Specification and certification are “key issues” relating to alternative bunker fuels which should be considered at the outset when drafting the terms of bunker supply contracts and charterparties, according to a Partner at the Singapore arm of global legal firm Clyde & Co.

Paul Collier was giving a presentation at the firm’s Asia Pacific Marine Conference 2024 on Wednesday (29 May) when he pointed out the potential legal issues of alternative marine fuels.

Lack of clear specifications

“Firstly, specifications. Leaving aside LNG where there are already ISO standards, there is currently a lack of clear specifications covering alternative bunker fuels. This is because alternative fuels are a developing technology,” stated Collier.

He recommended bunker buyers to clearly state the specification of the fuel required when purchasing alternative fuels such as biofuel, methanol, ammonia, and hydrogen to know what product they are getting.

When no clear international standard is available, bunker buyers may refer to national standards – for example, the WA 2: 2022 standard for biofuels (developed by Singapore) – or alternatively agree to bespoke terms setting out the specification of the alternative marine fuel to be supplied.

Certification important for shipowners

Collier, meanwhile, highlighted alternative bunker fuels to be only as green as the production process and this is where obtaining proper certification for procured material will be important.

“There are two parts to consider. Firstly, what the emissions are when the alternative marine fuel is consumed by a vessel, and secondly what the emissions are to produce and then transport the fuel into the vessel’s tank,” he explained.

“There is a question as to whether buyers should be able to claim damages if there is an alternative fuel which has produced with high carbon intensity.

“A bunker supplier may contend that their obligation is simply to provide fuel meeting specification, and there is no warranty as to its carbon footprint, whereas a purchaser may say that they expected carbon neutral fuel.

“This will boil down to the terms and conditions of supply that are agreed and in particular whether there is a warranty as to the well-to-wake emissions of the fuel.”

Collier noted the above factors to be important as certification will be key to Owners obtaining favourable treatment under the Carbon Intensity Indicator (CII) and European Union (EU) regimes.

“Without certification, alternative marine fuels may be treated as producing emissions equivalent to fossil fuel consumption,” he informed while adding “this would place Owners in no better position compared to if they had consumed traditional oil-based bunker fuel.”

Charterparty issues arising from specification and certification gaps

Moving forward, Collier noted all points regarding specification and certification to be highly relevant in the Charterparty context.

“Where Owners are time chartering their vessels, and their time charterers are acquiring bunkers, it is sensible for Owners to include provisions in their time charters which set out firstly, the specification and  secondly, certification requirements for any alternative fuels,” he stated.

“As mentioned, certification is key to the vessel obtaining favourable treatment under the CII and EU regimes. Without it, vessels may face unexpected penalties under these regimes.”

Further, Collier recommended it may be worthwhile for Owners and Charterers under long term charters to consider allocating costs and benefits of any modifications required to consume alternative bunker fuels.

“Here, the potential benefits of allowing a vessel to consume alternative fuels are high, but so are the costs of any retrofits. Owners and Charterers may wish to consider agreeing cost allocation clauses which share both the benefits and costs,” he advised.

“There are also potential risks for consuming alternative fuels. Who is to bear the risks of problems? It may be worthwhile Owners considering including in their charterparties express terms which provide that any alternative fuel bunkers supplied by their time charterers will be fit for purpose and capable of being consumed by the Vessel’s engines.

“By contrast, Charterers should be aware that there is a risk that the cause of engine problems may not be the fuel itself. Issues could, for example, be due to the handling of fuel, or problems with vessel maintenance, which are typically the responsibility of Owners.

“There may therefore be disputes as to whether the vessels are off-hire following engine problems and who will bear the repair costs.

“In summary, it is clear there are significant benefits from the use of alternative fuels, but there are also significant risks. It is worth considering the legal and contractual implications early given their potential ramifications.”

Photo credit: Clyde & Co
Published: 31 May 2024