Article: IMO 2020 - charterparty FAQs

The below FAQs are intended to assist members (as owners and charterers) in preparing their charterparties for IMO 2020.  Whilst this is not intended to be formal legal or technical advice or an exhaustive list of FAQs, it seeks to identify chartering issues arising from IMO 2020, including potential contractual responsibilities and liabilities in respect of compliance.

The main focus of the FAQs is on time charterparties, although guidance is also provided in respect of voyage charterparties where appropriate.

What is the ‘Sulphur Cap’ and how does it apply?

Regulation 14.1.3 [1]  of Annex VI of the MARPOL Convention (International Convention for the Prevention of Pollution from Ships, 1973 as modified by the Protocol of 1978) (MARPOL Annex VI) comes into force on 1 January 2020.

This Regulation provides that the sulphur content of any fuel oil used on board vessels for consumption shall not exceed 0.50% m/m on or after 1 January 2020 (the Sulphur Cap).  The current sulphur content limit is 3.50% m/m under Regulation 14.1.2 save where a vessel is trading within an Emission Control Area (ECA).

The Sulphur Cap applies to any fuel oil used on board a vessel, including fuel used in the main engine, auxiliary engines and boilers.

In addition, MARPOL Annex VI also prohibits the carriage of any fuel oil of more than 0.50% m/m sulphur content (HSFO) for use in the fuel tanks as from 1 March 2020 (Carriage Ban). 

The Sulphur Cap applies to those vessels which fly the flag of a state which has ratified MARPOL Annex VI and / or which transit through the territorial waters of / call at those states which have ratified MARPOL Annex VI. 

MARPOL Annex VI, therefore, has a wide sphere of application.

It should be borne in mind, however, that the Sulphur Cap does not affect the ongoing obligation under Regulation 14.4.3 that vessels operating within ECAs must consume fuel of a sulphur content of not more than 0.10% m/m (ULSFO).  This is in addition to those other areas around the globe where the sulphur content of fuel is also regulated, including those areas where the use of alternative abatement technology is regulated.

States that have ratified MARPOL Annex VI are responsible for the detection, enforcement and applicable penalties/fines.

What are the options for compliance and the technical issues?

There exist two principal methods of compliance with the Sulphur Cap:  

1. the use of compliant fuel (eg LSFO with a sulphur content which does not exceed 0.50% m/m)
2. the adoption of alternative abatement technology (eg such as an exhaust gas cleaning system (EGCS), commonly known as a scrubber) provided it is 'at least as effective in terms of emissions reductions' (Regulation 4.1) and has been approved by the Administration (the flag state).

Compliant fuel includes distillate fuels (eg MGO and MDO) and blended (eg blends between heavy distillate and light residual) and hybrid (eg new residuals coming onto the market such as HFO from sweet crudes or HFO that has undergone desulphurisation) fuels.  It also includes 'alternative fuel oils' such as LNG, methanol, bio fuels, LPG and hydrogen fuel cells provided these are again 'at least as effective in terms of emissions reductions' (Regulation 4.1), although these are likely to be less common in the market for various reasons.

There are several different types of scrubber systems. The majority in the market are wet scrubbers which use seawater for the scrubber surface (eg open-loop, closed-loop, hybrid, u-type and in-line), although there are also dry scrubbers.

Please refer to the guidance provided by our dedicated Loss Prevention Team which can be found in our article in Standard Safety. 

Which party is responsible for fines and actions brought in respect of non-compliance and / or violation of MARPOL Annex VI?

Primary responsibility for compliance with MARPOL Annex VI rests with shipowners.  This is normally reflected in (time and voyage) charterparty provisions.  For example, it is fairly common to find that shipowners have warranted that a vessel will comply with International (and National) rules and regulations.  In addition, to comply with any fitness obligations under a charterparty, this includes 'legal fitness' for the chartered service, and such fitness is likely to include compliance with International (and National) maritime rules and regulations, such as MARPOL Annex VI.

It is anticipated, therefore, that in most cases, the consequences of non-compliance will rest with shipowners in the first instance.  Nevertheless, it is possible for the cost and risk of compliance to be allocated by way of contractual arrangement between the parties, although it will also will depend on the nature and specific circumstances of the event of non-compliance itself post 1 January 2020 and the approach to enforcement by any contracting state. 

In a time charterparty context, charterers are obliged to pay for and supply fuel to a vessel whilst she is on hire. Clear wording will be required to allocate responsibility and/or liability for non-compliance onto charterers (eg an express obligation to provide compliant fuel and an accompanying  indemnity in favour of owners) failing which shipowners will be left to rely on implied terms depending on the nature of the non-compliant event and the charterparty provisions in question. However, in circumstances where the ship is not fit or capable of consuming compliant fuel, liability will, generally, rest with shipowners.

The BIMCO clauses seek to make clear which party bears the responsibility for non-compliance in prescribed circumstances in a time charterparty context (see below).

In a voyage charterparty context, where ship owners supply fuel and factor this into the freight rate (eg commonly seen as a bunker adjustment factor (BAF) or surcharge), there is unlikely to the same allocation of risk and responsibility when it comes to non-compliance.  Responsibility will, therefore, almost certainly rest with shipowners save for in exceptional circumstances.

What are the likely fines / consequences of non-compliance?

Regulation 11 expressly provides that enforcement and policing of MARPOL Annex VI compliance is to be left to each contracting state.  This means that it can be enforced either by a contracting flag state (Administration) or (more likely) a port state authority of a contracting state (eg port state control).

Importantly, however, there is no uniform application of MARPOL Annex VI, and no guidance on the level of potential fines to be levied and/or the form of enforcement (civil or penal action) in the event of non-compliance.  An early indication of the likely consequences has recently been provided by Singapore, although such guidance is few and far between, but it is hoped that only wilful non-compliance will carry with it the harshest consequences.  For the same reason, it is recommended that vessels complete The Ship Implementation Plan for the Consistent Implementation of 0.50% Sulphur Limit under MARPOL Annex VI [2]  and that members take all possible action necessary to ensure compliance.

Whilst primary responsibility is likely to rest with shipowners, it is not inconceivable that there may exist circumstances in which action could be taken against those parties supplying the fuel (eg charterers or bunker suppliers) in a given contracting state either by virtue of the way in which such a state has incorporated MARPOL Annex VI into its domestic law or by operation of local law itself.

What is the Carriage Ban and what does it mean?

This is not a prohibition on the carriage of HSFO as a cargo (eg on board a tanker), but a prohibition on the carriage of HSFO for use in the fuel tanks as from 1 March 2020.  All residual HSFO (eg non-compliant fuel as from 1 January 2020) is to be removed from a vessel's fuel tanks prior to 1 March 2020 failing which there will be de-facto non-compliance (even if such fuel is not being or is not intended to be used for consumption). 

The Carriage Ban does not apply to vessels fitted with scrubbers which are operational.  As matters stand, it is unclear what the position is likely to be under MARPOL Annex VI in the event that the scrubber is not operational (perhaps for a sustained period of time with little prospect of repair), and a vessel is still sailing with a large quantity of HSFO.  However, it is hoped that a sensible and pragmatic approach will be adopted by the authorities in those circumstances.

In any event, it should be borne in mind that there are areas around the world where carriage of HSFO (even as cargo) is prohibited and / or regulated.

How can the new 2020 BIMCO clauses assist you?

These clauses are intended to be inserted into time charterparties now in preparation for IMO 2020.  The clauses provide a clear allocation of risk and responsibility insofar as compliance with the Sulphur Cap and Carriage Ban is concerned.

The BIMCO 2020 Marine Fuel Sulphur Content Clause for Time Charter Parties is a general compliance clause for all sulphur emission regimes and is intended to operate on an ongoing basis. 

The BIMCO 2020 Marine Fuel Transition Clause for Time Charter Parties is intended to address the one-off event (transition from HSFO to compliant LSFO) and ensure compliance with the Sulphur Cap and the Carriage Ban by the dates that these important events come into force.  However, the clause envisages that a detailed plan/arrangements for the full de facto transition will still need to be agreed between the parties, as there is unlikely to be one solution that fits all.  Indeed, appropriate steps will vary from vessel to vessel, and will, ultimately, depend on the following factors: a vessel's type and age, the chosen method of compliance and preparation of her fuel system, her trade and employment and the commercial bargaining power between the parties.  It should also be borne in mind that this clause does not apply to time charterparties where vessels are to be redelivered prior to 01 January 2020.

For time charterparties spanning into 2020, it is advised to incorporate both clauses.

However, it should be noted that neither of these clauses are intended to apply to voyage charterparties, or vessels fitted with scrubbers. 

We have entered into a long-term time charterparty that will stretch beyond 1 January 2020 (and no scrubber has been fitted on the vessel).  What are the relevant considerations to bear in mind?

The overriding problem with existing time charterparties is that they have not been drafted with the regulatory change brought about by IMO 2020 in mind. 

In simple terms, there are no express provisions that deal specifically with the main issues arising out of the Sulphur Cap and Carriage Ban and this is unsatisfactory for both ship owners and  charterers who are obviously looking for commercial certainty at the end of the day.  A significant degree of cooperation and coordination is required to ensure a smooth transition into 2020 and to avoid significant disruption to the commercial adventure, and existing charterparties are unlikely to facilitate this. 

With this in mind, and in circumstances where the 2020 BIMCO clauses or similar provisions to that effect [3] are not incorporated, members are advised to consider the following (non-exhaustive list of) potential commercial considerations / contractual provisions:

1. Charterers' obligation to provide fuel: this will require very careful consideration of the charterparty terms.  Whilst existing charterparties are unlikely to expressly provide that compliant fuel (LSFO) is to be supplied, in most cases, charterers will probably be obliged to pay for and supply compliant fuel as of 1 January 2020 (for example, if a BIMCO Fuel Sulphur Content Clause for Time Charter Parties 2005 is incorporated or on the basis that there exists an implied term that fuel supplied is to be lawful (ie compliant) and suitable for the vessel to trade).  However, there may be exceptions to this if the charterparty provides that charterers are only to supply a specific grade/specification/standard of fuel oil (eg which has a higher sulphur content level for either residual or distillate fuels).  Such a scenario could exist  where there is a long term time charterparty entered into some time ago.  This is likely to be an area for dispute between the parties given the likely significant price differential between HSFO and LSFO from Q4/2019 onwards.
2. Fuel system: in order to ensure compliance with the Sulphur Cap, ship owners must ensure that a vessel's fuel system (tanks and pipelines) are fit to receive, store and consume compliant fuel.  Emptying tanks and a simple flushing of the lines are unlikely to be sufficient, especially where there is a build-up of HSFO residues on the tank coatings given the length of time the vessel has been operating on HSFO.  Cleaning is, therefore, likely to be required to avoid contamination of fuels which could result in non-compliance or even potential engine damage.  The extent of cleaning will largely depend on the age, type and employment of the vessel in question.  Different methods of cleaning (ie in drydock, manual cleaning with a rider crew, use of chemical additives or a mixture of these) exist, but the logistics of this process could be very onerous in terms of time and cost, and could also result in a disruption to trade.  The risk, time and cost of this process is not expressly addressed in existing charterparties.  In the absence of a specific provision, it is likely that this will form part of ship owners' maintenance obligations and any time lost for this cleaning process could be recoverable by charterers under an off-hire provision and / or as damages for breach of contract.  However, the disruption to the trade of the vessel could also give rise third party liabilities which charterers may seek to try pass onto ship owners unless there is a ship owners' right to take the vessel out of service and this has been exercised correctly.
3. Compatibility of new types of compliant LSFO and bunker quality issues: the transition from HSFO to LSFO is unlikely to be straightforward, and will require increased shipboard procedures and crew training.  The various types of compliant LSFO coming onto the market in the lead up to 1 January 2020 also give rise to an increased risk of compatibility issues between fuels (especially blends) and fuel quality.  Whilst these issues already exist in today's market, and it is recommended to keep stems segregated and to avoid comingling where possible, there may be more instances of problems with fuel management.  For example, it is entirely possible that fuels – especially from different geographical locations - may be on specification, of the correct grade and of the correct sulphur content, but contain additional properties that, nevertheless, mean that they are unsuitable for consumption by the Vessel or incompatible with other fuels.  In circumstances where main engine issues and delays relate to the use and management of fuel on board, it is likely that responsibility will rest with ship owners and the vessel will be off-hire.
4. Disposal of residual HSFO and title to fuel: the starting point is that, absent an express provision in the charterparty, there is no express obligation on charterers to stem compliant LSFO prior to 1 January 2020.  The risk, time and cost of the removal and disposal of HSFO (non-compliant fuel post 1 January 2020) before the Carriage Ban date is also not expressly addressed in existing charterparties.  Therefore, in theory, a large quantity of HSFO could still be on board post 1 January 2020.  Responsibility for disposing HSFO could rest with ship owners who would face the prospect of being in breach of MARPOL Annex VI (ie the Carriage Ban) and/or legal fitness obligations and compliance warranties under the charterparty if the HSFO was not removed.  In the context of a long-term time charterparty, there may exist circumstances where shipowners could  argue that charterers are under an implied obligation to remove the residual HSFO that they previously supplied which is their property and is no longer lawful or compliant to be consumed (eg where a HSFO stem very close to 1 January 2020 was supplied).  However, this would be a very difficult argument to run given that, at the time when such HSFO was supplied, it was lawful to do so and there is not, in any event, a positive obligation to remove such fuel.  Additional complications arise here given that ship owners do not have title to the HSFO (bunkers), and it is unclear how and where such HSFO can be disposed of, less what value (if any) such fuel may have post 1 January 2020.
5. Bunkers on delivery and redelivery – quantities and prices: given the predicted significant price spread between residual HSFO and compliant fuel (LSFO) post 1 January 2020, considerable care should be given to agreeing these provisions in the charterparty.  Agreeing provisions such as 'same quantity and prices of bunkers both ends' may leave charterers considerably out of pocket where ship owners buy back more expensive LSFO at a price initially envisaged for HSFO at the time the charterparty was entered into. 

In view of the above, members are advised to review their contracts carefully.  It would be prudent for the parties to enter into dialogue early with their counterpart to discuss the possibility of an addendum to the existing charterparty to address the issues arising out of the Sulphur Cap and the Carriage Ban, and any uncertainty arising therefrom.  Failing this, members are advised to seek guidance from the club.

We are entering into a time charterparty which provides for redelivery shortly before 1 January 2020.  What are the relevant considerations to bear in mind?

Even though the vessel will be redelivered before the Sulphur Cap and Carriage Ban have come into force, ship owners will still have to give serious consideration to the timing of the removal of residual HSFO (how and where) and any necessary cleaning of the fuel system (tanks, piping, service and storage tanks) in order to be in a position to receive, store and burn compliant LSFO after her redelivery.  It would be prudent for ship owners to factor in the down time to accommodate these steps in anticipation of the Sulphur Cap and the Carriage Ban, especially where the vessel is redelivered close to the 1 January 2020. 

In a time charterparty context, consideration should also be given to the likely price and quantity of residual HFSO remaining on board which ship owners will be taking over and paying for upon redelivery, and this may have a considerably reduced value.  Unless removed by 1 January 2020, a charterer may be less likely to charter a vessel which still has a large quantity of HSFO on board, alternatively it may impact the likely charter rate.

We are likely to enter into a voyage charterparty pre 2020 and the voyage is likely to span into 2020.  What are the relevant considerations to bear in mind?

Given that the charterer is not supplying fuel to the vessel, the prospect of charterer's actions resulting in non-compliance with MARPOL Annex VI would appear to be unlikely.  However, in circumstances where there is unlikely to be a charterer's implied indemnity (at law) under a voyage charter (in contrast to a time charter), shipowners may try to incorporate an express indemnity to cover this scenario.

Equally, depending on the commercial bargaining power of the parties, charterers may want to incorporate an express indemnity from shipowners for the consequences of any failure to comply with the Sulphur Cap (and Carriage Ban) and the requirements of any applicable sulphur emission regime.  It may also be prudent to provide that any time taken or delays suffered as a result of stemming, de-stemming or testing fuel for compliance shall not to count as laytime and/or demurrage (even if on demurrage).

Likewise, if the vessel is fitted with a scrubber, it would be prudent for charterers to insist upon a warranty/indemnity from shipowners that the scrubber is fully documented, operational and compliant with all applicable EGCS regulations and guidelines failing which all time and cost shall be for ship owners' account.

What are bunker adjustment factor (BAF) or surcharge clauses?

BAF clauses are often found in voyage charterparties and contracts of affreightment.  These clauses are designed to assist contractual carriers to hedge against the risk of bunker price volatility (which is very likely to be seen as early as Q4/2019), and can also be built into the freight rate. 

BAF clauses typically track against prices fixed on a passed date (often the bill of lading date), and not the actual pricing reality at the time the bunkers are purchased or stemmed.  That said, there can be different approaches (eg Bunker Escalation and De-Escalation clauses) which track actual bunker costs during the voyage more closely.

It is also possible that different BAF clauses may be appropriate depending on whether a vessel is fitted with a scrubber or not. 

If further guidance is required on this, members are advised to contact the club.

Will compliance with the Sulphur Cap impact the vessel's performance?

It is understood that certain types of compliant fuel have a different calorific value to conventional HSFO, and with new hybrid and blended fuels entering the market, it is possible that this fuel switch could result in higher consumption and lower average speeds.  For example, LSFO may require ongoing heating which could also necessitate additional equipment (eg a boiler) depending on the fuel system configuration.  A ship owner is recommended to consult with its engine manufacturer. 

Speed and performance warranties should, therefore, be considered carefully, and it may be prudent for ship owners to provide that such warranties are be suspended until such time as the full effect of the new fuel on consumption is better known. 

Likewise, the same logic may also apply to vessels fitted with scrubbers.  Scrubbers will need to be powered and this could also have an impact on the speed and consumption of the vessel, albeit this should be clarified with the scrubber manufacturer/supplier.

Given the prospect of increased bunker consumption and higher fuel costs, there may also be a tendency to slow steam depending on the rights of the parties under the charterparty.

I am concerned about the impact of new (untested) blends and hybrid compliant fuels on the vessel's main engine.  Will charterers be responsible if the vessel suffers engine damage?

This will depend on the actual cause of the engine damage and the terms of the charterparty. 

In a time charterparty context, it is fairly common to see express provisions which provide that charterers are to supply fuel that is suitable for burning in the vessel's main engine and auxiliary engines (this includes the BIMCO Bunker Quality and Liability Clause).  Alternatively, charterers are likely to be under an implied obligation at law to supply fuel which is suitable for the type of engine fitted to the particular vessel. 

If the cause of the main engine damage is shown to be the suitability or quality of the compliant LSFO itself - perhaps due to a particular blend of fuel or any additional properties that are harmful (eg high content of catalytic fines) -  and there are no aggravating factors (see below), responsibility is likely to rest with charterers (much in the same way that an off-spec or contaminated bunkers claim would do). 

However, there are still grey areas.  For example, it may still be necessary to carry out a factual and technical enquiry into whether the vessel's main engine (including her fuel system) was in a satisfactory state to receive, store and burn the fuel in the first place (eg calling into the fitness and/or seaworthiness of the main engine dependent on the circumstances). 

In addition, if the cause of the damage was due to comingling and/or compatibility between stems of fuel supplied, then this is likely to call into question the fuel management procedure on board the vessel, and responsibility for this could rest with ship owners.  As to whether the vessel would be off-hire in these circumstances, this will depend on the terms of the particular off-hire provision in question, and will need to be approached on a case by case basis.

It is probably true to say, however, that main burden will be on (time) charterers to displace the presumption that the fuel they supplied caused the damage.

As regards to whether shipowners could legitimately refuse to burn new (untested) blends and hybrid compliant fuels, this will, again, depend on the terms of the charterparty.  For example, where a specific type/specification/grade of fuel has been prescribed (eg if it is possible that the parties could agree that only MGO is to be supplied), this may be possible.  However, if there is no such qualification and charterers are simply obliged to provide 'compliant' LSFO (without specifying a particular grade or specification), then as long as the LSFO was of the required sulphur content and was of sound quality, ship owners would not be able to refuse a charterers' order to burn this.

What will happen if compliant LSFO is unavailable during a voyage post 2020?

In the event of unavailability of compliant LSFO, shipowners are required to document and evidence all steps taken to achieve compliance (eg source compliant fuel) (Regulation 18.2.1.2).  This requires the vessel to inform its flag state (Regulation 18.2.4) and to complete a Fuel Oil Non-Availability Report (FONAR). 

Regulation 18.2.2 provides that, 'ships should not be required to deviate or unduly delay the voyage in order to achieve compliance'.  It is suggested that ship owners must only take on the minimum quantity of non-compliant HSFO.

However, whilst this regulation could, potentially, act as mitigating circumstances, it is not an exception to compliance.  It is submitted that neither that nor the completion of a FONAR will constitute a 'get out of jail free card'.  This is because the vessel will be de facto in breach of MARPOL Annex VI and, whilst port state control 'shall take into account all relevant circumstances and the evidence presented to determine the appropriate action to take' (Regulation 18.2.3), the risk is that, with no uniform approach to enforcement and fines, a ship owner will be exposing himself to considerable risk.  Reasonable deviation may therefore be prudent to avoid unwanted consequences which, at this stage, cannot be predicted.

With thanks to Alessio Sbraga at HFW for his contribution to this article. 

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^[1] Resolution MEPC 305(73) adopted on 26.10.18 provides that the sub-paragraphs to Regulation 14.1 are to be replaced with one single paragraph which reads '1. The sulphur content of fuel oil used or carried for use on board a ship shall not exceed 0.50% m/m'.

^[2] Annex to MEPC 1/Circ 878, Appendix 1

^[3] The Intertanko Bunker Compliance Clause for Time Charterparties

类别: Alternative Fuels, Pollution