The Implications of Hanjin’s Bankruptcy

Hanjin Shipping Company originates in South Korea but is internationally recognized in the maritime industry. Responsible for a substantial portion of the industry’s shipping needs, Hanjin is the world’s seventh-largest container shipper. The company is now facing a detrimental dilemma: too many ships and not enough cargo. In order to protect its remaining assets, the company filed for bankruptcy in the United States. So far, eight of Hanjin’s ships have been seized. Approximately 80 more are awaiting their fate and are, in the meantime, preventing approximately $14 billion worth of cargo orders from being delivered. On September 9, 2016, a U.S. judge granted an order allowing Hanjin provisional protection from U.S. creditors, thus enabling some of its vessels to dock and unload.

Despite the court ordered protection, the company’s collapse has already made waves across the board. Retailers are predicting delayed shipments in advance of the holiday season, the impact of which will be felt by the consumer. U.S. exporters are estimating a 50% increase in shipping fees as a direct result of Hanjin’s bankruptcy. Additionally, commentators are noting that the bankruptcy is reflective of an industry-wide problem, citing Maersk Line’s $114 million loss in the first six months of 2016. Though the fate of the company and its vessels is uncertain, we can be sure that all members of the industry will feel the impact, either directly or indirectly.

Tides Are Turning: The Arrival of Subchapter M

*This article was prepared by our summer law clerk, Ridge Miguez.

 

On June 20, 2016 the U.S. Coast Guard posted a preview of the final version of the long-awaited Subchapter M regulation, which will extend inspection requirements to the majority of tugs and towboats for the first time. In 2004, Congress reclassified towing vessels as vessels subject to inspection, and consistent with 46 U.S.C. 3305, this rule sets out the scope and standards of inspection. Now with the implementation of Subchapter M the U.S. Coast Guard has created a comprehensive safety system that includes company compliance, vessel compliance, vessel standards, and oversight in a new Code of Federal Regulations (CFR) subchapter dedicated to towing vessels. This rule, which generally applies to all U.S. flag towing vessels 26 feet or greater, and those less than 26 feet moving a barge carrying oil or hazardous material in bulk, lays out both inspection mechanisms as well as new equipment, construction, and operational requirements for towing vessels.

 

To provide flexibility, vessel operators will have the choice of two inspection regimes. Under the Towing Safety Management System (TSMS) option, routine inspections of towing vessels will primarily be performed by third-party organizations (TPOs), including certain classification societies, and this rule creates a framework for oversight and audits of such TPOs by the Coast Guard. The TSMS will provide operators with the flexibility to tailor their safety management system to their own needs, while still ensuring an overall level of safety acceptable to the Coast Guard. Alternatively, under the Coast Guard inspection option, routine inspections would be conducted by the Coast Guard, providing an option for those operators who choose not to develop and implement their own TSMS.

 

Subchapter M also creates many new requirements for design, construction, equipment, and operation of towing vessels. Those requirements are typically based on industry consensus standards or existing Coast Guard requirements for similar vessels.

 

The most important change to the final revision of Subchapter M has been the changes made to the Coast Guard’s proposal in the NPRM. They have clarified the system for Coast Guard oversight and inspection of towing vessels that complements the TPO system. To address concerns about the cost impact of the rule, they have added “grandfathering” provisions to several requirements, so the requirements will not apply to existing vessels or vessels whose construction began before the effective date of the rule. Also, they have reorganized several parts for greater clarity or to better align with the existing text of other parts of the CFR. As noted in the NPRM (7 FR 49985), the Coast Guard still plans to promulgate a separate rulemaking for an annual inspection fee for towing vessels that will reflect the specific program costs associated with the TSMS and Coast Guard inspection options. As of now the Coast Guard is establishing the existing fee of $1,030 in 46 CFR 2.10-101 for any inspected vessel not listed in Table 2.10-101, as the annual inspection fee for towing vessels subject to Subchapter M. Furthermore, this fee will not be charged for a vessel being inspected for the initial issuance of a certificate of inspection (COI), however the fee will be charged annually starting the following year.

 

The Coast Guard released a statement that Subchapter M will affect approximately 5,509 U.S. flag towing vessels engaged in pushing, pulling, or hauling alongside, and the 1,096 companies that own or operate them. Towing vessels exempt from this rule include towing vessels inspected under Subchapter I, work boats, and recreational vessel towing vessels.

 

The estimate for total industry and net government costs is $41.5 million annualized at a 7 percent discount rate over a 10 –year period of analysis. The estimate for monetized benefits is $46.4 million annualized at a 7 percent discount rate, based on the mitigation of risks from towing vessel accidents in terms of lives lost, injuries, oil spilled, and property damage. Thus, a net benefit of $4.9 million is estimated from implementing Subchapter M.

 

The new rule became effective July 20, 2016. However, certain existing towing vessels subject to this rule will have an additional 2 years before having to comply with most of its requirements. It will be interesting to see how small operators are affected by the changes Subchapter M brings their way. Only time will tell, but it seems the rule change is in the greater interest of the industry as a whole.

 

Advanced Technology from U.S. Military will soon find its way into Commercial Diving Operations

The United State Navy has developed the Divers Augmented Vision Display, which is a high-resolution, heads-up display installed directly into a diver’s helmet.  The system will allow the diver to access sonar, text messages, diagrams, and photographs. Significantly, the display will allow for augmented reality videos; technology that allows images and video to be superimposed in real time (think the “monocle” mode in your Yelp app).

 

This technology will assist divers in recovery and salvage operations by offering real-time positional awareness.  The Naval Sea Systems Command is also working on development of enhanced video systems that will increase diver sight in near zero visibility situations.  Like so many other advancements before, it is only a matter of time before these technologies make their way into commercial diving operations.

Implementation and Concerns Pertaining to the IMO’s Verified Gross Mass Regulations

The International Maritime Organization’s (“IMO”) amendments to the Safety of Life at Sea (SOLAS) convention will become legally binding on July 1, 2016.  The changes to SOLAS require exporters to verify the weight of the containers before they are received at the port and loaded aboard the ship.

 

The rules provide two methods for a shipper may obtain the verified gross mass (VGM):

  • Method 1, upon the conclusion of packing and sealing a container, the shipper may weigh, or have arranged that a third party weigh, the packed container.
  • Method 2, the shipper or, by arrangement of the shipper, a third party may weigh all packages and cargo items, including the mass of pallets, dunnage and other packing and securing material to be packed in the container, and add the tare mass of the container to the sum of the single masses of the container’s contents.

 

The new rules have raised numerous concerns, some of which include:

  • Whether there is an agreed format to communicate the verified gross mass;
  • Whether there is a deadline for when the information must be received by the carrier and the terminal operator;
  • Whether the rules obligate the carrier to check the values given by the shipper; and,
  • Whether there is an acceptable margin of error when establishing the verified gross mass.

 

Although there are many more concerns, there is no doubt that additional unforeseen issues may arise once the requirements are put into practice.

 

http://www.aaei.org/resources/new-solas-regulations-and-resources/