risks in transporting oil.ppt

8/10/2019 risks in transporting oil.ppt

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RISK AND REWARDIN FUEL OIL

TRANSPORTATION CONTRACTS

Jack VaydaPartner, Nourse & Bowles, LLPOne Exchange Plaza, At 55 Broadway

New York, New York 10006-3030

Phone: (212) 952-6202E-mail: [email protected]


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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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1. F termsmost popular is FOB (load port) (Free On Board)

Carriage arranged/paid for by buyer

Buyer takes/assumes risk at load port

2. C TermsHybrid

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 Charteressentially a vehicle to assist finance

vessel purchase/construction

Time CharterHire use of vessel for fixed period of time at

fixed rate usually expressed in per day rate

Voyage CharterHire 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

VoyageCharterer

DeliveredBasis

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

VoyageCharterer

DeliveredBasis

Reward


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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

VesselOwner

BareboatCharterer

TimeCharterer

VoyageCharterer

DeliveredBasis


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ABILITY/EASE TO

GIVE/CHANGE DATES

VesselOwner

BareboatCharterer

TimeCharterer

VoyageCharterer

DeliveredBasis


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ABILITY/EASE TO

GIVE/CHANGE CARGOES

VesselOwner

BareboatCharterer

TimeCharterer

VoyageCharterer

DeliveredBasis


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ABILITY/EASE TO

CANCEL WITHOUT PENALTY

VesselOwner

BareboatCharterer

TimeCharterer

VoyageCharterer

DeliveredBasis


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ABILITY/EASE TO

INCREASE LENGTH OF VESSEL USE

VesselOwner

BareboatCharterer

TimeCharterer

VoyageCharterer

DeliveredBasis


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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

VesselOwner

BareboatCharterer

TimeCharterer

VoyageCharterer

DeliveredBasis


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Sucrest Corporation v. M/V JENNIFER, 45 F. Supp. 371 (D.Me 1978)

In 20thCentury, rule in USbut not in UKwas that if neither shipper or carrier knows of

dangerous properties of cargo then dangerous cargo owner not liableto 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


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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 (2dCir. 2002)

Fire broke out in containerized cargo of thiourea dioxide (TDO), causingdamage 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 ofdecomposition of TDO.

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

Suits were direct between shipper of hazardous goods and vessel owner fordamages which owner suffered. Owners damages included their settlement ofclaims 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 carrieris aware of dangerous characteristics, who shouldbear 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 tobe carrying coals to Newcastle if its purpose were simply to specifythat shipper liability in the dangerous-goods context requiresknowledge 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 ofstrict liability for a shipper of inherently dangerous goods whenneither shipper nor carrier had actual or constructive preshipmentknowledge of the cargos dangerous nature.

1304(6) does not imply a shipper scienter

requirement.


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ENTITY NOT PARTY TO CONTRACT ENTITLED TO STRICT LIABILITY AND FAILURETO WARN - M/V DG HARMONY, 394 F. Supp.2d 649 (S.D.N.Y. 2005) decided October5, 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 stowedin 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 ledit 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


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Court expanded Senator Linie conclusions to find under COGSA1304(6):

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

While carriers consented to carriage of cal hypo which theyknew was dangerous, they did not know of or consent to

carriage of cal hypo in question which was unusuallydangerous;

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

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


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

(i) risk/hazard was foreseeable to PPG as there weresufficient red flags to have caused PPG, in the exercise ofreasonable care, to have investigated further the dangerspresented and

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


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

A negligent-failure-to-warn claim requires twoshowings:

1) that PPG failed to warn Contship about dangersinherent in the cargo of which the stevedore andships master could not reasonably have beenexpected to be aware; and

2) that an absent warning, if given, would haveimpacted stowage.

Vessel owners stowage of cal hypo on top of bunkertank and heating bunkers to a temperature too highfailed to establish those elements.


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COURT OF APPEALS, SECOND CIRCUITFURTHER 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 theexplosion

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 twoissues which they found key in the CONTSHIP FRANCE, whetherthe carrier would have stowed the cargo in a different position, andthus prevented the explosion, if PPG had given the appropriatewarning

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

VoyageCharterer

DeliveredBasis

Risk

VESSEL OPERATIONS


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VESSEL OPERATIONS

NEED TO EMPLOY CREW/ENGINEERS/OPERATIONS STAFF

Vessel

Owner

Bareboat

Charterer

Time

Charterer

VoyageCharterer

Risk DeliveredBasis

VESSEL OPERATIONS


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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 boardwith cargo cargo

liable

Vessel

Owner

Bareboat

Charterer

Time

Charterer

VoyageCharterer

Risk DeliveredBasis


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VESSEL OPERATIONS

Security

- very/increasingly important.

causes delay

extra costs

Vessel

Owner

Bareboat

Charterer

Time

Charterer

VoyageCharterer

Risk DeliveredBasis

DELAY IN DELIVERY OF CARGO


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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 voyagelength or

delivery date (unusual)

ironically will most affect Delivered Basis because sales

contract probably has Force Majeure clause

Risk of

changedposition

Vessel

Owner

Bareboat

Charterer

Time

Charterer

Voyage

Charterer

Delivered

Basis



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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 deviateright 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

VoyageCharterer

Losses

from Late

Delivery

Delivered

Basis

Delivered

Basis

Vessel

Owner

Bareboat

Charterer

Time

Charterer

VoyageCharterer

Hire

RiskDelivered

Basis

Delivered

Basis


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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


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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


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VESSEL OWNER HAS LIEN ON CARGO FOR FREIGHT ETC

Vessel

Owner

Bareboat

Charterer

Time

Charterer

Voyage

Charterer

Delivered

Basis


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3D PARTY CREDITOR OF VESSEL OWNER COULD ARREST VESSEL

Vessel

Owner

Bareboat

Charterer

Time

Charterer

Voyage

Charterer

Delivered

Basis


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TIME CHARTERERS 3D PARTY CREDITOR COULD ARREST BUNKERS

Vessel

Owner

Bareboat

Charterer

Time

Charterer

Voyage

Charterer

Delivered

Basis

POLLUTION


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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


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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 statutesMigratory Bird Act

Non exclusiveDOES NOT preempt state law

Many state laws specifically target charterer/cargo owner

POLLUTION


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POLLUTION


CIVIL PENALTIES

Vessel

Owner

Bareboat

Charterer

Time

Charterer

VoyageCharterer

Risk DeliveredBasis

Delivered

Basis

POLLUTION


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POLLUTION


CRIMINAL FINES/PENALTIES

Vessel

Owner

Bareboat

Charterer

Time

Charterer

VoyageCharterer

Risk DeliveredBasis

Delivered

Basis

POLLUTION


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POLLUTION

OVERBOARD DISCHARGE

OBSTRUCTION OF JUSTICE

Vessel

Owner

Bareboat

Charterer

Time

Charterer

VoyageCharterer

Risk DeliveredBasis

Delivered

Basis

EFFECT ON CORP IMAGE


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C O CO G

POTENTIAL GAME ENDER

Vessel

Owner

Bareboat

Charterer

Time

Charterer

Voyage

Charterer

Risk DeliveredBasis

Delivered

Basis


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REWARDS

Delivery

where }

} desired

when }

At known cost


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SUMMARY

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risks in transporting oil.ppt