Expropriation of a Foreign-Flagged Vessel – a Measure Unfavourable for all

Key words: expropriation of a vessel, registration of rights to the vessel, humanitarian corridor for the exit of a foreign vessels.

1. The problem of vessel’s expropriation in Ukraine

The military conflict in Ukraine has affected all areas of human life. Merchant shipping has not been spared. On the twentieth of February 2022 some maritime vessels have called at the ports of Mariupol and Mykolaiv and they are still unable to leave them. Shipowners lost their control over the vessels in that time. Self-proclaimed and unrecognised by the international community Donetsk People’s Republic’s (hereinafter referred “DPR”) authorities decided to expropriate without compensation the vessels operated by the Ukrainian entities. In their turn, the Ukrainian authorities decided to expropriate without compensation the vessels operated by Russian organizations. Is this measure beneficial to the conflicting parties? Let us analyze the situation.

2. Illustration of the problem by the story with the vessel Blue Star I

Let’s illustrate the problem with an example.

On 23 February 2022 the vessel Blue Star I (IMO № 9375159, flagged Panama) called at the port of Mariupol to load metal onboard. The Vessel is owned by Blue Star Marine Co. LTD registered at Belize.

On 24 February 2022 the Russian Armed Forces announced a ban on vessels movements in the Sea of Azov. Otherwise, the vessels would be considered terrorist and might be destroyed by the Russian navy.

The vessel is still in the port of Mariupol even though, on 25 April 2022, the Russian Armed Forces announced that the Azov Sea waters are cleared and humanitarian corridors for foreign vessels to leave the port of Mariupol are created. The owner lost his control over the vessel on 24 February 2022.

Appeals to the Russian authorities by the vessel’s owner have not resulted in the vessel’s departing, while the DPR authorities have reported that the vessel has been expropriated without compensation. The vessel’s owner has received the letter of Ministry of Foreign Affairs of the DPR No. 09-41/1647 dated 27 June 2022 which states that, pursuant to Decree of the Governmental Defense Committee No. 78 dated 23 May 2022 “On Compulsory Confiscation of Movable Property with Transfer to the State Ownership”, the vessel was forcibly seized and transferred to the state ownership without compensation of her value to the owner.

Blue Star I is not the only vessel still in the port of Mariupol. As of 24 February 2022, there were six vessels. At the moment, it is safe to say that only one vessel, the Turkish “Azov Concord”, has left the port. The Bulgarian vessel Tzarevna is also preparing to leave or has left recently. Her owner is an Italian company. The departure of the vessel Tzarevna commenced being organized only after a direct appeal by the Italian authorities to the authorities of Russia and the DPR.

In all cases, Russian authorities said that there were no formal restrictions to leave the port of Mariupol from the part of Russia.¹ Humanitarian corridors have been opened and the entrance and exit to the port have been cleared. The reasons for the impossibility to leave the port range from the need to repair the vessels to the absence of any measures on the part of flag states of the stranded vessels.

On 31 May 2022, the head of the DPR announced the creation of a merchant fleet in the DPR. The source of this rapid creation was the foreign vessels stranded in the port on 24 February 2022. It is difficult to say how the DPR authorities justified such a decision. However, one thing is clear, the vessel is not an asset but a burden to the DPR and Russia. The vessel just cannot be operated. The vessel would simply not be able to operate in accordance with her intended purpose to transport the goods from one country to another by sea.

3. Legal assessment of the expropriation as illegal in terms of the DPR’s legislation

The Civil Code of the DPR (hereinafter referred to as “the DPR’s CC”), as well as the Russian legislation, classifies seagoing vessels as immovable property. This is explicitly stated in Art. 166 of the DPR’s CC. According to Art. 167 of the DPR’s CC, the ownership (its acquisition, transfer, and termination) is subject to state registration. The ownership of the immovable property arises from the moment of its state registration (para. 2 of Art. 9 of the DPR’s CC). Information contained in the register is publicly available.

Therefore, the DPR’s authorities shall maintain the vessel registry which is not maintained currently. It is not also possible to enter the Vessel in the registry maintained by Russia since it is required the Vessel to be removed from the registry in the state of her registration (in the case of the vessel Blue Star I, in Panama). As a result, without an entry into the registry, the vessel will not be able to leave the ports of any foreign country. The actual shipowner will not have the legal grounds to operate the vessel. The vessel is neither owned by them since the ownership did not arise until a vessel is registered; nor leased since a lease agreement was not concluded.

The vessel cannot be operated also because the vessel will not have the documents and permits necessary for her safe operation without any restrictions (all kinds of certificates, including classification certificate). The relevant documents and permits cannot be obtained by the actual shipowner without legal title. Therefore, the vessel will not be able to leave the port of a foreign state since she will not have the documents needed for her operation.

Pursuant to Art. 303 of the DPR’s CC, the property may be seized from the owner in the public interest in emergency circumstances by the decision of the state authorities in accordance with the procedure and on the conditions established by the law with payment of property value in favour of its owner. Meanwhile, the response to the Ministry of Foreign Affairs of the DPR directly states that the vessel has been seized forcibly without compensation for her value. This decision of the Governmental Committee of Defense contradicts both the legislation of the DPR itself and recognised principles of international law, including those set out in the 1982 UN Convention on the Law of the Sea.

In this case, there are to irregularities in the procedure for transferring property to state ownership. The decision on expropriation has been taken by an administrative body and not by the court; the owner has not received monetary compensation.

Therefore, the vessel’s expropriation without monetary compensation and without a court order constitutes an illegal act.

4. Experiences of the expropriation of a foreign vessels

Maritime transport is the oldest mode of transport in comparison with rail, road, and air transport. Obviously, in the history of warfare, vessels were often part of the spoils. However, the registration of ships was formed gradually and acquired its extant features in the second half of the 19th century.² Changing the entry in the registry of a ship’s title on the basis of an act of another state authority has always been a problem and required recognition of this act by the state in the country where the vessel was registered. Otherwise, the shipowner had difficulty in getting the vessel out of foreign ports. Although the main purpose of owning a vessel is to navigate the seas that border different countries.

4.1. Expropriation of a vessels in XX century

Expropriation (or the same term – nationalisation) is commonly understood as the transfer of private property to state ownership. The experience of expropriation of a foreign vessels is interesting for the sake of clarifying how the rectification of registers was handled.

A cursory examination shows that it is extremely difficult to find material on the expropriation of property owned by foreign persons and registered in a foreign country.

Usually, a state decides to expropriate property either registered in its registers or located on its territory. A state does not have the right to decide to expropriate property belonging to foreign persons on the territory of another state. It thereby violates the sovereignty of the foreign State.

4.1.1. London Declaration concerning the Laws of Naval War

In 1909 the Declaration concerning the Law of Naval War was adopted in London. The document was signed by representatives of Germany, Austria-Hungary, Spain, France, Great Britain, Italy, Japan, Russia, and Netherlands. The Declaration was not ratified but is still considered as a document containing universally recognised rules and customs of naval war.

The Declaration declares that the jurisdiction of a ship is determined solely by the flag and not by the ultimate beneficiary (Article 55). Merchant ships flying the flag of a state with which there is no war are not subject to seizure (expropriation). Exceptions are cases of artificial change of flag in time of war (Article 56) or cases of deliberate smuggling (delivery of necessary goods to the belligerents, Article 45).

Therefore, in terms of the Declaration on the Law of Naval War, ships entering the port of Mariupol under foreign flags on 23-24 February 2022 are not subject to expropriation.

4.1.2. Expropriation at the beginning of the Soviet period

No single act about expropriation was adopted by the Soviet authorities. Expropriation was expressed in several decrees adopted from the end of 1917 and during 1918, dealing with different types of property (land, real estate in cities, property in the banking sphere, industrial property.³

The Soviet Decree on the Nationalisation of the Merchant Navy was adopted on January 23 (February 5), 1918. This decree declared sea- and river-going vessels of all types, shipping companies with all their property owned by joint-stock companies, share partnerships, merchant houses and individual major entrepreneurs to be national indivisible property of the Soviet Republic.⁴ Obviously, a condition for expropriation was the vessel registration in the Russian register, as under the Brest Treaty dated 18 March 1918 (The Treaty ending World War I for Russia, the Treaty was signed by the new Soviet Republic, from the one side, and Germany, Austria-Hungria, Turkish and Bulgaria, from the other side) the parties could not claim property accounted for in another state. In the early years, the Soviets were more interested in following the Brest Treaty than any other signatory of it. Otherwise, the Soviets would not have been able to fight the Civil War inside the country, lacking the resources.⁵

Foreign vessels were registered in foreign states and that is why they were not subject to expropriation by the Soviet authorities. As a consequence, there was no problem with changing the entry in the foreign registry of the ship’s ownership.

4.1.3. Expropriation of German vessels after World War II

As it may be seen from all kinds of sources, there was no total expropriation of property belonging to German citizens after the Second World War. To some extent, expropriation only affected the property of German citizens living in the invaded states of Eastern Europe.⁶ Basically, Allied countries shared the German military fleet and other military assets with each other.

This allied sharing did not affect merchant vessels belonging to private individuals, much less foreign-flagged vessels that might have ended up in German ports upon surrender.

These approaches are eminently logical because, as a matter of law, one state has no jurisdiction over another state and cannot decide to repossess property whose right has been registered in another state. It is not uncommon for a legal mechanism to be applied when it is profitable to do so. From the point of view of benefit, it is highly irrational to expropriate foreign-flagged vessels since it will not be possible to change the entry of their ownership in a foreign register, as a consequence, it will not be possible to operate them in international transportation and they turn from an asset into a burden.

4.2. Confiscation of a vessel as an instrumentality of the offence for poaching

A common problem is the confiscation of the vessels registered in a foreign state for poaching since this vessel is an instrument of offence. This problem is well-known in Russia, and it is often encountered in the Far East region. The border service seizes the foreign-flagged vessel, and a Russian court decides to confiscate of the vessel as an instrument of offence.⁷ Then attempts are made to sell the vessel at a public auction. However, the demand for such vessels is extremely low, so the auction usually is not successful.⁸ The problem is that the potential buyer understands that they will have to apply to the court of the state where the vessel is registered for recognition and enforcement of the Russian court’s judgement on confiscation in order to get the ground for exclusion of the entry for the former owner’s rights for the vessel. It seems that few potential buyers are willing to arrange such a procedure. Therefore, they do not seek to participate in the auction.

There is another field where lawyers are faced with the public sale of foreign vessels. It is the foreclosure of the vessel on debts to creditors. A vessel is an expensive property with which the shipowner’s debts might be covered.

4.3. Foreclosure of the vessel on the debts to foreign creditors

The world community recognise that it is a serious problem when the procedure of judicial sale of a vessel flagged in one state takes place in another state. The more complicated the procedure for changing the register entry, the less attractive a vessel is as an asset.

At the initiative of Chinese lawyers, a working group of the UN Commission on International Trade Law (UNCITRAL) has been working on the draft of the Convention on Judicial Sale of Ships for several years.⁹ The main goal of this document is to propose the decision of the problem of excluding the vessel from the register of one state if the judgement of her sale was rendered in the other one. The draft of the Convention was adopted in June 2022. On 13 September 2022, the Draft has been presented to the UN General Assembly.

All of this demonstrates that it is extremely difficult to exclude the entry on the right to a vessel in one state registry upon another state authority acts. It is problem which is discussed by the world community for many years and there is no conventional decision. This proves that it is almost impossible to exclude the entry on the former owner’s right for the vessel, which expropriation based on an authorities act whose power is rather questionable.

5. No benefit from unlawful expropriation of a vessels

The situation with the illegal expropriation of the vessels in the ports of Ukraine and the DPR is not only unlawful but also extremely unprofitable for all.

The fact is that in all countries in the world, the vessels shall be registered in special registers.¹⁰ In Russia, a vessel is an immovable property and the right for a vessel is arises from the moment of her registration. In many other countries, a vessel is a movable property, but she shall still be registered, and, for third parties, the owner of the vessel is an entity whose right is registered.

In order to operate a vessel, the owner shall register its right in the relevant registry and delete the entry of the former rightholder. Otherwise, if the entry is not changed, the rightholder of the vessel may require arresting the vessel in any ports where she calls.

Ukrainian authorities which expropriated Russian vessels (as reported only by lawyers approached by Russian shipowners) are unable to change the entry on the right in the Russian register. Therefore, they will not be able to operate the vessel, she will not be able to call at any ports except Ukrainian ones. The DPR authorities are in the same situation. Again, the DPR does not maintain the vessel register at all and the expropriated vessels will not be able to call at even the Russian ports.

Therefore, the new shipowners cannot operate the expropriated vessels for their intended purpose of the transportation of goods from one state to another.

In order to operate a vessel, they shall have many other documents to prove the possibility of her operation, such as classification certificates, certificates required under the International Safety Management Convention (ISMC), the International Convention for the Safety of Life at Sea (SOLAS), and the existence of a Safety Management System (SMS). Such permits and certificates can only be obtained by the registered owner. Consequently, a vessel without the appropriate permits and certificates will not be able to enter or leave a port of any state.

6. Conclusion

The story of the expropriated vessels shows that the decision to expropriate them not only violates the rights of the shipowners but is also a burden on the authorities. It is expensive to maintain the vessel, and she needs permanent maintenance. At the same time, it is almost impossible to operate the vessels for their intended purpose to transportation of goods by sea.

The double unpleasantness of this story comes down to the fact that, in accordance with the Judgment of the European Court of Human Rights dated 16 June 2022 on complaint No 28944/22, the Russian Federation is responsible for the actions of the DPR (ruling on the prohibition to enforce sentences of the DPR courts).

The above position of the international court theoretically means that a person who has not received compensation has the right to claim for compensation against the Russian Federation at their location as an injured party.

Currently, some property of the Russia located abroad has been seized as part of the sanctions imposed. This property is used to secure future claims by victims, including from unlawful confiscation of property.

One of the favorite questions from a University course of Law theory is whether there is law on the desert island where Robinson Crusoe ended up. The discussion behind question usually leads the students to the conclusion that as long as there is no another person (Friday) there is no law and no legal relations. As soon as the second person appears, the law becomes possible. Why? It is due to the fact that law is based on recognising each other as persons and owners.

This uncomplicated conclusion is put to the test every time when someone tries to take something away from someone else. There is no point in that taking away until there is someone who recognises the person who has taken something away as the owner. In the relevant case, the registration makes the person whose right is registered the owner.

The Russian and Ukrainian authorities are exchanging prisoners of war. Similarly, it is time to negotiate the exchange of the expropriated vessels. Leaving the vessel through the humanitarian corridor would be a great way to gradually restoring the equilibrium. ■

Notes