VES-3-02-OT: RR:BSTC:CCI H008709 GG
Mr. John E. Casperson, Esq.
Holmes Weddle & Barcott
Wells Fargo Center
999 Third Avenue, Suite 2600
Seattle, WA 98104
RE: Coastwise Trade; Passengers; Bareboat Charter Agreement; 46 U.S.C. §§ 55102 & 55103
Dear Mr. Casperson:
This is in response to your correspondence of March 20, 2007, on behalf of three clients who wish to engage in bareboat chartering of their vessels, seeking approval of a bareboat charter agreement. A copy of the agreement was enclosed with your letter to us. In addition, a copy of an “operating agreement” was enclosed for our review. Our ruling on this matter is set forth below.
FACTS
Of the three vessels in question, one is a foreign flagged vessel and the other two are U.S. flagged. All vessels are U.S. owned. The two U.S. flagged vessels are documented with recreational endorsements, and one of them also has a coastwise endorsement. The owner of the foreign flagged vessel seeks to make the vessel available for recreational bareboat charters. Consequently, the scope of our ruling is limited to this particular vessel and the U.S. flagged vessel that does not possess a coastwise endorsement inasmuch as their proposed use is dependent upon our review of the charter agreement.
It is anticipated that all three vessels will be involved in travel between U.S. ports and ports in Canada or Mexico. An “operating agreement,” whereby the owner of the vessel would provide the master and crew, would be offered to each charterer, but would not be required as part of the bareboat charter agreement.
ISSUE
Whether the charter party agreement submitted for our review is a valid bareboat charter agreement for purposes of the coastwise laws administered by U.S. Customs and Border Protection (CBP).
LAW AND ANALYSIS
Title 46 United States Code, § 55102 (46 U.S.C. § 55102, the merchandise coastwise law commonly referred to as the “Jones Act,” recodified by Pub. L. 109-304, enacted on October 6, 2006), provides, in part, that no merchandise shall be transported between points in the United States embraced within the coastwise laws either directly or via a foreign port, or for any part of the transportation, in any vessel other than a vessel built in and documented under the laws of the United States and owned by persons who are citizens of the United States (i.e., a coastwise-qualified vessel). A coastwise-qualified vessel is one that is U.S.-built, owned and documented. Section 55103 of Title 46 (46 U.S.C. § 55103), which is more applicable to this particular case, prohibits the transportation of passengers between points in the United States embraced within the coastwise laws, either directly or by way of a foreign port, in a non-coastwise-qualified vessel. We note that for purposes of Section 55103, "passenger" is defined as " ... any person carried on a vessel who is not connected with the operation of such vessel, her navigation, ownership or business." See 19 CFR 4.50(b).
In interpreting the coastwise laws (Sections 55102 and 55103 as noted above), CBP has consistently ruled that a point in the United States territorial waters is a point in the United States embraced within the coastwise laws. The territorial waters of the United States consist of the territorial sea, defined as the belt, three nautical miles wide, seaward of the territorial sea baseline, and to points located in internal waters, landward of the territorial sea baseline, in cases where the baseline and coastline differ.
In its administration of 46 U.S.C. § 55103, CBP has ruled that the carriage of passengers entirely within territorial waters, even though the passengers disembark at their point of embarkation and the vessel touches no other coastwise point, is considered coastwise trade subject to the coastwise laws. However, the transportation of passengers to the high seas (i.e., beyond the three-mile territorial waters limit) and back to the point of embarkation, assuming the passengers do not go ashore, even temporarily, at another United States point (often called a "voyage to nowhere"), is not considered coastwise trade. (29 O.A.G. 318 (1912)). It should be noted that the carriage of fishing parties for hire, even if the vessel proceeds beyond territorial waters and returns to the point of the passenger's embarkation, is considered coastwise trade. Treasury Decision (T.D.) 55193(2).
With respect to chartering, CBP has consistently held that when a vessel is chartered under a bona fide bareboat charter, the bareboat charterer is treated as the owner of the vessel for the period of the charter, and, because the owners are not considered "passengers" for the purposes of the coastwise laws, the charterer is not prohibited by the coastwise laws from using the vessel during the charter for pleasure purposes only. A vessel chartered under a charter arrangement other than a bareboat charter (e.g., a time or voyage charter) and used in coastwise transportation (see discussion above on the carriage of passengers entirely in territorial waters or to the high seas or foreign waters) would be subject to penalties under the coastwise laws. A vessel chartered under a bareboat charter would also be subject to penalties if the bareboat charterer used it in the coastwise trade (e.g., to transport passengers, other than bona fide guests, between coastwise points or entirely within territorial waters). Customs Ruling HQ 226808 (June 7, 1996), citing Customs Ruling HQ 106049 (April 26, 1983); see also, HQ 116183 (April 5, 2004).
With respect to the validity of bareboat charter agreements, the United States Supreme Court stated:
To create a demise [or bareboat charter] the owner of the vessel must completely and exclusively relinquish "possession, command, and navigation" thereof to the demisee.... It is therefore tantamount to, though just short of, an outright transfer of ownership. However, anything short of such a transfer is a time or voyage charter party or not a charter party at all. Guzman v. Pichirilo, 369 U.S. 698, 699-670 (1962); see also, Leary v. United States, 81 U.S. 607, 611 (1871); 2B Benedict on Admiralty § 52 (6th Ed. 1990).
In our review of charter arrangements to determine whether or not they are bareboat charters for CBP purposes, we have held, in addition to the above-described principles, that:
The nature of a particular charter arrangement is a question of fact to be determined from the circumstances of each case. Under a bareboat charter or demise charter the owner relinquishes complete management and control of the vessel to the charterer. On the other hand, if the owner retains a degree of management and control, however slight, the charter is a time or voyage charter, and the vessel is deemed to be engaged in trade. The crux of the matter is whether complete management and control have been wholly surrendered by the owner to the charterer so that for the period of the charter the charterer is in effect the owner. Although a charter agreement on its face may appear to be a bareboat or demise charter, the manner in which its covenants are carried out and the intention of the respective parties to relinquish or to assume complete management and control are also factors to be considered. Customs Ruling HQ 226808, supra, citing Customs Ruling HQ 111424 (March 20, 1991) and Customs Ruling HQ 109638 (July 22, 1988).
Upon reviewing the terms of the charter agreement under consideration, we note that it is divided into eleven different provisions under the following headings: 1. Basic Agreement; 2. Hire, Charges, and Interest; 3. Operation and Use; 4. Warranties and Representations; 5. Surveys and Inventories; 6. Repairs, Maintenance, Alterations; 7. Redelivery; 8. Insurance; 9. Liability and Indemnity; 10. Canceling; and 11. Miscellaneous Provisions. Our analysis of the provisions set forth in these headings in light of the requisite criteria of a bareboat charter agreement discussed above is as follows.
The first provision, Basic Agreement, states that the vessel will be leased on a bareboat or demise charter basis and that the vessel will include all machinery, equipment, consumables, stores, furnishings, and gear associated with and/or aboard the vessel at delivery. The provision also states that the charter will commence at the delivery date and time, or actual date and time the charterer accepts and assumes control of the vessel, whichever occurs first. Acceptance of these terms by the parties indicates intent to have the charterer assume complete management and control of the vessel during the term of the charter.
The second provision, Hire, Charges, and Interest, states that the charterer shall be responsible for all charges and expenses "of every kind and nature whatsoever relating to the vessel or its use or operation during the charter.” It also states that the charterer shall pay in advance for hire unless otherwise agreed upon by the parties. Acceptance of these terms by the parties indicates intent to have the charterer assume complete management, control, and responsibility for the vessel during the term of the charter.
The third provision, Operation and Use, states that the charterer will man, fuel, victual [supply food], navigate, operate, maintain, and supply the vessel and “pay all charges and expenses of every kind and nature whatsoever” relating to the vessel and/or its use or operation during the term of the charter. It also states that these terms are “intended as a demise of the vessel by the owner to the charterer, and the charterer is to have full, complete and exclusive responsibility, possession, command and control of the vessel and its navigation and operation until redelivery to the owner.” (Emphasis added). This provision also states in part that the charterer agrees to employ the vessel “exclusively as a pleasure vessel” for the sole use of charterer and its guests and servants.
Lastly, this provision states that the charterer “shall employ the vessel only in lawful trades and activities and operate the vessel only within the trading limits and other conditions imposed by the vessel’s insurances.” The clause requiring the charterer to operate the vessel within the insurance coverage limits and in a safe manner is not incongruent with the other parts of this provision that give exclusive and complete control to the charterer during the charter period. See HQ 226808, supra.
The sixth provision states in part that the charterer “shall make all repairs, replacements and maintenance necessary to keep the Vessel in the same good condition, repair and working order as when delivered, less normal wear and tear…”
We find that the provisions in this agreement squarely address the nature of bareboat chartering; they clearly pass complete and exclusive control and responsibility for the vessel to the charterer during the term of the charter.
The remainder of the provisions contained within the subject charter agreement are inconsequential to our determination of whether in fact it is a valid bareboat charter agreement.
As for the “operating agreement,” we find that to the extent that it is not a requirement under the charter agreement but is merely offered to each charterer for acceptance or refusal, and provided that the charterer has full authority to hire, discharge or replace the master and crew, the operating agreement would not render the charter agreement a time charter. See HQ 111424 (March 20, 1991).
Thus, we find that the first, second, third and sixth provisions of the subject charter agreement indicate an intent by both the owner and the charterer to have the charterer assume exclusive and complete management and control of the vessel during the charter period. Consequently, we find the subject charter agreement is in fact a valid bareboat charter agreement for purposes of the coastwise laws administered by CBP. Accordingly, operation of the foreign-flagged vessel and the U.S. flagged-vessel possessing only a recreational endorsement pursuant to the subject charter agreement would not constitute a violation of coastwise laws.
HOLDING
The proposed charter agreement submitted for our review is a valid bareboat charter agreement for purposes of the coastwise laws administered by CBP. Consequently, the proposed use of the foreign-flagged and U.S. flagged non-coastwise-endorsed vessels would not violate these laws. Further, to the extent that the “operating agreement” described herein is offered to each charterer with the charterer having a right of refusal, such “operating agreement” would not negate our determination that the charter agreement in question is a valid bareboat charter agreement.
Sincerely,
Glen E. Vereb
Chief
Cargo Security, Carriers and Immigration Branch