Ship management German style

In recent years liner operators have been rushing to Germany for their new tonnage. Several have set up their own ship management companies in Germany. They have done so because, during the 1990s, Germany’s tax laws were amended to encourage private investment in merchant shipping. This developed into the tonnage tax system of 1999, which was amended in 2006 and has fuelled a surge in private investment in shipping in Germany.

Nowadays, private individuals, faced with low investment returns elsewhere, favour the purchase of shares in fonds created to purchase and operate new ships, usually container ships. An ever growing number of finance houses now specialise in managing such projects on behalf of private individuals. Many ship owners have chosen to expand their own fleets by transforming themselves into ship managers, tasked with the job of supervising the construction and operation of these new ships. As markets move, other operators including those of tankers, bulkers, heavy-lift and other specialised tonnage are also showing an interest.

Shares in the single ship-owning company, typically a GmbH and Co. Kommanditgesellschaft (KG), are purchased by private investors with the ship manager retaining a minority ownership. A ship management agreement establishes the duties of the owner and manager during the period of management. Typically ships are delivered from the yard into the hands of liner operators under long-term time charter.

What are the risks for the managers of KG financed ships?

1. Any ship manager taking on the management of a KG financed vessel must first have considered carefully the challenges of working on behalf of a group of private investors.

2. Another challenge is finding sufficient numbers of qualified and experienced shoreside personnel. The successful future managers will be those who plan and invest well ahead in the training of not only crew but also superintendents and operational staff ashore.

How can ITIC help?

There are four simple steps that a ship manager can take to protect himself. Most of them apply to ship managers throughout the world, not just in Germany.

1) Modern contract wordings

In the event of an error or omission on the part of the ship manager leading to financial losses for the ship owning company, the first document that is going to be analysed in detail is the ship management agreement. This document needs to be prepared carefully.

Jan Hungar of Ince & Co., Hamburg has provided his view on some of the issues to consider in a well constructed German ship management agreement or Vertragsreedervertrag.

(i) A Vertragsreedervertrag needs to reflect that the ship manager or Vertragsreeder is more than an ordinary third party ship manager. The Vertragsreeder is often involved as the arranger and “true” buyer/seller of the ship for which the KG and its investors then provide the finance. The contract must therefore balance the interests of the Vertragsreeder as long term manager of the vessel and the interests of the individual investors as legal owners of the vessels on the other.

A Vertragsreedervertrag is a tailor made contract. A BIMCO SHIPMAN agreement is not recommended for use, even when modified.

(ii) The Vertragsreedervertrag should be subject to German law as the contract relates to a German shipfonds vessel.

(iii) The scope of work of a Vertragsreeder, his duties and the power to represent the owners are in general more extensive than those of a third party ship manager and this needs to be reflected in the contract.

(iv) For tax saving reasons it is recommended to distinguish clearly in the contract between certain management activities such as (1) management during construction period (if any), (2) preparation of the management and (3) management itself.

Moreover, it is important that the contract reflects that the management will be conducted almost entirely from within Germany to meet the tonnage tax requirements. Subcontracting to service providers abroad is only permitted in limited areas such as, for example, the provision of ratings.

(v) Exclusion or limitation of liability requires careful drafting to avoid being rendered invalid. In general, exclusion or limitation of liability requires a more specific wording than under English law. In this regard, the following issues ought to be distinguished:

(a) liability arising out of cardinal and marginal obligations under the contract;

(b) liability for death or personal injuries and other claims and

(c) liability arising out of gross negligence on one side and simple negligence and lesser degrees of culpability on the other.

Furthermore, consideration must be given to cover liability risk connected with tax issues. It is still not entirely clear whether the German tax authorities will ultimately side with the owners’ and managers’ interpretation of the tonnage tax laws on conformity issues. The existing statutory instrument is not sufficiently clear in this regard and, as a result, the contract should be sufficiently flexible to accommodate possible changes in the German tax system and their consequences.

ITIC also offers the following guidance to all ship managers worldwide.

2) Co-assurance

Ensure that you are co-assured on all of the ship’s operational insurances, such as P&I, hull and loss of hire. Whether the ship owner manages his own vessel, or contracts some of the duties to a manager, the risk is the same for the underwriter. It is also a condition of ship management cover with ITIC.

3) Operate with appropriate systems and controls ashore

Mistakes can always happen but you can minimise the chances of something being overlooked. Holiday periods and staff absence through illness are a time to be especially careful. It is this time when staff have to handle unfamiliar tasks.

4) Sub-contractors

Be aware that, in the event of negligence by a sub-contractor to whom you entrust certain management responsibilities, it is the “head manager” who will be responsible for his sub-contractor’s actions. Take care to ensure that any sub-contract is on back-to-back liability terms and, essentially, that the sub-manager has in place well chosen liability insurance.

ITIC is available for any ship manager who wishes to discuss their management agreements, loss prevention activities or liability insurances. Contact Roger Lewis on itic@thomasmiller.com or +44 (0) 207 338 0150.

Ince & Co., Hamburg provide German and English law advice and Jan Hungar can be contacted on jan.hungar@incelaw.com or +49 40 380860.