Convention on the International Regulations for Preventing Collisions at Sea, 1972, 28 U.S.T. 3459. The Convention became effective by a Proclamation of President Gerald Ford issued Jan. 19, 1977, 42 F.R. 17112, reprinted in 33 U.S.C.A. following § 1602, which authorized the President to proclaim the Regulations.
For an account of the difficulties encountered in connection with adoption of the Regulations by the United States, and the part played by the Maritime Law Association of the United States in securing adoption, see Owen, 51 Tul.L.Rev. at 788-789.
38 The President is authorized to proclaim any amendment to the Regulations adopted in accordance with Article VI of COLREGS and to which the United States does not object. See 33 U.S.C. § 1602.
39 The 1948 Rules were, however, adopted at a diplomatic conference together with the 1948 Safety of Life at Sea ("SOLAS") Convention, and the 1960 Rules were adopted at the same conference that adopted the 1960 SOLAS Convention, 16 U.S.T. 185, T.I.A.S. No. 5780, 536 U.N.T.S. 27. Thus, the text of the 1960 SOLAS Convention was Annex "A" to the Final Act of the 1960 Conference and the Collision Regulations constituted Annex "B."
40 T. Schoenbaum, Admiralty and Maritime Law 446 (1987) (Schoenbaum); Owen, 51 Tul.L.Rev. at 790.
41 Navigation Rules for Harbors, Rivers and Inland Waters Generally, 33 U.S.C. §§ 151-232. Sections 154-232 were repealed as of Dec. 24, 1981, the effective date of the current Inland Rules, infra note 59, with respect to the Western Rivers and inland waters generally. See note following 33 U.S.C.A. § 2001.
42 Navigation Rules for the Red River of the North and Rivers Emptying into the Gulf of Mexico, 33 U.S.C. §§ 301-356, repealed as of Mar. 1, 1983, the effective date of the new Inland Rules, infra note 45, with respect to the Western Rivers and inland waters generally. See note following 33 U.S.C.A. § 2001.
43 Navigation Rules for the Great Lakes and their Connecting and Tributary Waters, 33 U.S.C. §§ 241-295, repealed as of Mar. 1, 1983, the effective date of the new Inland Rules, infra note 45, with respect to the Great Lakes.
44 Inland Pilot Rules, 33 CFR former §§ 80.01-80.36; Great Lakes Pilot Rules, 33 CFR former §§ 90.01-90.30, and Western Rivers Pilot Rules, 33 CFR former §§ 95.01-95.80. These pilot rules ceased to apply when the new Inland Rules, infra note 45, became effective.
46 Pub.L. 96-591, § 7, provided that the new rules were to become effective twelve months after the date of enactment of the law (Dec. 24, 1980), except that the effective date with respect to the Great Lakes was to be established by the Secretary of Transportation.
47 See 47 F.R. 15135, Apr. 8, 1982.
48 See Rule 14(d), 33 U.S.C. § 2-14(d), providing that a power-driven vessel operating on the Western Rivers and other rivers designated by the Secretary of Transportation, and on the Great Lakes, and proceeding downbound with a following current, has the right of way over an upbound vessel. See also Rule 24(i), relating to special lights for power-driven vessels when pushing ahead or towing alongside on the Western Rivers and other waters designated by the Secretary.
49 See Rule 23(d), 33 U.S.C. § 2003(d), relating to an all-around white light which a power-driven vessel operating on the Great Lakes may carry in lieu of the second masthead light and sternlight required elsewhere. See also Rule 14(d), supra note 48, which applies to the Great Lakes as well as to the Western Rivers.
50 Rule 1, 33 U.S.C. § 2001. The Inland Rules also apply to U.S. vessels on the Canadian waters of the Great Lakes to the extent that there is no conflict with Canadian law. Id.
51 See the comparative table in the U. S. Coast Guard publication, Navigation Rules, International-Inland (1990). See also 12 J.Mar.L. & Com. 543 (1981), setting out those Inland Rules which differ from the corresponding International Rules.
52 Compare Rules 9 and 34 of COLREGS with Rules 9 and 34 of the Inland Rules.
53 See U. S. Coast Guard, Statistics of Casualties-1990, 51 Proceedings of the Merchant Marine Safety Council, No. 1, p. 14 (1994).
55 See, e.g., the 1910 Collision Convention, Art. 2; The Clara, 102 U.S. 200 (1880). See also R. Brown, General Principles of Liability, 51 Tul.L.Rev. 820 (1977) (Brown), an article based upon a paper delivered at the Tulane Admiralty Law Institute's Symposium on the American Law of Collision, held at New Orleans in March 1977.
56 See N. Healy, The Apportionment of Risk Between Shipowner and Third Parties - Shipowner and Shipowner Collisions, in Report of CMI Seminar on Apportionment of Risk in Maritime Law, held at Aix-en-Provence in September, 1976.
59 See Neptune Maritime Company v. The Essi Camilla, 1984 AMC 2983, noted at 714 F.2d 132 (4th Cir. 1983).
60 See, e.g., Matter of Interstate Towing Co., 717 F.2d 752, 1983 AMC 2971 (2d Cir. 1983).
61 See, e.g., Amoco Transport Co. v. The Mason Lykes, 550 F.Supp. 1264, 1983 AMC 1087 (SD Tex. 1982). For a statistical analysis of apportionments in English and Scandinavian cases decided before 1976, see G. Paulsen, Apportionment of Fault in Both to Blame Collision Cases, Mar.L.Ass'n Doc. No. 602 (Oct. 30, 1976). The apportionments made by the American courts since Reliable Transfer are tabulated in the AMC Five-year Digests, under "Collision," Para. 2434.
62 The Genessee Chief, 53 U.S. 243 1852); The Bywell Castle, L.R. 4 Prob.Div. 219 (C.A. 1879); V/O Exportkhleb and Ins. Co. of U.S.S.R. v. The Reiss, 1983 AMC 728 (ND Ohio 1982).
63 See Brown, 51 Tul.L.Rev. at 837.
66 Chemical Transporter, Inc. v. M. Turecamo, Inc., 290 F.2d 496, 1961 AMC 1520 (2d Cir. 1961).
67 801 F.2d 616, 1987 AMC 231 (2d Cir. 1986).
68 801 F.2d at 621, 1987 AMC at 238.
69 The Jumna, 149 F.171 (2d Cir. 1906). See the discussion of inevitable accident in Griffin, at 537-550.
70 See The Jumna, supra note 69.
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Pro-Lender Pollution Rule Invalidated
Uncertainty as to the circumstances under which a mortgagee of a vessel might be held liable as a "Responsible Person" under the Oil Pollution Act of 1990, 33 U.S.C.A. §§ 2701-61 ("OPA"), remains a difficult problem. It was hoped that treatment of the issue under laws governing pollution on land (The Comprehensive Environmental Response, Compensation and Liability Act of 1980, "CERCLA"), would provide a helpful guide. Unfortunately, regulations issued by the Environmental Protection Agency ("EPA") clarifying lender liability under CERCLA were recently declared invalid by the Federal Court of Appeals sitting in Washington, D.C., Kelley v. Environmental Protection Agency, No. 92-1312, D.C. Cir. February 4, 1994, 62 U.S.L.W. 2489, 1994 W.L. 27881, and 1994 W.L. 57221, on the ground that the EPA had exceeded its power.
OPA causes concern to lenders because it has no provision exempting lenders from liability when, in the course of enforcing their security interests, they may appear to be "owners" or "operators" of a vessel, which could lead to the conclusion that they are "Responsible Persons" having liability under OPA.
CERCLA, in contrast, has a safe harbor provision for a lender that exempts it from liability when it holds indicia of ownership primarily to protect its security interest in a vessel or facility, as long as it has not participated in the management of the vessel or facility. 42 U.S.C. § 9601(20)(A).
The EPA Rule was initially prompted by an uproar among bankers about a court decision under CERCLA holding that a lender could be liable for pollution when it had the capacity to influence the borrower even if that capacity had not been exercised.
In April 1992, the EPA issued a final regulation concerning the lender's safe harbor. 40 C.F.R. § 300.1100 (the "EPA Rule"). The rule declared that participation in management meant actual participation and did not include a capacity to influence or an unexercised ability to control the business of the borrower. Several activities were established as not constituting participation in management. These included: requiring an environmental inspection; insistence that the borrower come into compliance with environmental standards; requiring the borrower to decontaminate a facility; and monitoring the facility, or monitoring the borrower's business or financial condition. The rule did not require a prospective mortgagee to conduct an environmental audit before making the loan in order to qualify under the lender exemption. Upon foreclosure, a mortgagee could have retained its exemption (assuming that it had not already been lost) as long as it attempted to sell the property on commercially reasonable terms in a reasonably expeditious manner. A lender would have been outside the exemption if it had exercised decision-making control over the borrower's environmental issues, or if it had exercised day-to-day decision-making control over substantially all of the borrower's operational aspects other than environmental compliance.
Before it was invalidated, three federal court decisions were issued that approved the EPA Rule. In one of the cases, a lender exercised substantial influence over a borrower by causing the founder of the company to be removed as CEO, and by conducting daily reviews of the borrower's finances. Under the EPA Rule, these actions were within the safe harbor. The judges' comments in these decisions indicate a belief that because of the broad remedial intent behind CERCLA (and by analogy OPA), Congress intended to encourage lenders to select new borrowers based on their compliance with environmental laws, and to insist upon such compliance with respect to existing borrowers. In trying to honor these intentions, however, lenders must be careful not to "participate" in the borrower's management.
The EPA Rule was invalidated in February, 1994 in a suit brought by the Attorney General of the State of Michigan and the Chemical Manufacturer's Association against the EPA. The plaintiffs argued that the rule should be overturned because it improperly circumscribed their ability to recover clean-up costs from lenders under the right of private action granted in CERCLA. The court agreed with the plaintiffs, finding that Congress, by providing for a private right of action, designated the courts and not EPA as the adjudicator of the scope of CERCLA liability.
Although it established the courts as having exclusive power to interpret the scope of the lenders' exemption, the court offered no comment on the merits of the EPA Rule, nor any guidelines to be used in its place. The majority concluded its opinion by suggesting that the EPA again seek from Congress an amendment to CERCLA. The EPA is seeking a re-hearing of the case. If the EPA is unable to obtain reinstatement of its rule, we will see continued uncertainty in this area until additional decisions are issued by the courts.
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John
Koster Co-Edits "Forms" Volumes for Benedict on Admiralty
Healy & Baillie partner John Koster has become Co-Editor (along with
Professor Michael F. Sturley of the University of Texas Law School and
the Matthew Bender editorial staff) of the "Forms" volumes of
Benedict on Admiralty published by Matthew Bender. The complete twenty-five
volume set of Benedict on Admiralty covers all aspects of international
and American maritime law. The four volume "Forms" sub-set (Vols.
2A-2D) offers a comprehensive overview of the principles affecting common
and private carriage of cargo and gives full texts of over 125 standard
form charter parties, 30 bills of lading and 15 other shipping documents
(from sale contracts to agency agreements and towage contracts). Charter
parties are arranged by categories such as bareboat, coal, general, etc.
Additionally, the volumes provide 400 pages of Tanker Voyage Charter Party
Riders and over 600 pages of standard charter clauses arranged by category.
The four volume sub-set on "Forms" can be purchased separately and is available direct from Matthew Bender. John is also the author of the chapter on "Marinas" of the Matthew Bender publication "Recreational Boating Law."
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U.S. Capital Markets as Source for Funding Fleet Renewals
by Robert
G. Shaw
Foreign shipowners have recently raised significant
amounts of long term capital in the U.S. markets. Marine Money International
estimates that over $3 billion have been raised by shipowners, including
cruise operators, in the last six months. Several of the shipping stock
and debt issues have attracted considerable publicity in the trade press.
Although many cruise shipowners have raised large amounts of money in the
U.S. capital markets in recent years, relatively few bulk ship operators
have used these markets successfully. The average age profile of many types
of bulk ships and the stricter requirements of charterers, classification
societies and underwriters will likely cause an increased need for long
term capital as fleet renewals become necessary over the next decade.
New York offers bigger equity and debt markets for long term corporate needs than perhaps any other world financial center. Freight rates in the wet and dry bulk markets are presently not high enough for owners to cover operating expenses and the debt service on newbuilding costs. Traditional ship financing banks are generally unwilling or unable to extend fixed interest loans or on terms deferring principal repayments beyond the first year of the loan or for a term of more than five to seven years. These facts also make it more likely that more shipowners may consider funding their long-term capital needs through the New York capital markets.
A shipowner considering raising funds in these markets may seek to do so through either a private or public placement. The securities offered may be for debt or equity, i.e., either notes or bonds or shares of stock, or a combination of both.
Making the appropriate choice, preparing
the requisite accounts and offering documents and marketing the offering
effectively require the intensive participation and guidance of investment
bankers, accountants and lawyers. In a short article of this kind it is
impossible to discuss fully all the choices available and their various
implications. The following are some of the very general considerations
that apply.
Type of Capital to Be Raised: Debt or Equity?
Investment bankers will review with the issuer its capital requirements and advise what amounts the issuer can reasonably hope to raise, by what methods, and at what prices. The pricing of the interest rate in the case of a debt issue, and of shares and the percentage shareholding to be offered in the case of an equity issue, are matters that are closely studied by the issuer and its investment bankers. Together they will also determine whether to place the issue in the public or private market.
PUBLIC PLACEMENTS
The U.S. Securities Act of 1933 is one of seven main federal statutes regulating the sale of securities in the United States. The Act requires that except in certain exempted cases, all securities offered for sale in the United States must, before sale, be the subject of a registration statement filed with and approved by the Securities Exchange Commission ("S.E.C."), including a prospectus to be issued to prospective investors. The Act specifies in great detail the information to be contained in the registration statement and the prospectus. The aim of the Act is to insure that there is full disclosure of all material facts which any investor would reasonably want to know about the prospective issuer, its management, officers, directors and shareholders, the promoters of the issue, the use of the proceeds, the commissions to be earned by investment bankers and a whole variety of other matters. Failure to disclose any material information can expose all the directors and officers of the issuer as well as its professional advisers to civil liabilities which are not dependent on a showing of fraud on their part.
Because of the detailed information and accounts that have to be contained in a registration statement and prospectus, the fees and expenses of lawyers, accountants and investment bankers are usually substantial. They will almost always exceed the fees a shipowner can expect to pay for the preparation of a term loan agreement accompanied by a ship mortgage and other standard security documents.
The S.E.C. requires an issuer to publish financial statements based on U.S. general accounting principles, which add further expense to the professional costs of a public offering. Moreover, the extensive disclosure required in documents which are of public record and get widely circulated often are unattractive to individuals in the shipping industry who, for a variety of reasons, value privacy in their business affairs. Among other things, full disclosure has to be made of beneficial ownership, including the identity of the ultimate individual owners and of related party transactions. An issuer of publicly traded securities also has to make quarterly and annual public filings with the S.E.C. on a wide range of financial and other matters concerning the issuer's affairs. These, too, add considerably to professional costs and management time, and are open to public inspection.
The S.E.C. is keen to encourage foreign companies to seek listings in the United States. According to the New York Times of May 3, 1994, more than 200 foreign issuers from 27 countries have entered the U.S. public markets for the first time in the last year. The S.E.C. has recently eased requirements for foreign issuers seeking to register stock with it and has relaxed the reporting requirements that it ordinarily imposes. Several accounting rules have been relaxed. Instead of U.S. generally accepted accounting principles, the S.E.C. will now accept international accounting standards for foreign companies' cash flow statements.
PRIVATE PLACEMENTS
The Securities Act of 1933 contains certain exemptions from the requirement of a registration statement if securities are offered to fewer than 35 investors. Moreover, any prospective investor who is an "accredited investor" does not count within the 35 person limit. "Accredited investors" include banks, insurance companies and individuals with high personal worth as defined within limits set pursuant to regulations promulgated by the Securities Exchange Commission in accordance with the Act.
Thus, for example, an equity offering made to individuals (each having a net worth in excess of $5 million) is exempt from the registration requirements of the Act. A debt offering made to a life insurance company also does not require the filing of a registration statement.
It may be more difficult to place a private equity offering unless the issuer or its investment bankers have access to investors who have some particular interest in and knowledge of the shipping industry. With debt issues there will ordinarily be less difficulty finding interested potential purchasers, provided an enterprise exists which already owns and operates ships and can show an ability to service the debt to be issued. Debt issues, both public and private can be made in conjunction with bank term debt or on their own. Typically life insurance companies are potential purchasers of the debt issues made in the U.S. private placement market. Their primary investment objective is to find fixed interest securities of sound issuers. These will have a term substantially longer than shipowners ordinarily obtain under a traditional bank ship financing loan. While the fixed interest rate payable on long term obligations issued to a life insurance company may be higher than under a fluctuating "LIBOR plus" ship financing term loan, principal repayments will likely begin significantly later and be stretched over a longer term thereby spreading the shipowner's payment obligations over a bigger portion of a newbuilding's life. The issuers of securities sold to life insurance companies invariably have to be rated as "investment grade", a process requiring assessment by a U.S. credit rating agency. This is a step which a number of foreign shipowners operating bulk vessels have gone through in the last year.
The transaction costs of a private placement will ordinarily be smaller than those of a public placement. There is no registration statement filed with the S.E.C. and no legal requirement for accounts of a private issuer to be prepared according to U.S. accounting principles. The terms of the offering memorandum will be the subject of negotiation between the issuer and the debt purchaser and their advisers. Usually less detailed disclosure is required in a private placement of the issuer's affairs. Nevertheless, all material facts should be disclosed to potential investors. This is not only good business practice. It is also advisable because under both common law principles and the various securities law of the states in the United States (as opposed to the federal securities laws), omissions or misrepresentations in private placements give rise to a wide range of liabilities and penalties.
CONCLUSION
For many bulk shipowners around the world raising money in the U.S. markets is still a wholly unfamiliar and sometimes intimidating experience. These markets are, however, a potential source of long term capital funding which financially sophisticated owners are beginning to consider as they contemplate fleet renewals.
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W.
Cameron Beard and Simon
Harter Became Partners of the Firm as of January 1, 1994
Cameron Beard joined the firm as an associate in June 1991. Prior to that
he had served as law clerk to the Hon. B. Edenfield, Judge of the U.S.
District Court for the Southern District of Georgia (1986-87) and had been
an associate of Burlingham Underwood and of Windels, Marx, Davies and Ives
in New York. He is a 1986 graduate of the University of Connecticut School
of Law, where he was Co-Editor-in-Chief of the Journal of International
Law. While at law school he had the distinction of having a case note he
wrote cited by the U.S. Supreme Court, See Exxon Corp. v. Central Gulf
Lines, Inc., 111 S.Ct. 2071 at 2075, 1991 AMC 1817 at 1822 (1991). His
specialty is complex multi-national maritime litigation. He reads and speaks
Norwegian fluently and is admitted to practice in Connecticut and New York.
Simon Harter joined the firm as an associate in February 1991 after having been in practice in New Orleans with the firm of Lemle & Kelleher. He received his B.A. degree from Ohio State University and in 1986 his J.D. degree from Tulane University School of Law. He is admitted to practice in New York, New Jersey, Connecticut and Louisiana, his practice consisting primarily of Marine Insurance and Charter Party disputes. Simon and his wife Karen, have two children, Kathryn (age 4) and Graham (10 months), and reside in Princeton Junction, New Jersey.
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Howard M. McCormack Elected a Vice-President of The Maritime Law Association
of the United States
Partner Howard M. McCormack was elected Second Vice President of the Maritime Law Association of the United States at its Annual Meeting on May 6, 1994. He previously served the Association as Membership Secretary from 1986 to 1990 and as Secretary from 1990 to 1994. Before joining Healy and Baillie as a partner in 1979 he had been Maritime Counsel to Bethlehem Steel Corporation for seven years. Prior to that he had been with the New York firm of Zock, Petrie, Sheneman and Reid for ten years. In great demand as a lecturer on maritime law subjects, he has delivered papers at the International Congress of Maritime Arbitrators, the Shanghai Maritime University, the Tulane Admiralty Law Institute, William and Mary Law School, the World Trade Institute and at Maritime Law Association Seminar. A number of his papers have been published.
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Jeremy J.O. Harwood Becomes an MLA "Proctor in Admiralty"
It was announced at the Annual Meeting of the Maritime Law Association
that Jeremy J.O. Harwood is among the most recent group of MLA members
to achieve the rank of "Proctor in Admiralty" in the Association,
Members of the Association are not eligible to become Proctors in Admiralty,
the highest membership category for practicing lawyers, until after having
been Associate Members for four years and having met stringent professional
and educational requirements to the satisfaction of the Committee on Proctor
Admissions. Twelve Healy and Baillie lawyers are now in the "Proctor
in Admiralty" category.
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How to Reach Healy and Baillie Lawyers by E-mail
by Glen
T. Oxton
The firm has installed an e-mail connection through MCI which will
enable desktop to desktop e-mail communication from almost anywhere in
the world. Under this system, e-mail addressed to any of our lawyers can
be sent directly to his or her desktop. This will avoid the delay sometimes
encountered in facsimile transmissions in physically delivering the facsimile
from the central receiving point to the lawyer.
Electronic document files may be attached to e-mail messages in word processing format and may be edited by the recipient. The recent versions of the most popular word processing programs contain extensive conversion facilities so that the recipient need not have the same word processing program as the sender. Also, incoming e-mail can be filed electronically by using a few key strokes. In the future, this will surely be the preferred method of filing communications, rather than using traditional paper filing, or scanning incoming paper communications for electronic storage.
To reach the firm by e-mail, use the address MCI EMS:566-4694. A message addressed in this fashion will be received by our receptionist, who will route it by internal e-mail to the addressee. If you know the initials of your intended recipient, for example "ABC," simply add the phrase MBX:ABC@HBNY to the EMS address above for delivery to ABC's desktop. A notice will automatically appear on ABC's screen when e-mail is received.
It is not necessary to be an MCI subscriber to send mail to our MCI e-mail address, although it is easier. Most major providers of e-mail services enable users to send mail to an MCI address. A special address format may be required.
If you have any questions or problems in reaching us by e-mail, please contact Jorge Yau (JY), Diana Magno (DM), or Glen Oxton (GTO).
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Firm Was Patron for Concert Tour of Bremen Cathedral Choir
The Firm is pleased to have been a patron for the East Coast U.S. tour,
March 18-30, 1994, of the Choir and Chamber Orchestra of over 100 participants
from St. Peter's Cathedral of Bremen, Germany, directed by Prof. Wolfgang
Helbich. The featured composition at all the programs was the monumental
Passion according to St. John by J.S. Bach. Concerts took place at the
Harvard University Chapel in Cambridge, Mass., St. Agnes R.C. Cathedral
in Rockville Center on Long Island, Riverside Church in Manhattan and various
churches in the state of Pennsylvania and in Washington, D.C. it is reported
that the programs were beautifully rendered before very appreciative audiences.
Mr. Reinhard Schale of the Bremen Law Firm of Dr. Schakow and Partner is
a member of the Choir.
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Rt. Hon. Lord Staughton of the English Court of Appeal to Give Nicholas
J. Healy Lecture on Maritime Law in November
New York University Law School has announced that the Rt. Hon. Lord Staughton
will deliver the second Nicholas J. Healy Lecture on Admiralty Law. The
lecture will be held at NYU on Thursday, November 3, 1994. Lord Staughton
is a Judge on the English Court of Appeals. His lecture will concern the
interpretation of maritime contracts. More information concerning the exact
time and location of the lecture will be made available later. The Nicholas
J. Healy Lecture on Admiralty Law was established by New York University
two years ago to honor Nick Healy for his many contributions to NYU and
the field of admiralty law. Requests for more information about the lecture
can be addressed to John Kimball.
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Nicholas J. Healy to Lecture in Greece
Partner Nicholas J. Healy is participating this summer as a guest lecturer in Tulane University Law School's "Greek Isles" summer program. In early June he will give a series of lectures on Charter Parties on the Island of Rhodes, as part of a course on International Carriage of Goods by Sea. The other part, on Ocean Bills of Lading, will be given by Geoffrey Brice, Q.C. of London. In late June he will be lecturing on the Law of Collision on the Island of Spetses, as part of a course on Collision and Limitation of Liability. The lectures on Limitation will be given by Neal Hobson of New Orleans, an adjunct professor of law at Tulane.
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MAINBRACE is intended to provide general information. The articles contained in MAINBRACE do not constitute legal advice. An analysis of the facts relating to a particular issue must be accomplished before legal advice can be given.
NOTE: "Mainbrace," our Firm's cable address, in nautical terminology means the brace or rope sustaining the main yard on a ship. The Staff of "Mainbrace" consists of Nicholas J. Healy, Gordon W. Paulsen, John C. Koster, Matthew A. Marion, Betty M. Waterman and Renee Kintzer.
New York Office: 29 Broadway New York, NY 10006-3293 Telephone: (212) 943-3980 Telecopier: (212) 425-0131 |
Hong Kong Office: Luk Hoi Tong Bldg., Suite 1301 31 Queen's Road Central Hong Kong Telephone: (852) 2 537-8628 Telecopier: (852) 2 521-9072 |
Connecticut Office: Stamford HarborPark 333 Ludlow Street Stamford, CT Telephone: (203) 961-7250 Telecopier: (203) 357-7909 |
New Jersey Office: 374 Millburn Avenue P.O. Box 599 06902-6987 Millburn, NJ 07041-0599 Telephone:(201) 384-2556 Telecopier:(201) 384-1081 |
Internet:Reception@Healy.com
MAINBRACE
HEALY & BAILLIE
29 BROADWAY
NEW YORK, NEW YORK 10006-3293
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