HQ 226808 - Coastwise Trade; Passengers; Bareboat Charter Agreement; 46 U.S.C. App. ? 289 - United States International Trade Commision Rulings

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HQ 226808

June 7, 1996

VES-3-02-RR:IT:EC 226808 GEV

CATEGORY: CARRIER

William H. Welte, Esq.
Welte & Welte, P.A.
Harbor Square
50 Bayview Street
Camden, Maine 04843-2248

RE: Coastwise Trade; Passengers; Bareboat Charter Agreement; 46 U.S.C. App. ? 289

Dear Mr. Welte:

This is in response to your letters of March 12, 1996, and April 29, 1996, on behalf of your client, Bass Harbor Marine, seeking approval of a bareboat charter agreement. A copy of the agreement was enclosed with your first letter to us. Our ruling on this matter is set forth below.

FACTS:

Bass Harbor Marine of Bass Harbor, Maine, the owner of a yacht, seeks to operate it pursuant to a bareboat charter. To that end, a copy of its proposed bareboat charter agreement has been submitted to Customs for review. No description or specifications of the yacht in question were provided.

ISSUE:

Whether the charter party agreement of Bass Harbor Marine submitted for our review is a valid bareboat charter agreement for purposes of the coastwise laws administered by the U.S. Customs Service.

LAW AND ANALYSIS:

Title 46, United States Code Appendix, ? 883 (46 U.S.C. App. merchandise shall be transported between points in the United States embraced within the coastwise laws either directly or via a foreign port, or for any
part of the transportation, in any vessel other than a vessel built in and documented under the laws of the United States and owned by persons who are citizens of the United States (i.e., a coastwise-qualified vessel). Section 289 of title 46 (46 U.S.C. App. ? 289), which is more applicable to this particular case, prohibits the transportation of passengers between points in the United States embraced within the coastwise laws, either directly or by way of a foreign port, in a non-coastwise-qualified vessel (see above). We note that for purposes of ? 289, "passenger" is defined as " ... any person carried on a vessel who is not connected with the operation of such vessel, her navigation, ownership or business" (19 CFR ? 4.50(b)).

In interpreting the coastwise laws (i.e., 46 U.S.C. App. ?? 289, 883) Customs has ruled that a point in the United States territorial waters is a point in the United States embraced within the coastwise laws. The territorial waters of the United States consist of the territorial sea, defined as the belt, 3 nautical miles wide, seaward of the territorial sea baseline, and to points located in internal waters, landward of the territorial sea baseline, in cases where the baseline and coastline differ.

In its administration of 46 U.S.C. App. ? 289, the Customs Service 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 3 mile territorial sea) 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

With respect to chartering, the Customs Service 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 proscribed 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). Headquarters Ruling 106049, dated April 26, 1983.

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 Customs 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.

(Headquarters Ruling Letter 111424, dated March 20, 1991, citing Headquarters Ruling Letter 109638, dated July 22, 1988).

Upon reviewing the terms of the charter agreement under consideration, we note that it is divided into the following headings appearing on the left-hand side of the agreement: Term, Hire & Payments; No Pets Aboard; Delivery; Insurance or Security Deposit; Accidents; Running Expenses; Liens; Navigation Limits; Re-Delivery & Indemnification; Restricted Use; Non-Assignment; Transfer of Charter; Charterer's Authority Over Crew; Brokerage Fees; Defaults; Charterer's Certification; Entire Agreement; and Additional Conditions. 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 heading (Term, Hire & Payments) has been left blank on the copy of the charter agreement forwarded for our review. Although recognizing that the owner of the yacht may, due to a myriad of reasons, wish to reserve the right to change these conditions between charterers, we are nonetheless unable to comment as to what impact, if any, the non-existent provisions of this heading might have on the paramount question in this case (i.e., the intention of the respective parties to relinquish or assume complete management and control of the yacht during the period of the charter).

The second heading (No Pets Aboard), as with the first heading discussed above, has been left blank on the copy of the charter agreement forwarded for our review. Notwithstanding the absence of any specific provisions as to this heading, and in the absence of any compelling reason to the contrary, this heading is indicative of a restriction placed on the charterer by the owner and suggests less than the relinquishment of the complete management and control of the yacht to the charterer during the period of the charter.

The third heading (Delivery) specifies the condition of the yacht for which the owner is responsible at the time of delivery to the charterer. The fourth heading (Insurance or Security Deposit) provides options available to the charterer and the responsibilities of both the owner and charterer with regard to ensuring proper coverage in the event of damage to the yacht. The fifth heading (Accidents) sets forth the conditions of a pro rata rebate to the charterer in the event of any breakdown, fire, grounding, collision or other cause not due to any fault of the charterer which results in the charterer's loss of use of the yacht for a period in excess of twenty-four hours. It is readily apparent that the provisions of these three headings are of no consequence to our determination as to the validity of the bareboat charter agreement.

The sixth heading (Running Expenses) provides that the "Charterer agrees to accept the yacht as herein-before provided and to pay all running expenses during the term of the charter." Acceptance of this provision by the charterer evidences an intent to assume complete management and control of the yacht during the period of the charter and the owner's relinquishment thereof.

The seventh heading (Liens) provides that the charterer shall not incur liens against the yacht, except for crew's wages and salvage, and to indemnify the owner for any charges, losses or expenses in connection with any liens which may arise. This provision is not antithetical to the validity of a bareboat charter agreement.

The eighth heading (Navigation Limits) restricts the geographical area in which the yacht may cruise to "U.S. Atlantic Coastwise and Inland Tributary waters between Eastport, ME and Cape Ann, MA." The agreement also provides that "[a]n extension to such limitations is available upon request." It further states, "Extensions will require an additional premium." 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. (Headquarters Ruling letters 108360, dated June 12, 1986, 108418, dated July 24, 1986, and 110984, dated July 27, 1990) Furthermore, the granting of an extension of these limitations upon
the payment of an additional premium evidences an intent on behalf of the owner to relinquish complete management and control of the vessel once the attendant insurance requirements have been satisfied.

The ninth heading (Re-Delivery & Indemnification) sets forth the condition in which the charterer is to return the yacht at the expiration of the charter and the agreement to indemnify the owner for any loss or damage not covered by insurance. This provision, as with the third, fourth and fifth headings discussed above, is of no consequence to our determination of the validity of the subject bareboat charter agreement.

The tenth heading (Restricted Use) provides that the use of the yacht is to be restricted only insofar as it is in compliance with Federal and State law and the laws of any other Government within the jurisdiction of which the yacht may be at any time. The terms of this heading are not antithetical to the validity of this bareboat charter agreement.

The eleventh heading (Non-Assignment) states that the "[c]harterer agrees not to assign this Agreement or subcharter the yacht without the prior written consent of Owner." We do not view this as evidence of a failure on the part of the owner to relinquish complete management and control of the yacht during the period of the charter.

The twelfth heading (Transfer of Charter) provides that, "It is mutually agreed that full authority regarding the operation, possession, management, and command of the yacht is hereby transferred to Charterer for the term hereof." This provision is reflective of the position of the Supreme Court in Guzman v. Pichirilo, supra, as well as prior Customs rulings and evidences an intent on the part of the owner to relinquish complete management and control of the yacht during the period of the charter.

The thirteenth heading (Charterer's Authority Over Crew) provides that, "In the event the Charterer wishes to utilize the services of a Captain and/or crew members in connection with the operation and management of the yacht, it is agreed that said Captain and/or crew members are agents and employees of the Charterer and not of Owner." The heading goes on to provide, in pertinent part, that "[t]he Captain shall receive orders from Charterer as to ports to be called at and the general course of the voyage,..." This further evidences an intent on the part of the charterer to assume complete management and control of the yacht during the period of the charter.

The fourteenth and fifteenth headings cover brokerage fees and defaults of the agreement, respectively. These provisions are of no consequence to the critical issue under consideration.

The sixteenth heading (Charterer's Certification) is applicable only in the event the charterer is to personally operate the yacht in which case he/she must certify his/her competence - 6 -
in seamanship and capability to operate the vessel and not permit anyone not so qualified to operate it. While such a certification does not invalidate an otherwise valid bareboat charter agreement, we note that this provision further provides as follows:

In the event that the Broker determines that the Charterer's experience is insufficient to ensure the safety and protection of the yacht at the time the yacht is delivered to Charterer, Owner, or the Broker in the Owner's absence, shall have the right to require that an experienced crew member be assigned to accompany the Charterer on the yacht, and the Charterer agrees to pay the standard daily rate for said crew member. A decision made in good faith by the Broker concerning the necessity of adding a crew member shall not be subject to review or challenge by the Charterer or any other party, and the refusal of the Charterer to accept the crew member and pay for his or her services shall be a default under this
Agreement. (Emphasis added)

The fact that the owner wants his yacht operated by a competent seaman is not problematic for purposes of determining the validity of a bareboat charter agreement. What is problematic in this case is the owner assigning a crew member to the charterer. 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. (Headquarters Ruling letters 106642, dated April 30, 1984, and 108414, dated July 24, 1986) Consequently, this provision negates a determination that this charter agreement is in fact a bareboat one.

The seventeenth heading (Entire Agreement) provides that the document represents the entire agreement between the parties in question. The eighteenth heading (Additional Conditions) provides that in the event of a dispute, the parties will use their best efforts to resolve the dispute. These two headings have no impact on our determination as to the validity of the 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 (i.e., headings 6 (Running Expenses), 11 (Transfer of Charter), and 12 (Charterer's Authority)), others preclude our reaching that conclusion (i.e., headings 1 (Term, Hire & Payments), 2 (No Pets Aboard), and 16 (Charterer's Certification)). Consequently, we find the subject charter agreement to be other than a bareboat charter agreement for purposes of the coastwise laws administered by Customs.

HOLDING:

The charter party agreement of Bass Harbor Marine submitted for our review is not a valid bareboat charter agreement for purposes of the coastwise laws administered by the U.S. Customs Service.

Sincerely,

William G. Rosoff

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