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IMO 2020 Regulation looms large

As is well known, the IMO low sulphur regulations enter into force from 1 January 2010. CJC is frequently consulted to advise shipping companies on contractual terms and other legal issues arising. According to Ian Short: “By now, prudent owners and charterers ought to have started taking practical and legal steps ahead of the IMO 2020 Regulations coming into force.”

Over recent months, Ian has been giving talks in the UK, Norway and China outlining how owners and charterers can best protect their position. In addition, he has published an article exploring the arrangements owners and charterers ought to be making with current and future contractual counterparties in inserting key additional clauses dealing with both the transition period and the use of compliant fuel thereafter or seeking to agree addendums in respect of long term charter arrangements.

IMO 2020 creates legal stress points

Shipowners, operators and charterers face technical, commercial and legal challenges in the run-up to the IMO’s January 2020 sulphur cap. Campbell Johnston Clark partner Ian Short explains some essential contractual precautions.

The different responsibilities laid out in timecharter contracts for owners and charterers for the management, procurement and payment of bunker stems provide a key stress point for the IMO’s sulphur content cap for marine fuel. Indeed, if ship operators have not undertaken internal fuel-related risk assessments based on expert advice, we recommend that they do so as soon as possible.

One source for tension is the fact that some new low-sulphur fuel blends being made available by refiners in the run-up to January 2020 have shown variable characteristics, in part depending on the properties of the original crude oil from which they were refined. Specific issues to watch for have proved to be fuel viscosity, stability and compatibility, each of which can cause fuel management problems on board ship – including blocked pipes, pumps and purifiers.

A further issue arising relates to the lack of an updated ISO standard, which means that ISO 8217:2017 forms the basis for fuel sampling and testing. As was demonstrated last year by contaminated bunkers supplied in Houston and, more recently, in Panama, existing standard and test protocols do not necessarily identify all potential contaminants.

Fuel suppliers should have provided exactly what is set out on the bunker delivery note (BDN), but their responsibility for bunker stems ends at the fuel manifold during the bunker loading process. Therefore, the 0.5% sulphur cap creates new uncertainties in an area already prone to dispute: charterers seek to pay for cost-competitive fuel that is available as conveniently as possible, while the priority for ship operators is to receive bunker stems of high quality that will not generate shipboard engineering problems. Shipowners are also responsible for compliance, both internationally and in emission control areas.

New fuel clauses

Both BIMCO and Intertanko have drafted clauses setting out the division of responsibilities between owner and charterer before, during and after the transition period on January 1, 2020.  Key points in the BIMCO 2020 Marine Fuel Sulphur Content Clause for Time Charter Parties are summarised as:

  • Charterer shall supply compliant fuel;
  • Charterer warrants bunker suppliers’ compliance, specifically with respect to contents of the BDN;
  • Charterer indemnifies owner for non-compliance and vessel remains on hire;
  • Owner warrants that vessel complies with sulphur content requirements;
  • Charterer not liable for owner’s failure to comply provided that charterer supplied compliant fuel.

Key points in the Intertanko Bunker Compliance Clause can be summarised as follows:

  • Charterer supplies compliant fuel, including 0.1% sulphur within Emission Control Areas;
  • Fuel complies with ISO 8217:2017;
  • Bunkers provided are “fit for purpose and suitable for burning in the main and auxiliary engines”;
  • Charterer ensures compliance with BDNs and fuel samples;
  • Charterer indemnifies owner for non-compliance;
  • Owner warrants vessel compliance and capability to consume compliant fuels;
  • Bunkers to be kept segregated;
  • Owner to indemnify charterer for owner’s failures;
  • Speed and performance warranties based on use of compliant fuels.

Outstanding issues

Both of these sets of clauses are relatively well-balanced and bring more clarity and certainty with respect to the division of responsibilities. It is certainly prudent for owners and charterers to insert such clauses or variations of them into new time charterparties, even where the vessel is due to be redelivered before 1 January 2020 in the event of any extensions to the charter period.

But what of long term charters that will overrun the 1 January 2020 date but which have made no provision for the transition period and the requirement to burn low sulphur fuel thereafter?  Ideally, the parties would agree between themselves their responsibilities in advance of 1 January 2020 by, say, agreeing to an addendum with additional clauses.  However, who holds the bargaining power with such negotiations?

Time charterparties often contain a provision that owners warrant that the vessel complies with all applicable conventions, laws and regulations, including MARPOL as amended and extended.  A charterer could argue that the obligation is on the owners to upgrade the vessel when new MARPOL regulations come into effect during the charter period (see the Elli and The Frixos [2008] 2 LL.L.R.) and that it remains possible to burn high sulphur fuel oil if scrubbers are installed.  Existing time charterparty clauses will provide the spec and grade of fuel that a charterer is to supply throughout the Charterparty period and a charterer could insist on continuing to supply such (less expensive) contractual high sulphur fuel post 1 January 2020.

However, charterparties also often include a provision that fuel supplied is suitable for burning in the vessel’s engines.  An owner would suggest that there is an implied term that suitability extends to the legal requirements of the bunkers supplied.

These are just some examples of the legal uncertainty of the parties’ positions should they not agree to suitable fuel transition and low sulphur clauses in charterparties or addendums, although parties can use some of these points as bargaining chips in commercial negotiations.

Further potentially contentious matters remain. One such issue arises as a result of low sulphur fuel oil characteristics, as outlined above. If fuel complies with both ISO 8217:2017 and at the fuel manifold from the charterer’s and bunker supplier’s points of view but cannot be used by the ship for reasons of viscosity, stability or compatibility, who is then responsible?

An industry in transition

In the run up to the deadline, ship operators also have some pressing issues related to heavy fuel oil (HFO) itself. The residual product is often full of impurities that marine engineers refer to as ‘unpumpables’, which cannot be burnt and settle as solid deposits at the bottom of bunker tanks. In rough seas, these impurities can be stirred up. Previously, resulting operational issues related to extra engine wear; now, lack of bunker tank cleanliness could mean such residues rendering a perfectly satisfactory 0.5% sulphur fuel non-compliant.

For the purposes of this discussion owners and charterers are well advised to take precautions to clarify the division of their responsibilities specifically relating to the transition period. Some of the industry clauses drafted so far, we believe, fail to cover some eventualities.

For example, a prudent owner might undertake comprehensive bunker tank cleaning in August or September to ensure an efficient fuel change-over but such a move would leave the charterer paying significant premiums for bunkers consumed during the balance of 2019. Conversely, an owner would not want a vessel redelivered in late December 2019 with a large quantity of HSFO on board when, under existing terms within most time charterparties, payment would be due for such fuel on redelivery. Neither would a charterer want to redeliver in early January with a full quantity of LSFO having bought HSFO on delivery unless they were fairly compensated.

Linking bunker price on redelivery to the last invoice or to an index may produce a more balanced result than a fixed contractual price or having the same value as bunkers on delivery, but the parties may be advised to reach agreement before 1 January 2020 because such matters go beyond the BIMCO and Intertanko clauses.

We firmly believe that it is in both parties’ interest to agree new low sulphur fuel oil provisions covering both the transition period and continuing operations over the balance of the charter period. Such agreements will help to reduce the risk of costly litigation in the future.

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