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Article: IMO 2020 - scrubber FAQs for charterparties

16 April 2019

The below FAQs about scrubbers are intended to assist members (as owners and charterers) in preparing their charterparties for IMO 2020.  Whilst this is not intended to be formal legal or technical advice or an exhaustive list of FAQs, it seeks to identify chartering issues arising from IMO 2020, including potential contractual responsibilities and liabilities in respect of compliance.

Are ship owners obliged to install scrubbers?

In general terms, shipowners are not obliged to install scrubbers.  However this question cannot be considered in isolation from the wider implications of MARPOL Annex VI (which remains the primary responsibility of ship owners), and from the terms of the charterparty.

It would only be necessary to install scrubbers in circumstances where any of the following scenarios exist post 1 January 2020:

  1. The terms of the charterparty and / or the flag state regulations oblige ship owners to have such equipment on board (in order to comply with their 'legal fitness' obligations).
  2. The vessel is not technically capable, or requires modifications in order to receive, store and burn compliant LSFO.
  3. Charterers are not contractually obliged to supply compliant LSFO (and could elect to supply HSFO) in the context of a time charterparty.
  4. There are no alternative solutions available to enable ship owners to comply with their obligations under MARPOL Annex VI.

Are there areas where scrubbers are prohibited and / or regulated?

There are a number of areas around the globe where the use of scrubbers in territorial waters are prohibited or restricted.  This largely depends on the type of scrubber fitted.  Should vessels trade to ports in those areas, it would be prudent to ensure that sufficient (reserve) compliant LSFO is available on board to comply with applicable regulations.  Otherwise sufficient compliant LSFO and ULSFO (depending on whether a vessel is trading in an ECA or not) will need to be sourced, and it is presently unclear what the availability of such fuel will be come 1 January 2020.

Existing time charterparties (where a scrubber has been fitted) – What are the relevant considerations to bear in mind post 1 January 2020?

Post 01 January 2020, the obvious advantage to charterers – who are responsible for paying and supplying fuel under a time charter - of chartering a scrubber-fitted vessel is that they will benefit from likely lower fuel costs of HSFO, at least in the short term.  The advantage to ship owners is that, as a result of fitting a scrubber, the vessel may be able to benefit from higher charter rates.  The Carriage Ban will also not apply to the vessel provided the scrubber is fully operational and complies with the relevant MARPOL Annex VI provisions and EGCS guidelines and regulations.

However, again, existing time charterparties are not drafted with the regulatory change in mind, and this includes the use of alternative abatement technology, such as a scrubber.

When reviewing existing charterparties, the following (non-exhaustive list of) commercial considerations / contractual provisions should be borne in mind.

  1. Operation and maintenance: this will be the responsibility of ship owners under their seaworthiness and maintenance obligations.  It is understood that this will result in increased crew training and monitoring which may need to be enhanced in order to accommodate the new equipment.
  2. Breakdown / deficiency: the costs of repair are likely to be for shipowners' accounts in line with their seaworthiness and maintenance obligations.  If any time is lost as a result, this is also likely to be for shipowners' accounts depending on the specific facts and the off-hire provisions of the charterparty.  If compliant fuel (LSFO or ULSFO) is consumed to enable the vessel to continue trading, this will need to be supplied and paid for by the charterer in the first event, although this could lead to a claim for damages for the difference in price between compliant fuel (LSFO or ULSFO) and HSFO subject to it being shown that there is an actionable breach of contract (eg that the breakdown was due to ship owners' breach of their seaworthiness/maintenance obligations under the charterparty).  Repairs to the scrubber or sourcing compliant fuel could also lead to a disruption in the trade of the vessel and associated losses which charterers may seek to try and recover from ship owners on the same basis as above, albeit subject to ordinary contractual principles.
  3. Storage of compliant fuel on board and availability: a prudent approach may be for there to be sufficient reserve compliant fuel on board in the event of a scrubber breakdown, although this may not be provided for in the charterparty (for the reasons explained above).  However, consumption of compliant fuel (for example, in the event of breakdown) assumes that the vessel's fuel system (and associated tanks and lines) are capable of receiving, storing and consuming such fuel without resulting in non-compliance with the Sulphur Cap.  This may require separate lines and tanks, or for existing lines and tanks to be cleaned to be fit to receive compliant fuel.  Existing charterparty provisions do not adequately address the risk, time and cost of such an exercise.
  4. Disposal of scrubber residues (as applicable): the cost and time involved in dealing with the disposal of residues (for example, in the case of a closed loop scrubber) is not expressly addressed in existing charterparties.  It is also not clear how often residues will need to be disposed of and / or where suitable reception facilities are likely to be located.  The likelihood is that ship owners will probably have to bear this responsibility in the first event.  However, it may be possible to argue that ship owners are entitled to be indemnified by charterers (eg on the basis that such residues resulted from charterers' orders to burn the fuel in question), although this is unclear.
  5. Impact on speed and performance: depending on the type and specification of scrubber system, it will need to have a sufficient power supply and it is not inconceivable that its operation could impact the speed and performance of the vessel and any performance warranties.

In view of the above considerations, it is recommended that separate contractual arrangements be made for the use and operation of a scrubber in a charterparty context.

 

With thanks to Alessio Sbraga at HFW for his contribution to this article.