Vessel Hypothetical - A Lawyer's Perspective

Originally published in Marine Money

[It is 1985, a shipowner and broker decide, over drinks at the Four Seasons in New York, that the time is right to build a new vessel.]

After the euphoria of the evening wears off, the questions begin to swirl. How do we choose the right yard? Have we timed the market correctly? Where will we get the money?

We haven't heard too much about our owner's business. He has made a good deal of money in the United States – his business is buoyed by Uncle Sam. His is one of the lucky companies that had successfully negotiated Operating Differential Subsidies ("ODS") with the U.S. Maritime Administration. The U.S. government is contractually obligated to provide these funds to the owner who happens to operate a fleet of primarily U.S. flag vessels in certain desirable liner trades. In 1985, one of these contracts alone is worth up to $2 million per year per vessel. Despite the collapse in the tanker trades, our owner is doing quite well.

But his success could easily be eclipsed by a making the wrong newbuilding decision – what will the market demand in two years, when this idea finally results in a vessel? Yes, he has an innovative design that he expects will capitalize on commercial demands and military cargo needs in the coming years. However, is he thinking too big? Will speed and propulsion prove to be more important? Will the addition of ro-ro ramps increase the marketability? Will the design work? Which yard is best suited to build a high quality vessel efficiently with this unique design? Japan, Europe, Scanyards? These questions and many others keep him up at night, but not for long. Soon, he sits down with his counsel and they map out a plan of attack to identify the shipyard, negotiate the contract, secure construction and long-term financing, document the vessel and secure her long-term employment. The uncertainty and risk don't disappear, but identifying the moving pieces and developing a timeline for the process make everything seem more manageable.

A note on timing: remember that it is 1985 – before the technology boom. The efficiencies that we enjoy from modern conveniences such as e-mail, cell phones, pdfs, faxes, texting and tweets, couldn't possibly have been imagined. Deals took time. Negotiations were handled in person. Contracts were typed. It was not uncommon to create redlines or track changes in a document by hand. This work was painstakingly slow but, when compared to today, refreshingly...

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