Ship Classification

Ship Registration

Ship Registration is the expression that is used when a ship is accepted by a country to operate under that country’s flag.  

In 1982, United Nations produced the Convention on the Law of the Sea (UNCLOS) which requires every ship to sail under one flag (Article 92) and also confers a right to every country, whether littoral or landlocked, to have ships flying its flag (Article 91). If a country exercises this right to have ships flying its flag, that country must also consider the obligation to ensure that the ships are subject to its effective jurisdiction and control (Article 94). 

Flag Country may offer favorable conditions for ship operators in these areas:

  1. Legal Administrations (Mortgage Laws, Limitation of Liability, Litigation Laws, etc)
  2. Fiscal Administrations (Foreign Exchange, Tax exemption, Fees)
  3. Ship Ownership Qualifications 
  4. Agreements that give special rights to its ships 
  5. Ship Manning Requirements (Crew Nationality, Certificates, Manning Scale, Crew Wages)

Flag Country must ensure that:

  1. The ship is subject to Flag Country’s exclusive jurisdiction
  2. Flag Country has jurisdiction under its internal law for ship’s managerial, technical, and social matters.

Consequently, Flag Country has laws and regulations comprising:

  1. Ship Construction, Equipment, and Survey
  2. Manning, Training, and Living Conditions 
  3. Safe Navigation
  4. Marine Pollution 
  5. Investigation of Casualties

United Nations Convention on the Law of the Sea (UNCLOS) also provides that there must be a genuine link between the ship and the flag country but UNCLOS is silent on what establishes the link. 

In 1986, the United Nations Convention on the Conditions for the Registration of Ships was adopted. The United Nations Convention on the Conditions for the Registration of Ships was intended to fill the space left by the United Nations Convention on the Law of the Sea (UNCLOS), however, it did not receive much support. The United Nations Convention on the Conditions for the Registration of Ships‘ main provisions:

  1. Flag Country must have a sufficient and competent maritime administration and shall execute appropriate international maritime laws and standards 
  2. The United Nations Convention on the Conditions for the Registration of Ships applies only to self-propelled seagoing vessels of 500 GT and above that are employed in international seaborne trade for the transportation of goods or passengers
  3. Shipowners or operators are appropriately identifiable
  4. A country of registration has to comply with the terms on ship ownership and ship manning
  5. A country of registration must ensure that the ship owning company or its subsidiary company or its principal place of business is established within its territory. Otherwise, the ship owning company must have a representative or manager who is a national of that country
  6. A country of registration may register ships chartered-in by a charterer in that country in conformity with the convention

The shipowner must prove ownership of the ship to register a ship. For a second-hand ship, the shipowner must provide written permission from the existing Flag Country to enable the transfer to another country’s registry. If the new shipowner prefers to maintain the existing flag then it will only be required to record the change of ownership. Any country, including a landlocked country, may grant the right to ships to fly its flag. The ship’s name and the port of registry are written on the stern of every ship. The Ship’s Registration Certificate (Ship’s Register) comprises these pieces of information that are unique to that ship. The Ship’s Registration Certificate (Ship’s Register) is a vital document and is required to be presented to a shore-based authority on port arrival. Every ship must fly the flag of the country in which it is registered. 

Historically, the shipowners with the most cost-effective ships were the most successful. A significant portion of the operating costs of any ship is the crew wages. Nevertheless, developed countries that have a higher standard of living realized that the crew costs incurred were considerably costlier than for rival countries while freight income was the same for all. In developed countries, wage levels are high and the labor unions are strong. The labor unions can determine not only the level of crew wages but also the number of crew to be employed. Moreover, when freight income rates are soaring, income tax, corporation tax, and profits tax increased the costs of shipowners. Unavoidably, some shipowners found themselves uncompetitive if their ships are registered under their own country’s flag. When the shipping market conditions worsened, shipowners could not afford to operate their ships cost-effectively. Therefore, the shipowners are either going to bankrupt or register their ships elsewhere.

Therefore, shipowners established a subsidiary company in a country where costs and tax rates were lower. The shipowners still operated under a Closed Registry (a country that requires the owner of the ships to be incorporated in that country). As long as there is no bar to the shares in the owning company being held outside that country, the shipowner could take the advantage of the lower costs.

Open Registry (Flag of Convenience FOC)

For numerous shipowners, moving to another country with a Closed Registry was not enough, because levels of manning and crew wages were still dictated by the government and trades unions.

In the 1920s, some shipowners realized that the high cost of running ships under the home country flag made it impossible to compete internationally. Therefore, shipowners searched for:

  • A country that would allow a company owned and controlled by non-nationals to operate ships under its flag
  • A country that would allow the beneficial shipowners to reside and operate outside the country while maintaining all banking operations and keep all profits in another country
  • A country that would allow the hiring of a crew of any nationality and at any wage scale
  • A country that would charge insignificant tax

Shipowners noticed that Panama satisfied all of these conditions and the first shipowner was registered in Panama in 1922. Afterward, Liberia and the Marshall Islands became popular Open Registries. Today, PanamaLiberia, and the Marshall Islands flags account for about half of the world’s fleet measured by deadweight (DWT). Panama, Liberia, and the Marshall Islands are by no means the only Open Registries. Other popular Open Registries are Bermuda, Malta, Cyprus, St Vincent, Honduras, Vanuatu, and Cambodia. The more solidly established Open Registry countries attempt to achieve international respectability. The more solidly established Open Registry countries do not want to be linked with substandard ships. Regrettably, some Open Registries have regulations that may be so relaxed that they become a haven for reckless shipowners. Regularly, Port State Control (PSC) statistics incorporate details of the flags with the poorest safety and detention records.

Offshore Flags (Second Registry)

Germany, Norway, and Denmark established the so-called “International Registry” that allows ships to fly the flag of the country concerned but does not impose the same restrictions on the nationality of either the shipowner or the crew. Some countries maintain close ties with their former colonies that are still appropriately part of the parent country’s sphere of influence. For example, Bermuda and Gibraltar (United Kingdom)the Netherlands Antilles (the Netherlands) have their taxation regimes and laws on manning and wages. The United Kingdom has another type of Offshore Flags such as the Channel Islands and the Isle of Man are part of the United Kingdom but have maintained significant autonomy in running their domestic affairs. 

Open Registry (Flag of Convenience FOC) Disadvantages

Open Registry countries are used to apply advantageous formulae when calculating a ship’s Register Tonnage. This not only permitted shipowners to avoid some port charges but also permitted shipowners to sidestep international legislation. Therefore, some port authorities surcharged 20% on port charges for Flag of Convenience (FOC) ships unless the ship had received a more respectable International Tonnage Certificate (ITC). In 1994, International Tonnage Certificate (ITC) came into force and this surcharge has almost disappeared. 

The International Transport Workers’ Federation (ITF) has more or less declared war against Open Registry (Flag of Convenience FOC) ships because the wage levels for crews are too low. Many of the world’s transport unions are affiliated with the International Transport Workers’ Federation (ITF). The International Transport Workers’ Federation (ITF) was established in 1896 to fight for better conditions when seafarers were carelessly treated and inadequately paid. The International Transport Workers’ Federation (ITF) has substantial support from shore-based transport and stevedoring unions, so collectively these unions can immobilize any ship through a shortage of tugs or unopened lock gates until the International Transport Workers’ Federation’s (ITF) demands are met. Many governments have passed laws regarding labor relations. In some countries, industrial action by unions whose members’ employment conditions are not directly affected by the root cause of the dispute has been made illegal. In such countries, action by stevedores against a ship where the crew has no dispute with the shipowner should not be possible. Nevertheless, the mere threat of action by the International Transport Workers’ Federation (ITF) while receiving legal assistance is usually more than sufficient to drive the shipowner to agree to the demands. 

Ship Tonnage Tax

To encourage more shipowners to operate under national flags, many countries are offering a Tonnage Tax. Tonnage Tax is not an extra charge made against shipowners. Tonnage Tax is a scheme whereby shipowners make a payment to the Flag Country based on the size of the fleet rather than on the income the ships generate. Subsequently, the shipowner can budget for the costs in advance. Generally, the Tonnage Tax rate is set very low to encourage the shipowner to leave the attractions of Open Registry in favor of a more regulated Flag Country. Some Flag Countries attach conditions to the Tonnage Tax permission. For instance, the United Kingdom demands the shipowner to hire one new trainee every year for every fifteen officers hired. The disadvantage of the Tonnage Tax is that tax is payable even if the fleet suffers an overall loss. Contrarily, corporation tax is set at a low level and in most years, shipowners will be able to keep the preponderance of their profit. Tonnage Tax is a sort of state aid to promote shipping.

Port State Control (PSC) 

Port State Control (PSC) system applies fairly to ships operating under National FlagOffshore Flag, and Open Registry (Flag of Convenience FOC). After a lot of ship catastrophes, in 1982, several European countries and the North Atlantic agreed on the terms of a Paris MoU (Memorandum of Understanding). Paris MoU (Memorandum of Understanding) is an agreement for the Maritime Authorities in each signatory country to enforce the international conventions for ships arriving at its ports regardless of the flag. Currently, 18 countries are members of the Paris MoU (Memorandum of Understanding).

Paris MoU (Memorandum of Understanding) comprises:

  • International Convention for the Safety of Life at Sea (SOLAS)
  • International Convention for the Prevention of Pollution from Ships (Marpol) 
  • International Convention on Standards of Training, Certification, and Watchkeeping for Seafarers (STCW) 
  • Merchant Shipping (Minimum Standards) Convention
  • International Convention on Load Lines 
  • International Regulations for Preventing Collisions at Sea (Colregs)

Completely new conventions and codes are enacted regularly. Codes are subsidiary documents to a particular convention. Numerous conventions cover all aspects of ship construction, equipment, and operation. Furthermore, certificates are issued to approve compliance with these conventions. The success of the Paris MoU (Memorandum of Understanding) has been such that the scheme has been taken up in other regions. The Tokyo MoU (Memorandum of Understanding) was set up in 1994 to cover the Pacific basin. Other regional organizations were set up in Latin America, the Indian Ocean, and the Caribbean. 

Under these memorandums, each country is at liberty to introduce its Port State Control (PSC) regime. A well-known example is the US Coast Guard of the USA. Port State Control (PSC) performs by employing surveyors visiting onboard ships on a random basis and occasionally targets specific ship types or flags. 

Port State Control (PSC) Surveyor checks that all the important certificates are in order and then commences a thorough inspection of the ship. Port State Control (PSC) Surveyor checks whether or not the ship complies with the international regulations. If Port State Control (PSC) Surveyor detects any deficiency, Port State Control (PSC) Surveyor has three (3) options depending on the seriousness of the problem.

  1. Minor Problems: the Port State Control (PSC) Surveyor orders the deficiency to be rectified within a given time but will allow the ship to continue on its voyage
  2. More Serious Matters: remedial action will have to be taken before the ship is authorized to leave port
  3. Most Serious Cases: the Port State Control (PSC) Surveyor order the ship to be detained indefinitely

If the ship is detained after inspection, the Port State Control (PSC) Surveyor is obliged to notify the ship’s Flag State’s Consulate and Classification Society. Whatever the result of the inspection, the Port State Control (PSC) Surveyor issues a report, one copy of the report remains on board while a second copy is sent to the regional reporting station where it is maintained on record. In cases where remedial action is ordered, the Port State Control (PSC) authorities at the following ports are informed and to check the required action has been taken. Paris MoU and Tokyo MoU have websites to check the details of ships’ detentions and deficiencies. Regional Port State Control (PSC) authorities may act together and carry out a CIC (Concentrated Inspection Campaign) over an extended geographic area. The Port State Control (PSC) Surveyors are deemed to be ensuring compliance with international standards therefore there should be no discrepancy in the interpretation of the international standards. Nevertheless, there are some concerns among shipowners that some Port State Control (PSC) Surveyors are enthusiastic and detain ships for minor deficiencies. This may be true however Port State Control (PSC) is an efficient mechanism to fight against substandard shipping and many maritime disasters have been averted.

Today, Port State Control (PSC) is almost globally utilized. In some countries, Port State Control (PSC) is unquestionably being managed as a revenue-raising activity, however, in many maritime nations, Port State Control (PSC) is fairly applied and produces important results. The results of inspections and detentions are announced and can be easily accessed online. Annual statistics are published online and records of individual ships can be viewed on the Equasis database (www.equasis.org). Equasis database (www.equasis.org) lists the name under which the ship was inspected, but data can also be accessed using the IMO (International Maritime Organization) number that stays with a ship throughout its life. IMO number prevents dishonest shipowners from covering a ship’s history simply by altering its name.

Ship Classification

All ships that wish to trade on the seas must have a name and flag (nationality). Although some countries do not require a ship to be classed with a classification society, unclassed ships are unattractive to insurers and prudent charterers. Classification Societies were established in the 18th century when there was no IMO (International Maritime Organization) or other organizations to stipulate minimum standards for ship construction. No matter how well built a ship was originally, it is the quality of care and maintenance the ship receives that determines its seaworthinessClass Societies take on the role of a third-party endorser more for the benefit of the charterers than for the shipowner. The shipowner pays for the class surveys and works required to ensure the ship maintains the class. A shipowner building or buying a ship will inquire a classification society to survey the ship and judge its fitness by the rules of that society. The class societies’ standards must be at least the equivalent of the SOLAS (The International Convention for the Safety of Life at Sea) regulations that apply, otherwise, the class societies’ standards would be useless. Each classification society has its own rules, however, there is significant commonality between the class societies’ rules. For bulk carriers and tankers over 150 meters in length, there is one set of Common Structural Rules (CSR) that applies to all members of the International Association of Classification Societies (IACS). These CSR Common Structural Rules (CSR) relate only to the construction of the ship and not its machinery or continuous maintenance. When a ship is accepted by a classification society, the shipowner can prove that the ship is of a particular standard and the ship will be attractive to both charterers and insurers.

International Association of Classification Societies (IACS)

Twelve of the major classification societies form the International Association of Classification Societies (IACS): T

  1. CCS (China Classification Society) China
  2. LR (Lloyd’s Register of Shipping) the UK 
  3. BV (Bureau Veritas) France 
  4. ABS (American Bureau of Shipping) the USA
  5. DNVGL (Det NorskeVeritas/Germanischer Lloyd) Norway  
  6. PRS (Polish Register of Shipping) Poland
  7. CRS (Croatian Register of Shipping) Croatia 
  8. RINA (Registro Italiano Navale) Italy
  9. NK (Nippon Kaiji Kyokai) Japan
  10. RS (Russian Maritime Register of Shipping) Russia
  11. KR (Korean Register of Shipping) South Korea
  12. IRS (Indian Register of Shipping) India 

The International Association of Classification Societies (IACS) was established to harmonize the rules of different societies and also to reassure the shipping world that ships classed with an International Association of Classification Societies (IACS) member are not substandard ships. Furthermore, various smaller classification societies exist, some of which have a decent reputation, while other smaller classification societies are deemed to act under highly questionable conditions. Port State Control (PSC) Surveyors have been scrutinizing the link between poor ships and the classification societies. The Classification Societies’ records are covered in the annual statistics of Port State Control (PSC) regions. Certainly, some types of deficiency are directly attributable to the classification society. This link and the recording of deficiencies have encouraged some Classification Societies to take action to enhance their standards. A shipowner is free to choose which Classification Society their ship will be registered. However, some Flag Countries may restrict the choice of Classification Societies available to ships flying their flag. The Classification Societies draft precise specs of all ship construction materials and all equipment. To enforce the Classification Societies’ rules and regulations they control a network of Class Surveyors throughout the globe.

A ship can get a classification in several ways depending on when in the ship’s lifecycle the choice of classification society is made. A shipowner planning a new build can opt to have the ship built under class survey:

  1. Ship plans are scrutinized by the Classification SocietyIf ship plans are found satisfactory, it is approved by the Classification Society
  2. The construction of the ship is supervised by a Class Surveyor from the Classification Society, which will maintain a programme of spot inspections and examinations to ensure that the rules of the Classification Society are being met
  3. Final sea trials of the new-build ship will be attended by the Class Surveyor. If everything is satisfactory, the ship will then be formally entered as classed with the society and will have the attached qualification built under survey

The shipowner might be buying a secondhand ship or a ship already under construction that is classed with another Classification Society or simply changing the Classification Society of the ship. In such circumstances, the new Classification Society will order to view the previous records of the ship and will only accept the ship into its Classification Society after conducting a meticulous inspection of the ship. Depending on the apparent condition of the ship and its past record, the new Classification Society may request to inspect the ship.

Following the ship’s initial acceptance and classification, the ship enters a programme of surveys that are imperative if the ship is to maintain its class. The survey programme ensures that everything on board the ship is surveyed in rotation according to a predetermined timetable. Class Surveys are scheduled so that every part will have been inspected at the end of a period of four (4) years. Once the four-year cycle has been accomplished thoroughly the ship will have completed its First Special Survey (SS), whereupon the entire cycle of surveys starts all over again. Class Survey Programme comprises a requirement that the ship is drydocked twice during the Class Survey Cycle. In some circumstances, Class Societies grant an extension of one (1) year (a year of grace) in a Survey Cycle.

Classification Societies launched an Extended Drydocking Programme for some types of new ships that are built to specific standards and with agreed maintenance procedures in place. Ships that are accepted for Extended Drydocking Programme are inspected alongside and require to drydock every 7.5 years until these ships are 15 years old when they return to the regular inspection programme.  

Classification Societies require that, in the event of an accident arising to the ship or the ship’s equipment, a Class Surveyor be invited to inspect the damage and recommend if the repair has to be done immediately or whether the repair can be postponed and, if so, for how long. If a Class Surveyor grants a postponement, full details are entered in the ship’s records as a recommendation. The eventual repair will have to be done under the supervision of the Class Surveyor. Classification Societies keep full Survey Records of all ships that they classify. Survey Records list the dates of surveys passed, all repairs carried, and all current recommendations for scheduled repairs.  

All the Classification Societies publish an annual register the best known of which is Lloyd’s Register (www.lr.org).  Lloyd’s Register was started from the same Edward Lloyd’s coffee shop in London, as the one from which the insurance market, Lloyd’s of London emerged. Originally, the register was for the private use of insurance underwriters. Later a rival register was inaugurated by a group of shipowners and eventually, in 1834, the two merged and formed the independent society that is today’s Lloyd’s Register. Lloyd’s Register publishes details of all ships over 100 GT (Gross Tonnage), whether or not they are classed by Lloyd’s Register.