2020 Sulphur Bunker Cap – Charterers’ Concerns

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This is a special edition dedicated to IMO’s 2020 Sulphur Bunker Cap.

IMO has amended Regulation 14 of MARPOL Annex VI with effect from 1 January 2020. The amended Regulation 14 will result in a new global sulphur limit cap of 0.5% in HFO against the present 3.5% sulphur limit cap. The major amendment in Regulation 14 is that the prohibition to release air pollution from burning high sulphur HFO is supplemented with a prohibition to also carry high sulphur HFO on board the vessel with effect from 1 March 2020, unless scrubbers are installed.

Voyage charterers are normally not much at risk for this new sulphur cap regulation, as they should not hold title to the bunkers.

Time charterers generally hold title to the bunkers onboard, and the MARPOL amendment will have an effect on them as well as owners who fix on spot voyage. Under the T/C bunkers clause, charterers normally warrant to be in compliance with MARPOL and may also have given an indemnity to owners for costs, liabilities, fines etc. for breach of MARPOL compliance. From 1 January 2020, MARPOL fines levied on owners may presumably be sought from charterers under a T/C indemnity provision.

Transition period is now

The signal from IMO is that there will be no transition period starting 1 January 2020 to adjust to the new sulphur cap. That means that we are in the transitional period now, and charterers need to prepare for the legal and practical sides of the new MARPOL regulation.

Most charterparties have not contemplated this situation. For charterparties stretching beyond 1 January 2020, we recommend that charterers should discuss with owners to find a common action plan, as all parties have a shared interest and responsibility to comply with MARPOL. Some of the operational issues, which need to be considered, are timing of cleaning of bunker tanks and pipes and, where such tank cleaning will be done, who is to pay for the cleaning of the tanks which takes, on average, two weeks.

For some time, vessels may have to burn MGO instead of high sulphur HFO to comply with Regulation 14 of MARPOL. This will result in increased cost for charterers, which may not have been taken into the commercial considerations when entering into the T/C.

Likewise, charterers may face a depreciated return on the value of their high sulphur bunkers prior to and post redelivery 2020. The parties should seek to agree an addendum to address this potential pitfall.

Additionally, if trading on CIF terms sellers have an obligation to enter into a reasonable contract of carriage which is clear on the incidence of burden, i.e. properly drafted bunker clauses.

Conversely, if trading on FOB terms sellers will want to conduct due diligence on their buyers and their ability to meet their obligations in respect of risks. For instance, a vessel arrested by port authority for non-compliance before discharge of cargo could result in a substantial liability for demurrage being incurred with no practical indemnity.

No high sulphur bunkers on board by 1 March 2020

In order to avoid fines for breach of MARPOL, no vessel should have high sulphur bunkers on board by 1 March 2020 unless scrubbers are installed. In some cases, bunkers may therefore have to be taken off the vessel. Charterers will have to prepare for debunkering operations and consequent costs. Another practical issue is to consider local regulation in ports where a debunkering operation is contemplated, as some ports may treat bunkers in non-compliance with MARPOL as toxic waste, requiring an import licence to debunker.

It is also expected that the supply chain is likely to be overwhelmed by the demand of low sulphur bunkers thereby increasing the price. Charterers should, as far as possible, look into sourcing 2020 compliant bunkers already at this time to avoid price inflation and more importantly to avoid being left without compliant bunkers all together.

In general, lost time, potential drydocking, off-hire, liability for fines and costs etc. will need to be discussed between owners and charterers. On this basis, some of the major shipping NGO's are redrafting their suggested bunker clauses to take into consideration the new sulphur cap. However, unless these clauses are inserted into running T/Cs as addenda they will only take effect on new charterparties.

In early December both BIMCO and INTERTANKO Associations(1) introduced new clauses but importantly they do not address vessels fitted with scrubbers.

How can Skuld help

From 1 January 2020, Skuld expects there to be an increasing number of disputes related to breaches of the new 0.5% MARPOL sulphur cap, including disputes on lost time, cleaning costs, off specification claims etc.

Skuld will generally only be able to give limited support to charterers or owners in breach of MARPOL, particularly with respect to cover of fines. We therefore encourage our charterers and owners to do active loss prevention by planning ahead. All parties involved will have to consider practical and legal solutions to the challenges brought upon the marine industry by the amended sulphur cap.

Skuld's team of lawyers can provide general advice under the FD&D cover concerning the above-mentioned issues, and how to best approach the upcoming change in the regulations. Workshops and seminars can be given to your in-house legal and operations teams. Further, claims handlers will assist members and clients with disputes under for example charterparties and bunker supply contracts arising as a result of the new regulations. For more information, we encourage you to contact your dedicated Skuld team as soon as possible.

Written by Sarah Brooke and Øystein Djuv-Stiansen, Skuld Oslo.