Sulphur 2020: Contractual Conundrums

March 2019
Video article

As Members will be aware, the Marpol Annex VI Regulation 14.1.3 (the “Regulations”) will come into force on 1 January 2020 requiring vessels to comply with the 0.5% SOX emissions limit worldwide, other than in Emission Control Areas [ECA] to which the existing 0.1% limit will continue to apply. The Club has already discussed the options available for compliance in its August 2018 article. However, with less than 10 months to go before implementation, more questions are being asked as to the contractual responsibilities and liabilities for compliance with this wide ranging Regulation.

As of 1 January 2020, the Regulations will limit the sulphur content for ship’s fuel and as of 1 March vessels will be prohibited from carrying fuels with a sulphur content in excess of 0.5% (except as cargo or with a scrubber fitted). Therefore, from these dates vessels will either need to use low sulphur fuel oil or have a scrubber fitted.

This article highlights contractual issues which are likely to arise from these Regulations and may give rise to disputes. In order to minimise the scope for disputes, these issues should be considered and negotiated between the parties, in order that contracts contain suitable clauses to address these.

Charterparty Issues – the need for clauses to address these

Obligation on Charterers of Non Scrubber Equipped Vessels to Supply LSFO

Unless negotiated recently, and with an eye to the Regulations, existing Charterparties are unlikely to specify that compliant LSFO is to be supplied to the vessel. However, even if this is not expressly stated, a term may be implied requiring any fuel supplied to be lawful and compliant with the Regulations as in the absence of this any Charterparty would be unworkable. The Courts generally take a restrictive approach to implying terms into contracts but will do so where it is necessary. Alternatively, if the Charterparty contains a requirement that the fuel supplied is suitable for burning, depending on the wording of this provision, it could be argued that to be suitable for burning the fuel must be lawful.

Cleaning of Tanks / Lines

An important consideration is flushing of lines and cleaning of tanks (storage, settling and service) in order to accommodate LSFO and to ensure that any remnants of prior stems do not contaminate this. This may be a time consuming process and, for fleets, it may be necessary to trial on one vessel of each type to ensure that the methodology used is effective and plans can be put in place to ensure that this process is completed before 1 January 2020. In practice, it may be prudent to change over the LSFO well before this date.

Flushing of lines may not be sufficient and extensive tank cleaning may be required, especially if there has been a build up of residues over time. Owners may argue that the residue is only in the tanks/lines due to fuel supplied by Charterers over a period or months or years (depending of course on the length of the Charterparty). However, it could also be argued that where Owners are required to maintain the vessel in a “thoroughly efficient state” or to “comply with regulations” this would extend to ensuring that the tanks/lines are suitable for receiving LSFO.

Removal of Non-Compliant Fuel

The Regulations also require that any non-compliant fuel be removed from the vessel prior to 1 March 2020. Therefore, where, for example, the vessel has multiple fuel tanks and residues have been removed to ensure compliant fuel can be taken into one/more of these tanks prior to 1 January, it may be that the remaining HSFO needs to be removed before this later date (1 March 2020). For the same reasons as discussed above it could be argued that this obligation rests with Owners albeit, where there is more than residues, this may raise an argument that if such fuel is Charterers’ the obligation rests with them.

Issues on Board due to LSFO

There is a real prospect of issues arising on board with the engines as a result of the LSFO blended fuels – for example some engines may not be able to cope with the change in viscosity, instability, or incompatibility (if indeed these issues transpire) of the new blended fuels. In some circumstances, vessel modifications may be required. There is an argument that it would be for Owners to resolve any such issues on the basis of any maintenance provisions in the Charterparty. However, if the issues experienced are due to the quality of the fuel, as opposed to the engine’s ability to burn the fuel, this may rest with Charterers as a result of an obligation to provide fuel suitable for burning/use. Resolution of these disputes will be fact dependent and Members are reminded of the need to obtain evidence for bunker claims.

Speed & Performance Warranties

Consideration will also need to be given to whether the vessel can meet any speed and performance warranties in the Charterparty. LSFO has a different calorific value than HFO and it may be that switching fuel results in higher consumption and lower average speeds. It may be that, unless amended warranties are agreed, Charterers may have a claim for damages if the vessel is unable to meet these when using LSFO. In response, Owners may have a counterargument that the Charterparty incorporates an implied term that lawful/compliant fuel is required to be provided and that any warranties must be interpreted in line with this.

BIMCO and Intertanko Clauses

BIMCO has published two clauses which seek to address the issues and “share” the obligations arising from the Regulations. Intertanko has also published a suggested clause. These clauses will no doubt form the basis for the many negotiations for Charterparty clauses to address the issues discussed above arising from the Regulations. However, whether and to what extent these clauses are suitable will always depend on other clauses in the Charterparty, the length of the charter period including the degree to which this spans the period from 1 January to 1 March, and the negotiating position between the parties.

2020 Fuel Transition Clause For Time Charterparties

This clause is intended to be included in Charterparties which span the introduction of the Regulations. This clause places an obligation on Charterers: (i) to supply compliant fuel to the vessel before 1 January; and (ii) to remove non-compliant fuel prior to 1 March 2020.

Removal of fuel is at Charterers time, risk and cost and they are required to ensure tanks are “free of liquid and pumpable fuel” by 1 March 2020. Once Charterers have made the tanks “free of liquid and pumpable fuel”, Owners are obliged at their risk, time and cost to ensure tanks are fit to receive compliant fuel. This will likely necessitate removal of residues that are not “liquid and pumpable” which could result in significant cleaning. Depending on the length of charter prior to 1 January 2020, the parties may wish to consider negotiating this provision to allocate who will bear the cost of tank cleaning, if this is necessary, and also the risk of any cleaning being ineffective. There is also no express obligation that Charterers’ removal of fuel is done to “Owners’ satisfaction” and it may be that disputes arise as to the effectiveness of this and, for example, if this had been carried out effectively, whether extensive cleaning would not have been required.

The clause as drafted only imposes obligations to remove “liquid and pumpable fuel” (on Charterers) and cleaning obligations (on Owners) after 1 January and before 1 March 2020 and does not fully address the need for cleaning tanks/flushing lines prior to 1 January 2020 to ensure that sufficient tanks are fit to receive compliant fuel by the date that the Regulations come into force. If there is no tank separation and tanks/lines are not cleaned sufficiently before the sulphur cap comes in to ensure that no residues remain there is a real risk that HFO residues may contaminate LSFO and result in an inadvertent breach of the Regulations.

This is addressed to a degree at Clause b(i) which provides for Charterers to supply compliant fuel before 1 January and the vessel to have sufficient complaint fuel to reach the nearest bunkering port. In addition to this, there is a provision requiring Owners and Charterers to use best endeavours to ensure that by 1 January there is no non-compliant fuel carried. However it is not clear whether the compliant fuels to be supplied are to include fuel to be used by the vessel to flush the tanks/lines in the process of making the tanks free of liquid/pumpable fuel and the likelihood that more than one stem of LSFO would need to be provided before 1 January in order to comply with the obligations.

2020 Marine Sulphur Content Clause for Time Charterparties

This clause is intended for use in Charterparties which will be in existence when the sulphur cap comes into force on 1 January 2020. This provides for Charterers to use, and allow to be carried, only low sulphur fuel, and to indemnify the Owners for all losses arising from the failure to supply compliant fuel. The risk of the vessel not being able to use compliant fuel rests with Owners and in order to do so Owners will need to ensure that the tanks are suitable for the fuel, including cleaning and removal of residues, and also that the engine is able to cope with burning LSFO.

Intertanko Bunker Compliance Clause for Time Charterparties

This clause is broader than the BIMCO clauses and includes specific reference to speed and performance warranties and a warranty from Charterers that the bunkers are suitable for burning. In turn, it includes a warranty from Owners that the vessel is able to consume compliant bunkers.

There are separate obligations depending on when the vessel is to be redelivered. When the vessel is to be delivered prior to 31 December 2019, Charterers warrant that non-compliant fuel will not exceed a set quantity and there will be a minimum quantity of compliant fuel on board. In contrast to the BIMCO clause, where the vessel is to be redelivered after 31 December, i.e. when the Regulations will be in effect, Charterers are expressly required to prepare the bunker tanks, including cleaning and flushing, to Owners’ satisfaction, before 1 January. If tank cleaning is required in order for compliant bunkers to be received this will be for Owner’s account and the vessel will be off hire. There is however scope for dispute as to what cleaning is required by each of Charterers and Owners, and the extent to which an Owner can say that they are not satisfied with the steps taken by Charterers.

With each of these clauses, parties should consider the impact of the requirement that Charterers warrant the compliance of third parties, which importantly will include bunker suppliers. Any supply and other ancillary contracts will need to be carefully reviewed to ensure that Charterers are not exposed for this risk, especially in circumstances where there are concerns about the quality and compatibility of some of the new blended LSFO.

Tolerances and Enforcement

Annex VI provides that the Regulations shall apply to all “ships”. The obligation to comply with the Regulations is therefore on the ship/Owners and Owners will be the principal party responsible in the event of a violation of the Regulations.

However, Regulation 11 expressly provides that how the Regulations are to be enforced is to be left to each contracting state to decide. Therefore, there is a risk that a time charterer may be held responsible, for example if they have supplied non-compliant fuel. Under the terms of the Charterparty a liability of Owners may also be capable of being passed on to Charterers by way of an indemnity claim.

It is not yet clear how the Regulations will be enforced by different states and it is highly likely that a range of approaches will be taken. For example, in some instances tolerances may be permitted but a cautious approach should be taken and it should be assumed that if a vessel does not comply that a fine will be levied.

Comment

These Regulations will necessarily result in negotiations both of future fixtures and addendums to existing Charterparties and there are many issues which will need to be contemplated. Parties should consider their existing and future contractual commitments to ensure that the practical and legal issues are accounted for, this may necessitate a combination of the BIMCO/Intertanko clauses and/or bespoke negotiated provisions.

The IMO is recommending a ship specific implementation plan and it would be sensible for both Owners and Charterers to give early consideration to appropriate testing to ascertain what cleaning/flushing or modifications are required, and to ensure that non scrubber equipped vessels are able to take on and burn LSFO by 1 January 2020.

The contractual position is far from straightforward and will always depend on the negotiating position of the parties and also the other terms of the Charterparty, for example trading range and length. However, careful consideration should be given to the issues highlighted in this article and should any questions arise these should be addressed to your usual Club contact.

Article by Heloise Campbell

Syndicate Manager

Eastern Syndicate