Bunker Contamination in the US Gulf : Legal and Practical Implications

Following recent reports of marine fuel contamination on an unprecedented scale in the US Gulf Region, we briefly consider some of the issues arising for those affected parties, including shipowners, time charterers and bunker suppliers.

Background

Reports suggest that possibly up to one hundred vessels may have been affected by contaminated marine fuel oil stemmed at ports in the Houston and US Gulf region, giving rise to significant concerns in the industry, as well as a range of both practical and legal issues.

Contaminated fuel supplies of blended fuel oils, such as IFO 380, were first reported in the US Gulf region earlier in February and appear to have persisted, with newly reported incidents still arising. Whilst the root source of the issue remains inconclusive, initial reports based on advanced fuel testing methods, such as Gas Chromatography Mass Spectrometry (GCMS), seem to point to adhesive phenolic compounds as the principal contaminant, although other products may also be involved.

Vessels affected report a range of technical problems. These include blocked fuel filters, fuel pump seizures and even the complete loss of main engine power, giving rise to the possibility of serious incidents such as collisions or groundings.

The issue appears to have been compounded due to the lack of detection of contaminants via conventional fuel testing analysis performed in accordance with the ISO 8217 requirements and fuel specifications, commonly incorporated into marine fuel supply contracts and also time charterparties.

The issue has affected a number of suppliers, leading some to speculate that the problem is linked to a refinery, or cutter stocks that are lighter petroleum products added to heavier fuel to reduce viscosity.

What are the issues?

Below we give some examples of the issues arising, proceeding on the basis that the supply of marine fuel oil was arranged by a time charterer.

Shipowners

• The immediate question will be how to deal with the contaminated fuel remaining onboard and not yet burned. This will need to be assessed on a case by case basis and is likely to require the input of a marine fuel specialist in conjunction with an Owner's P&I Club and legal advisors. Options may include the blending or filtration of the contaminated fuel, or alternatively its complete discharge, as well as fuel tank and fuel system cleaning. Initial indications suggest that discharge may be the only option in many cases. Discharge of the contaminated fuel also presents challenges. For example, the contaminated fuel may be designated as a chemical waste requiring specialist handling and not suitable or permitted for onshore fuel storage facilities. The issues of where and how to dispose of the contaminated fuel will therefore need to be carefully checked in advance via local port agents and with the relevant authorities. Owners will be looking to their Charterers for assistance and cooperation in the arrangements, as well as putting them on notice of the claims.
• Although circumstantial evidence may point to fuel contamination, when considering their potential claims against Charterers or Bunker Suppliers, Owners will need to consider and preserve the evidence necessary to prove that the cause of the problem is off-specification fuel oil and that the cause is not a ship related problem. This will include retaining samples of the contaminated fuel in question, as well as establishing that the relevant maintenance checks of their fuel filtration and pumping system are up to date and in order via documentary records. Evidence of previous bunker supplies, potentially going back over a period of time, may also be required to rule out problems caused by earlier stems. Owners are well advised to speak to their P&I Club and technical experts at an early stage in order to assess what evidence ought to be preserved.
• Needless to say, in order to bring a claim in damages arising from a contaminated fuel supply, Owners will need to carefully consider the relevant Charterparty terms, seek legal advice and report to their insurers. They will also need to try and ensure that they take steps to minimise their losses, to ensure that their claims are not prejudiced. This could be a simple as switching the fuel supply to other fuels onboard (possibly even requiring the use of more expensive low sulphur fuel), or ensuring that repairs are performed as soon as possible.
• Owners purchasing marine fuel from the US Gulf region would be well-advised to be vigilant and alert to potential technical problems, keeping their crew informed on the latest developments, circulating bulletins issued by P&I Clubs, the US Coastguard and Classification Societies, and on the lookout for the tell tale warnings signs of fuel contaminants, to be advised by their technical experts. Owners with ships regularly calling at the affected ports may, in an abundance of caution, also wish to check that they have onboard spare parts for their fuel pumps and systems, in case of need. Some Owners with a regular service to the US Gulf may also need to consider revising the wording to their existing charterparties for greater protection.

Time Charterers

• The effects of the contamination, ranging from the need to clean and overhaul fuel pumping and filtration systems to the more serious main engine problems, will inevitably lead to downtime, in addition to any time spent deviating to a port of refuge, discharging, filtering or blending contaminated bunkers, as well as awaiting the arrival of spare parts and fuel analysis test results. This in turn is likely to result in off-hire issues. Owners will inevitably be saying that the vessel remains on hire for the period of any delays and claiming their costs in addition as damages. However, the burden remains with Owners to establish that the cause of any problems was due to the supply of contaminated fuel. Charterers will need to consider very carefully whether or not they intend to withhold hire for the time lost and the potential implications if they do so, such as the rights that Owners may have under the relevant Charterparty to withhold performance, cancel the contract or exercise liens over cargo and /or freight. In cases where contamination is clearly established, then Charterers should exercise extreme caution before deducting from hire.
• Delays, whilst awaiting spare parts, repairs or discharge of the contaminated fuel will be particularly problematic for perishable cargoes. Having to deal with or dispose of the contaminated fuel or perform repairs may result in the need to deviate the vessel from its intended voyage. These issues will create problems for Charterers if they are the contractual carriers under bills of lading, so that they may face potential claims from shippers or receivers and will need to look to their P&I Clubs for support.
• Owners will look to Charterers to take responsibility for any contaminated fuel supplied and take over the handling of the issue. Charterers will need to try and engage with their Suppliers to seek support (for example on the issue of the discharge and handling of the contaminated fuel) and carefully consider the terms of the relevant Bunker Supply contract, in particular the law and jurisdiction clause, time bar clauses and any clauses dealing with the limitation of liability. Charterers should be especially alive to the potential for short contractual time periods for bringing and notifying claims under the relevant Supply Contract. If bunkers were stemmed sometime ago and the contamination only recently discovered, Charterers could be at risk of potential time bars if not carefully checked and the necessary steps taken.

Bunker Suppliers

• Suppliers concerned that they may have received contaminated fuel stocks, or in order to provide confidence to their buyers, may consider performing more advanced fuel testing analysis (such as GCMS) to try and rule out the risk of future fuel contamination problems and claims. Bunker suppliers will also need to consult with their insurers and put them on notice of any potential claims. They will also need to carefully review their supply chain in order to investigate any problems and pass on any claims brought by their customer to their own supplier under the relevant contract.
• In cases where there is conclusive evidence that contaminated fuel has been supplied, a Supplier may wish to adopt a cooperative approach in order to try and minimise the claims brought against them, as well as looking to commercial resolution of the claims before legal costs rise.

Owners, Charterers and Bunker Suppliers

• The existence of chains of marine fuel supply contracts on potentially back-to-back terms, entail that similar legal issues may arise at different stages of the supply chain, or in time charterparties where charterers are commonly obliged to supply and pay for bunkers. For example, the different versions of the ISO 8217 in use (i.e. 2005, 2010 and 2017 versions), are regularly incorporated into the terms of both time charterparties and bunker supply contracts, all prescribe, in slightly different language that the fuel should "not contain any additive at the concentration used in the fuel, or any added substance or chemical waste that a) jeopardizes the safety of the ship or adversely affects the performance of machinery..." [ISO 8217:2010 paragraph 5.5]. As such, parties involved in cases of allegedly contaminated fuel, will be currently seeking to identify whether the fuel supplied is compliant and whether or not there has been a breach entitling a claim in damages.
• All parties will need to ensure that sealed samples of the fuel supplied are carefully retained for testing and testing protocols agreed in case of any allegations of contamination. In this regard, all parties are recommended to retain at an early stage of alleged fuel contamination a marine fuel expert to assist and attend at any testing and advise on how samples ought to be retained and stored. Note that due to the high number of recent fuel contamination incidents, there are reported delays at fuel testing houses due to the backlog of samples requiring analysis.

The Applicable Law?

Given that the majority of supplies were made in the US, it is anticipated that there will be a US law element to the claims brought against Suppliers, either due to the contractual terms of the local physical supplier, or by application of US tort law for claims to damage to property. Indeed, the possibility of class actions in the US against Suppliers cannot be ruled out.

The question of the applicable law is far from straightforward, and the existence of 'umbrella' bunker supply agreements entered into by larger ship operators with bunker traders and suppliers, means that English law could potentially apply to the relevant supply contract, for example, potentially incorporating the implied terms of fitness for purpose and satisfactory quality under section 14 the Sales of Goods Act 1979. The applicable law will need to be assessed on a case by case basis.

Comment

As matters still unfold, it remains to be seen whether recent reports of contamination are due to an earlier supply of contaminated bunkers, or whether there continues to be a problem with the stemming of new bunkers. At this stage, ship operators are well advised to exercise caution, whilst suppliers should be looking to try and restore confidence to those looking to purchase marine fuel from the affected areas.

Fuel contamination is not a new phenomenon and the issue for discussion is how it may be addressed in the longer term. Modern technologies such as blockchain, with point of origin traceability could be a solution in due course, such as being currently looked at as a method of controlling contamination in the food industry. Whether this could be a practical or feasible solution in marine fuel supply industry is unclear, especially in an industry of low margins and costs sensitivity.

Should you have any questions, please do not hesitate to contact the authors of this briefing:

Paul Dean
Partner, London
T +44 (0)20 7264 8363
E paul.dean@hfw.com

Rory Grout
Senior Associate, London
T +44 (0)20 7264 8198
E rory.grout@hfw.com

Footnote

Paul Dean is HFW's representative on BIMCO's subcommittee established for the development of a charterparty clause that will address the 2020 global sulphur limit of no more than 0.50% that will come into force on 1 January 2020. Rory Grout is assisting.