The use and supply of VLSFO consisting of various different blends of light distillate and heavier residual fuels, that are different to traditional fuels could lead to fuel quality and specification disputes. Standard Club has put forward an article to address such issues onboard vessels.
Let us take a look at it.
What causes VLSFO disputes?
An inevitable by-product of IMO 2020 has been the shift in the type and nature of marine fuels required by the market to meet the regulations.
A wide variety of new fuels are currently entering onto the market, including numerous formulations of VLSFO.
VLSFO characteristics
VLSFO possesses characteristics which vary significantly depending on:
- the type of refinery process involved,
- blending components used and
- the petroleum crude source itself.
Most will consist of various different blends of light distillate and heavier residual fuels, which are different to traditional fuels.
Consequently, the use and supply of VLSFO could lead to fuel quality and specification disputes.
Protective provisions for fuel users
Disputes are likely to arise between fuel users, purchasers and suppliers under both time charterparties and bunker supply contracts.
Various provisions exist to protect fuel users, such as :
- statutory provisions on fuel oil quality,
- commercial fuel standards such as ISO 8217:2017 specifying the grade and nature of fuel to be supplied, and
- charter party terms relating to quality and suitability of fuel (being either bespoke or standard wording).
In the absence of express terms, charterers are under an implied absolute obligation at English law to supply fuel that is of reasonable quality and suitable for the vessel’s engines to burn.
Limitations of protective provisions
However, these protective provisions – in particular ISO 8217:2017 – come with their own limitations:
- ISO 8217:2017 does not identify all possible contaminants. It does not cover all the qualitative requirements for fuel under Regulation 18.3 of MARPOL and routine testing does not identify all contaminants (which is what happened with the Houston off-spec bunker issues of 2018). So with the unpredictable nature of VLSFO blends, there is scope for contaminants to go undetected and lead to bunker claims.
- It is possible that the maximum limits for cat fines under ISO8217:2017 might be inadequate when evaluating new VLSFO blends which may contain a harmful level of catalytic fines.
- ISO 8217:2017 also does not address issues relating to stability and compatibility.
- Older ISO 8217 standards (i.e. 2005 and 2010) are still being used throughout the market, and these standards may not afford sufficient protection in terms of testing parameters and limits, especially for new fuel coming onto the market such as VLSFO.
- The scope of charterers’ implied obligation to provide suitable fuel may be limited and/or not apply in circumstances where a vessel’s main engine has unusual or specific requirements in terms of fuel to be supplied, and this was not brought to the attention of time charterers.
- Issues arising out of incompatibility between fuels are well known but are likely to become more complicated due to the various blends of VLSFO entering the market, and limited guidance exists on how to manage this risk This is especially relevant for those bulk vessels in the tramp trade who have limited storage capacity and may have limited choice in terms of fuel due to extensive trading around the globe. Whereas there are safeguards to combat this, such as segregation of fuel stems into empty separate tanks and avoiding co-mingling of fuel where possible, an element of co-mingling will always be inevitable on board due to existing residues in the ship’s system or limited tank capacity. ISO 8217:2017 does not address compatibility concerns, and there is only limited guidance in the recently published ISO Publicly Available Specification (PAS).
Physical fuel suppliers under scrutiny
Physical fuel suppliers are also likely to be under increased scrutiny.
Supplier’s default warranty
For bunker supply contracts, the BIMCO Bunker Terms 2018 include a physical supplier’s default warranty that the fuel supplied complies with ISO 8217:2017 which represents a good starting point.
However, fuel purchasers will need to consider their contracts carefully.
Compliance with all relevant MARPOL regulations
This applies, in particular, to time charterers who are recommended to ensure that they are as back to back as possible between the charterparty and bunker supply contract. This is not only limited to the specification and grade (including sulphur content) of fuel to be supplied, but includes compliance with all relevant MARPOL regulations and extends to fuel sampling at delivery (e.g. the method, location and witnessing), testing, notification of quality claims and dispute resolution.
For example, particular care should be taken if a ship owner is seeking a compatibility warranty from a time charterer (i.e. under the INTERTANKO Bunker Compliance Clause), because a physical supplier is very unlikely to agree to such a warranty.
Physical suppliers seeking protection
More generally, care needs to be taken to identify whether physical suppliers might seek to protect themselves by limiting the scope of ISO 8217:2017, either through deleting or amending clause 5, imposing shorter time limits for notification of bunker quality claims or seeking to cap their financial liability.
Finances/cash flow of physical suppliers
The finances/cash flow of physical suppliers may also be adversely affected by the premium of VLSFO over HSHFO, which may itself result in reduced credit terms and shorter payment periods being inserted into bunker supply contracts.
Payment provisions
Physical suppliers may also be more keen to enforce payment provisions, for example by seeking to arrest (unpaid) bunkers in favourable jurisdictions.
Club cover
As reflected above, there are many possible reasons why non-compliance with IMO 2020 may occur and may lead to fines and potential liabilities and claims for damages.
Fines and Penalties
Consequently, in the case of fines or other penalties levied by a Flag State or a PSC against the vessel, Club cover may be discretionary. There may be instances where Club cover could be available in respect of accidental escape or discharge of any substances. For a discharge to be accidental, there should be no intention to cause a discharge. Rather, the discharge itself should be an accident.
A case where discharge (or other breach of regulation) is done intentionally, even in the mistaken belief that it is permitted, would not be deemed accidental. Put simply, a casualty or equipment breakdown which results in discharge of incorrect fuel is likely to be deemed accidental (albeit such circumstances are likely to be rare), whereas a vessel mistakenly using or carrying fuel which is in breach of regulations is not.
Pollution claims
Claims of pollution are covered, subject to Club rules, if damage is proven for which the Member is liable.
However, it is considered unlikely that non-compliance with IMO 2020 will result in incidents giving rise to pollution damage claims. If pollution damage occurs, claimants may find it difficult to establish a causal link between an incident involving an entered vessel (alone) and the damage to property, the environment or public (or personal) health.
Conclusion
The bunker quality claims
- The bunker quality claims and/or related vessel main engine damage claims could become more frequent and complicated.
- There is a clear tension between the provision of stable and suitable fuel (an issue for time charterers/bunker suppliers) and the role of on-board fuel management (an issue for ship owners/ship operators).
- Detailed investigation of shipboard operation and vessel maintenance in the lead up to the reception of a fuel stem is all likely to be required.
Documents to be collected
When dealing with incidents and/or potential disputes arising out of IMO 2020, the following categories of documents should be collected in the first instance by from Members:
- Ship Implementation Plan (SIP), prepared in accordance with IMO guidance.
- Oil Record Book (Part 1) & Engine Logbook – all entries for internal fuel transfers, bunkering, retention, disposal should be entered properly and kept up to date.
- Tank plans and piping diagrams.
- Records to note the condition of tanks, pipelines and other associated records (like line flushing, tank cleaning, etc).
- Records noting that segregation of fuel system tanks and pipe work has been maintained, where necessary.
- Fuel supply document(s) (bunker quotation/ correspondence).
- Bunker samples.
- Bunker Delivery Note (BDN).
- Fuel Quality Test report (as per Appendix VI of MARPOL Annex VI).
- Written procedures for fuel changeover and associated records.
- Training records for crew and shore side personnel.
- Fuel Oil Non-Availability Report (FONAR), if applicable.
- Notes of Protest.
- Any notifications made to either PSC or Flag State.
IMO 2020 Technical Challenges
IMO 2020 has created new technical challenges for ship owners and managers:
- increased training of crew and updating of onboard procedures will be required for fuel handling, and
- there is limited guidance on how to manage stability and compatibility risks with VLSFO.
A failure to clean a vessel’s fuel system adequately could give rise to either non-compliance with MARPOL (e.g. PSC samples taken identify a sulphur content of more than 0.50%), or fuel contamination or instability causing vessel main engine damage.
Whilst the industry standard clauses discussed above seek to allocate responsibility for this operation to ship owners, the actual cause of the damage may not be immediately apparent, and this could be a grey area.
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Source: Standard Club
