Does IMO 2020 expose shipbuilders to claims for breach of contract?

Law firm Hill Dickinson has noted that, since the adoption of the 0.50% maximum global limit on sulphur content by the IMO in October 2016, much consideration had been given to the practical and legal challenges facing shipowners in meeting the global limit, which will become effective from January 1st 2020. However, the law firm also observed that there had been little focus on the potential impact on shipbuilders, specifically their potential exposure for breach of contract.

Shipbuilders could be liable for fines in circumstances where, for example, sea trials were taking place should the fuel being consumed violate the sulphur cap. However, Hill Dickinson warned that shipbuilders might also be exposed to claims for breach of contract as a consequence of the implementation of Regulation 14.1.3.

One area of potential concern related to the shipbuilders’ obligations in relation to class and ‘other regulatory bodies’ after January 1st 2020. The writer noted that there was, as yet, no published guidance or commentary in this regard.

Consequently, while it was not known whether it would be more difficult to obtain class approval from January 1st 2020 for vessels which were built without emission abatement technology on board (and it can probably be safely assumed that at least to begin with it probably will not be) there were risks.

Class might make recommendations, restrictions or qualifications in relation to newbuildings delivered in an area where there was an issue concerning the availability of compliant fuel. There could be seaworthiness issues if there were doubts about the availability of compliant fuel. Some classification societies might decide to approve only vessels with scrubbers on board. Or, if more ports banned the use of open loop scrubbers, a newbuild with open loop scrubbers might struggle to obtain class approval.

Hill Dickinson said that these could lead to knock-on claims, adding that the approach of class and other regulatory bodies in this regard would be important and might become increasingly so, since the shipbuilder usually committed to delivering a vessel which was compliant with rules, regulations and requirements.

Under Article I of the Shipbuilders’ Association of Japan form of shipbuilding contract (‘SAJ Form’) the builder commits to deliver a vessel which complies with rules, regulations and requirements of Class and other regulatory bodies in force as at the date of the contract. (By contrast the Newbuildcon places this obligation at the date of delivery.) Arguably therefore, said Hill Dickinson, the approach of class in this regard would only bite on those contracts on the SAJ Form entered into after January 1st 2020.

Article V SAJ Form provides a mechanism to change the vessels’ specifications in response to compulsory and non-compulsory changes in class requirements or regulations during the build. Accordingly, said the legal firm, it was potentially relevant to all contracts on the SAJ Form where delivery was due after January 1st 2020.

Until it became clear whether there would be additional issues in relation to obtaining class and other regulatory bodies’ approval, there was a risk of increased exposure to costs and delays for the builder arising out of requests for alterations in the specification, particularly those which were non-compulsory.

The law form said that a further, perhaps more pressing issue, arose from the characteristics of low sulphur fuel. The experience in the emission control areas so far had suggested that low sulphur fuel had different performance criteria to high sulphur (higher consumption and lower speeds) and that there could be ignition issues and compatibility issues.

It noted that in circumstances where performance was being warranted without reference to the properties of low sulphur fuel (particularly with the added challenge that not all low sulphur fuels behave in a uniform way), the builder might be exposed unless there had been a careful adjustment to the contractual performance parameters to bring them in line with the likely characteristics of low sulphur fuel, or an amendment to the warranty to account for different performance on the basis of low sulphur fuel.

Since it was also known that low sulphur fuel can cause ignition issues and might have compatibility issues, both of which might affect the smooth running of sea trials, the shipbuilding contract should be amended to deal with the technical challenges which might arise, such as ignition failure, in order to keep the parties’ obligations intact.

Hill Dickinson said that the challenges that builders would face were largely practical in nature, but also commercial and legal.