HQ 116331 - Coastwise Trade; 46 U.S.C. App. 883; Sixth Proviso - United States International Trade Commision Rulings

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HQ 116331

October 13, 2004

VES-3-17-RR:IT:EC 116331 GOB

CATEGORY: CARRIER

Brett Esber, Esq.
Blank Rome LLP
600 New Hampshire Ave., N.W.
Washington, DC 20037

RE: Coastwise Trade; 46 U.S.C. App. 883; Sixth Proviso

Dear Mr. Esber:

This letter is in reply to your letter of October 4, 2004 on behalf of China Shipping Container Lines Co., Ltd. (“China Shipping”).

FACTS:

You describe the pertinent facts as follows:

China Shipping is an ocean liner shipping company with services worldwide, including services to and from the United States. It is currently the 10th largest container shipping company by volume, operating a fleet of over 110 container vessels with a total capacity of over 231,480 TEUs.

China Shipping is in the process of implementing an internal restructuring that will involve the transfer of some of its liner shipping services to its wholly-owned subsidiary, China Shipping Container Lines (Hong Kong) Co. Ltd. (“China Shipping (Hong Kong)”). After the restructuring, which is expected to become effective January 1, 2005, both China Shipping and China Shipping (Hong Kong) will operate liner shipping services in the U.S. foreign commerce. Both companies will qualify as “vessel operating common carriers” and will be registered as such with the U.S. Federal Maritime Commission.

An essential element of this internal restructuring is to have the two companies operate as distinct legal entities. In other words, each company will issue its own bill of lading and will have sole responsibility for the cargo carried under its bills of lading. Separate books of account will be maintained for each company, and each company will respect all corporate formalities.

Although the two companies will be separate and distinct legal entities, from a commercial standpoint they will essentially operate much the way they would if they were a single company. Both carriers will operate under the China Shipping tradenames and trademarks. As one would expect of a parent company and its wholly-owned subsidiary, the two carriers will operate and coordinate their services to the greatest extent possible to rationalize and expand their services to their collective customer base, avoid unnecessary duplication of services, realize economies of scale, reduce costs, and produce operating efficiencies. It is also anticipated that the two carriers will publish a common tariff, enter into joint service contracts with their shipper customers, and enter into agreements with other carriers as a single party. As part of the ongoing cooperation and coordination of their respective services, China Shipping and China Shipping (Hong Kong) would each transport for the other empty cargo containers owned or leased by the other and used by the other for the carriage of cargo in the U.S. foreign trades.

ISSUE:

Whether, for the purpose of the Sixth Proviso to 46 U.S.C. App. § 883, a parent company (China Shipping) and its wholly-owned subsidiary (China Shipping Hong Kong) should be treated as one owner/operator.

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 the 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 key issue in our analysis of cases under the Sixth Proviso of 46 U.S.C. App. § 883 frequently involves the degree of operational control of the vessel. That issue here would be whether the parent company China Shipping and wholly-owned subsidiary China Shipping (Hong Kong) will each have the requisite degree of operational control when they transport for the other empty cargo containers owned or leased by the other and used by the other for the carriage of cargo in the U.S. foreign trades.

Black’s Law Dictionary (5th ed., 1979) provides the following definitions:

Parent company. Company owning more than 50% of the voting shares of another company, called the subsidiary. A corporation which has working control through stock ownership of its subsidiary corporations. Culcal Stylco, Inc. v. Vornado, Inc., 26 Cal. App. 3d 879, 103 Cal. Rptr. 419, 421. A “parent corporation” is one which has working control through stock ownership of its subsidiary corporations. Culcal Stylco, Inc. v, Vornado, Inc., 26 C.A.3d 879, 103 Cal. Rptr. 419, 421.

Subsidiary corporation. One in which another corporation (i.e., parent) owns at least a majority of the shares, and thus has control. . .

In support of your claim that, for the purpose of the Sixth Proviso to 46 U.S.C. App. 883, China Shipping and China Shipping (Hong Kong) may be said to own or operate the vessels of each other, you state:

The level of cooperation and coordination between China Shipping and its wholly owned subsidiary China Shipping (Hong Kong) clearly equals or exceeds that which exists between carrier parties to a VSA [vessel sharing agreement]. Although they are separate legal entities, China Shipping controls China Shipping (Hong Kong), and the two parties will therefore cooperate and coordinate their vessel chartering activities, sailing schedules and port calls to ensure that they provide the greatest level of service to their collective customer base while avoiding unnecessary duplication of services. They will likewise cooperate on the expense side to the greatest extent possible through chassis and other equipment pooling arrangements, and joint negotiation and contracting for terminal and stevedoring services, insurance and other items to realize economies of scale, reduce costs and produce operating efficiencies.

Because China Shipping owns and controls China Shipping (Hong Kong), a written contract is not needed to obligate the parties to cooperate and coordinate their services as described above. [Footnote omitted.] By the nature of their corporate structure, a VSA-type agreement is not necessary to “unify” the services of China Shipping and China Shipping (Hong Kong). They are unified by virtue of the control that China Shipping possesses through its ownership of China Shipping (Hong Kong).

It is a basic principle of corporate law that a corporation is a separate and distinct legal being, a proposition which has been adopted for Customs (now Customs and Border Protection) purposes. See Moberly v. United States, 4 Cust. Ct. 91, 94-95, C.D. 294 (1940). A parent corporation and its subsidiary are separate and distinct legal entities. See Tennessee Valley Authority v. Exxon Nuclear Co., Inc., 753 F.2d 493, 497 (6th Cir. 1985); see also 18 C.J.S. (1990) Corporations, sections 8 and 15). That principle does not answer our inquiry here.

In HQ 116276, dated August 26, 2004, a ruling involving the Sixth Proviso to 46 U.S.C. App. 883, we stated:

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 matter 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 stated that the above factors will be considered together with generally accepted principles and 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.

You have submitted a draft copy of an Alliance Agreement between China Shipping and China Shipping (Hong Kong). That agreement authorizes these two parties to cooperate and coordinate all aspects of their services.

After careful consideration we find that China Shipping and China Shipping (Hong Kong) have a relationship such that they may be treated as one owner/operator for the purpose of the Sixth Proviso to 46 U.S.C. App. § 883. Our determination is contingent upon the Alliance Agreement being signed by China Shipping and China Shipping (Hong Kong) in substantially the same substance and form as the draft document you have provided.

Therefore, China Shipping and China Shipping (Hong Kong) may transport each others’ containers aboard their vessels provided that the other requirements of the Sixth Proviso to 46 U.S.C. App. § 883 and section 4.93, Customs and Border Protection Regulations (19 CFR 4.93) are complied with.

HOLDING:

China Shipping and its wholly-owned subsidiary, China Shipping (Hong Kong), may be treated as one owner/operator for the purpose of the Sixth Proviso to 46 U.S.C. App. 883, provided that these parties sign the Alliance Agreement in substantially the same substance and form as the draft document you have provided. Therefore, China Shipping and China Shipping (Hong Kong) may transport each others’ containers aboard their vessels provided that the other requirements of the Sixth Proviso to 46 U.S.C. App. § 883 and section 4.93, Customs and Border Protection Regulations (19 CFR 4.93) are complied with.

Sincerely,

Glen E. Vereb
Chief

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