Shipowners and charterers need to revisit their charterparties and fuel supply agreements to ensure that they are ‘fit for purpose’ well ahead of the introduction of the 2020 global sulphur cap. Julian Clark and Chris Primikiris of Hill Dickinson summarise the key points for review.
The global sulphur cap is due to take effect on 1 January 2020 as a result of amendments to Annex VI of the International Convention for the Prevention of Pollution of Ships (MARPOL). From that date onwards, ships will have to use fuel oil on board (including the fuel used for main and auxiliary engines and boilers) with a sulphur content of no more than 0.50% m/m against the current limit of 3.50%, which is a significant reduction. The existing 0.10% limit for emission control areas (ECA) will remain unaffected.
The International Maritime Organization (IMO) has indicated firmly that there will be no grace period, meaning that the shipping industry will have to be ready by 1 January 2020. Planning and preparations should be well underway, and these should include reviewing the parties’ standard contractual terms of business and making them 2020 compliant.
Whilst the 2020 sulphur cap will impact both time and voyage charters, the issues may differ depending on the type of charter. We therefore consider each type of charter in turn and then look at some considerations in common.
First, we take a look at time charters both from the perspective of owners and charterers.
There are in effect two main options for ships to be 2020 compliant: either using compliant fuel or adopting approved equivalent methods such as ‘scrubbers’ which clean the emissions before they are released into the atmosphere.
Under a time charterparty, the responsibility for supplying fuel lies on the charterers. For example, the NYPE 1946 and Shelltime 4 forms state respectively:
Clause 2. ”That the Charterers shall provide and pay for all the fuel except as otherwise agreed…”
“7. Charterers to provide and pay for all fuel (except fuel used for domestic services)…”
“29. Charterers shall supply marine diesel oil/fuel oil with a maximum viscosity of ___ Centistokes at 50 degrees Centigrade/ACGFO for main propulsion and diesel oil/ACGFO for the auxiliaries.”
The obligation is on charterers to provide fuel that is of reasonable general quality and suitable for the engine types. However, it is common market practice to include a bunker specification clause in the riders or fixture/re-cap.
Provision is also often made through the use of the standard form BIMCO clauses, such as the Bunker Fuel Sulphur Content Clause or Bunker Quality and Liability Clause. However, in their current form neither of these clauses will provide sufficient cover for owners. This is because the former only makes reference to ‘emission control zones’ (e.g. the Baltic Sea, North American ECA, etc.) and the latter only makes reference to ISO 8217 which, in its current format, does not provide an adequate cap.
Owners should therefore ensure that there is express reference to compliance with MARPOL Annex VI and the 0.50% limit in the relevant rider clauses and/or fixture re-cap. Further, any standard or bespoke clauses currently used should be amended accordingly.
Subject to the installation of ‘scrubbers’ (see under next heading), it will be charterers who will have to face the impact of the increased cost of compliant fuel, as is usually the case in time charters.
Particular care should be taken when fixing vessels that span into 2020 and beyond. A number of issues are likely to arise in such circumstances, including the requirement to comply with much stricter bunker specification standards. Decisions will also need to be made as to what is to happen to any unused non-compliant bunkers and who is to bear the cost of the same. For example, whether it would be possible to discharge the bunkers at the next port of call – an issue that will depend on how the port authorities will treat the non-compliant bunkers: if treated as ‘waste’ these could lead to the vessel being detained and issues regarding which party is to bear the associated costs and delay. Another question is whether charterers will be able to sell any non-compliant fuel and if so, whether they would suffer a significant loss on the re-sale (as it is not clear how the markets are to react).
Similar considerations will apply on redelivery of the vessel. Bunker redelivery clauses usually specify that the owner is required to accept and pay for all bunkers retained onboard at current market prices. Again, consideration should be given as to what is to happen in circumstances where the vessel is redelivered with non-compliant fuel onboard or in circumstances where the vessel is to be redelivered before but very close to 1 January 2020.
Whether acting as owner or charterer, it is important that the charterparty contains suitable clauses that protect the party in question, including indemnities covering losses that may arise from wrong supply, fines and delays.
EXHAUST GAS CLEANING SYSTEMS OR ‘SCRUBBERS’
One potential way of mitigating the increased cost of low sulphur fuel oil (LSFO) is by the installation of an exhaust gas cleaning system (ECGS), or ‘scrubber’.
There are a number of different types of scrubbers which operate in various ways and which will produce various by-products (e.g. open loop scrubbers use seawater which is discharged back overboard; closed loop scrubbers use sodium hydroxide which results in sludge retained on board; and dry scrubbers use solid solvents which form salt retained on board). Depending on the type of scrubber, there could be further implications or costs consequences, for example any issues with compliance when discharging the by-products of open loop scrubbers or the additional energy usage and associated cost of closed loop scrubbers.
It is important, therefore, that relevant provisions are included detailing the characteristics of the scrubbers and any associated issues (such as handling of by-products), on top of the additional performance warranty that is likely to be incorporated into the charterparty.
There are a number of significant issues that may arise in the context of a time charter. These include responsibility for the scrubbers’ installation and the associated dry-docking; whether owners can be obliged to install a scrubber under the existing terms of a charterparty; and, significantly, what is to happen in the event that the scrubber system is defective.
Dealing with the second of these issues first, it seems unlikely that a charterer will be able to compel an owner to install a scrubber. Changes in international regulations have in recent years resulted in some notable decisions. For example, in the Elli and Frixos  EWCA Civ 584, the owners were deemed to be in breach of the charterparty for failing to provide a vessel that was both legally and physically fit (in this case, the vessel was not entirely double-hulled as required by MARPOL).
However, it is likely that the above case can be distinguished in the present circumstances as there are numerous alternative means of compliance with the cap. For example, it is possible to use compliant bunkers such as LSFO or alternative fuels (such as LNG).
In circumstances where an owner takes the commercial decision to dry-dock the vessel and install a scrubber system, it is possible that the associated time and cost will fall within an existing dry-docking clause, but that will depend on the wording of the specific clause and is a matter of interpretation.
Scrubbers, as mentioned, will create additional performance warranties for owners. There could be a specific clause dealing with the scrubber or, more likely, under the general performance/maintenance obligations imposed on owners by the charter. In the same manner, the vessel would be off-hire for any periods within which the scrubber system was defective and maintenance and/or repairs were carried out. For example, this would be captured by the standard off-hire clauses in the NYPE 1946 and SHELLTIME 4, providing that the vessel is off-hire in circumstances of:
15. …breakdown to hull, machinery or equipment”
21. “repairs…time in and waiting to enter dry dock for repairs; breakdown (whether partial or total) of machinery, boilers or other parts of the vessel or her equipment”
In conclusion, it is important that the contractual documents used by owners and charterers respectively are reviewed and amended accordingly in order to be 2020 compliant.
Under a voyage charterparty it is the owner who is responsible for supplying the vessel with fuel and it is therefore owners who will face the impact of the expected increased cost of LSFO.
However, it seems likely that, as a result of the increased cost to owners, freight rates will also increase, with the consumer being ultimately affected.
The use of scrubbers is unlikely to present too many issues in the context of a voyage charter. The voyage will be fixed with full knowledge of whether the vessel has a scrubber installed and the freight rate will likely be adjusted accordingly.
However, issues may arise in circumstances where the scrubber system stops operating and time is lost for repairs/maintenance, etc. It is important for charterers to ensure that suitable clauses are in place so that laytime (and maybe even demurrage) do not count in such circumstances.
COMMON ISSUES TO TIME AND VOYAGE CHARTERS
There is some concern within the industry that there will not be sufficient LSFO available when the cap comes into force on 1 January 2020 and also that the LSFO will not be globally available. This will result not only in price increases, but also present potential issues with regard to the practicalities of bunkering.
Similarly, it does not appear that scrubbers have been adopted as broadly as expected and there could be a risk that high sulphur fuel oil will not be as widely available or at the much lower cost initially anticipated.
Even though, according to Regulation 18.2, the ship should not be required to deviate from its intended voyage or to delay unduly in order to achieve compliance, owners can protect themselves by inserting clauses making it the owners’ right to deviate to ports of call where low sulphur fuel is available to be stemmed and also allocating the associated financial implications on charterers.
Bunker sampling and non-compliance
In order to minimise the potential for bunker disputes, clear procedures should be set out with reference to the sampling procedure to be adopted during bunker operations. The current BIMCO Bunkering Operations and Sampling clause should be sufficient for continued use in time charters.
Parties should also consider their contracts with their bunker suppliers and ensure that the bunker delivery notes state the sulphur content of the fuel supplied, although this can be difficult at times given that bunker suppliers tend to use their own terms. This will depend to some degree on how many suppliers are available at the location in question and the negotiating power of the parties.
Non-compliance with the MARPOL regime will likely result in significant fines being levied by the port State authorities of contracting parties – these could vary, however, given that arrangements will have to be made by way of national legislation. In any event, it is important that in the charterparty there is clear allocation of liability for such fines.
One final point to consider is the effect of non-compliance on the ‘seaworthiness’ of the vessel. If a vessel fails to comply with the requirements of the MARPOL Convention, then it would effectively be in breach of the flag State national law and the vessel’s MARPOL certificate may be withdrawn, or at least suspended, by the flag State. This could also have considerable significance for the vessel’s continued insurance cover.
The global sulphur cap coming into force on 1 January 2020 requires review of the relevant contractual documentation including charterparties and fuel supply contracts. It is important to incorporate clauses that clearly allocate the risk between the parties, clarify who is responsible for compliance and indemnify the innocent party with regard to any delay, costs and associated consequences.
Therefore, it is necessary for owners and charterers to review the contractual nexus under which they operate and plan in advance, so that they can be 2020 compliant.
Partner and Global Head of Shipping
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