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Web alert: New low sulphur fuel oil requirements under MARPOL Annex VI - Legal considerations and contractual allocation of risks
News & Insights 16 January 2015
The new MARPOL Annex VI provisions could well lead to disputes between owners and charterers under the relevant contractual terms concerning a number of issues.
The new requirements relating to sulphur emissions that entered into force in emission control areas (ECAs) on 1 January 2015, namely that ships trading in designated areas have to use fuel on board with a sulphur content of no more than 0.10%, do not, strictly speaking, alter the regulatory environment. However, the new MARPOL Annex VI provisions could well lead to disputes between owners and charterers under the relevant contractual terms concerning a number of issues, namely:
Owners are likely to regularly face difficulties in finding and coping with compliant low sulphur bunkers. If such disputes arise, the allocation of liability that owners, charterers and bunker suppliers have agreed to in their contractual arrangements will be key.
Absent an agreement to the contrary, under voyage charters an owner will face the impact of increased bunker prices, as low sulphur bunkers are (currently) significantly more expensive than higher sulphur equivalents. For time/bareboat charters, the obligation to provide bunkers lies with the charterer, who will shoulder this financial burden. Therefore, from an owner’s perspective, it would be prudent to include an express provision in the time or bareboat charter obliging the charterer to provide sufficient quantities of low sulphur fuel oil in order that the vessel can comply with their voyage instructions. Charterers should also bear the risk of supplied ‘low sulphur’ bunkers that do not comply with the required parameters and, ideally, an express provision should be inserted into the subject charter to deal with this. In addition, an indemnity covering all owner’s losses (including fines) that may arise from such bunkers' supply would be beneficial, as well as a provision ensuring that the vessel remains on-hire throughout any detentions by PSC or other authorized governmental agency (such as the EPA in the United States), or any other delays incurred as a result of off-spec/non-compliant bunkers supplied by a charterer.
Under the BIMCO Fuel Sulphur Content Clause, charterers are obliged to supply low sulphur fuel permitting the vessel to comply at all times with all applicable regulations, if trade to an ECA is contemplated for that, or the vessel’s next, voyage. Of course, orders to load non-compliant bunkers could be refused. Moreover, a charterer will be liable to indemnify, defend and hold an owner harmless in respect of any losses, delays, fines etc. arising from any failure on their part to supply compliant fuel. The use of this BIMCO Clause is encouraged by the club.
Conversely, bearing in mind that an owner could be tempted to burn the cheaper (high sulphur) fuel for as long as possible, the charterer would need to ensure that an owner is contractually obliged to comply with all applicable regulatory regimes. A prudent charterer will also want to insert provisions in the charter to ensure that liability for complying with the system of sampling and record keeping (bunker delivery notes) as set out in Regulation 18 of Annex VI, as well as ensuring segregation of high and low sulphur fuel, rests with the owner. Also, a charterer will want to ensure that any loss of time arising from such issues, i.e. detentions due to such failings, is for the owner’s account.
In addition, charterers will need to carefully review the terms of their bunker supply agreements to ensure that liability can indeed be passed back on to their suppliers, being particularly aware of the very short contractual time bars which are common in bunker supply contracts, whereas low sulphur bunkers may not be consumed immediately. It is also crucial that fuel specifications are on back-to-back terms when the vessel is sub-time chartered.
‘Fitted for the service’
Under a typical NYPE 1946 charter, if the ship is not able to burn low sulphur fuel in compliance with the pertinent regulations, but trade to ECA ports is planned, the vessel will not be ‘in every way fitted for the service’, and thus will be in breach of the charter. Indeed, if the BIMCO Fuel Sulphur Content Clause for time charters has been incorporated, the owner expressly warrants that the vessel ‘shall be able to consume fuels of the required sulphur content when ordered by the Charterers to trade within any such zone’.
In light of the above, the key question is whether, and to what extent, an owner is obliged to make capital investments towards modifying a vessel (often applying approved retrofit plans) in order to make her compliant for using low sulphur bunkers when trading in the ECAs. Until the vessel is modified, the charterer may require reduced charter rates if they cannot trade within the ECAs without incurring penalties.
Whilst this issue, amongst several others, is yet to be tested before the English courts/arbitration, it should probably be accepted that, under English law, a vessel would be contractually compliant if she can actually carry the low sulphur fuel in dedicated/fully segregated tanks to avoid cross contamination risks, or else, in the absence of tanks dedicated to low sulphur bunkers, tanks having previously consumed high sulphur fuel have been extensively cleaned prior to receiving low sulphur bunkers. In any case, it would seem to be irrelevant if the vessel has limited tank capacity and thus would need to carry out repeated bunkering operations whilst being in an ECA.
Besides, equipment modifications and tank cleaning actually mean increased time and costs, which an owner/charterer would need to allocate in the charter using clear language.
If a vessel’s trading pattern includes ECA port calls, this may result in regular bunkering deviations and delays, especially if there is limited capacity for storing ECA compliant fuel. Typically, under a charter, the vessel will be obliged to proceed with the ‘utmost despatch’ from port to port, or other nominated destination, without deviations, i.e. by the direct route or by a route which, though not direct, would be a usual and reasonable route. A failure to do so may constitute a deviation, which can also have an impact on a member’s P&I cover in circumstances where such deviation would prejudice member’s rights and defences under the Hague / Hague-Visby rules. Therefore, from an owner’s perspective, inserting a suitable liberty to deviate for low sulphur fuel stemmings would be strongly recommended.
On the other hand, an owner should very cautiously consider a charterer’s voyage orders which could possibly constitute a breach of the contract of carriage, especially if the suggested route could potentially create safety issues for the vessel.
Bearing in mind that disputes and conflicts in relation to the new MARPOL VI requirements are likely to escalate until the situation is crystalized, owners and charterers are recommended to invest in loss prevention, not only by taking all the appropriate practical / technical steps, but also by focusing on their contractual arrangements aiming to explicitly allocate all costs and risks, thus minimizing the scope for any disputes that might otherwise have arisen due to ambiguity.
The Standard Club is always here to assist. Members should not hesitate to approach their usual club contact, or the authors, if at any time they have a query in relation to this publication.