укр eng рус est


Recent news
Chambers Europe

“The team was recently visible advising on a number of pharmaceutical cases. Sources agree that the team is “moving in the right direction” and are particularly impressed by its work in the pharmaceutical sector”.


The State “Privatization” of Issue of Classification Certificates in the Sphere of Shipping Industry is Restraining the Procedure of Creation of the Institute of Private Registers in Ukraine


Dmytro Shemelin, lawyer at Ilyashev & Partners Law Firm
Source: Yurydychna Praktyka

Today in Ukraine, as well as in the Russian Federation, the unified state classification company exists in the form of the Register of maritime traffic which was “inherited” from the times of USSR. At the same time the major part of classification societies are private: DNV GL, American Bureau of Shipping, Bureau Veritas, Lloyd’s Register, Classnk and others.

Is it worth creating private classification societies (hereinafter – the “CS”) in Ukraine within the current reform of the maritime sphere?

Classification standards

In general the business of classification societies is a business of very big and rich companies. As of nowadays 90% of the world transportation tonnage is managed by only 12 CS united into the International Association of Classification Societies (the IACS). There is a huge gap between the members of the IACS and 40-50 companies left outside its list, including the Ukrainian Register of Shipping (hereinafter – the “Register”) which are in general of a niche character.

There are several evident reasons for this. Above all high-scale business of CS requires big investments into R&D and knowledge-intensive research, and engagement of qualified personnel. Actually, the bigger the CS the bigger is quantity of vessels it has in its register, the more resources it is able to invest into its development, and the more sustainable its work will be.

It is understood that all the clients are interested in cooperation with the most reliable and predictable CS. Correspondingly enlargement of a CS triggers the mechanism of positive inverse reaction: the big societies become even bigger. Today the market of maritime insurance, freightage and financing of vessels, ship-building etc. is using the standards of the biggest CS. This is why the vessels are registered under the mentioned standards already at the designing stage. More than that, many international maritime administrations deny registration of vessels under their national flag if they were not classified by one of IACS’s members. If the classification certificate is issued not by the IACS’s member there is a risk that certain port authorities exert a stricter control over the vessel.

For this reasons the market of qualification services, oligopolistic as it is, is inclined towards bigger consolidation – suffice it to recall the not very distant merger of two giants – Det Norske Veritas та Germanischer Lloyd as a result of which DNV GL took up 21% of the world market of classification services.

Everyone is aware of the analogy – the market of auditors’ services where the “Big Eight” was gradually (through a number of mergers) transformed into the “Big Four” clients of which include 99 of 100 companies of FTSE 100 or 96% of FTSE 250.

It is understood that nobody is going to compete with DNV GL, this is why creation of private SC in Ukraine will be deliberately aimed at certain particular narrow niche, most likely – provision of services to vessel owners under Ukrainian flag. If the aim is to get accreditation by the states of the flag outside Ukraine it is much simpler and quicker to establish a CS abroad.

Correspondingly, possible private classification societies in Ukraine with high probability will graze on the same field where Ukrainian Register now is playing a dominant role.

The room for improvement

The key argument for the benefit of creating private CS in Ukraine is improvement of competition between CS which, in theory, must lead to improvement of the quality of services. There is also hope that in chase of profits private Ukrainian CS (additionally to Ukrainian market) will enter international (European) markets by improving the quality of their work.

As of today the results of the Register’s work may be approximately evaluated under so-called flag state performance tables. These are the special tables calculating the correlation between the quantity of inspections of vessels under a certain flag (within control of the vessels exercised by the state of the port) and the quantity of instances when such inspections led to delay of the vessel (i.e. when quite serious violations were revealed). For the vessels under Ukrainian flag of the greatest importance are the tables of the Paris Mou related to calls to European ports.

According to the tables of 2015 Ukraine occupies the 53-rd place out of 73 countries – right in the middle of the list, i.e. of the list of the countries where serious violations are not quite rare. Suchwise there is of course the room for improvement.

The system control

Opponents of the private CS are justifiably afraid that CS will not be competent enough compared to the current Register or will not act in a good faith (in other words, issue certificates against payment) which will lead to weakening of the safety of navigation. Being aware of our Ukrainian realities it may be said that all this is quite justifiable although it must be taken into consideration that (according to various judgments) in 80% of cases the accidents are caused not by the state of the vessel, but because of the human factor.

Similar concerns are, of course, actually applied to any type of activities controlled by the state starting from public catering or driving. This is why it is unlikely that it will be possible to say no to private CS in principle. The problem is rather posed in the form of creation of the effective system of control.

It is evident that the main instrument of control of quality of work demonstrated by a private CS in Ukraine is recognition of its certificate by Ukrainian Government within the Article 22 of the Code of the merchant shipping, i.e. accreditation of such CS for monitoring the vessels under Ukrainian flag.

As of today the system of accreditation of CS for the vessels under Ukrainian flag is in its initial state. There is a Decree of the Cabinet of Ministers No. 172-р as of March 06, 1996 which established the certain list of CS recognized by our government. However, there is neither approved procedure of putting this CS into the mentioned list, nor procedure of withdrawal from such list. It is suffice to say that amendments to the Decree were introduced only twice throughout 20-year period and it now even mentions Det Norske Veritas which was reorganized almost four years ago.

The practice shows that today the list of CS may be absolutely voluntarily amended by the Cabinet of Ministers of Ukraine which (acting under its own discretion) may either include or exclude every CS at any moment.

Very illustrative in this case is the example when in 2014 the Russian Maritime Register of Shipping was excluded from the list of accredited CS (the Decree of the Cabinet of Ministers of Ukraine No. 1114-р as of October 01, 2014).

The Decree No. 1114-р did not provide any grounds for cancellation of accreditation of the Russian register. At the same time when the Decree No. 1114-р was appealed by Transship LLC to the Ukrainian court (case No. 826/411/15) the first instance court actually ruled out that the Cabinet of Ministers of Ukraine is unrestrictedly independent in relation to management of the list of accredited CS (the Order of the Interdistrict Administrative Court in Kyiv as of September 14, 2015). Such decision was also supported by the appellate court (Ruling of Kyiv appellate court as of October 28, 2015) and came into force.

In such way manipulation of the list of accredited CS is nowadays an unlimited prerogative of the Cabinet of Ministers of Ukraine. In this situation it is hard to expect that a potential founder of a private CS in Ukraine will be interested to invest substantial monetary assets into organization and adjustment of activities of the CS fate of which will be fully at the discretion of the Cabinet of Ministers of Ukraine.

Correspondingly, establishment of private CS in Ukraine implies not so much formal permit for their establishment, as establishment by the Cabinet of Ministers of Ukraine of the clear procedure of including CS into the lists of the recognized societies for the vessels under Ukrainian flag (so that the decision on dismissal of recognition could be appealed to the court under clear and understandable grounds). Without such insurance it will be quite risky to make substantial investments into Ukrainian private classification societies.

© 2020 Ilyashev & Partners / Mobile version