The New MARPOL ANNEX VI Regulations, Requirements and Issues Michael G. Chalos K&L Gates, LLP Copyright 2015 by K&L Gates LLP. All rights reserved.
klgates.com 1 PART ONE REGULATORY BACKGROUND
REGULATORY BACKGROUND MARPOL MARPOL is an international treaty that emerged as a result of a determination by various maritime nation-states that ships transiting in international waters are a significant source of pollution and that this problem can be effectively addressed only if each of the participating nations passed domestic laws to enforce MARPOL s rules and regulations. The individual sections of the convention have become active at different times as each section received the required number of signatory states. Annex 1, which includes regulations for the prevention of oil, has been in active the longest and has been in force for over twenty years. Today, we are dealing with Annex VI. klgates.com 2
MARPOL: Annex VI Key Facts First entered force in 2005 Governs Ozone depletion substances Nitrogen oxides Sulphur oxides Volatile organic compounds Fuel oil availability and quality control Focus Today Sulphur oxides Fuel oil availability and quality control klgates.com 3
MARPOL: ANNEX VI Sulphur Content in Fuel Two regimes Global standards: Apply to commercial vessels greater than 400 gross tons engaged in international voyage Global standards are more lenient than ECA standards Specific geographic standards that vary across Emission Control Areas (or ECAs) Ships become subject to ECA standards when they are within 200 miles of the shore What do the regulations govern? The percentage of sulphur content of fuel used on board, which includes use in main and auxiliary engines and boilers Ships must maintain bunker delivery notes Port and coastal states can use Port State Control to verify compliance, and they can use air surveillance to assess vessel smokestack plumes. klgates.com 4
THE ANNEX VI STANDARD By the numbers Global Standard 2012-2020: 3.5% As of Jan. 1 2020: 0.5% ECA Standard 2012-2015: 1% As of Jan. 1 2015: 0.1% Important in 2020 Important right now! klgates.com 5
The North American ECA (Enforced as of August 1, 2012) klgates.com 6
MARPOL: ANNEX VI How Does This International Treaty Get Enforced? The United States enforces MARPOL regulations through the Act to Prevent Pollution from Ships, or APPS APPS was enacted in 1980 to implement MARPOL into US domestic law. Creates a comprehensive administration, inspection and enforcement regime Provides authority to the US Coast Guard and the Environmental Protection Agency to enforce MARPOL provisions. Criminal and Civil Penalties for violations klgates.com 7
COAST GUARD ENFORCEMENT Basic Inspection Expanded Exam What the Inspectors Look At klgates.com 8
WHAT THE INSPECTORS LOOK AT? Basic Inspection Review IAPP Certificate Review EIAPP Certificate Review Exhaust Cleaning Systems Documentation (If Fitted) for each engine Review Type Approval Certificate for Incinerator Examine the Vessel s Incinerator Review Bunker Delivery Notes (spot check) for each fuel delivery Verify Fuel Samples Onboard (spot check) for each fuel delivery Verify vessel is utilizing low sulphur fuel oil Will entail review of logbooks, sounding records, changeover procedures, and informal queries of crew to ensure they understand the policies Examine Any Alternative Compliance Methods used (if applicable) klgates.com 9
WHAT THE INSPECTORS LOOK AT? Expanded Exam Might include Review Technical Files Review Record Books Review Reports of Non-Compliance provided to Flag Sound Tanks and Compare with Shipboard Annex VI Records Examine/Test Equipment Used to Switch Over to ECA Compliant Fuel Review any Report of Non-Availability Inspect potential sources of Ozone Depleting Substances Test Incinerator Interview Crewmembers klgates.com 10
WILL MAGIC FUEL BE THE NEXT MAGIC PIPE? What is a Magic Pipe? Annex I governs the discharge of oil and oil/water mixtures. APPS using strict record-keeping regulations to essentially obtain jurisdiction for environmental crimes committed in international waters. Annex I allegations usually involve the use of a pipe to bypass the vessel s Oil/Water Separator Hence Magic Pipes klgates.com 11
THE NEXT MAGIC PIPE Key Annex VI/ECA Recordkeeping Requirements Bunker delivery notes Regulation 18.5 and 40 C.F.R. 1043.70 (maintained for three years) Maintain representative fuel oil samples taken at the time of fuel oil delivery, sealed/signed by Master of Officer in Charge. Regulation 18.8.1 and 40 C.F.R. 1043.70 (maintained for one year) Written fuel oil changeover procedures must show how and when the fuel oil changeover is done to ensure that only compliant fuel oil is burned within the ECA. Regulation 14.6 and 40 C.F.R. 1043.70 klgates.com 12
THE NEXT MAGIC PIPE Sarbanes Oxley (18 U.S.C. 1519) Tampering with Witnesses (18 U.S.C. 1512) The False Statement Act (18 U.S.C. 1001) DOJ Toolkit Obstruction of Justice (18 U.S.C. 1505) Conspiracy (18 U.S.C. 371) What does this mean for shipowners? Applicable charging statutes that allow the DOJ to obtain higher fines and take stronger negotiating position to enforce the regulations against shipowners and charterers. klgates.com 13
ONE LAST THING ABOUT APPS Whistleblowing Provision The Department of Justice openly offers lucrative awards to anyone who notifies the government of wrongdoing that eventually results in a conviction and fine The reward can be as large as 50% of the total APPS fine. No internal reporting requirement! Whistleblowers often ignore company policies and report directly to the Coast Guard, divesting owners of the opportunity to correct a problem that, most times, they didn t even know existed klgates.com 14
EPA S NEW PENALTY POLICY Released January 15, 2015 On January 15, 2015, the Environmental Protection Agency issued a new penalty policy that describes the methods by which the EPA will assess civil penalties for violations of the ECA regulations. The Coast Guard will enforce the EPA s policy pursuant to a Memorandum of Understanding between the two agencies The progressive reduction period is over we expect the US government to be more aggressive in enforcing Annex VI moving forward klgates.com 15
PART TWO Main Commercial Issues Moving Forward klgates.com 16
WHOSE FINE IS IT ANYWAY? Liability Between Parties In the event that a ship fails to comply with Annex VI and the government learns of that non-compliance, the first issue will involve who bears responsibility. When a vessel is under time charter, the following parties are involved in bunkering: the shipowner, the charterer, the bunkers broker and the fuel supplier. Which of these parties bears responsibility for MARPOL compliance? The government does not view its task as trying to find the person or persons most responsible; it will seek to find any person or entity that may be held responsible. As such, fines and criminal penalties will probably be levied against all parties that the government believes had anything to do with the non-compliance. Where possible, the government will likely seek civil and criminal fines for the owner and manager and will often seek jail time for the individual wrongdoers. klgates.com 17
ISSUE ONE: WHOSE FINE IS IT ANYWAY? CONT.. Having said that Shipowner: As a general rule, MARPOL compliance is shipowner s responsibility Charterer: May be liable to shipowner (and potentially to the USCG and/or EPA) based on actual fault and indemnity language in the charterparty Fuel Supplier: Suppliers in MARPOL signatory countries have an obligation to comply with Annex VI requirements, and shipowners/charterers can bring claims if fuel is off-spec. However, due to strong bargaining position, claims are usually limited to the value of the bunkers provided Bunker Broker: Typically deemed an agent of the purchaser, and thus not a party to the contract and not subject to liability klgates.com 18
LIABILITY BETWEEN SHIP-OWNERS AND CHARTERERS Most likely subject of future litigation and arbitration Bunker Clause Shipowner seek to recoup fines that it believes trace to the charterer s wrongdoing The charterer may seek to recover damages and business losses that result from the ship s detention Responsibilities Clauses THREE KEY CLAUSES Off-Hire Clauses klgates.com 19
LIABILITY BETWEEN SHIP-OWNERS AND CHARTERERS Bunker Clauses Typical bunker clauses provide that the charterer will be responsible to the shipowner for any loss or damage that the owner suffers as a result of unsuitable fuels Under that language, charterers will bear full financial responsibility for violations of Annex VI if they fail to provide compliant fuel, including reductions in speed performance and increased consumption as a result of noncompliance. Note that the language does not distinguish between intentional and unintentional failure to provide compliant fuel. klgates.com 20
LIABILITY BETWEEN SHIP-OWNERS AND CHARTERERS Ways to eliminate uncertainty BIMCO has recently published a clause that is intended to balance the rights and responsibilities of owners and charterers in light of Annex VI. The clause provides that the charterer will be liable to the owner when the physical supplier delivers non-compliant fuel. However, if the fuel is compliant, the owner will be fully responsible for MARPOL violations, as well as for operational failures such as the failure to change over to low sulphur fuel before entering an ECA. klgates.com 21
LIABILITY BETWEEN SHIP-OWNERS AND CHARTERERS Off-Hire Clause Typical off-hire clauses mandate, in relevant part, that vessel shall be deemed off-hire the vessel is unable to comply with the instructions of the Charterer as a result of 1. any deficiency of the Master, Officers and/or Crew to perform or 2. the arrest of the vessel at the suit of a claimant except where the arrest is caused by the charterer. Coast Guard detention will render the crew unable to perform Where the Annex VI violation occurs due to a crewmembers failure, the clause establishes that the vessel will be off-hire. Charterer s obligations to pay hire will cease after an arrest, unless arrest caused by charterer s failure. klgates.com 22
LIABILITY BETWEEN SHIP-OWNERS AND CHARTERERS Off-Hire Clause (Cont.) The arrest clause can also potentially attach liability to the shipowner, though this clause leaves more room for modification should parties wish to limit or enhance the owner s exposure. Does at the suit of a claimant include suits by the US government? Modified clauses may clarify this one way or the other Deletion of the phrase except where the arrest is caused by the charterer may leave the shipowner exposed If a vessel is arrested because the charterer failed to obtain compliant fuel, the vessel will be deemed off-hire if the clause does not include the exception klgates.com 23
LIABILITY BETWEEN SHIP-OWNERS AND CHARTERERS Responsibilities Clause This clause speaks only to cargo claims, but includes claims relating to delays to the cargo. Such delays can be caused by detention by the USCG. When they are, this clause potentially divides responsibilities between the charterer and owner for the costs associated with that delay Typically enumerates certain responsibilities of each party and then provides that all claims arising from any other cause will be shared equally between the owner and the charterer. The only typical enumerated clause that potentially speaks to this issue is that the owner is liable for claims arising from the failure of the Owner and its servants to exercise due diligence to make the vessel seaworthy. As discussed below, extent to which seaworthiness includes Annex VI compliance is unclear klgates.com 24
IMPACT ON OTHER PARTS OF CONTRACT Trading Warranties Trading warranties govern the geographical range in which a vessel can trade. They often, but not always, list expressly excluded ports, countries and areas. These limitations limit the shipowners exposure by preventing charterers from trading outside of the specified limits. Shipowners should evaluate the costs associated with Annex VI compliance, as avoiding ECAs will avoid the need to use.1% fuel. klgates.com 25
IMPACT ON OTHER PARTS OF CONTRACT Vessel Readiness Shipowners typically undertake that the vessel will be physically and otherwise ready to perform the lawful orders of the charterers, trade within agreed ranges, and carry agreed cargoes The obligation extends beyond basic seaworthiness, though a shipowner can negotiate down from that as well. The extent of this obligation depends on individual charterparty terms klgates.com 26
IMPACT ON OTHER PARTS OF CONTRACT Vessel Readiness ECA Obligations Unclear how extensive the obligation is on shipowners to take steps to modify the vessel to make her ready for trading in ECAs while using compliant fuel Because compliant fuel will need to be segregated from higher-sulphur fuels to avoid cross contamination, vessels will need particular tank and line arrangements and capacity to complete the segregation safely. Less of an issue for newer ships Older vessels may require significant cleaning and/or overhauls to allow compliance. Many charter parties that went into effect prior to January 1, 2015 continue in effect well beyond that date. The modification and costs that may be associated with compliance require time, money and possible revisions to existing agreements. klgates.com 27
IMPACT ON OTHER PARTS OF CONTRACT Fuel Specifications Bunker clauses already receive a lot of attention in charterparties because MARPOL compliance is one of many issues impacted by fuel. Despite recent drops in prices, fuel costs remain a large factor in a vessel s daily running costs and, as noted, using compliant fuel will increase those expenses significantly. Annex VI Issues re: Specifications Many existing charter parties require that any fuel supplied must be fit and safe for the specific vessel s engine Requirement is implied under English law Requirement has not been litigated as relates to the use of Annex VI-compliant fuel, Parties should consider including an express warranty as party of the comprehensive bunker fuel clause. klgates.com 28
EFFECT ON P&I COVERAGE What might get covered? While owner s P&I policies usually do not cover damage to hull and machinery (there is separate H&M coverage for those liabilities), Clubs and fixed premium insurers do offer comprehensive policies to charterers that insure against liability for damage to the hull. Liability for physical damage caused by the shift to compliant fuel is therefore probably a covered risk under the policy. Liability for personal injury to do exposure to toxic substances is a covered P&I risk. Legal costs associated with any of these covered risks are also probably covered under the policy. P&I clubs under their FD&D covers will provide compensation for legal and other costs relating to Annex VI disputes between the owner and the charterer. klgates.com 29
Michael G. Chalos Partner 212.536.4097 michael.chalos@klgates.com Michael Chalos has been practicing maritime law for more than 35 years. During such time, Mr. Chalos has handled numerous matters involving traditional maritime issues such as collisions, groundings, arbitrations, failure of equipment, damage to cranes and offshore rigs, cargo and other damages, general average, arrests, insurance (relating to cargo, P&I, hull, indemnity and general liability). He has also been involved in defending high profile cases arising out of Marpol and APPS violations, compliance, and defense of both civil and criminal matters falling under the Clean Water Act and other environmental regulations, dealing with governmental agencies such as the Coast Guard, EPA, Department of the Interior, as well as litigationg commercial disputes, drafting of charter parties, bills of lading. Michael is a Member of the United States Maritime Law Association and a Proctor in Admiralty. klgates.com 31