Dan Paige has been in practice since 1995, principally in the field of international and maritime litigation. He has extensive experience in complex commercial litigation, as well as personal injury, wrongful death and insurance litigation, charter party arbitration and class actions, and maritime transactional matters. He also has a strong background in classification society litigation (representing American Bureau of Shipping for 19 years, including in the Prestige litigation), vessel operations, asset transactions, asset finance, equipment leasing, internet privacy, civil RICO and criminal law.
Dan is a member of the Maritime Law Association of the United States, the Connecticut Maritime Association, the Association of Corporate Counsel and the American Bar Association. Dan currently serves as primary outside counsel to an ocean transportation company, a food import and distribution company, and is general counsel to an international members’ services company. He has been counsel to an energy development corporation and was associated with the law firm of Kirlin, Campbell & Keating.
Dan is admitted to practise in New York, New Jersey, Connecticut and Maryland and numerous federal jurisdictions.
GTDT: What is the current state of the shipping industry in your country?
Dan Paige: The United States has historically been a critical player in the global shipping industry, and shipping remains a significant piece of the US economy. According to the US Bureau of Transportation Statistics, the shipping sector has contributed US$36 billion and 65,000 jobs to the US economy. The shipping industry in the United States consists of vessel owners and operators, shipbrokers, shipbuilders, ports, equipment suppliers and manufacturers, insurers, banks and other sources of marine finance, and marine consultants (including legal, financial and technical services).
Shipping accounts for the most significant mode of transporting US imports and exports. Approximately 53 per cent of US imports are transported by water, the remainder split almost equally by air and by land. Approximately 38 per cent of US exports are transported by water, and, again, the remainder split almost equally by air and by land.
According to the US Bureau of Transportation Statistics, on average 62,000 vessels call at US ports each year, or 170 vessels per day. In 2015, the Federal Maritime Administration (MARAD) reported total calls to US ports of vessels over 10,000 deadweight tonnage at 82,044. Of those calls, 18,711 were container vessels, 13,666 were dry bulk vessels, 1,703 were gas carriers, 7,793 were general cargo vessels, 7,065 were ro-ro vessels and 33,106 were tankers. All of these movements accounted for a total of over 3 billion gross tonnes of cargo.
Containerisation, a product of US innovation, remains a major force in US cargo movements despite years of mixed economic results in the sector. Containerised cargo generally account for more than half the US cargo moved when measured as a percentage of vessel value.
The most significant imports and exports in the US are fuel and oil, accounting for approximately 22 per cent of trade cargo as measured by percentage of vessel value. In 2013, as reported by HQEconomy.com, the United States consumed approximately 19 million barrels of oil on a daily basis, or 6.9 billion barrels per year. US ‘. . . consumption is almost double that of the next highest user of crude, and is more than second, third and fourth place combined. We import just under half of our oil, producing the rest within our own borders.’ According to the US Bureau of Transportation Statistics, fuel and oil accounted for 32 and 22 per cent of US imports and exports by vessel value, respectively, in 2011. By value, the top five exports to the United States by vessel were:
- mineral fuel and oil;
- nuclear reactors, boilers, machinery, and parts;
- vehicles, except railway or tramway, and parts;
- organic chemicals; and
- plastics and articles thereof.
The top five imports to the United States by vessel were:
- mineral fuel and oil;
- nuclear reactors, boilers, machinery, and parts;
- vehicles, except railway or tramway, and parts;
- electric machinery, sound equipment, TV equipment and parts; and
During the global recession in and around 2008, US imports as measured by vessel value experienced a steep decline, in the neighbourhood of 25 per cent of pre-recession values. However, by 2011, US imports had recovered to pre-recession levels. During the same period, US exports experienced a far less severe decline, and by 2011, US exports as measured by vessel value had exceeded their pre-recession numbers.
The US maritime economy relies heavily on global trading partners and relatively low barriers to trade. China and Japan respectively have been the largest waterborne trading partners with the United States, both as sources for imports and for exports by vessel, followed by Germany, Mexico and Saudi Arabia for imports, and Mexico, Brazil and South Korea for exports. In a 2016 study, as of 2014, according to the National Transportation Statistics database, US imports by water were at approximately 760.9 millimetre short tonnes – down from 2008 levels – and US exports by water were approximately 647.8 millimetre short tonnes – significantly up from 2008 levels. Domestic transportation by water saw the movement of 937.1 millimetre short tonnes, with inland and coastal transportation accounting for 771.4 millimetre of those short tonnes.
According to MARAD, in 2011, there were over 38,700 US flag privately owned vessels available for operation in US foreign and domestic trade, predominantly comprised of dry and tank barges.
There are nearly 200 seaports in the United States. According to the American Association of Port Authorities, cargo activities at seaports contribute 23 million jobs to the US economy. Those jobs create US$1.2 billion in income and consumption, and for every billion dollars in exports from US seaports, 15,000 jobs are created. The AAPA reports that cargo activity at US seaports account for 26 per cent of the US economy, generate US$4.6 trillion in total economic activity, and create US$321 billion in total tax revenues.
Cruise and Ferry transportation also contribute significantly to the US maritime economy. In the past decade, ferry transportation provided nearly 400 million passenger miles annually. In 2010, it was reported that there were 233 ferry operators serving 520 terminals employing almost 640 active vessels. Those numbers represented a significant increase over prior reporting, and the numbers are growing with new services having been recently introduced in New York City and elsewhere. Public ferry transportation operators historically employed over 4,500 people and those numbers continue to grow.
In 2010, according to the US Bureau of Transportation Statistics, the cruise ship industry contributed US$37.8 billion to the US economy. The industry also accounted for over 300,000 jobs and US$15.2 billion in wages. The latest statics from MARAD show 102 cruises serving almost 11 million passengers in the last quarter of 2011.
According to a 2015 MARAD study, in 2013 there were 124 US shipyards spread over 26 states classified as active ship builders. There were more than 200 shipyards performing ship repairs. According to the study: ‘In 2013, the US private shipbuilding and repairing industry directly provided 110,390 jobs, US$9.2 billion in labour income and US$10.7 billion in gross domestic product, or GDP, to the national economy. Including direct, indirect and induced impacts, on a nationwide basis, total economic activity associated with the industry reached 399,420 jobs, US$25.1 billion of labour income, and US$37.3 billion in GDP in 2013.’
Other robust US maritime-related industries include offshore and related services, ship recycling, yacht building, refit, repair and servicing, and recreational boating.
The US is also a leader in the training of seafarers. There are seven maritime academies in the United States, the US Merchant Marine Academy at Kings Point, New York and the six State Maritime Academies (SMAs): California Maritime Academy, Maine Maritime Academy, Massachusetts Maritime Academy, Great Lakes Maritime Academy, Texas A&M Maritime Academy, and the State University of New York Maritime College. MARAD, recognising the economic and national security import of the US merchant marines, provides funding to the US Merchant Marine academy, and partial funding to the SMAs. Graduates of the maritime academies serve at sea and ashore in a variety of professions such as shipbuilding, steamship company operations and port operations.
Finally, the United States remains a critical centre for shipping dispute resolution. The US courts are a preferred venue for litigation as they are charged with the uniform application of maritime law throughout the country, and courts located in maritime centres such as New York, Texas and California are deeply familiar with the issues concerning maritime transportation. Additionally, New York is the home to the Society of Maritime Arbitrators, an organisation formed in 1963 that is recognised internationally as a leading forum for arbitration and mediation concerning maritime and commercial disputes. New York is also home to the American Arbitration Association International Center for Dispute Resolution, providing an alternative forum for arbitration and mediation services. The Maritime Law Association of the United States, formed in 1899, is a membership organisation concerned with the improvement of maritime law both domestically and internationally. Its membership includes lawyers, judges, professors and non-lawyers with significant activity and interest in the field of maritime law.
GTDT: What are the prevailing shipping market trends affecting your country?
Dan Paige: Shipping is a global industry and as such it was deeply affected by the 2008 financial crisis. As the housing market suffered, the stock markets lost value and commodity and oil prices dropped, charter rates dropped, shipyard orders went unfulfilled, and shipping markets saw overcapacity of tonnage. This is best illustrated by reference to the Baltic Dry Index (BDI), which reflects the average raw materials over specified shipping routes on ships of a certain tonnage. During its most volatile years, 2005–2009, the BDI saw what some call a ‘bubble’ reflecting the surge in oil prices. In that time, the index went from relatively consistent levels of below 2,000 to spikes approaching 12,000. Once the financial crisis set in during 2008 and 2009, the BDI, reflecting the precipitous drop in oil and commodities prices, readjusted over the following seven years to more historical levels. The BDI’s worst year since 1985 came in 2016, coinciding with West Texas Intermediate crude priced at US$29.41 per barrel. There were great gains in the BDI in 2017, with the 2016 low of 291.00 rising to a 2017 high of 1702.00, consistent with an uptick in crude prices and optimism in the financial markets. However, the index lost nearly half its value in April 2018, possibly coincident with trade war fears, only to nearly regain its 2017-high three months later. Bulk carrier order books remained high following the 2008 crisis, but the drop in charter rates and overcapacity (along with the time-lag between order and completion of build) finally caught up in 2013, with order books reported to be at their lowest levels since 2007–2008. The trend was up in 2014–2015, but still only about half 2009–2011 levels, and with concerns of overcapacity looming. For the first six months of 2018, iron ore freight rates are on a slight upward trend, with coal rates remaining stagnant.
Oil tanker rates were trending upward reflecting the upward trend of crude prices. During periods where futures prices are higher than spot prices, producers may use tankers for storage to wait out the markets. This can create a demand for tonnage for storage rather than transportation. The success of the US shale production has created additional demand for tanker capacity, and analysts have reported that owners have negotiated with shipyards to convert bulk carrier orders to tankers. Some analysts see higher crude demand in 2018, but an oversupply of vessels coming on line in 2018 may keep tanker rates low. The oversupply may be mitigated by higher scrapping rates. Clarksons reported 11 very large crude carrier scrappings in 2017, the majority of those coming in late 2017.
Container trends tend to be a bit more complex and difficult to pin down. Container rates tend to reflect shifts in demand for manufactured goods, and as reported in The Economist, container rates were hit the hardest by the 2008 financial crisis. Since then, rate trends have been uneven, but Maersk reported a 2017 profit of $356 million, with its carrier operator, Maersk Line, being the largest contributor to its profits. Large owners are building higher capacity ships which lead to greater efficiencies, however trends toward large-scale consolidation and container shipping alliances also affect container rates and competition in the market. According to Drewrys assessment of the World Container Index, container rates in July 2018 were down (below US$15,00) from their January 2017 high (approximately US$1,850).
“The escalation of a trade ware with US trade allies, as well as with China has created uncertainty in US markets.”
GTDT: Are there any recent domestic or international political or legislative developments that may have an impact on your country’s shipping market?
Dan Paige: The most important, and likely most obvious, political development affecting the US shipping industry is the Trump presidency. The goals of the Trump administration to increase US manufacturing, domestic oil production and US exports are worthy. The appointment of Elaine Chao, a member of a prominent shipping family, as Secretary of the Department of Transportation was well-received by the maritime industry. While financial markets were initially buoyant and enthusiastic about the Trump administration’s domestic agenda, financial markets are recently relatively flat on concerns that the various investigations into the conduct of the Trump campaign during and after the elections will overshadow and stall the administration’s economic agenda. Additionally, the escalation of a trade ware with US trade allies, as well as with China has created uncertainty in US markets.
There are a variety of political factors tied to the Trump administration’s agenda having the potential to directly affect the US shipping economy. Increasing political hostility with Iran, including the United States walking away from the Iran Nuclear Deal and reinstatement of sanctions has led to uncertainty in the oil markets and left vessels out of work. Political hostility toward other gulf nations, including Qatar, may lead to further trade restrictions in the region. Rollbacks of Obama-era policy toward Cuba have the potential to curtail economic gain from tourism and trade. Sanctions against Russia passed by the US House of Representatives, and charges brought against Russian operatives working to influence the 2016 US elections may widen the rift between the United States and Russia, placing more barriers to trade. However, Trump administration statements following the recent NATO and G7 gatherings may suggest otherwise. The US withdrawal from the Paris Accords has the potential to stifle US clean energy production. US clean energy exports were projected to reach 5.6 per cent of the global market by 2017, nearly double the projections for 2016. Whether this growth trend continues will depend largely on policy. Trump administration protectionist policies will likely affect US shipping. Relationships with trading partners are already strained with the US withdrawal from the Paris Accords and the Trans-Pacific Partnership, and pending threats to renegotiate the North American Free Trade Agreement and the imposition of higher tariffs on imports have the potential to chill trade.
Finally, while Trump administration rhetoric against Germany, anti-immigration policies and support for nationalist sentiment both in the United States and in Europe may serve the domestic political message of the administration, isolationism is not well received abroad, and the potential for trade to suffer as a result looms large.
GTDT: What are the key regulatory and compliance issues for your country’s shipping market?
Dan Paige: The US regulatory framework applicable to shipping is extensive, and includes both domestic and international regulatory regimes. Most recognisable to any US business interest, both shipping and non-shipping related companies engaged in global trade, is the Foreign Corrupt Practices Act (FCPA). The FCPA is a US federal law that addresses both accounting transparency under the Securities Exchange Act of 1934, and, more recognisably, the bribery of foreign officials in exchange for business advantage. The FCPA applies to any individual who is a citizen, national or resident of the United States and any corporation and other business entity organised under the laws of the United States or of any individual US state, or having its principal place of business in the United States, and applies to foreign persons or companies who violate the act in the United States. Enforcement was stepped up in 2010 with the creation of a special enforcement unit within the Securities and Exchange Commission, and as a result, a cottage industry of FCPA consultants has flourished.
Specific to US shipping, likely the most influential legislation is the Merchant Shipping Act of 1920, also known as the Jones Act. The Jones Act is a protectionist measure with a stated policy ‘. . . to encourage and aid the development and maintenance of a merchant marine satisfying the objectives . . .’ of the act. One of the most restrictive provisions of the Jones Act is that a vessel may not provide any part of the transportation of merchandise by water, or by land and water, between points in the United States to which the coastwise laws apply, either directly or via a foreign port, unless the vessel:
- is wholly owned by citizens of the United States for purposes of engaging in the coastwise trade; and
- has been issued a certificate of documentation with a coastwise endorsement or is exempt from documentation but would otherwise be eligible for such a certificate and endorsement.
Violation of these ‘cabotage’ provisions of the Jones Act are enforceable by substantial fines, or forfeiture or seizure of the cargo.
Nita Ghei, director of policy editing at the Mercatus Center of George Mason University, argues that the Jones Act falls short of its goals. ‘Instead, the growing thicket of regulations increases costs for American consumers and American businesses, and it results in lost opportunities for American businesses.’ Likewise, Senator John McCain, in supporting legislation to repeal the Jones Act, called the act ‘an antiquated law that has for too long hindered free trade, made US industry less competitive and raised prices for American consumers’. Repeal of the Jones Act is opposed by maritime unions (supporters of Secretary Chao), and will likely not be supported by the Trump administration, which has been known to favour protectionist measures. However, there are complexities in the implementation of the Jones Act, particularly concerning offshore equipment supply, that could tilt the Trump administration either way. So far, there is no policy position concerning the Jones Act from the Trump administration.
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?
Dan Paige: Over the past two decades, the sources of ship finance have shifted from predominantly debt financing to larger and larger percentages of equity financing. In 2000, equity finance made up only a tiny fraction of total global shipbuilding finance, whereas by 2015, shipbuilding finance was nearly equally split between debt and equity. As a result of the 2008 financial crisis, banks all but stopped lending in the industry, and many banks left the industry suffering heavy losses in the process. Several shipowners credit large growth over the last few years with increased access to capital markets, while some in the industry caution that many new suppliers of ship finance are unfamiliar with the industry. That, coupled with a potential lack of transparency in smaller operators, may create a risky scenario. The result is an attraction to larger fleets with lower credit risk and the potential for smaller operators to be overlooked by financing sources. As reported in the Financial Times, some credit the growing sophistication of operators and investors with growth of equity finance, while others feel the growth of equity finance coincided with the overcapacity issues following the financial crisis. However it ultimately plays out, the United States is and will likely remain a major source of both bank and capital market financing for the shipping industry.
“Maritime arbitration in the United States remains robust, and brings with it the advantages of lower fees and more transparency and predictability with reporting of arbitration awards.”
GTDT: Have there been any recent significant domestic or foreign court decisions or arbitration awards that impact on your country’s shipping market?
Dan Paige: US and English lawyers will debate the relative merits of their arbitration regimes to the end of time, but from this lawyer’s perspective, maritime arbitration in the United States remains robust, and brings with it the advantages of lower fees and more transparency and predictability with reporting of arbitration awards. The US courts, particularly the federal courts situated in maritime centres, are well versed in the body of US maritime law, and thus are a favoured jurisdiction internationally. There is constant development of US law related to shipping, but probably the most prominent are the recent bankruptcy proceedings related to OW Bunkers and Hanjin Shipping.
The OW Bunkers bankruptcy created a flow of litigation, wending its way through courts in many US jurisdictions. The main issues raised by the litigation are who, if anyone, is entitled to maritime liens as suppliers of vessel necessaries (bunkers) under the US Commercial Instruments and Maritime Liens Act. The litigation has resulted in conflicting rulings from the various jurisdictions as to whether, if any, the physical suppliers of the vessel fuel, OW Bunker (the trader, but in contractual privity with the vessels), or ING Bank (the assignee) are entitled to maritime liens against the vessels for fuel supplied to the vessels. According to IHS Fairplay, as of February 2017, there were ‘. . . nine OW-related district court rulings that have been appealed to the appellate court level in four circuits: six cases in the Second Circuit, and one each in the Fifth, Ninth, and Eleventh Circuits . . . .’ The case has great importance to the US and global shipping community in terms of security for suppliers of vital vessel fuel.
The Hanjin Shipping bankruptcy had its roots in the 2008 financial crisis, when the container industry suffered US$15 billion in losses, according to the Journal of Commerce. Hanjin’s own financial statements reported a loss of $1.1 billion in 2009. But the end came suddenly when Hanjin’s creditors, including the Republic of Korea, pulled their support for restructuring in August of 2016. Two days later, with over 100 ships on the water, Hanjin filed for bankruptcy. While the Korean bankruptcy court issued a worldwide stay preventing creditors from seizing Hanjin assets, US creditors with federal maritime liens were threatening the arrest and attachment of Hanjin assets, including vessels, as they entered US ports. Hanjin petitioned the US Bankruptcy Court, under Chapter 15 of the Bankruptcy Code, to recognise the Korean bankruptcy proceeding as a main foreign proceeding. This had the effect of invoking the US bankruptcy law automatic stay. Practically speaking, the US bankruptcy court, hearing the claims of a wave of creditors, was able to block the enforcement of maritime liens so that the vessels could enter US ports without fear of arrest or attachment, and billions of dollars of goods in transit could then be landed in the US and delivered to their consignees.
GTDT: What is the outlook for your country’s shipping market?
Dan Paige: At the end of 2017, Moody’s presented a stable general outlook for the shipping industry, taking into account a continuing, but not worsening oversupply in the container sector, excess supply in the tanker sector keeping profits low and slow improvement in the dry bulk sector. However, it appears the US government and the current administration are committed to the continued growth of US industry. The US economy is strong, unemployment is low and confidence is high. The Trump administration, however, is faced with the need to balance its idealistic goals with the United States’ position in the global economy. Alienating our trading partners, exiting trade agreements and pursuing protectionist policies arguably weaken trade and growth, which may ultimately weaken the US shipping industry. So far, however, trade over water remains strong in the United States, with Panjiva reporting December 2017 seaborne shipments up 3.8 per cent, and up a total of 4.1 per cent for 2017.
The Inside Track
What are the particular skills that clients are looking for in an effective shipping lawyer?
A shipping lawyer, like any lawyer, must be carefully attuned to the needs of the individual client. Shipping clients are each unique in their goals, and a good shipping lawyer recognises that there is no one-size-fits-all approach to serving its clients. Technical knowledge, understanding global trade and trading routes, and familiarity with the various domestic and international regulatory regimes, as they apply to the vessels and their cargo, are essential. Finally, a balance between transactional experience and litigation experience allows the lawyer to see around the corner in terms of transactional risk avoidance in structuring a deal.
What are the key considerations for clients and their lawyers when arranging finance for a shipping transaction?
There are so many approaches to vessel finance that it is key that the client and the lawyer have a meeting of the minds as to the short- and long-term goals of the transaction. While a client may have relied on a single structure, method or financier in the past, that same model may not fit the present needs of the client. A client must pursue the short term needs of obtaining financing while being cognisant of the short-termlender or investor’s goals of maximising security and minimising risk, goals that are inherently at odds with one another.
What are the most interesting and challenging cases you have dealt with in the past year?
On the sale and purchase side, we were recently engaged on a scrapping deal that posed great challenges. An owner entered into a scrapping deal with Indian buyers at a very favourable price per tonne for the vessel. It appeared too good to be true, and in fact, was. While the vessel was at anchorage, the buyer informed our client that the port authorities found discrepancies and would not allow the vessel into port. They apparently also became aware that the vessel’s class certificates were near expiration on arrival at the anchorage. Opportunistically, the buyers engaged in renegotiation of the sale price, knowing that the vessel was not being allowed to enter the port and that the vessel could not sail from the anchorage without valid class certificates. After long hours of negotiation over great distances, we were in the end able to force the buyers to complete the transaction with little concession from our client.
Daniel F Paige
Paige Law, LLC