Every little helps

Early-adopters have subscribed to the philosophy – on the basis of both economic and reputational considerations – that being green can be profitable. However, other market participants have yet to be convinced.

Environmental regulation is set to play a key role in shaping the future. The IMO has pressed ahead with the implementation through MARPOL Annex VI of limits on sulphur oxides (SOx) and nitrogen oxides (NOx) emissions in particular, leading to Emissions Control Areas (ECAs) in North America, the US, Caribbean and EU waters (currently, the English Channel, North Sea and Baltic Sea, but with the Black Sea and Mediterranean Sea under consideration). The consequence is a greater emphasis on cleaner fuels and engines.

Emissions limitations

Attention is also turning to the need to reduce the production of carbon dioxide and other greenhouse gases, which has so far resulted in vessel energy efficiency rules, and is very likely to lead to further emissions limitations in the future. In addition, ballast water management has been the subject of global focus, with the expected implementation of the Ballast Water Management Convention in the foreseeable near future, and increased restrictions on the treatment of waste on board vessels. Overall, there is an increasing obligation on those who own and operate vessels to adapt their practices.

Technological innovations such as de-rated engines, hull designs, propellers, exhaust scrubbers and paints have been developed to facilitate this change. The adoption of technological innovations via retrofit as well as the replacement of non-compliant vessels are two ways – and, in some instances, the only ways – of meeting the standards set by international environmental regulations.

There are those who are more hesitant to adopt those technologies and designs which are on the market and in the pipeline. An element of their caution is based on the perception that savings promised through efficiency gains have been overstated. There are further doubts over the efficacy of technologies which may not have had widespread uptake or rigorous sea tests.

Overall, there is a significant number in the market who hold the opinion that some designers, builders and manufacturers have set themselves an unrealistically high bar.

The obvious implication is that owners and charterers would be on the sharp end of any failure to meet expectations. For owners in particular, the burden (and associated risk) of purchasing and employing new technologies and designs is perceived to be too high for some. This is understandable in the context of difficult market conditions and the reduced availability of finance.

Disputed claims

We have not yet seen any major reported disputes concerning eco-ship technologies or newbuilds. This does not of course mean that there have been no such disputes as most industry contracts are governed by arbitration clauses which mandate confidentiality between the parties. In addition, shipping disputes are of course often settled without the need for the intervention of the courts or arbitration tribunals.If claims were to arise in respect of under-performing eco technologies, they would most likely be made on the basis of breach of contract. This would mean claiming under the warranties given by the designer, manufacturer or yard, depending on the contractual framework, as to the effectiveness of their technology or vessel, or alternatively for negligence in this regard.

Depending on the circumstances, claims could also conceivably be made on the basis of misrepresentation, arguing that an incorrect statement about the eco technology concerned induced the owner to enter the contract concerned. If eco technology fitted did not meet the standards agreed or stated, the implications would include owners potentially being faced with speed and consumption claims by charterers for breach of agreed consumption rates. Owners could also potentially face off-hire claims for deviation or breakdowns caused by any technological problems. Significantly, if a vessel does not meet standards or contravenes environmental regulations in any given jurisdiction, this could result in liability for owners and operators.

Loss leader

The extent to which such losses can be claimed from a yard or manufacturer which is believed to be in breach is governed by a number of factors. Foremost, it is standard in the shipping industry to limit liability, and sale and purchase contracts for vessels and machinery are no different. Furthermore, contractual warranties as to a vessel’s quality usually run for the period of one year from delivery, which means that owners could be barred from claiming under the warranties outside of this time. The contract may also incorporate liquidated damages clauses for failure to meet certain technical specifications, making it difficult to claim more than the amounts stated. As to any criminal liability that may arise for breach of environmental laws, this is very difficult to transfer or insure against (at least under English law).

In light of the above, it is essential that these considerations are taken into account at the earliest stages. Owners and operators can mitigate the potential risks of being early-adopters of eco-ship and green technology through commercial negotiation. Particular attention should be paid to the scope of warranties as to precise output and efficiency, as well as time limitations. Guarantees of key figures may also be included and should ideally be based on sea trials, as opposed to models or forecasts. Purchasers should also put consideration into the level of liquidated damages which would cover their losses in the event that such guaranteed figures are not ultimately achieved.

The importance of close co-operation between buyer and seller in respect of both eco-friendly retrofit and newbuild eco vessels cannot be overestimated. Shipyards, designers and manufacturers are keen to maintain reputations and avoid disputes. Where it is suggested some have overstated the ‘eco-saving’ benefits of their designs, this may at least in part have been due to difficulty in realistically modelling vessels and the sea. Owners can provide their own insight (for example, their existing vessel efficiency data) to help refine the warranted figures at the negotiation stage. Some companies have already carried out eco-friendly retrofit to large numbers of vessels and ordered newbuild eco vessels.

While other owners and operations are not to be blamed for their caution, there are means of mitigating perceived risks, as discussed above. The potential upside of implementing the latest technological and design innovations cannot be dismissed lightly.

Author information

Max Thompson is an associate at Holman Fenwick Willan, an international law firm advising businesses engaged in international commerce.