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Denmark special: Bad bunker fuel causes damage worth millions – but who is liable?

Copenhagen legal firm NJORD shares with Manifold Times what the recent spate of contaminated bunkers mean for Danish shipping firms looking to recover claims.

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The following article is produced by Njord Law Firm’s Shipping and Transport Department and the intended readers of the article are for Danish shipping companies looking to recover claims for bad bunkers. Readers who have additional queries are welcomed to contact the authors for any questions.

Bad bunkers: business as usual?
The shipping industry is following closely the developments regarding poor quality bunkers, the consequences and scope of which has expanded since the problems were first encountered earlier this year. The significant risk of engine failure when using bad bunkers, and the lack of a solution presents ship owners and charterer with an unacceptable risk.

Bad bunkers, however, are not new in the industry: many owners consider it to be “business as usual” when they receive poor quality bunkers from time to time. Whether it is due to mistakes in the blending of different types of fuel or other sources, the usual precautions are taken: purchases are only made from trusted bunker suppliers and bunkers are tested to ensure the quality.

However, the current problems with bad bunkers are not “business as usual”. The problems appeared in April, first at bunker deliveries in Houston, later Panama and now also in Singapore and Hong Kong. During that period more than 100 deliveries of bad bunkers have been reported, all of which are believed to be due to similar causes. Importantly, the standard ISO tests used for bunker quality assurance will not reveal the harmful substances that are causing the problems. The origin and exact content of these harmful substances is unclear. Technical reports refer to traces of shale oil from Estonia or the United States, while other reports refer to chemical waste and by-products from the timber industry. The lack of clarity is in part due to the relatively long supply chain in the bunker industry, ranging from the buyer to the contractual bunker supplier with which the purchase agreement is concluded, and from there to the physical supplier who performs the actual delivery to the ship, and even further to the parties from whom the physical supplier originally bought the bunker oil.

The consequences of using bad bunkers including clogged filters and pipes in the ship's machinery, as well as breakdown of fuel pumps and sometimes total engine shutdown. A number of Danish shipping companies have experienced problems with bad bunkers, with engine shutdown and subsequent grounding as one of the more dire examples. Such problems may result in disputes between charterers and ship owners, and/or between carriers and good-owners. The outcome of such disputes will depend on the provisions of the relevant charterparties or bill of lading, respectively.

Who can claim compensation from whom?
As a buyer of bunkers, you can take the usual precautions, including requiring bunker suppliers to account for the origin of the bunker. However, once the accident occurs, the losses can quickly accumulate. The losses include both direct physical damage to the ship and the resulting repair costs, but also financial loss in the form of off-hire or compensation claims from charterers of the ship or good-owners. In this context, bunker purchasers (both charterers and ship owners) should ensure to explore the options available for recovering their claims from the bunker suppliers.

First, the potential parties against whom a claim can be brought should be identified. So far, the industry has focused on the physical bunker suppliers and parties further up the supply chain, because the nature of the problem indicates that the harmful substances were introduced in this part of the supply chain. However, for a buyers of bunkers it will be at least as relevant to consider the possibility of bringing a claim against the contractual counterparty, ie. the contractual bunker supplier.

This is due in part to the fact that buyers of bunkers may be faced with significant challenges when bringing a claim directly against a physical bunker supplier. Generally, no agreement will have been entered into between the buyer and the physical supplier for the bunker supply. In addition, the claim will often be subject to foreign law (typically the law applicable to the place of delivery), and it will have to be commenced before foreign courts. Only rarely, the claims will be subject to Danish jurisdiction and choice of law, for example in certain circumstances where bunkers are delivered to a Danish flagged ship.

The bunker suppliers’ liability for the claim will depend on the applicable law, but will typically involve a negligence based assessment. The buyer will therefore have to prove that the physical supplier acted negligently when delivering the bad bunkers. Although these challenges may appear difficult to overcome, on the other hand, any provisions on limitation of liability in bunker supplier's terms will normally not apply as no contract has been entered into with the physical bunker supplier.

Claims against the contractual bunker supplier
The buyer's claim against the contractual bunker supplier will be subject to the provisions of the bunker supply contract. The terms vary and often contain notification clauses and limitations of liability restricting the buyer's ability to recover the claim in full. Especially the short deadlines for notifying claims have proven problematic for buyers of bunkers, as the poor quality of bad bunkers is often only discovered some time after delivery took place.

The terms and conditions should be reviewed in detail. For claims against suppliers with foreign law and jurisdiction clauses, advice from local lawyers should be obtained. Many Danish bunker suppliers include Danish choice of law and jurisdiction clauses in their standard terms. Claims against such bunker suppliers may be brought before the Danish courts, which may be advantageous for buyers for various reasons.

In order to succeed in a claim against a contractual supplier under Danish law, the buyer of bunkers must prove that the supplier has breached the bunker supply contract, for example by delivering bunkers that did not comply with the specifications in the contract. In this respect, obtaining and securing evidence is essential, including bunker samples and documentation for the use of bad bunkers (and the consequences thereof) by the ship.

In relation to the current problems with bad bunkers, the challenge for buyers is that the bad bunkers often comply with the agreed specifications for the delivered product, because the harmful substances do not show up in the standard ISO quality tests applied in the industry.

Even so, a claim could still be brought under the contract if the bunkers did not comply with any statements made or information provided about the bunkers by the bunker supplier. The same applies if the bunkers were not fit for purpose. Delivery of bad bunkers could therefore, depending on the factual circumstances, constitute a breach of contract, regardless of whether the bunkers delivered comply with the agreed specifications. However, the buyer’s claim would still be subject to any liability limitations in the bunker supply contract.

Product liability
Alternatively, a buyer could also bring a claim in contract under the Danish legal principles on product liability rules. The principles are based on Danish case law and require that the product (1) is defective and (2) has caused damage to something other than the product itself, in order for the buyer to succeed in showing that the bunker supplier acted negligently. This would be the case for bad bunkers that cause damage to a ship's engine.

Although the contractual bunker supplier would not necessarily be the “manufacturer” of bunker oil in the traditional terminology of Danish product liability rules, contractual bunker suppliers will be considered as intermediaries, who will be liable to the same extent as the actual manufacturer under the Danish rules on product liability.

In addition, a Danish court will adopt a narrow interpretation of contractual limitation of liability clauses - and be more willing to set them aside - for claims based on the principles of product liability, compared to ordinary claims in contract. In addition, Danish law provides claims under the principles of product liability are not subject to any notification period. Therefore, any notification period set out in the contractual bunker suppliers terms and conditions must specifically state that they cover claims based on the rules regarding product liability – otherwise, such clauses are unlikely to be applied by the courts. Buyers should therefore carefully review the contracts in this regard in assessing whether claims can be recovered under the principles on product liability.

Contacts:
ULLA FABRICIUS
Attorney at law, Partner, Copenhagen
Direct: (+45) 77 40 10 12 
Mobile: (+45) 40 40 93 59 
[email protected]

CHRISTIAN BENEDICTSEN-NISLEV
Attorney at law, Partner, Copenhagen
Direct: (+45) 77 40 11 47 
Mobile: (+45) 27 79 32 70 
[email protected]

Photo credit: NJORD
Published: 29 August, 2018

 

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Vessel Arrest

Vietnam: Fishing vessel TH-92237-TS arrested over 80,000 litres of illegal diesel oil

Ship first spotted being surround by several other wooden hull fishing boats at a location about 100 nautical miles southeast of Con Da on 7 June.

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Kiem tra huong tien

The Vietnam Coast Guard on Saturday (8 June) said it arrested fishing vessel TH-92237-TS over the carriage of about 80,000 litres of illegal diesel oil.

It first spotted the vessel being surround by several other wooden hull fishing boats at a location about 100 nautical miles southeast of Con Da on 7 June.

The authority proceeded to inspect the vessel and found it to be transporting about 80,000 litres of diesel oil with no invoices or documents proving its legal origin.

Following, the coast guard conducted a record of administrative violations, established initial records, and sealed the violating goods.

It escorted the fishing vessel back to the port of Squadron 301 (in Vung Tau City) and handed it over to the Command of Coast Guard Region 3 for further investigation and handling in accordance with the provisions of law.

 

Photo credit: Vietnam Coast Guard
Published: 13 June 2024

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Alternative Fuels

IUMI: How can liability and compensation regimes adapt to alternative bunker fuels and cargoes?

Existing international liability and compensation regimes do not fully cater to the changes that the use of alternative marine fuels will bring.

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Dangerous cargo

By Tim Howse, Member of the IUMI Legal & Liability Committee and Vice President, Head of Industry Liaison, Gard (UK) Limited

The world economy is transitioning, with industries across the board seeking to reduce their carbon footprint and embrace more sustainable practices. As part of this, there is a huge effort within our industry to look to decarbonise, using alternative fuels such as biofuel, LNG, LPG, ammonia, methanol, and hydrogen.

Until now there has been much focus on carbon emissions and operational risks associated with the use of alternative fuels. This includes increased explosivity, flammability, and corrosivity. An ammonia leak causing an explosion in port could result in personal injuries, not to mention property damage, air, and sea pollution. In addition, alternative fuels may not be compatible with existing onboard systems, increasing the risk of breakdowns and fuel loss resulting in pollution. Apart from these safety concerns, which particularly concern crew, air pollution and other environmental impacts need to be addressed.

However, the green transition also presents us with a separate regulatory challenge, which has received less attention so far. So, whilst carbon emissions and safety concerns are rightly on top of the agenda now, the industry also needs to prioritise the potential barriers in the legal and regulatory frameworks which will come sharply into focus if there is an accident.

If anything, historic maritime disasters like the Torrey Canyon spill in 1967, have taught us that we should look at liability and compensation regimes early and with a degree of realism to ensure society is not caught off-guard. With our combined experience, this is perhaps where the insurance industry can really contribute to the transition.

Currently, existing international liability and compensation regimes do not fully cater to the changes that the use of alternative fuels will bring. For example, an ammonia fuel spill would not fall under the International Convention on Civil Liability for Bunker Oil Pollution Damage (Bunkers Convention), potentially resulting in a non-uniform approach to jurisdiction and liability. Similarly, an ammonia cargo incident would not fall under the International Convention on Civil Liability for Oil Pollution Damage (CLC). Uncertainties may also exist in the carriage of CO2 as part of Carbon Capture and Storage (CCS) projects, which may be treated as a pollutant, with corresponding penalties or fines.

A multitude of questions will arise depending on what happens, where it happens, and the values involved, many of which may end up as barriers for would be claimants. How will such claims be regulated, will there be scope for limitation of liability, and would there be a right of direct action against the insurers? In the absence of a uniform international liability, compensation and limitation framework, shipowners, managers, charterers, individual crew, and the insurers may be at the mercy of local actions. Increased concerns about seafarer criminalisation (even where international conventions exist, ‘wrongful’ criminalisation does still occur) may emerge, creating another disincentive to go to sea.

When being carried as a cargo, the International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea (HNS), which is not yet in force, may resolve some of these issues for alternative fuels and CO2. However, until HNS comes into force, there will be no international uniformity to liability and compensation for the carriage of alternative fuels and CO2 as cargoes. This creates uncertainties for potential victims and their insurers, who may face increased risks and costs, due to the potential inability of existing regulations to provide protections.

The situation is even less clear in the case of bunkers. The rules for using alternative fuels as bunkers might require a separate protocol to HNS, a protocol to the Bunkers Convention, or a whole new convention specifically for alternative fuels.  Relevant considerations for the appropriate legislative vehicle include states’ preparedness to reopen the Bunkers Convention, the ability to conclude a protocol to HNS before it comes into force, and whether a multi-tier fund structure is needed for alternative fuels as bunkers (perhaps unnecessary because bunkers are usually carried in smaller quantities compared to cargoes).

Until then, what we are left with are the existing international protective funds, designed to respond at the highest levels to pollution claims resulting from an oil spill, without any similar mechanism in place to respond to a spill of alternative fuels, which are themselves so central to a green transition. Somewhat perversely, victims of accidents involving an oil spill may therefore enjoy better protections than victims of an alternative fuels spill.

In summary, while the use of alternative fuels will no doubt help to reduce the industry's carbon footprint, there are safety and practical hurdles to overcome. Stakeholders must also come together to find solutions to complex - and urgent, in relative terms - legal and regulatory challenges.

 

Photo credit: Manifold Times
Source:  International Union of Marine Insurance
Published: 13 June 2024

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Legal

Malaysia: MMEA detains Singapore tugboat, barge for illegal anchoring in Johor

Inspection found that both vessels from Singapore were suspected of committing offences for failing to report their arrival and anchoring without permission from Malaysian Marine Department Director.

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Malaysia: MMEA detains Singapore tugboat, barge for illegal anchoring in Johor

The Malaysian Maritime Enforcement Agency (MMEA) on Tuesday (11 June) detained a Singapore-registered tugboat with a barge at approximately 3.5 nautical miles west of Pulau Harimau in Johor.

Mersing Zone MMEA director Maritime Commander Suhaizan Saadin said the tugboat and barge were apprehended at 11.00am by a MMEA patrol team during Ops Jaksa and Ops Tiris. 

“Inspection found that both vessels from Singapore were suspected of committing offences for failing to report their arrival and anchoring without permission from the Director of the Malaysian Marine Department,” he said. 

Investigation also revealed all seven crew members from both vessels were Indonesians, aged between 25 and 44 including the captain.

The detained vessels and crew were taken to Mersing Maritime Jetty to be handed over to MMEA investigators for investigation under the Merchant Shipping Ordinance 1952.

“MMEA will not compromise on any activities that are against the law and will always be committed in continuing operations and patrols along Malaysian Maritime Zone (ZMM) to curb illegal activities in the country's waters,” said Suhaizan.

 

Photo credit: Malaysian Maritime Enforcement Agency
Published: 12 June 2024

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