Lexology GTDT Market Intelligence provides a unique perspective on evolving legal and regulatory landscapes. This interview is taken from the Shipping volume discussing topics including sources of finance, compliance initiatives and foreign court decisions within key jurisdictions worldwide.
1 What is the current state of the shipping industry in your country?
It is undeniable that Spain has a privileged geographical position in the world. Being located at the gates of the Mediterranean Sea, with access to the Atlantic and the Gulf of Biscay, having a frontier port at the Gibraltar Straits, and one of the last ports on the way to the Americas (the Canary Islands), has undoubtedly benefited Spain in terms of both the shipping trade and the fishing market.
Spain’s strategic location, along with other relevant reasons – Spain has one of the longest sea coasts in the world (7.26km according to the World Resources Institute) – have promoted an ancient marine tradition and a great interest in the sea and the benefits that can be obtained from it. Spain has a population of 47 million and a gross domestic product of US$1,394.12 billion in 2019, representing 1.16 per cent of the world economy. Of the above GDP figure, €68,209 million comes from the transport sector (Q4, 2019).
The fleet controlled by Spanish shipowners comprises 218 vessels, totalling 5,044,994 gross tonnage (GT), representing the highest figure of the past 35 years. According to Puertos del Estado, 564,611,193 tons were handled at 46 Spanish ports over the course of 2019, 28 per cent of which represents cargo in transit (154 million tons). Evidently, the past decade has seen a significant growth in port traffic, from 432,500,000 tons in 2010 to the current historical maximum.
As far as container trade is concerned, Lloyd’s list, One Hundred Ports 2019 (which ranks ports according to annual container throughput figures), includes three Spanish ports in the top 100 in the world, namely Valencia (29), Algeciras (33) and Barcelona (48). These three ports are also included in the top 15 container ports in Europe. Quite significantly, Spain is the gateway to southern and western Europe, especially the port of Algeciras, which is a main trans-shipment hub of the Mediterranean, and handled 5,120,000 twenty-foot equivalent unit (TEU) in 2019. The ports of Valencia and Barcelona combine considerable trans-shipment flows with cargo bound for the Spanish mainland, handling 5,441,000 TEU and 3,324,000 TEU, respectively, in 2019. With an investment of over €62 million in the port of Valencia, Cosco Shipping Ports Spain aims to increase the capacity of CSP Iberian Valencia Terminal by 30 per cent, to 5 million TEU by 2022.
Another key sector of the shipping trade in Spain is the transport of passengers, which is directly affected by tourism and the peninsula islands transport. According to the UN World Tourism Organization, Spain was the most visited country in 2019, with 83.7 million tourist arrivals and US$79.7 billion spending from tourism.
It is also worth mentioning that Spain, as a member of the EU, receives significant aid from the community. In 2019, for instance, 12 Spanish port authorities distributed €68.2 million of EU funds to improve efficiency and competitiveness in ports, while the EU Cohesion Policy programme in Spain has allocated €10 billion for smart growth, €8.5 billion for sustainable growth and sustainable transport and €11 billion for inclusive growth.
Given the outbreak of covid-19 at the beginning of 2020, and Spain declaring a state of emergency in mid-March lasting for more than two months, it is undeniable that the shipping industry has been negatively affected, not only in Spain but all over the world. Even though the extent of the pandemic’s impact cannot be fully ascertained as yet, port statistics of Q1 2020 and of Q1 2019 can be compared to indicate the preliminary effects on the industry. During the first quarter of 2020, port traffic decreased to 174.8 million tons, down 6.18 per cent from the same period in 2019. Accordingly, solid bulk fell by 17 per cent; liquid bulk increased by 0.7 per cent; general cargo faced an overall decrease of 6.4 per cent; cargo in transit to third countries has fallen by 1.4 per cent, ro-ro traffic has decreased by 12.5 per cent. Cruise-ship traffic has seen a dramatic fall of 53.4 per cent during Q1, bearing in mind that it has been nil since March 2020. The number of ships crossing Spanish ports has also fallen by 19.7 per cent compared to 2019. GDP from transport is also indicative of the effects, as it decreased to €60,466 million in Q1, representing a decrease of 6.18 per cent from Q4 2019.
The figures already show the devastating impact of the pandemic on port operations. For this reason, the Spanish government has adopted economic support measures for maritime sector companies, consisting of savings and injected liquidity amounting to €350 million.
2 What are the prevailing shipping market trends affecting your country?
Apart from the general increase of container trade in Spain, another sector that has grown exponentially is the cruise sector. In 2017, for the first time in its history, Spain surpassed nine million visitors coming onboard this kind of vessel. In terms of cruise passengers, Spain has the fourth most important market in Europe, overtaking countries such as France. The revenue generated by the cruise sector in Spain was €476.3 million in 2019, with 587,400 users. Due to covid-19, revenue for 2020 is expected to be less than half of what was generated the previous year.
Moreover, the number of contracts for the construction of specialised vessels has also increased in Spain. In terms of compensated gross tonnage, Spain is the first EU country, and third in the world, in the construction of vessels for the fishing industry; the second country in the world in the construction of oceanographic research vessels; and the second EU country in tugboats. Of the total number of vessels being constructed in Spanish shipyards 39 per cent are for the fishing industry, 26 per cent are tugboats, 9 per cent are passenger vessels and 6 per cent are tankers. In addition, Spanish shipyards focusing on vessel maintenance and repairs have increased their turnover by more than 5 per cent.
While it is true that there is an oversupply in the construction, maintenance and repair of vessels worldwide, the strict environmental regulations in force in European, North American and Asian ports are an incentive for the scrapping and renewal of the most pollutant and obsolete vessels, which could help balance the market situation. Spanish shipyards are an example of constant innovation and ongoing adaptation to the market and have constructed the first three big tugs in Europe driven by liquefied natural gas (LNG) and diesel.
Further, Spanish companies are developing and helping to investigate other technological and innovative projects that will have a significant effect on the industry. This is the case of the projects in place to improve the operational safety of maritime transport using satellite navigation technology. Another example is the research centre that will be installed in Spain to help develop the hyperloop project. The hyperloop will allow to transport containers that have arrived at the Port of Valencia to reach Madrid in 30 minutes – today, such a journey is typically done by railway and takes around five hours.
3 Are there any recent domestic or international political or legislative developments that may have an impact on your country’s shipping market?
Undoubtedly, the covid-19 pandemic has adversely affected the global shipping industry. Volumes of handled cargo have fallen, crew disembarkation has been challenging, with seafarers remaining onboard vessels for extended periods. In June 2020, in response to such issues, BIMCO published the Covid-19 Crew Change Clause for Time Charter Parties 2020. Its purpose is to allow the carrying out of a crew change, without breaching the contract, if covid-19 restrictions prevent it in the scheduled ports of call.
In response to the pandemic, Spain has also published Royal Decree-Law 26/2020, 7 July, on economic recovery measures to deal with the impact of covid-19 in transport and housing. This increases the time frame and the amount of reductions in vessel tax to help alleviate the effects of the crisis. Evidently, as the carriage of goods by sea is indispensable to the economy, the government appreciates the efforts of shipping companies to continue operating so as to provide essential services to territories off the mainland. These measures, therefore, aim to incentivise companies to operate, even when they do not cover their costs.
Another effect of the covid-19 crisis is the obligation of shipowners regarding the inventory of hazardous materials (IHM) process. From 31 December 2020, the EU’s Ship Recycling Regulations require ships of 500GT and above flying the flag of EU countries, or any other country, to carry out an IHM when calling at an EU or European Economic Area port. The pandemic has interrupted compliance with this process and, given the challenges posed to shipowners, a letter was sent to the EU Commission requesting a time-limited implementation or grace period to enable shipping companies to complete the IHM process while coping with covid-19 restrictions and interruptions. Given the significance of maritime trade, the international community seems to support and facilitate shipping companies in an effort to minimise disruption.
Beyond covid-19, the trade dispute between the United States and the EU is a significant ongoing international political development. The current tension revolves around plane subsidies, specifically Airbus (EU) and Boeing (US). The United States won the right to impose tariffs of US$7.5 billion on EU goods over subsidies for European aircraft maker Airbus. The Word Trade Organization has postponed its decision on the EU’s right to impose tariffs against the United States over subsidies to Boeing, due to the effects of covid-19. The EU Commission finds this unjustifiable and damaging to the bloc’s rights of retaliation. The real fear is the possibility that this spiral of protectionism is the beginning of a global trade war that will have a damaging impact on the global shipping market, not just Spain.
Another significant development is China’s recent efforts to expand its operations in Europe. The Mediterranean Sea is an area of special interest for Chinese companies that have acquired Greek ports, so that once they have entered through the Suez Canal they can better transport their products to eastern Europe. The Chinese company COSCO Shipping Ports bought 51 per cent of NOATUM, the leading operator of port terminals in Spain, including the Ports of Valencia, Bilbao and Las Palmas and the dry ports of Madrid and Zaragoza, with the idea of entering Europe from the south. This Chinese strategic plan of investing in Spanish ports and infrastructure could prove detrimental to northern European ports such as Rotterdam or Hamburg.
Further, as the UK became a ‘third country’ as of the 1 February 2020, the transition period has begun, with ongoing negotiations between the EU and the UK for an agreement on a free trade area. It follows that the legal repercussions of such an agreement, or the possible failure to reach one, will be felt by all interested parties and economic operators. Undoubtedly, the result of the negotiations, as significant as it may be, for now remains to be seen.
4 What are the key regulatory and compliance issues for your country’s shipping market? What’s coming up in the near future?
The IMO 2020 or, in other words, the International Maritime Organization (IMO) ruling that sets out the reduction of the limit for sulphur content of ships’ fuel oil from 3.5 per cent mass/mass to 0.5 per cent mass/mass is already in force.
Despite the fact that the regulation entered into force over six months ago (on 1 January 2020), the Spanish shipping industry is still adapting to comply with one of the most momentous regulations in the history of modern trade.
In addition, the carriage ban, a further IMO regulation that prohibits the onboard carriage of non-compliant fuel oil for combustion purposes, unless the ship has an approved exhaust gas cleaning system retrofitted, took effect on 3 March 2020.
Amid the various challenges arising from these two rulings, the main ship operators remark the importance of training the crew adequately and having all the required documentation in order, as well as making contingency plans.
Regarding a means of compliance, the major Spanish shipping companies have opted for different alternatives. By way of example, Balearia has bet heavily on LNG, planning to invest more than €60 million in the retrofitting of five of its ships. Moreover, they are building the first two ferries with dual LNG engines that will sail in the Mediterranean. On the other hand, the Group Armas Trasmediterránea has diversified its approach and burns only compliant fuel in some of its vessels and will retrofit scrubbers in others.
The Jules (Joint Operation for Ultra Low Emission Shipping) project, in which Navantia is working with 39 other companies, justifies a special mention. This project aims to find systems for assessment and evaluation of the overall energy efficiency of the ship throughout its life cycle, from construction to scrapping, aiming to reduce the maximum levels of greenhouse gases for each type of vessel.
Another key issue is lashing, which will be effected by the stevedores and not by the crew. No longer muddy waters; there is now official confirmation that the lashing of containers to the ship in European ports and waters is responsibility of stevedores and not a ship’s crew. This announcement – a joint declaration from the European Transport Worker’s Federation, the International Transport Worker’s Federation and the International Dockworkers Council – is likely to be met with a mixed reception given the potential cost implications to some operators who request this task of their crew. The three organisations agreed that the use of the ship’s crew to complete the lashing of containers to ships runs an increased risk of ineffective completion, as well as a threat to the crew’s health and safety. It is argued that the crew, fatigued from managing the manoeuvres of entering and exiting ports, plus the general navigation of the vessel, are not sufficiently equipped for the task that they, until now, have regularly undertaken. According to the three representative organisations, the benefits of this change will not just be felt by the crew, but will also affect the environment, as avoidable cargo losses at sea will be minimised.
5 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?
Traditionally, the Spanish shipping industry’s main source of credit has been the Spanish banks. Despite some uncertainty flowing from a previous tax lease scheme, and challenges under European legislation, this had been largely addressed by a new scheme launched in 2012. However, uncertainty has once again been disseminated by a recent European Court of Justice (ECJ) decision which overturned a decision of the General Court of the European Union which had itself annulled the decision of the European Commission on 17 December 2015 (Joined Case T-515/13 and T-719/13 Spain and Others v Commission). The Commission decision, which had determined that certain tax measures associated with the Spanish tax lease system constituted illegal state aid and were partially incompatible with the internal market. The matter has been referred back to the General Court. The Spanish tax lease system, which was seen as very favourable to the tax shipbuilding industry, will doubtless suffer from this uncertainty, as will the ship sector.
The regulatory framework for the financing of newbuilds has certainly improved with the modernisation of the applicable legislation in the System of National Accounts (SNA) 2014.
Spain has a well-developed and detailed legal registral infrastructure for the protection of the interests of those financing ship purchase and ship building. It has two merchant registries: the ordinary registry; and a second registry based in the Canary Islands that offers significant tax benefits but that also requires specific corporate structures in order to have the benefit of the same. Further flexibility is introduced by article 94 of the SNA, which permits, in certain circumstances, a Spanish vessel to be temporarily flagged in the place of residence of the charterer for the duration of the charter and for any other type of chartering contract that temporarily transfers possession of the vessel.
An advantage to those seeking ship finance in Spain is the degree to which Spain can be said to have a transparent framework regarding the rights of priorities of the financiers of ships. Spain is a signatory of, and has implemented, the Geneva Convention on Maritime Liens and Mortgages 1993, which some regard as offering greater certainty and definition to a marine financier and which is also is one of the few states to have ratified and implemented the Arrest Convention 1999.
It seems undeniable that the most recent ECJ decision will have a negative effect on Spanish ship finance, owing to its dependence on the tax lease system.
6 Have there been any recent significant domestic or foreign court decisions or arbitration awards that impact on your country’s shipping market?
In High Court Judgment 160/2020, 3 March 2020, the Court reinforced the prior case law rules that laid down the requirement of a cause-effect relationship between the insufficient qualification of the master and the eventual casualty to exclude the cover of the insurance policy. This decision is of special relevance given that, despite applying article 758 of the Spanish Commercial Code (hereafter, CCom) that is no longer in force, it serves for the interpretation of the current regulation set out in the Spanish Shipping Act.
The plaintiff, owners of a ship that sank for unexplained reasons while fishing in international waters, filed an action against their hull and cargo insurance company on the grounds of the latter’s refusal to compensate its insured for the losses.
In this scenario, while the defendant based its refusal to pay the owners for the losses arising from the sinking because of the unseaworthiness of the ship at the time of the accident, and since the captain did not hold the required professional qualification, the plaintiff claimed that the accident was covered by both the hull and cargo policies, the fact that the captain was insufficiently qualified was not directly related to the cause of the accident, as per the requirement set out in article 756 CCom.
For better understanding, it is convenient to cite the revoked article 756 CCom:
Insurers shall not be held liable for damages to the subject matter insured, from any of the causes listed below, even if they are not expressly excluded from the policy’s coverage: … 7. Lack of the compulsory documents specified in the provisions of this Code, in the Ordinances and Regulation of the Merchant Navy, or omissions of another kind by the Master that amount to a breach of the administrative rulings, unless the insurance policy covers barratry by the Master.
On the basis of the above articles, the High Court concluded that in order to exclude the insurer’s liability it does not suffice to allege the master’s lack of qualification, but it is also required that such lack of qualification has caused the accident, which, in light of the facts of this case, did in fact occur. It was, therefore, proven that the master was overwhelmed by the events that took place, lacking the necessary qualification to handle them with the diligence and professionalism required from a seafarer.
The Spanish High Court harshly reproached the master for his behaviour when dealing with the accident, asserting that his acts were the direct cause. The master stated that he found out about the ingress of water through the chief engineer and instead of inspecting and assessing the damage he remained on the bridge and proceeded directly to activate the sinking alert. Further, he did not take charge and instead acted under the chief engineer who ordered the evacuation of the ship. In clear breach of his duties, the master gave no order to close the three watertight doors to ensure the vessel’s buoyancy, which would have prevented the flooding despite the fact that it was a rather easy operation and that there was enough time to do so – the ship took 10 hours to sink.
The judgment determined that the captain’s lack of qualification caused the damage, which falls outside the insurance coverage.
This decision is important in construing the regulation, in understanding where there is a cause-effect relationship between the master’s insufficient qualification and the damage suffered, the insurance company is not obliged to pay out.
7 What is the outlook for your country’s shipping market? Which sectors are likely to grow, and which not?
One of the main forces of change in the industry is sustainability. The IMO 2020 sulphur cap, which entered into force on 1 January 2020, has already altered the maritime industry, with operators switching to alternative, low-emission fuels or opting for scrubbers. This is only the beginning – the forecast until 2023 is that the use of distilled fuel will increase because it is one way of achieving the 0.5 per cent target. Considering a more distant future, the Iberian Peninsula has enormous potential as an LNG supplier in the maritime sector. It is estimated that by 2030 the ports of the Iberian Peninsula – most importantly Algeciras, Las Palmas and Barcelona – will supply up to 2 million m3 LNG, which will increase to 8 million m3 by 2050. Accordingly, it could, therefore, be estimated that the heavy fuel oil sector will decrease considerably as the alternative-energy sector grows in parallel.
Industry focus on sustainability is exemplified by the European Green Deal, which acts as a roadmap to making the EU climate neutral by 2050, meaning that there will be no net emissions of greenhouse gasses. The proposed European Climate Law aims to turn a political commitment into a legal obligation, and therefore a trigger for investment to ensure a just transition. As transport accounts for a quarter of the EU’s emissions, the deal calls for a 90 per cent reduction in these emissions. The move towards a green economy will be supported by financial and technical assistance given to affected parties, with at least €100 billion to be spend between 2021 and 2027 (Just Transition Mechanism). In its own efforts to curb emissions and promote sustainability in transport, the Spanish government intends to present the Law on Sustainable Mobility and Financing of Urban Transport by the end of 2020.
The Spanish shipping industry is moving towards industry 4.0 technologies (eg, automated systems, blockchains and artificial intelligence) to enhance connectivity, communication and automation through advancements in machine learning, data exchange and real-time control. Spanish state-owned company Navantia has implemented the Shipyard 4.0 model, applying and optimising new technologies to reduce costs, increase productivity and improve performance. To promote and increase disruptive innovation and entrepreneurship, Spanish port authorities have invested €25 million in corporate open innovation model PORTS 4.0. This is intended to facilitate the transition of the port logistics sector to Industry 4.0, encompassing smart technologies and artificial intelligence in the context of the fourth industrial revolution.
The Inside Track
What are the particular skills that clients are looking for in an effective shipping lawyer?
Effective shipping lawyers must have sound knowledge of applicable substantive and procedural law to guide clients, as well as a good understanding of foreign laws. Owing to the international nature of shipping, round-the-clock work is required, together with the capability to lead teams from different backgrounds and locations.
Finally, a truly relevant skill is imagination. An effective shipping lawyer must offer clients innovative solutions that, despite being grounded in the applicable law, may set a path to new case law.
What are the key considerations for clients and their lawyers when arranging finance for a shipping transaction?
A safe and sound jurisdiction will create an adequate environment for profitable finance operations. Players in the finance sector must perceive a flexible, safe and active system. Despite uncertainty owing to recent decisions in T-515/13 and T-719/13, the outcome should affect only previous finance operations, whereas the new tax lease scheme received a decisive endorsement from the European Court of Justice which dismissed the case brought by Netherlands Maritime Technology against the European Commission’s decision of 20 November 2012, approving such a tax lease system.
What are the most interesting and challenging cases you have dealt with in the past year?
In one case, a Spanish court had the opportunity to render a judgment on a multi-million euro liability coverage case involving the owners of an FPSO vessel and their insurers against the liability insurer of a Spanish manufacturer of one of its key elements. Another court, after more than four years of proceedings, has condemned a freight forwarder for demurrages incurred by nearly 70 containers at a port of destination in Iran. The decision sets a clear and accurate view of the interpretation of the time bar regime applicable to actions related to demurrages, their calculation and the liability of the freight forwarder independently of its inclusion, or not, in the bills of lading.
