World Bunkering > News > Winter 2010 > Crunch time

Although the credit crisis would seem to be easing, and with it the fear of a double-dip recession, still the economic picture is far from encouraging. In shipping, for example, the boom years seem a long way off now, and further overcapacity is looming in several sectors.

To date, not many shipowners have gone bankrupt, but in most cases this is simply because the ship finance banks have been reluctant to foreclose. At the same time, the number of shipowners in default is staggering, either because of breaches of loan-to-value ratios as ship values go down, or through an inability to repay principal and interest on time, or for still other reasons.

The big difference between now and the last comparable economic crisis, in the 1980s, is that today there are hardly any buyers. In such a market, foreclosure would lead to rock-bottom prices. And because of low freight rates, charterers are also encontering difficulties, and a number have gone out of business.

The bunker market, of course, cannot escape the consequences of these financial difficulties, either. Bunker suppliers still in many instances sell on 15 or 30 days’ credit terms. Where shipowners or charterers are short of cash, they may easily be tempted (or forced) to delay paying their suppliers or else advance reasons for not paying at all, such as non-conformity of the product supplied. And, in the event of bankruptcy or Chapter XI or similar, the chances of recovery become much slimmer.

How can suppliers protect themselves?

However, there are measures which suppliers can take to strengthen their position, other than through pre-payment. To start with, a good contract with good conditions of sale is required. Under such a contract or conditions, a number of issues can be dealt with which protect the position of the supplier.

Firstly, though, the applicable law and jurisdiction must be fully understood. Shipping is a very international business by nature, and it is wise to achieve clarity at the outset in respect of the law which applies to the contractual relationship between the supplier and the buyer. Where this has not been clearly defined, disputes as to the applicable law may arise later.

The question of forum (which court in which country will have jurisdiction, or arbitration in which country) and of enforceability of judgements or awards is also of great importance. Clear contractual provisions in this respect are essential. Bunker suppliers may be able to benefit from the legal systems in other countries.

Issues involving contracts or conditions can include retention of title (the bunkers remain the property of the supplier until paid), short claim periods (to avoid late and fabricated defences that bunkers are off-spec), non-set-off clauses (to avoid set-off with a fabricated claim) and others. In all such cases, however, the ship will have left the port and the bunkers may have been used.

Can arrest help?

When the bunkers have been ordered by the owners, it may be possibe to arrest the ship in the event that payment is not made. Of course, it then remains to be seen whether this helps, given that the mortgagee may come first when it comes to getting money out of the value of the ship. The ship may also have been sold in the meantime. But an arrest will put immediate pressure on all parties involved, including charterers and owners, and can be a good method of getting security or even payment for a claim.

When the bunkers have been ordered by the timecharterers, however, the position is quite different. The usual method of addressing the invoice “to owners and/or charterers and/or managers…” will not really help. One cannot change a legal relationship by a mere invoice. The general rule under almost every legal system is that a contractual claim, such as one for the sale of bunkers, is a claim “in personam”, against a particular person (ie the contractual buyer). This means that the buyer is liable with its whole estate (including ships), but only that buyer and its estate, not third parties.

Thus, under many systems of law, a claim for the supply of bunkers to a time-charterer cannot be enforced against the ship. In the event that the timecharterer goes bankrupt, and the estate does not cover the claims, the supplier will end up empty-handed. But, because of the existence of different systems of law, there may nevertheless be ways to proceed against the ship in a particular jurisdiction. In this respect, an important question is whether a claim for bunker supplies creates a ‘maritime lien’, or whether such claim has ‘droit de suite’ (follows the ship).

Under certain systems of law – generally speaking, the system in common law countries and in certain civil law countries – a claim for ‘necessities’ such as bunkers is recoverable against the ship to which the bunkers have been supplied. This may be the case generally, or only under certain circumstances (eg when the order to supply has come from the master). Also, these rights usually have a short lifespan, for example six months. To avoid such recovery rights against the ship, charterparties commonly contain “no lien clauses”, but a supplier is not party to a charter and so this has only limited effect.

Another attempt to avoid these rights involves ships’ personnel being instructed to stamp bunker delivery receipts (BDNs) with clauses stipulating that the bunkers are not for the account of the ship – at the same time, however, BDNs often contain a clause specifying that any remarks thereon will be without effect; and, quite as often, the BDN comes from a physical supplier who is not the contractual supplier. That defence is therefore of limited use.

Thus, arrest of the ship to which bunkers were supplied may well be possible. Although there may be cases where nothing can be done, suppliers should not give up too easily. There may be more possibilities than they think. But they must act quickly, and will help their own case by making sure that the contract is as good as possible and contains clauses which will help them if the worst comes to the worst.