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?
While 2019 was a somewhat disappointing year for the economy in general, it was overall a good year for the shipping industry in Panama. The economy grew by 3 per cent in 2019 – a 0.7 per cent decrease from 2018. This outcome underperformed estimates from the World Bank, the International Monetary Fund (IMF), United Nations Economic Commission for Latin America and the Caribbean, and the quite conservative 4 per cent prediction given by the new government that came to power in July 2019. This marked the continuation of a downward trend – in a decade that started with a brisk 5.8 per cent growth and saw its high point in 2011 with a robust 11.3 per cent growth. There was a glimpse of a possible reversal of this trend in the first quarter of 2020, but then the covid-19 pandemic struck. Panama’s economy is now expected to contract in 2020 by at least 2 per cent, the first time this has happened since the 1980s – the years of the Noriega dictatorship, and Latin America’s ‘Lost Decade’ (when Latin America’s per capita GDP contracted by 8.3 per cent ). Unemployment could be as high as 25 per cent at the end of 2020, according to some experts. This comes as shockingly sad news for Panamanians, given that, after an official visit in early 2020, IMF experts had predicted that the country’s GDP would grow by 4.8 per cent in 2020.
Despite this somewhat lacklustre scenario, Panama’s shipping sector proved, once again, to be the economy’s most resilient segment. In most of its key components, Panama’s maritime industry grew through 2019 and into the first quarter of 2020. The Panama Canal again proved to be the main engine of the country’s maritime activity, with the ports posting another record year in throughput. Bunkering and the merchant marine also fared well in 2019. Nevertheless, the clouds hovering over the world economy in the past few years only seem to be getting darker. There is no end in sight to the trade war between China and the United States; in fact, it would appear that tensions between these two commercial behemoths are ever on the rise (despite occasional respites). It may simply be that – as some commentators have said – the two giants are entangled in a veritable Thucydidean struggle, involving issues that go far beyond trade. If that is indeed the case, we are heading towards a further major restructuring of the world’s supply chain. The covid-19 pandemic will only add to this general tendency. In a sense, this is a concerning development for a country situated at the crossroads of world trade, as Panama is. Yet, the prospect of regionalised supply chains may create new interesting opportunities for Panama to add value, precisely due to its insuperable strategic location.
2 What are the prevailing shipping market trends affecting your country?
Panama remains a key regional and world logistical hub. Even as growth has slowed down recently, the 3 per cent increase posted in 2019 was better than the regional average. The country has one of the highest per capita GDPs in Latin America, comparable to that of Chile. Unemployment has been relatively low for the better part of the decade, although – as in the case of GDP – the trend is worsening. When it comes to unemployment, the covid-19 shock could land Panama in double-digit territory for the first time in 20 years. This has naturally impacted the country’s finances (debt/GDP ratio has risen significantly, and will probably exceed 50 per cent in 2020). Yet, with a US$5.8 billion inflow of foreign capital, Panama was among the leading recipients of foreign direct investment in Latin America in 2019. In this context, no other area of Panama’s economy has proved as resilient in 2019 as shipping.
In 2019, Panama again posted the best Liner Shipping Connectivity Index in the region, although its score dropped slightly under 50. With regard to Panama’s Logistics Performance Index rating, the country’s aggregate score since 2012 positions it almost tying with Chile – making these two the top performers in the region. Inland infrastructure continues to be a challenge, yet there were improvements in 2019, the most significant of which was perhaps the inauguration of the Atlantic Bridge – the third over the Panama Canal – and the inauguration of the Logistics Corridor of the Pacific, which is a road network connecting ports, industrial parks, factories and other logistics centres.
The Panama Canal is, no doubt, the country’s most important logistical asset; and 2019 proved to be another record year. The Panama Canal broke its previous record by transiting 469.6 million tons PC/UMS (Panama Canal Universal Measurement System) – a 6.2 per cent increase as compared with 2018. Board chairman of the Panama Canal Authority (ACP), Aristides Royo, stated ‘despite the trade war between the United States and China, they are two of the main users of the Canal’. According to the ACP’s annual report, total vessels’ transits decreased by 0.07 per cent (13,795 versus 13,785) in 2819 ‘. . . as a result of less refrigerated cargo, container and dry bulk vessels transits’. Yet, tolls earned by the Panama Canal in 2019 were US$2.592 billion – a 4.3 per cent increase on 2018. Liquefied petroleum gas (LPG) and liquefied natural gas (LNG) transits continue their strong performance. LPG transits have increased by 24 per cent since 2017, while LNG transits have gone up 124 per cent for the same period. Petroleum or petroleum products are by far the principal commodity transiting the Panama Canal – with 73.5 million long tons in 2019. Containerised cargo is a distant second, with 57.2 million long tons in 2019. In 2017, however, these two categories were much the same – 54.7 million long tons for containerised cargo versus 58.9 million long tons for petroleum or petroleum products. This just shows how important the LPG/LNG segment has become for the ACP’s overall business. Still, LNG transits were less than expected owing to ‘fewer Asian imports as a result of more favuorable weather conditions than anticipated, geopolitical factors and the restart of nuclear reactors in Japan’ (ACP’s annual report). Trade between the United States and Asia comprised 61 per cent of the total cargo going through the Canal in 2019, and it accounted for 90 per cent of the containerised commodities going through the Panama Canal in 2019. Finally, the Canal’s total revenues for 2019 where US$3.336 billion (up from US$3.172 billion in 2018) while its contribution to the national treasury again broke the previous record, with a total of US$1.786 billion (as compared to US$1.703 billion in 2018).
Despite a good 2019, there are reasons for concern for the ACP in the years ahead. Chief among these is the supply of water, which is vital for the Panama Canal’s very existence. Less rainfall and increased consumer demand in Panama City have put enormous pressure on the freshwater resources the ACP depends on. The ACP is looking at various alternatives to remedy this, including building new reservoirs, acquiring existing ones, building desalinisation plaints, or a combination of all of these. For this, as well as environmental reasons, the ACP implemented in early 2020 a freshwater-use charge for transiting vessels, for the first time in history. The fracturing of the global trade system has been a concern for years, and its effects are beginning to show ever more clearly. Extremely low fuel prices pose an additional threat to the Canal’s commercial attractiveness. Finally, the covid-19 pandemic threatens to plunge the world economy into another long recession, if not outright depression. Uncertainty abounds, but based on past history, there are still reasons to be optimistic about the Canal’s performance for the years ahead.
The bunkering business surged in 2019, recording a 22 per cent increase in overall sales compared to the previous year, and the highest figures in at least a decade, according to the Panama Maritime Authority. In 2019, bunker providers attended 7,633 vessels, compared to 6,046 in 2018, delivering 5,352,396 metric tons of fuel, as opposed to 4,634,922 the year prior, according to official data. As usual, most of the deliveries were conducted in the Pacific (almost 80 per cent), with fuel oil accounting for nearly 90 per cent of the total sales. That said, diesel oil sales gained 44 per cent in 2019. Overall, it was a very good year for bunkering in Panama, placing the country among the best performing marine fueling hubs in 2019.
Panama’s port system broke its all-time record in 2019, by moving 7,346,859 TEUs (as opposed to 7,014,411 TEUs in 2018). It was the second straight year Panama’s port terminals broke the 7 million TEU mark per year. Installed capacity is about 10 million TEUs, and experts say that Panama ought to be able to process some 15 million TEU per year. Panama has five major container terminals – two in the port of Balboa, in the Pacific, and three in the port of Colon, in the Atlantic. Once again, the Colon terminals led the way, with MIT (Stevedoring Services of America) posting the biggest numbers (2.5 million TEU plus). Indeed, the Colon port complex remains the busiest in Latin America and the Caribbean. The port of Balboa’s activity, on the other hand, continues to slide – about an 11 per cent reduction from 2018 – as seemingly a significant part of the transshipment business has transferred to the Atlantic ports. Movements in the Pacific ports have continually declined, since the high watermark of 3.468 million TEs in 2014. In 2019, Balboa’s ports moved 2.898 million TEUs. The Atlantic terminals, on the other hand, had posted consecutive record years – posting throughputs in excess of 4 million TEUs (4.324 million TEUs in 2018 and 4.379 million TEU in 2019). Overall, the Panamanian port system remains the most dynamic in the region.
Being primarily a transshipment centre, the Panamanian ports are particularly vulnerable to the ebbs and flows of world commerce. Current uncertainties about the future of globalised trade suggest a difficult road ahead for this important element of Panama’s maritime sector. Covid-19 only adds to these challenges. Yet the first quarter of 2020 was a good one for Panama’s ports, posting double-digit increases. However, it has been suggested that this was due to actors seeking to secure inventories, as pre-emption to a deteriorating trade environment. Also, the preliminary numbers for 2020 do not account for the covid-19 slowdown, which hit Panama in April. With the unprecedented uncertainties that this creates ahead, Panama’s ports would be hard pressed to break the 7 million TEU mark in 2020.
In 2019, the Minera Panama’s dock at Puerto Rincon, Donoso in Colon province, began dispatching its first copper exports. Minera Panama is a mining project operated by First Quantum; it is one of the largest copper mines in Latin America. It commenced full production in September 2019, and by November already 17 vessels full of copper concentrate had been dispatched. About three vessels dock every month at Puerto Rincon, to load minerals, most of it copper concentrate. First Quantum’s Donoso production is overwhelmingly (60 per cent of production) bound for China (the country being the largest world copper consumer). Expectations are high, as this US$6 billion plus mine – the largest private investment project in the history of Panama – was anticipated to multiply Panama’s yearly exports by as much as factor of three, when fully operational. Then in April 2020, Panamanian health authorities ordered the mine to close temporarily, owing to covid-19 concerns. As at the time of writing, Minera Panama remains closed. The company has filed a constitutional challenge to the government measure, which is pending.
In 2019, the Panama Maritime Authority announced an increase in both gross tonnage and number of registered vessels, for the first time in a number of years. Despite maintaining its status as the number one flag registry, Panama’s merchant marine had virtually no growth since 2015, even as competitors such as the Marshall Islands and Liberia steadily gained ground. A particular concern had been the fleet’s average age. In that regard, in 2019/early 2020 the Panamanian registry definitely turned the corner. In the first four months of 2020, 389 new vessels entered the registry, 137 of which were new buildings. Indeed, a score of newly built mega container carriers have entered the Panamanian registry since the second half of 2019. This trend began in 2019, with the registration of the MSC Gülsün (a 23,756 TEU container carrier), and has been followed by a number of similar MSC vessels (the MSC Mia, the MSC Ambra, the MSC Samar, the MSC Leni, to name a few). Then in April 2020, the HMM Algeciras was launched by South Korean President Moon Jae-In. The HMM Algeciras is the largest container carrier in the world (23,964 TEU), and has been registered in Panama. A number of sister vessels (such as the HMM Oslo, the HMM Copenhagen, the HMM Dublin and three others) have been registered and a further five are in line to be registered in Panama.
This is good news for the world’s oldest and largest open registry, currently comprising about 17 per cent of the world’s merchant fleet. As a testimony of Panama’s continued leadership in this area, the country was once again elected as a category A member of the International Maritime Organization’s (IMO) Council in 2019. As elsewhere, the covid-19 pandemic poses many challenges. However, the Panama Maritime Authority has effectively deployed new methods and technologies to streamline and expedite processes across the board. Early in 2020, registry authorities were optimistic that a further 5 million gross tons could be added to the Panamanian flag by the end of the year. It remains to be seen if this goal can be achieved. What seems clear is that the world’s premier registry showed renewed signs of its continuing vitality.
3 Are there any recent domestic or international political or legislative developments that may have an impact on your country’s shipping market?
Because of the fundamental role the US and China play in international trade, the dispute between these two countries is probably the most impactful event that could affect Panama’s maritime industry in the immediate future. This could be true for most countries that rely heavily on trade, and that seek to do business with the two largest global economies. In 2018, Panama established formal diplomatic relations with China, breaking with its long-held traditional policy towards Taiwan. President Xi even travelled to Panama to meet with the then Panamanian President Juan Carlos Varela. Many agreements were signed, seemingly foreshadowing a rapid increase in Chinese investment in Panama. But with the current status of the standoff between the US and China, the viability of being able to maintain simultaneous fruitful economic ties with these two antagonists is ever more uncertain.
In addition to the US/China trade war, the price war between OPEC plus countries may also severely impact Panama’s shipping sector. Lower oil prices naturally tend to put downward pressure on the demand for the Panama Canal route. In addition to that, the covid-19 pandemic may continue or even aggravate trade disruptions, again negatively impacting the Panama Canal’s business. Being at the core of Panama’s maritime industry, any situation that affects the Panama Canal raises uncertainty for the whole sector. These are serious headwinds, which make it improbable that the ACP will be able to meet its initial forecast of US$3.426 billion revenue and US$1.824 billion dividend to the government in fiscal year 2020.
4 What are the key regulatory and compliance issues for your country’s shipping market? What’s coming up in the near future?
The influx of newly built tonnage will ensure that Panama remains the world’s premier open registry in the near future. Naturally, this will only improve on the good PSC performance in past years. It seems that the recent IMO 2020 emission restrictions have not affected the registry adversely. On the other hand, the strict regulations enacted a year or so ago, aimed at swiftly deleting vessels engaged in illegal activities, have resulted in a number of ex officio cancellations. Indeed, the Panama Maritime Authority has not hesitated to take immediate action against any semblance of illegality. While in many cases these actions were justified, concerns about fairness and due process have been raised by many in the shipping community. The Panamanian registry strives to be an international model of good practice and abidance by international law. This need not compromise the registry’s quality of service and its commitment to upholding the rights that Panama’s Constitution affords to all. In fact, the registry authorities have shown a willingness to reconsider on individual cases actions taken, on the basis of faulty information about possible misconduct.
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?
Europe and Asia remain the predominant sources of financing, for vessels in the Panamanian merchant fleet. Lending activity has picked up, but refinancing seems to advance at an even brisker pace. Given the tremendous uncertainty clouding market conditions in the years ahead, its to be expected that mortgage refinancing, as well as non-traditional lending schemes utilisation, will increase appreciably in the near future. Despite all this, the Panamanian naval mortgage and pledge of shares on Panama-incorporated ship-owning entities continue to be the preferred security instruments for their convenience, flexibility and proven reliability to lenders.
6 Have there been any recent significant domestic or foreign court decisions or arbitration awards that impact on your country’s shipping market?
In the second half of 2019, the Maritime Appeals Tribunal (MAT) issued two important decisions, both pertaining to time bars on certain actions under Panamanian substantive law.
The first of these was the case of Romualdo Gondola v M/V ‘PGS Strident Force’ (MAT/11.09.2019). This was a personal injury in rem claim brought by a stevedore who suffered injuries while working on the PGS Strident Force. Counsel for the vessel moved to include the container terminal as a third-party defendant. Then counsel for the container terminal filed a special preliminary defence (SPD) – a procedural mechanism similar to a motion for summary judgment – alleging plaintiffs lacked title to sue the vessel, because the in rem right had lapsed under article 245 of Panama’s law on maritime commerce (Law No. 55 of 2008). Article 245 of Law No. 55 prescribes that a maritime lien would be extinguished six months after the inscription in the Public Registry of a private ownership transfer. In this case, the plaintiffs alleged a maritime lien in tort, under Panamanian substantive law. The vessel had been sold more than six months prior to the time the complaint was filed, and so potentially article 245 of Law No. 55 would bar the plaintiffs’ right of lien. Under previous precedent, courts had held that issues pertaining to time bar and extinguishing of liens were governed by the very law governing the right of lien. Thus, counsel for the terminal invoked article 245 as a bar to the plaintiffs’ claim of a maritime lien under Panama’s law. The plaintiffs, however, argued that article 245 was only applicable to Panamanian registered vessels, while the PGS Strident Force was registered in the Bahamas. The lower court judge ruled for the plaintiffs; the MAT confirmed. Fundamentally, the MAT indicated that the SPD’s lack of title to sue was misplaced. Cleary, the plaintiff had title to sue, theoretically at least, given that no one questioned the he suffered injuries as a result of working as a stevedore on the vessel in question. For that reason alone, said the MAT, the lower court ruling should be upheld. However, the MAT tackled the question of whether article 245 applied in the case at hand. It concluded it did not. The MAT did not overturn previous precedent on the applicable law to time bar and lien extinguishment. Rather, the MAT reached its conclusion by strictly construing articles 2 and 245 of Law No. 55. Article 2 contains a list of definitions of certain terms employed through Law No. 55. In 2014, Law No. 55 was amended. The 2014 amendments added a definition of ‘Public Registry’ to article 2 – and it defined it as the Directorate General of the Public Registry of the Property of Vessels of the Panama Maritime Authority (AMP). Thus, the MAT concluded that the six-month lien time clock could only be triggered by registering a bill of sale in the AMP. This, of course, could not have happened when the PGS Strident Force changed ownership, since the vessel was registered in the Bahamas. Despite the MAT’s literalist construction of the statue, the decision nevertheless raises some questions about its value as precedent. Since the MAT had confirmed the lack of title to sue SPD was misplaced, the debate going forward will be whether the analysis of article 245 was part of the decision’s ratio decidendi or simply a somewhat elaborated form of obiter dictum. This point seems bound to be litigated again.
In the case AP Moller-Maersk A/S v Panama Ports Company SA (MAT/16.09.2019), the issue was the moment when the time bar for an indemnity claim commenced running. The plaintiffs were the time charterers of the M/V Hansa Bergen, when the vessel suffered damages during cargo ops at the defendant’s container terminal in 2006. The plaintiffs had a contract with the terminal operators to service vessels operated by them. The owners of the vessel started arbitration against the plaintiffs, which ended with a settlement in 2015, in which the plaintiffs agreed to pay the owners damages. In late 2013, the plaintiffs filed suit against the container terminal. Counsel for the container terminal filed a time bar SPD, based on article 1650 of Panama’s Commercial Code, which provides a five-year prescription period. Counsel for the terminal argued that the time bar period began to run in 2006, when the plaintiffs learned of the accident for which they could potentially be liable to the vessel’s owners. The lower court dismissed the defendants’ time bar SPD, and the MAT confirmed. As in the case of the PGS Strident Force, the MAT seems to have reached its conclusion based on a very strict construction of the relevant provisions of Panamanian law. Article 1650 of the Commercial Code provides that ‘the prescription term for actions will commence to run from the day the obligation becomes demandable’. The MAT ruled that the defendants’ obligation as regards the plaintiffs became demandable only when they paid the settlement funds to owners in 2015 – that is, after the plaintiffs had already filed their complaint. Interestingly enough, previous precedent had allowed the plaintiffs to commence proceedings on indemnity before the plaintiffs had been forced to pay a third party. The defendants arguments echoed this to make the point that plaintiffs could have and should have filed an action within five years of 2006. The defendants’ position seems better aligned with the wording of article 1707 of Panama’s Civil Code, which says that ‘the time for prescription of all actions … will count from the day on which they could have been exercised’. The Civil Code focuses on the moment when ‘actions could have been exercised’, while the Commercial Code focuses on the moment when an ‘obligation becomes demandable’. This is a subtle yet significant difference, which may perhaps render a different ruling on slightly different facts.
7 What is the outlook for your country’s shipping market? Which sectors are likely to grow, and which not?
If the unresolved US/China conflict made for an unpredictable future for the Panamanian shipping industry, covid-19 has only made this worse. No one can forecast what lies ahead. What we may venture to say is that Panama has all the tools to position itself to take advantage of the new opportunities that all crises bring with them.
Depressed consumer spending will impact copper prices. This may foreshadow a dire immediate future for the local copper exporting industry. The good news is that there is hope that as more countries deploy massive investments in digitalisation, green infrastructure and electric vehicles, the demand for copper will surge. Redrawing of the world’s commerce supply lines may pose challenges as well as great opportunities for Panama’s shipping market. However, much is unclear. As the IMF’s Gita Gopinath said in a recent interview, there is tremendous uncertainty in what remains of 2020, and looking into 2021.
The Inside Track
What are the particular skills that clients are looking for in an effective shipping lawyer?
Good old-fashioned analytical acumen, the ability to understand clients’ needs and to communicate remain fundamental skills for any effective shipping attorney. Along with that, experience, flexibility and diligence are always a must. But nowadays, creativity, inventiveness and technological dexterity are rapidly becoming key components in a practitioner’s tool box. Simply put, the 21st-century shipping attorney must be able to work effectively and with the same level of quality from home and other non-traditional environments. Regardless of crises, shipping does not stop; and neither does the shipping lawyer.
What are the key considerations for clients and their lawyers when arranging finance for a shipping transaction?
The naval mortgage continues to be the key security instrument in most ship finance transactions, thus, the track record and proven reliability of the legal system of the flag where the vessel is registered is the foremost consideration. The swift adaptability of the Panama law securities to future amendments of facility agreements is no doubt a key consideration that plays in favor of our jurisdiction for shipping finance transactions.
What are the most interesting and challenging cases you have dealt with in the past year?
In the case of Workboat International DMCCO et al v Alam Maritim (L) Inc (MAT/29.01.2020), the Maritime Appeals Tribunal (MAT) dealt with a motion to stay based on the existence of a ‘previously and expressly’ negotiated arbitration agreement. This case dealt with a dispute about the transfer of a Panamanian vessel. The plaintiffs wanted the sale annulled on the grounds that the person that executed the memorandum of agreement (MOA) and the bill of sale on behalf of the seller lacked the corporate authority to do so. We argued that under the doctrine of Kompetenz-kompetenz it was incumbent on the arbitral tribunal to rule on issues dealing with its own jurisdiction and all things pertaining to the MOA. The MAT was of the view that the shareholder’s claim was directly tied with the MOA, and decided to send the whole matter to arbitration in Kuala Lumpur.
Source: Morgan & Morgan – Francisco Linares and Jazmina Rovi
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