SHIPPING: An Introduction to Scotland

Legal Developments 

Given that over 90% of the world’s trade is handled by sea and 70% of the planet is made up of our oceans, it is little wonder that shipping law is of such vital importance to the fabric of commerce. In these times of uncertainty, there have been numerous changes across the sector, from the initial financing of a vessel through its working life until final disposal. Below is a summary of some key legal developments and trends that we have seen affecting the Scottish shipping industry.

Ship financing 

Debt financing, secured against a vessel pursuant to a vessel mortgage, has been the predominant means of funding new building and vessel acquisitions for small and medium enterprises for decades. However, we are now seeing a move away from traditional means of funding to alternative financing models that are more adaptable to the changing financial climate.

Charter and sale agreements are a means of facilitating the sale and purchase of a vessel over an agreed period. During the charter period, the purchaser, as charterer, has the exclusive right to use and possess the vessel, and is often responsible for crewing, maintenance, repair and other ownership obligations/costs.

This arrangement benefits both owner and purchaser, with the owner being relieved of ongoing obligations/costs in respect of their surplus asset. In exchange, they receive a steady revenue stream during the charter period, whilst retaining the right to terminate the agreement in a default situation. On the other hand, the purchaser can have the use of a vessel without the significant initial outlay.

There has also been, in recent years, an increase in the vessel sale and leaseback market, whereby an owner sells their vessel to a third-party financier, and then leases it back by way of charter, with ownership being returned at the end of the charter period. Vessel sale and leaseback agreements bring with them the benefits of a quick equity injection for asset rich/cash poor owners or owners seeking to invest in other areas of their business. Although this may be an attractive option, it is important to consider that such agreements do bring with them risk, such as the third-party financier being able to terminate the arrangement and repossess the vessel in the event of a default. Owners seeking to enter into such arrangements should therefore be diligent in their negotiation of the contract. In terms of financing new builds, loan finance is still the most common form of financing. Lenders may take a variety of security, including an assignment of the refund guarantees and the build contract and/or a mortgage over the ship, if the jurisdiction of the build permits this. In recent years, Spanish yards have proven popular with several Scottish fishing companies, which have benefited from the Spanish tax leasing system.

Ship-building 

While most new builds proceed to a satisfactory conclusion for both buyer and builder, it is unfortunately a transaction in which disputes can and do arise, with the result that the parties may end up in arbitration proceedings.

Frequently it is delays which give rise to disputes, and in recent years both the COVID-19 pandemic and the war in Ukraine will either have led or will lead to late deliveries. Contractually, these will typically be treated as force majeure events – ie, events beyond the builder’s control, permitting the builder to limit its liability for the delay. However, builders must notify any such force majeure events in accordance with the requirements of the ship-building contract, otherwise its ability to rely on the provisions may be lost. A buyer should nonetheless have the right to elect to cancel the contract if the delay exceeds a certain period.

Another concern for buyers is what will happen if the builder gets into financial difficulty and cannot complete the vessel. For new builds abroad, the buyer’s instalments are almost invariably secured by a refund guarantee issued by the builder’s bank so that these are repaid on demand in such an event. However, for domestic builds, the buyer may instead have an ownership right in the hull as it is constructed. Practically, although buyers may contractually have ownership of the hull during construction, in reality, the situation is not as clear-cut, as many contracts do not provide for materials that have been purchased and not yet incorporated into the vessel.

Looking to where disputes may arise in future, undoubtedly developments in the Ukraine war have increased supply-chain costs. It is possible we may see a trend for the additional cost incurred by the builder because of such increases to be passed on to the buyer via a price escalation clause. Such clauses at present usually only cover changes to the vessel specification requested by the buyer. For those representing the buyer’s interest, such clauses shall have to be carefully drafted.

Dispute resolution 

As indicated above, arbitration remains a key element of maritime legal work, with charterparties, ship-building and cargo claims making up much of these referrals.

The majority of such cases are heard in London and tend to be governed by the London Maritime Arbitration Rules. These Arbitration Rules are a direct alternative to the courts and can be seen very much as a success for Alternative Dispute Resolution within the niche market of marine and shipping law.

Arbitration also flags-up the cross-border and international dynamic of maritime law.

In addition to arbitration, Scotland has its own Admiralty Rules within its courts and these tend to mirror much of the English law in this field. Admiralty cases may involve ship arrest and incidents arising from collisions, although the number of actions going through the Admiralty Court in Scotland is minimal and there is not a specific and standalone Admiralty Court.

Ship arrest continues to be a recognised and distinct branch of the Scottish legal system. Every care is required in effecting an arrest, given the potential impact for restriction of sailing and potential loss-of-profit claims if the matter has been taken in error.

Employment  

As a continuing fallout from Brexit and in response to concerns about welfare of seafarers, there have been recent changes to the way in which seafarers, particularly non-UK resident seafarers, can work and enter the UK.

In 2022, the UK government estimated that, of the UK Chambers of Shipping members, only around 15% of seafarers active at sea on UK-registered vessels were UK nationals. Due to a shortage of Scottish seafarers and with such a large portion being non-UK residents, it is essential for most shipping companies to be able to crew their vessels with overseas seafarers.

It has been a longstanding maritime tradition that non-resident seafarers have been permitted to enter the UK on the basis that they shall work on a vessel “wholly or mostly” outside the UK territorial waters.

From April 2023, there has been a change in the law that permits those non-UK resident seafarers to only enter the UK on a “transit” basis if they work exclusively outside the UK territorial waters. This has caused some difficulty for many maritime-based companies due to crew shortages, and has led to an increase in applications for alternative visa options.

To help address the shortage of crew, various “right to work” changes have taken place, such as fishing “deckhands” being included in the list of skilled workers. As a result of this, there has been an increased appetite for many Scottish, and UK-wide, companies to become skilled worker sponsors. Obtaining crew through skilled worker sponsorship, although beneficial to many, is also not without its own issues.

In addition to a somewhat lengthy application process for becoming a sponsor and a further financial burden at a time of uncertainty, there are a number of hurdles. These include onerous English language requirements, which determine the crew that can be employed as a skilled worker under this scheme. As the majority of non-UK resident seafarers hail from countries that do not ordinarily speak English, the pool of candidates is limited.

In another development, following the public outcry after P&O Ferries’ dismissal of 800 seafarers without notice, the government outlined a nine-point plan for the protection of seafarers. This has resulted in the introduction of new legislation that requires the UK minimum wage to be paid to all seafarers who work on vessels that enter its harbour at least 120 times per year, regardless of whether they meet the criteria. Although in practice, this will largely relate to those working on ferries rather than other maritime areas, it shows an emerging trend towards increased seafarer protection.

Conclusion  

It would be fair to say that the Scottish shipping industry has dealt with its fair share of challenges over the last three years. As one of Scotland’s traditional industries, it has shown resilience throughout the years and is now adapting to meet the challenges that it currently faces. With increasing public attention, it is hoped that we may continue to see encouraging developments within the sector.