Fionna Gavin Partner
Contractual pitfalls relating to the Ballast Water Management Convention
With the Ballast Water Management Convention 2004 (the “Convention”) likely to enter into force in the near future, the industry has understandably been focused on meeting its practical requirements. Nonetheless, the importance of considering the impact of the Convention on contractual arrangements should not be forgotten.
The Convention will enter into force 12 months after ratification by 30 States representing at least 35% of world merchant shipping tonnage. As of 2 December 2013, 38 states equalling 30.38% had signed up. The imminent entry into force of the Convention has been announced somewhat prematurely on more than one occasion in the past few years. Nevertheless, it would be prudent to expect the above requirements to be met in the not so distant future.
As such, interested parties should consider reviewing and amending key contracts that are likely to be impacted by the various requirements of the Convention. This article explores some examples.
The potential for the provisions of the Convention to impact the contractual division of liability under charterparties is clear. For example:
Strictly speaking, it is arguably unnecessary for charterers to push for express contractual provisions whereby shipowners warrant that the various requirements of the Convention will be met. This is because owners will, in any case, need to comply in order to pass the various surveys required by the Convention and avoid detention.
That said, prudent charterers are nevertheless likely to desire the additional protection granted by such clauses. Owners, on the other hand, may well argue that a reasonable endeavours obligation is more appropriate.
Another important point to consider during charter negotiations is whether owners warrant only that a chartered vessel meets the requirements of the Convention at the time of entering into the contract, or that it will continue to do so for the duration of the charter.
Ultimately, subject to commercial bargaining power, most parties are likely to agree on compromise clauses. Various model clauses have been produced that attempt to deal with this issue. For example, Ince & Co assisted with the drafting of the pro forma Intertanko ballast water management clauses, which seek to strike a fair balance between charterers and owners.
Laytime and demurrage
Dealing with the simple but important example of laytime and demurrage, it may be prudent for owners and charterers to make provision for the changes introduced by the Convention. For example, the ASBATANKVOY tanker voyage charterparty 1990 provides that:
“7 . . . Time consumed by the vessel in moving from loading or discharging port anchorage to her loading or discharge berth, discharging ballast water or slops, will not count as used laytime.” (our emphasis)
Whilst this clause deals with discharging ballast water and cargo tank slops, it is worth bearing in mind that, under the Convention, ballast water tank sediments must be discharged into suitable facilities. Whether time should continue to run during such discharge is worth agreeing at the start of the charter, in the interests of avoiding unnecessary dispute in due course.
Port state control
Article 9 authorises port state control inspections for the purposes of determining whether a ship is in compliance with the requirements of the Convention. Under Article 12(1), all possible efforts are to be made to avoid undue detention or delay. In the event that a vessel is nevertheless unduly detained or delayed, it shall be entitled under Article 12(2) to compensation for “any loss or damage suffered”.
Owners and charterers may wish to consider appropriate charter amendments in light of the above. For voyage charters, should any time lost due to an inspection count towards laytime/demurrage? For time charters, should the vessel remain on hire? In the case of both, should the answer depend on whether owners have fully complied with the requirements of the Convention?
Furthermore, what happens if, for example, time lost is for charterers' account, but owners have a right to claim compensation for “any loss or damage suffered”? If this provision is to be interpreted as including any loss or damage suffered by charterers, should owners be obliged under the charter to bring such a claim?
BIMCO has recently commenced the drafting of a clause aimed at allowing a shipowner to recover costs involved in port state control inspections if sampling and testing reveals the vessel to be in compliance with the Convention and national regulations.
Close attention needs to be paid to local and regional rules concerning ballast water.
For example, whilst the situation remains in a state of flux, in future all vessels operating in US waters will need a ballast water treatment system that has been approved by the US Coast Guard. Approval will be required regardless of whether or not the system in question has been type-approved by another maritime administration. There is of course no guarantee that systems approved by another flag state and installed on vessels will pass the US requirements.
Another risk factor to bear in mind is the possible introduction of local rules requiring the treatment of ballast water to standards higher than that mandated by the Convention. For example, New York had been due to bring in rules for the start of 2012 stipulating that owners must purify ballast water to 100 times the standard required by the Convention. This was pushed back due to a recognition that the requisite technology was not yet available, but may still be introduced if and when this is no longer an issue.
Trading limits clauses need to be carefully considered prior to the signing of relevant charterparties, and then regularly reviewed in light of the changing patchwork of international, regional, national, and state regimes.
From the point of view of owners, subject to questions of bargaining power, perhaps the optimum solution is to include a bespoke clause whereby charterers agree to only order the chartered vessel to suitable ports.
In the current constrained lending environment, some shipowners are facing difficulties in persuading their lenders to extend finance to cover the sizeable sums required to purchase and install ballast water treatment systems. Increasingly, the potential for third-party leasing companies to provide finance is being explored. However, such deals must be carefully structured in order to avoid potential difficulties arising.
The central issue relates to the status of a ballast water treatment system after installation in a vessel's engine room. Does it remain a chattel i.e. an item of personal property separate to and distinct from the vessel? Or does it become a fixture i.e. part of the vessel?
Whilst much of the case law concerning the annexation of chattels is concerned with land, it is generally accepted that the rules set out in the case law apply where one chattel is attached to another. As such, it is necessary to consider in each case the following questions:
- What is the degree of annexation i.e. can the item be physically severed and, if so, how difficult would that be?
This is likely to depend on the type of system installed. Those treatment systems that fit inside a container and are designed to be self-contained should be capable of being relatively easily removed from a vessel. At the other extreme, systems that have been specially designed to fit a particularly crowded engine room may well be difficult to remove.
- What was the purpose of the annexation?
In this respect, it is necessary to consider why the treatment system is being installed. Is the intention to permanently and substantially improve the vessel, or simply for a temporary purpose? In the case of specialised vessels used in the offshore oil industry, for example, equipment is often installed by charterers for the duration of a charter and removed at the end of the charter period. The better view in such a case is that, subject to the terms of the specific charterparty in question, the equipment is likely to remain a chattel.
In the case of ballast water treatment systems, the likely answer is that they are intended to provide ballast water treatment for the remainder of the lifetime of the vessel, a factor suggesting they may be classified as fixtures.
Lessors contemplating financing ballast water treatment systems need to take into account the above. In an ideal world, they would wish to protect their position through a mortgage or similar security over the system itself. However, not only is this likely to be barred under the terms of the loan agreed between the shipowner and its finance banks, difficulties arise if the system has become part of the vessel itself.
In our experience, assuming that it is not possible for the leasing company to take security over assets unrelated to the vessel, the safest course of action available to it is to negotiate with the lending banks as to whether the lessor's interest can be adequately secured.
It might be imagined that once a ballast water treatment system has been released onto the market, it is guaranteed to work. However, caution should be exercised in this regard. According to trade press reports, at least one system has been withdrawn from the market after it failed an evaluation test, despite the fact that it had already been installed on a number of newbuildings.
In terms of attempting to avoid being left in a similar situation, shipowners and their managers will be aware of the need to work closely with Class in order to identify which of the 30+ type-approved systems is suitable for the particular vessel in question. Nonetheless, the question remains whether a manufacturer might be liable for the supply of defective equipment.
In short, the answer very much depends on the terms of the supply contract i.e.:
- What guarantees is the manufacturer prepared to give concerning the performance of the equipment?; and
- Is the manufacturer offering a contractual warranty covering the repair or replacement of defective parts?
Needless to say, in most cases, the manufacturer's standard terms are likely to exclude many of the types of loss and damage that a shipowner might expect to suffer in the event that a treatment system fails to operate as advertised, for example loss of hire and other consequential losses such as drydocking costs. Owners may, in certain circumstances, be able to fall back on a claim in tort, although the position in this regard varies significantly depending on the applicable national law.
In this case, prevention is definitely better than cure and well-advised shipowners will concentrate on selecting good quality treatment systems from top-quality manufacturers. Nevertheless, it is at least worth bearing in mind that the terms on offer from manufacturers in respect of the limitation/exclusion of liability, as well as the value of repair warranties, are likely to be variable. Furthermore, in a buyers' market, with many manufacturers vying for trade, and bearing in mind the high cost of some of the treatment systems on offer, shipowners should not discount the potential to negotiate more favourable terms in respect of manufacturers' liability.
From a legal point of view, the most important point to be emphasised in relation to newbuilding contracts and ballast water treatment systems is the need for planning, clarity and certainty.
For example, owners need to consider whether they want a treatment system installed during the newbuilding process, or whether they want to leave their options open and carry out installation at a later date. If the latter, points to be aware of include:
- The need to ensure sufficient space is left in the engine room to allow installation of a treatment system in due course; and
- The engine room plans must take into account the likely need for retrofitting of a treatment system in the future, and should be designed with sufficient flexibility to make this possible.
Ince has reviewed draft clauses in some shipbuilding contracts that indicate an apparent failure on the part of owners (or their advisers) to properly get to grips with the requirements of the Convention. For example, clauses that simply require a vessel to have installed on board a fully functioning Ballast Water Treatment System that complies with the requirements of the Convention, and that is approved by a Class Society. Left unamended, such a clause is arguably inadequate as owners need to make an informed choice regarding which treatment system is most suitable for the vessel, with the help of technical managers and Class. This choice should take into account a long list of factors such as cost, the vessel's intended trading pattern, ease of operation and maintenance requirements.
The challenge posed by the Ballast Water Management Convention is primarily one of ensuring compliance with the new obligations it imposes on vessels, their managers, owners and crew. However, the potential for significant claims for loss and damage to arise out of the areas highlighted above, amongst others, should not be underestimated. The introduction of the Convention will undoubtedly affect the balance of risk and reward in relation to various types of contract, and contracting parties should be alive to this.
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