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Getting The Deal Through

in Panama

An interview with Jazmina Rovi and Francisco Linares

Morgan & Morgan

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 of the Autonomous University of Madrid (1994).

Mrs Rovi has a wide 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 to 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 JD (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 and Francisco Linares: There was a noticeable rebound in the shipping industry in 2017. With world and regional economic conditions improving throughout the year, and a fully operational expanded Panama Canal, the local shipping industry posted positive results. Latin America is coming back from a contraction in 2016 – of minus 1 per cent – but turned around in 2017 with 1.3 per cent growth, according to the UN Economic Commission for Latin America and the Caribbean (ECLAC). The region is expected to grow by about 2 per cent in the next few years, according to ECLAC, thanks to improvements in Brazil and Argentina. Panama remains the most dynamic economy in the region, with 5.4 per cent growth in 2017 and an average of about 7 per cent growth during the past 10 years. The maritime sector, however, continues to face intense competition. This, coupled with the prospect of a full-blown trade war among the Panama Canal’s biggest users may pose significant challenges for 2018 and beyond.

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

JR & FL: Panama remains the region’s top logistical hub. Panama has the highest Liner Shipping Connectivity Index rating in the Latin America (almost 52), as per UNCTAD, as well as the highest Logistics Performance Index ranking according to the World Bank (3.34). The maritime and logistics segment of the economy amounts to large portion of the county’s export services. To take full advantage of Panama’s increasing role as a logistical hub, last September the government unveiled a master plan called the National Logistical Strategy (ELNP). This roadmap was elaborated by industry and Inter-American Development Bank experts. Among other things, the plan calls for massive infrastructure investments – especially in roads and railways – to separate cargo movement from the urban transport system (a weakness that traditionally has pulled Panama’s LPI scores downward). If properly implemented, experts estimate that the ELNP could impact Panama’s overall GDP growth by as much as 30 per cent by 2030.

The Panama Canal expansion has proven a tremendous success, and some even believe a further expansion may be in the horizon much sooner than expected. The Neopanamaxes seem to be coming faster than initially expected, even when the economy of scale benefits to be realised with larger vessels transiting were quite obvious from the beginning. June 2018 marked the second anniversary of the new locks’ inauguration. The new set of locks is, of course, fully operational, although some minor works are still pending completion by subcontractors (Sacyr/Jan De Nul/Impregilo). The continuing dispute between subcontractors and the Panama Canal Authority (ACP) is likely to drag into 2022. The former are claiming some US$6 billion of additional construction costs. Recently, the ACP obtained a favourable ruling in one of the several arbitration proceedings filed by subcontractors, for almost US$200 million. Yet, there are still a number of proceedings pending, for an aggregate of about US$5.5 billion.

In these almost two years of operations, the new locks have seen over 3,500 Neopanamax vessel transits. Toll revenues in 2017 were US$2.23 billion – well above the US$1.93 billion for 2016 and US$1.99 billion for 2015. In fiscal year 2017, the ACP posted record overall revenues of US$2.88 billion, as well as a record dividend payment to the Panama government of US$1.65 billion. This one year payment alone is nearly as much as the total US$1.87 billion Panama received during the 85 years of US administration. In 18 years of Panamanian administration, the Panama Canal has produced US$13.33 billion in dividends to the National Treasury.

About 50 per cent of the Neopanamax vessel transits were container carriers. Liquefied petroleum gas (LPG) and liquefied natural gas (LNG) vessel transits also contributed to the robust results for 2017. Indeed, the LNG segment is a completely new business for the Panama Canal, and quite a promising one. In 2017, the United States quadrupled its LNG exports. About 49 per cent of these go through the Panama Canal to various markets, mostly in Asia. An excess of 5 million tons of LNG passed through the Panama Canal in fiscal year 2017, about 80 per cent of which shipped from the United States. The ACP projects that by 2020, some 30 million tonnes of LNG will transit through the Panama Canal. An ever increasing chunk of US LNG exports is being swallowed up by China, which recently surpassed Japan as the world’s largest importer of that commodity. In light of this, it comes as no surprised that US LNG imports were spared by China in the retaliatory response to the United States’ tariffs that may take effect in 2018. Currently, an average of about four LNG vessel transit the new locks – which, incidentally, can accommodate about 90 per cent of the total LNG fleet – but this is expected to double by 2020. The ACP expects LNG vessel transits to grow by 50 per cent by the end of fiscal 2018. Given this, the ACP has recently made available an additional daily transit slot for LNG vessels, and will allow night transit of these vessels starting this year. The LPG market, likewise, showed a strong performance in 2017. LPG vessels accounted for 29 per cent of the transits through the new locks, second only to container carriers. US LPG exports to Asian markets, again, stand out. Since 2015, US shipments to Japan, China, South Korea and Singapore have nearly doubled. About 90 per cent of these exports are shipped from Persian Gulf ports, most of which pass through the Panama Canal.

Despite the uncertainties about the possible adverse impact of the canal expansion, 2017 was definitely a good year for the bunkering industry. The quantity of vessels served and volumes sold increased in 2017. A total of 4.6 million metric tonnes of fuel were dispatched locally last year – only the second time in history that over 4 million metric tonnes of fuel have been sold in Panama. Sales of fuel oil went up in 2017 by 14.38 per cent compared to 2016, and 23.3 per cent as compared with 2015, while sales of diesel oil increased by 32.43 per cent with respect to 2016 and 42.9 per cent versus 2015, according to data from the Maritime Authority of Panama (MAP). According to the MAP, 5,792 vessels took fuels in Panama in 2017, as compared to 5,336 in 2016 and 5,627 in 2015. First quarter results for 2018 suggest an 8 per cent increase in sales and, at current pace, the number of vessels served may surpass 6,000 for the first time in history.

Panama’s port system regained its regional dominant position in 2017. According to ECLAC, Panama’s port system throughput grew by 10 per cent, essentially regaining the level it had in 2015 of over 6.8 million 20-foot equivalent unit (TEUs) moved. This volume had fallen dramatically in 2016. Official figures show that 6.8 million TEUs were processed in 2017 – a historic high. This strong performance was fuelled by the ports in the Atlantic, particularly Cristobal (operated by Hutchinson). Hutchison’s Cristobal port moved some 1.3 million TEUs in 2017 – the first time ever this facility has had a throughput in excess of 1 million TEUs in a year. Panama has five major container ports – three in the Atlantic and two in the Pacific – with a total aggregate capacity of approximately 10 million TEUs (though the system has never surpassed 7 million TEUs in throughput per year). There is currently a new facility under construction at Margarita Island, in the Atlantic, that should add a further 2.5 million TEUs to the system. Severe weather in the Caribbean in the past few years seems to account for the consistent throughput increase in the Atlantic ports. Panamanian ports, however, continue to face stiff regional competition (Cartagena in Colombia, Manzanillo in Mexico and Callao in Peru, to name a few). Plus, increased industry consolidation continues to create downward pressure on the rates port operators are able to charge. These are the challenges facing the local port industry in 2018, which has had a lacklustre first quarter – down some 4.3 per cent, driven primarily by a 13.7 per cent drop in the port of Balboa, on the Pacific side.

The Panamanian ship registry continues to perform well. It remains, by far, the largest flag registry in the world. It had an overall good Port State Control performance in 2017. The implementation of new technologies to facilitate issuance of certificates, improving efficiency and quality, while reducing the environmental footprint continues at full throttle. That said, the biggest development in 2017 for the Panamanian flag registry has been the opening of formal diplomatic relations with the China. Prior to 2017, Panama recognised Taiwan as a legitimate state. This changed in 2017, as Panama diplomatically recognised the government of Beijing and closed down its embassy in Taipei. This change alone will facilitate the development of an immense market for the Panamanian flag. Moreover, Panama and China signed a maritime transport agreement whereby each party grants each other most favoured nation status. Now, Panamanian vessels can enjoy great savings (in excess of 28 per cent) and reduce wait time when calling at Chinese ports, allowing the registry to compete on a level playing field with other registries that have most favoured nation status with China. This, along with continuing efforts to increase quality and efficiency, is expected to increase Panama’s leading position as the number one open registry in the world.

About 68 per cent of all the cargo that goes through Panama’s logistical platform either originates in or is destined to the United States. The United States is, by far, Panama’s main export market, as well as its principal source of imports. The US economy is doing quite well, and Panama’s recent inauguration of official diplomatic relations with China opens the door for a cascade of foreign direct investment and unimaginable new opportunities for Panamanian exports. Panama has a free-trade agreement (FTA) with the United States, and it is currently negotiating one with China. The International Monetary Fund has revised down Panama’s expected GDP growth for 2018 by nearly a full point (to about 4.6 per cent, due, mainly, to an unexpectedly long construction workers’ strike), but it forecasts that the country will be back to a more seemingly growth rate of 6 per cent in 2019. Panama’s port system and ship registry maintain their leading positions. All of this bodes well for the future, giving grounds for realistic optimism. Yet, there are risks lurking in the background. As the drumbeats of an impending trade war grow louder, with the United States escalating its rhetoric against the institutional underpinnings of the global commercial system, Panama – one of the world’s key logistical hubs – finds itself right in the middle of a gathering economic storm.

“As the drumbeats of an impending trade war grow louder, with the United States escalating its rhetoric against the institutional underpinnings of the global commercial system, Panama finds itself right in the middle of a gathering economic storm.”

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: Panama now has full diplomatic relations with China. In November 2017, the President of Panama made an official visit to China, and opened Panama’s embassy in Beijing. Panamanian consulates are now operating in Shanghai and Hong Kong. A further consulate in Dalian may also come along in the foreseeable future. In the context of this official visit, some 19 bilateral agreements were signed between Panama and China, dealing with maritime transport, immigration, project finance, investment promotion, tourism, among others. A maritime transport agreement was signed between the two countries in November 2017, which was officially approved by Congress in Panama on 27 March 2018. This agreement will allow Panamanian-flagged vessels to enjoy all the benefits of the most favoured nation status when calling at Chinese ports. Finally, Panama and China are negotiating a FTA. When signed, Panama will become just the fourth country in Latin America to have an FTA with China.

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

JR & FL: Panama is a party to all the International Maritime Organization (IMO) Conventions, and is a category A member of the IMO Council. Standards are high, as evidenced by the flag’s port state control performance in recent years. But beyond this, the country is as committed as ever to ensure that international law and peaceful relations among nations prevail. Hence, the Panamanian registry continues to fully enforce the measures adopted by the UN to sanction countries hostile to nuclear non-proliferation. Accordingly, screening systems have been enhanced to make sure that violators of the UN sanction’s regime are unable to enter or remain in the Panamanian registry. Authorities are keen to take swift and decisive action to prevent the abuse of the Panamanian registry system by rogue operators.

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: Traditionally, ship financing has come from Asia and Europe. That did not change in 2017. After a catastrophic 2016, markets appear to have normalised in 2017. Necessary consolidations and corrections continue, but it seems that we are past the worse part of the storm. In spite of risks, improved economic conditions worldwide and increased capacity in the industry could herald a good year for ship financing in 2018. Panama remains a preferred jurisdiction for major maritime lenders. Panama’s mortgage legislation is flexible, modern and convenient throughout. It is easy to record a ship mortgage in Panama, and said security will enjoy a preferred ranking – ahead of most other maritime liens (including supply liens) – at enforcement time. This lender-friendly legal regime is one of the reasons why Panama has the world’s largest merchant navy.

“In spite of risks, improved economic conditions worldwide and increased capacity in the industry could herald a good year for ship financing in 2018.”

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

JR & FL: The 2009 amendments to Panama’s Code of Maritime Procedure (CMP) made a significant change in the section dealing with stay of proceedings. Before the 2009 amendments, the section allowing a stay of proceedings 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 amendments, it read 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, thus, placed the burden on those moving for a stay, based on a forum selection clause, of showing that a reasonable opportunity to negotiate said clause had been afforded. Predictably, the net result of this change in the CMP has been to make it much more difficult to stay proceedings, simply based on forum selection clause inserted in standard format. The matter, however, has not stayed there, as jurisprudence has in some cases extended this pro forma rule into other aspects of maritime contracts, beyond forum selection clauses. The Maritime Appeals Tribunal (MAT), in the case of Jose Luis Parra Jaen v M/V Curimagua [MAT/24 November 2015], expanded the pro forma rule to undertakings not to arrest, included in seamen employment contacts, reversing a prior Supreme Court precedent that stood for the exact opposite proposition (see Maximino Torres vs M/V Judibana [S.Ct./1C/24 November 2009]) . With Curimagua the question lingered whether the MAT would restrain the pro forma rule to cases involving a wide disparity of bargaining power between the parties involved, or whether it would continue to expand the doctrine. In 2017, the MAT issued a few precedents that point towards a reasonably clear answer to this question.

On the one hand, the MAT further confirmed its ruling in Curimagua. In the case of Pablo Antonio Rodriguez v M/V La Rosa Mistica (MAT/24 August 2017), the MAT once again invalidated an undertaking not to arrest, contained in a contract between a seaman and owners. The MAT’s reasoning basically followed Curimagua. In our view, the decision in La Rosa Mistica clearly rested on the position of relative weakness the seaman had vis-à-vis owners, when entering into the contract. By way of contrast, in the case of Sea Debt Management, SA v M/V Grace One (MAT/29 June 2017), the MAT took a much less sympathetic approach when dealing with somewhat contradictory terms contained in an adhesion contract involving commercial actors. The issue in Grace One was whether English or US law would govern the in rem claim filed by plaintiffs, pursuant to a contract to provide necessaries to a vessel whose terms were contained almost entirely in the supplier’s general terms and conditions of sale. According to the standard terms in question, English law governed the contract, yet there was a sub clause with an option for US law to apply ‘with respect to the existence of a maritime lien’. Defendants argued that this was contradictory, or ambiguous at best, and that according to the contra proferentem doctrine terms in an adhesion contract should be interpreted unfavourably to the drafter (which in this case would result in the application of English law). The TAM, however, refused to deploy the pro forma rule to the detriment of the contract drafter, finding rather that it was plain that the parties to the contract had agreed on US law. The TAM would honour the parties contractual agreement, despite the fact that they were included in a pro forma or adhesion contract. These two different approaches suggest – with sufficient clarity, in our view – that the pro forma rule cuts differently, depending on who the parties to the dispute are. Commercial enterprises, with seemingly comparable bargaining positions, cannot expect the MAT to cross out leonine terms contained in standardised contracts, simply because the contract in question was not intensively negotiated. Based on the precedents issued by the MAT so far, it seems that, practically speaking, parties with roughly equivalent bargaining power may – at best – only be able to invalidate forum selection clauses in adhesion contracts (as it happened in Mund & Fester Versicherungen et al v M/V Nagoya Bay et al [S.Ct./1C/30 May 2012]).

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

JR & FL: Coming out of a difficult 2016, and despite concerns about policy changes in the United States, 2017 was on the whole a successful year for Panama. The Panama Canal, the ports and the flag registry all had an outstanding year. A stronger world economy and the inauguration of diplomatic relations with China are good reasons to feel quite optimistic for 2018. Yet that optimism could easily vanish, if the United States continues on a path that could deal a deathblow to the globalised world order that, for the most part, has allowed partnering countries – large and small – to enjoy stability and prosperity. Panama sits at the crossroads of globalised commerce, and will certainly be impacted if it is swamped by a tidal wave of protectionism.

The Inside Track

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

Always of supreme importance are analytical, negotiation and communication skills. Clients highly appreciate the ability to identify risks – especially hidden ones – to assess the likelihood of them materialising, and to place a price on them. Experience-based creativity is absolutely indispensable, in order to be able to design and implement the best approach to advance clients’ interest in any given situation. All of this, without sacrificing the need to provide the immediate response that clients demand of maritime practitioners. The ability to timely deliver top-quality service, around the clock, is also something clients always look for and value in a shipping lawyer.

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

No doubt, a reliable repayment source and sound security schemes are always of paramount importance. Usually, the primary form of security in ship financing is the vessel mortgage. Hence, lawyers should always carefully consider the legislation of potential flag states, and then recommend one that better suits clients’ interests. Panama’s mortgage legislation offers very significant advantages for lenders, which is one of the main reasons behind the ship registry’s popularity with international financial institutions.

Though often security is limited to a ship mortgage, quite frequently it also involves assignments (of insurance payments, earnings, compensations, etc), parent company guarantees and pledge of shares of the ship-owning company. It is always important to consider tax and other compliance issues, for many times it will be preferable for lenders to avoid having a security interest on the shares of the ship-owning company, absent an event of default. To avoid potential problems, an option of pledge of shares would be a viable alternative.

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

We had an interesting case that recently came out from the MAT, dealing with arrest proceedings. While there is no associate ship per se in Panama, often plaintiffs file against a multitude of in personam defendants, including the company owning the vessel targeted for arrest in Panama. Quite often, the vessel-owning defendant had, at most, a remote connection with the underlying dispute. Our Code of Maritime Procedure requires plaintiffs to present prima facie evidence in support of the claim, in order for the judge to be able to grant the arrest order. That said, the judge has wide discretion as to how this evidence is evaluated. In the past, precedent tended to be quite deferential to the judge’s assessment of the prima facie evidence, even in cases where the vessel arrested was owned by a defendant with no direct connection with the dispute (see, for instance, Sea Anchor Shipping Co Ltd v Evelina Marine Limited et al [SCt./1C/28 November 12]). However, in the recent case of Allseas Marine, SA v Sumec Marine, Co Ltd et al (MAT/28 May 2018), the MAT dismissed an arrest against a vessel owned by a co-defendant, because plaintiffs had failed to provide clear prima facie evidence proving that the former had a direct connection with the claim. This precedent is important, we think, because it shows that the MAT is willing to apply strict scrutiny on the trier of fact very early on into the proceedings, if plaintiffs fail to demonstrate – beyond elaborate allegations – a tangible, basic connection between a ship-owning defendant and the dispute in which recovery is being sought.

Jazmina Rovi and Francisco Linares
Morgan & Morgan
Panama City

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