Impact on Charterparties – Time to Act Now

The challenges introduced by the global sulphur cap are not exclusively technical. The new limits are likely to impact contracts and charterparties. Forward planning now could help to avoid painful disputes in the future.

Time charterparties will require particularly close attention, with more challenges anticipated for vessels already in long-term charterparties that span the enforcement date of 1 January 2020. Unfortunately, there is no single “magic” charterparty clause to deal with all of the issues that might arise. All bunker clauses will almost certainly need to be reviewed but other clauses might also need to be considered, depending upon the chosen method of compliance. Below, we look at some of the issues that we anticipate will more commonly arise.

Carriage of non-compliant fuel

It is likely that a prohibition on the carriage of non-compliant fuels will come into force on 1 March 2020 for vessels not fitted with Exhaust Gas Cleaning Systems (“EGCS” or “scrubbers”). Non-compliant fuels will have to be removed to avoid fines or the vessel being detained. Assuming such fuel is not consumed before 01.01.2020, who is obliged to arrange or pay for the removal of such fuel will depend upon the wording of the charterparty, so it will be important for this to be considered at the drafting stage. There may be significant logistical difficulties in removing non-compliant fuel and it is likely that the re-sale value will be less than the original purchase price. Issues might also arise over who owns the non-compliant fuel and who therefore has the right to remove it.

Definition of ‘high sulphur’ and low sulphur’

At the moment, vessels burn either ‘low sulphur’ (0.1%S max) fuel in ECAs or ‘high sulphur’ (3.5%S max) fuel outside ECAs. In 2020, there will be three sulphur types (<0.1%S, <0.5%S and >0.5%S). This raises the question: what will ‘low sulphur’ mean in 2020? Will it be <0.1% or <0.5%? It is therefore advisable to move away from the use of terms such as ‘high’ and ‘low’ sulphur but instead to specify the exact sulphur limit of fuel e.g. <0.5% sulphur content; <0.1% sulphur content etc.

Bunkers on redelivery (“BOR”)

When a vessel is redelivered by a time charterer, the charterparty usually requires that the vessel is redelivered with approximately the same quantities of ‘high sulphur’ and ‘low sulphur’ fuel as on board at delivery. The owner will usually be required to buy this fuel back at a certain price (often the same price as at delivery). ‘High sulphur’ fuel bought from the charterer at redelivery will have little value to the owner unless the vessel is fitted with scrubbers. BOR requirements in the charterparty might mean that the charterer can redeliver the vessel with insufficient compliant fuel on board to reach a bunker port. Therefore, Owners might want to ensure that BOR clauses are adjusted accordingly.

Bunker quality clause

Some bunker quality clauses require the charterer to provide fuel that complies with the international quality standard ISO 8217. However, not all fuels are covered by ISO 8217 (e.g. hybrids) so the bunker quality clause might need to be amended to ensure that the charterer is obliged to provide fuel of the correct specification, which is safe and suitable for the vessel, and in compliance with MARPOL and any other relevant regulations.

Fuel availability

Although it is anticipated that there will be enough compliant fuel available to meet demand, it may be geographically fragmented. So a vessel might trade in areas where compliant fuel cannot be supplied or even be unable to trade in such areas, such that trading limit clauses might need to be reviewed. The same is likely to be true for new hybrids/blends, and LNG is already known to have limited availability.

Bunker tank cleaning

Bunker tank cleaning will be needed if switching from heavy fuels to hybrid/blends/ distillates. Tank cleaning might also be needed before switching between different products, depending upon the advice given by the relevant fuel provider. Cleaning products will be needed, waste will need to be disposed of and time might be lost during the cleaning. Responsibility for all of this will depend upon the charterparty wording.

Performance warranties

Different fuels have different calorific values and energy densities. The performance of the vessel could be affected by any of the chosen compliance methods so the performance warranties might need to be amended. Owners should check with engine manufacturers.

Costs of installing an EGCS

It is unlikely that existing charterparties will expressly say who is to pay for a vessel to have an EGCS installed. If the charterer is likely to benefit in fuel cost savings then there may be scope for a commercial agreement as to who will pay.

Can owners be compelled to install an EGCS?

The Court of Appeal considered this type of issue in the Elli and the Frixos [2008] 2 Lloyd’s Rep. 119. In 2005, new MARPOL regulations came into force, which made it unlawful for any ship to carry fuel oil as cargo unless it was either double-hulled or double-sided. Expensive modifications would be required to the ships in question to allow them to comply with the new regulations. The Court found that the owners were in breach of certain clauses in the particular charterparties for not having carried out the necessary modifications, namely; a warranty relating to compliance with MARPOL and a clause requiring the vessel to have on board documents required by any applicable law to allow the vessels to trade. Installation of an EGCS is only one option for compliance and, as things currently stand, it will be possible to meet the new sulphur requirements without installing an EGCS. Therefore, the absence of an EGCS on a vessel will not necessarily put the vessel or its owner in breach of MARPOL or impact on the vessel’s documentation. Hence it seems likely that the Elli and the Frixos will not apply but it will depend on the facts of the individual case.

Fines for non-compliance

In the first instance, the owner will be responsible for paying any incurred penalties but they might be entitled to be indemnified by the charterer depending upon the charterparty terms. It might be less clear who will be responsible for lost time and costs if the vessel is detained by port state control.

Looking ahead

Early consideration of the above issues will be key to avoiding future headaches. The solutions will not be the same in every case and will be best considered in the context of the trade that the vessel is going to perform. Additional issues could arise as technologies develop and as we get an idea about availability of compliant fuels etc, which might necessitate further review of charterparties from time to time.

By Tiejha Smyth
Deputy Director (FD&D)