What’s all the smell about? IMO’s 2020 sulphur regulation changes are about to kick in: charterparty implications

There are going to be significant changes to the shipping world by way of the IMO sulphur limit in marine fuels (IMO 2020) with new regulations coming into force on 1 January 2020. We have previously reported on the upcoming changes in our September article but in short, outside of emission control zones, where the sulphur limit is presently 3.50% m/m (mass by mass), the limit is going to be reduced to 0.5% m/m. This means that the marine sector will have to reduce sulphur emissions by over 80% by switching to lower sulphur fuels or using scrubbers, which will represent the largest reduction in the sulphur content of a transportation fuel undertaken at any one time.

The shipping industry has lagged behind many industries in reducing its carbon footprint, with vessels burning the dirtiest fuels. The world’s reliance on the marine transportation has allowed it to escape its responsibilities to some extent, but change is afoot. That change is of course necessary, but it will come with significant disruption across the entire industry.

Charterparty implications

In our September bulletin, we reported on some of the insurance implications. Below we consider some of the charterparty implications as that is where the immediate impact will be felt.

The extent to which the new cap will impact parties will depend on the type on contract in place – in particular, who has responsibility for providing bunkers. The usual position is that in a time charter, the charterers provide and pay for bunkers. Under a voyage charter, it is usually the owners that provide and pay for the bunkers.

Voyage charters

The voyage charter position is therefore relatively simple. The owners have a choice to either install scrubbers (and continue to use low grade fuel) or must purchase bunkers which meet the IMO requirements but are more expensive. The additional cost will no doubt be reflected in increased freight rates.

The sudden increase by the world’s tonnage in using compliant fuel could however potentially cause engine problems. These issues may include problems due to the change in viscosity, instability, or incompatibility blended fuels. Damage to the engine could therefore give rise to a number of salvage and general average and potential unseaworthiness arguments. It will also result in delays possibly giving rise to cargo claims.

Time charters

The time charter position is more complicated however. As far as the regulations are concerned, the burden is on the owners to ensure that their vessel is compliant. However, it is the charterers providing the fuel, which could give rise to some tension between the parties. We consider some of the issues below.

What type of fuel must the charterers now provide?

This will depend on the terms of the charter. Existing charters may be clear that compliant fuel must be provided by the charterers. For example, the BIMCO Fuel Sulphur Content Clause for Time Charter Parties 2005 provides that the bunkers that the charterers provide must be compliant with MARPOL Annex VI. The BIMCO 2020 Marine Sulphur Content Clause (see here) and the INTERTANKO Bunker Compliance Clause also make the charterers responsible for providing compliant fuel.

If there is no such clause to that effect, it is less clear what the position will be and there may be a stand-off between the owners who will say that it must be implied that the charterers should provide compliant fuel and the charterers who will say that absent any precise obligation on them to do so, they do not have to. If that is so, it will remain incumbent on owners to ensure that the vessel is still compliant despite the charterers having to provide low grade fuel, meaning, most likely, the cost of installing scrubbers or re-negotiating charter terms with an arm tied behind their back.

What happens on 1 January 2020?

Owners and charterers have been working together to prepare the transition. As reported by us last year, BIMCO prepared a Transition Clause allocating different responsibilities between the parties in the lead up to 1.1.20.

Charterers providing compliant fuel will want to continue to using high sulphur fuel until the very last moment, giving rise to the potential for a log-jam effect in the days leading up to 1 January 2020 as charterers urgently seek to stem compliant fuel. However, early indications, as reported by Lloyd’s List in early December, suggest the progression to low-sulphur fuel oil has started positively. Bunker sales of 0.5% fuels are reportedly steady and the move to comply with the IMO 2020 Regulation appears to be at the forefront of the industry’s mind.

Engine breakdowns

As mentioned above, the new type of fuel may result in engine damage. Responsibility for the damage and delays (i.e. whether the vessel is on or off-hire) will turn on whether there is some problem with the fuel itself or if it is down to the engines struggling to cope with the new compliant fuel.

Speed and consumption

Charterparties will usually include speed and performance warranties. Owners will need to ensure that the change in the type of fuel being used will not hinder the vessel’s ability to meet those warranties.

Delivery/redelivery bunkers

Consideration will also need to be given to anticipated differences in bunker prices, as between compliant and non-compliant fuel. Charterparties entered into before 1 January 2020 but ending after this date could include clauses that cater from differences in bunker prices on delivery and redelivery of the vessel. Common clauses such as 'same quantity and prices of bunkers both ends' could leave charterers, who have provided more expensive compliant fuel during the currency of the charter, having to sell back the compliant fuel on redelivery at a far lesser price than it was purchased.

Comment

We have looked at just some of the anticipated issues that the industry will face as it tries to make much needed changes to its carbon footprint. In April 2020, we will hold a seminar at our offices to see how the first 3 months of IMO 2020 have begun to affect the various sectors of our industry.

Read more items in Marine Brief - December 2019

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