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?
The stability in oil prices following the agreement between OPEC and Russia to cut oil production has helped the shipping industry to recover to some degree from the impact of the plunge in oil prices from 2014 to 2017. The strength in the UAE’s shipping industry lies in its strategic position as a logistics centre in the Middle East and its leading port companies continue to see year-on-year growth.
The UAE comprises seven emirates – Dubai remains the major maritime centre, but other emirates also make their own important contribution to the shipping industry. UAE benefits from its vital geographic location connecting the Red Sea, East Africa and the Indian subcontinent.
The Jebel Ali port operated by DP World is the largest port in the Middle East and world’s ninth-largest container port. It is reported that more than 5,500 companies work in the maritime sector in Dubai, supporting the economy with 76,000 jobs. In 2018, Dubai’s GDP increased by 1.9 pr cent compared to the year before and the transportation and storage sector is reported as contributing to the GDP at 12 per cent. Transport and logistics sectors are key to UAE’s economic growth.
Abu Dhabi ports have also shown continuous growth as the UAE’s maritime trade hub covering general and bulk cargo, container and increasing roll-on/roll-off traffic. There is an influx of investment into the new container terminal at Khalifa Port. Fujairah is another maritime hub in the UAE and its infrastructure will be subject to further development by Abu Dhabi Ports including deepening of berths and expanded storage facilities, which reportedly involves investment of 500 million dirhams.
The UAE hosts a number of large shipowners including branches of international owners. The offshore industry in the UAE is weathering the storm relatively better than in some other parts of the world, with vessel utilisation rates in the region being higher than the global average. The UAE remains an important base for a number of offshore shipowners.
The UAE government has maintained its efforts and goals to create conditions for the growth of the industry and increasing importance of the UAE as a major maritime centre.
2 What are the prevailing shipping market trends affecting your country?
The country’s unique position in the market can be attributed primarily to the UAE’s geopolitical position and the vision of the UAE government. The government has recognised the need for diversification in light of global economic crises and, more recently, the strategic vision of the country is to build on the strength of the country by focusing on technology, innovation and continuous growth of Dubai as a logistics centre.
The country is preparing for EXPO 2020, which drives substantial investments in the transport and logistics sectors. The UAE is also set to benefit from China’s One Belt One Road initiative. This initiative is a state-backed initiative to connect Asia, Africa and Europe through a ‘belt’ of ‘overland corridors and a maritime “road” of shipping lanes’. The UAE is among 71 countries that will be connected in this initiative.
3 Are there any recent domestic or international political or legislative developments that may have an impact on your country’s shipping market?
In May 2019, four vessels, including two Saudi tankers, a Norwegian vessel and a UAE vessel, were attacked off Fujairah in the Gulf of Oman. The attacks came amid rising tensions between the US and Iran. Following the attacks, an extraordinary meeting of the Lloyd’s Market Association Joint War Committee took place at which Lloyds widened its list of areas in and around the Gulf posing ‘enhanced risk for marine insurers’ after attacks on ships off the UAE.
In June 2019, the Gulf of Oman witnessed another attack on two vessels – a Norwegian and a Japanese vessel. These vessels were significantly damaged and the Norwegian vessel was completely abandoned and its crew members were rescued. The attacks occurred in international waters 16 miles away from Iran and 80 miles away from the UAE.
In July 2019, Iran seized a British flagged vessel and a Liberian flagged vessel operated by a British company; and the latter has been released shortly after her detention. The British flagged vessel and her crew have been detained. While the Iranian government declared that the reason for detention is that the vessel has violated the international navigation rules, the UK government commented that there cannot be compromise on freedom of navigation in the straits of Hormuz.
Although the UAE government confirmed that these attacks did not affect the flow of vessels in the Arabian Gulf and Gulf of Oman, the prices of hull and machinery and cargo insurance premiums are likely to increase. It is yet to be seen whether the increase in premium prices will increase the cost of shipping.
In terms of legislative developments, in February 2019 new Executive Regulations on Civil Procedures (Executive Regulations) came into force in the UAE. The Executive Regulations have modernised the notification of court claims, simplified the procedure of enforcement of foreign judgments and arbitral awards and introduced various procedural changes.
The UAE remains in need of a new maritime law, with the current Maritime Code dating back to 1981 and lacking in a number of areas to properly cater for the country’s growing importance as an international shipping centre. The government has started working on a new draft law. Input is being provided by civil law and common law lawyers to identify best practices and solutions. There is no set date for when the law will be introduced but the maritime community is watching this space with great interest. It is hoped that the new law will address a number of issues including making changes that would transform the UAE into an attractive flag state.
4 What are the key regulatory and compliance issues for your country’s shipping market? What’s coming up in the near future?
The sanctions against Iran remain a relevant issue in the UAE, as has been the case for a number of years. Despite the suspension of the US and the EU sanctions regimes in January 2016 the majority of UAE banks remain reluctant to do any business involving Iran for the fear of repercussions from their American banking partners, which made it difficult for businesses to pursue their legitimate trade with Iran. The re-imposition of sanctions by the US announced in May 2018 has impacted the trade between Iran and the UAE. The sanctions landscape is set to be difficult to navigate in the year ahead. In 2019, the US has imposed further sanctions on corporations that the US Treasury says that they have connections with the Iranian Revolutionary Guards and on the Iranian Supreme leader and other top officials. The US has also ended the exemptions from oil sanctions previously granted to certain countries except for Iraq. It remains to be seen whether the EU will impose sanctions on Iran in light of Iran’s announcement to scale back some of its commitments under the 2015 nuclear deal and the escalations around the Strait of Hormuz.
The UAE has introduced an embargo against Qatar in June 2017 and it remains in place at the time of writing. The embargo affects the ability of Qatari vessels to call at the UAE (and embargoing states) ports and restricts transportation of cargo originating in the Qatar between Qatar and embargoing states.
In July 2019, the UAE Cabinet issued a resolution identifying the list of activities in which up to 100 per cent foreign ownership of local companies are permitted. The list includes various sectors such as agriculture, construction, manufacturing and transportation. It includes the following maritime activities: sea and coastal water cargo transportation, internal waterways cargo transportation, chartering of commercial vessels, piloting and towage of vessels and marine towage of speedboats and marine bicycles. The resolution provides for a requirement of a minimum share capital in certain activities. The implementation may differ from one emirate to another. The resolution comes as an implementation of a Federal investment law issued in 2018. The law and the resolution are seen as a positive step in attracting foreign investments and are likely to have a positive impact on the economy in general.
The UAE is also preparing to ratify the Maritime Labour Convention and, as part of that process, the Federal Transport Authority has introduced a mandatory insurance requirement. The FTA’s Circular No. 1 of 2018, which entered into force on 20 February 2018, requires all UAE flag ships and all foreign flag ships of 200 gross tonnage and more operating in the UAE waters to have insurance in place with identified insurance providers to cover certain financial liabilities to seafarers.
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?
Traditional and Islamic ship financing in the UAE has been fairly quiet in the past year. There is some availability of local capital, which sets it apart from many other jurisdictions, but that activity remains limited. The international banks remain cautious and have not established dedicated shipping desks in the UAE. This has presented an opportunity for the UAE local banks to build stronger relationships with local shipowners.
Difficulties remain for owners and operators to get consistent financial support. The lending requirements and cost of funding from traditional finance sources continue to increase. There are indications that the government is considering the challenges faced by the local market and is working on solutions to address them. With that, Islamic finance have proven itself to be a competitive method of funding for the shipping industry in the UAE.
6 Have there been any recent significant domestic or foreign court decisions or arbitration awards that impact on your country’s shipping market?
In a landmark final judgment, the Dubai Cassation Court confirmed that despite the absence of a shipowner’s liability toward a bunker trader who supplied the vessel with bunker purchased by a previous charterer of the vessel, the security amount deposited by the shipowner to lift the arrest will be forfeited in favour of the arresting bunker trader. The Court confirmed that the previous charterer (rather than the shipowner) is liable to the bunker trader. The court concluded that the shipowner does not have the standing to challenge the court of appeal decision.
The significance of this judgment is that shipowners may not have confidence in their ability to defend UAE court arrest orders against their ships, and this will open the door of auctioning ships in the UAE without giving shipowners the opportunity to challenge the actions to protect their own vessels.
7 What is the outlook for your country’s shipping market? Which sectors are likely to grow, and which not?
The outlook for the UAE shipping market is relatively positive.
In a recent survey conducted by Menon Business Economics Group and DNV-GL, Dubai was ranked as the ninth shipping centre for 2019, climbing up one rank from the same survey conducted in 2017. The experts predict that Dubai will continue to grow as a maritime hub and could be ranked as one of the top five maritime centres by 2024. In the same survey, Dubai was ranked in sixth place for port and logistics services, highlighting its growing importance as a logistics hub for both shipping and aviation industries. Dubai was described in the survey as the ‘rising star’ in terms of attractiveness and competitiveness. Dubai obtained high scores in relation to the Burden of Customs Procedure Index and experts ranked it in the top four cities for setting up an operational office. All these factors point to Dubai’s potential ability to climb up the rating of the major shipping hubs in the years to come.
The government is implementing a number of initiatives to ensure that Dubai’s potential comes to fruition.
The Dubai government has recently launched the Dubai Industrial Strategy 2030, which identifies the maritime sector as one of the six priority sectors. The strategy forecasts that Dubai’s total GDP will increase by 160 billion dirhams. In the maritime sector, the strategy aims to capitalise on the status of DP World as one of the largest port operators in the world.
Dubai is also implementing the Maritime Sector Strategy to develop, regulate and promote Dubai’s maritime sector with a vision to create a leading global maritime centre. The Dubai Maritime City Authority is implementing the strategy and is leading the initiatives in the maritime sector.
The Inside Track
What are the particular skills that clients are looking for in an effective shipping lawyer?
Clients in the maritime world rightly expect their lawyer to have a thorough understanding of their business as well as the legal framework in which it operates. Shipping is an international business and so a lawyer who has international exposure is essential. Like clients in many sectors, shipping lawyers also need to be responsive to their clients and be able to give definitive and clear answers in a timely fashion.
What are the key considerations for clients and their lawyers when arranging finance for a shipping transaction?
In our opinion the key considerations are:
- Availability: this may sound obvious, but there are differences geographically and between the sectors as to what type of lender will be willing to lend at a particular time in a particular market.
- Price: most owners will accept more restrictive covenants and provide greater security if the price is right. This does not mean the margin alone but duration of the loan balanced with the repayment schedule.
- Flexibility: where underlying employment contracts are highly sought after, it is vital that owners enjoy a degree of freedom to enter into a variety of contracts, change flags or trade in some more difficult areas.
- Trust: finally, and most importantly, there is the personal element. Most finance documentation will be relatively lender-friendly, meaning that any obliger, not just the primary debtor but any security provider, can rely on the lender to work with them, not against them when matters are difficult.
What are the most interesting and challenging cases you have dealt with in the past year?
It is difficult to choose, and interesting cases are often the most challenging too. We have had a number of cases dealing with ships abandonments and the opportunity to safeguard the interests of port operators, ship agents, crew members and insurers in the region. The most interesting cases handled by our office last year relate to representing the vessels that were attacked in the straits of Hormuz.