Claims letter – Sulphur cap
Implications for charterers
As from the 01st of January 2020, all ships will be required to comply with the MARPOL Annex VI Sulphur content requirements and to burn fuel with a Sulphur content of no more than 0.5 % (the current limit is 3.5%) unless they are fitted with an exhaust gas emissions cleaner (the so-called scrubbers that are systems that “clean” the emissions before they are released into the atmosphere). The existing 0.1% limit for emission control areas will remain unaffected.
To start with, it is probably important to point out that the 2020 cap will apply to all ships flying the flag of a state that has ratified the MARPOL Annex VI and/or calling at a port or passing through the waters of a state that has ratified the Convention. The BIMCO estimates that the Sulphur cap will therefore apply to 96% of the world’s fleet so all the Charterers (at least, the time-Charterers) will be affected by the new regulation in a way or another (unless they charter vessels equipped with scrubbers).
Time-Charterers will be more affected than voyage-Charterers or the time-Charterers of vessels equipped with scrubbers.
Under a time-charter, the responsibility for supplying fuel lies on the Charterers. This means that the Charterers will have to ensure that the vessel will have enough 0.5% fuel (compliant fuel) on board to reach the next bunkering port or if the vessel is delivered to Charterers shortly after 01st January that the next bunkering port(s) will have enough 0.5% of suitable quality available for the vessel. If time is lost because of the non-availability of compliant fuel in the port, it is likely that the vessel will remain on hire during the time lost.
While it is unlikely that there will be fuel shortages in the big bunkering hubs, there is a risk regarding more remote locations.
Charterers may therefore (try to) obtain guarantees from their bunker suppliers that the required fuel will be available and that the supplier will be MARPOL compliant. In that respect and to give an example, the bunker delivery note will have to state the Sulphur content of the fuel supplied so the bunker supplier will have to ensure that its sub-contractor/the physical supplier will comply with the MARPOL regulation.
In this respect, the implementation of the new regulation is probably a good opportunity for Charterers to review their contracts with their bunker suppliers. Particular attention should be paid to the time limits within which to notify the supplier of a quality dispute (often limited to 7 or 14 days which are too short) and/or to present a claim as well as the limits of the suppliers’ liability (often, the bunker suppliers try to exclude their liability or to limit it to extremely low levels not sufficient to cover Charterers’ losses which could be significant in some cases).
Because low Sulphur fuels cannot be mixed with high Sulphur fuels, Charterers will need to discuss with Owners well in advance the possibility to segregate the two type of fuels in tanks that can receive the compliant fuel (the tanks may have to be cleaned first) or if the vessel is chartered after 01st January, ensure that the C/P will contain specific provisions by which Owners will undertake to have tanks ready to receive Charterers’ compliant bunkers.
Time charters usually contain performance warranties (in respect of speed and consumptions) for specific fuels. A warranty given for a specific fuel will probably no longer apply so Charterers will have to ensure that the vessel’s description clause and performance warranties will be amended to take into consideration the new compliant fuel. In that respect, we feel it necessary to remind Charterers that they should not accept that the vessel’s description and performance warranties are given “without guarantee” since these words mean that the Owners are in fact not giving any guarantee in respect of vessel’s performance…
The new regulation also provides that any remaining non compliant fuel on board vessels will have to be removed from the vessel before 01st March 2020. Assuming that the bunkers belong to the Charterers, it is Charterers who will have to remove the bunkers prior 01st March (and presumably clean the vessel’s tanks). However, before doing so, a number of issues need to be considered: where can the non compliant bunkers be discharged (all the ports will not necessarily have the means to discharge bunkers and some ports may simply prohibit it), will the bunkers be considered as a “waste” and if so, how can they be disposed of and at what costs, etc…
If non compliant fuels remain on board after 01st March, there is a risk that the vessel could be detained and even fined by the competent authorities. The time lost and the fine are likely to be for Charterers’ account if they owe the bunkers at the time.
Charter parties often provide that the Charterers will redeliver the vessel with the same quantity of bunkers as on delivery and that Owners will take over these bunkers at a certain price fixed in the C/P. After 01st January 2020, there is a risk that high Sulphur bunkers could have no or little value. The parties should therefore try to agree on a clause that will deal with the prices of both the high and low Sulphur bunkers on terms acceptable to both parties in order to avoid future disputes.
The impact that the new type of fuel will have on the engine is obviously not known to the Charterers. Under English Law, where compliant fuel is supplied but it still causes damage to the engine, the Charterers will nevertheless be responsible for the damage (subject to causation) but of course, the parties can agree different terms in their contracts so Charterers should consider inserting a clause that will clearly provide that Charterers’ obligations and responsibility will be limited to providing bunkers that are within the specifications stipulated by the Owners, for instance.
BIMCO has published two 2020 sulphur clauses (available on the BIMCO’s web site):
- BIMCO 2020 Marine Sulphur Content clause for Time Charter Parties (which is meant to replace the BIMCO Fuel Sulphur Content Clause 2005). The clause is short and provides that Charterers shall supply fuels to permit the vessel to comply with any applicable Sulphur content requirements at any time and that the fuel shall meet the specifications and grades set out in the Charter Party. The Charterers also warrant that any bunker suppliers, bunker craft operator and bunker surveyors shall comply with the Sulphur content requirements. The clause also contains an indemnity which provides that Charterers will indemnify, protect, defend and hold harmless the Owners from any and against all losses, damages, liabilities, delays, deviation, claims fines, costs, expenses, actions, proceedings, suits, demands arising out of the Charterers’ failure to comply with the clause and that the vessel should remain on hire throughout. The clause is therefore very wide and protective of Owners’ interests. The parties are of course free to amend the clause if they wish.
- BIMCO 2020 Fuel Transition Clause for Time Charter Parties which deals with the one-off event of switching from 3.50% Sulphur content fuel to 0.50% Sulphur content. The approach taken by the BIMCO is that the Charterers should pay to offload and dispose of any non-compliant fuel on board and Owners should ensure that the ship is fit to receive compliant fuel.
While these two clauses are helpful, they do not, in our view, cover all the aspects of the new regulation as mentioned above and they also do not deal with issues relating to the specifications, grades, quality and suitability of the fuels supplied (which are often dealt with by specific rider clauses in the Charter Parties). The parties will therefore need to review their Charter Parties and ensure that they fit their needs.
The consequences for not complying with the new regulation will vary from jurisdiction to jurisdiction and it will be left to each port state to determine the level of fines imposed, whether or not exemptions will be granted and if the vessel will be detained. Charterers should however keep in mind that if they are found in breach of the regulation, the vessel is likely to be considered as on-hire for all the time lost and the Owners will probably have a claim against Charterers for any fine paid and/or other losses suffered.
The impact of the new regulation on voyage Charterers should be limited but it is possible that some Owners will try to insert clauses in the Charter Parties to allow them to deviate to a convenient bunkering port during the voyage or try to limit their liabilities in case the vessel is detained due to a breach of the new regulation. Charterers should also consider inserting in their contracts a clause that provides that laytime and time on demurrage will not count in case the vessel is detained and/or time is lost. Similarly, voyage-Charterers of vessels equipped with scrubbers should consider inserting a clause that will make the Owners responsible in case the scrubber system fails and that laytime/time on demurrage should not count in such circumstances.
3. Time-Charters of vessels’ equipped with scrubbers:
In principle, if the vessel’s equipment fails, the Owners should be responsible for the time thereby lost on basis of most of the standard forms of time-Charters. Parties should however check the rider clauses to ensure that they do not contradict this principle. Depending on the type of scrubbers/equipment used by the vessel, it is possible that it will create waste that will have to be disposed of during the period of the time-charter. In our view, Charterers should ensure that the costs and risks related with these waste will remain Owners’ responsibility since we feel that they should be part of the maintenance of the vessel. To avoid any misunderstanding, it would be preferable to insert a specific clause in the C/P.
While we hope that the above comments will be helpful, they cannot cover all situations but this should be a good opportunity for Charterers to review their contracts (including the contracts with their bunker suppliers) to ensure that they will meet their requirements/needs and protect them as much as possible.