VES-3-02-OT:RR:BSTC:CCR H331733 DMK
Mr. Gianfranco Di Costanzo
NauticALL Yacht Management
1535 SE 17th Street
Fort Lauderdale, FL 33316
RE: Coastwise Trade; Passengers; Bareboat Charter Agreement; 46 U.S.C. §§ 55102 & 55103.
Dear Mr. Di Costanzo:
This letter is in response to your April 5, 2023, ruling request seeking approval of a bareboat charter agreement. Our decision follows.
FACTS
The following facts are from your April 5, 2023, ruling request and supporting information. The subject vessel, the M/Y CETACEA (the “Vessel”), is a Dutch-built and Marshall Islands-registered yacht owned by CETACEA ASSET MANAGEMENT LLC, a Marshall Islands corporation. The owner of the Vessel seeks to make the vessel available for recreational bareboat charters in United States waters. It is anticipated that the Vessel will be involved in travel between U.S. ports. You have provided a proposed bareboat charter agreement, charterer’s certification, and captain’s guidelines, required to be followed as part of the bareboat charter agreement. Consequently, you seek our determination regarding the operation of the Vessel pursuant to the provided charterparty agreement. More particularly, you seek a determination as to whether the operation of the Vessel pursuant to the attached charterparty agreement would violate the coastwise laws. It must be noted that the scope of our ruling is limited to this particular vessel and the proposed use pursuant to the provided draft charter agreement.
ISSUE
Whether the charterparty agreement submitted for our review is a valid bareboat charter agreement for purposes of the Jones Act, 46 U.S.C. § 55102, and the Passenger Vessel Services Act, 46 U.S.C. § 55103.
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.0F The coastwise law applicable to the carriage of passengers is found at 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, maritime law recognizes three types of charterparties. For example, the United States District Court for the Eastern District of Pennsylvania remarked in Dougherty v. Navigazione San Paolo, S.P.A.:
Under general maritime principles, there are three types of charter parties: the voyage charter, the time charter, and the demise or bareboat charter. In a voyage charter the ship is engaged to carry a full cargo on a single voyage. The owner retains all control over the vessel. In a time charter the ship's carrying capacity is taken by the charterer for a fixed time for the carriage of goods on as many voyages as can fit into the charter period. Again, the owner retains all control for management and navigation. In a demise or bareboat charter, the charterer takes over full control of the ship and becomes the owner pro hac vice. The charterer thus assumes control of management and navigation.1F
The United States Supreme Court described the characteristics of a demise or bareboat charter, saying:
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).
Accordingly, CBP has consistently held that when a vessel is chartered under a bona fide bareboat charter, the bareboat charterer is treated as the owner pro hac vice 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 period of the charter for pleasure purposes only. A non-coastwise-qualified 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 non-coastwise-qualified 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 H300963 ( November 7, 2018), HQ 116183 (April 5, 2004).
In our review of charterparties to determine whether they constitute bona fide 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 26 headings:
(1) Agreement to Let and Hire;
(2) Delivery;
(3) Redelivery;
(4) Payment of the Charter Fee;
(5) Cruising Area;
(6) Charter Guests;
(7) Charterer’s Responsibilities;
(8) Use of the Vessel;
(9) Captain and Crew;
(10) Operating Expenses;
(11) Disbursement of the Charter Fee;
(12) Force Majeure;
(13) Delayed Delivery;
(14) Delayed Redelivery;
(15) Cancellation by Owner;
(16) Cancellation or Nonpayment by Charterer;
(17) Disablement;
(18) Security Deposit;
(19) Sale of the Vessel;
(20) Insurance;
(21) Taxes;
(22) Maritime Liens;
(23) Brokers;
(24) Additional Terms;
(25) Miscellaneous; and,
(26) Governing Law.
The fifth provision, Cruising Area, states a requirement that the charterer will use the Vessel for lawful purposes between safe ports within the cruising area, which is contemplated to be in the New England Region, including Rhode Island, Massachusetts, and Maine. It is noteworthy that Benedict on Admiralty characterizes a safe berth clause as a warranty on the part of the charterer, saying:
Charter parties frequently state that the vessel shall only be delivered or ordered to proceed to a safe port or berth where the vessel may lie always afloat. A safe port or berth is one in which the ship’s physical safety is not threatened and where the vessel will not be exposed to forfeiture, penalty or other political sources of danger….The obligation to furnish a safe port or berth is considered a warranty, breach of which justifies the master’s refusal to enter the port or entitles the shipowner to sue for damages.2F
See e.g., Western Tankers Corporation, v. United States Of America, 387 F. Supp. 487. 1975 AMC 775, “…the government breached its warranty to provide a safe place or wharf where the tanker could lie ‘always safely afloat.’” (Emphasis added). This provision also clarifies that the charterer must stay within the navigational limits of the Vessel’s insurance. Similarly, Benedict on Admiralty characterizes a navigational limit in the context of a vessel’s insurance as a warranty by the insured, saying, “[t]rading warranties, which are also referred to as navigation warranties, restrict the geographic scope of the scheduled vessel’s operation. If the vessel exceeds the scope of the stated navigational limit, the Insured is in breach of the warranty.”3F
Also, CBP has held that, navigational limits do not, in and of themselves, invalidate an otherwise valid bareboat charter. HQ 110984 (July 27, 1990); HQ 226808 (June 7, 1996). Accordingly, it is our position that the navigational limits and safe berth provisions found in the Cruising Area provision, being in the nature of warranties issued by the charterer to the vessel owner, do not indicate an intent on the part of the owner to not “completely and exclusively relinquish possession, command, and navigation” of the Vessel.
The sixth provision, Charter Guests, states the maximum number of guests on board the Vessel during the charter period. The provision also requires that charterer ensure all guests are medically fit to be aboard the vessel. This provision also clarifies that the charterer is responsible for the conduct of any guests. We note that limiting the number of guests and requiring their medical can indicate the owner’s intent to not “completely and exclusively relinquish” command of the Vessel, indicating that it may be an invalid bareboat charter. However, these requirements are also related to the safety of the vessel and those on board and may be a reasonable courtesy. We note that there is no indication the owner is requiring specific medical fitness tests, and merely is requiring that the guests follow whatever medical visas and proofs of vaccination are required by law in the delivery location, cruising location, and redelivery location. Additionally, the clarification that the charterer is responsible for the conduct of any guests rather than the owner taking any responsibility indicates the owner’s intent to “completely and exclusively relinquish” command of the Vessel. Accordingly, we determine that this provision would not invalidate an otherwise valid bareboat charter.
The seventh provision, Charterer’s Responsibilities, explicitly states that the agreement is a demise charter, and that the charterer will have complete possession, command, and navigation of the Vessel, and will crew, provision, and operate the Vessel. There is a presumption against finding that a charterparty constitutes a bareboat charter unless the language of the document reveals a clear-cut intention to the contrary. In Christian v. Bullock, a case involving a bareboat charter of a yacht, the Supreme Court of Virginia stated, “A presumption exists that a charter party is not a demise, and an owner who seeks to escape liability thereby has the burden of establishing that the charter was a demise.”4F Also, “Courts are not inclined to regard the contract as a demise of the ship if the end in view can conveniently be accomplished without the transfer of the vessel to the charterer. Even where words of demise are used, yet it must appear that the instrument taken as a whole was intended to operate as such or it will not be so construed.”5F In the present matter, the terms of the Charterer’s Responsibilities provision indicates an intent to have the charterer assume complete management and control of the vessel during the term of the charter.
The eighth provision, Use of the Vessel, states that the charterer and their guests must comply with the laws of the flag state and jurisdictions to which the Vessel travels during the charter. This provision also clarifies that the Vessel cannot be used to carry merchandise or passengers for hire, for commercial photo or film shoots absent the owner’s consent and prohibits the charterer from assigning or subchartering the Vessel. This provision clarifies that the charterer and guests may not cause a nuisance or bring the Vessel or owner into disrepute, and prohibits weapons, illegal drugs, prescription drugs without a prescription, and pets without the owner’s consent. Finally, this provision allows the owner to terminate the agreement without refund if any of the terms of this provision are violated.
A requirement that the charterer not carry merchandise or passengers for hire, engage in commercial photo or film shoots without the owner’s consent, or assigning or subchartering the Vessel could be interpreted to indicate that the owner may not intend to fully relinquish possession and command of the Vessel. However, if the charterer carried merchandise or passengers for hire or engaged in commercial photo or film shoots, the Vessel would be engaged in coastwise trade which accordingly would invalidate a bareboat charter in a recreational context. Accordingly, it is our position that these sections of this provision indicate an intent to establish a bareboat charter agreement. Additionally, requiring the charterer and guests to follow the laws of the locality has strong public policy reasons outweighing the level of control the owner has engaged in maintaining by prohibiting such actions. See, e.g., HQ H008709 (June 18, 2007), citing HQ 226808 (June 7, 1996). We note that prohibiting the charterer and guests from bringing pets on board without the owner’s consent may indicate a lack of the owner’s intent to completely and exclusively relinquish” command of the Vessel, but we determine that it would not, in and of itself, invalidate an otherwise valid bareboat charter.
The ninth provision, Captain and Crew, states that the charterer must provide a qualified, competent captain and crew in sufficient number and rating as required by the flag state and the Vessel’s insurers. The employment and control of the vessel’s master and crew are significant factors in determining whether a demise or bareboat charter is created. The U.S. District Cour for the Eastern District of New York remarked that the customary practice in bareboat chartering is for the charterer to provide the master and crew, saying, “[u]sually, the shipowner is not required by the terms of the demise charter to furnish a crew, and so the charterer gets the 'bare boat'; hence the term 'bareboat' charter.”6F The Supreme Court advises us, however, that the essential element of consideration is control of the captain and crew when it said, “…the fact that the Captain is employed by the owner is not fatal to the creation of a demise charter party, for a vessel can be demised complete with captain if he is subject to the orders of the demisee during the period of the demise.”7F In the present matter, the requirement that the charterer provide the master and crew is a strong indicator of intent to have the charterer assume complete management and control of the vessel during the term of the charter.
The tenth provision, Operating Expenses, states that the charterer must pay all expenses to operate the Vessel during the charter period, but that the owner will pay registration, insurance, and routine maintenance during the charter period. 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. Acceptance of these terms by the parties indicates intent to have the charterer assume complete management and control of operational expenses for the vessel during the term of the charter, and the only things the owner manages are longer term requirements which extend beyond a temporary charter.
The twentieth provision, Insurance, states that the owner will insure the Vessel, and will include the charterer under the insurance. This provision limits the liability of the Vessel’s insurance to a degree as it relates to the charterer and directs the charterer to decide on any additional insurance needs they may have during the charter period. The owner’s insurance is a longer-term requirement which extends beyond a temporary charter, and because the charterer should determine and pay for any additional insurance they wish indicates intent to have the charterer assume complete management and control of insurance as it relates to insurance specifically for the charter period.
The twenty-second provision, Maritime Liens, states that the charterer cannot incur maritime liens on the Vessel, indemnifies the owner for liabilities arising from maritime liens, will not enter into salvage agreements, and that proceeds from derelicts, salvages, and towage earned by the Vessel during the chartering period are shared equally between the charterer and owner. The provision against incurring maritime liens is not antithetical to the validity of a bareboat charter agreement. See HQ H300963 (Nov. 7, 2018), HQ 226808 (June 7, 1996). Additionally, we note that the provisions regarding shared proceeds do not direct the charterer to engage in a derelict, salvage, or towing activity, nor do the provisions prohibit the charterer from engaging in those activities should the charterer decide to do so. Accordingly, we determine that this provision is not inconsistent with the complete and exclusive relinquishment of possession, command, and navigation of the vessel to the bareboat charterer.
The twenty-fourth provision, Additional Terms, is blank. It must be noted, however, that it is possible that additional terms could be added to this blank provision which could mitigate against the finding of a bareboat charter agreement. The Supreme Court cautions that there is a presumption against a bareboat charter, saying, “[c]ourts of justice are not inclined to regard the contract as a demise of the ship if the end in view can conveniently be accomplished without the transfer of the vessel to the charterer, ….”8F The Supreme Court’s cautionary language was echoed by the United States District Court for the Eastern District of Virginia, Newport News Division, in Saridis v. S.S. Paramarina, saying, “[c]ourts are not inclined to regard the contract as a demise of the ship if the end in view can conveniently be accomplished without the transfer of the vessel to the charterer. Even where words of demise are used, yet it must appear that the instrument taken as a whole was intended to operate as such or it will not be so construed.”9F Accordingly, any terms inserted into this blank provision inconsistent with the complete and exclusive relinquishment of possession, command, and navigation of the vessel to the bareboat charterer could result in a determination that the charter is a time or voyage charter instead.
Upon reviewing the Charterer’s Certification, we note that it is merely a restatement of the Charterer’s agreement to the terms of the charter agreement. Upon reviewing the terms of the Captain’s Guidelines, we note that it is divided into the following eight headings: (1) Agreements; (2) Captain’s Briefing; (3) Role of Captain and Crew; (4) Captain’s Authority; (5) Operating Expenses; (6) Accounting for the ABA; (7) Confidentiality; and (8) Insurance. In addition, the captain’s guidelines contains a preamble.
The preamble directs the master of the vessel to review the guidelines before charters. This preamble notes the importance of the master’s and charterer’s understanding of and responsibilities under bareboat charters, as well as directing the captain to ensure the charterer’s certification document is signed. While directing the captain to perform a specific action indicates the owner’s some level of intent to exert some control over the management of the vessel, because the action in the preamble is to confirm that the charter agreement is signed, we determine that this does not affect our position as to whether the document is, in fact, a valid bareboat charter agreement.
The first provision, Agreement, states that the charterer has entered into a chartering agreement and a crew services agreement. This provision directs the master to review the terms of both agreements and keep copies on board the vessel, as well as to ensure that the charterer’s certification has been signed. While directing the captain to perform a specific action indicates some level of intent on the owner’s part to exert some control over the management of the vessel, because the action in this provision ensures the captain understands the nature of a bareboat charter and that the charter agreement is signed, we determine that this does not affect our position as to whether the document is, in fact, a valid bareboat charter agreement.
The second provision, Captain’s Briefing, directs the captain to discuss safety procedures and prohibited activities, the cost of shipboard communications, the terms of the charter agreement and crew services agreement. While directing the captain to perform a specific action indicates the owner’s intent to exert some control over the management of the vessel, because the action in this provision is directly related to the safety of the vessel and those on board, as well as ensuring all parties understand the nature of the charter agreement, we determine that this does not affect our position as to whether the document is, in fact, a valid bareboat charter agreement.
The third provision, Role of Captain and Crew, states that the charterer must provide their own crew and captain, and that the crew and captain work for the charterer. This provision restates requirements of a bareboat charter agreement and accordingly indicates the parties’ intent to enter into a valid bareboat charter agreement.
The fourth provision, Captain’s Authority, states that the master has the ultimate responsibility for the safety of the vessel and everyone on board and has sole discretion to refuse to comply with instructions. This provision also directs the master to notify the owner, escrow agent, and broker if the captain believes any breach of the crew services agreement or any applicable law occurs. While directing the captain to perform a specific action indicates the owner’s intent to exert some level of control over the management of the vessel, because the action in this provision directs the captain to notify when the captain believes that the law or the charter agreement has been violated, we determine that this does not affect our position as to whether the document is, in fact, a valid bareboat charter agreement. Additionally, because certain actions which violate the charter agreement could invalidate an otherwise valid bareboat charter agreement, we determine that this provision indicates the parties’ intent to enter into and maintain a valid bareboat charter agreement.
The fifth provision, Operating Expenses, states that the charterer is responsible for paying operating expenses, and the procedures for expenses of shoreside activities. 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 sixth provision, Accounting for the APA, directs the master to review the expenses paid under the advance provisioning allowance with the charterer regularly, and notify the charterer if the captain believes the balance is insufficient. This provision also directs the captain to present a full accounting at the end of the charter period. While directing the captain to perform a specific action indicates the owner’s intent to exert some level of control over the management of the vessel, because the action in this provision directs the captain to provide an accounting after the end of the charter, we determine that this is merely facilitating a smooth transition from the end of the charter period and accordingly we determine that this does not affect our position as to whether the document is, in fact, a valid 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 the owner is directing some actions and not relinquishing total control of the vessel, they do not preclude a determination that the subject charter agreement is a valid bareboat charter agreement. Consequently, we find that the subject charter agreement is a valid bareboat charter agreement for purposes of the coastwise laws administered by CBP.
HOLDING
The charter agreement submitted for our review is a valid bareboat charter agreement for purposes of the coastwise laws. Operation of the Vessel herein pursuant to the subject charter agreement would not be a violation of the coastwise laws.
Sincerely,
W. Richmond Beevers
Chief, Cargo Security, Carriers and Restricted Merchandise Branch
Office of Trade; Regulations and Rulings
U.S. Customs and Border Protection