Maritime

Action Item: A recently published Rebuild Determination Letter issued by the National Vessel Documentation Center (“NVDC”) adds a significant new criteria in making Jones Act rebuild determinations by calling into question any previous rebuild activity in which a vessel may have been engaged. To ensure future compliance with coastwise trade requirements, industry stakeholders must now consider the additional “cumulative steelweight” test articulated in the recent determination when assessing the extent to which foreign work has been performed on a vessel’s hull or superstructure.

New Development

On May 25, 2017, the NVDC posted a Determination Letter on its website concerning proposed modifications to be made in a foreign shipyard to two vessels, the Horizon Enterprise and Horizon Pacific. As is standard practice for such cases, the owner/operator of the two U.S.-flagged vessels in question submitted a request to the NVDC to determine whether such modification would jeopardize their respective Jones Act eligibility.

Significantly, the NVDC response created a new criteria when evaluating coastwise eligibility following rebuild work, essentially adding a new factor that contemplates whether a vessel has undergone multiple foreign rebuilds. Now, the NVDC will consider the cumulative steelweight changes of all foreign rebuilds before rendering its decision, signaling an affirmative change in its position on rebuilds that has been in place for decades.

Background

Any vessel with a coastwise trade endorsement, which is later rebuilt in a foreign shipyard outside the United States, is no longer eligible to engage in the coastwise trade. The NVDC makes foreign rebuild determinations upon request from interested stakeholders and considers whether alterations to a U.S.-flag vessel, performed in a foreign country, exceed permissible thresholds that may result in revoking the privilege to engage in the coastwise trade.

The NVDC uses a two part test to determine if a steel-constructed vessel is deemed rebuilt foreign. First, the NVDC evaluates whether a “major component” of the hull or superstructure was added to the vessel. 46 C.F.R. § 67.177(a). A definition of the term “major component” is not available in statute or regulation, thus the NVDC must refer to practice and precedent in evaluating what constitutes a major component. Generally, a “major component” refers to separately built units which are added to a vessel prior to the work, and which weigh more than 1.5 percent of the steelweight. In this case, the vessels were undergoing relatively minor modification of the transverse coaming plate well below the 1.5 percent threshold, and thus within the allowable limit.

Second, the NVDC evaluates whether the work performed on the hull or superstructure constitutes a “considerable part” of the hull or superstructure. A vessel is not considered rebuilt when work performed on its hull or superstructure constitutes 7.5 percent or less of the vessel's steelweight prior to the work. 46 C.F.R. § 67.177(b). Under the considerable part test, the NVDC found that the proposed modifications of new foreign steel was also within the allowable 7.5 percent rebuild weight threshold.

Therefore, in this case, the vessels met the requirements of the rebuild test, and the performance of the proposed work was determined to not adversely affect the eligibility to engage in coastwise trade. However, there is now additional risk in failing to evaluate a vessel’s full rebuild history, including whether a vessel has previously submitted a request for a Determination Letter from the NVDC.

Analysis

In previous rebuild determinations using the considerable part test, the NVDC has historically relied only on the application being submitted at the time of the work in question. It did not consider repair or modification work previously accomplished in a foreign shipyard.

However, in this determination, the NVDC, in a rather vague reference to some previous rulings, stated that while cumulative foreign work on a vessel may have been considered in prior determinations, such an analysis had not been included in the determination itself except for one previous ruling. Unfortunately, the NVDC neglected to provide the citation to the actual letter of determination on which it was relying, leaving industry stakeholders to independently surmise on what basis the NVDC was relying.

Now, in this most recent determination, the NVDC articulated that the vessel had received multiple foreign rebuild applications for the same vessel, and thus the allowable steelweight under the “considerable part test” should be reduced by the cumulative steel weight changes of previous foreign rebuilds. Furthermore, the NVDC stated that the threshold for what constitutes a major component under the "major component test" should be based on that same original steelweight, bringing both parts of the test in line with requiring historical analysis. In framing its determination absent a well-founded and clearly articulated basis, the NVDC essentially ignored decades of precedent on which shipbuilders and shipowners have relied on when performing repairs in a foreign shipyard to ensure continued eligibility of such vessels to engage in the coastwise trade.

Moreover, by deciding to take into consideration the historical rebuilding of a particular vessel prior to issuing a rebuild determination, the NVDC deemed its interpretation to be consistent with the intent of the Jones Act. Essentially, the NVDC found that the Jones Act was intended to deter circumstances related to the cumulative effect of multiple instances of foreign rebuilding, as well as the associated applications for determinations seeking approval of that work. Consequently, the NVDC found that such a conservative approach aligned not only with the intent of the Jones Act mandate, but also with prior determinations even though the NVDC has not previously articulated the impact of cumulative effect of foreign work.

Conclusions and Recommendations

This development is significant for any company owning or operating vessels in the coastwise trade that may at some point undergo repair or modification work in a foreign shipyard. Despite the NVDC’s assertion that it considered the cumulative effect of foreign repair and modification work in one previous ruling, the fact of the matter is that the cumulative effect has not been taken into account previously in decades of rebuild determinations. Accordingly, owners and operators of vessels engaged in the coastwise trade must now take into account this new decision in their long-term planning on how work in a foreign shipyards could impact the coastwise eligibility of their vessels. Failure to adequately plan and fully take into account cumulative steelweight changes from previous foreign rebuilds could cause a vessel to lose its eligibility for a coastwise endorsement.