Chalos SMA Presentation Feb 2015 - Society of Maritime Arbitrators

The New MARPOL ANNEX
VI Regulations,
Requirements and Issues
Michael G. Chalos
K&L Gates, LLP
© Copyright 2015 by K&L Gates LLP. All rights reserved.
ROADMAP
  Regulatory Background
  Consequences of Drop from 1% to 0.1%
  Increased cost of compliance
  Increased cost of non-compliance
  EPA’s new Penalty Policy
  Issues Moving Forward
  Liability between shipowners and charterers
  Impact on other contractual provisions
  Effect on P&I Coverage
  The Next Magic Pipe?
  Conclusion
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PART ONE
REGULATORY BACKGROUND
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REGULATORY BACKGROUND
MARPOL
  MARPOL is an international treaty that emerged as a result
of a determination by various maritime nation-states that
ships transiting in international waters are a significant
source of pollution and that this problem can be effectively
addressed only if each of the participating nations passed
domestic laws to enforce MARPOL’s rules and regulations.
  The individual sections of the convention have become
active at different times as each section received the
required number of signatory states. Annex 1, which
includes regulations for the prevention of oil, has been in
active the longest and has been in force for over twenty
years.
  Today, we are dealing with Annex VI.
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MARPOL: Annex VI
Key Facts
Focus Today
  First entered force in
2005
  Governs
  Sulphur oxides
  Fuel oil availability and
quality control
  Ozone depletion
substances
  Nitrogen oxides
  Sulphur oxides
  Volatile organic
compounds
  Fuel oil availability and
quality control
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MARPOL: ANNEX VI
Sulphur Content in Fuel
Two regimes
  Global standards: Apply to
commercial vessels greater
than 400 gross tons engaged
in international voyage
  Global standards are
more lenient than ECA
standards
  Specific geographic
standards that vary across
Emission Control Areas (or
ECAs)
  Ships become subject to
ECA standards when they
are within 200 miles of
the shore
What do the regulations
govern?
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  The percentage of sulphur
content of fuel used on
board, which includes use in
main and auxiliary engines
and boilers
  Ships must maintain bunker
delivery notes
  Port and coastal states can
use Port State Control to
verify compliance, and they
can use air surveillance to
assess vessel smokestack
plumes.
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The North American ECA
(Enforced as of August 1, 2012)
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MARPOL: ANNEX VI
How Does This International Treaty Get
Enforced?
  The United States enforces MARPOL
regulations through the Act to
Prevent Pollution from Ships, or
APPS
  APPS was enacted in 1980 to
implement MARPOL into US domestic
law.
  Creates a comprehensive
administration, inspection and
enforcement regime
  Provides authority to the US Coast
Guard and the Environmental
Protection Agency to enforce
MARPOL provisions.
  Criminal and Civil Penalties for
violations
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COAST GUARD ENFORCEMENT
Basic
Inspection
“Expanded”
Exam
What the
Inspectors
Look At
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WHAT THE INSPECTORS LOOK AT?
Basic Inspection
  Review IAPP Certificate
  Review EIAPP Certificate
  Review Exhaust Cleaning Systems Documentation (If Fitted) for
each engine
  Review Type Approval Certificate for Incinerator
  Examine the Vessel’s Incinerator
  Review Bunker Delivery Notes (spot check) for each fuel delivery
  Verify Fuel Samples Onboard (spot check) for each fuel delivery
  Verify vessel is utilizing low sulphur fuel oil
  Will entail review of logbooks, sounding records, changeover
procedures, and informal queries of crew to ensure they
understand the policies
  Examine Any Alternative Compliance Methods used (if applicable)
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WHAT THE INSPECTORS LOOK AT?
“Expanded” Exam
Might include…
 
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Review Technical Files
Review Record Books
Review Reports of Non-Compliance provided to Flag
Sound Tanks and Compare with Shipboard Annex VI Records
Examine/Test Equipment Used to Switch Over to ECA Compliant
Fuel
Review any Report of Non-Availability
Inspect potential sources of Ozone Depleting Substances
Test Incinerator
“Interview” Crewmembers
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ONE LAST THING ABOUT APPS
Whistleblowing Provision
  Whistleblowers often
ignore company policies
and report directly to the
Coast Guard, divesting
owners of the opportunity
to correct a problem that,
most times, they didn’t
even know existed
  The Department of Justice
openly offers lucrative
awards to anyone who
notifies the government of
wrongdoing that eventually
results in a conviction and
fine
  The reward can be as large
as 50% of the total APPS
fine.
  No internal reporting
requirement!
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THE ANNEX VI STANDARD
By the numbers
  ECA Standard
  Global Standard
  2012-2020: 3.5%
  2012-2015: 1%
  As of Jan. 1 2020: 0.5%
  As of Jan. 1 2015: 0.1%
Important in 2020
Important right now!
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PART TWO
CONSEQUENCES OF DROP
FROM 1% TO 0.1%
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INCREASED COST OF COMPLIANCE
  Compliant fuel is more likely to cause ignition and
combustion problems
  Compliant fuel will likely result in an increase in catalytic
fines
  Cause engine damage
  Result in personal injury to crew
  Difficulty and time/energy in training new crew on new fuel
  May result in complications when changing to lowsulphur fuel in preparation for entry to an ECA
  Compliant fuel is less available than non-compliant fuel…
meaning it is more expensive.
  Additional paperwork and regulations to deal with both on
board and shoreside
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INCREASED COST OF NON-COMPLIANCE
Low enforcement of 1% standard
  The 2008 changes clearly anticipated some
challenges in decreasing from 1.5% all the way
down to 0.1%.
  There haven’t been a lot of “tickets” for violating
the 1% limit that went into place in 2012, and we
have expected for a while that that would change
when the limit dropped to 0.1%. The EPA’s new
Penalty Policy, discussed in the next section, all
but confirms that expectation.
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COSTS OF NON-COMPLIANCE
  Civil and Criminal Penalties.
  Fines of up to $500,000 for each violation
  Department of Justice charges multiple counts to increase
the possible sentence and/or fine imposed
  Variety of additional tools used by the government
  Arrest, detain and/or confiscate the vessel to obtain a
security and/or collect fines
  Criminally charge vessel personnel
  Hold vessel personal as material witnesses for
indefinite periods of time
  Criminally charge owning, operating and/or
management companies, as well as the corporate
officers of those companies, under theories of
vicarious liability
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EPA’S NEW PENALTY POLICY
Released January 15, 2015
  On January 15, 2015, the Environmental
Protection Agency issued a new penalty policy
that describes the methods by which the EPA will
assess civil penalties for violations of the ECA
regulations.
  The Coast Guard will enforce the EPA’s policy
pursuant to a Memorandum of Understanding
between the two agencies
  The progressive reduction period is over—we
expect the US government to be more aggressive
in enforcing Annex VI moving forward
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EPA’S NEW PENALTY POLICY CONT…
Key Provisions
  The EPA’s policy, referencing its primary goal of deterrence,
concentrates on two components: the “economic benefit”
component and the “gravity” component.
  Economic benefit component: focuses on the benefit the
wrongdoer enjoyed as a result of noncompliance, using a
mathematical formula based on the price difference between
compliant and non-compliant fuel and the amount of noncompliant
fuel used while within the ECA. The policy explicitly states that it
will estimate these numbers when actual data is not available.
  Gravity component: The gravity component intends to reflect the
seriousness of the violation. For example, the EPA will consider
the actual sulphur content of the fuel--burning fuel with a .05% fuel
content is obviously less serious than fuel with a 5% fuel content,
and the EPA’s policy reflects that.
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EPA’S NEW PENALTY POLICY
Lots of wiggle room for the government
  If that sounds like a lot of wiggle room and ambiguity, welcome to
working with the US government.
  The government tends to use the factors and/or its sacrosanct
formulas when it finds the numbers favorable, but readily ignores
the factors wherever it suits the government’s interest
  The use of and focus on the economic benefit of noncompliance
may well be completely illegal. Unlike other statutes that use the
economic benefit factor as guidance, the statute granting the
EPA authority does not mention economic benefit at all. Instead,
the statute lays out a number of factors that the EPA must
consider. The Penalty Policy all but ignores these factors and
states that the economic benefit factor can trump the statutory
ones.
  the agency seems very unconcerned with cooperation of any
kind: noncooperation is essentially defined as capitulation.
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PART THREE
Main Issues Moving Forward
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ISSUE ONE: WHOSE FINE IS IT ANYWAY?
Liability Between Parties
  In the event that a ship fails to comply with Annex VI and the
government learns of that non-compliance, the first issue will involve
who bears responsibility.
  When a vessel is under time charter, the following parties are
involved in bunkering: the shipowner, the charterer, the bunkers
broker and the fuel supplier. Which of these parties bears
responsibility for MARPOL compliance?
  The government does not view its task as trying to find the person or
persons most responsible; it will seek to find any person or entity
that may be held responsible. As such, fines and criminal penalties
will probably be levied against all parties that the government
believes had anything to do with the non-compliance. Where
possible, the government will likely seek civil and criminal fines for
the owner and manager and will often seek jail time for the individual
wrongdoers.
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ISSUE ONE: WHOSE FINE IS IT ANYWAY?
CONT..
Having said that…
  Shipowner: As a general rule, MARPOL compliance is
shipowner’s responsibility
  Charterer: May be liable to shipowner (and potentially to the USCG
and/or EPA) based on actual fault and indemnity language in the
charterparty
  Fuel Supplier: Suppliers in MARPOL signatory countries have an
obligation to comply with Annex VI requirements, and shipowners/
charterers can bring claims if fuel is off-spec. However, due to
strong bargaining position, claims are usually limited to the value
of the bunkers provided
  Bunker Broker: Typically deemed an agent of the purchaser, and
thus not a party to the contract and not subject to liability
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LIABILITY BETWEEN SHIP-OWNERS AND
CHARTERERS
  Most likely subject
of future litigation
and arbitration
  Shipowner seek to
recoup fines that it
believes trace to
the charterer’s
wrongdoing
  The charterer may
seek to recover
damages and
business losses
that result from
the ship’s
detention
Bunker
Clause
THREE
KEY
CLAUSES
Responsibilities
Clauses
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Off-Hire
Clauses
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LIABILITY BETWEEN SHIP-OWNERS AND
CHARTERERS
Bunker Clauses
  Typical bunker clauses provide that the charterer will be
responsible to the shipowner for any loss or damage that
the owner suffers as a result of unsuitable fuels
  Under that language, charterers will bear full financial
responsibility for violations of Annex VI if they fail to
provide compliant fuel, including reductions in speed
performance and increased consumption as a result of noncompliance.
  Note that the language does not distinguish between
intentional and unintentional failure to provide compliant
fuel.
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LIABILITY BETWEEN SHIP-OWNERS AND
CHARTERERS
Ways to eliminate uncertainty
  BIMCO has recently published a clause that
is intended to balance the rights and
responsibilities of owners and charterers in
light of Annex VI.
  The clause provides that the charterer will be
liable to the owner when the physical
supplier delivers non-compliant fuel.
However, if the fuel is compliant, the owner
will be fully responsible for MARPOL
violations, as well as for operational failures
such as the failure to change over to low
sulphur fuel before entering an ECA.
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LIABILITY BETWEEN SHIP-OWNERS AND
CHARTERERS
Off-Hire Clause
  Typical off-hire clauses mandate, in relevant part, that
vessel shall be deemed off-hire the vessel is unable to
comply with the instructions of the Charterer as a result of
1.  any deficiency of the Master, Officers and/or Crew to
perform or
2.  the arrest of the vessel at the suit of a claimant except
where the arrest is caused by the charterer.
  Coast Guard detention will render the crew unable to
perform
  Where the Annex VI violation occurs due to a
crewmembers’ failure, the clause establishes that the
vessel will be off-hire.
  Charterer’s obligations to pay hire will cease after an arrest,
unless arrest caused by charterer’s failure.
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LIABILITY BETWEEN SHIP-OWNERS AND
CHARTERERS
Off-Hire Clause (Cont.)
  The “arrest” clause can also potentially attach liability to
the shipowner, though this clause leaves more room for
modification should parties wish to limit or enhance the
owner’s exposure.
  Does “at the suit of a claimant” include suits by the US
government? Modified clauses may clarify this one way or
the other
  Deletion of the phrase “except where the arrest is caused
by the charterer” may leave the shipowner exposed
  If a vessel is arrested because the charterer failed to
obtain compliant fuel, the vessel will be deemed off-hire
if the clause does not include the exception
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LIABILITY BETWEEN SHIP-OWNERS AND
CHARTERERS
Responsibilities Clause
This clause speaks only to cargo claims, but includes claims relating
to delays to the cargo.
  Such delays can be caused by detention by the USCG. When
they are, this clause potentially divides responsibilities between
the charterer and owner for the costs associated with that delay
  Typically enumerates certain responsibilities of each party and
then provides that all claims arising from any other cause will
be shared equally between the owner and the charterer.
  The only typical enumerated clause that potentially speaks to
this issue is that the owner is liable for claims arising from the
failure of the Owner and its servants to exercise due diligence
to make the vessel seaworthy.
  As discussed below, extent to which “seaworthiness” includes
Annex VI compliance is unclear
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ISSUE TWO: IMPACT ON OTHER PARTS OF
CHARTER CONTRACT
Trading
Warranties
Fuel
Specifications
Provisions
Impacted By
Compliance
Vessel
Readiness
Allowed
Deviations
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IMPACT ON OTHER PARTS OF CONTRACT
Trading Warranties
Trading warranties govern the geographical range in
which a vessel can trade.
  They often, but not always, list expressly
excluded ports, countries and areas.
  These limitations limit the shipowners’ exposure
by preventing charterers from trading outside of
the specified limits.
  Shipowners should evaluate the costs associated
with Annex VI compliance, as avoiding ECAs will
avoid the need to use .1% fuel.
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IMPACT ON OTHER PARTS OF CONTRACT
Vessel Readiness
  Shipowners typically undertake
that the vessel will be
physically and otherwise ready
to perform the lawful orders of
the charterers, trade within
agreed ranges, and carry
agreed cargoes
  The obligation extends beyond
basic seaworthiness, though a
shipowner can negotiate down
from that as well.
  The extent of this obligation
depends on individual
charterparty terms
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IMPACT ON OTHER PARTS OF CONTRACT
Vessel Readiness—ECA Obligations
  Unclear how extensive the obligation is on shipowners to take steps to
modify the vessel to make her ready for trading in ECAs while using
compliant fuel
  Because compliant fuel will need to be segregated from higher-sulphur
fuels to avoid cross contamination, vessels will need particular tank
and line arrangements and capacity to complete the segregation
safely.
  Less of an issue for newer ships
  Older vessels may require significant cleaning and/or overhauls to allow
compliance.
  Many charter parties that went into effect prior to January 1, 2015
continue in effect well beyond that date.
  The modification and costs that may be associated with compliance require
time, money and possible revisions to existing agreements.
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IMPACT ON OTHER PARTS OF CONTRACT
Fuel Specifications
  Bunker clauses already
receive a lot of attention in
charterparties because
MARPOL compliance is one
of many issues impacted by
fuel.
  Despite recent drops in
prices, fuel costs remain a
large factor in a vessel’s
daily running costs and, as
noted, using compliant fuel
will increase those
expenses significantly.
Annex VI Issues re:
Specifications
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  Many existing charter parties
require that any fuel supplied
must be fit and safe for the
specific vessel’s engine
  Requirement is implied under
English law
  Requirement has not been
litigated as relates to the use
of Annex VI-compliant fuel,
  Parties should consider
including an express warranty
as party of the comprehensive
bunker fuel clause.
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ISSUE THREE: EFFECT ON P&I COVERAGE
What Is P&I Coverage?
Does It Cover Annex VI?
  Protection and Indemnity
insurance, known almost
exclusively as P&I coverage,
is a form of insurance
provided by a mutual
insurance association based
on risk pooling.
  P&I coverage does not
extend to willful misconduct
and criminal activity cannot
be insured against.
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  P&I coverage does not extend to
willful misconduct or criminal
activity. As a result, P&I clubs
have historically not insured
against the risks associated with
MARPOL violations. Clubs can
provide discretionary cover where
the member satisfies the club that
he took steps as were reasonably
necessary to avoid the event
giving rise to the fine.
  However, Annex VI violations
potentially provide more wiggle
room than the strict Annex I
regulations on oil discharge.
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EFFECT ON P&I COVERAGE
What might get covered?
  While owner’s P&I policies usually do not cover damage to hull
and machinery (there is separate H&M coverage for those
liabilities), Clubs and fixed premium insurers do offer
comprehensive policies to charterers that insure against liability
for damage to the hull.
  Liability for physical damage caused by the shift to compliant fuel
is therefore probably a covered risk under the policy.
  Liability for personal injury to do exposure to toxic substances is a
covered P&I risk.
  Legal costs associated with any of these covered risks are also
probably covered under the policy.
  P&I clubs under their FD&D covers will provide compensation for
legal and other costs relating to Annex VI disputes between the
owner and the charterer.
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ISSUE FOUR: WILL “MAGIC FUEL” BE THE
NEXT “MAGIC PIPE?”
What is a “Magic Pipe”?
  Annex I governs the discharge of
oil and oil/water mixtures.
  APPS using strict record-keeping
regulations to essentially obtain
jurisdiction for environmental
crimes committed in international
waters.
  Annex I allegations usually
involve the use of a pipe to
bypass the vessel’s Oil/Water
Separator
  Hence—“Magic Pipes”
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THE NEXT MAGIC PIPE
Key Annex VI/ECA Recordkeeping Requirements
  Bunker delivery notes – Regulation 18.5 and 40 C.F.R. §
1043.70 (maintained for three years)
  Maintain representative fuel oil samples – taken at the time
of fuel oil delivery, sealed/signed by Master of Officer in
Charge. Regulation 18.8.1 and 40 C.F.R. § 1043.70
(maintained for one year)
  Written fuel oil changeover procedures – must show how
and when the fuel oil changeover is done to ensure that
only compliant fuel oil is burned within the ECA. Regulation
14.6 and 40 C.F.R. § 1043.70
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THE NEXT MAGIC PIPE
Fuel Oil Changeover Logbook (a.k.a. Sulphur Record Book) – See Annex
VI Regulation 14.6 and 40 C.F.R. § 1043.70
  Vessels must log:
  Fuel changeover procedures
  Vessel’s position/date/time at entrance/exit from ECA
  Volume of low sulphur fuel onboard
  Position, date and time of any fuel-oil changeover operation
prior to entering and after exiting an ECA
  MUST BE COMPLETE, ACCURATE OR TRUTHFUL
  Other important records:
  Record Book of Diesel Engine Parameters
  Ozone Depleting Substances Record Book
Recordkeeping requirements allow US to assert jurisdiction over
foreign flag vessels for all violations of Annex VI on the high seas!
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THE NEXT MAGIC PIPE
The False
Statement
Act (18
U.S.C. §
1001)
Sarbanes
Oxley (18
U.S.C. §
1519)
Tampering
with
Witnesses
(18 U.S.C. §
1512)
Conspiracy
(18 U.S.C. §
371)
DOJ
“Toolkit”
Obstruction
of Justice
(18 U.S.C.
§1505)
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What does this mean for
shipowners?
  Applicable
charging statutes
that allow the DOJ
to obtain higher
fines and take
stronger
negotiating
position to enforce
the regulations
against
shipowners and
charterers.
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THE NEXT MAGIC PIPE
“Playing Defense”
  Expect scrutiny of logbooks and records by Coast
Guard Port State Control inspectors
  Practice sound International Safety Management
(ISM) Code policies and procedures
  Train onboard vessel personnel
  Know the requirements, policies, and options
available
  Accuracy of ship records is essential
  Expect more Annex VI related disputes to be
arbitrated
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Michael G. Chalos
Partner
212.536.4097
[email protected]
Michael Chalos has been practicing maritime law for more than 35 years. During such time, Mr.
Chalos has handled numerous matters involving traditional maritime issues such as
collisions, groundings, arbitrations, failure of equipment, damage to cranes and offshore rigs,
cargo and other damages, general average, arrests, insurance (relating to cargo, P&I, hull,
indemnity and general liability), issues involving Marpol and APPS violations, compliance, and
defense of both civil and criminal matters falling under APPS, OPA, the Clean Water Act and
other environmental regulations, dealing with the Oil Spill Liability Trust Fund (OSLTF) under
the Oil Pollution Act of 1990 (OPA), and related governmental agencies such as the Coast
Guard, EPA, Department of the Interior, Bureau of Ocean Energy Management, Regulation and
Enforcement (BOEMRE),and its sub-agencies, as well as commercial disputes, drafting of
charter parties, bills of lading, Memorandum of Agreements for the sale and purchase of
vessels and rigs, Management Agreements, pooling arrangements and agreements,
registration of vessels in U.S. and other jurisdictions around the world, financing of vessel
purchases and leasing. Michael is a Member of the United States Maritime Law Association
and a Proctor in Admiralty.
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