The United States is one of many nations that protect their domestic transportation industries through “cabotage” laws. These laws require the transportation of passengers or cargo between U.S. ports to be performed aboard “U.S.-flagged” vessels (vessels registered under the laws of the U.S.) and U.S.-built vessels.
Many small recreational vessels afloat in the U.S. are foreign-built. A foreign-built vessel may not legally carry passengers for hire in this country unless the owner obtains a waiver of the restriction from the U.S. Maritime Administration (MARAD). This restriction is not related to the number of passengers the boat may carry.
Any boat that carries at least one passenger for hire must be built in the United States or obtain a MARAD waiver. In practice, we see a lot of foreign-built boats that operate as charter vessels with a limited number of passengers aboard, but those boats are, nonetheless, violating the law. The Coast Guard simply has not made enforcement a major priority.
The next issue concerns the passenger count. Coast Guard regulations (46 C.F.R. sec. 2.01-7) allow a vessel measuring less than 100 gross tons to carry up to six paying passengers without undergoing a rigorous Coast Guard inspection (the limit is increased to 12 passengers if the boat measures more than 100 gross tons). These “six-pack” charters offer a relatively inexpensive avenue for small vessels to be used in a charter business, since they can avoid the expensive Coast Guard inspection process.
Faced with these construction and inspection restrictions, many charter boat companies either operate “below the radar” or, like our reader, they look for loopholes to get around the restrictions. The most commonly used loophole is a bareboat charter.
A bareboat charter (also known as a “demise charter”) is a lease arrangement where the charterer takes on all of the rights and obligations of ownership without actually transferring title, and the owner is generally protected from liability against third parties.
Bareboat charters are common in the world of commercial shipping, where complex tax and international vessel registration laws may encourage a lender to take ownership of a ship rather than to simply record a mortgage. Like most principles of maritime law, bareboat charters were developed to manage the safety and commerce of ships at sea, but they are equally applicable to recreational boats.
A bareboat charter has the effect of shifting the possession and control of the vessel — and liability for injuries to third parties — from the owner to the charterer. It is attractive to charter boat operators because the charterer is treated as an owner. Since an owner may bring as many guests and friends aboard as the vessel may safely accommodate, the operation is not subject to the construction and Coast Guard inspection regulations discussed above.
Unfortunately, to create a bareboat charter, the owner of the vessel must completely and exclusively relinquish possession, operation, maintenance, command and navigation of the boat to the charterer. Many owners are uncomfortable with that idea. But if the owner is allowed to manage or operate the boat in any way, it is not a “bareboat” charter and the operation is subject to the construction and inspection regulations.
The most common mistake made by people who seek to use this structure as a loophole is that they require the charterer to use a specific captain and crew, or to select from a very short list of captains and crew. A true bareboat charter arrangement does not allow the owner to designate a captain and crew.
Our reader is also considering a fractional ownership structure. This may seem like a bad idea, since he is looking for “creative” ways around the chartering regulations rather than partners to participate in the ownership of the boat. However, we have seen boat owners adapt this structure to a charter business by selling a “temporary” ownership interest in the vessel or in the company that owns the vessel.
This structure calls for the true owner to repurchase the ownership shares from the customer at the conclusion of the voyage. The Coast Guard, however, has seen through this trick and they have deemed these schemes to be thinly disguised charters and, therefore, are subject to charter regulations.
We can argue about whether the restriction against the use of foreign-built boats in charter operations is reasonable in the context of a small boat that is used for harbor and coastal cruising. However, the limits on passenger count and the related Coast Guard inspection requirements are driven strictly by safety concerns, and the Coast Guard takes those issues very seriously. Contact the Coast Guard or an experienced maritime attorney for more information.