Skip page header and navigation

Part one (time charters): IMO 2020 - implications of the global sulphur cap to charterparties

Details

The global sulphur cap is due to take effect on 1 January 2020 as a result of amendments to annex VI of the International Convention for the Prevention of Pollution of Ships (MARPOL). From that date onwards, ships will have to use fuel oil on board (including the one used for main and auxiliary engines and boilers) with a sulphur content of no more than 0.50% m/m against the current limit of 3.50% which is a significant reduction. The existing 0.1% limit for emission control zones will remain unaffected (for more details regarding the IMO 2020 regime please see our recent article).

The IMO has indicated firmly that there will be no grace period, meaning that the shipping industry will have to be ready by 1 January 2020. Planning and preparations should be well underway and these should include reviewing the parties’ standard contractual terms of business and making them 2020 compliant.

Part one of this article highlights the main points to consider in time charters both from the perspective of owners and charterers. Part two will look at voyage charters and some common issues under time and voyage charters.

There are in effect two main options for ships to be 2020 compliant: either using compliant fuel or adopting approved equivalent methods such as ‘scrubbers’ which clean the emissions before they are released into the atmosphere.

Bunkers

Under a time charterparty the responsibility for supplying fuel lies on the charterers. For example, the NYPE 1946 and Shelltime 4 forms state respectively:

NYPE 1946

Clause 2. ‘That the Charterers shall provide and pay for all the fuel except as otherwise agreed…’

Shelltime 4

‘7. Charterers to provide and pay for all fuel (except fuel used for domestic services)…’

‘29. Charterers shall supply marine diesel oil/fuel oil with a maximum viscosity of ___ Centistokes a 50 degrees Centigrade/ACGFO for main propulsion and diesel oil/ACGFO for the auxiliaries.’

The obligation on charterers is to provide fuel that is of reasonable general quality and suitable for the type of engines. However, it is common market practice to include a bunker specification clause in the riders or fixture/re-cap.

Provision is also often made through the use of the standard form BIMCO clauses such as the bunker fuel sulphur content clause or bunker quality and liability clause. However, in their current form neither of these clauses will provide sufficient cover for owners. This is because the former only makes reference to ‘emission control zones’ (e.g. the Baltic Sea, North American ECA, etc.) and the latter only makes reference to ISO 8217 which, in its current format, does not provide an adequate cap.

Owners should therefore ensure that there is express reference to compliance with MARPOL annex VI and the 0.5% limit in the relevant rider clauses and/or fixture re-cap. Further, any standard or bespoke clauses currently used should be amended accordingly.

Subject to the installation of ‘scrubbers’ (see below), it will be charterers who will have to face the impact of the increased cost of compliant fuel, as is usually the case in time charters.

Particular care should be taken when fixing vessels that span into 2020 and beyond. A number of issues are likely to arise in such circumstances, including the requirement to comply with much stricter bunker specification standards. Decisions will also need to be made as to what is to happen to any unused non-compliant bunkers and who is to bear the cost of the same. For example, whether it would be possible to discharge the bunkers at the next port of call – an issue that will depend on how the port authorities will treat the non-compliant bunkers: if treated as ‘waste’ these could lead to the vessel being detained and issues regarding which party is to bear the associated costs and delay. Another question is whether charterers will be able to sell any non-compliant fuel and if so, whether they would suffer a significant loss on the re-sale (as it not clear how the markets are to react).

Similar considerations will apply on redelivery of the vessel. Bunker redelivery clauses usually specify that the owner is required to accept and pay for all bunkers retained on-board at current market prices. Again, consideration should be given as to what is to happen in circumstances where the vessel is redelivered with non-compliant fuel on-board or in circumstances where the vessel is to be redelivered before but very close to 1 January 2020.

Whether acting as owner or charterer, it is important that the charterparty contains suitable clauses that protect the party in question, including indemnities covering losses that may arise from wrong supply, fines and delays.

Exhaust gas cleaning systems (ECGS) or ‘scrubbers’

One potential way of mitigating the increased cost of LSFO is by the installation of an ECGS or ‘scrubber’. These are systems which effectively ‘clean’ the emissions before they are released into the atmosphere and are a method recognised by MARPOL.

There are a number of different types of scrubbers which operate in various ways and which will produce various by-products (e.g. ‘open loop’ scrubbers use seawater which is discharged back overboard; ‘closed loop’ scrubbers use sodium hydroxide which results in sludge retained on board; and ‘dry scrubbers’ use solid solvents which forms salt retained on board). Depending on the type of scrubber, there could be further implications or costs consequences, for example any issues with compliance when discharging the by-products of open loop scrubbers or the additional energy usage and associated cost of closed loop scrubbers.

It is important therefore that relevant provisions are included detailing the characteristics of the scrubbers and any associated issues (such as handling of by-products), on top of the additional performance warranty that is likely to be incorporated into the charterparty. 

There are a number of significant issues that may arise in the context of a time charter. These include responsibility for the scrubbers’ installation and the associated dry-docking; whether owners can be obliged to install a scrubber under the existing terms of a charterparty; and, significantly, what is to happen in the event that the scrubber system is defective.

Dealing with the second of these issues first, it seems unlikely that a charterer will be able to compel an owner to install a scrubber. Changes in international regulations have in recent years resulted in some notable decisions. For example, in the Elli and Frixos [2008] EWCA Civ 584 the owners were deemed to be in breach of the charterparty for failing to provide a vessel that was both  legally and physically fit (in this case, the vessel was not entirely double-hulled as required by MARPOL).

However, it is likely that the above case can be distinguished in the present circumstances as there are numerous alternative means of compliance with the cap. For example, it is possible to use compliant bunkers such as low-sulphur fuel oil or alternative fuels (such as LNG).

In circumstances where an owner takes the commercial decision to dry-dock the vessel and install a scrubber system, it is possible that the associated time and cost will fall within an existing dry-docking clause, but that will depend on the wording of the specific clause and is a matter of interpretation.

Scrubbers, as mentioned, will create additional performance warranties for owners. There could be a specific clause dealing with the scrubber or more likely under the general performance/maintenance obligations imposed on owners by the charter. In the same manner, the vessel would be off-hire for any periods within which the scrubber system was defective and maintenance and/or repairs were carried out. For example, this would be captured by the standard off-hire clauses in the NYPE 1946 and Shelltime 4 providing that the vessel is off-hire in circumstances of:

NYPE 1946

15. ‘…breakdown to hull, machinery or equipment’

Shelltime 4

21. ‘repairs…time in and waiting to enter dry dock for repairs; breakdown (whether partial or total) of machinery, boilers or other parts of the vessel or her equipment’

In conclusion, it is important that the contractual documents used by owners and charterers respectively are reviewed and amended accordingly in order to be 2020 compliant.

Read part two (voyage charters and common considerations): IMO 2020 - implications of the global sulphur cap to charterparties

From dealing with everyday contracts to major incident emergency responses, our shipping and offshore specialists can help. With one of the largest maritime practices in the field, you can expect clear, commercial advice from experts you trust and who know the problems you face internationally.

We work across the whole of the maritime and offshore industries, advising ship owners, charterers, shipyards, P&I clubs, port and terminal operators, underwriters and traders, oil majors, commodity houses, insurers and reinsurers, offshore contractors and owners of FPSOs, platforms, rigs and other offshore craft and installations.