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Getting The Deal Through

in Panama

An interview with Jazmina Rovi and Francisco Linares


Jazmina Rovi is a partner in Morgan & Morgan’s ship finance and registration group. Mrs Rovi obtained an LLB from the School of Law of the University of Panama (1989). She also has a PhD in private international law from the Autonomous University of Madrid in Spain (1994).

Mrs Rovi has expertise on all types of registration schemes under Panama flag and ship finance structures, including ship mortgages and pledge of shares. She has played an active role in drafting various pieces of maritime legislation. Mrs Rovi was President of the Maritime Law Association of Panama from 2011–2013.

Francisco Linares is a partner in Morgan & Morgan’s admiralty litigation group. Mr Linares obtained a BA in philosophy and economics from Notre Dame University (1992), a juris doctor degree (cum laude) from Tulane University, specialising in maritime law (1996), and a diploma from Panama’s Maritime University (2010).

Mr Linares has 20 years’ experience in all types of maritime claims. Clients include shipowners, P&I Clubs and underwriters. Mr Linares has taught maritime law at the Santa Maria La Antigua University and was part of its board of advisers. He is the current President of the Maritime Law Association of Panama.

GTDT: What is the current state of the shipping industry in your country?

Jazmina Rovi & Francisco Linares: Local maritime service providers, particularly in bunkering and energy, are expanding in line with the Panama Canal. That said, 2016 was one of the most challenging years for the Panamanian shipping industry in the past 20 years. The general economic slowdown, political crises in key South American countries, ongoing market corrections in the industry, and stiffer regional competition in the port industry are some of the factors that made 2016 a difficult year for the Panamanian maritime sector. Even though some of these trends may begin to improve in 2017, new protectionist inclinations in Panama’s biggest trading partner may create some perils to the country’s shipping industry.

GTDT: What are the prevailing shipping market trends affecting your country?

JR & FL: Panama’s logistics platform is the most sophisticated in Latin America. This accounts for the country’s impressive connectivity rating. According to UNCTAD, in 2016, Panama had a 53.42 liner shipping connectivity index rating – the highest in the region. The centrepiece of this is the expanded Panama Canal, which inaugurated its new set of locks on June 2016, after much delay and squabbling between the Panama Canal Authority (ACP) and the subcontractors in charge of the project – a consortium composed of Spain’s Sacyr, Belgium’s Jan De Null, Impregilo of Italy and Panama’s Constructora Urbana. The ACP and subcontractors are locked in a legal battle for claims brought by the latter for nearly US$6 billion of additional construction costs. While the dispute works its way through arbitration, the new set of locks are open for business and are already setting transit records. As of May, some 1,200 Neopanamax vessels had transited the new locks. On average, nearly six Neopanamax vessels transit the Panama Canal every day, with about five liquefied natural gas (LNG) carriers transiting every week. The expanded Canal is aiming at taking full advantage of the expanding LNG market – a promising new market segment for the ACP. These are much welcomed developments for the ACP following a 7.5 per cent reduction in transits in 2016 compared to the average of the previous eight years. Adverse market conditions affecting the shipping industry, coupled with delays in the expansion works, accounted for the almost US$61 million reduction in toll revenues in the 2016 fiscal year. This has to be viewed in perspective, though. The Panama Canal has contributed well in excess of US$9 billion to the state’s coffers since 2000 – the year it was officially handed over to Panama. That is more than five times as much as Panama ever received, during the 85 years of US administration. There may be a turnaround for the ACP in 2017, though. Some 15 Neopanamax liner services have redirected to Panama because of the Canal expansion, with more expected to come later this year.

Despite a drop of about 6 per cent in attended vessels, the local bunkering industry performed well in 2016. Panama’s bunkering cluster is composed of nine terminals – five in the Atlantic and four in the Pacific – and nearly 30 service barges, two-thirds of which operate in the Pacific and the remaining third in the Atlantic. The industry went through serious difficulties shortly after the 2008 crisis, with sales dropping by more than 17 per cent in 2009. Since then, it has bounced back, posting a 7.82 per cent growth in sales as compared with 2015.

The development of the Panamanian ports over the past 20 years has been one of the country’s real success stories. There are five major container ports in Panama – two in the Pacific (operated by Hutchinson and PSA) and three in the Atlantic (operated by Hutchinson, SSA and Evergreen). With more container terminals come more container vessels. While in 1994 about one container vessel would call at a Panamanian port per day, by 2015 that average was up by a factor of 15. By 2015, the ports at Balboa and Colon were the busiest in the region, posting an aggregate throughput of close to 8 million twenty-foot equivalent units, according to the United Nations Conference on Trade and Development. However, in general, all of the major container terminals registered declines in 2016. Overall, cargo movements fell over 9 per cent last year. In fact, as of September 2016, the shortfall for 2015 was 13.8 per cent. Only a last quarter surge in the port of Cristobal – most likely because of the effects of Hurricane Matthew in other ports – reduced the shortfall. Despite the recent downward trends, the ACP ventured off its core business on a project to develop a new container terminal in a recently acquired plot of land in Corozal, at the Pacific end of the Panama Canal. The ACP’s Corozal container terminal project failed to attract any bidders in last March’s public tender. The project itself has been the subject of some 25 legal actions, many of which are still pending. The ACP’s board of directors are due to meet, in order to re-evaluate the project’s viability. Whether this new Pacific container terminal goes forth eventually is, at present, uncertain. The good news for terminals is that, according to the International Monetary Fund (IMF), the world’s economy is projected to grow by 3.9 per cent. Panama remains the most dynamic economy in the Americas and is expected to grow by 5.8 per cent in 2017, according to IMF projections. First quarter industrial output data coming from Asia may give reason to be optimistic that this forecast will hold. There are signs of an increase in global demand for container boxes, which also point towards improved market conditions in 2017. On the other hand, consolidation in the container shipping industry – which may continue in 2017 – could generate downward pressure on box terminal tariffs. Finally, increased regional competition will continue to exert pressure on Panama’s container ports. Uncertainty abounds, and the extent of recovery in 2017 remains to be seen.

In 2017 the Panamanian ship registry turns 100. The oldest of the open ship registries, the Panamanian flag registry remains the largest in the world, both in terms of number of vessels and registered tonnage, comprising about 18 per cent of the world’s merchant fleet according to IHS Global. Panama is a party to all major International Maritime Organization (IMO) conventions, and it has quite successfully improved the quality of the flag’s tonnage, as evidenced by recent port state control performance, and the flag’s inclusion in the Paris MOU White List since 2011. The flag registry – in line with other registries – is moving to modernise and streamline processes; for example, Panama is becoming paperless, and the registry is deploying new technologies to issue various vessel certificates online. That said, the Panamanian flag faces intense competition. In the 1990s Panama overtook Liberia to become the leading registry in the world. Now the Marshall Islands has recently surpassed Liberia to become the second-largest ship registry. Despite this, the Panamanian registry’s greatest comparative advantage over its competitors remains much the same today as it was 20 years ago – the Republic of Panama itself. Users of the Panamanian flag can feel confident that they have the support of a fully sovereign nation, a category A Member of the IMO Council, with one of the most competitive economies in Latin America, and a cadre of experienced professionals ready and able to assist shipowners.

And then there is the outcome of the recent US election. The US is, by far, Panama’s most important trade partner. Panama has a free trade agreement with the US. The US is Panama’s primary source of imports and its primary export market. In 2016, 67 per cent of all the cargo that went through the Panama Canal either originated from or was bound to a US port. Will the Trump administration foster or hinder trade? The answer to this question is of the utmost importance for Panama, as the whole point of the Canal, the ports, the maritime support industry, the flag registry and, for all intents and purposes, the country’s service economy is world trade. President Trump has vowed to protect the American worker. This may signal a more mercantilist approach to international commerce and, if effected, may ignite a trade war, which would have a negative impact on Panama. On the other hand, Mr Trump has suggested a much bolder energy policy. This could unleash the US’s very significant energy capabilities and perhaps prompt an increase in, for instance, natural gas exports. This would mean more shipments from the US Gulf Coast to overseas markets in Asia and Latin America (most of which would have to cross the Canal). Along with an improved jobs and wages market in the US, this could help to temper the lure of protectionism.

GTDT: Are there any recent domestic or international political or legislative developments that may have an impact on your country’s shipping market?

JR & FL: Congress has just passed a bill proposed by the Panama Maritime Authority that will offer a range of incentives to banks providing shipping finance from Panama, as well as to companies engaged in shipbuilding, ship repairs, construction and maintenance of containers and construction of sea wind farms. In order to come into force, the bill must be approved by the executive branch. Incentives include favourable immigration, labour and tax regulations, which are certainly worth considering. Panama has long been a venue for international banks and this impending piece of legislation may well trigger ship financing from Panama-based banks, and boost local shipping and maritime activities.

GTDT: What are the key regulatory and compliance issues for your country’s shipping market?

JR & FL: IMO and International Labour Organization regulations continue to set the pace for regulatory and compliance issues for Panama flag vessels. Ballast Water Management is the most recent regulation and the Panama administration is quite effectively carrying on its obligations under the Convention.

The innovative Seafarers’ Automated Application is now in place to ensure efficiency and transparency in seamen licences, which is much welcomed news considering there are approximately 600,000 seafarers on board the over 8,000 Panama flagged vessels. Traceability and increased levels of security come hand in hand with this new tool.

GTDT: What are the shipping industry’s current sources of finance? How do you predict they will develop, and what are the advantages and challenges to financing a vessel in your country?

JR & FL: These are Asian and European lenders, for the most part. This past year was a turbulent one for lenders (Hanjin’s collapse is a case in point), but 2017 will hopefully prove more stable, and even demonstrate growth in ship financing activity. Panama’s ship mortgage legislation is modern and convenient. It is easy to record a naval mortgage, and its ranking and enforceability with regard to other maritime liens – despite bankruptcy proceedings involving the shipowner or its parent – are two of the most important advantages for lenders. The fact that Panama’s legislation ranks mortgages ahead of suppliers of necessaries, and that mortgagees can enforce their rights and sell the vessel – despite bankruptcy proceedings involving the shipowner or its parent – is one of the reasons why Panama is the largest ship registry.

GTDT: Have there been any recent significant domestic or foreign court decisions or arbitration awards that have had an impact on your country’s shipping market?

JR & FL: In the mid to late 1990s, several personal injury claims were brought in Panama by Filipino seamen. Invariably, the plaintiffs in these cases were employed pursuant to the POEA standard contract, which contained clauses submitting all disputes to the jurisdiction of the National Labor Relations Commission (NLRC) in the Philippines. In most of these claims, shipowners moved to stay proceedings in favour of the NLRC, based on the forum selection clause in the crewman’s contract. By the late 2000s, a steady line of Supreme Court precedents emerged, enforcing these forum clauses, thereby staying proceedings in Panama (see, eg, Rosita N Bisnar et al v Elite Rederi A/S [Supreme Court/1C/2 February 2009]). In 2009, Panama’s Code of Maritime Procedure (CMP) was amended, and this included the section allowing proceedings to be stayed. Prior to the amendments, the key provision read: ‘when the parties have agreed by written contract to submit their controversies to arbitration, or to a tribunal in a foreign country’. After the 2009 amendments, it reads as follows: ‘when the parties have negotiated, previously and expressly, to submit their controversies to a tribunal in a foreign country, and they had so agreed to in writing. Pro forma and adhesion contracts will not be considered as negotiated previously and expressly.’ The amendment seemed to place the burden on those moving for a stay, based on a forum clause, of showing that a reasonable opportunity to negotiate said clause had been afforded. The first precedent that analysed this issue under the new CMP was Mund & Fester Versicherungen et al v M/V ‘Nagoya Bay’ et al [Supreme Court/1C/30 May 2012]. This case involved a cargo claim, where the bill of lading made reference to an arbitration clause, contained in a charter party, to which the consignee’s were not privy. The Supreme Court ruled that such arbitration clause could not be enforced on consignees, since they were not parties to the charter party. This case seemed to cover the specific concerns the drafters of the CMP’s amendments had in mind. Then, in 2012, the decision in Roberto Ariel Martinez Monroy v M/V ‘Enchantment of the Seas’ et al [Supreme Court/1C/7 November 2012] came out. This case involved a cruise vessel’s crewman, injured in the course of his employment. The defendants moved for a stay, based on an arbitration clause contained in the employment contract. The plaintiff argued that the clause was unenforceable, because it was contained in a pro forma/adhesion contract. The first instance court denied the stay. On appeal, the defendants pointed out that the contract in question had been the result of collective bargaining agreement between labour unions and owners. Furthermore, the defendants highlighted the fact that the appealed decision flew in the face of the long line of Supreme Court precedents issued in Filipino crew cases – where similar clauses had been enforced. The Supreme Court, however, confirmed the lower court ruling. The Court’s decision rested on two fundamental considerations. The first was the fact that – according to the Court – the CMP’s amendments excluded ‘adhesion contracts from the general rule on staying jurisdiction due to a jurisdictional or arbitration agreement’. The fact that the clause in question was the product of a collective bargaining agreement was insufficient – in the Court’s view – to overcome the fact that the plaintiff himself never had the opportunity to negotiate the contract’s terms. Secondly, the Court made a key distinction between this and the Filipino crew line of cases. In those cases, the relevant forum selection clause was the product of an agreement where not only unions and employers were involved, but also the Filipino government. State involvement in framing the POEA standard contract was a critical distinguishing factor, in the eyes of the Court.

“While there are certainly trends that give grounds for optimism, there is still much uncertainty in the shipping market.”

All of the foregoing cases had dealt with forum selection and arbitration clauses. In late 2015, the Maritime Appeals Tribunal (MAT) – now the court of last recourse in maritime disputes – further extended the ‘pro-forma/adhesion contract’ doctrine to cover arrest challenges. Under the CMP, there are grounds to challenge an arrest when the arrester violates an undertaking not to arrest. In 2009, just prior to the reforms to the CMP, the Supreme Court had upheld such a clause, inserted on contract whereby a seaman worked on board a Venezuelan fishing vessel (see Maximino Torres v M/V ‘Judibana’ [Supreme Court/1C/24 November 2009]. However, in Jose Luis Parra Jaen v M/V ‘Curimagua’ [MAT/2 November 2015], the MAT reversed the Judibana precedent. The MAT adopted the reasoning of the Supreme Court in the Enchantment of the Seas case, and simply expanded it to arrest challenge scenarios.

This further extension of the pro-forma/adhesion contract doctrine is yet to develop into a firmly established doctrine. There are a couple of lower court cases in the pipeline that aim to test the Curimagua case. If the Curimagua decision becomes the rule, however, it remains an open question whether this may spill over into other contexts. The fact of the matter is that maritime actors often contract on the basis of standard terms and conditions, containing other important provisions in addition to forum selection clauses – such as choice of law clauses, limitation of liability clauses, etc. Would all of these be called into question by the Curimagua precedent? That is yet to be seen, but the fact that the Curimagua ruling rested heavily on a finding of lack of ‘equal bargaining conditions’ between the contracting parties, would suggest that this precedent will remain circumscribed to the area of personal injury disputes.

GTDT: What is the outlook for your country’s shipping market?

JR & FL: The outlook is positive, despite the risks that could hinder global commerce and affect Panama’s shipping industry. What 2017 will bring to the Panamanian shipping market is an open question. While there are certainly trends that give grounds for optimism, there is still much uncertainty in the shipping market. There is bound to be more protectionism in the US and other developed economies. Panama – at the crossroads of global commerce, virtually since the ‘opening’ of the Pacific Ocean by Spanish explorers in the 16th century – will be impacted by this, no doubt. The more important question – the one key question, for Panama’s logistical platform – is whether the US ultimately withdraws its support to the liberal, globalised world order it helped to create after World War II. If, at the end of the day, that order is fundamentally maintained, then Panama’s logistical offer will remain relevant, and ever more so, in years to come.

The Inside Track

What are the particular skills that clients are looking for in an effective shipping lawyer?

Analytical skills, and the ability to be an effective negotiator and communicator are, of course, paramount. Along with these, a good shipping lawyer must have a sharp eye in order to identify potential hidden risks, and also knowledge-based creativity to help engineer the best approaches to advance clients’ interest in any given situation, without compromising the efficiency required in handling maritime work. The ability to deliver top-quality service in a timely manner, around the clock, is something clients always look for, and value, in a maritime attorney.

What are the key considerations for clients and their lawyers when arranging finance for a shipping transaction?

A reliable repayment source and sound security are always the key. The main security is undoubtedly the ship mortgage. This means that lawyers must check the legislation of potential flag states and choose the one that best covers their clients’ interests. Panama’s mortgage legislation offers very significant advantages, which make the country’s ship registry very attractive to lenders.

Although security may be and sometimes is limited to a ship mortgage, more often than not, it also involves assignment of insurances, earnings and requisition compensation, parent company guarantees and pledge of shares of the shipowning company. Tax and other compliance issues should be considered, as in some cases it will be preferable for lenders not to hold security interest on the shares of the shipowning company in the absence of an event of default. In such cases, an option of pledge of shares will be the alternative.

What are the most interesting and challenging cases you have dealt with in the past year?

A huge project is to be undertaken in 2017 after almost two years of negotiations and processing with local government agencies in charge of energy, environmental and maritime matters. For the first time in over 30 years, Panama will use seismic wave data to determine the existence of gas or fuel reservoirs in the marine underground.

An interesting case on shipowners’ limitation of liability occurred in 2016. In M/V ‘Modalwan 20123’ and the barge ‘LM 2411’ [MAT/11 May 2016], the issue was the meaning of article 538(1) of the CMP. This is the analogous provision to article 2(1)(a) of the 1976 London Convention; the only difference being that, in the CMP, the phrase in parentheses reads: ‘excluding damage to harbor works, basins, waterways, bridges, canals, aids to navigation and installations of the Panama Canal’. The question before the court was whether the excluded infrastructure referred only to that of the ACP. The plaintiffs showed – based on the legislative history – that Congress intended to replicate the rules of the 1976 Convention, and argued for a restrictive construction of the exclusion. The MAT, however, ruled that the provision excluded all listed infrastructure – whether public or privately owned – in addition to the Panama Canal’s own infrastructure.

Jazmina Rovi and Francisco Linares
Morgan & Morgan
Panama City
www.morimor.com




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