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Pequod Associates: Demurrage Conference 2022

On Behalf of | Jun 16, 2022 | Articles, Neil Klein |

US Law Considerations: State of Play

  1. Introduction

Interesting times we live in. World events, that affect all of mankind, good or bad. Things can change in an instant, as we have witnessed recently. From pandemics, to wars, to economic downturns and recession (or at least significant inflation). Sounds like the proverbial or Biblical end times.

No doubt the pandemic has had a huge impact on our ports and cargo operations, and the war in Ukraine is clearly impacting oil cargoes. Particularly, the ports of Los Angeles and Long Beach have seen major congestion and delays, with vessels stuck in a virtual parking lot stretched for miles and miles out to sea, unable to give notice of readiness.[1] Some vessels have been stuck without a berth for up to several months; at the going freight rates, this has escalated to millions of dollars for owners and charterers.

For those in worldwide trade, how does it affect us? What can be done to avoid financial bloodshed?

The question is who is responsible for the related detention and demurrage costs.[2] The answer will usually turn on the terms and conditions in the charter party/contract of affreightment, and the sales contract.
II. Detention & Demurrage – General Regulatory Background

The practices of common carriers and marine terminal operators (MTOs) in the US have been the focus of increased concern and regulatory scrutiny over the last several years. Shipping inefficiencies were exacerbated by the pandemic, which drove US consumer demand to record levels – and caused unprecedented problems throughout the supply chain; for example:

  • “dwell time” for inbound ships waiting to berth at terminals increased from days to months
  • marine terminals reached operational capacity
  • liner schedules were disrupted
  • vessel carrying capacity was reduced
  • delivery delays occurred in multiple markets

The supply chain dislocations led to the FMC’s Fact-Finding Investigation No. 29, International Ocean Transportation Supply Chain Engagement (known as FFI 29), in March 2020, to address the challenges of whether the practices of ocean common carriers calling at the Ports of Los Angeles, Long Beach and New York and New Jersey – specifically as to demurrage and detention, container return requirements and availability of export containers – violated the Shipping Act.[3]

In July 2021, Interim Recommendations were directed at minimizing barriers to private party enforcement of the Shipping Act, to encourage parties to assist FMC enforcement and bring about a quick, fair dispute resolution on unreasonable demurrage practices. Since then, the FMC has seen an uptick in administrative case filings by cargo interests seeking reparations v. ocean carriers.

III. Certificate of Compliance

A. Introduction & Review Process

Federal regulations require oil tankers that conduct cargo lightering operations in the US Exclusive
Economic Zone (EEZ) to have onboard a valid Certificate of Inspection (COI) or Certificate of Compliance (COC), [4] when the cargo is destined for a port or place subject to US jurisdiction. COIs and COCs are issued by the US Coast Guard.

Existing vessels that return to service in the US more than 1-year after the annual COC expired, and more than 5-years since the last Marine Safety Center (MSC) plan review, must complete an Initial COC exam (examiners also conduct concept reviews for novel ship arrangements or unique design features, to identify how they can affect overall vessel compliance with international convention requirements).

The initial COC exam occurs after the US Coast Guard completes plan review and the MSC provides appropriate comments and stamped plans to the local Officer in Charge, Marine Inspection (OCMI). Vessel operators should plan for at least 1-day in port to complete the US part of the initial COC exam; completion depends on discrepancies left over from the overseas portion of the initial exam.

Note: As of March 2020, US-flagged members due for renewals, annual inspections, periodic inspections, drydock inspections and internal structural examinations should contact the OCMI. After review of the vessel history and discussions with owner/operator, OCMI may do as follows:

  • delay inspection for up to 90-days
  • require Coast Guard attendance on the vessel in full or abbreviated format
  • accept objective evidence (recent classification surveys, photographs, ship logs, video) in lieu of actual onboard attendance

B. Waivers
The San Diego sector of the US Coast Guard has granted temporary waivers from inspection requirements for certain foreign tankers arriving from foreign ports to conduct lightering operations in the Pacific Area Lightering Zone (PAL).

For a waiver to be considered for an overdue inspection, the master must submit a completed COC Waiver Request Worksheet at least 7-days prior to anticipated cargo operations, subject to the following criteria:

  • Current COC not more than 90-days overdue for annual inspection (vessels overdue for COC Renewal will not be considered for COC waiver)
  • Re voyage plan, no intention to venture closer than 50-nautical miles from US mainland prior to commencing cargo operations
  • Have onboard and submit current International Oil Pollution Prevention (IOPP) Certificate including Form B attachment, current Continuous Synopsis Record (CSR), and most current
    COC with the completed Waiver Request Worksheet
  • Not loiter in PAL over 24-hrs before commencing cargo operations with another vessel
  • Currently in good standing on US Coast Guard user fees
  • Inspection scheduled with another Coast Guard immediately after cargo operations completed
  • No major outstanding deficiencies or major incidents of record since prior Coast Guard inspection
  • Not involved in an IMO detention for at least 12-months
  • Does not rate score of “ISPS I” on ISPS/MTSA Security Compliance Targeting Matrix, or “PI”
    on PSC Safety and Environmental Protection Compliance Targeting Matrix, as per COMDTINST Ml6000.7B (Coast Guard’s Marine Safety Manual)
  • Age (delivery date) not more than 15-years
  • Ship’s crew has not changed more than 25% since most recent cargo transfer
  • Not affiliated with “targeted” flag state, recognized security organization, ship management company, or charterer

C. Inspections

Applications for inspections must be made by the master, owner, or agent (CG-3752—Application for Inspection of US Vessel; and CG-986—Application for Inspection of Foreign Vessel).

They require name and type of vessel, nature of employment and route to be operated, place and date when the vessel may be inspected, submitted to the OCMI in the Marine Inspection Zone for inspection.

  1. New vessels: Preceded by submission of drawings or prints in accordance with requirements in subchapters D (Tank Vessels), E (Load Lines), F (Marine Engineering), H (Passenger Vessels), I (Cargo and Miscellaneous Vessels), J (Electrical Engineering), K (Small Passenger Vessels Carrying More Than 150 Passengers Or With Overnight Accommodations For More Than 49 Passengers), L (Offshore Supply Vessels), O (Certain Bulk Dangerous Cargoes), S (Subdivision and Stability), and T (Small Passenger Vessels), and type of service in which the vessel is proposed to be operated.
  2. Foreign-built vessels: those authorized by public or private laws to engage in coastwise trade, and those documented to engage in foreign trade, must be inspected and certificated as required by law and/or regulations applicable to their class and employment. Since foreign-built vessels are not permitted to engage in the US coastwise trade (domestic trade) unless specifically authorized by law, they will not be inspected and certificated unless specifically authorized by law to engage in coastwise trade.
  3. D. Case Study

    American and foreign oil tankers operating in U.S. waters are required to carry certificates of compliance issued by the Coast Guard. Certificates confirm that vessels have been thoroughly inspected and conform with U.S. regulations governing the transfer of petroleum cargoes. The regulations relate to ship design, construction, cargo safety, operational procedures and are designed to lessen the chances of oil spills and pollution.

    The “M/V Framura” maritime arbitration (S.M.A. 3006) in New York is the latest in a series of decisions on the importance of certificate of compliance requirement clauses found in most tanker charter parties. These clauses say the vessel owner warrants its tanker will be in full compliance with Coast Guard pollution-prevention regulations for trading to U.S. ports and that the vessel possesses a valid certificate for the service.

    The practical importance of the certificate of compliance is that it is now being viewed by the majority of arbitrators in New York as a prerequisite for the commencement of laytime in the tanker charter trade to the United States.

    In the typical tanker charter, the vessel owner earns freight by placing its ship at the charterer’s disposal for carrying cargo on a single voyage. However, the shipowner retains full control over the navigation and maintenance of its vessel during the voyage.

    The charterer is entitled to a stipulated period of free time to load and discharge its cargo, known as laytime. If laytime is exceeded, the charterer pays an additional freight charge called demurrage.

    For laytime to commence, the vessel must be physically and legally ready to receive or discharge cargo at destination. To be legally ready, the vessel must comply with local regulations and documentation requirements.

    Usually tankers arrive at ports ready to load or discharge. The master then tenders a notice of readiness to the charterer. This normally triggers the running of laytime. Demurrage accumulates when laytime expires.

    The “M/V Framura” arbitration dealt with a demurrage dispute between a tanker owner and a charterer arising during a voyage from Algeria to the United States. The vessel arrived at the first U.S. discharge port and the master immediately tendered the notice of readiness to the charterer. Unfortunately, the vessel’s certificate of compliance had expired.

    In order to obtain a certificate of renewal, the Coast Guard had to board and reinspect the vessel the next day. No cargo operations were allowed before a new inspection had taken place and the certificate was reissued.

    The vessel owner argued to the arbitration panel that tendering the notice of readiness at arrival triggered the running of laytime. The Charterer contended that the tender was invalid and that laytime did not start until the certificate was issued. The arbitration found that the vessel was in breach of its obligation in the charter by not having a valid certificate of compliance aboard.

    The “M/V Framura” arbitration illustrates that in the tanker trade, certificate clauses in charter parties should not be taken lightly by owners. Any time lost due to a vessel’s failure to have a valid certificate aboard will defeat a vessel owner’s claim for time on demurrage.

    The “M/V Framura” arbitration illustrates that in the tanker trade, certificate clauses in charter parties should not be taken lightly by owners. Any time lost due to a vessel’s failure to have a valid certificate aboard will defeat a vessel owner’s claim for time on demurrage.

    Notice of Readiness (NOR)

    A Notice of Readiness (“NOR”) is a notification by the vessel that it is ready to start the charter service (upon delivery) or is ready to load or discharge cargo. Giving an NOR has two purposes: (1) to inform the charterers that the vessel is at their disposal; and (2) to start the running of hire or laytime.

    The general requirements for a valid NOR: There are three requirements to be met in order to tender a valid NOR: (a) The vessel must have reached the agreed place (being an “arrived ship”); (b) The vessel must be “physically ready”; and (c) The vessel must be “legally ready”.

    The vessel as an arrived ship

    In this instance, the NOR must be tendered when the ship has arrived at the contractual place of delivery, loading or discharging.

    The charter party will usually state where the vessel must be before a valid notice of readiness can be tendered. The ship must be at the immediate and effective disposition of the charterer, having come to rest at the place at which she can be described as an “arrived ship”. Where that place is depends upon the terms agreed in the charter party. In the simplest case, the place will be the name of a port, dock or a berth. In voyage charters it is sometimes hard to determine the place when the charter mentions both the port and a berth.

    It is always a matter of construction whether the agreed destination is the port or the berth. For example, a charter which describes the destination as “one safe berth, London” is a berth charter, but one which describes the destination as “London, one safe berth” is a port charter (the reference to a berth is to be construed as a safe berth warranty).

    In a berth charter, owners can only tender the NOR when the vessel has actually berthed. In the case of a port charter when no berth is available, the vessel must normally have reached a position within the port where waiting ships usually lie. In this regard, the customary waiting area does not have to be “the commercial area of the port”, but can be the “legal, fiscal and administrative area of the port”. However, if the customary waiting area is outside the limits of the port, then no valid notice of readiness can be served. However, some charters (Gencon for example) extend the waiting place beyond the port.

    The above basic principles can however be varied by the terms “whether in berth or not” (“WIBON”) or “whether in port or not” (“WIPON”). The phrase “whether in berth or not” converts a berth charter into a port charter and ensures that under a berth charter party the NOR can be given as soon as the ship has arrived within the port’s commercial area. However, this is only when the berth is inaccessible due to congestion and not bad weather. (This is because the charter party puts the risk of navigational delays onto owners and of commercial delays onto charterers.) It is thought that the phrase “whether in port or not” will mean that an NOR can be tendered outside port limits as long as the ship is at the port’s usual waiting area. Also, some voyage charters commonly contain other exceptions and will for instance state that the commencement of laytime will start “Whether Customs Cleared or Not” (WCCON) and “Whether in Free Pratique or Not”.

    The vessel must be physically ready

    In order to be ready the ship must be prepared in such a way that it is able to commence cargo operations without delay and to comply with charterers’ orders whenever they are given. The vessel must therefore be “physically ready” and “legally ready”.

    Note: The requirement for the vessel to be physically ready will include that the holds are suitable to receive cargo in accordance with the charter.

    The vessel generally needs to be ready in all respects to load or to discharge the whole cargo. This extends to all equipment required for the cargo operations (such as, hatches, cargo gear and equipment etc.). This does not mean, for example, that hatch covers have to be open before a valid NOR can be given. It does mean that the vessel has to be ready and able to commence the charter service required of the vessel without delay when charterers give orders to load or discharge.

    Legal readiness

    In order to tender a valid NOR the vessel (not the cargo) must be legally ready. This requirement will include: (a) Customs clearance or entry; (b) Immigration and police approval; and (c) Health or free pratique.

    All papers necessary for the commencement of the charter service, loading or discharging must be in order for the vessel to be legally ready. If charterers are to arrange for a certain document or certificate before the vessel can carry out its cargo operations they have to do so with reasonable speed to enable owners to tender a valid NOR. An NOR tendered after this reasonable period has expired would probably still be valid, if all other requirements have been met.

    What happens if the NOR is invalid but there are other delaying factors?

    Owners may argue that although the ship was not ready, because of some other factor (port congestion, for example) there was no actual delay which resulted from the lack of readiness. It is not relevant whether the ship was actually delayed in carrying out the cargo operations. The important question is whether the ship was ready at the time of tendering the NOR. If the ship was not ready (apart from minor and routine matters) then the NOR will be invalid.

    What happens if charterers accept an invalid NOR?

    Even though, as stated above, an invalid NOR will never become valid, charterers may be deemed to have accepted an invalid NOR either expressly or by their conduct, in which event, charterers may lose the right to argue that the NOR is invalid.

    This is particularly so if charterers had reasonable opportunity to ascertain the vessel’s true condition. Acceptance by conduct could be demonstrated if charterers have conducted themselves in such a way as to show that they intend to be bound by the charter party (for example giving orders to a ship to load cargo). Acceptance of an invalid NOR can be made by the shippers or receivers who are considered to be charterers’ agents. In order not to lose any rights, therefore, charterers should accept a potentially invalid NOR on a “without prejudice to the charter” basis.

    BPVOY4 v. BPVOY5

    As with BPVOY4, BPVOY5 is designed for use by BP as charterers and includes many requirements for owners and the vessel to comply with. There are a considerable number of changes from BPVOY4. Individually many of them are in the form of updates and are not particularly onerous, but it is important that Owners review the charter in detail and make sure that they can comply with the various obligations on them (and also that they know what they are required to do during the service).

    Key Changes

    Compliance: Owners will be aware that more stringent compliance regulations have come into force since 1998 (when BPVOY4 was issued) and these are captured in clause 2 of BPVOY5.

    Clause 2.2 is particularly onerous for Owners, obliging them to “comply with all applicable requirements stipulated in respect of zones and/or areas regulated by regional and/or national and/or international authorities.”

    Should Owners breach any of the compliance obligations in clause 2, Owners will assume liability and shall indemnify, defend and hold harmless Charterers against any fines, penalties or other regulatory measures and related costs.

    Notice of Readiness (NOR): A new provision has been added to clause 10.1, whereby if a Master is unable to obtain a signature from a terminal representative for a NOR certificate, then he shall present a Letter of Protest (“LOP”) recording the failure of the terminal to sign.

    A NOR is not effective until a US Coastguard Vessel Examination Certificate (“COC”) has been issued, when calling at US ports (10.4(c)).

    If a valid COC is required, but on tendering NOR, the Vessel does not have one, then the Master shall retender NOR immediately upon receipt of valid certification. If the Master fails to do so, all the time from the receipt of a valid certification until the sooner of (a) such retender or (b) commencement of loading or discharge, shall not count as laytime or demurrage (10.6).

    The requirement to have a valid COC when calling at a US port is strict. If the Vessel does not have one, then there are significant consequences for the calculation of laytime and demurrage. A Shipowner cannot recover time lost, by way of demurrage, if such time is incurred as a result of the failure to have a valid COC.

    Note: Previously, under the BPVOY4 NOR clause, the language states;

    notwithstanding tender of a valid NOR by the Vessel such NOR shall not be effective, or become effective, for the purposes of calculating laytime, or if the Vessel is on demurrage, demurrage unless and until the following conditions have been met”-

    in the case of calls at US ports, a US Coast Guard Tanker Vessel 278 Examination Letter (“TVEL”) has been issued, or in the case of calls at non-US ports where any similar certificate is required to be issued by a state authority at those ports prior to loading or discharging of cargo, such certificate has been issued”.

    Public Docks

    For a Terminal to be considered a Public Dock for purposes of the LEAP Public Dock clause, the following must be true:

  • The Terminal is owned and operated by a governmental authority OR a third party company

And, all of the following criteria are also true:

  • The Terminal has a strict policy of berthing vessels in a first come, first served basis.
  • There are two (2) or more companies holding Product inventory at that Terminal.
  • Terminal owner/operator is NOT in the business of purchasing and selling oil or oil products.
  • Terminal owner/operator is NOT an affiliate of a company in the business of purchasing and selling oil or oil products.

[1] Notice of Readiness (NOR) is notification by the vessel that it is ready to start the charter upon delivery, or is ready to load or discharge cargo; it has two purposes: (1) to inform the charterers the vessel is at their disposal; and (2) to start the running of hire or “laytime” (i.e. the amount of time allowed in a voyage charter for the loading and unloading of cargo).

[2] Demurrage refers to damages payable by a charterer to vessel owner as compensation for lost time, where the chartered vessel is not returned to the owner on a specified date (it is a separate freight charge, in addition to the shipping costs, imposed for unreasonable delays in loading or unloading cargo or for sailing – the amount is determined under the terms of the charter party). Detention is a charge assessed against cargo for use of a container (outside the terminal) in excess of free time.

[3] The Shipping Act, relating to ocean carriers, states at §41102(c):

A common carrier … or ocean transportation intermediary may not fail to establish, observe, and enforce just and reasonable regulations and practices relating to or connected with receiving, handling, storing, or delivering property.

The Code of Federal Regulations interprets the Shipping Act, with regard to unjust and unreasonable demurrage and detention practices, and provides guidance on how the FMC will interpret Section 41102(c) and §545.4(d) in the context of demurrage and detention.

[4] 46 CFR §2.01-6: Certificates issued to foreign vessels. Foreign vessels of countries signatory to the International Convention for the Safety of Life at Sea, 1974 (SOLAS), are issued a Certificate of Compliance (CG-3585) on satisfactory completion of a compliance examination by the OCMI.

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