World Bunkering > News > Summer 2011 > Bunker disputes: who pays the price?

Ince & Co partner Jonathan Lux was in at the birth of IBIA in 1992 when he was the legal voice on a working group formed to take the association forward, having been involved in some big bunker legal cases. At his suggestion, among the objectives of the fledgling IBIA was dispute resolution in bunker cases and he served as IBIA’s first secretary. Others in the working group included IBIA’s first chairman, currently Maritime London chief executive Doug Barrow, who apparently put about the story that IBIA actually stood for ‘I believe in action’.

One of IBIA’s first conferences was in Orlando at a hotel shaped like Micky Mouse, Mr Lux recalls. It was there, he says, that a poolside conference with Chris Fisher resulted in him making a decision to co-author the first legal book on bunkering, Fisher & Lux on Bunkers, now in its third edition. At the beginning of the project, he says the preoccupation was to get the acceptance of the industry – while bunker traders and brokers were receptive, “it was more difficult to get owners and charterers interested”.

The working group on dispute resolution has been a force for good in terms of monitoring regulatory developments, not least as far as air emissions and other environmental issues are concerned, notably the development of Sulphur Emission Control Areas – now transformed into ECAs. Ian Adams, he says, does a good job in keeping the membership abreast of developments at the International Maritime Organization.

Education is an issue, he stresses, as “there are quite a few cowboys out there” and IBIA of course runs its own bunker education programme.

Although IBIA developed arbitration and mediation terms for the bunker industry with a view to enabling quick and cheaper mediations, for the most part there has not been much take up, Mr Lux says. He is not sure, but thinks that parties might have decided to use other rules laid down by bodies like the London Maritime Arbitrators Association.

“The idea was judgement from your peers,” he explains, with experts in the bunker arena dealing with the disputes. As bunker costs have become the first or second most expensive item in running a ship, disputes have blossomed. Whereas in years gone by there were few quality issues to speak of, one exception being a 1922 legal case where a bunker full of best Welsh coal ignited, buying unsuitable fuel is now a source of many legal disputes.

With a number of different commodities being blended to create the fuel supplied and fuel of cutter stock being introduced to adjust viscosity, disputes are perhaps inevitable. Unscrupulous traders, mixing in low grade products to enhance the profit margin, is one possibility.

Another problem area which reached the courts was the use of automotive lube oil on ships, which resulted in a dispute between FOBAS and DNV, called as experts in the case, as to whether the use of automotive fuel oil in bunkers was permissible or not according to ISO standards.

Evidently one issue at the moment exercising the bunker industry is whether ships may have to carry different grades of fuel oil to meet with legal requirements in ECAs and the EU. This adds to the difficulties of voyage planning, and has prompted comments from cruise lines, for example, that they will have to adapt itineraries when the US ECA comes into operation, with possible redeployment in Europe.

Economical steaming is one of the areas being considered, or already in operation by companies. By steaming at less than the maximum speed one can evidently save on fuel costs but it is the ‘virtual arrival’ issue that may swing the balance, Mr Lux says. In cases where ships are chartered to deliver at utmost despatch, as charterparties would generally indicate, what is the position if the ship travelling at optimum speed arrives at the discharge port and is unable to discharge the cargo because of congestion? If the situation is known in advance, the vessel could slow down and reach the berth when needed, but contractual issues and liabilities would need to dealt with – not least the “with utmost despatch” clause in the charterparty.

The industry is examining whether there could be standard industry clauses to cover the economical steaming issue. Disputes have arisen over the ownership of bunker supplies, for example in cases where a charterer orders fuel and then goes bust but the vessel has consumed the fuel. Is the owner in such a case liable to pay the bunker supplier? In the 1993 Saetta case, for example, the bunker supplier successfully relied on his retention of title clause and the owner was required to pay the value of the bunkers. A more recent case, the Fesco Angara, went the other way, Mr Lux explains.

As Fionna Gavin of Ince said in the firm’s shipping e-brief last year, “The case is a warning to bunker suppliers. Drafting tighter clauses in the supply contract may not get round it. It may be possible for the bunker suppliers to include terms in their contracts requiring charterers to account for the proceeds of sale, but how effective this will be will heavily depend on how tight the wording is and if the buyers agree to it”. However the case did not end there.

Although bunker suppliers Oceanconnect failed in the London Mercantile Court to recover losses from the Fesco Angara’s owner Angara Maritime, the case went to the Court of Appeal on a different issue. Oceanconnect had originally arrested the vessel in Amsterdam, the parties entered into an escrow agreement and the ship was released after the owners put up security. Under the terms of the escrow agreement, it was to be governed by English law and “any dispute arising hereunder or relating thereto or arising in connection herewith shall be referred to the exclusive jurisdiction of the High Court of England and Wales”.

The agreement also stated that the claim was payable to Oceanconnect “by virtue of a judgment (which is not or no longer subject to appeal) rendered against Angara by a competent court of law having jurisdiction ... or by virtue of a valid arbitration award which is not or no longer subject to appeal...”

Angara started proceedings for negative declaratory relief, Ince’s January 2011 e-brief explains, seeking a declaration that it was not liable to pay Oceanconnect for the bunkers. Oceanconnect then arrested the vessel in the US, seeking to found jurisdiction for an in rem claim based on a maritime lien under US law. The owners then applied to the English court for an anti suit injunction claiming that England was the forum conveniens for the dispute.

Mr Justice Simon allowed the anti suit injunction but this was set aside by the Court of Appeal, which held that the escrow agreement taken as a whole did not provide for exclusive jurisdiction by the English court as far as the underlying claim for unpaid bunkers was concerned. Under English law, a bunker supplier cannot obtain a maritime lien, and the Court of Appeal took into account that it was unlikely that the bunker supplier would have restricted itself to a court where it was unlikely to succeed when it had good prospects of winning its case in the US courts.

Other legal issues relating to bunkers involve cat fines, a by-product of the cracking process that can damage fuel lines, and the long chains of brokers and traders between the ultimate buyer and suppliers of bunkers. It can be difficult to determine if intervening parties are acting as brokers or traders, Mr Lux says. While a broker is just an agent, a trader is a principal, buying and selling on his own account and risk.

One example he cites is the Spet-Scollay affair which involved buying on extended credit terms at one price and selling on cash terms at less than that price in the hope that the money in hand would have generated considerably more than by the time it came to pay the supplier or intermediate trader. Another problem, he says is the theft of bunkers by vessels.

Mr Lux feels environmental pressures will “become stronger rather than weaker” in the years to come and even if there is a switch to distillate fuels, it is unclear whether a new set of problems will not arrive. The final word goes to Mr Lux’s son. When comparing the literary achievements of their fathers with the son of Poet Laureate Andrew Motion, Lux junior declared: “My dad wrote a book on bonkers.”