Regardless of whether a buyer purchases fuel directly from physical suppliers or via brokers or traders and whether sale is under a global framework agreement or ad hoc on a port by port basis, a common feature is that the seller’s terms generally
On 1 January 2020, the lower sulphur
limit imposed pursuant to IMO 2020 regulations came into effect. The new
regulations have been written about extensively by Gard and others in the
shipping and insurance industries. However, the terms upon which bunkers
are purchased is perhaps not given the consideration it deserves
Sellers' terms often incorporate fixed
(often low) limits on sellers’ liability, exclusions for certain types of loss
(e.g. loss of time, profit, indirect or consequential loss), short time bars
for buyers’ claims, and evidential and law and jurisdiction clauses in sellers'
favour. There have been moves to try and work towards standard bunker purchase
contracts with BIMCO introducing BIMCO Bunker Purchase Terms in 2015 which were
updated in 2018. These contracts are more balanced than typical sellers'
standard terms, and representatives from owners, charterers and bunker
companies were all involved in the drafting process.
From a commercial bargaining perspective,
it may be easier to negotiate more balanced terms if they are agreed in advance
as part of a worldwide framework agreement to buy bunkers from a single or
small number of sellers.
Taking the BIMCO Terms as a starting
point buyer may try to negotiate on some of the following checklist key items:
Bunker supply contracts – key issues
checklist
· Due diligence with respect to the
seller: consider market reputation and financial
standing of sellers, in terms of financial standing and insurance position (see
below) and involvement in previous supply issues. Are they also a physical
supplier or only an intermediary? How do they verify the quality of the fuel
supplied? What are their supply chain quality management procedures?
·
Due diligence with respect to the
fuel: consider what information you need about
the fuel and its origin. Are there any special parameters regarding
storage, handling, treatment and use of the fuel on board? Do you require
specific information in the Certificate of Quality?
· Fuel specification:
the contract should identify the correct specification of the fuel - for
example by expressly stating the relevant ISO specification. For residual
fuels, the most widely used specification is ISO 8217 Table 2. The Table
2 specification for sulphur content is stated as per “statutory requirements”
and, since 1 January 2020, the global MARPOL sulphur limit is 0.50% with lower
limits set for SECAs. ISO 8217 is periodically revised and the industry
guidance recommends the most recent version, ISO 8217 2017. Check whether the
fuel specified in your bunker supply terms complies with IMO 2020 and that this
also accords with charterparty requirements so it is back-to-back. A further
point to consider adding is an express term that the fuel is free of contaminants,
is fit for purpose and complies with MARPOL.
·
Sampling and quality testing:
the contract should specify the agreed sampling and quality testing regime,
including for sulphur content. Ideally, a sample from each of the bunker
supplier and the vessel should be analyzed as opposed to only the supplier's
sample. Again, insofar as possible, sampling and testing requirements
need to match the charterparty so the buyer is not exposed to different test
standards. Ideally, the sampling process should be set out in detail in the
contract together with the agreed analysis regime that is to be used.
Consideration should also be given as to whether preferred accredited labs for
testing should be identified in the contract. In the event there is a dispute
about the quality or characteristic of the particular stem, inability to agree
to a lab for testing may complicate and delay resolution.
·
Quality claims time bar: the
contract should ideally include a quality claim time bar that allows sufficient
time for quality testing to be performed, taking into consideration that
testing might need to take place at an accredited lab located at a place other
than the place of supply. In our experience, bunker contract time bars are
normally far too short, especially given that bunkers may not be immediately
used (for example bunker test results may be required under the charter before
the bunkers are in fact used) and even when used promptly problems may not
manifest themselves immediately. We have seen cases where the bunker recourse
claim against the supplier is time barred before the bunkers have been used. It
is recommended to link any time bar to 14 days after use of the bunkers or
alternatively to have a much longer time bar period, for example 45 days.
· Limitation of liability: standard
bunker supply contracts usually include a low mutual limitation of liability
figure (usually one or at most two times the invoiced value of the fuel).
Consider negotiating increased limitation of liability sums to reflect the fact
that losses arising from loading or consumption of off-specification fuel can
be very high in value. It is suggested that at least twice the value of the
fuel or more should be targeted where possible. An alternative option is to
include reference to both a specific amount and at least twice the value of the
fuel provision, with the highest of the two applying. Lastly, make sure that
any limitation agreed applies mutually to both parties (rather than just the
sellers).
·
The "OW Bunkers" issue: if
buying direct from a physical supplier there is less risk, but if purchasing
via a broker or trader there is a risk they may not have paid their counterpart
for the bunkers which could, in the event of their insolvency, lead to
competing payment demands and the
risk for the buyer of having to pay twice.
It is sensible to include provisions under which the sellers warrant they have
paid for the bunkers and the buyer has a right to request evidence from the
sellers that they have paid any third parties for the bunkers before the buyer
is required to pay the sellers' invoice, such that if no evidence is provided
the buyer may withhold payment/hold sellers in breach.
It is further prudent to include a term
that in the event of bankruptcy of the sellers, the buyer will be entitled to
withhold payment for the fuel until the relevant court/tribunal determines
whether sellers or the physical suppliers or any third parties have a claim
directly against the buyer/vessel. If there is such a determination, the
contract can also provide that payment to a party other than sellers for the
fuel, as determined by the relevant court/tribunal, shall be deemed to
subordinate the claim to the rightful party in order to safeguard the buyer
from having to pay more than one party (and more than once!) for the fuel.
Consider also making the contract subject
to the Sale of Goods Act 1979, so as to make the contract a contract of sale
(thus bringing in the Act's protection so far as fitness for purpose and
quality are concerned, and the requirement that the Sellers also have good
title to the fuel at the time of sale to the buyer).
· Insurance: sellers
should ideally have insurance in place and should be required to produce evidence of this. Such insurance may for example include credit, professional
indemnity and product liability insurance.
· Local rules and regulations: most
standard term contracts incorporate local rules and regulations into the bunker
supply contracts. Local rules and regulations can bring about surprises that
the parties to the contract might not be aware of at the time of contracting.
Consideration is accordingly recommended to be given to the exclusion of local
rules and regulations either in their entirety or to limit their applicability
to fuel sampling only.
·
Uniform bunker supply terms: ideally
the same supply terms should be used across the board with all suppliers so as
to have certainty over the risk allocation and to avoid the use of ad hoc
supplier friendly terms. In effect, have a framework agreement/standard terms
agreed with major suppliers.
·
Lien: try
and avoid provisions that give the sellers a lien over the vessel or any rights
of action against third parties (e.g. the owner if the charterer is the buyer)
as this can cause serious issues under the charterparty. A further point to
consider, is to add an express provision that the sellers must hold the buyer
harmless and indemnify the buyer in the event that a third party asserts a lien
or encumbrance on the vessel in relation to the fuel purchased from the
sellers. Similarly, a clause can also be included by which the sellers warrant
that no third party has any right to claim against the buyer in relation to the
fuel, or exercise any right of lien, charge, encumbrance or arrest over the
vessel or any sister vessels in respect of the fuel. Lastly, consider including
a provision that if such a claim nevertheless arises, the sellers shall
co-operate to allow interpleader proceedings. See also our comments on the OW
Bunkers issue above.
·
Exclusions: consider
whether you wish to exclude indirect or consequential loss (as this could
extend to loss of time). Be careful of broad term exclusions that are usually
found in bespoke sellers' contracts. Make sure that any exclusions apply
mutually to both contractual parties if they are agreed.
·
Law and Jurisdiction: avoid
the application of US law (due to maritime lien rights) and agree on a neutral
law/jurisdiction that is not necessarily the sellers' choice.
These suggestions come from our
experience in disputes and litigation involving bunker quality. It is important
for buyers to understand the consequences of accepting sellers' terms and well
worth the effort to attempt to negotiate a more balanced contract. Even when
the terms are not negotiable, risks can be mitigated by exercising due
diligence before selecting the seller.
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