“Third Proviso” to the Jones Act

“Third Proviso” to the Jones Act

Introduction

The disposal of a ship after it reaches the end of its useful life (which may vary depending on the type but is typically around 20 years) is an important matter that has far-reaching ESG consequences. While some of the regulatory framework developed in relation to ship recycling has not become effective for international application, lenders and insurers have started to require some of the terms of that framework by contract, and this note discusses the contractual provisions that might be found in a loan agreement relating to the various ship recycling regulations

What is the Jones Act?

As a refresher, the Merchant Marine Act of 1920, more commonly known as the Jones Act, requires that any ship carrying merchandise between two points of the United States be built, owned, and crewed by U.S. citizens as prescribed by the Jones Act. The vessel also must be U.S.-flagged, meaning that it operates under American laws. The requirements for U.S. coastwise trade are more fully set forth in our prior Simply Speaking post here.

What are the consequences of violating the Jones Act?

Generally speaking, the penalty for violating the Jones Act is forfeiture of the relevant merchandise in question or a monetary fine. In the aforementioned case involving the seafood company, the fines totaled approximately $350 million. Serious violations may result in more severe penalties such as imprisonment, the complete loss of coastwise trading privileges or even the forfeiture of the vessel.

Are there any exceptions to the Jones Act requirements?

A waiver may be obtained under the Jones Act upon a demonstration that such waiver is “in the interest of national defense”, which may be requested by the Secretary of Defense, or upon determination by the Administrator of the Maritime Administration (MARAD) that no coastwise-qualified vessels are available and capable of providing the proposed transportation.

In addition, there are a handful of “provisos” or exceptions that are written into the statute. For example, under specified circumstances, the coastwise trade prohibition does not apply to transportation of hazardous waste. Another one, which has gotten the public attention, is the so-called “third proviso” which exempts the transportation of merchandise between points in the continental United States, including Alaska, involving routes in part over Canadian rail lines and connecting water facilities if the routes are recognized by the Surface Transportation Board and rate tariffs for the routes have been filed with the Board.

What is the status of the case involving the seafood company?

United States Customs and Border Protection (CBP) assessed fines on the seafood company for allegedly not complying with the requirements under the third proviso to the Jones Act. The seafood company has been transporting seafood from Alaska to other parts of the United States by utilizing the third proviso – that is, first by having seafood first transported from Alaska to New Brunswick, Canada, by a non-Jones Act vessel, then by trucks and trains within Canada, then by a non-Jones Act vessel to other parts of the United States. CBP had previously ruled that a tariff filing (as prescribed by the statute) was not required for third proviso compliance. However, CBP has now indicated that a lack of tariff filing is one of the reasons for non-compliance by the seafood company.

The seafood company has now commenced legal action to prevent CBP from enforcing the fines indicating that all details of its transportation practice were made available to CBP and the general public, and such arrangement was approved by CBP.

The case is now pending a ruling from a United States federal court judge in Alaska, and such ruling will have far-reaching implications on the Jones Act coastwise trade and industry practice on compliance.

Given the severe consequences, is there a way to pre-clear Jones Act compliance with the US government?

One of the points of contention from the aforementioned case is whether the claimant should have sought a letter ruling when it changed its route to include the new rail line when CBP had previously approved a similar route.

Letter rulings may be requested from, depending on the subject matter, CBP, Coast Guard or MARAD, and depending on the nature and issuing office, some prior rulings are posted publicly. Parts of the Jones Act (and the American Fisheries Act) dealing with citizenship determination and coastwise trade requirements are vaguely drafted and subject to different interpretations, and it is therefore often advisable to seek a letter ruling in order to obtain certainty on the contemplated transactional structure.