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2020 Fuel Transition Clause for Time Charter Parties

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Marcus Dodds, partner, London

At a Glance…

BIMCO has last week released its two eagerly awaited standard clauses (the ‘2020 Marine Fuel Sulphur Content Clause for Time Charter Parties’ and the ‘2020 Fuel Transition Clause for Time Charter Parties’).

Both are intended to address the International Maritime Organisation’s (“IMO”) revised sulphur content limits with regards the consumption and carriage of marine fuel (per Regulation 14 of Annex VI of the International Convention for the Prevention of Pollution from Ships, 1973 as modified by the Protocol of 1978 “MARPOL”) which enter into force on 1 January and 1 March 2020 respectively.  As the name suggests, the latter is intended to deal with the transitional period between such milestones only, whereas the former is effectively a timely update to its predecessor, the ‘Fuel Sulphur Content Clause for Time Charter Parties 2005’.

Authors: Marcus Dodds

Definitions and Taiwan

In the 2020 Fuel Transition Clause for Time Charter Parties, the definition of ‘Sulphur Content Requirements’ is, it seems, intended to be wide enough to encompass Emission Control Areas (as defined in Regulation 13 of Annex VI of MARPOL) (“ECA”) and equivalent (local, national or regional) restrictions on sulphur content in marine fuels.  However, the definition of ‘Compliant Fuel’ is restricted to mean fuel that complies with regulations coming into effect as from 1 January 2020. It therefore does not address existing ECA restrictions and equivalents or anomalies, such as the Taiwanese early introduction of the revisions to Regulation 14 of Annex VI, effective from 1 January 2019.

BIMCO’s earlier Fuel Sulphur Content Clause for Time Charter Parties 2005 requires charterers to provide fuels that comply with maximum sulphur content requirements within “any emission control zone”. However, this only addresses “zones as stipulated in MARPOL Annex VI and/or zones regulated by regional and/or national authorities”. It seems arguable, therefore, that the early introduction of the revisions to the ‘global’ limits in Regulation 14 of Annex VI of MARPOL does not fit within such description, as this does not create a zone within the ordinary meaning of that word or the context of ECA, which is what was clearly contemplated. Accordingly, although not mentioned in the ‘Explanatory Notes’ provided by BIMCO, adopting the Fuel Sulphur Content Clause for Time Charter Parties 2020 and its wider ambit of “any sulphur content…related requirements as stipulated….by any other applicable lawful authority” is helpful in this respect, even for time charters expecting to redeliver ahead of 1 January 2020.

Stability and availability of compliant fuels

A fair amount has been written about the possible instability of any fuels that rely upon blending of residual and distillate fuels to achieve the reduced global limit of 0.5 per cent m/m sulphur content. In particular, a concern has been expressed that any separation of the components will create a non-compliance, as the residual fuel component would be expected to have an excessive sulphur content (as against the 0.5 per cent m/m limit). The drafting of the first paragraph of sub-clause (b) of the ‘2020 Marine Fuel Sulphur Content Clause’ seems apt to address this though, as the fuels supplied by the Charterers must “at all times” comply with applicable sulphur content limits. Given the apparent import of such a provision, it is perhaps surprising that BIMCO did not draw attention to this in their Explanatory Notes. Albeit, perhaps the primary intentions of such drafting, was to address the possible non-availability of compliant fuel (as foreshadowed by the IMO in Regulation 18 of Annex VI of MARPOL) aside from the already existing diversity between ‘global’ (presently 3.5 per cent m/m) and ECA or other equivalent ‘local’ sulphur content limits.

Broader than suggested

The Explanatory Notes to the 2020 Marine Fuel Sulphur Content Clause explain that the requirement to comply with the sulphur content limits stipulated “by any other applicable lawful authority” (in sub-clause (a)) were intended to cover “additional regulation that may be applied…as a supplement to MARPOL Annex VI”. However, the drafting seems helpfully broad enough to cover any regulation of a national, regional or local authority that imposes sulphur content limits, even if not supplemental to Annex VI or indeed where Annex VI might not be in force (such as where the state is not a party to MARPOL).

Similarly whereas the intention behind the words “and related requirements” (after “sulphur content”) in sub-clause (a) is explained by BIMCO as being only to capture “any additional documentary requirements such as the Bunker Delivery Note”, it may be that these will capture the expected broadening of Annex VI to include particulate matter (and other requirements) in the future.

Possible shortcomings?

Under the 2020 Fuel Transition Clause for Time Charter Parties, Charterers are required to provide sufficient ‘Compliant Fuel’ (defined in the clause to mean fuel with sulphur content of no greater than 0.5 per cent m/m) for the relevant vessel to reach the nearest bunkering port where such fuel is further available. The logic behind this is obvious, albeit it leaves no margin and assumes a quantitative sufficiency at that first bunkering port.

More importantly, the provision only addresses fuel tank cleaning to the extent that there is a need to make sure that the vessel complies with the 1 March 2020 ban on carriage (other than as cargo) of ‘Non-Compliant Fuel’ (defined in the clause to mean fuel that exceeds the ‘global’ 0.5 per cent m/m sulphur content limit), not the 1 January 2020 consumption ban. There is a provision that requires that Compliant Fuel is not loaded until the Owners have the fuel tanks in a condition fit to receive the same, but this only applies after 1 January 2020.

Until then, the obligation on Charterers is merely to provide Compliant Fuel. The provision takes no account of whether the vessel’s fuel tanks are in a condition such that remnants from earlier stems might mingle so as to transform such Compliant Fuel, or at least the part of it that might be tested by Port state control (or any other authority), into Non-Compliant Fuel. Given the prospect of widespread reliance on distillate fuel for Compliant Fuel, which has a propensity for lifting remnants of residual fuel, the potential for creating non-compliance by such means is probably not fanciful. As the 2020 Fuel Transition Clause for Time Charter Parties is intended to address the transitional period, it would have been helpful if this had been addressed directly. Particularly where BIMCO’s accompanying Explanatory Notes acknowledge the need for this by stating that “the switchover is a process that will need to be started before the coming into force date of 1 January 2020” and so “this may involve agreeing to reserve tank space as and when it becomes free so that it can be made fit to receive compliant fuel”.

With only 10 per cent of the world’s fleet likely to be able to use approved exhaust emission abatement technology come 1 January 2020, a very large number of ships will need to empty and clean some or all of their fuel tanks ahead of 1 January 2020. Unless the cycling of distillate fuel is to be used for cleaning purposes, such processes will likely need reception facilities to receive the remnants from these tanks, even assuming that all useable and pumpable fuel will be consumed rather than discharged. Given the expected price differential between Compliant Fuel and Non-Compliant Fuel, it would be surprising if most fleets do not seek to adopt a relatively last-minute approach to making the transition to Compliant Fuel.

Creating an orderly process to ensure that quantities of Non-Compliant Fuel remaining onboard are run down, allowing time for the subsequent cleaning of the empty fuel tanks (if cycling is not pursued) and disposal of any remnants of Non-Compliant Fuel, and ensuring Compliant Fuel is provided within time would seem prudent, but this is not covered by the BIMCO clause.

Extending the ambit of compliance

The disposal of Non-Compliant Fuel must be done in accordance “with any local regulations at Charterers’ risk, time and cost”. To avoid reliance on implied terms in respect of the lawfulness of Charterers’ orders, it would have been helpful to have also made reference to, at the least, ‘flag state’ and ‘international’ (or even ‘national’) regulations. It cannot be taken for granted that all local authorities or even littoral states will have adopted all regulations that a shipowner might be obliged to comply with.

A problem in combination?

The final requirement of the 2020 Fuel Transition Clause for Time Charter Parties (in sub-clause (e)) is for the segregation of stems. Unless otherwise agreed between Owners and Charterers, this means that the loading (but not internal transfer) of any Compliant Fuel must be made “into empty tanks”, which according to the Explanatory Notes provided by BIMCO “assumes that there will normally be unpumpable residues” remaining in the tanks. It is not explained why the same language from sub-clause (c)(ii) (“free of liquid and pumpable fuels”) was not repeated (instead of “empty tanks”) if that was the intention. However, it should be noted that the Explanatory Notes are unlikely to be accepted as a guide to construing the meaning under English law.

Presumably, this inconsistency was deliberate, in which case a logical explanation for this is that the requirement of sub-clause (c) (and more particularly sub-clause (c)(ii), which obliges Owners to make tanks that are “free of liquid and pumpable fuels” fit to receive Compliant Fuel) does not apply to sub-clause (e). In other words, Owners’ only obligation is to strip fuel tanks to unpumpable levels before loading a fresh stem of Compliant Fuel.

However, if that is so, this clause may not sit comfortably with the 2020 Marine Fuel Sulphur Content Clause for Time Charterparties. The reason for this is that if, after 1 March 2020, a fuel storage tank has been used for the carriage of 0.5 per cent m/m sulphur content fuel but then is needed to carry 0.1 per cent m/m sulphur content fuel (e.g. due to availability issues or because the relevant vessel needs to spend more time within ECA or equivalent areas), the unpumpable remnants might have sufficient sulphur content to create a non-compliant (with the 0.1 per cent m/m requirements) sample (if the tank contents are tested by, for example, Port State Control), particularly bearing in mind the above-mentioned propensity of distillate fuels to lift remnants of other fuels.

Under sub-clause (b) of the 2020 Marine Fuel Sulphur Content Clause for Time Charterparties, Charterers would not be obliged to indemnify or hold harmless the Owners for such non-compliance, while under sub-clause (c) of the same clause, Owners would be in breach of their warranty as to compliance. In such circumstances, the Owners may find some respite by other means; however, the 2020 Marine Fuel Sulphur Content Clause for Time Charterparties seems unhelpfully (for Owners) clear on this point. It may be that all 0.5 per cent m/m sulphur content fuel will be sufficiently free-flowing such as to leave minimal remnants, depending on the fuel tank’s structure (e.g., the amount of internal horizontal frames or other surfaces). However, if the actual sulphur content of the 0.1 per cent m/m sulphur content fuel is close to the limit of compliance when delivered, it may not take much by way of remnants to push a sample (particularly if not homogenous) over the limit.

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