Clyde & Co lawyers discuss legal issues on bunker quality claims in 2020 - Part 2
International law firm Clyde & Co has published the second of a two-part series of articles highlighting the key legal issues from the impact of IMO 2020 regarding bunker quality claims, it has been written by Paul Collier; the article has also been shared with Manifold Times:
1 March 2020 carriage ban, enforcement actions against vessels, and claims under bunker supply contracts.
Since 1 January 2020, vessels without scrubbers have been prohibited from consuming fuel with sulphur content above 0.50% m/m. Whilst the IMO has commented that, so far, there has been a “relatively smooth transition” to the new sulphur limit, it has not been without issue, with breaches of the new limit being identified by authorities and enforcement action taken against a number of vessels. There have also been reports of high sedimentation levels in low sulphur fuel blends in the Americas, Singapore and Europe, which have the potential to cause clogged filters and engine damage, and generate legal claims.
Issues remain for the shipping industry going forwards. The key upcoming deadline is 1 March 2020 – the point at which vessels without scrubbers will be prohibited from carrying fuel with sulphur content in excess of 0.50% m/m. To comply with the carriage ban, vessels without scrubbers will, therefore, need to take steps to debunker any remaining high sulphur fuel on board in advance of 1 March 2020. Alternatively, vessels could comply with the carriage ban by installing scrubbers before 1 March 2020. However, given the impact of the coronavirus, there have been reports of delays at Chinese repair yards, and concerns have been raised that this may impact on the ability of shipowners to have scrubber installations completed by 1 March 2020.
The purpose of the carriage ban is in part to provide a means for the effective enforcement by States of the new sulphur limits set out in MARPOL Annex VI. After 1 March 2020, it may be more straightforward for port authorities to pursue enforcement action against vessels; a breach will be clearly evident to authorities if a vessel without scrubbers is found to have fuel above the 0.50% m/m limit in any of its tanks. This may prompt increased enforcement action in coming months.
The carriage ban presents new risks for shipowners and operators who do not implement a fuel management plan to ensure compliance with the sulphur cap limits. There is a risk that high sulphur fuel residues in tanks and fuel systems may combine with otherwise compliant low sulphur fuel to push the overall sulphur content of the fuel above the 0.50% m/m limit. This issue has already been seen in China, where a vessel which loaded low sulphur fuel was found to have exceeded sulphur limits, as originally compliant fuel mixed with high sulphur fuel residue which was still in the fuel systems. Authorities ordered the vessel to take measures to clean its fuel system. If similar issues arise, vessels face the risk of penalties being imposed by port authorities, of the costs of remedying the problem (which could include debunkering a bunker stem that has become non-compliant), as well as delay. It is likely to be difficult for owners to recover any of these losses from their charterers, and vessels may be placed off-hire during any period of delay. It is, therefore, advisable that owners take appropriate steps to pre-empt this potential problem.
Concerns about the quality of low sulphur fuel blends also remain, with complaints in a number of jurisdictions regarding sedimentation levels. Tests run by FOBAS, in Singapore, on low sulphur fuel blends, identified that a number of blends tested in January 2020 were above the total sediment potential (TSP) limits in the ISO 8217: 2017 standards. Should fuel with high sediment levels be consumed, there is the risk of sludge forming in tanks, which could block fuel filters. Separately, the IMO has received complaints regarding the level of black carbon emissions from low sulphur fuel with high aromatic content, and this could in future lead to legislative changes impacting on the standards and use of low sulphur fuel.
The remainder of this article focuses on some of the key points of relevance to both purchasers and suppliers under bunker supply contracts.
What terms and conditions apply to the bunker supply?
Purchasers of bunkers (namely, owners, time charterers and bunker traders) will often contract on the terms and conditions of the bunker supplier, which are generally drafted heavily in favour of the supplier. Such terms may contain a number of provisions which will make it difficult for purchasers to advance claims and recover the full amount of any losses, in the event of any quality issues.
Purchasers may therefore wish to consider pressing for variations to the supplier’s general terms in contractual negotiations, or alternatively pressing for a more balanced set of terms, such as the BIMCO bunker terms.
Bunker suppliers will also press for their own terms to be incorporated into the supply contract, as they will assist in protecting their position should claims arise. Bunker traders, in the middle of the contractual chain, will want to avoid the risk of exposure to claims which they cannot pass on to the physical supplier (owing to the physical supplier’s terms), when they themselves are unable to rely on their own terms to protect their position.
The following terms are worth particular consideration given their potential impact on claims.
Short claims notification time bars are a frequent feature of bunker supply contracts, often imposing requirements on purchasers to notify claims within days of the supply (generally ranging from 7 to 30 days). The 2018 BIMCO Bunker Terms, for example, provide that if the purchasers fail to notify any quality claim within 30 days of the date of delivery, the claim “shall be deemed waived and barred”.
Questions regarding the enforceability of such terms have been raised, particularly where there are latent defects in the fuel, not identifiable through ISO 8217 table 2 tests. In the “Houston problem” contamination cases, initial ISO 8217 tests were unable to identify a number of contaminants, which caused engine problems (such as phenols and fatty acids), and which could only be identified through advanced GC/MS testing. The difficulty was that such tests were often carried out after the fuel had been consumed, and after short time bars for notifying claims under bunker supply contracts had expired.
In cases where latent quality problems only become apparent after short contractual time bars have expired (for example following engine damage), purchasers could seek to argue that the short contractual time bar ought not to be enforceable. Purchasers could contend that they could not reasonably have been expected to notify the quality claim within the time bar period, and this should, therefore, not be enforced by a Court / Tribunal. However, English Courts have repeatedly upheld the validity of documentary time bars in voyage charters for demurrage claims, and it is open to argument as to whether, in any particular case, a short claim notification time bar in a bunker supply contract would be enforceable.
Bunker suppliers will generally specify that their contractual obligation is limited to supplying fuel meeting the ISO 8217 fuel specification standard, and they will generally exclude any terms implying that the bunker fuel is “fit for purpose”.
The issue facing purchasers, particularly in view of the evolving position regarding low sulphur blends, is that fuel may technically be on specification, according to the ISO 8217 standards, but may nonetheless not be of high enough quality to be consumed. For example, asphaltenes may precipitate out of suspension, causing the formation of sludge which can clog the engine, or, alternatively, the fuel may have poor ignition quality.
In such cases, depending on the circumstances and the specific issues with the fuel, the purchaser may be able to argue that the supplier has breached the requirements under clause 5 of ISO 8217 that “fuel shall be free from any material that renders the fuel unacceptable for use in marine applications”. However, if the bunker contract expressly excludes terms implying that the fuel is fit for purpose, the purchaser may find it difficult to assert that fuel which technically falls within ISO 8217 specification parameters, but is nonetheless of low quality, has been supplied in breach of contract.
A further issue is the difference between the tolerance applied to testing under MARPOL Annex VI and under a bunker supply contract. With bunker fuel, there are relatively small degrees of variation between test results. On commercial tests, a 95% confidence limit is applied, meaning that a result of 0.53% m/m would be likely be considered compliant by the supplier under an ISO 8217 standard. However, testing of the MARPOL delivered sample under MARPOL Annex VI does not permit any tolerance, and there is a strict 0.50% m/m limit. As a result, if a MARPOL sample is tested by authorities as being over 0.50% m/m, the vessel may be at risk of enforcement action, but it may be difficult for the purchasers to assert a claim against a bunker supplier unless the result exceeds 0.53% m/m. Purchasers of bunkers may, therefore, wish to consider specifically negotiating an express requirement with a bunker supplier, that any low sulphur fuel supplied is MARPOL Annex VI compliant (rather than just ISO 8217 compliant).
The standard terms and conditions of bunker suppliers commonly include provisions providing that in the event of a quality dispute, the test results of the supplier’s retained sample are “final and binding”. This is sometimes subject to a caveat that the supplier’s sample results are not final and binding in cases of “fraud or manifest error”.
These provisions can potentially make it difficult for purchasers to pursue quality claims against suppliers. In the context of IMO 2020 or of contamination claims, clauses providing that the results of the supplier’s sample are “final and binding” may afford the suppliers a potential defence against liability if the supplier’s sample tests on specification, but other samples test off-specification.
Unless there is strong evidence from the results of other samples, which clearly evidence that the supplier’s sample was not representative of the fuel product supplied, it may be difficult to defeat such a clause. It is advisable for purchasers to ensure that samples are taken at the receiving vessel’s manifold, and that the sampling and sealing is properly witnessed, so as to mitigate the risk that the supplier’s sample is not representative of the product supplied.
Bunker supply contracts may contain provisions which provide that the supplier shall not be liable for any quality claim, unless payment is first made in full by the purchaser. These provisions can be of considerable assistance to suppliers; if payment is not made in full before a claim is advanced, the supplier could potentially seek an interim award for payment of the purchase price, and/or take enforcement action to obtain payment. Purchasers may therefore wish to consider whether they are prepared to take the commercial risk of contracting on such terms.
Limitation of liability provisions
Bunker suppliers often include highly restrictive limitation of liability provisions in their standard terms, which can make it very difficult for purchasers to recover the full extent of their losses for any quality claim. These may include express provisions restricting the ability to claim for consequential loss (including loss of hire or demurrage) and an express liability cap, for example expressly limiting the amount that can be recovered to the purchase price.
In circumstances where contaminated bunkers cause delay and engine damage such provisions, if included unamended, can make it difficult for purchasers (such as owners or time charterers) to recover their full losses from a bunker supplier.
Those contracting to either sell or purchase bunkers should consider the contractual terms carefully. From the suppliers’ perspective, any dilution of their terms and conditions may make them more vulnerable to a claim from a purchaser, so bunker traders in the middle of a contractual chain would be wise to consider whether they risk being exposed to liability, which they cannot pass on to their supplier, in the event of a claim. From the purchasers’ perspective, it is worthwhile reviewing the terms proposed by the bunker supplier, and considering whether their interests are sufficiently protected in the event of a quality claim.
Please click here to read part 1 of this series: Bunker Quality Claims in 2020 – Issues to Consider.
Vietnam: Vessels with 100,000 litres of diesel oil and 6,500 litres of lubricant detained
Both ships were discovered at about 3.00 pm on Sunday (5 April) around the Quang-Ninh-Haiphong bay area; neither one was able to prove the validity of their cargo.
Vietnam: Oil tanker with 40,000 litres of undocumented diesel arrested
Oil tanker numbered BT 98144TS was discovered by Command of the Coast Guard Region 3 to be behaving suspiciously at 2.30 pm on Thursday 2, April.
Vietnam: Fishing vessel with 30,000 litres of undocumented diesel oil detained
Reconnaissance Task Force No.2 discovered ‘modified’ fishing vessel BTr 99996 behaving suspiciously at the Binh Thuan sea area on 30 March.
U.S. court fines Singapore-based Unix Line USD 1.65 million over oily waste discharges
Company also placed on probation for four years and ordered to enforce a comprehensive Environmental Compliance Plan as a special condition of probation.
Jungwon Maritime faces winding up application from Eastern Navigation Pte Ltd
Bunker trading house Praxis Energy Agents Pte Ltd has earlier initiated a winding up application against Jungwon Maritime at the High Court in Singapore in 2019.
U.S. Treasury sanctions oil trading firms for allegedly facilitating Iranian regime
Petro Grand FZE, Alphabet International DMCC, Swissol Trade DMCC, Alam Al Tharwa General Trading LLC, and Alwaneo LLC Co reportedly falsified origin of Iranian petroleum.
Singapore: Inter-Pacific Group files for winding up application at High Court
Winding up application directed to be heard before the court sitting of the High Court of the Republic of Singapore at 10:00am on 27 March.
PetroChina International (Singapore) Pte Ltd winds up CV Shipping Pte Ltd
CV Shipping is believed to be a 50/50 joint venture between PetroChina International (Singapore) Pte Ltd and Petróleos de Venezuela, S.A. (PDVSA).
Malaysia: Crew of two Mongolian-flagged oil tankers fined by Johor Court
Skippers of both vessels pleaded guilty and were fined MYR 20,000 at the Kota Tinggi Courthouse; vessels to be released upon payment of fines.
Malaysia: MMEA detains oil tanker and two Singapore-registered supply boats
All three vessels were caught in an alleged illegal ship to ship operation 12.3 nautical miles east of Tanjung Balau on Wednesday morning, according to MMEA.
Malaysia: PPM confiscates “Hoe Hup 99” with 450,000 litres of diesel in Labuan
Captain of oil tanker could not produce a record for the sale and purchase of the diesel, which has since been confiscated along with the vessel.
Vietnam: Vessel with 80,000 litres of undocumented diesel oil detained
TG 90214 TS detained at the Southwest coastal area by task force of Coast Guard Region 4 Command and escorted to Nam Can Ca Mau port.
IBIA: Revision of EGCS guidelines completed
Revised guidelines on scrubber air and water discharge performance made more stringent; to be adopted after the MEPC meeting in early April.
Malaysia: Marine police seize diesel cargo worth MYR 1.5 million
Cargo vessel carrying 20,000 litres of undocumented diesel detained in Bintulu; case referred to Ministry of Domestic Trade and Consumer Affairs.
Shipping agency Armada (Singapore) Pte Ltd voluntarily winds up operations
Winding up application is scheduled to be heard before the Court sitting at the High Court of Singapore at 10.00 a.m. on 20 March 2020.
The Shipowners’ Club: Legal costs cover and IMO 2020
Maritime insurer discusses potential commercial disputes it foresees post IMO 2020, and outlines response parameters for legal costs covers.
Brazil: Condition of “MV Stellar Banner” stable after grounding, says navy
Stakeholders remain in close coordination to resolve the incident as soon as possible while obeying safety rules and procedures, says Brazilian Navy.
Cambodia: Cameroon-registered tanker “MT Courageous” detained
3,912 dwt MT Courageous with 16 crew onboard found illegally anchored in Cambodian waters by Coast Guard.
Singapore-based shipper terminates hauling Venezuela oil due to sanctions
Mercantile & Maritime iterates stance as a group operating in full compliance with trade laws and maritime regulations.
Brightoil release of outstanding financial results delayed by COVID-19
Current auditor cannot travel to PRC to perform any audit procedures on the outstanding financial results, it states.
Dry Bulk Singapore Pte Ltd filing for protection against creditors
Application under Section 211B(1) of the Companies Act to be heard before High Court of Singapore on 16 March.
Singapore-based Unix Line pleads guilty to illegally discharging bilge waste
U.S. Court sentencing scheduled for 20 March; maximum statutory penalty is six years’ imprisonment and a fine.
U.S. sanctions Rosneft Trading for brokering Venezuela crude oil deal
‘United States is determined to prevent the looting of Venezuela’s oil assets by the corrupt Maduro regime,’ says Steven T. Mnuchin.
Malaysia: MMEA detains unnamed oil tanker in Johor waters
Inspection found the ship was manned by 7 crew members, however 2 of the crew members, including the ship Master, are missing.
Impending Carriage Ban - “Legitimate” de-bunker/disposal practices
Ince & Co. outline implications of current de-bunkering malpractices that have arisen, and how to safely navigate the upcoming carriage ban.
Malaysia: MMEA detains unnamed Korean-flagged VLCC in Johor waters
MMEA states Malaysia’s territorial waters extend as far as Eastern Bank, Ramunia Shoal, and North Patch despite being beyond 12 nautical miles from nearest land.
Vietnam southwest region coast guard detains “96868 TS” over undocumented diesel
Vietnam 4th Coast Guard Region Command found 100,000 litres of undocumented diesel oil on board 96868 TS on Friday.
Malaysia: Two Mongolian-flagged tankers detained by MMEA Johor
Both tankers found sailing suspiciously close together and investigations revealed numerous violations of the law, according to MMEA.
Former Singapore bunkering firm Gas Trade (S) Pte Ltd in final creditors meeting
Meeting to be held on 25 February for updating creditors on liquidation administration and various winding up related activities.
Bulk Marine faces winding up application from The Swedish Club at Singapore court
Application for Bulk Marine, formerly known as Sino Marine Agencies, will be heard on 21 February at the Singapore High Court, say lawyers.
BSM fined $1.75 million by U.S. Court for tampering with bilge waste records
Ship management company pleads guilty to illegally dumping bilge waste, destroying and altering Topaz Express waste discharge records.
rise-x.io, DNV GL, NUS embark on project to predict illegal bunker activity
Though computer models analysing automatic identification system data to determine if illegal fuel bunkering can be detected using vessel pattern analysis.
Malaysia: MMEA detains Malaysian-flagged cargo ship “Danum 171” in Penang
Spokesman enforces Penang division of MMEA will continue constant vigilance in surveillance around island.
Malaysia: Unnamed Liberian-flagged cargo ship detained by MMEA Penang
The second arrest in 24 hours by MMEA in Penang was at 8.5 nautical miles north of Teluk Bahang; vessel had 21 crew onboard.
Hill Dickinson: Ongoing LSFO sediment issues lead to bunker alerts
Bunker quality claims are not new to the industry, but these claims going global indicate an issue with the stability of low sulphur fuel.
Clyde & Co: Implications of Wuhan virus outbreak for shipping and international trade
Outbreak is increasingly putting a strain on businesses and shippers should be well armed with relevant contractual terms to ensure smooth negotiations.
Ince: Novel Coronavirus (2019-nCoV) Legal issues and Impact on International Trade & Transportation
WHO has declared the outbreak as a Public Health Emergency of International Concern and has proposed certain Temporary Recommendations be issued.
Malaysia: Taiwan-flagged cargo vessel detained by MMEA outside Malacca anchorage area
MMEA detains Master and Third Engineer of Xie Rong 12 for further investigation under Malaysia’s Merchant Shipping Ordinance 1952.
Singapore-based Target Ship Management under winding up order
Order effective 10 January initiated by Hudong Heavy Machinery Co. Ltd, Shanghai Spare Parts Branch.
Labuan Port Authority to be investigated for corruption over port tender
Complaint relates to decision making process of on-going tender to operate Labuan’s containerised port.
Standard Club: Regulation of IMO 2020 compliant fuel availability issue
In the event of unavailability of compliant fuel, members are required to document and evidence all steps taken to achieve compliance (Regulation 126.96.36.199).
Malaysia: Mongolia-flagged oil tanker detained by MMEA in Johor waters
Marine Prime being investigated over failure of meeting ‘Safe Manning Certificate’ and anchoring in a non-anchorage area without permission.
Malaysia: Cargo vessel “ANET” detained by MMEA Penang State
Netherlands-flagged cargo vessel was detained 22.2 nautical miles southwest of Kendi Island while anchoring.
Singapore oil tanker ‘Ocean Gull’ detained by MMEA Penang State
The Singapore-registered oil tanker was detained 26 nautical miles north of Penang Island while anchoring.
Shell Singapore oil heist: Third offender pleads guilty for gas oil theft
A former tanker captain pleads guilty to six counts of abetting to dishonestly receiving stolen property.
Vietnam Coast Guard detains ships over alleged illegal cargoes
HD1591 detained with 600m3 of sand cargo and BV5491TS detained with 30 m3 of diesel oil cargo on Sunday.
Commercial fuel oil samples offer ‘no legal proof’ for IMO 2020 compliance
BIMCO clarifies discord between verification procedure for statutory and commercial fuel oil samples.
MMEA detains two vessels over alleged illegal oil transfer op at Labuan
Further investigations found the ships had transferred 37,000 litres of diesel worth USD 19,000.
North Korean-flagged tanker “Nam San 8” spotted in illegal STS op
DPRK tanker conducted STS oil transfer operations on 16 and 17 December, said Japanese government.
MMEA detains general cargo ship “Bangsakao” at Penang
Maritime authorities of Penang have always been serious about enforcing the law, says spokesman.
Vietnam Coast Guard holds “Yen Dinh 0025” over 18,000 litre diesel cargo
The similar vessel was also detained by authorities about a year ago over 120,000 litres of diesel oil.
Dan-Bunkering arrested “Megacore Honami” sold at Singapore auction
The 36,955 dwt chemical and oil carrier has been sold for approximately USD 13.4 million on 18 December.
Vietnam Coast Guard detains tanker “Hai Phong 16” over diesel oil cargo
Captain unable to present invoices and documents proving the legality of 30,000 litres of product, it says.
Captain of “Prime South” jailed in Shell Pulau Bukom gas oil theft
Ship captain jailed 5.5 years from profiting in MGO theft from Shell’s Pulau Bukom refinery at Singapore.
Singapore: Earlier court judgement between Hanwa and Harley Marine discharged
Hanwa obtained judgement following an “Emergency Arbitration” application on 18 July 2018 to prevent the risk of dissipation by the former Singapore-based bunkering firms.
BP Singapore bunker trial nears end as legal reps present summary submissions
Lawyers of the ex-Regional Marine Manager of BP Singapore, the Executive Director of Pacific Prime Trading, and Deputy Public Prosecutors were present at the State Courts on Wednesday.
Vitol Group acquires Sinanju Tankers Holdings; gains foothold in Singapore bunker ops
The Singapore Bunkering license holding entity has been renamed Vitol Bunkers (S) Pte Ltd and from 1 April 2020 all bunker deliveries will be carried out by Vitol Bunkers (S) Pte Ltd.
PMI Trading responds to Nustar Energy over alleged off-spec bunker fuel supply at Houston
Seeks to enforce either arbitration clause under contract or to dismiss NuStar and TPP respective liability claims, according to documents obtained by Manifold Times.
‘Minimal disruption’ to Singapore bunkering operations despite COVID-19, confirms MPA
‘We are closely monitoring the rapidly developing COVID-2019 situation while remaining committed to working with the bunkering industry to ensure minimal disruption to bunkering operations and services.’
Photo Essay: “Marine Vicky” in multi-agency emergency preparedness exercise at Singapore port
The emergency preparedness exercise involving SCDF, PCG, MPA, and Sinanju was carried out on the LNG dual-fuel bunker tanker at Raffles Anchorage on 17 March, learned Manifold Times.