China’s struggling shipping industry should receive a little bit of encouragement from recent forecasts that it is likely to reclaim the title of the world’s largest shipbuilder by value this year, even if that it largely thanks to the even worse recession in neighbour and rival Korea.

Industry watchers, however, still have reason to be pessimistic. Official statistics from November 2012 have revealed a continuing decline in shipbuilding with completed orders, new orders, and handling orders dropping by 18.2 percent, 49.4 percent and 30.3 percent respectively from the same period last year.

Going by that data, some small- and medium-sized shipyards will probably be out of business if they receive no significant new orders in the immediate future. Tan Zuojun, head of the China State Shipbuilding Corp, predicts that half of China’s shipyards will go bankrupt in the next two or three years.

Meanwhile, the Baltic Dry Index, the benchmark for the freight market, stayed under 800 points at the beginning of this year, in contrast to its record high of 11,793 in 2008.

The bad times look like they are set to continue.

“With the international and Chinese shipping markets still in a poor state and with this trend likely to continue for another two to three years, the volume of maritime disputes involving China continues to be on the rise,” says Ik Wei Chong, partner at Clyde & Co in Shanghai.

New types disputes

As the lawyers witness a steady rise in volume of work, the areas of focus are changing as the economic depression bites. This was commonly sensed among attendees from Chinese and international firms at the China Lawyers International Maritime Law Forum 2012, which was held in Beijing/Shanghai last November in partnership with ALB.

“We can see the obvious decrease in cargo damage claims, which consisted of the majority of the conventional cases in the past. It reflects the decline of international trade, especially the export to EU countries during the recession,” says Zhou Qi, partner at Sloma & Co.

The cases relating to marine cargo, hull and P&I insurance continue to provide bread-and-butter work for lawyers, says Chong.

“The cases related to accident claims, such as stranding or sinking, have little correlation to the economic cycle, but to the weather and current,” says Mervyn Chen, partner at Wintell & Co and one of the organisers of the conference.

However, the quantum of claims has certainly gone up. The types of those claims have also become more complicated and are mostly multijurisdictional, adds Chong.

Shipbuilding defaults represented the bulk of work in the past couple of years, when capital flow for foreign owners was strained to the extreme, according to Zhou. Such cases peaked from early 2011 to mid-2012.

“There have been enormous numbers of cases of this kind,” says Zhou. “But what had to happen has already happened.”

Now, lawyers see increased sophistication in the types of disputes, as well as in the transactional or finance structures being contemplated, say Chong.

Another trend is the wide involvement of banks and other financial institutions in maritime disputes.

“With many shipping companies going bust, banks have stepped up their involvement, by seizing and auctioning mortgaged ships,” says Chen.

“The market started to go downhill in 2010. But the banks at first gave the shipping companies a moratorium before killing the goose with the golden eggs,” he says.

But towards the end of last year, frustrated banks began calling in loans.

“The contract is simple. And the default is obvious. The problem is how the bank can recover the money, and where the ship is,” says Chen.

The feedback from the auction market is not that encouraging. With the exception of some certain types of cargo vessels like chemical carriers, few ships can actually bring in cash for the banks.

And lawyers certainly have a role to play.

“We can sense that the commissions from banks are increasing significantly. And quite a few banks are now enlarging their pool of maritime lawyers. Some firms specialised in shipping have caught the eyes of banks,” says Chen, who emphasises that regardless of what part of the economic cycle we’re in, lawyers will find themselves with enough work.

Investors also see potential in the down market, adds Chong.

“There is always good value to be had in depressed market conditions, and it is a good opportunity for cash-rich shipowners and operators to invest. Hedge funds and private equity funds are scouring for investment opportunities in the shipping industry again,” he says.

“There has been a rise in second hand ship sale and purchase activities. Shipbreaking is also on the increase in China. I see LNG-related shipping and passenger cruise industry to be areas of growth not just for China, but in Asia over the next three to five years.”

However, lawyers need to work out is how to collect their fees, otherwise having more cases does not necessarily translate higher revenues for the firm. “It’s been quite a problem. Sometimes clients have no money. But they have been our long-term partners and so we cannot leave helpless,” says Chen.

Labour regulations

Meanwhile, 100,000 Chinese sailors who work on foreign-registered vessels expect better protection after the implementation of the Regulations on the Administration of Foreign Labour Cooperation, effective from last August.

As China’s first special regulations in the field of foreign labour cooperation, it is a milestone in promoting foreign labour cooperation on a healthy development track, says Commerce Minister Chen Deming.

Under present labour outsourcing system, these Chinese sailors are dispatched to their posts on foreign ships via some 150 labour agencies, which have been registered and approved by the transportation and maritime authorities.

Generally, the purpose of the regulations is to place more responsibilities on the labour agencies, requiring them to better protect the rights and interests of the employees, according to lawyers.

“The most meaningful provision is the rise of the entry threshold for labour agencies,” Zhou says.

The regulations have changed the criteria for setting up such agencies, for instance. The paid-up registered capital must be no less than six million yuan ($ 965,000), with an additional three-million yuan deposit, triple the previous requirement of one million.

“These regulations are in response to the chaotic labour outsourcing market a few years ago when the agencies were poorly regulated. Seafarers were sold like slaves, and left unattended when accidents occurred,” says Chen.

The Maritime Safety Administration of China is planning to create a Chinese Sailor Development and Security Centre to supervise labour management and provide assistance to the Chinese sailors claiming compensation.

“The regulations would not directly affect the shipping companies. It is mainly on the relationship between employees and the agencies,” adds Chen.

However, he suggests the deposit should be replaced by mandatory insurance, given the fact that the whole shipping industry is so short of cash.

“The fund, to be deposited into a special bank account or be paid in the form of a bank guarantee, is excluded from the firm’s capital turnover,” he says. “I think it would be better to solve the problem by requesting them to buy high commercial insurance, which is now rather common in many other countries like the U.S. A mandatory insurance could largely reduce the cost of the agency, while also strengthen the supervision and resolve the concerns of the authorities.”

Another notable provision in the regulations stipulates that the labour agencies will bear joint liability with the foreign employers where the employees’ rights and interests are not protected. The agency is obliged to assist the employees in requiring employers to perform agreed obligations and compensate the employees for losses. And when the employees do not get due compensation, they are entitled to request the foreign companies to bear joint and several liability.

But in practice, this article would be difficult to enforce, according to Zhou. He points out there is a precondition for employees taking preliminary legal action before they can demand the involvement of the agency.

“By ‘do not get due compensation’, it means the employees have already taken the necessary legal action but have been unsuccessful. If the agency only starts ‘assisting’ after that, this provision is not really helping because it is really unrealistic for the employees to sue foreign employers by themselves,” he says.

Zhou suggests the agencies be given the rights to file for a lawsuit or arbitration on the behalf of the employees in the first place.

“A provision in the regulations of this kind of authorisation would have made it much easier. All we need is a compulsory item in the contracts with the employer,” he says.

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