Thursday, March 11, 2010

Longview Port Commissioners Forgo Pay Increase Despite Booming 2009

Commissioners at the Washington state Port of Longview, despite a booming 2009 at the port, said this week they plan to refuse a hike in their monthly pay triggered by the port topping the $25 million annual revenue mark.

State law provides that once the port hit the $25 million revenue mark for a single year, the three commissioners are entitled to see their pay increase from $200 per month to $500 a month.

The state law also allows the commissioners to opt out in writing of the pay increase. The three sitting commissioners, citing port staff's voluntary decision last year to forgo cost-of-living increases this year, said they will collectively request to remain at their $200 per month salaries.

The commissioners also praised port staff for hitting the $25 million revenue mark, the first time the port has managed to cross the $25 million threshold and only the second time the port has crossed the $20 million level.

Last year, port revenue grew to $25.1 million, up 7 percent from the $23.5 million in revenue reported in 2008. Operating expenses for 2009 topped out at $22.4 million leaving the port to post a $2.7 million profit for the year.

The increase in revenues were tied to solid cargo volume increases in bulk food, chemicals, log exports and wind-energy imports.

Total imports through the port in 2009 increased by 9 percent compared to 2008, exports saw a 13 percent increase and total tonnage handled also jumped 12 percent for the year.

Long Beach Port Roundup: Top Exec Departs, Park Named for ILWU Leader

After serving just under a year as one of the top executives at the Port of Long Beach, managing director of trade relations and port operations Alex Cherin has announced he will leave the port to form his own law firm. His last day at the port is Friday.

Cherin joined the port in November 2007 as the Executive Officer to the Board of Harbor Commissioners and was appointed to his current position in April 2009. Cherin moved to the port from City Hall, where he served as Assistant City Auditor. Prior to joining the city in May 2006, Cherin practiced trade and maritime law for more than a decade.

In his managing director role, Cherin oversaw the Port's Trade Relations and Port Operations Bureau, which includes the Communications, Trade Relations, Security and Maintenance Divisions. 

Cherin has said he is unsure of what type of law he will practice, but he hopes to open his firm's doors in Long Beach within the next several months.

In other Port of Long Beach news, city and International Longshore and Warehouse Union officials gathered last week to rechristen the Queen Mary Events Park – located on port property adjacent to the RMS Queen Mary attraction – to the Harry Bridges Memorial Park in honor of the legendary ILWU leader. Bridges, a founder of the dockers' union in the 1930s who went on to lead the union for nearly 40 years, helped transform the numerous disjointed maritime unions on the West Coast into one of the most powerful blue-collar unions in the United States.

Also in Port of Long Beach news, it was revealed this week that the same federal district judge who approved a settlement between the port and the American Trucking Associations over the port's Clean Truck Program will hear a challenge seeking to invalidate the settlement. The challenge was brought by the Long Beach Coalition for Good Jobs and a Healthy Economy who have referred to the port/ATA agreement as a "backroom" deal.

The court approved agreement, which removed the port from ongoing ATA litigation against the Southern California ports' Clean Truck Program, allowed the port to move forward with environmental aspects of the truck program but eliminated certain portions of the program objected to and challenged in court by the ATA. The neighboring Port of Los Angeles is still fighting the ATA in court over its version of the Clean Truck Program, a case which heads to the courtroom in April.

QDB Cup Coming Back to Seattle’s Bell Harbor for Maritime Week

As a fitting finale to Seattle’s Maritime Week, the Seattle Maritime Festival Quick and Dirty Boatbuilding Competition will take place at Bell Harbor Pier on Saturday, May 8th from 9 am to 3 pm. Up to 12 teams, comprised of the most confident naval architects, ship and boatbuilders and tug and barge crews in the Seattle area will build vessels from $100 worth of materials, and at 4:00 the teams will race their boats in the Bell Harbor Marina hoping to win the coveted Marty Johnson Memorial Fastest Boat Trophy.

While a team comprised of two top tier naval architecture firms won last year’s competition, past winners have included Lake Union Drydock and Todd Shipyard, as well as Crowley and Foss Maritime, although neither towboat company has been able to field a winning team for years.

Companies wishing to enter a team can contact Eric Blumhagen at Jensen Maritime Consultants, Inc., at (206) 332-8091 or for full competition rules. Space is limited.

Maritime week will also include the awarding of the 2010 Puget Sound Maritime Achievement Award. The Selection Committee is accepting nominations for this year’s award, to be announced at the Seattle Propeller Club’s May Maritime Festival luncheon to be held on May 11th aboard the Carnival Spirit at Terminal 91 at Smith’s Cove, Seattle. 

Nominations must be received by March 29, 2010 and may be e-mailed to . Nominations should include specific achievements of the candidate, particularly those impacting the Puget Sound maritime community, and a brief biography of the nominee. Industry segments represented by past recipients include steamship lines and agents, tug and barge operators, passenger vessel operators, port authorities, stevedores, labor and government. Several paragraphs about the nominee are sufficient.

Feel free to contact Rich Berkowitz at (206) 443- 1738 with any questions about the award nomination.

LA Port Round-Up: New Roadway Breaks Ground, Security Expert Tapped

Officials from the Port of Los Angeles were joined by city and federal representatives to break ground on a 1.3-mile redevelopment of Harry Bridges Boulevard located on the northern side of the port's TraPac container terminal and Wallenius Wilhelmsen Logistics auto terminal. 

Expected to be completed in 2012, the $22 million project will completely revamp the stretch of roadway, which runs from the northern end of Gibson Boulevard to the southern end of Alameda Street and serves as the main route for trucks heading from the port to State Route 47. The project will include grading, utility relocations, construction of concrete walks, gutters, driveways, traffic signals, fire hydrants, street lighting storm drainage, signage, landscaping, irrigation and fiber optic infrastructure.

While the completed project will maintain the roadway's current two lanes in each direction, expansion of the roadbed during the project will provide space to add an additional lane in each direction if future demand increases.

The project is being funded through the American Recovery and Reinvestment Act of 2009 and is expected to create more than 250 local construction jobs.

In other Port of Los Angeles news, port officials have approved a contract with security expert Stephen Flynn to assist the port in developing a program and securing support from government and industry to increase the scanning of containerized cargo destined for the port prior to loading at overseas terminals. Flynn will also be responsible for working with port staff in seeking public sector and/or industry funding for this program, including funding for the overseas deployment of cargo screening equipment. The port approved the one-year contract term with two, one-year renewal options, for an amount not-to-exceed $200,000.

Flynn, recently named the President of the Center for National Policy, is also a bestselling author on the topic of national security. Prior to joining the CNP, he spent a decade as a senior fellow for National Security Studies at the Council on Foreign Relations. Following the election of President Barack Obama, he served as the lead policy advisor on homeland security for the presidential transition team. He also currently serves as a member of the bipartisan National Security Preparedness Group, co-chaired by former 9/11 commissioners, Governor Tom Kean and Congressman Lee Hamilton.

GOP Gov. Candidate Will Rollback Environmental Laws for Railroad

California Republican gubernatorial candidate Meg Whitman said Tuesday that if elected she would roll back clean-air and other environmental-quality regulations to allow Union Pacific railroad to expand its port facilities.

She made the comments during a Tuesday campaign event where she toured the Union Pacific intermodal rail facility at the Port of Oakland and met with UP officials. UP, a campaign contributor to Whitman, has long sought to increase the size of rail facilities at several ports in the state, including Oakland and Long Beach/Los Angeles. 

Labeled as an open press event by Whitman's campaign, attending press members found themselves barred from riding along on the candidate's 2-hour tour of the facility and restricted to a holding room. 

Following the tour, Whitman confined her comments to a five-minute conversation with a UP spokesperson in front of reporters.

In addition to her comments about environmental laws, Whitman expressed amazement at the amount of freight being moved through the UP facility.

At end of the exchange, Whitman's staff informed reporters that Whitman would take no questions due to a lack of time before escorting the media from the room. Whitman remained behind to speak with self-described San Francisco Chronicle conservative columnist Debra Saunders for another 30 minutes.

Whitman, who left following the interview through a back entrance of the facility, later called a local TV station to apologize, saying the press portion of the event did not work out as she had hoped.

eNav 101: A Question of Governance

By Robert Moore

Since this series of articles has generally followed the framework of the International Maritime Organization’s (IMO) eNavigation documentation this one normally would discuss what the IMO considers as the “General Principles for the Development of eNavigation”. Nine general principles are discussed in a document prepared for the 54th Session of the IMO’s Subcommittee on Safety of Navigation (June 2008) and, while all of them are significant, the one that caught my attention was the second in that list: “Clear Ownership and Control”. Of the nine, that one struck me as critical to future success and so this article focuses on it.

The descriptive paragraph for that principle led off with the words “Realization of the eNavigation vision requires a clear, global commitment, articulated through a viable and coherent framework, which sets out a migration plan to guide Governments and industry. eNavigation is a global concept that will be implemented and operated at global, regional and local levels across all user groups” and went on to say that, at the global level “…[the] IMO is the only organization that is capable of meeting the overall governance requirement.”

The document goes on to enumerate the IMO’s responsibilities but is silent on regional roles, giving little help with the vital question of how the governance of eNavigation should be handled here in the United States – or elsewhere, for that matter. In the US, little leadership is in evidence and one concern is that without careful management our broad maritime community may not realize the full benefits of eNavigation. For example, mariners may not be provided with the common operating environment so important to safety, and resources may be squandered through duplication of effort or by decisions made in a vacuum. Near term resolution of the question of who’s in charge is becoming critical, particularly since there are things going on related to eNavigation, with a lot of money being spent, primarily on security-related programs.

Closely related to this leadership issue is the question of the proper role of national governments in a "user driven" system. Those responsibilities can be extrapolated from what the IMO has said about its own eNavigation governance:

• Conduct an educational and outreach program for those affected by or who are potential users of eNavigation. Considering the present-day low level of knowledge about eNavigation this step is critical to insure that the full potential of eNavigation is realized across the entire spectrum of users, that user needs are accommodated incident to implementation and to build support for the establishment, operation and maintenance of the requisite infrastructure.

• Participate in the international activities relating to the development and implementation of eNavigation to provide input to that process and keep current on developments. Contribute to international standard setting and adjust national requirements to reflect those standards. Maintain close liaison with the IMO, international organizations such as the IHO and IALA, as well as other standard-setting bodies. Assist in the IMO's eNavigation developmental planning.

• Define the eNavigation services appropriate to the region, including identification of their scope in terms of users and geography, and formulate a regional concept of operations, which takes account of international treaties, national laws and regulations, and the rights, obligations and limitations of eNavigation users.

• Develop and coordinate the execution of an implementation strategy that facilitates early realization of benefits and accommodates existing and emerging technology and infrastructure. This should include, among other things, prioritizing of the development and operation of supporting infrastructure, including Research and Development where required.

• Monitor eNavigation activities to insure consistency with treaty obligations, national laws and regulations and the provision of a common standard operating environment for mariners.

When looking elsewhere for examples of regional governance, I've found relatively few. The nearest may be the European Union (EU) with its common transportation policy, maritime policy coordination, and its targeted developmental research. The results of that research, by the way, constitutes a major input to the development of eNavigation and also seems to give the European companies involved a leg up in the maritime technology market. Examples of the European effort include, among others, ATMOS IV (Advanced Technology to Optimize Maritime Operational Safety – Intelligent Vessel), MarNIS (Maritime Navigation and Information Services), and the EfficienSEA project.

To our north, Canada has published the Canadian Coast Guard eNavigation Strategy (October 2008) the purpose of which is:

• To define a strategic eNavigation vision for incorporating the use of new technologies in a structured way, while ensuring that their use is compliant with various navigational and communication technologies/services that are already available.

• To develop an eNavigation implementation strategy for Canada that can be the basis for national implementation within the broader context of international conventions and maritime initiatives (e.g., by IMO and IALA).

The Canadian effort represents an example of a good start, but unfortunately leaves much still to be resolved.

Other examples of regional maritime cooperation seem to have narrower aims and interests, and thus do not readily translate to eNavigation governance, even though they do embrace eNavigation concepts and practices. These include the Helsinki Commission (HELCOM) and the Marine Electronic Highway project in the Malacca and Singapore Straits.

In any discussion of what should be done in the US it's probably well to start with the words of the IMO's preamble to the ISM Code: “The cornerstone of good safety management is commitment from the top. In matters of safety and pollution prevention it is the commitment, competence, attitudes and motivation of individuals at all levels that determines the end result.”

A second thing to keep in mind is that the basic definition of eNavigation is “the collection, integration and display of maritime information aboard and ashore by electronic means to enhance berth-to-berth navigation and related services, safety, and security at sea, and the protection of the marine environment”. This makes clear that eNavigation has a wide range of stakeholders, public and private. (Emphasis supplied)

Finding an effective way to provide leadership and promote, coordinate and manage eNavigation policy will be a complicated undertaking. It's made more difficult by the fact that, as I've indicated, significant efforts relating to eNavigation are already underway. Prime examples of such activities are implementation of the National AIS System, the Maritime Domain Awareness Program (MDA), P.O.R.T.S. and the various Rulemaking for the carriage requirements of the basic shipboard components. From the standpoint of governance, particularly orchestrating development and applications, it's clear that the Federal government will of necessity have a primary role, and its efforts need to be coordinated to a common end. Otherwise there is a high likelihood of duplication, wasted resources and an end product resembling a camel, which we all know is a committee-designed horse. This is reinforced by recognizing the major role of the federal government in providing, operating and maintaining essential eNavigation infrastructure.

Management and coordination issues are complicated by the number of government entities involved, including those with responsibilities for regulations and infrastructure as well as the consumers of data the system generates. Those include the Departments of Commerce, Defense, Homeland Security, Interior, Transportation, and a number of agencies such as the EPA. If one adds to that mix the number of Congressional Committees potentially involved the size of the resulting list is enough to boggle the mind.

I believe four things should happen, and happen soon.

First, (and this may be unrealistic and wishful thinking) constrain the number of Congressional Committees and Subcommittees involved to a workable number. There are three primary reasons for this. First is the old adage "Too many cooks spoil the broth", translating in a legislative sense to delays and infighting over who does what to whom. This, I think, is not a misplaced concern, considering that something over eighty Committees and Subcommittees are involved with the Department of Homeland Security. Second, infrastructure funding is and will be required in significant amounts, including money to pay for management of the eNavigation process, and the involvement of a small group of committees may offer a better chance of getting done what is needed. The last reason is that there should be a focused legislative review and winnowing out of knee jerk legislative proposals surfacing after marine “incidents” – like Cosco Busan – that capture the media and public interest.

Second, a lead agency for eNavigation must be designated by the Administration. This would provide unified representation of the US needs and position in international deliberations, serve as traffic director for governmental involvement and be the ‘educator’ of the US maritime community, including government, about eNavigation and its benefits. Such a lead agency should also be able to halt developments the effects of which would be detrimental to maritime safety. Given today's trend toward multi-agency task groups this may, like reducing the number of Congressional Committees involved, be wishful thinking.

Third, a federal coordinating committee should be formed representing the governmental entities involved to insure that all are working to the same common end. Such a committee could well be modeled upon some of the language in the October 2005 "National Plan to Achieve Maritime Domain Awareness for the National Strategy for Maritime Security". That plan "...lays the foundation for an effective understanding of anything associated with the Maritime Domain that could impact the security, safety, economy, or environment of the United States..." and serves to ",,,unify United States Government [actions] and support international efforts to achieve MDA across the Federal government, with the private sector and civil authorities within the United States, and with our allies and partners. It directs close coordination of a broad range of federal departments and agencies for this lasting endeavor. Implementation of this Plan will be conducted under the oversight of an interagency implementation team." Actually, it might be possible to utilize an existing organization, the Committee for the Marine Transportation System, for this role.

Fourth, a structure should be constructed to capture the needs of and deal with the concerns of the broad maritime private sector, perhaps institutionalizing something like the earlier National Dialogue group that provided input to VTS development and expansion. Convened by the US Coast Guard in 1997 the effort brought together maritime and port community stakeholders to identify the needs of waterway users with respect to Vessel Traffic Services. Incorporating the private sector in the eNavigation implementation process is the only way to insure success and to convey a sense of ownership.

Make no mistake. Failure of leadership at the national level could have significant consequences for the maritime industry.

Tuesday, March 9, 2010

SoCal Air Regulators Propose Minimum Standards for Port Pollution Reductions

Regulators from the South Coast Air Quality Management District have proposed "backstop" rules that would provide enforcement of ambitious environmental goals and deadlines set down by the Southern California ports of Long Beach and Los Angeles in their omnibus Clean Air Action Plan.

The ports jointly developed and adopted the CAAP, a collection of new and old environmental plans targeting air, water, and land pollution sources, in 2006.

The five-year CAAP proposed spending hundreds of millions of dollars in investments by the ports, the local air district, the state, and port-related industry to cut particulate matter pollution from all port-related sources by at least 47 percent by 2012. The plan also called for a reduction in smog forming nitrogen oxide (NOx) emissions by more than 45 percent, and a reduction in sulfur oxides (SOx) by at least 52 percent.

The backstop rules would set minimum clean air standards and deadlines for attainment that the ports have to meet, such as a target date for particulate matter reductions by 2014 and an ozone deadline by 2023.

While the full backstop rules are not set to be determined until the end of the year following a public input process starting next month, most of the final SCAQMD attainment goals are likely to either match the ports' goals or be later than those set under the CAAP. This is because when the ports wrote the CAAP, many of the goals were set ahead of potential air regulations being discussed by state and local government regulators. In most cases this means that the ports' attainments, if successful, will be well ahead of any dates currently contemplated by SCAQMD and the California Air Resources Board.

LA Port Holds Off Decision on Infrastructure Cargo Fee

The governing board for the Port of Los Angeles has delayed making a decision on whether it should scrap or postpone a per-TEU infrastructure fee that is intended to pay for $1.4 billion in port-area projects.

On Thursday the port's five-member board of commissioners considered an action to delay the collection of the fee, which was approved two years ago, until Jan. 1, 2010. Instead of voting on the item, the commissioners decided to ask staff to come back with more information on whether it was most viable to simply cancel the fee or delay its collection. 

In January 2008, the commission approved a $15-per-TEU infrastructure fee on all boxes moving either in or out of the port and set a Jan. 1, 2009 date as the start of collection. At the time the fee was set to be collected through 2015 in an effort to raise up to $1.4 billion for port-area infrastructure projects like the replacement of the aging Gerald Desmond Bridge.

"Some of these projects have to get done or the port just isn't going to function," Commissioner Joseph Radisich said. "The Desmond Bridge needs to be replaced or it's going to fall down."

In December 2008, the commission revised the fee schedule and came up with a variable rate between $6-per-TEU and $20-per-TEU to be collected through 2016 depending on the needs of ongoing projects. The commission also delayed collection of the fee until July 1, 2009. Shortly before that deadline, the commission again decided to delay the collection start date, this time to July 1, 2010.

The fee scheme was developed in partnership with the neighboring Port of Long Beach and both ports have moved in lock step on approving changes to the fee structure and delays to the collection date.

The Los Angeles port commission could revisit the delay or eliminate topic later this month.

End of US/Mexico Truck Program Hurting US Farmers

The end of a Bush Administration pilot program that allowed a limited number of Mexico-domiciled trucks to enter deep into US territory has affected farmers in the Western United States.

In response to the cancellation of the cross-border program by the Obama administration last year, the Mexican government implemented a 20 percent tariff on more than 90 US agricultural and industrial export products worth nearly $2.5 billion a year.

The Mexican government, staunch supporters of opening the US/Mexico border to all trucking, has remained adamant that the tariff will remain in place until a full cross-border program – not just the original pilot program – is implemented by the US.

The Bush Administration Department of Transportation pilot program, which started in September 2007, provided for the authorization of truck fleets from 100 pre-screened Mexican trucking firms to travel throughout the US, well beyond a narrow 20- to 25-mile border zone. The plan also provided for an equal number of US truck firms to be authorized to receive reciprocal access to Mexico. 

Under the terms of the North American Free Trade Agreement, signatories Mexico and the US must allow access to trucks from each nation. Since the implementation of NAFTA in 1994, however, Congressional legislation and litigation spearheaded by US labor unions and public safety groups have limited Mexican trucks to the narrow 20- to 25-mile-deep zone along the border.

Ultimately several hundred Mexico-domiciled trucks were operating under the authority of the pilot program.

From its inception, the DOT pilot program met fierce opposition from labor, trucking and public safety groups, with most critics citing concerns of American job losses and inadequate US control of safety regulations on Mexican trucks and drivers.

Twice in 2007, both the House and Senate amended de-funding language regarding the truck program to transportation bills that were eventually signed by the White House. 

However, the program, originally set to run for a year, continued to operate until a third attempt at Congressional legislation ending the program was passed and then signed by President Barack Obama in March 2009. The Mexican government imposed the tariff on US goods shortly thereafter.

Since then, US agriculture producers in the Western US have been particularly hard hit by the tariff, as Mexican purchasers have turned to other suppliers not affected by the tariff such as Canada and China.

Washington state, the third largest exporter of agricultural goods to Mexico, reported a nearly $20 million decline in agriculture exports to Mexico – excluding corn, rice and soybeans – in 2009 compared to the year before. The state also reported that half of it's pre-tariff $28 million a year in frozen potato exports to Mexico have disappeared and are now being bought mainly in Canada. Apricot, berry, cherry and mixed nut exports from Washington State to Mexico have also declined since the tariff took effect.

California and Texas, the two leading exporters of agricultural goods to Mexico, have each suffered even heavier losses. 

The situation, and the potential for even further losses, has caused members of Congress to push for the cross-border program’s immediate reimplementation.

On Thursday, Sen. Patty Murray, D-Wash., asked the Department of Transportation during Capitol Hill subcommittee meeting to move more quickly on reimplementation as possible.

"We are finalizing a plan," DOT Secretary Ray LaHood told Murray. "The reason it's taken so long is because there's a lot of moving parts, including about five different cabinet officials, and every time we make a tweak or a change everybody has to sign off on it. But we're very near a proposal that we think will meet all of the safety concerns that I heard when I talked to 25 members of Congress."

In other moves to head off the situation, language defunding the truck program was not renewed in the latest Congressional appropriations bill, and the US trade representative to Mexico told Reuters last month that negotiations over ending the tariff were set to intensify.

Members of the Mexican government have said that the tariff will remain in place until a permanent cross-border solution – as called for under NAFTA – is implemented by the US.

Crowley, Foss Tugs Assist Disabled Container Ship off Neah Bay

Two tugs, including the Crowley Maritime Corp. emergency response tug Hunter, provided emergency assistance to the container ship Horizon Tacoma last week, towing the disabled vessel through Puget Sound to the Port of Tacoma.

The crew of the 712-foot-long Horizon Tacoma, en route to the port from Dutch Harbor, Alaska, noticed smoke coming from one the vessel's main engine turbochargers late Tuesday evening. The incident occurred with the vessel located about three miles north of Neah Bay.

The captain decided to shut down the main engine as a precautionary move. Though no fires, damage, or injuries were reported aboard the Horizon Tacoma and the vessel maintained full use of its thrusters and directional navigation, the captain decided to call for tug assistance.
The Hunter, which reached the vessel in about 30 minutes, attached a towline and began towing the vessel toward Port Angeles.

A repair crew that met the container vessel at Port Angeles Wednesday morning determined that the vessel needed to go to Tacoma for full repairs.

Under direction of the United States Coast Guard, Horizon Lines engaged a second tug – Foss Maritime Co.'s Garth Foss – to meet the container vessel at Port Angeles and assist with the tow to Tacoma.

The Horizon Tacoma arrived at the Port of Tacoma APM Terminal at about 1 a.m. Wednesday morning.

The Hunter, a state-funded emergency response tug, is based at Neah Bay under an annual contract between its owner, Crowley, and the Washington State Department of Ecology.

This was the Hunter's first full emergency response of the year and its 11th in ten years. More than 44 full emergency responses have been made since a response tug was first stationed at Neah Bay in 1991.

The Crowley tug Valor was on position at Neah Bay until the Hunter returned from Tacoma.

MSC CEO Blames Shippers for Industry Crisis

The head of the world's second largest shipping fleet is placing much of the blame for the deepness of the recent shipping industry downturn on the ocean carriers' customers – the shippers. 

“Shippers are not that deep,” Gianluigi Aponte, chief executive of Mediterranean Shipping Company said during an exclusive interview with Robert Wright of the Financial Times. “They worry always who will ship for $50 less. The shippers are concerned solely by the price.”

While Aponte predicted that every major ocean carrier will survive the downturn, the worst in the shipping industry since the 1970s, he worried about instability brought to the system by the shippers – mainly through their efforts to repeal the conference system. This system, which was abolished in October 2008 just as the worst of the financial crisis was taking hold, was used by the industry to predict future capacity needs and help prevent devastating rate swings. 

It is worth noting that ocean carriers, by their nature, are creatures of long term planning. In the formula for financial success in the carrier industry, ocean carriers must maintain a fine balance between capacity, in the form of available space aboard vessels, and cargo rates, which provide revenue to cover operating costs.

Anytime the formula gets out of balance, the balance sheets of ocean carriers prosper or suffer accordingly. If capacity rises to a level that can no longer support the demand, you have overcapacity, and rates tend to drop, leading to reduced revenues for the carriers. On the opposite end is undercapacity, with the concomitant rise in rates and often a surge in the earnings of the carriers.

The problem for carriers is that their investment side of the formula, i.e., the vessels, does not encourage a quick response. It can take years for vessels ordered in good times and costing tens of millions of dollars to come on line. In some cases, as has been the case during the recent economic downturn, massive vessel orders came on line just as the bottom fell out of the industry.

However, carriers, faced with a sudden surge in overcapacity, are loath to lose any ordered capacity. It can cost them millions in deposits and they may have to wait years to get back in the purchase cycle with shipbuilders. So even in the worst of times carriers try to maintain their long-term investments in vessels – even if it means tying up the vessels in bad times and taking the loss on continued payments.

This situation imposes upon the carriers a lack of ability to quickly respond to changes in the rate side of the formula, especially if rates drop. And if rates fall too quickly, as they did in the past two years, carriers face monumental losses. Add to this the increase in operating costs over the past several years due mainly to fuel price increases, and the losses become staggering.

Complicating the matter, on the other end of the formula is the shipper – the customers of the carriers. By and large, shippers do not suffer from restraints due to long-term investments or high overhead costs. They can respond quickly to turbulence in the market simply by adjusting their rates. During a downturn, while cargo volumes slow, shippers can easily cut their rates to attract more business. However, this often leads to a race to the bottom. In the case of what happened in 2008 and 2009, the bottom literally was the bottom. Cargo rates that were above $2,000 per TEU before the global economic crises began fell to less than $400 per TEU in the early part of 2009. Bulk rates suffered an even worse collapse.

However, ocean carriers and their tremendous overhead require a certain rate level just to cover operating expenses. It was not until cargo box rates began returning to around the $1,500 per TEU level at the end of 2009, that ocean carriers even flirted with talk of a better 2010.

“I think that the big operators will come out very strong,” Aponte told the Financial Times. “We will all recover our losses in 2010.”

Exculpatory Clauses in Shipyard Contracts

By Marilyn Raia,

A vessel owner bringing a vessel into a shipyard for repairs is often presented with a work order or contract purporting to exonerate the shipyard from liability for damage to the vessel. The work order or contract may also provide for a limitation of the shipyard’s liability. This article addresses exculpatory clauses in shipyard contracts.

As a general rule, maritime law recognizes the rights of parties to enter into maritime contracts on the terms they choose. However, not all the terms they choose are enforceable under every circumstance. Some may be recognized and enforced as the product of bargaining between the parties to the contract. Others may be invalidated as against public policy regardless of the parties’ agreement.

When a shipyard enters into a contract to repair a vessel, it is exposed to three different types of liability if the repairs are not properly made. It can be liable for breach of contract, that is, the failure to perform the work as stated in the contract. It can be liable for breach of the implied warranty of workmanlike performance. And, it can be liable for negligence. Because of the potential financial consequences to the shipyard and/or its insurer for improper repairs, shipyards more often than not put clauses commonly known as “red letter” clauses in their contracts, which disclaim or limit liability. Unfortunately, the courts around the US have not taken a uniform approach when determining whether such clauses are valid.

The California approach
The California Supreme Court addressed exculpatory clauses in shipyard contracts in Fahey v. Gledhill, 33 Cal.3d 884 (1983). It recognized that under maritime law, parties of equal bargaining strength could agree to allocate the risk of loss or damage to the vessel while in the shipyard. When doing so, the parties had to use clear and unequivocal language to reflect their intent. In Fahey, the work order signed by the vessel owner had a clause relieving the shipyard from loss or damage “from any cause whatsoever”. The California Supreme Court held the clause unenforceable because among other things, it did not specifically mention the negligence of the shipyard and its employees.

The Ninth Circuit approach
Like the California Supreme Court, the federal Ninth Circuit Court of Appeals, which encompasses the West Coast, has held an exculpatory clause in a shipyard contract may totally relieve the shipyard from liability for its ordinary negligence. However, it has also held a shipyard cannot use an exculpatory clause to relieve itself of liability for its gross negligence.

In Morton v. Zidell Explorations, 695 F.2d 347 (9th Cir. 1982), the owners of a tugboat contracted with Zidell to convert the tugboat into a fish processor. The contract contained a clause purporting to exculpate Zidell from “all risks of loss or damage…under any circumstances whatsoever.” The vessel was damaged due to the negligence of Zidell’s employee while welding. The Ninth Circuit agreed with the trial judge’s view that the exculpatory clause was valid in the absence of any evidence of overreaching by Zidell.

In Royal Ins. Co. of America v. Southwest Marine, et al. 1999 AMC 2873 (9th Cir. 1999), the Ninth Circuit considered the “unresolved issue” of whether an exculpatory clause could relieve a shipyard for liability resulting from its gross negligence, or “the want of even scant care or an extreme departure from the ordinary standard of conduct”. It concluded public policy does not permit a party to contractually relieve itself of liability for intentionally or recklessly caused harm.

In Royal, Garthwaite entered into a contract with Southwest Marine, a ship-repair facility, in connection with the renovation of his yacht. The contract had an exculpatory clause that relieved Southwest Marine of all liability, using very broad language.

Southwest Marine’s crane lifted Garthwaite’s yacht from the water and placed it into a cradle without incident. Southwest’s crane was later used to return the yacht to the water. As the crane lifted the yacht, the winch
drum cracked and the yacht dropped a few inches but did not suffer any damage. The crane, however, suffered serious damage.

The crane was repaired and Southwest Marine attempted to re-launch Garthwaite’s yacht the day after the repairs were completed. The wire rope snapped, the yacht dropped several feet to the water, and the crane’s boom crashed onto the yacht’s deck. The evidence suggested Southwest Marine had used the yacht as a test weight despite a request from the yacht’s captain that it not be so used.

The Ninth Circuit held the exculpatory clause in the contract to be effective to shield Southwest Marine from liability for its ordinary negligence. However, it also held the exculpatory clause did not shield Southwest Marine from liability for its gross negligence. It recognized the possibility a jury could find Southwest Marine grossly negligent if, in fact, it used the yacht as a test weight. The Ninth Circuit also held certain limitations in the contract such as time limits on claims and waivers of subrogation would not be enforceable if the shipyard were grossly negligent.

The First Circuit approach
Not all circuits follow the Ninth Circuit principle that exculpatory clauses in shipyard contracts generally are enforceable in the absence of overreaching. The First Circuit, which encompasses part of New England including Massachusetts and Maine, follows the opposite principle, that is, clauses attempting to totally exculpate the shipyard generally are not enforceable.

In La Esperanza de P.R. v. Perez 1998 AMC 21 (1st Cir. 1997), the S/V La Esperanza was brought to a shipyard for a retrofit as a passenger-carrying vessel. The retrofit contract provided the shipyard would make good at its own expense any defective work or materials or pay for the cost of repair. The contract also provided the shipyard would not be responsible for “any loss of use or profit of the vessel.” The retrofit was not done properly resulting in extensive damage to the vessel.

The First Circuit agreed with the trial court’s denial of loss of use damages to the vessel owner. It reasoned a clause totally absolving the shipyard from liability should not be enforceable because the prospect of liability would deter negligence but a clause limiting the shipyard’s liability would be enforceable in the absence of overreaching. Because the shipyard’s contract only relieved the shipyard of liability for a particular type of damages, i.e. loss of use, the clause was held valid. The First Circuit also held gross negligence vitiates an otherwise valid exculpatory or limitation clause.

The Fifth Circuit approach
The Fifth Circuit, which encompasses Texas, Louisiana, and Mississippi, has also rejected clauses in shipyard contracts that purport to totally exonerate a shipyard for its negligence but enforced clauses limiting the shipyard’s liability.

In Alcoa Steamship Co, Inc. v. Charles Ferran & Co. Inc. 383 F.2d 46 (5th Cir. 1967), Alcoa’s vessel was damaged by a fire caused by the negligence of Ferran’s employee. Alcoa sought damages of $1,000,000.

Alcoa and Ferran had a prior course of dealing and Ferran’s invoice, customarily issued after completion of repairs, was the only document between the parties containing a “red letter” clause. The clause provided Ferran would not be liable for damage to the vessel unless caused by its negligence and further provided “and in no event shall our aggregate liability …exceed the sum of $300,000.”

Alcoa argued the clause should not be enforced because it never was part of a repair contract in the past and was only in the invoices issued after the repairs were completed. The Fifth Circuit held the trial court was correct in limiting Ferran’s liability to $300,000 finding the parties had equal bargaining strength, Alcoa had notice of the limitation amount from the prior dealings, and the limitation amount was significant enough to deter negligence.

In Todd Shipyards Corp. v. Turbine Service, Inc. 674 F.2d 401 (5th Cir. 1982), a “red letter” clause in the shipyard’s contract purported to relieve the shipyard of liability for damage to the vessel “unless the same is cause solely by the negligence of one of our employees”. The shipyard argued it should be relieved of liability for damage suffered by the vessel during work at the shipyard because its subcontractor actually caused the damage. The Fifth Circuit rejected the argument and held the “sole negligence” language invalid, reasoning such interpretation would lead to the “preposterous” result that a shipyard could relieve itself of liability by subcontracting out the work.

A shipyard’s location is a significant factor in determining whether it can contractually avoid liability for damage to a vessel at its facility. In California and the Ninth Circuit, liability for ordinary negligence but not gross negligence may be avoided if the contract is carefully drafted and the customer has notice of and expressly or impliedly agrees to the exculpatory language. In other parts of the country, a shipyard may not be able to totally avoid liability for its ordinary or gross negligence but may be able to limit its liability for ordinary negligence.