AI explained: AI and shipping

AI-driven autonomous ships raise legal questions, and shipowners need to understand autonomous systems’ limitations and potential risks. Reed Smith partners Susan Riitala and Thor Maalouf discuss new kinds of liability for owners of autonomous ships, questions that may occur during transfer of assets, and new opportunities for investors.

Transcript:

Intro: Hello and welcome to Tech Law Talks, a podcast brought to you by Reed Smith's Emerging Technologies Group. In each episode of this podcast, we will discuss cutting edge issues on technology, data and the law. We will provide practical observations on a wide variety of technology and data topics to give you quick and actionable tips to address the issues you are dealing with every day. 

Susan: Welcome to Tech Law Talks and our new series on AI. Over the coming months, we'll explore the key challenges and opportunities within the rapidly evolving AI landscape. And today we will focus on AI in shipping. My name is Susan Riitala. I'm a partner in the asset finance team of the transportation group here in the London office of Reed Smith. 

Thor: Hello, I'm Thor Maalouf. I'm also a partner in the transportation group at Reed Smith, focusing on disputes. 

Susan: So when we think about how AI might be relevant to shipping, One immediate thing that springs to mind is the development of marine autonomous vessels. So, Thor, please can you explain to everyone exactly what autonomous vessels are? 

Thor: Sure. So, according to the International Maritime Organization, the IMO, a maritime autonomous surface ship or MASS is defined as a ship which, to a varying degree, can operate independently of human interaction. Now, that can include using technology to carry out various ship-related functions like navigation, propulsion, steering, and control of machinery, which can include using AI. In terms of real-world developments, at this year's meeting of the IMO's working group on autonomous vessels, which happened last month in June, scientists from the Korean Research Institute outlined their work on the development and testing of intelligent navigation systems for autonomous vessels using AI. That system was called NEEMO. It's undergone simulated and virtual testing, as well as inland water model tests, and it's now being installed on a ship with a view to being tested at sea this summer. Participants in that conference also saw simulated demonstrations from other Korean companies like the familiar Samsung Heavy Industries and Hyundai of systems that they're trialing for autonomous ships, which include autonomous navigation systems using a combination of AI, satellite technology and cameras. And crewless coastal cargo ships are already operating in Norway, and a crewless passenger ferry is already being used in Japan. Now, fundamentally, autonomous devices learn from their surroundings, and they complete tasks without continuous human input. So, this can include simplifying automated tasks on a vessel, or a vessel that can conduct its entire voyage without any human interaction. Now, the IMO has worked on categorizing a spectrum of autonomy using different degrees and levels of automation. So the lowest level still involves some human navigation and operation, and the highest level does not. So for example, the IMO has a degree Degree 1 of autonomy, a ship with just some automated processes and decision support, where there are seafarers on board to operate and control shipboard systems and functions. But there are some operations which can be automated at times and be unsupervised. Now, as that moves up through the degrees, we get to, for example, Degree 3, where you have a remotely controlled ship without seafarers on board the ship. The ship will be controlled and operated from a remote location. All the way up to degree four, the highest level of automation, where you have a fully autonomous ship, where the operating systems of the ship are able to make their own decisions and determine their own actions without human interaction. action. 

Susan: Okay, so it seems like from what you said, there are potentially a number of legal challenges that could arise from the increased use of autonomy in shipping. So for example, how might the concept of seaworthiness apply to autonomous vessels, especially ones where you have no crew on board? 

Thor: Yeah, that's an interesting question. So the requirement for seaworthiness is generally met when a vessel's properly constructed, prepared, manned and equipped for the voyage that's intended. Now, in the case of autonomous vessels, they're not going to be able to. The kind of query turns to how a shipowner can actually warrant that a vessel is properly manned for the intended voyage where some systems are automated. What standard of autonomous or AI-assisted watchkeeping setup could be sufficient to qualify as having excised due diligence? A consideration is of course whether responsibility for seaworthiness could actually be shifted from the shipowner to the manufacturer of the automated functions or or the programmer of the software of the automated functions on board the vessel as you're aware the concept of seaworthiness is one of many warranties that's regularly incorporated in contracts for the use of ships and for carriage of cargo. And a ship owner can be liable for the damage that results if there's an incident before which the ship owner has failed to exercise due diligence to make the ship seaworthy. And this, in English law, is judged by the standard of what level of diligence would be reasonable for a reasonably prudent ship owner. That's true even if there has been a subsequent nautical fault on board. But how much oversight and knowledge of workings of an autonomous or AI-driven system could a prudent ship owner actually have? I mean, are they expected to be a software or AI expert? Under the existing English law on unseaworthiness, a shipowner or a carrier might not be responsible for faults made by an independent contractor before the ship came into their possession or before it came into their orbit. So potentially faults made during the shipbuilding process. So to what extent could any faults in an AI or autonomous system be treated in that way? Perhaps a ship owner or carrier could claim a defect in an autonomous system came about before the vessel came into their orbit and therefore they're potentially not responsible for subsequent unseaworthiness or incidents that result. There's also typically an exception to a ship owner's liability for navigational faults on board the vessel if that vessel has passed a seaworthiness test. But if certain crew and management functions have been replaced by autonomous AI systems on board, how could we assess whether there's or not there has actually been a navigational fault for which the owners might escape liability or pre-existing issue of unseaworthiness, so a pre-existing hardware or software glitch? This opens up a whole new line of inquiry as to at what might have happened behind the software code or the protocols of the autonomous system on board and the legal issues of responsibility of the ship owner and the subsequent applicable liability for any incidents which might have been caused by unseaworthiness are going to involve a significant legal inquiry and in new areas where it comes to autonomous vessels. 

Susan: Sounds very interesting. And I guess that makes me think of, I guess, a wider issue that crewing is only part of, which would be standards and regulations relating to autonomous vessels. And obviously, as a finance lawyer, that would be something my clients will be particularly interested in, in terms of what standards are there in place so far for autonomous vessels and what regulation can we expect in the future? 

Thor: Sure. Well, the answer is at the moment, there's not very much. So as I've mentioned already, the IMO has established a working group on autonomous vessels. And the aim of that IMO working group is to adopt a non-mandatory goal-based code for autonomous vessels, the MASS code, which will aim to be in place by 2025. But like I said, that will be non-mandatory, and that will then form the basis for what's intended to be a mandatory MASS Code, which is expected to come into force on the 1st of January 2028. Now, the MASS Code working group last met in May of this year. And it reports on a number of recommendations for inclusion in the initial voluntary MASS Code. Interestingly, one of those recommendations was for all autonomous vessels, so even the fully autonomous degree four vessels, to have a human being, a person in charge designated as the master even if that person is remote at all times so that may rule out a fully autonomous non-supervised vessel from being compliant with the code. So mandatory standards still very much under develop in development and not currently in force until 2028 at the moment that doesn't mean to say there won't be national regulations or flag regulations covering those vessels before then. 

Susan: Right. And then I guess another area there would be insurance. I mean, what happens if something happens to a vessel? I mean, I'm looking at it from a financial perspective, of course, but obviously for ship owners as well, insurance will be the key source of recovery. So what kinds of insurance products would already be available for autonomous vessels? 

Thor: Well, good to know that some of the insurers are already offering products covering autonomous vessels. So just having Googled what's available the other day, I bumped into Ship Owners Club, which holds entries for between 50 and 80 autonomous vessels under their All Risks P&I cover. And it seems that Guard is also providing hull and machinery and P&I cover for autonomous vessels. And I can see that their industry is definitely taking steps to get to grips with cover for autonomous vessels. So hull and P&I cover is definitely out there. So we've covered some of the legal challenges and insurance and what autonomous vessels are. I wonder, Susan, what other more specific challenges people interested in financing autonomous vessels might face? 

Susan: Sure. Yeah. So, I mean, I guess I'll preface that by saying that I'm an asset finance lawyer. So instinctively, when I think about financing autonomous vessels, I'm thinking about the assets itself. So either financing the construction or the acquisitions of of the vessel. But in terms of autonomous vessels in particular, there are boundless investment opportunities beyond just the vessel itself, you know, on the financing, some of the research and development, some of the corporate finance of the companies designing and building those vessels, and the technology used to operate them. So there's, I imagine, a vast opportunity here for an investor who's keen to get involved. From a commercial perspective, autonomous vessels are pretty new. They're pretty untested. Obviously, you've talked a lot about the fact that a lot of the regulation isn't really completely there yet. There's a lot of development still to come. So it takes quite a brave investor to put funding into it. And so far, at least, the return on investment is a bit uncertain. It's not like investing in a tanker or a bulk carrier where you've got a known market. Everyone knows what the problems are. Everyone knows what the risks are, how to mitigate them. So in a lot of ways, this is all still very, very new, both for the owners and for the finances. But investors are very interested in sustainability solutions. They're interested in what the next big thing is. So I imagine that the autonomous ships are quite likely to appeal with potentially better safety records, being more sustainable. That in turn would then make the asset better value for the investors and less likely to result in insurance claims or reputational damage resulting from incidents and that sort of thing. From a legal perspective, it doesn't immediately seem that there would be a huge difference in taking a mortgage over an autonomous ship versus a manned one. But then it becomes a bit more complicated if we start to think about enforcing that mortgage. So in the traditional way to enforce a mortgage, the mortgagee will arrest the vessel in a suitable port. Depending on where the vessel is, the lender may need to instruct the borrower or the manager to sail the vessel to a suitable port. And if the borrower fails to do this, the lender can become a mortgagee in possession, take over the ship, sail it into a friendly port and apply for traditional sale. But how are you going to do that if you can't just go on board and say to the master, hey, I've arrested this ship, I'm going to take over now. And thinking about, for example, the degree three vessels where you'd have a remote operator redirecting the ship, what happens? Presumably the mortgagee would have to go to them and say we'd like you to redirect this vessel what if they refuse can the lender take over can they override the autonomous system or the remote operation would they have to. Would there be cybersecurity issues, issues with password and access and things like that? I mean, these are all kind of big questions at the moment that no one's tried to do this yet. So it isn't really clear how all of this would fit in with the existing law on the rights of a mortgagee in possession, which is a very well-tested legal concept, but it does assume physical control of the ship, which is not as obvious in an autonomous scenario as it would otherwise be. And a conducted issue to that would be, what I already mentioned, is kind of the absence of a clear market, and this would be relevant in the context of a judicial sale. So at least at the outset, valuing autonomous vessels could be a bit difficult. And until there's a clearly defined secondhand market, it might be difficult to lend us to determine whether it's even worth enforcing in terms of the potential return they would get, because it's difficult to analyze how much you might be able to get for the vessel. Not aware of any cases where someone has tried to do this. So the existing law will definitely need to develop and it's going to be very interesting times as we navigate these changes in the market in relation to autonomous vessels. 

Thor: Yeah, I can see that autonomy definitely throws up a whole bunch of issues for financing. 

Susan: Definitely. I mean, at the moment, we don't entirely know all the answers, but we're definitely looking forward to finding out. 

Thor: Right. 

Susan: Thank you so much for joining us for our AI podcast today. 

Outro: Tech Law Talks is a Reed Smith production. Our producers are Ali McCardell and Shannon Ryan. For more information about Reed Smith's emerging technologies practice, please email techlawtalks@reedsmith.com. You can find our podcasts on Spotify, Apple Podcasts, Google Podcasts, reedsmith.com, and our social media accounts. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

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