Thursday, May 23, 2024

Off-Spec Bunker quality for increased total Sediment Potential (TSP)

According to laboratory analysis, the Charterers’ supplied bunkers at the loading port were off-spec (TSP above limits). Owners demanded the Charterers to de-bunker and supply bunkers that meet the agreed specs in the charter party. Charterers denied liability and requested owners to mitigate by taking reasonable steps to prevent further losses.

The procedure: 1st test in a lab, 2nd test in a lab, 3rd test on samples from bunker tanks in lab, de-bunkering.

1. 1st bunker sample analysisBunker sample analysis per ISO 8217:2010, which deals with marine fuels: the fuel shall conform to the characteristics and limits given in Table 1 or Table 2 when tested by the methods specified. The fuel analysis report reflects the TSP value was outside specification limits and recommends whether to use it or not; the “Operational advice”.

As said, “TSP or Total Sediment Potential (referred to in ISO 8217 as “total sediment aged”) is a measure of how much sediment (asphaltenes) any given fuel oil will produce in long-term storage. Thus, TSP does not indicate the presence of contaminating materials but measures the fuel oil’s tendency to precipitate sediment in, for example, the fuel filters of a marine engine“- (The Nounou [2020] EWHC 1795(Comm), [12]).
2. Claim NotificationOwners notify the Charterers that the supplied bunkers are off-spec; they refuse to burn them and request same to be disposed of (de-bunker) and replaced with suitable fresh bunkers as agreed in the charter party. In turn, Charterers pass this information to the bunker sellers and maintain a back-to-back position. A London tribunal described it as follows, “The charterer is the party who entered into the contract with the supplier. He would be able to negotiate its terms and to bring any action for breach of the contract of supply. The charterparty only made commercial sense if the owner had a proper contractual remedy against the charterer and the charterer had the contractual remedy against the supplier” (London Arbitration 1/88).

However, a tribunal decided differently under this wording, e.g. “[t]he charterer shall not be responsible for loss..arising out of acts or omissions of..bunker firms.., although engaged by charterers shall be deemed to be the servants of the owners..” (London Arbitration 15/00). And the perennial problem is: that usually, the terms are not back to back in the different contracts. Therefore, Charterers seek to follow the T&C under the bunker supply contract and, if possible, maintain a back-to-back position in the separate agreements.
3. Documentary evidenceOwners present to Charterers the bunker witness sampling statement and BDN, which refers to the testing sample from the ship’s manifold (a “representative sample”). In addition, Owners ask for copies of the bunker purchase contract, including the bunker surveyors’ documentation and analysis report. At the same time, Owners demand written instructions from the Charterers on handling their supplied bunkers as the property remains vested in the Charterer until redelivery.
4. Discussion on re-testing & Additional bunker supplyDepending on the 1st analysis, Charterers resist conducting another bunker analysis on a different sample. If that fails, Charterers invite the Owners to join another bunker sampling/testing and request the details of the appointed surveyors instructed for this task. Another issue which arises will be when the ship is almost ready to depart towards the next port and the ‘good’ fuel on board is insufficient to perform the voyage. Who will deal with it? Charterers supply LSDO but reserve their right to claim damages. Owners will reject this claim because, in the circumstances, it is reasonable not to use off-spec bunkers pending re-testing. Charterers put forward other defences based on seaworthiness/ due despatch obligation.
5. Collect samplesMeantime, Charterers’ representatives appoint local surveyors to go on board and draw samples from the supplied off-spec bunkers for testing at a reputable independent laboratory. The Charterers omit to provide specific instructions about the testing methods. How and where to draw samples would require expert advice & guidance. Bunker suppliers are invited to attend but refused by alleging that the retained barge sample must be tested and the results to be final and binding on the parties. Because this is  what the parties agreed to under the bunker supply contract.
6. Experts appointed Test results considered  Charterers instruct marine fuel experts (and chemical experts- See The Nounou) for guidance and reject the Owners’ allegations that bunkers remain unsuitable for burning in the Vessel’s engines. Owners appoint experts to assist them in responding to various technical arguments Charterers’ experts raise. However, Charterers insist the Owners burn the fuel and follow the recommendations of their lab (see para 1, the “Operational advice”). Meantime, Charterers provide no specific instructions or directions but repeat what the Owners’ lab recommended (avoiding an indemnity claim?) in the operational advice.

Further, Charterers argue that the initial analysis was not conclusive evidence or binding on the parties. Meanwhile, experts consider the fuel testing results, the witness sampling, the delivery notes, the charter party, the bunker supply contract, and survey reports. In addition, they ask the Owners & Ch Engineer (C/E) to advise on the steps taken in drawing the samples, including the condition of the cubitainer/ sampling equipment. What if there was an error by C/E in taking samples that affected the samples or analysis? Or does the C/E fail to witness the sampling on the barge side (a breach of the relevant clause)? Not uncommon during the COVID 19 pandemic, the bunker barges did not allow the ship’s crew to witness the sampling at the bunker barge manifold.
7. Obtaining confirmationCharterers check whether Owners agree to test the samples at the proposed laboratories from bunker suppliers.
8. Testing methods- expert adviceAt this juncture, marine fuel experts recommend an additional testing method on samples (Total sediment accelerated & density, Sulphur, Carbon, Vanadium) to compare the outcome with the analysis of the initial sample; input from Owners’ experts is sought. If the delivery samples were taken by continuous drip from a different end of the supply hose, the test results should usually provide similar quality characteristics. Upon opening a sample, a strong/ non-typical smell will be something of further consideration. Density results may suggest that the samples were not from the same fuel source.

As observed in a recent case, “[t]he analysis of the composite sample prior to loading revealed an on-spec level of TSP because the samples used were unrepresentative of the product loaded on board”. Will this assist the Charterers in supporting their claim against the suppliers? (Tortious liability was considered to escape the narrower contractual limitations).
9. Disputed sampleOwners maintain their position, i.e. the charter party terms should be strictly followed and provide which samples must be tested. Owners request that the acceptable representative samples be tested and taken at the ship’s bunkering manifold. Further, in the case of 2nd analysis, both parties must agree on the instructions, the testing methods and the laboratory to carry out the tests. Otherwise, it will be open to challenges.
10. Sampling conducted -2nd analysis in progressFinally, surveyors collected the samples for analysis and sent pictures. Some issues worth considering are: (a) whether it is possible to carry out the analysis based on the method proposed at this port (lab availability?) and (b) whether this is a method agreed upon by the charter party. For (a), not always. The parties extensively discussed the witnessing seals breaking and the test’s scope, which delayed the entire process. Usually, experts propose additional analysis on fuel components like Ash, TSA, TSP, Density, TSE, Sulphur, Metals, etc. For (b), Owners will reject any such proposal as the charter party will usually not refer to it.
11. Conflicting evidenceCharterers wait for their surveyor’s preliminary advice and discuss with the expert for further guidance on how to proceed. At this stage, as observed in other cases, the suppliers provided the lab analysis of the barge retained sample, showing that the fuel specifications are within specs or marginally below the maximum allowable figures (substantial discrepancies may call into question the source of the barge sample or the whole process of testing). Charterers asserted that the barge sample was referred to in the BDN and is a ‘representative sample’ within the meaning of the relevant clause. Also, the barge samples carry considerable evidential weight; as a London tribunal stated, “Had they been taken, properly witnessed and acknowledged, analysis of them would have been of considerable weight” (London Arbitration 8/98).

The documentary evidence proved that the sample was adequately witnessed and acknowledged. Despite that, the Owners argued that from the point of view of the evidence, the two sample analyses have more relationship and probative force compared to the incomplete test results in the barge sample. As observed in other cases, the suppliers provide a preliminary analysis of the bunker sample. If the point of dispute concerns the TSP results, they may only give an analysis of the TSP. That cannot assist the lab (or experts) in properly comparing the results of the various samples and concluding whether the barge sample was indeed taken from the same bunkers supplied.
12. Mitigation planIn the meantime, the Charterers consider the following steps: de-bunkering and a mitigation plan. However, the Charterer will request Owners to burn the off-spec bunkers with prior trial purification conducted or de-bunker and seek to recover from bunker suppliers (obtaining advice from local lawyers) or their insurers. The following steps depend on the additional evidence submitted by all parties and the individual legal advice on the merits under the separate contracts. Meantime, Charterers reject liability and point to the Owners’ duty to mitigate. Parties are considering whether de-bunkering is allowed at the next port, when testing results will be available, including salvage selling of fuel and corresponding expenses. The regulations change occasionally, and getting approval for de-bunkering might be more challenging.

In a previous case, the customs were on strike, so obtaining their permission was impossible. Charterers will raise these points for the trial purification: even if they have failed to provide suitable bunkers, the resulting loss or damage is subject to questions of causation and mitigation. The clause contemplates that Charterers are liable for loss or damage and includes the off-loading of bunkers. So, de-bunkering is not the only option, but one of the options if that is the reasonable step (expert advice required?), which is not unless trailing the fuel to determine whether there is a risk. Thus, Owners become exposed to a significant claim for the value of bunkers, time lost and other losses/ expenses.
13. Owners’ concernsApart from safety concerns, Owners consider issues of burden (reverse burden of proof), causation (owners to establish that the off-spec bunkers caused the damage) and mitigation (defend arguments on mitigation might be easier- the standard of reasonableness is not high).
14. 2nd analysis  The 2nd test results show that the fuel is off spec and not fit for use. The next steps?
15. Charterers evaluate their position against Owners and Suppliers-   Whether it is possible to burn it without issuesCharterers will request the bunker suppliers to cover all losses, including the de-bunkering and cleaning of tanks (or sometimes claiming betterment from Owners). In addition, Charterers will check whether there is salvage value (if discharged as sludge- no value) or it can be reconditioned (minimize exposure to costs). Finally, Charterers seek legal advice locally for claiming against the bunker suppliers and whether to test different bunker samples from the Vessel’s storage tanks to give more info or potential grounds to defend or pursue a claim. Based on the analysis, the expert may suggest a possible sampling error that affected the results and further testing to be carried out on samples from bunker tanks before de-bunker (a last resort). Further, experts may request a trial consumption of a small quantity to observe whether it produces sludge and is burned without risk.

Owners oppose saying that the master has raised safety concerns and they cannot jeopardize the safety of the crew, ship and cargo. Charterers respond to this argument by saying that there is advice from experts and lab on how to burn the bunkers and if the crew cannot follow a simple instruction, that raises a point of “crew incompetence”- being Owners’ matter. Finally, experts highlight the difficulties in mixing fuels on board to bring them back “on-spec”; a typical inquiry made by the Charterers to the experts. Owners challenge any such proposal on different grounds, for example: “on-board blending carries extra technical challenges. The best practice is to blend the components ashore before delivery to the vessel” (The Nounou, [23]) or that this is not within the ambit of the relevant terms in the charter party.
15. Owners to mitigate- experts input

Up to now, costs rise considerably
Charterers assert that Owners must mitigate, and since experts guide how to treat the fuel safely, Owners must follow their recommendations and mitigate losses. Additionally, Charterers may propose an expert to attend the entire procedure and stay on board for further guidance and assistance. On the other hand, Owners will argue that the charter party clearly states that if the supplied bunkers are off-spec, the Charterers shall provide new bunkers that meet the agreed specifications (the word “shall” indicates a mandatory obligation).

In one case, Owners further pressed that Charterers’ words or conduct evinced an intention not to be bound by the charter(relying on bunker supply contract) and their total or partial failure to perform obligations which have fallen due, i.e. by refusing to de-bunker & supply fresh bunkers. That being the case, Owners threatened to terminate the charter party due to the Charterers’ repudiatory breach. Also, Owners said that if Charterers & their experts that give recommendations are willing to provide a letter of guarantee for all losses/ damages sustained by burning the off-spec bunkers, Owners would consider burning the bunkers. Charterers said there is a difference between “burning” and conducting “trial” fuel purification.
16. Lawyers instructed- additional costsCharterers instruct external lawyers to assist in both claims that arise under the separate contracts. The lawyers respond to the Owners’ request for de-bunkering, pursue the claim under the bunker purchase contract and consider the advice received from lawyers based in the suppliers’ country with the potential steps to secure the claim against the suppliers.
17. Lien, unpaid bunkers-
Costs in obtaining legal advice
At the same time, another issue concerns the unpaid bunkers. Charterers seek advice on whether the supplier can arrest the Vessel for unpaid bunkers (off-spec) and potentially breach their obligation not to create or permit to be continued any lien or encumbrance in the Vessel. It depends on whether the courts have jurisdiction to grant an arrest where the ship is trading. Also, the local lawyers will advise whether it is lawful to withhold payment in the light of the dispute and potential options (payment to an escrow account?) to secure a claim against the suppliers, the time limit to bring an action and the procedures for commencing legal proceedings. Sometimes, this re-testing process may not be resolved by the due date of payment of the bunker invoice.
18. Again, Owners must mitigateCharterers apply pressure on the Owners to accept their proposals to mitigate, alleging that they will redeliver the ship with bunkers as on board and leave Owners to sort it out, or Charterers will make an application to an English court for an order. Charterers will likely say that the local customs authorities request more information on the condition of the bunkers remaining in the tanks to decide whether to accept de-bunkering. And Owners have an implied duty of cooperation. Assume the parties agreed to test other samples from the Vessel’s bunker tanks. Then, Charterers will also consider with their experts on the testing & sampling method and if there are labs available in this country to carry out this task. If not, when and where the samples should send for further analysis? Is the Vessel engaged on a charter? How soon must a decision be taken? These are critical factors.
19. De-bunkering plan?Meantime, Charterers evaluate with local correspondents whether it is possible to de-bunker. That may require further input if this is allowed locally. Agents and local correspondents or lawyers can advise further on the requirements of the port. At the same time, Charterers consider their options with the local lawyers at the de-bunkering port and set a strategy.
21. 3rd sample analysis from bunker tanks Any challenges? Costs increaseAt this juncture, the parties focus on taking additional samples from the bunker tanks (how? any specific instructions?) for analysis in a lab. Owners may request written confirmation from the Charterers on certain conditions to apply before allowing the charterers to make any arrangements: samples drawn are not “representative samples”, the charterers will not rely on their analysis to bring any claim and the costs related to this sampling and testing, or any other delays, will be for the Charterers’ account.  

It may be problematic if there is no lab to make the analysis, and it would require time for arranging the samples to be dispatched to another country. For example, the ship is scheduled to immediately depart from the port or committed to another employment that requires full bunkers stored in Vessel’s bunker tanks. The more the bunkers remain in the tanks, the more the parties’ liabilities increase, given the consequential losses due to delays/ deviation, etc. A potential solution is for Charterers to supply LSDO. Still, again this depends on the bunker tank restrictions, availability and the quantity of good fuel oil remaining on board at separate tanks. Thus, the process becomes even more challenging.
22. Collecting samplesThe parties are arranging for their representatives to attend the collection of vessel tank samples. The procedure is to obtain samples from different levels of the bunker tanks (top, middle and bottom) without sounding pipes. The samples must be labelled and sealed, referring to sampling location, method and time—one set to be retained on board. Notably, there must be evidence of where, how and when those “samples” were taken (See London Arbitration 8/98).
23. Potential limitations in testing or analysis- Commercial considerationsIf there is no lab availability, samples will be sent to another country [X]. The previous samples tested or kept in the custody of the surveyors that attended the 2nd analysis will also be sent to the same lab in [X] Country, including the suppliers’ sample. All parties are invited to participate and witness the testing and analysis results. Charterers seek advice from their expert on the proper bunker sample method analysis, and experts may recommend a step-by-step procedure to avoid unnecessarily increased costs. The procedure may depend on the required time to provide the results, as the Vessel is due to depart from the port that de-bunkering is allowed, and parties need to decide whether to de-bunker there and avoid deviation costs/ delays. Meanwhile, Charterers continue to evaluate the costs and options to de-bunker, viewing the Vessel’s commercial program. Still, will the suppliers take any action for the unpaid bunkers pending the test results? Now the payment for bunkers is overdue.
24. Additional evidenceBased on observations from other cases, suppliers may provide supplemented evidence from another ship that received bunkers after the present supply and were within specs. Experts consider all the bunker sample analysis and form a view on the fuel quality/ characteristics. Whilst the suppliers’ evidence may not be admissible, parties will refer to it during settlement discussions.
25. Pending results- how to reduce losses ?Now, the bunker sample analysis is in progress. Some parties have not witnessed it. Charterers are under pressure as they must decide their next steps due to the Vessel’s departure from the port. Charterers are still checking where to de-bunker at the best possible terms to reduce losses.
26. 3rd analysis off-spec

Whether responsibility can be shifted?
The bunker tank samples were tested and show that the bunkers are not fit for use. Charterers now consider de-bunker but make last attempts to convince the Owners to burn these bunkers. Charterers will press the point of mitigation and that there is no risk of burning the bunkers. Also, the lab results are just indicative; the position differs when the fuel is heated/ used. If a purification test proves that there is no substantial amount of sludge, the fuel is stable and can be used. Suppose the test results demonstrate that pre-existing water in one tank affected the testing results or any other factor that falls on the owners. In that case, Charterers will argue that this is an Owners’ matter and Owners must cooperate for the benefit of both parties. For the former, what if the TSP results are high and segregating the wet layer at the bottom of the tank, the fuel would create issues if burned in any event? A critical consideration is when and where to conduct trial purification, avoiding increased risks and other claims due to a potential collision, grounding, etc.
27. Parties focus on the points raised on mitigation/ proper interpretation of the charterOwners responded to the Charterers’ above points on mitigation and interpretation as follows:
Interpretation
There is little or no precedent for off-spec bunker issues. However, as a matter of construction: If, as alleged, the clause strikes a right balance and the commercial purpose favours a wider interpretation, it lessens the Charterers’ absolute obligation to supply bunkers that meet the agreed specifications. The repeated use of the word “shall”( i.e. Charterers shall supply) in the clause indicates that the obligation is mandatory. Also, Charterers would benefit by selling to Owners off-spec bunkers at higher charter prices than the purchase prices. But as a matter of principle, in construing a contract, it was to be presumed that the parties would not ordinarily have intended that either should be entitled to rely on his breach and obtain a benefit. Lastly, the expert’s advice or the lab recommendations cannot modify the express terms or the scheme of the charter or re-write the charter in the interests of commercial convenience for one party.
Mitigation
Charterers rely on general law principles on damages and misuse the concept of mitigation to impermissibly re-write the charter party, forcing the Owners to accept un-contractual procedures in burning off-spec bunkers. The purpose of the clause is to avoid such debate/ risks/ costs in the aftermath on whether the bunkers are suitable for use. That also brings commercial certainty. Further, Owners contended that the duty to mitigate does not extend to placing the safety of the crew, Vessel and cargo at risk. Besides, the hurdle of mitigation is not high. As argued, another factor to consider is whether the off-spec bunker quantity is substantial (i.e. would 800 mts compared to 150 mts make a difference? Experts may say yes), thus increasing the possibility of damage by burning it, even if it was found “slightly” off-spec. After all, the concept of mitigation applied only where a party was in breach, and the other had to act reasonably to keep its losses to a minimum, not to reduce the defaulting party’s losses. Also, the loss can be increased by mitigation, as here, the Owners provided a letter from the engine makers recommending not to use the bunkers as there is a risk of damage. Lastly, Owners said that by obtaining a quotation from the market from potential buyers of the off-spec bunkers, then typically, Charterers cannot sell the bunkers at prices above that offered in the market.
28. Debunker- recover claims Charterers de-bunkered at the next convenient port, supplied fresh bunkers and sought to recover the expenses from their insurers and the bunker suppliers. However, each case is fact specific and does not necessarily end up in de-bunkering, and most disputes are settled. As noted, this happens because “..neither party has a truly representative sample of the fuel as it was bunkered.” (‘Fuel Oil in Marine Engines and some Legal Implications’, 2000, Lloyd’s Shipping & Trade Law), while the above process adds to these findings more reasons for consideration.

Below are some references for consideration:

  • Time Charters, §12.7- 12.12
  • Carver on Charterparties,  §7-057, §7-060, §7-064, §7-066
  • McGregor on damages, Ch. 9 “Mitigation of damages”
  • Septo Trading Inc v Tintrade Ltd (The Nounou) [2020] EWHC 1795(Comm)-Whether cargo of fuel oil complied with the contractual specification- TSP found over the maximum permitted value under ISO 8217:2010
  • Nippon Yusen Khaisa v Alltrans Group of Canada Ltd (1984 LMLN 116 3)- Charterers’ duty is absolute and not merely one to exercise due diligence; modern forms now specify the details of the bunkers required.
  • London Arbitration 1/88 -the Charterers’ obligation to supply bunkers of proper quality is absolute.
  • London Arbitration 8/98 -charterers are liable for delivering contaminated bunkers.
  • London Arbitration 14/84-the cost of cleaning the sludge tanks is for the Owners; unless demonstrated that the fuel was of unusual specification.
  • London Arbitration 20/16 -Owners can recover the cost of surveyors’ attendance on de-bunkering.
  • London Arbitration 6/21-the fuel supplied by the charterers did not meet the specifications; held that slight differences could not justify the Vessel’s poor performance. The award was referred to support the proposition that a negligible departure is excused (de minimis).
  • London Arbitration 15/00-fuel supplied did not meet specification, and Charterers successfully relied on exemption clause deeming bunker firms to be servants of the shipowners.

IMO Resolution MEPC.96(47) Guidelines for the Sampling of Fuel Oil for Determination of Compliance with MARPOL 73/78 Annex VI or any subsequent amendments.

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