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HQ 115863

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January 9, 2003

VES-3 RR:IT:EC 115863 RSD

CATEGORY: CARRIER

Paul D. Coleman, Esq.
Hoppel, Mayer & Coleman
1000 Connecticut Avenue, N.W.
Washington D.C. 20036

RE: Coastwise Trade; Sixth Proviso, Empty Cargo Containers; Vessel Sharing Agreement; 46 U.S.C.§ App. 883

Dear Mr. Coleman:

Reference is made to your letter dated November 8, 2002, concerning a vessel-sharing agreement (VSA). You are writing on behalf of the members of the U.S. Pacific Coast-Oceania Agreement (Oceania Agreement). Enclosed with your letter was a copy of the VSA between the five vessel operating common carriers that comprise the Oceania Agreement. You request that our office review the submitted VSA for the purpose of determining whether the U.S. coastwise movement of the empty containers on non-coastwise qualified vessels pursuant to the Sixth Proviso of the Jones Act, 46 U.S.C. App. § 883, would be permissible.

FACTS:

Five foreign-flag shipping lines consisting of Hamburg-Sudamerikanische Dampfschifffahrtsgesellschaft KG d/b/a Columbus Line, P&0 Nedlloyd Limited and P&O Nedlloyd B.V. (as a single party), Australia-New Zealand Direct Line, a division of CP Ships (UK) Limited and FESCO Ocean Management Limited have entered into a vessel sharing agreement. This consortium of foreign shipping lines operates pursuant to the VSA that was filed with the Federal Maritime Commission. A copy of the VSA, also known as the Oceania Agreement, was attached to your letter.

Pursuant to the Oceania Agreement, the members of the consortium will operate 15 containership vessels in trade between ports on the Pacific coasts of the U.S., Canada and Mexico, and ports and points in Australia, New Zealand and the Pacific Islands. Aside from carrying their respective cargoes on Oceania vessels, the parties will also reposition their respective empty containers on the Oceania vessels. The empty containers will be repositioned at U.S. coastwise locations.

Under the Oceania Agreement, the parties have agreed to substantially integrate their vessel operations in the trade. The parties shall operate two initial strings under the agreement. One string is known as the Pacific South West string, which will call at ports in California as well as ports in New Zealand, Australia, Fiji and Mexico. The second string is known as the Pacific North West string and will call at ports in California the Pacific North West, Hawaii, New Zealand, Australia, Fiji and Tahiti. The vessels that will be used in the VSA shall have suitable characteristics regarding size, speed, configuration and power points for temperature-controlled units, and shall only be introduced after agreement with the other parties. Such agreements should not be unreasonably withheld.

In Article 5.1(c) of the VSA, the parties agree to maintain adequate capacity and service levels to satisfy the schedules that are set forth in the agreement. In accordance with Article 5.1(e) of the VSA, the parties shall agree on a long-term pro-forma schedule for service. The schedule may be changed from time to time as the parties mutually agree and shall incorporate periods required for programmed maintenance and repair including periodic dry-docking. The parties will agree on string co-maximum efforts to remedy any failure to comply. The parties are also authorized to discuss and agree upon rules for remedial actions and financial consequences in cases of non-performances.

In Article 5.4 of the VSA, members of the VSA are authorized to jointly negotiate the ocean terminal and stevedoring agreements. Pursuant to Article 5.6 of the VSA, the parties are also authorized to discuss and agree upon the chartering, hiring, establishment, use, scheduling, and coordination of feeder and transshipment service in conjunction with the strings operated under the agreement. In accordance with Article 5.7, the parties are authorized to discuss and agree upon standards for, and may interchange, purchase, pool, lease, sublease, maintain and repair, or otherwise co-operate in connection with containers, chassis and other equipment utilized in the Trade as among themselves as they may from time to time agree, including the establishment of joint container and chassis pools, depots, container yards and container freight stations.

Article 5.11 specifies that the parties are authorized to enter into written agreements or otherwise agree on working and administrative procedures that implement the procedures for booking of cargo in slots allocated, as well as the acceptance and accommodation of dangerous cargoes, out-of-gauge cargoes and reefer cargoes, terminal operations usage of containers, chassis and other equipment, and all other routine operational and administrative matters.

ISSUE:

Whether under the terms of the VSA entered into by the parties, the parties might at all relevant times be considered to be vessel operators for transporting their owned or leased empty shipping containers for purposes of satisfaction of the Sixth Proviso to the Jones Act.

LAW AND ANALYSIS:

Title 46, United States Code Appendix, section 883 (46 U.S.C. App. 883), commonly called the Jones Act, provides, in part, that no 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 citizens of the United States. Section 883 was amended by the Act of September 21, 1965 (Pub. L. 89-194, 79 State. 823), which added the Sixth Proviso, and by the Act of August 11, 1968 (Pub. L. 90-474, 82 State. 700), which amended that proviso.

The 1965 Act exempted from the provisions of section 883 the coastwise transportation of empty cargo vans, empty lift vans, and empty shipping tanks in non-coastwise-qualified United States-flag vessels or foreign-flag vessels, on a reciprocal basis, when the vans and tanks are owned or leased by the owner or operator of the transporting vessels and are being transported for use in the carriage of cargo in foreign trade. The 1968 Act added equipment for use with cargo vans, lift vans, and empty shipping tanks, empty barges specifically designed for carriage aboard a vessel, and certain empty instruments of international traffic to the articles included within the Sixth Proviso. These articles and the articles covered by the 1965 Act were required by the 1968 Act to be owned or leased by the owner or operator of the transporting vessel and transported for his use in handling his cargo in foreign trade.

The 1968 Act also added stevedoring equipment and material to the articles included within the Sixth Proviso. To qualify for exemption from section 883 under the Sixth Proviso, the stevedoring equipment and material must be owned or leased by the owner or operator of the transporting vessel or owned or leased by the stevedoring company contracting for the lading or unlading of the vessel and the stevedoring equipment and material must be transported without charge for use in the handling of cargo in foreign trade.

The language of the proviso regarding containers which requires that they be owned or leased by the owner or operator of the transporting vessel and transported for his use in transporting his cargo in foreign trade, has collided with contemporary business practice in the vessel industry. Newly emergent limited-purpose alliances of vessel owners have blurred the clear boundaries of the proviso in terms of its application. Whereas even arms-length dealings used to be too close for comfort in the industry, an examination of the current landscape reveals numerous betrothals, if not outright marriages, in the form of “Vessel Consortia”, “Vessel Sharing Agreements”, and “Joint Service Agreements.”

The legal effect for Customs purposes of such a Joint Service Agreement is at the heart of the present matter. Under the Agreement in question, five vessel operating companies have entered into a cooperative working agreement which obligates the dedicated vessels of either of the companies to be made exclusively available for cargo transportation for the Agreement members.

The question presented for resolution is whether under the terms and intent of the merchandise transportation statute, the particular parties operating under the provisions of the proposed VSA may all be considered to be the joint operator of a VSA vessel while they are engaged in transporting shipping containers of members to that agreement. If such parties may be so considered, and if the containers transported are either owned or leased by those parties to the VSA and are transported for their use in moving their cargoes in the foreign trade, the transporting vessels must be documented as provided in section 4.93 of the Customs Regulations (19 CFR 4.93).

Historically, administrative cases involving interpretation of the Sixth Proviso have involved questions concerning the character of vessel charter arrangements. It has been our long-standing position that slot or space charter arrangements do not fulfill minimal statutory ownership or operational requirements, whereas those requirements are met under the terms of a standard bareboat or demise charter agreement. The present matter involves less a question of charter characteristics and more a consideration of degree of operational control under the terms of this new generation of agreement. We are left to determine whether such agreements as presently under consideration contain sufficient indicia of operational vessel control so as to qualify the members as vessel operators.

In reviewing prior VSAs, we note that there are several factors under which the agreements are formed and the parties are governed which indicate that the members shared the operational control of the designated vessels. For example, the VSA members would jointly agree upon when, where and which vessels they would operate. They would also agree to cooperate in such matters as insurance, leases, sailing schedules, port calls, rate policies and the terms of service contracts, among other things. In addition, in other cases, the parties also pooled shore-side chassis and made them available for any of the members’ containers.

In Headquarters Ruling Letter 114560, dated January 14, 1999, we pointed out that Customs will take the above factors into consideration together with generally accepted principles that if possible, the law should be interpreted in a dynamic and forward-looking manner which takes into account changes and evolving practices which were not contemplated at the time of a statutory enactment.

Upon examining the VSA presented in this case, we find that the basic facets of joint operation control are present in the agreement. As noted above under the VSA, the parties will cooperate and make joint decisions in a number of significant areas in operating vessels for the purposes of carrying cargo such as setting up a long-term pro-forma schedule for service. In addition, the parties to the agreement will mutually agree on changes in the scheduled service and shall incorporate periods required for programmed maintenance and repair including periodic dry-docking. In addition, the agreement provides that the parties are authorized to discuss and agree upon standards for, and may interchange, purchase, pool lease, sublease, maintain and repair or otherwise co-operate in connection with containers, chassis and other equipment utilized in the Trade as among themselves as they may from time to time agree, including the establishment of joint container and chassis pools, depots, container yards and container freight stations. The parties are authorized to jointly negotiate ocean terminal and stevedoring agreements. The parties are authorized to enter into written agreements or otherwise agree on working and administrative procedure for the booking of cargo in slots.

These provisions in the VSA indicate that there are shared responsibilities and that the parties will jointly function together in the operation of vessels and the carrying of cargo, and as such the submitted VSA is more than a slot chartering agreement. Article 6(a) of the VSA, indicates that it will be administered and implemented by decisions, memoranda, and communications between the parties to enable them to effectuate the purpose of the agreement. The parties are authorized to establish such standing or temporary committees and subcommittees as deemed appropriate from time to time. We believe that this shows that there is joint administration among the parties in implementing the VSA.

Accordingly, we have determined that the agreement under examination does convey the status of vessel operator upon the individual parties and that, as such, their cargoes may be transported aboard any of the qualified vessels involved without consequence under the Sixth Proviso. The cargoes that this decision applies to are empty shipping containers that are either owned or leased by an agreement member, which containers are being transported for the purpose of handling the member’s cargo in the foreign trade.

HOLDING:

We have determined that the VSA under examination would convey the status of vessel operator on each of the individual signatories and that as such their empty
containers may be transported coastwise aboard any of the vessels involved without consequence under the Sixth Proviso to 46 U.S.C App. 883.

Sincerely,

Gina Grier

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