LNG Terminal Conditions of Use – The Contractual Maze

Vessels routinely need to sign LNG Terminal Conditions of Use (COUs) before being allowed to berth at LNG Terminals. 

We are often asked by our Members to review COUs to check whether the relevant contract is acceptable from a P&I/Pooling point of view. These COUs frequently include clauses that are favourable to the terminal.  

Beware of additional contractual liabilities

Broadly speaking, International Group (IG) P&I clubs cannot cover the contractual liabilities agreed to by a Member which the Member would not otherwise be liable for under the relevant law (e.g. the law of the place where the LNG terminal is located). In addition, where a Member has waived their legal right to limit liability under a contract, IG P&I clubs may only cover the Member up to the limit which would otherwise have applied. 

Poolable Cover

These principles are subject to some exceptions in the International Group Pooling Agreement (some of which are specifically concerned with COUs). 

Generally, for a COU to be poolable it must meet certain requirements which include:

• A limitation of liability by statute or in the contract ( the maximum permissible contractual limit is currently US$150 million);
• Where a contractual limit applies, the limit must include all of the liabilities a Member faces under the contract flowing from one incident. However, exceptions apply for wreck removal and crew injury where the Member has tried their best (the so-called “best endeavours” test) to obtain a right to limit all of their liabilities flowing from one incident but has failed; and   
• The Member should bear no liability when the party requesting an indemnity (i.e. the LNG terminal) is solely or 100% negligent, unless such indemnity arises under a Knock for Knock agreement. 

In a contract which includes a Knock for Knock provision, each party (a) agrees to accept its own loss, damage and liability regardless of which party is to blame; and (b) agrees that they will not claim against the other party.  To be acceptable for club cover, there must be a fair balance of liability between the parties, and the right to limit liability must be preserved.  Again, however, exceptions apply for wreck removal and crew injury on board the Member’s vessel where the Member has carried out best endeavours to achieve this outcome but has not succeeded.

How can we help?

If the COU doesn’t comply with the above requirements, we will provide our Members with recommendations on how the contract can be changed to correct the offending clauses.  If the LNG terminal still refuses to make the amendments, we can then assist the Member to consider available options including obtaining a quote for alternative market insurance cover.    

North has a dedicated and experienced LNG Terminal COU Advice Team which reviews COUs. Our assistance has on occasion resulted in terminals agreeing to vary their terms so that the contracts are poolable or are more favourable to the shipowner. 

Find out more

If a Member has a vessel which is due to call at an LNG Terminal and would like North to review the COU sufficiently in advance of the vessel’s call, send it to: LNG-COU-Advice@nepia.com

Author: Sean Durr
Deputy Director (Training)