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RISK AND REWARD


IN FUEL OIL
TRANSPORTATION CONTRACTS
Jack Vayda
Partner, Nourse & Bowles, LLP
One Exchange Plaza, At 55 Broadway
New York, New York 10006-3030

Phone: (212) 952-6202
E-mail: jvayda@nb-ny.com

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INTRODUCTION

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RISK/REWARD

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TYPES OF PRODUCT
PURCHASE AND SALE CONTRACTS

FORMS AND TERMS
Virtually all international sales contracts governed by INCOTERMS, most recently
2000 edition
It breaks purchase and sale into three basic groups of contracts
[for the purpose of this presentation we will always look at a transaction
from the buyers/users perspective since after all the conference is called The
Fuel Oil/Energy Buyers Conference]


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6

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1. F terms most popular is FOB (load port) (Free On Board)
Carriage arranged/paid for by buyer
Buyer takes/assumes risk at load port
2. C Terms Hybrid
Buyer insulated from transport cost but
Buyer assumes risk of transport loss
3. D Terms
Buyer insulated from transport cost
Buyer insulated from transport risk

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PURCHASE AND SALE TERMS
INTEGRATION WITH TRANSPORT CONTRACTS
Purchase/sale contracts which use these terms do not include any way
in which to have the product delivered to the buyer. That requires a separate
transportation contract. But clearly the transportation contract must integrate with
the purchase/sales contract.
Transportation of petroleum products is essentially handled in 4
(maybe 5) different manners
As a vessel owner
As bareboat charterer
As time charterer
As voyage charterer
As Receiver of the cargo on a delivered basis

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Receiver on Delivered Basis
No role in transportation
Owner
Own and operate the vessel either through your own staff/employees or
through professional managers by contract.

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Owner
100% Role
From Management/Operations
Perspective

polar extremes

Delivered Basis
No Role
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Owner
100%
or
0%

Risk
Ironically, however, from the perspective of corporation
which follows best management practices or ISM they
may create identical risk.
If own all product stages (including vessel) and
move your own cargo you effectively take on delivered
basis as you control everything and ensure it is done
perfectly (in other words no risk). This is a model
followed by an integrated major petroleum company

Delivered Basis
0%

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Bareboat Charter essentially a vehicle to assist finance
vessel purchase/construction
Time Charter Hire use of vessel for fixed period of time at
fixed rate usually expressed in per day rate
Voyage Charter Hire use of vessel to go from 1 point to
another usually at a rate dependent on the voyage duration and quantity of
cargo

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PARTICULAR RISKS AND REWARDS IN DIFFERENT
TYPES OF TRANSPORTATION CONTRACTS
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LOCK IN TRANSPORTATION COSTS FOR DURATION OF
OWNERSHIP/CHARTER








Owners risk is for increased/inflated; operation costs, crew,
maintenance, insurance; fixed high cost if Market Declines
Time Charterers risk is increased/inflated; bunkers; fixed high cost if
market declines



Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
Risk
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Each/all achieve locked in cost in rising market
Owners potential reward is increased value in second hand
Time Charterers potential reward is ability to sub-charter at increased
freight rate and profit from differential

Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
Reward
16
IN RAPIDLY RISING MARKET VESSEL MAY BE WITHDRAWN ON PRETEXT











Risk of
withdrawal
Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
Reward of
Risking
Market
Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
17
IN RAPIDLY FALLING MARKET CHARTERER MAY
SEEK PRETEXT TO GET OUT OF C/P













Risk of
Jettison
Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
Reward of
Falling
Market
Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
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IN BEAR MARKET VESSEL OWNER MAY BECOME INSOLVENT
WITH YOUR CARGO ONBOARD/HOSTAGE







Charterer may be forced to
Take over vessel/operations
Subsidize balance of voyage




Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
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ABILITY/EASE TO
GIVE/CHANGE LOAD/DISCHARGE PORTS












Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
20
ABILITY/EASE TO
GIVE/CHANGE DATES












Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
21
ABILITY/EASE TO
GIVE/CHANGE CARGOES












Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
22
ABILITY/EASE TO
CANCEL WITHOUT PENALTY











Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
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ABILITY/EASE TO
INCREASE LENGTH OF VESSEL USE














Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
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CARGO DAMAGE
When place cargo on vessel shipper gets bill of lading
serves 2 or 3 functions
receipt
negotiable document of title
Contract of carriage unless charter party serves that function


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BENEFIT/REWARD
entitled to all privileges of bill of lading and COGSA
principal benefit is that vessel/carrier must deliver in
same order and condition as received, subject to limited exceptions which are
hinged to vessel owners exercising due diligence to make vessel seaworthy.
COGSA 1304(3).
The shipper shall not be responsible for loss or damage sustained by the
carrier or the ship arising or resulting from any cause without the act, fault or
neglect of the shipper, his agents, or his servants.
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RISK
entitled to all obligations of bill of lading and COGSA
COGSA 1304(6).
Goods of an inflammable, explosive, or dangerous nature to the shipment
whereof the carrier, master or agent of the carrier, has not consented with
knowledge of their nature and character, may at any time before discharge be
landed at any place or destroyed or rendered innocuous by the carrier without
compensation, and the shipper of such goods shall be liable for all damages and
expenses directly or indirectly arising out of or resulting from such shipment. If
any such goods shipped with such knowledge and consent shall become a
danger to the ship or cargo, they may in like manner be landed at any place, or
destroyed or rendered innocuous by the carrier without liability on the part of the
carrier except to general average, if any.



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CARGO CAUSES CASUALTY (FIRE/EXPLOSION/SET UP)
LIABLE AS SHIPPER/CARGO OR VESSEL INTEREST







Law develops very slowly in this area because so few fires/explosions/dangerous
goods situations
In last 75 years only about 10 cases decided by Appellate Courts and 10 by New
York arbitrators

Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
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Sucrest Corporation v. M/V JENNIFER, 45 F. Supp. 371 (D.Me 1978)
In 20
th
Century, rule in US but not in UK was that if neither shipper or carrier knows of
dangerous properties of cargo then dangerous cargo owner not liable to vessel owner for
damages/losses which the dangerous cargo causes
Bulk sugar wet from seawater biologically degraded. Coupled with engine vibrations became quasi-
liquid (thixotropic) and shifted. Vessel intentionally stranded. Vessel and cargo owner brought suit
against each other for voyage delay, vessel damage and cargo damage.
Court found thixotropic qualities of raw sugar were new and unknown. Cargo owner not negligent in
supplying cargo. Vessel owner not negligent in loading or handling the cargo. Court never
discussed 1304(6) but just 1304(3). Court relied on the pre-COGSA cases to conclude:
Cargo owner only under obligation to inform carrier of inherent cargo dangers of which
cargo owner aware or ought to be aware and of which carrier is not aware and cannot
reasonably be expected to be aware.
Cargo owner cannot be negligent for failing to inform shipowner of dangers about which it
does not have actual or constructive knowledge.

Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
29
Ionmar Compania Naviera S.A. v. Olin Corporation, 666 F.2d 897 (5th Cir. 1982)
Fire started in cargo of calcium hypochlorite spilled and mixed with sawdust from
dunnage. Court followed and expanded JENNIFER.
(i) Cargo manufacturer has duty to warn stevedore and the vessel of foreseeable
hazards inherent in the cargo of which the stevedore and the ships master could not
reasonably have been expected to be aware;
(ii) Shipper had no duty to warn either the stevedore or shipowner of the hazards of
which they were aware or could reasonably have been expected to be aware;
(iii) Sufficiency of the shippers warning cannot be evaluated in a vacuum, but must be
assessed in light of the knowledge and expertise of the crew and of the stevedore.

Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
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NY Arbitrators
(1) follow these rules
The ALCHEMIST, SMA No. 1473 (1980) (Trowbridge, Preusch, Berg)
Cargo of glacial acrylic acid set up in parcel tanker.
Danger of polymerization known to all.
Cargo owner sought recovery of lost cargo, shipowner sought recovery for vessel delay and
damages.
Arbitrators found cause of loss not proved, denied all claims since neither side met its
burden of proof.

Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
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(2) but hold cargo owner/charterer liable for losses where they
a. load cargo which has different
specifications/characteristics than what the market infers the cargo described in
the charter party to have






The KARTINI, SMA No. 1958 (1984) (Zubrod, Nelson, Berg)
Hot coal had to be discharged.
Vessel owners claimed extra time and expenses.
Panel found that unknown to owners, pond solids were included in cargo even though they were a known danger.
Inclusion of pond solids made this coal cargo, otherwise safe, dangerous.
Stowage of pond solids in layers between safe coal constituted improper stowage.
Owners were awarded their claims.
Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
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The KAPETAN ANTONIS, SMA No. 2516 (1988) (Vismans, Berg, Cederholm)
Cargo of turnings caught fire which caused delay and additional expenses, all of which owners
sought to recover.
Arbitrators ruled in favor owners accepting charterer owes a duty to furnish safe and transportable
cargo and the shipowner is paid to lift a hazardous cargo but not one which is rendered far more
dangerous than anticipated because of a charterers failure to exercise reasonable care.
Panel found charterers procedure for selection and inspection of turnings was flawed which
permitted unsafe turnings to be loaded.
Led to conclusion charterer was negligent in both furnishing and loading unsafe cargo which
directly caused fire.
Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
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b. fail to do commercially reasonable tests to
ensure quality and safe carriage




The CANTIGNY, SMA No. 1656 (1982) (Berg, Nelson, Donovan)
Blended fuel oil cargo set up while onboard because of incompatibility
between components of blend.
Panel found shipper negligently failed to learn sources of cargo parcels and
ensure, by testing if necessary, their compatibility.

Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
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STRICT LIABILITY - Senator Linie GmbH & Co. Kg. v. Sunway Line, Inc., 291 F.3d 145 (2d
Cir. 2002)

Fire broke out in containerized cargo of thiourea dioxide (TDO), causing
damage to vessel and other cargo.

TDO not named hazardous or dangerous cargo in IMDG Code.

Available literature did not describe exothermic reaction as likely result of
decomposition of TDO.

Shipper advised shipment was regular chemicals, not hazardous so cargo not
treated as dangerous goods nor listed in dangerous cargo manifest.

Suits were direct between shipper of hazardous goods and vessel owner for
damages which owner suffered. Owners damages included their settlement of
claims by innocent shippers whose cargoes had been damaged.

Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
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Question before the court; when neither shipper nor carrier
is aware of dangerous characteristics, who should
bear loss?

Court answered; loss should fall on shipper.

Court analyzed and contrasted COGSAs 1304(3) and 1304(6).

1304(3) provides for liability based on act, fault or neglect of the
shipper.

1304(6) creates strict liability. 1304(6) would appear to
be carrying coals to Newcastle if its purpose were simply to specify
that shipper liability in the dangerous-goods context requires
knowledge on the shippers part of the danger to which it is exposing
the ship and other cargo. In sum 1304(6) sets forth a rule of
strict liability for a shipper of inherently dangerous goods when
neither shipper nor carrier had actual or constructive preshipment
knowledge of the cargos dangerous nature.

1304(6) does not imply a shipper scienter
requirement.


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The court summarized:

we conclude today that a strict-liability construction of
1304(6) will foster fairness and efficiency in the dealings of
commercial maritime actors. In contrast to a carrier, which
typically is in the position of taking aboard its vessel a large
quantity and variety of cargoes, a shipper can be expected to
have greater access to and familiarity with goods and their
manufacturers before those goods are placed in maritime
commerce. If an unwitting party must suffer, it should be the one
that is in a better position to ascertain ahead of time the
dangerous nature of shipped goods. That party in many cases
will be the shipper.

We note, furthermore, that in conforming our construction of
COGSA 1304(6) to that given to its British counterpart by the
House of Lords in Effort Shipping, we are furthering another broad
purpose of COGSA and the Hague Rules; international uniformity
in the law of carriage of goods by sea. One point on which pre
1936 Second Circuit cases agreed unanimously was that in
matters of commercial law our decisions should conform to the
English decisions, in the absence of some rule of public policy
which would forbid.


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ENTITY NOT PARTY TO CONTRACT ENTITLED TO STRICT LIABILITY AND FAILURE
TO WARN - M/V DG HARMONY, 394 F. Supp.2d 649 (S.D.N.Y. 2005) decided October
5, 2005

Thermal runaway in one of ten containers of calcium hypochlorite.

Each container loaded with new size of drum (each containing 300 pounds of
cal hypo) to maximize number of drums and, in turn, amount of cargo stowed
in container.

Use of that size drum was new and untested.

Few tests which were run showed that cal hypo was less stable than had
been realized.

PPG had experienced numerous other cal hypo thermal reactions which led
it only to transport large shipments domestically in refrigerated containers.

Court found stowage of cal hypo, albeit next to heated bunker tanks,
complied with IMDG Code and did not contribute to casualty.

Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
38
39

Court expanded Senator Linie conclusions to find under COGSA
1304(6):

Rationale for applying strict liability even more compelling
because PPG was not just shipper, but also manufacturer;

While carriers consented to carriage of cal hypo which they
knew was dangerous, they did not know of or consent to
carriage of cal hypo in question which was unusually
dangerous;

1304(6) does not require privity of contract between claimant
and dangerous goods manufacturer;

1304(6) permits (a) owner of innocent cargo and (b) vessel
owner who itself had not issued a bill of lading to PPG, to
make a recovery against dangerous goods shipper. First and
only case to date which has reached such a conclusion.


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Trial court also found shipper liable under common law for
failure to warn and negligence because

(i) risk/hazard was foreseeable to PPG as there were
sufficient red flags to have caused PPG, in the exercise of
reasonable care, to have investigated further the dangers
presented and

(ii) after examining the reasonableness of PPGs actions
measured by the dangers presented, it concluded that
PPGs warnings were inadequate and misleading.

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STRICT LIABILITY CUT BACK - Contship Container Lines Ltd. v. PPG Industries,
442 F.2d 74 (2d Cir. 2006) decided March 21, 2006

Same cargo, shipper and factory as DG HARMONY. Stowed directly on bunker tank
which was heated. Little evidence of other casualties and shippers failure to warn.

Ship/cargo not CTL. Claims in many places so no large suits anywhere.

Claims made under 1304(6) as claims in strict liability.

Court backed away from standard it created in Senator Linie asking is strict
liability a claim available to a carrier that knew the cargo was flammable but had
reason to think that it was safe enough under the conditions of stowage? Answer:

We conclude that a carrier cannot invoke strict liability if it knows that a
cargo poses a danger and requires gingerly handling or stowage, and
nevertheless exposes the cargo to the general condition that triggers the
known danger, regardless of whether the carrier is aware of the precise
characteristics of
the cargo. A carrier that exposes a cargo to heat with knowledge of its
flammability may or may not ultimately prevail depending on the particulars
of what it and the shipper knew and their respective duties but it cannot
prevail on strict liability.



Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
42

Re: Claims under COGSA 1304(3) which it
characterized as creating a duty to warn

A negligent-failure-to-warn claim requires two
showings:

1) that PPG failed to warn Contship about dangers
inherent in the cargo of which the stevedore and
ships master could not reasonably have been
expected to be aware; and
2) that an absent warning, if given, would have
impacted stowage.

Vessel owners stowage of cal hypo on top of bunker
tank and heating bunkers to a temperature too high
failed to establish those elements.

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COURT OF APPEALS, SECOND CIRCUIT
FURTHER REDUCES SCOPE OF STRICT LIABILITY
In Re M/V DG HARMONY, 518 F.3d 106 (2d Cir. 2008)

Affirmed lower court findings that

PPG had a duty to warn of the dangerous nature of the cargo

PPG breached that duty

PPGs calhypo cargo furthest from the bunker tank caused the
explosion

Lower court correctly rejected PPGs arguments that neither the
heated bunker tanks or the stowage position caused the casualty

Court of Appeals remanded to trial court to determine one of the two
issues which they found key in the CONTSHIP FRANCE, whether
the carrier would have stowed the cargo in a different position, and
thus prevented the explosion, if PPG had given the appropriate
warning



Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
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VESSEL OPERATIONS
BUNKERS CAUSING ENGINE DAMAGE




Maro SMA 2533
Time Charterer has non-delegable duty to supply in
conformity with charter party

Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
Risk
45
VESSEL OPERATIONS
NEED TO EMPLOY CREW/ENGINEERS/OPERATIONS STAFF

Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Risk
Delivered
Basis
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VESSEL OPERATIONS
Stowaways/contraband/security












from practical perspective
- Stowaways/contraband
usually not large issue with tanker
rule is liability follows interest in vessel
i.e. if they come on board with cargo cargo
liable







Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Risk
Delivered
Basis
47
VESSEL OPERATIONS
Security



- very/increasingly important.
causes delay
extra costs
Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Risk
Delivered
Basis
48
DELAY IN DELIVERY OF CARGO
WEATHER (During voyage)








No effect on owner or Time Charter
Time Charterer/cargo owner has no delay claim unless time
of delivery was of essence in the contract (charter)
Generally will not affect speed warranty of charter party
Because that tied to weather of force 4
Affects voyage charter party only if there is guaranteed voyage
length or
delivery date (unusual)
ironically will most affect Delivered Basis because sales
contract probably has Force Majeure clause









Risk of
changed
position
Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
49
DELAY IN DELIVERY OF CARGO
VESSEL PERFORMANCE/CONDITION


















Owner pays to repair vessel
- Off-hire under Time Charter
- Law split whether off-hire is exclusive remedy
Charterer/cargo owner may have to eat loss
arising from delivery delay
- Voyage charter party
- vessel has implied duty to follow usual/customary route.
- Limited right to deviate right is set out in charter party - Vessel owner liable if deviates for
failure to use due diligence to make vessel seaworthy, supply competent crew, bunkers,
supplies

Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Losses
from Late
Delivery
Delivered
Basis
Delivered
Basis
Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Hire
Risk
Delivered
Basis
Delivered
Basis
50
DELAY IN DELIVERY OF CARGO
VESSEL DETENTION ie BY AUTHORITIES



if detention caused by problem with
cargo or receiver
cargo/charterers initially at risk
vessel secondarily at risk


Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
51



if detention caused by problem with vessel
vessel likely will be arrested
charterers/cargo will suffer delay and may be penalized for delay
and/or presenting problem vessel

Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
52
VESSEL OWNER HAS LIEN ON CARGO FOR FREIGHT ETC
Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
53
3D PARTY CREDITOR OF VESSEL OWNER COULD ARREST VESSEL
Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
54
TIME CHARTERERS 3D PARTY CREDITOR COULD ARREST BUNKERS
Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
55
POLLUTION
CASUALTY/UNINTENTIONAL
CLEAN UP
Federal/Oil Pollution Act of 1990







Responsible Party (RP) liable without fault for REMOVAL AND DAMAGES up to
statutory limit subject only to defenses of
- Act of God
- War
- Act/omission of third party
(Strict Liability)


Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Delivered
Basis
56
Damages very broad (include NRDA)
RP includes vessel owner and operator but
operator may include charterer/cargo owner and/or others all
depending on facts
Other federal statutes Migratory Bird Act
Non exclusive DOES NOT preempt state law
Many state laws specifically target charterer/cargo owner

57
POLLUTION
CASUALTY/UNINTENTIONAL
CIVIL PENALTIES




Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Risk
Delivered
Basis
Delivered
Basis
58
POLLUTION
CASUALTY/UNINTENTIONAL
CRIMINAL FINES/PENALTIES




Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Risk
Delivered
Basis
Delivered
Basis
59
POLLUTION
OVERBOARD DISCHARGE
OBSTRUCTION OF JUSTICE




Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Risk
Delivered
Basis
Delivered
Basis
60
EFFECT ON CORP IMAGE




POTENTIAL GAME ENDER
Vessel
Owner
Bareboat
Charterer
Time
Charterer
Voyage
Charterer
Risk
Delivered
Basis
Delivered
Basis
61
REWARDS

Delivery
where }
} desired
when }
At known cost
62
SUMMARY