Legal issues arising from using tankers as floating storage

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    (Image Courtesy: Petrofac)

    Within the contractual and legal limits of the charterparty, charterers enjoy wide liberty to employ a vessel to accommodate their commercial requirements. This will usually take the form of voyage orders for the vessel to proceed from one named port to another, to carry one or more named cargoes, and may include waiting time at named ports or places. The principal restrictions on charterers are generally the requirement to nominate safe ports or berths, the range of cargoes permitted to be carried, compliance with Institute Warranty Limits, and any sanctions compliance.

    However, when a charterer orders a vessel to be used as floating storage, the position is not as straightforward as an order to proceed from one named port to another for the purposes of loading and discharging. For charterparties that contain a floating storage clause, such as BPTIME 3 (clause 21 – Storage), a right to order a vessel to be used for floating storage is express, but additional clauses will be needed to deal with the array of issues arising from such storage. For charterparties that do not contain an express right for the vessel to be used for floating storage, the position is complicated, compounded if a bill of lading has been issued by owners, and may amount to an unlawful order by charterers.

    For voyage charterparties, the situation is even less straightforward. Most voyage charterparties will contain an express term that “the vessel shall perform her service with utmost dispatch and shall proceed to such berths as Charterers may specify… or so near thereunto as she may safely get… load the cargo… proceed as ordered on signed bills of lading… and there… discharge the cargo” (SHELLVOY 6). If the term is not express, an utmost dispatch term will likely be implied. Any order by charterers to stop the vessel for the purposes of floating storage places the owner at risk of breaching the “utmost dispatch” requirements and any specific bill of lading terms which restrict deviations other than for the safety of life at sea.

    Some voyage charterparties expressly provide for the vessel to be stopped or diverted to an alternative port: For example, BPVOY5 (clause 24 Revised Voyage Orders) provides that “Charterers may issue revised Voyage Orders and instruct the Vessel to stop and await orders and/or proceed to an alternative loading or discharge port within the Charter Ranges”. However, the precise scope of this provision has not been tested before the courts as regards floating storage, and it cannot be stated with confidence that this clause would, on its true construction, extend to permitting charterers to use the vessel for floating storage.

    Under clause 22 of BPVOY4, charterers have a right to cause the vessel to “await orders at one or more location”. Under clause 22.2.3, if, after loading, the vessel is instructed to stop and wait at charterers’ request, then all time spent by the vessel awaiting orders shall count as laytime or, if the vessel is on demurrage, as demurrage.

    This may work if floating storage is considered to be within the orbit of clause 22. If it is not, demurrage would likely fall away and be replaced with damages for detention.

    In the case of Gard Shipping versus Clearlake Shipping (The Zaliv Baikal) [2017] EWHC 1091 (Comm), the BPVOY4 charterparty, with amendments, provided that if the charterers gave orders for the vessel to stop and wait for orders for a maximum of three days, such waiting time was to count as laytime or demurrage. The additional clauses provided for escalating rates of demurrage after five days waiting for instructions on the basis that the vessel was being used for storage. The vessel arrived at the discharge port and tendered notice of readiness, but charterers did not give any discharge instructions for 64 days. The court held that demurrage was payable at the ordinary rate under the charterparty and not at the escalating rates set out in the additional clauses that applied where the charterers gave a positive instruction for the vessel to stop and wait for orders. It follows that owners need to exercise caution when considering the operative effect of standard form and additional clauses, and be clear as to what rates are intended when the vessel is to be used for floating storage.

    In addition, depending on the length of time the vessel is instructed to ‘stop’, any delay may even trigger an alleged frustration of the voyage charterparty. Mere hardship, inconvenience, or material loss will not frustrate a contract. The doctrine of frustration only arises when an event occurs that is both unexpected and beyond the control of the shipowner and the charterer, and renders it physically or commercially impossible to fulfil the charterparty, or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the charterparty. In all cases, this is a question of fact and law, but given the current issues with terminal and tank farm capacity, such lack of capacity is unlikely to be found to be an unexpected event.

    It is therefore of crucial importance that, before any agreement is reached on using the vessel for floating storage, owners consider not only the terms of the time or voyage charterparty but also the bill of lading and their insurance cover.

    Aside from chartering and bill of lading issues, there are numerous practical issues that can give rise to varying legal issues as a consequence of an order for a vessel to be used for floating storage. Oil cargoes over time are subject to a variety of risks, including degradation:

    • Crude oil stored at cool temperatures and without sufficient and proper thermal intervention is liable to reach its pour point and become unpumpable.
    • Clean petroleum products may suffer from factors such as gum formation, bacterial growth, instability, or settlement of sediments.
    • A number of cargoes require dosing with additives while the cargo is in the care and custody of the owner.
    • A failure to dose the cargo may prejudice the stability of the cargo.
    • All petroleum cargoes are at risk of evaporation, which over time may manifest in in-transit loss.
    Sue Terpilowski
    Author: Sue Terpilowski