The shipping industry has seen a significant number of bunker quality-related engine problems during 2018, but what are the key legal issues likely to arise?
The problem started with fuel supplied in the US Gulf region, particularly in the Houston area, but the problems quickly spread to Panama. More recently, similar problems have been encountered with fuel supplies out of Singapore. Although the problem is now widespread, it is described in the industry as “the Houston problem”, Houston being the first location affected.
Industry commentators estimate that in excess of 200 vessels have been affected by quality-related issues following supplies of bunkers. By late August, the fuel testers FOBAS alone have confirmed that they are involved in 60 cases, of which 30 stemmed from supplies in Houston, 15 in Panama, and 5 in Singapore. It is widely expected that the problem will continue to grow.
The common problem arising out of the burning of the fuel involves the sticking and seizure of fuel-injection system components and the blocking of fuel filters. In many cases the damage to the engine and the cost of repair is modest. In other cases, the impact is far more dramatic. Press reports have identified a number of ships which suffered blackouts and groundings, allegedly as a result of bad bunkers.
The evidence coming to light suggests that the problem arises from the inclusion of adulterants and contaminants within the fuel of non-petroleum refining origin. Two different forms of contaminants appear common: some bad fuels show evidence of chemical waste related to bisphenol manufacturing operations, while others show evidence of bio-derived contaminants, including tall oil — a by-product from the timber industry.
The problem for shipowners
The overwhelming majority of bunkers are supplied under contracts, which stipulate that they will comply with the ISO 8217 parameters. Supplies are frequently tested immediately after delivery to ensure that the fuel complies with the “Table 2” test requirements within IS0 8217, which tests for water content, aluminium, sulphur, etc. The vast majority of the Houston Problem supplies are on specification for Table 2 parameters.
This has led to vessels consuming the fuel and only when engine damage occurs is the potential problem discovered.
The contaminants found in the Houston Problem bunkers can only be identified by advanced analytical techniques such as gas chromatography, combined with mass spectrometry (GC–MS), which go beyond the standard tests for Table 2 parameters. Few laboratories in the world have the ability to perform GC–MS testing and this has caused a major backlog in the delivery of results. Few GC–MS tests were carried out at the time the problem began although this is changing.
The industry is now alive to the Houston Problem and prudent owners are insisting upon testing involving GC–MS techniques before fuels can be consumed. This remains the only safe way of ensuring the fuel will not have characteristics consistent with the Houston Problem.
If an owner, unfortunately, encounters bad fuel with the Houston characteristics then, depending on the extent of the contamination, it is likely that this fuel cannot be safely consumed and must be de-bunkered (although some vessels have consumed the fuel safely). The issue facing owners when suffering the Houston Problem is who is contractually obliged to de-bunker the vessel (with associated loss of time) and/or to compensate an owner for the consequences of burning the bad fuel.
Where owners have chartered the vessel by way of a time-charter party, then the charterer is contractually obliged to supply fuel to the vessel and, in the absence of any special conditions, it is implied that such fuel will be fit for consumption by a reasonably well-maintained vessel. Fuel displaying the characteristics of Houston bunkers is likely to be in breach of this obligation. Further, many Time Charters impose obligations on the Time Charterers to supply fuel compliant with ISO 8217.
The start point when looking at whether the fuel is compliant with ISO 8217 is Clause 5 setting out the general requirements. Clause 5.1 requires the fuel to confirm to the characteristics and limits set out in Table 2. However, the remainder of Clause 5 requires the fuel to be:
“A homogenous blend of hydro-carbons derived from petroleum refining”;
“Free of inorganic acids and used lubricating oil”;
“Free of any material that renders a fuel unacceptable for use in marine applications”; and
“Not contain any additive at the concentration used in the fuel or any added substance of chemical waste that jeopardises the safety of the ship or adversely affects the performance of the machinery”.
If the result of the GC–MS testing is to identify chemical waste relating to the bisphenol manufacturing or bio derived contaminants (i.e., the Houston Problem) then it is likely that the fuel is in breach of some or all of the above Clause 5 obligations.
The immediate recourse action for any ship owner fearing or actually suffering engine damage through bad bunkers, is to pass liability to the Charterers and call upon them to de-bunker the vessel and compensate owners for such losses.
Where the owners themselves have purchased the fuel, the position is more complex.
Bunker supply contracts
The supply of bunkers is, in the absence of a bespoke contract, usually done on the physical supplier’s or trader’s terms and conditions of business. They are inevitably weighted in favour of the seller. These supply contracts invariably contain the following provisions:
Short periods of time for notification of a quality claim. These range from as short as seven days up to 28 days but rarely, in the absence of any bespoke agreement, any longer. Given that in many cases the innocent buyer of the fuel will have no knowledge of the problem until the fuel is consumed (and quite often not until a large quantity is consumed weeks later), then many buyers are facing the problem of not knowing that they have a claim until after the notification period has expired. The enforceability, or otherwise, of these short time limits is the subject of current debate and, we anticipate, will inevitably be determined by the Courts in the near future. The start point though is that notification of a claim outside the time limit may result in the claim being waived — i.e., lost in its entirety;
Clear requirements for only the Bunker Delivery Note samples to have any evidential value and so any ship samples will be disregarded for establishing the quality of the fuel;
A waiver of all claims if the vessel co-mingles the fuel or fails to permit the Seller’s survey and access or fails to preserve any damaged parts; and
Most bunker contracts contain caps on liability, whereby the seller can limit liability to the purchase price or less. They frequently contain exclusions of liability for consequential losses, loss of hire, loss of use, etc, and limit any recourse solely to physical damage. Many terms also will only pay a portion of the engine damage cost, applying depreciation calculations to limit liability still further. It is unlikely an Owner would recover his losses in full because of these limitation provisions.
How owners can protect themselves
The key to protecting the interest of the owners and their insurers is to take prudent steps to test fuel stemmed out of the Houston area or Singapore, including GC–MS testing before use. Where this is not possible, extreme care should be taken when consuming the fuel and regular checks on engine performance should be undertaken to monitor performance.
Where the test results show the presence of contaminants consistent with the Houston Problem, then the fuel should not be consumed if at all possible and the Seller or Charterer should be put on immediate notice. If there is any doubt as to the quality of the fuel, an early notice within the time limit of the trader/supplier’s terms and conditions is prudent whether such notice would comply with the express terms of the supply contract, which usually requires a fully documented claim. An early dialogue should be initiated with the seller to prove the off-spec nature of the fuel and the damage, and to compel a prompt de-bunkering.
It is hoped that now the Houston Problem is well known that the contaminants will be removed from the supply chain. Only time will tell whether this problem will continue.
Andrew Preston and Mike Roderick are Partners at Clyde & Co. Contact Andrew on +44 (0) 20 7876 4740 or at firstname.lastname@example.org. Contact Mike on +44 (0) 20 7876 4534 or at email@example.com.