February 10, 2020

Bunker Quality Claims in 2020 – Issues to Consider – Part 2

1 March 2020 carriage ban, enforcement actions against vessels, and claims under bunker supply contracts

Since 1 January 2020, vessels without scrubbers have been prohibited from consuming fuel with sulphur content above 0.50% m/m. Whilst the IMO has commented that, so far, there has been a "relatively smooth transition" to the new sulphur limit, it has not been without issue, with breaches of the new limit being identified by authorities and enforcement action taken against a number of vessels. There have also been reports of high sedimentation levels in low sulphur fuel blends in the Americas, Singapore and Europe, which have the potential to cause clogged filters and engine damage, and generate legal claims.

Issues remain for the shipping industry going forwards. The key upcoming deadline is 1 March 2020 – the point at which vessels without scrubbers will be prohibited from carrying fuel with sulphur content in excess of 0.50% m/m. To comply with the carriage ban, vessels without scrubbers will, therefore, need to take steps to debunker any remaining high sulphur fuel on board in advance of 1 March 2020. Alternatively, vessels could comply with the carriage ban by installing scrubbers before 1 March 2020. However, given the impact of the coronavirus, there have been reports of delays at Chinese repair yards, and concerns have been raised that this may impact on the ability of shipowners to have scrubber installations completed by 1 March 2020.

The purpose of the carriage ban is in part to provide a means for the effective enforcement by States of the new sulphur limits set out in MARPOL Annex VI. After 1 March 2020, it may be more straightforward for port authorities to pursue enforcement action against vessels; a breach will be clearly evident to authorities if a vessel without scrubbers is found to have fuel above the 0.50% m/m limit in any of its tanks. This may prompt increased enforcement action in coming months.

The carriage ban presents new risks for shipowners and operators who do not implement a fuel management plan to ensure compliance with the sulphur cap limits. There is a risk that high sulphur fuel residues in tanks and fuel systems may combine with otherwise compliant low sulphur fuel to push the overall sulphur content of the fuel above the 0.50% m/m limit. This issue has already been seen in China, where a vessel which loaded low sulphur fuel was found to have exceeded sulphur limits, as originally compliant fuel mixed with high sulphur fuel residue which was still in the fuel systems. Authorities ordered the vessel to take measures to clean its fuel system. If similar issues arise, vessels face the risk of penalties being imposed by port authorities, of the costs of remedying the problem (which could include debunkering a bunker stem that has become non-compliant), as well as delay. It is likely to be difficult for owners to recover any of these losses from their charterers, and vessels may be placed off-hire during any period of delay. It is, therefore, advisable that owners take appropriate steps to pre-empt this potential problem.

Concerns about the quality of low sulphur fuel blends also remain, with complaints in a number of jurisdictions regarding sedimentation levels. Tests run by FOBAS, in Singapore, on low sulphur fuel blends, identified that a number of blends tested in January 2020 were above the total sediment potential (TSP) limits in the ISO 8217: 2017 standards. Should fuel with high sediment levels be consumed, there is the risk of sludge forming in tanks, which could block fuel filters. Separately, the IMO has received complaints regarding the level of black carbon emissions from low sulphur fuel with high aromatic content, and this could in future lead to legislative changes impacting on the standards and use of low sulphur fuel.

The remainder of this article focuses on some of the key points of relevance to both purchasers and suppliers under bunker supply contracts.

What terms and conditions apply to the bunker supply?

Purchasers of bunkers (namely, owners, time charterers and bunker traders) will often contract on the terms and conditions of the bunker supplier, which are generally drafted heavily in favour of the supplier. Such terms may contain a number of provisions which will make it difficult for purchasers to advance claims and recover the full amount of any losses, in the event of any quality issues.

Purchasers may therefore wish to consider pressing for variations to the supplier’s general terms in contractual negotiations, or alternatively pressing for a more balanced set of terms, such as the BIMCO bunker terms.

Bunker suppliers will also press for their own terms to be incorporated into the supply contract,  as they will assist in protecting their position should claims arise. Bunker traders, in the middle of the contractual chain, will want to avoid the risk of exposure to claims which they cannot pass on to the physical supplier (owing to the physical supplier's terms), when they themselves are unable to rely on their own terms to protect their position.

The following terms are worth particular consideration given their potential impact on claims.

Time bars

Short claims notification time bars are a frequent feature of bunker supply contracts, often imposing requirements on purchasers to notify claims within days of the supply (generally ranging from 7 to 30 days). The 2018 BIMCO Bunker Terms, for example, provide that if the purchasers fail to notify any quality claim within 30 days of the date of delivery, the claim "shall be deemed waived and barred".

Questions regarding the enforceability of such terms have been raised, particularly where there are latent defects in the fuel, not identifiable through ISO 8217 table 2 tests. In the "Houston problem" contamination cases, initial ISO 8217 tests were unable to identify a number of contaminants, which caused engine problems (such as phenols and fatty acids), and which could only be identified through advanced GC/MS testing. The difficulty was that such tests were often carried out after the fuel had been consumed, and after short time bars for notifying claims under bunker supply contracts had expired.

In cases where latent quality problems only become apparent after short contractual time bars have expired (for example following engine damage), purchasers could seek to argue that the short contractual time bar ought not to be enforceable. Purchasers could contend that they could not reasonably have been expected to notify the quality claim within the time bar period, and this should, therefore, not be enforced by a Court / Tribunal. However, English Courts have repeatedly upheld the validity of documentary time bars in voyage charters for demurrage claims, and it is open to argument as to whether, in any particular case, a short claim notification time bar in a bunker supply contract would be enforceable.

Bunker quality

Bunker suppliers will generally specify that their contractual obligation is limited to supplying fuel meeting the ISO 8217 fuel specification standard, and they will generally exclude any terms implying that the bunker fuel is "fit for purpose".

The issue facing purchasers, particularly in view of the evolving position regarding low sulphur blends, is that fuel may technically be on specification, according to the ISO 8217 standards, but may nonetheless not be of high enough quality to be consumed. For example, asphaltenes may precipitate out of suspension, causing the formation of sludge which can clog the engine, or, alternatively, the fuel may have poor ignition quality.

In such cases, depending on the circumstances and the specific issues with the fuel, the purchaser may be able to argue that the supplier has breached the requirements under clause 5 of ISO 8217 that "fuel shall be free from any material that renders the fuel unacceptable for use in marine applications". However, if the bunker contract expressly excludes terms implying that the fuel is fit for purpose, the purchaser may find it difficult to assert that fuel which technically falls within ISO 8217 specification parameters, but is nonetheless of low quality, has been supplied in breach of contract.

A further issue is the difference between the tolerance applied to testing under MARPOL Annex VI and under a bunker supply contract. With bunker fuel, there are relatively small degrees of variation between test results. On commercial tests, a 95% confidence limit is applied, meaning that a result of 0.53% m/m would be likely be considered compliant by the supplier under an ISO 8217 standard. However, testing of the MARPOL delivered sample under MARPOL Annex VI does not permit any tolerance, and there is a strict 0.50% m/m limit. As a result, if a MARPOL sample is tested by authorities as being over 0.50% m/m, the vessel may be at risk of enforcement action, but it may be difficult for the purchasers to assert a claim against a bunker supplier unless the result exceeds 0.53% m/m. Purchasers of bunkers may, therefore, wish to consider specifically negotiating an express requirement with a bunker supplier, that any low sulphur fuel supplied is MARPOL Annex VI compliant (rather than just ISO 8217 compliant).

Sampling issues

The standard terms and conditions of bunker suppliers commonly include provisions providing that in the event of a quality dispute, the test results of the supplier’s retained sample are "final and binding". This is sometimes subject to a caveat that the supplier’s sample results are not final and binding in cases of “fraud or manifest error”.

These provisions can potentially make it difficult for purchasers to pursue quality claims against suppliers. In the context of IMO 2020 or of contamination claims, clauses providing that the results of the supplier’s sample are “final and binding” may afford the suppliers a potential defence against liability if the supplier’s sample tests on specification, but other samples test off-specification.

Unless there is strong evidence from the results of other samples, which clearly evidence that the supplier’s sample was not representative of the fuel product supplied, it may be difficult to defeat such a clause. It is advisable for purchasers to ensure that samples are taken at the receiving vessel’s manifold, and that the sampling and sealing is properly witnessed, so as to mitigate the risk that the supplier’s sample is not representative of the product supplied.

Payment clauses

Bunker supply contracts may contain provisions which provide that the supplier shall not be liable for any quality claim, unless payment is first made in full by the purchaser. These provisions can be of considerable assistance to suppliers; if payment is not made in full before a claim is advanced, the supplier could potentially seek an interim award for payment of the purchase price, and/or take enforcement action to obtain payment. Purchasers may therefore wish to consider whether they are prepared to take the commercial risk of contracting on such terms.

Limitation of liability provisions

Bunker suppliers often include highly restrictive limitation of liability provisions in their standard terms, which can make it very difficult for purchasers to recover the full extent of their losses for any quality claim. These may include express provisions restricting the ability to claim for consequential loss (including loss of hire or demurrage) and an express liability cap, for example expressly limiting the amount that can be recovered to the purchase price.

In circumstances where contaminated bunkers cause delay and engine damage such provisions, if included unamended, can make it difficult for purchasers (such as owners or time charterers) to recover their full losses from a bunker supplier.

Comment

Those contracting to either sell or purchase bunkers should consider the contractual terms carefully. From the suppliers' perspective, any dilution of their terms and conditions may make them more vulnerable to a claim from a purchaser, so bunker traders in the middle of a contractual chain would be wise to consider whether they risk being exposed to liability, which they cannot pass on to their supplier, in the event of a claim. From the purchasers' perspective, it is worthwhile reviewing the terms proposed by the bunker supplier, and considering whether their interests are sufficiently protected in the event of a quality claim.

Please click here to read part 1 of this series: Bunker Quality Claims in 2020 – Issues to Consider.