VES-3-02-OT:RR:BSTC:CCR H300963 ASZ
Alberto Castañer-Padró
MAI Center
Marginal Kennedy
771 Calle 1, Suite 204
San Juan, Puerto Rico 00920
RE: Coastwise Trade; Passengers; Bareboat Charter Agreement; 46 U.S.C. §§ 55102 & 55103.
Dear Mr. Castañer-Padró:
This letter is in response to your August 24, 2018 ruling request on behalf of your client, Dream Yacht Charter, Ltd. (“DYC”), received in this office on September 25, 2018, seeking approval of a bareboat charter agreement and requesting a determination regarding the dutiability of the TOLKIEN. Our decision follows.
FACTS
The following facts are from your August 24, 2018 ruling request and October 17, 2018 e-mail to this office. The subject vessel, the TOLKIEN, is a French-built and registered sailing catamaran owned by DYC, a non-U.S. corporation. DYC wishes to charter the vessel to a British-resident from November 13-19, 2018 pursuant to a bareboat charter. The charter will depart from Fajardo, Puerto Rico and will visit the following ports: Vieques, Puerto Rico; Culebra, Puerto Rico; St. Thomas, U.S. Virgin Islands; Tortola, British Virgin Islands; and Virgin Gorda, British Virgin Islands. The charter will then terminate at Fajardo, Puerto Rico where the charterer will redeliver the vessel to DYC. A copy of the proposed charter party agreement has been submitted for our review. You also seek a determination regarding the dutiability of the subject vessel.
ISSUE
Whether the charter party agreement submitted for our review is a valid bareboat charter agreement for purposes of the coastwise laws.
LAW AND ANALYSIS
Generally, the coastwise laws prohibit the transportation of passengers or merchandise between points in the United States embraced within the coastwise laws in any vessel other than a vessel built in, documented under the laws of, and owned by citizens of the United States. Such a vessel, after it has obtained a coastwise endorsement from the U.S. Coast Guard, is said to be “coastwise qualified.”
The coastwise laws generally apply to points in the territorial sea, which is 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. The coastwise law applicable to the carriage of passengers is found in 46 U.S.C. § 55103 which provides:
(a) In General. Except as otherwise provided in this chapter or chapter 121 of this title, a vessel may not transport passengers between ports or places in the United States to which the coastwise laws apply, either directly or via a foreign port, unless the vessel-
(1) is wholly owned by citizens of the United States for purposes of engaging in coastwise trade; and
(2) has been issued a certificate of documentation with a coastwise endorsement under chapter 121 or is exempt from documentation but would otherwise be eligible for such a certificate and endorsement.
Section 4.50(b) of the Customs and Border Protection (“CBP”) Regulations provide:
A passenger within the meaning of this part is any person carried on a vessel who is not connected with the operation of the vessel, her navigation, ownership, or business.
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 (Mar. 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 the following twelve headings: 1. General; 2. Payment Schedule; 3. Boat Delivery; 4. Boat Re-Delivery; 5. Warranties and Procedures of DYC; 6. Representations and Warranties of Charterer; 7. Responsibilities of Charterer; 8. Damage Deposit/Insurance Deductible; 9. Contract Cancellation; 10. Force Majeure; 11. Additional Delays; and 12. Miscellaneous. 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, General, states that the terms and conditions that follow represent the entire agreement between DYC and the charterer for a bareboat charter and that by paying the deposit, the charterer agrees to the conditions in the agreement. Although this provision identifies the charter as a bareboat charter, that statement alone, without more, has little impact on our determination as to the validity of the bareboat charter agreement.
The second provision, Payment Schedule, states the amounts owed and the dates by which payments must be made. This provision is of no consequence to our determination of the validity of the subject bareboat charter agreement.
The third provision, Boat Delivery, states that DYC will deliver the vessel to the charterer upon full payment of any balance; signature by both parties of the inventory statement; and receipt of a copy of the charterer’s identification, passport, and a list of crew members. In addition, this provision further provides:
In the event DYC believes that Charterer’s and crew’s sailing experience is deficient, DYC reserves the right to cancel or modify the charter and will not refund Charterer for payments made to date. If available, DYC may offer to provide an approved skipper at Charterer’s expenses [sic]. If an approved skipper is provided, Charterer may not discharge the skipper before completion of the charter, except with DYC’s consent.
In HQ 226808, we found that a provision of a charter agreement in which the owner retained the right to assign a crew member to the charterer was not congruent with a bareboat charter agreement. HQ 226808 (June 7, 1996). Similarly, in this case, the fact that the owner will assign an approved skipper to the charterer is problematic. Generally, we have held that a charter arrangement in which the captain and crew are selected by the owner or his agent and not by the charterer, by its very nature results in an implication that the owner may not have relinquished complete management and control of the vessel to the charterers. HQ 226808 (June 7, 1996) and HQ 114314 (May 7, 1998). Consequently, this provision negates a determination that this charter agreement is, in fact, a bareboat.
The fourth provision, Boat Re-Delivery, states that the vessel is to be returned to the port on the date and time set forth in the charterer’s invoice and lists the penalties if redelivery is delayed. This provision is of no consequence to our determination of the validity of the subject bareboat charter agreement.
The fifth provision, Warranties and Procedures of DYC, states that the vessel shall comply with all applicable laws and regulations at delivery and will be in good working order. It also states that upon check-in, and after signing the delivery statement and submitting the boat documents, charterer can freely use the vessel. The statement that charterer can freely use the vessel provides some evidence of intent on the part of the owner to relinquish complete management and control of the vessel during the period of the charter.
The sixth provision, Representations and Warranties of Charterer, states that the charterer represents that a competent person shall operate the vessel and that the charterer has the practical knowledge of seamanship, piloting, and rules-of-the-road to exercise full authority of the vessel. This evidences an intent on the part of the charterer to assume complete management and control of the vessel during the period of the charter.
The seventh provision, Responsibilities of Charterer, states that the charterer and crew are “fully responsible for the Vessel and for any damage to property or injury to persons that could happen.” Charterer “will be responsible for all boat maintenance during the charter and will pay all running expenses incurred after delivery of the boat.” Acceptance of these clauses by the charterer evidences an intent to assume complete management and control of the vessel during the period of the charter and the owner's relinquishment thereof.
The provision further states that if there are problems with the vessel, the charterer must notify DYC before incurring expenses for outside assistance. The charterer must also take all reasonable steps to prevent towing of the yacht by another vessel. Further, the charterer must carry only the number of passengers allowed by security rules, follow all island laws, not transport merchandise or passengers for pay, and not lend or rent the vessel. Charterer must also not sail if vital equipment is damaged, if port authorities prohibit navigation, or if wind strength is above a certain threshold. Charterer must return the vessel in good condition and pay for any loss or damage not covered by insurance. The provision also states that the charterer may only participate in select regattas approved by DYC, may not sail after dusk, must stay within the approved cruising grounds as provided by DYC and/or by law, and must “follow any navigation and routing instructions which DYC may give him especially in the event of bad weather.”
Although many of the requirements in this provision are not problematic, some clauses are of concern. For example, the agreement states that the vessel may participate only in select regattas approved by DYC; all others are “strictly prohibited.” It is unclear whether there is a mechanism available whereby the charterer can submit a regatta for approval by DYC. Similarly, the clauses which state that the vessel may not sail after dusk and that the charterer must follow DYC’s navigation and routing instructions are restrictions placed on the use of the vessel which suggest less than the relinquishment of the complete management and control of the vessel to the charterer during the period of the charter. The provision also states that the vessel must operate within cruising grounds as provided by DYC. In this regard, we note that Customs has previously held that geographical/navigational restrictions, in and of themselves, do not invalidate an otherwise valid bareboat charter agreement. HQ 110984 (July 27, 1990) and HQ 226808 (June 7, 1996). However, the agreement does not state the geographical restrictions. Therefore, in the absence of any compelling reason to the contrary, these requirements are indicative of restrictions placed on the charterer by the owner and suggest less than the relinquishment of the complete management and control of the vessel to the charterer during the period of the charter.
The eighth provision, Damage Deposit/Insurance Deductible, describes the insurance options available to the charterer and the details of the damage waiver. The ninth provision, Contract Cancellation, states the terms and fees should the charterer cancel the contract. The tenth provision, Force Majeure, states that DYC shall not be liable for failure of performance resulting from a force majeure event. The eleventh provision, Additional Delays, lists the options the charterer can pursue should a delay in delivery of the vessel result from other than a force majeure event. These provisions are of no consequence to our determination of the validity of the subject bareboat charter agreement.
The twelfth provision, Miscellaneous, sets forth the jurisdiction where any legal action arising from the contract will be adjudicated. Further, this provision provides that the charterer shall not incur liens against the vessel, abandon the vessel, or enter into a salvage agreement without DYC’s consent, and that the charterer shall indemnify DYC in connection with any liens, salvage, or debt which may arise. This provision is not antithetical to the validity of a bareboat charter agreement.
Accordingly, our analysis of the subject charter agreement leads us to conclude that although some of the covenants contained therein suggest that it is in fact a valid bareboat agreement, clauses in the third (Boat Delivery) and seventh (Responsibilities of Charterer) provisions, as discussed above, preclude our reaching that conclusion. Consequently, we find that the subject charter agreement is not a valid bareboat charter agreement for purposes of the coastwise laws administered by CBP. As a result, your question regarding the dutiability of the vessel is rendered moot, so we will not address it here.
HOLDING
The charter party agreement submitted for our review is not a valid bareboat charter agreement for purposes of the coastwise laws.
Sincerely,
Lisa L. Burley
Chief/Supervisory Attorney-Advisor
Cargo Security, Carriers and Restricted Merchandise Branch
Office of International Trade, Regulations and Rulings
U.S. Customs and Border Protection