A matter of contract rights

On Dec. 13, 2011, the Department of Public Lands announced that marine sports operators, such as banana boat and parasail tour operators, would not be permitted to pick up customers on Mañagaha Island for their tours. Instead, only the company that has been granted the exclusive commercial concession on Mañagaha Island, and its subcontractors, would be permitted to begin tours from the island. This announcement received considerable public attention. Marine sports operators, primarily small companies, claimed that Public Lands had: (1) adopted a new rule without allowing for public comment, and (2) caused harm to their business opportunities. These operators argued in favor of an exception, which would permit them to pick up tour customers on Mañagaha Island whenever the tour had been sold prior to the customers landing on Mañagaha.

The basis of the December letter was the exclusive concession agreement for Mañagaha Island. This is a Public Lands contract that provides one company-in exchange for an annual payment to Public Lands-the sole right to operate all commercial concessions on the island. When the letter was issued, Public Lands was not adopting a new rule; instead, it was explaining the rights granted under this contract.

In order to avoid confusion, Public Lands must determine whether the December letter correctly interpreted the contract’s provisions. We will undertake this task in a manner that will educate the public as to our management philosophy and obligations for Mañagaha Island. We will explain both the fundamental principles that govern our management, and the history of managing this precious resource. Then, we will examine the provisions of the contract between Public Lands and the company with the exclusive concession rights.

First, the Department of Public Lands is a trustee over public lands, and the beneficiaries are Northern Marianas descent persons. The secretary is charged with the highest standard of care in managing public lands. These principles derive from the CNMI Constitution and its public laws. Article 11 of the CNMI Constitution declares public lands to belong collectively to the people of the Commonwealth who are of Northern Marianas descent. That same article gave the Marianas Public Land Corp. the duty to manage and dispose of all surface lands. CNMI courts have long recognized that MPLC held these lands in trust and acted “in a fiduciary capacity” when it managed public lands. Among the court cases establishing this principle are Romisher v. MPLC, 1 CR 843, 848 (1983) and Govendo v. MPLC, 2 N. Mar. I. 482, 491 (1992) (“strict standard of fiduciary care”). MPLC was dissolved in 1994 by the governor’s Executive Order 94-3. Today, the duty to manage and administer public lands is entrusted to the Department of Public Lands by statute (1 CMC Section 2801). That statute also provides for the continuation of the “strict standards of fiduciary care.” Section 2802. Any decision with regard to the management of Mañagaha Island, as public land, must meet this standard.

Second, it is important to understand how persons of Northern Marianas descent benefit from the management of public lands. All money from Public Lands must be transferred to the Marianas Public Land Trust, which is a “co-trustee” in managing public lands. MPLT receives the revenues from the management and disposition of public lands and invests them for the benefit of all persons of Northern Marianas descent. Even though MPLC could be, and was, abolished, MPLT exists in perpetuity. These principles were set forth as the law of the land by the Commonwealth Supreme Court in Dept. of Public Lands v. CNMI, 2010 MP 14, ¶¶ 3, 30.

Third, while there are, at least in theory, basically two different approaches that may be taken with regard to managing Mañagaha Island, Public Lands chose its approach 23 years ago. That approach must still be followed today.

One approach is to aim to derive the highest dollar value from the use of the land with this money being used publicly for the benefit of a large number of persons of Northern Marianas descent. The other approach is to provide broad commercial access to Mañagaha Island so that small business owners of Northern Marianas descent may use the island to make money for their personal benefit.

In 1988, MPLC adopted the first approach in managing Mañagaha Island. MPLC decided to select by competitive bid a single company to receive the exclusive rights to all commercial concessions related to Mañagaha Island, with the exception of transportation. There were two reasons for adopting this approach. The first reason was to place the responsibility for the island’s cleanliness and maintenance on the shoulders of a single company. Prior experience taught that when several companies had access to the island, the area was not kept clean and the structures were not repaired. Each company placed the blame on the other. The exclusive concession contract would resolve this by placing these responsibilities on the company that won the bid. The second reason was that granting exclusive rights to the commercial concessions on Mañagaha Island would yield the highest dollar value. This approach is consistent with Public Lands meeting its fiduciary duty. A trustee has a duty to use reasonable care to preserve the trust property (cleanliness and maintenance obligations) and to make the trust property productive (obtain the highest rental price). 1

The strategy to maximize returns by offering an exclusive concession succeeded. On July 2, 1989, MPLC awarded a five-year exclusive concession on Mañagaha Island in return for an advance payment of $4,170,000 and improvements to the Mañagaha pier worth up to $500,000. To date, this is the highest fee ever paid by a private company for the use of public lands in the CNMI. A great many persons of Northern Marianas descent have benefited from the Mañagaha Island concession contracts. The money was used to build infrastructure (e.g., sewers, roadways) critical to the establishment of the Dandan and As Matuis homesteads. The money was used to the ultimate benefit of all the homesteaders in both of these subdivisions, who are, by definition, persons of Northern Marianas descent. This contract has been re-bid and renewed several times since then.

This management approach not only meets Public Lands’ fiduciary duty by maximizing the value of Mañagaha Island as an asset, but also spreads the benefit to the greatest number of beneficiaries. When local water sports operators seek access to the customers on Mañagaha Island, they seek to do so without paying these exclusive concession fees. Their access would benefit very few persons of Northern Marianas descent while depriving a great number of persons of the benefit of the high concession payments. This second approach, in general, would violate the fiduciary duty to deal with beneficiaries impartially. 2

This brings us to the issue. The issue is whether the exclusive concession contract permits water sports operators, who have not paid for concession rights, to pick up customers for tours that begin on Mañagaha Island. These operators argue that they should be permitted to pick up customers so long as they do not solicit these customers on Mañagaha Island. In other words, they wish to be allowed to pick up customers who have purchased their tours prior to visiting Mañagaha Island.

Since Public Lands long ago adopted a management approach to Mañagaha Island and has entered a contract for the exclusive concession on the island, this issue is answered by examining the language of the existing contract. The Agreement for Special Recreational Concession (Mañagaha Island) granted on Oct. 4, 2006, states in section 3A: “Concessionaire shall have the exclusive rights to operate all commercial concessions on Mañagaha Island during the term of this Agreement.” The contract is very specific in section 3B as to the categories of rights it is intended to cover:

The term “commercial concessions” includes the right to prepare, deliver, sell, and provide food or beverages on the island for all persons who desire to purchase the same; the rental or sale of water sports equipment, recreational equipment, or beach equipment and related supplies; the conduct of tours on the island and from the island; the sale of goods on the island; and the provision of entertainment for profit on the island. (Emphasis added.)

The highlighted language shows that the exclusive concession was intended to extend to “tours.” It is very significant that the contract does not just state “tours,” which would leave the possibility it was intended to apply only to tours conducted on the island. By expressly breaking “tours” down to those conducted “on the island” and those conducted “from the island,” the contract shows the parties intended the reach of the exclusive rights to extend to water sports tours that start from the beach or the pier of Mañagaha Island. This is consistent with the history of the management of the island, which shows the intent to maximize revenues by offering a broad scope of exclusive rights.

The parties to the contract intended the exclusive rights to cover parasailing, banana boating, and other water sports tours, because these tours are expressly listed in the very same section that grants exclusivity. Section 3B(1) lists two types of tours that would be conducted from the island by the company with the exclusive concession rights:

C. Operate underwater activities, such as scuba diving, snuba diving, snorkeling, and sea walker-type tours,

D. Operate surface water activities, such as parasailing, banana boat rides, pedal bikes, power boat lagoon cruises, windsurfing, canoe rentals and tours, and kayak rentals and tours. (Emphasis added.)

There is no support in the language of the contract for making a distinction between tours sold on Mañagaha Island and those sold prior to the customer reaching Mañagaha Island. The clear language of the Concession Agreement shows that exclusivity is based upon the location of the activity (the tour)-not the location of the sale of the tour.

In conclusion, the contract shows Public Lands must restrict the conduct of tours from Mañagaha Island, including parasailing and banana boat tours, to the company, which holds the contract rights to the exclusive concession and its subcontractors. Other marine sports operators may not pick up customers from Mañagaha Island and then take them on water sports tours. Any statement or suggestion by Public Lands to the contrary is hereby rescinded. It makes no difference whether these tours were pre-sold or not. It makes no difference whether the tour is one-way from Mañagaha Island or a round-trip. Any tour from Mañagaha Island must be conducted by or sanctioned by the exclusive concessionaire.

There are at least three reasons for enforcing these contract rights as written: (1) Public Lands has a contractual duty to ensure the company with exclusive concession rights receives the benefits of its contract; (2) Public Lands has a fiduciary duty to maximize the value of the public lands entrusted to it and the failure to enforce these rights at present will seriously affect the bid price when the concession is put to bid in the future; and (3) limiting tours to the company and its subcontractors ensures these tours are conducted by responsible marine sports operators. This is because the company with the exclusive concession is required to keep in place a high level of insurance for the operations of itself and its subcontractors. This level of insurance is available only to companies that are well-capitalized and experienced. This protects both the tourist and government.

As this is a matter of contract rights, no further public comment is needed or sought. Public Lands will resume enforcing these exclusive rights immediately.

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Pedro I. Itibus is the acting secretary of the Department of Public Lands.

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1 These rules as to fiduciary duty are set forth in the Restatement (Second) of Trusts at sections 176 and 181, which were adopted as CNMI law by statute.

2 This is another rule as to fiduciary duty set forth in the Restatement (Second) of Trusts § 183.