Challenges of global sulphur cap are more than just technical: North

The challenges introduced by the global sulphur cap are not exclusively technical, North of England Club has warned its Members. Tiejha Smyth, Deputy Director (FD&D) said that the new limits were likely to impact contracts and charterparties and noted that “forward planning now could help to avoid painful disputes in the future”.

North said that time charterparties would require particularly close attention, with more challenges anticipated for vessels already in long-term charterparties that span the enforcement date of January 1st 2020. The Club said that, unfortunately, there was 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”, the club said.

Tiejha Smyth wrote on some of the issues North anticipated would be among those that might more commonly arise:

Carriage of non-compliant fuel

It was likely that a prohibition on the carriage of non-compliant fuels would come into force on March 1st 2020 for vessels not fitted with Exhaust Gas Cleaning Systems (EGCS, “scrubbers”). Non-compliant fuels would have to be removed to avoid fines or the vessel being detained.

Assuming such fuel is not consumed before January 1st, 2020, North said that at issue was who was obliged to arrange or pay for the removal of such fuel, and that this would depend upon the wording of the charterparty. It would therefore be important for this to be considered at the drafting stage. North warned that there could be significant logistical difficulties in removing non-compliant fuel and it was likely that the re-sale value would be less than the original purchase price. Issues might also arise over who owned the non-compliant fuel and who therefore had 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 this will change to three sulphur types (<0.1%S, <0.5%S and >0.5%S). North observed that this raised the question as to what would constitute ‘low sulphur’ from January 1st 2020, less than 0.1% or less than 0.5%.

North said it was 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.

Bunkers on redelivery (BOR)

When a vessel was redelivered by a time charterer, the charterparty usually required that the vessel was redelivered with approximately the same quantities of ‘high sulphur’ and ‘low sulphur’ fuel as on board at delivery. The owner would usually be required to buy this fuel back at a certain price – often the same price as at delivery.

However, North noted that high sulphur’ fuel bought from the charterer at redelivery would have little value to the owner unless the vessel was fitted with scrubbers. BOR requirements in the charterparty might mean that the charterer could 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”, said North.

Bunker quality clause

Some bunker quality clauses required the charterer to provide fuel that complied with ISO 8217. However, not all fuels – hybrids, for example – were covered by ISO 8217. Therefore, said North, the bunker quality clause might need to be amended to ensure that the charterer was obliged to provide fuel of the correct specification, which was “safe and suitable” for the vessel, and in compliance with MARPOL and any other relevant regulations.

Fuel availability

Although it was anticipated that there would be enough compliant fuel available to meet demand, it might be geographically fragmented and therefore not in the right place at the tright time. A vessel might be trading in an area where compliant fuel could not be supplied or even be unable to trade in such areas, such that trading limit clauses might need to be reviewed. The same was likely to be true for new hybrids/blends, with LNG already known to have limited availability.

Bunker tank cleaning

Bunker tank cleaning would 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 would be needed; waste would need to be disposed of and time might be lost during the cleaning. North said that responsibility for all of this would depend upon the charterparty wording.

Performance warranties

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

Costs of installing an EGCS

North felt it to be unlikely that existing charterparties would expressly say who was to pay for a vessel to have an EGCS installed. If the charterer was likely to benefit in fuel cost savings then there might be scope for a commercial agreement as to who would pay, the Club said.

Could owners be compelled to install an EGCS?

Tiejha Smyth observed that the Court of Appeal considered this type of issue in the Elli and the Frixos [2008] case. 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.

However, Smyth noted that installation of an EGCS was only one option for compliance and, as things currently stood, it would be possible to meet the new sulphur requirements without installing an EGCS. Therefore, the absence of an EGCS on a vessel would not necessarily put the vessel or its owner in breach of MARPOL or impact on the vessel’s documentation. Smyth said that it therefore seemed unlikely that the Elli and the Frixos precedent would apply, but added that it could depend on the facts of the individual case.

Fines for non-compliance

In the first instance the owner would 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, North said.

Concluding, North said that early consideration of the above issues would 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.”