Sea-Land Service, Inc. v. US, Court No. 80-12-00159.

• Decision Date: 31 March 1988
• Docket Number: Court No. 80-12-00159.
• Citation: 683 F. Supp. 1404
• Parties: SEA-LAND SERVICE, INC., Plaintiff, v. The UNITED STATES, Defendant.
• Court: U.S. Court of International Trade

683 F. Supp. 1404

SEA-LAND SERVICE, INC., Plaintiff, v. The UNITED STATES, Defendant.

Court No. 80-12-00159.

United States Court of International Trade.

March 31, 1988.

Gerald A. Malia and Tanya J. Potter, Ragan & Mason, Washington, D.C. (at the trial and on the brief), Robert S. Zuckerman, Edison, N.J., (of counsel), for plaintiff.

John R. Bolton, Asst. Atty. Gen., Washington, D.C., Joseph I. Liebman, Atty. in Charge, Intern. Trade Field Office (Barbara M. Epstein, New York City, at trial and on the brief), for defendant.

RE, Chief Judge:

In this action, plaintiff, Sea-Land Service, Inc. (Sea-Land), seeks to recover customs duties paid for work done and equipment provided in a foreign country to its vessel, M/V Sea-Land Adventurer (Adventurer), a vessel documented under the laws of the United States to engage in foreign trade.

Pursuant to 19 U.S.C. § 1466(a) (Supp. III 1979), the cost of "repairs," "repair parts," "materials," and "equipment" provided in a foreign country to a United States documented vessel is subject to a duty of 50 per centum ad valorem, when the vessel first arrives in the United States. Accordingly, upon the entry of the Adventurer into the United States, the Customs Service assessed duties of 50 per centum ad valorem on plaintiff's estimated cost of the work performed and the equipment provided to the vessel in foreign ports.

Plaintiff contends that the repair duty provisions of section 1466(a) do not apply to the work done on the Adventurer since that work did not constitute "repairs" within the meaning of the statute. It is plaintiff's position that, although the work was done after the vessel was documented, it was performed pursuant to a warranty clause in the construction contract, as a part of the original construction process, and, therefore, does not come within the meaning or intent of the foreign repair statute.

Defendant contends that a presumption exists that foreign material or foreign work performed on a foreign-built vessel, after United States documentation, is dutiable under section 1466(a), and is not part of the original construction of the vessel. Defendant further contends that plaintiff has failed to establish that most of the items at issue were, in fact, part of the original construction of the vessel.

The pertinent provisions of 19 U.S.C. § 1466(a) (Supp. III 1979) provide as follows:

Equipment and repairs of vessels

(a) Vessels subject to duty; penalties

The equipments, or any part thereof, including boats, purchased for, or the repair parts or materials to be used, or the expenses of repairs made in a foreign country upon a vessel documented under the laws of the United States to engage in the foreign or coasting trade, or a vessel intended to be employed in such trade, shall, on the first arrival of such vessel in any port of the United States, be liable to entry and the payment of an ad valorem duty of 50 per centum on the cost thereof in such foreign country....

The question presented is whether work and equipment provided to a vessel in a foreign country, after United States documentation, pursuant to a warranty clause in the construction contract, are dutiable under 19 U.S.C. § 1466(a) as foreign "repairs," "repair parts," "materials," or "equipment," or are free of duty as part of the original construction of the vessel.

The court has carefully considered the governing legislation, relevant case law, testimony of record, and the parties' proposed joint legal standard. It is the holding of the court that as to those items in dispute, the applicable standard or criterion is that work done or equipment added pursuant to the specifications of the original contract for the construction of the vessel, are not dutiable. Hence, all work performed and equipment added, not required by the contract are dutiable items under the foreign repair statute. Consequently, the case is remanded to the Customs Service to determine, in conformance with the standard enunciated in this opinion, which items are subject to duty under section 1466(a) as "repairs," "repair parts," "materials," or "equipment."

The Adventurer was constructed as a new vessel from an existing refurbished midbody, by Mitsubishi Heavy Industries, Inc., in Japan. The construction contract contained a "guarantee clause" for a 12-month period. This clause warranted against all defects which were "due to defective material or poor workmanship, ordinary wear and tear excepted...."

On July 12, 1978, the Adventurer was issued a United States Certificate of Registry and was documented under United States law to engage in foreign trade. Sea trials were conducted on the vessel on July 15 and 16, 1978, to ensure that the vessel was seaworthy. On July 27, 1978, it was delivered by its builder to its owner, Sea-Land.

During the 8 months between the date of delivery and the date it first entered the United States, April 5, 1979, various items of work and equipment were provided to the Adventurer, while it was engaged in foreign trade in Japan.

Upon the vessel's arrival in the United States, plaintiff filed entry papers which noted 259 items of work and materials, which were listed as "Guarantee Work-No Cost Items." All of the work done on the vessel was completed within 8 months of its delivery, and prior to its entry into the United States.

Pursuant to Customs Regulation 19 C.F. R. § 4.14(k) (1979), plaintiff petitioned for relief from the duty for the foreign work performed on the vessel.

The Customs Service determined that some of the items listed by plaintiff on its petition were additions or alterations to the hull or hull fittings, transportation expenses, consumable supplies, or non-repair type inspections, and, therefore, not dutiable under 19 U.S.C. § 1466(a). As to other items listed by plaintiff, Customs determined that they constituted "repairs," "repair parts," "materials," or "equipment" within the common meaning of those terms, and were not encompassed by any exception to section 1466(a). Consequently, a duty was assessed on those items. Plaintiff protests the assessment and commenced this action to recover its payment.

It should be noted that Sea-Land does not make any claim for the remission of duties pursuant to 19 U.S.C. § 1466(d) (Supp. III 1979). Remission of duties assessed under 1466(a) is authorized under section 1466(d), when a vessel is "compelled, by stress of weather or other casualty" to make repairs or purchases outside of the United States to secure the safety and seaworthiness of the vessel. 19 U.S.C. § 1466(d)(1). See, e.g., Suwannee Steamship Co. v. United States, 79 Cust.Ct. 19, 22, C.D. 4708, 435 F.Supp. 389, 391 (1977). Hence, Sea-Land does not seek a remission of duties under any exception to section 1466(a) but rather, contends that the foreign repair statute does not apply to the work done on the Adventurer.

Sea-Land has moved for judicial notice of certain documents and to admit certain discovery material into evidence. The court has considered all relevant materials, documents, and evidence presented. In effect, the court has granted plaintiff's motions, and acknowledges the cooperation of the parties during the trial, and counsels' helpful post-trial briefs.

Historically, vessels have been treated as sui generis and are not subject to duty under the tariff laws. See The Conqueror, 166 U.S. 110, 118, 17 S.Ct. 510, 513, 41 L.Ed. 937 (1897). The tariff schedules expressly provide that, "vessels which are not `yachts or pleasure boats' within the purview of subpart D, part 6, of schedule 6, are not articles subject to the provisions of these schedules." See Tariff Schedules of the United States, General Headnotes and Rules of Interpretation, 19 U.S.C. § 1202, General Headnote 5(f) (1982).

The Supreme Court in The Conqueror, left no doubt that while a vessel may bear items that enter the stream of commerce, the vessel itself is not an article of commerce. The principle, therefore, is clear that, although the vessel is a vehicle of dutiable articles, the vessel itself is not a dutiable article. See 166 U.S. 110, 115, 17 S.Ct. 510, 512, 41 L.Ed. 937 (1897). Accordingly, the cost of foreign construction of a vessel is not dutiable. By the same reasoning, the vessel's original equipment is also not dutiable since it is part of the construction cost of the vessel. See 22 Op. Att'y Gen. 360, 361 (1899).

Although the principle is clear and uncontested that the cost of the foreign construction of a vessel is not dutiable, the foreign repair statute, 19 U.S.C. § 1466(a), provides that foreign repairs to a United States documented vessel, and replacement equipment are dutiable, unless exempt by the statute. It is therefore clear at the outset that the foreign repair statute applies to repairs and not the cost of the construction of the vessel. In general terms, therefore, the question to be answered is whether work performed on the vessel subsequent to documentation is part of the original construction, or repairs within the meaning of the foreign repair statute. The answer cannot be a categorical response, but depends upon the nature of the work, and the facts of the particular case.

It would seem obvious that a variety of factors must be considered to determine, in each case, whether the work done was a continuation or reasonable extension of the "original construction," or constituted "repairs." Some of the salient factors to be considered include the terms and nature of the guarantee or warranty clause, when the work was actually performed, and the nature and purpose of the work and the equipment provided. Surely, it is important to determine whether the "guarantee clause" is indeed a warranty of fitness for use and quality, and is limited in time to what may properly be deemed part of the original construction. Hence, one cannot quarrel with the government's position that a service contract cannot be labeled to be a warranty clause, thereby excluding work...