RISK AND REWARD IN FUEL OIL TRANSPORTATION CONTRACTS

1. RISK AND REWARDIN FUEL OILTRANSPORTATION CONTRACTS Jack VaydaPartner, Nourse & Bowles, LLPOne Exchange Plaza, At 55 BroadwayNew York, New York 10006-3030 Phone: (212) 952-6202E-mail: jvayda@nb-ny.com

2. INTRODUCTION

3. RISK/REWARD

4. 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 buyer’s/user’s perspective since after all the conference is called The Fuel Oil/Energy Buyer’s Conference]

7. 1. F terms – most popular is FOB (load port) (Free On Board) Carriage arranged/paid for by buyer Buyer takes/assumes risk at load port 2. C Terms – Hybrid 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

8. 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

9. 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.

12. Bareboat Charter – essentially a vehicle to assist finance vessel purchase/construction Time Charter – Hire use of vessel for fixed period of time at fixed rate usually expressed in per day rate Voyage Charter – Hire use of vessel to go from 1 point to another usually at a rate dependent on the voyage duration and quantity of cargo

13. PARTICULAR RISKS AND REWARDS IN DIFFERENT TYPES OF TRANSPORTATION CONTRACTS

14. Risk VoyageCharterer Vessel Owner Bareboat Charterer Time Charterer DeliveredBasis LOCK IN TRANSPORTATION COSTS FOR DURATION OF OWNERSHIP/CHARTER Owner’s risk is for increased/inflated; operation costs, crew, maintenance, insurance; fixed high cost if Market Declines Time Charterer’s risk is increased/inflated; bunkers; fixed high cost if market declines

15. Reward VoyageCharterer DeliveredBasis Vessel Owner Bareboat Charterer Time Charterer Each/all achieve locked in cost in rising market Owner’s potential reward is increased value in second hand Time Charterer’s potential reward is ability to sub-charter at increased freight rate and profit from differential

16. Risk of withdrawal Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis Reward of Risking Market Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis IN RAPIDLY RISING MARKET VESSEL MAY BE WITHDRAWN ON PRETEXT

17. Risk of Jettison Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis IN RAPIDLY FALLING MARKET CHARTERER MAY SEEK PRETEXT TO GET OUT OF C/P Reward of Falling Market Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis

18. Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis 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

19. Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis ABILITY/EASE TO GIVE/CHANGE LOAD/DISCHARGE PORTS

20. Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis ABILITY/EASE TO GIVE/CHANGE DATES

21. Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis ABILITY/EASE TO GIVE/CHANGE CARGOES

22. Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis ABILITY/EASE TO CANCEL WITHOUT PENALTY

23. Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis ABILITY/EASE TO INCREASE LENGTH OF VESSEL USE

24. 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

25. – 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 owner’s 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.

26. – 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.

27. Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis 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

28. Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis Sucrest Corporation v. M/V JENNIFER, 45 F. Supp. 371 (D.Me 1978) In 20th Century, rule in US – but not in UK – was that if neither shipper or carrier knows of dangerous properties of cargo then dangerous cargo owner not liable to 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.

29. Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis 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 ship’s 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 shipper’s 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.

30. Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis NY Arbitrators 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.

31. Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis (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.

32. Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis 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 charterer’s failure to exercise reasonable care.” Panel found charterer’s 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.

33. Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis 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.

34. Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis STRICT LIABILITY - Senator Linie GmbH & Co. Kg. v. Sunway Line, Inc., 291 F.3d 145 (2d Cir. 2002) Fire broke out in containerized cargo of thiourea dioxide (“TDO”), causing damage 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 of decomposition of TDO. Shipper advised shipment was “regular chemicals, not hazardous” so cargo not treated as dangerous goods nor listed in dangerous cargo manifest. Suits were direct between shipper of hazardous goods and vessel owner for damages which owner suffered. Owners’ damages included their settlement of claims by “innocent shippers” whose cargoes had been damaged.

35. Question before the court; when neither shipper nor carrier is aware of dangerous characteristics, who should bear loss? Court answered; loss should fall on shipper. Court analyzed and contrasted COGSA’s §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 to be carrying coals to Newcastle if its purpose were simply to specify that shipper liability in the dangerous-goods context requires knowledge on the shipper’s part of the danger to which it is exposing the ship and other cargo. In sum … §1304(6) sets forth a rule of strict liability for a shipper of inherently dangerous goods when neither shipper nor carrier had actual or constructive preshipment knowledge of the cargo’s dangerous nature.” §1304(6) does not imply a shipper scienter requirement.

36. The court summarized: “… we conclude today that a strict-liability construction of §1304(6) will foster fairness and efficiency in the dealings of commercial maritime actors. In contrast to a carrier, which typically is in the position of taking aboard its vessel a large quantity and variety of cargoes, a shipper can be expected to have greater access to and familiarity with goods and their manufacturers before those goods are placed in maritime commerce. If an unwitting party must suffer, it should be the one that is in a better position to ascertain ahead of time the dangerous nature of shipped goods. That party in many cases will be the shipper. We note, furthermore, that in conforming our construction of COGSA §1304(6) to that given to its British counterpart by the House of Lords in Effort Shipping, we are furthering another broad purpose of COGSA and the Hague Rules; international uniformity in the law of carriage of goods by sea. One point on which pre 1936 Second Circuit cases agreed unanimously was that “in matters of commercial law our decisions should conform to the English decisions, in the absence of some rule of public policy which would forbid.”

37. Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis ENTITY NOT PARTY TO CONTRACT ENTITLED TO STRICT LIABILITY AND FAILURE TO WARN - M/V DG HARMONY, 394 F. Supp.2d 649 (S.D.N.Y. 2005) decided October 5, 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 stowed in 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 led it 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.

39. Court expanded Senator Linie conclusions to find under COGSA §1304(6): Rationale for applying strict liability even more compelling because PPG was not just shipper, but also manufacturer; While carriers consented to carriage of cal hypo which they knew was dangerous, they did not know of or consent to carriage of cal hypo in question which was unusually dangerous; §1304(6) does not require privity of contract between claimant and dangerous goods manufacturer; §1304(6) permits (a) owner of “innocent cargo” and (b) vessel owner who itself had not issued a bill of lading to PPG, to make a recovery against dangerous goods shipper. First and only case to date which has reached such a conclusion.

40. Trial court also found shipper liable under common law for failure to warn and negligence because (i) risk/hazard was foreseeable to PPG “as there were sufficient red flags to have caused PPG, in the exercise of reasonable care, to have investigated further the dangers presented” and (ii) after examining the “reasonableness of PPG’s actions measured by the dangers presented,” it concluded that PPG’s warnings were inadequate and misleading.

41. Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis STRICT LIABILITY CUT BACK - Contship Container Lines Ltd. v. PPG Industries, 442 F.2d 74 (2d Cir. 2006) decided March 21, 2006 Same cargo, shipper and factory as DG HARMONY. Stowed directly on bunker tank which was heated. Little evidence of other casualties and shipper’s failure to warn. Ship/cargo not CTL. Claims in many places so no large suits anywhere. Claims made under §1304(6) as claims in “strict liability”. Court backed away from standard it created in Senator Linie asking “is strict liability a claim available to a carrier that knew the cargo was flammable but had reason to think that it was safe enough under the conditions of stowage?” Answer: We conclude that a carrier cannot invoke strict liability if it knows that a cargo poses a danger and requires gingerly handling or stowage, and nevertheless exposes the cargo to the general condition that triggers the known danger, regardless of whether the carrier is aware of the precise characteristics ofthe cargo…. A carrier that exposes a cargo to heat with knowledge of its flammability may or may not ultimately prevail – depending on the particulars of what it and the shipper knew and their respective duties – but it cannot prevail on strict liability.

42. Re: Claims under COGSA §1304(3) which it characterized as creating a “duty to warn” A “… negligent-failure-to-warn claim requires two showings: that PPG failed to warn Contship about dangers ‘inherent in the cargo of which the stevedore and ship’s master could not reasonably have been expected to be aware’; and that an absent warning, if given, would have impacted stowage.” Vessel owners’ stowage of cal hypo on top of bunker tank and heating bunkers to a temperature “too high” failed to establish those elements.

43. Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis COURT OF APPEALS, SECOND CIRCUIT FURTHER 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 PPG’s calhypo cargo furthest from the bunker tank caused the explosion Lower court correctly rejected PPG’s 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 two issues which they found key in the CONTSHIP FRANCE, whether the carrier would have stowed the cargo in a different position, and thus prevented the explosion, if PPG had given the appropriate warning

44. Risk VoyageCharterer Vessel Owner Bareboat Charterer Time Charterer DeliveredBasis VESSEL OPERATIONS BUNKERS CAUSING ENGINE DAMAGE Maro SMA 2533 Time Charterer has non-delegable duty to supply in conformity with charter party

45. Risk VoyageCharterer Vessel Owner Bareboat Charterer Time Charterer Delivered Basis VESSEL OPERATIONS NEED TO EMPLOY CREW/ENGINEERS/OPERATIONS STAFF

46. Risk VoyageCharterer Vessel Owner Bareboat Charterer Time Charterer Delivered Basis 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 board – with cargo → cargo liable

47. Risk VoyageCharterer Vessel Owner Bareboat Charterer Time Charterer Delivered Basis VESSEL OPERATIONSSecurity - very/increasingly important. causes delay extra costs

48. Risk of changed position Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis DELAY IN DELIVERY OF CARGO 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 voyage length or delivery date (unusual) ironically will most affect Delivered Basis because sales contract probably has Force Majeure clause

49. VoyageCharterer Hire Risk Vessel Owner Bareboat Charterer Time Charterer Delivered Basis Delivered Basis VoyageCharterer Losses from Late Delivery Vessel Owner Bareboat Charterer Time Charterer Delivered Basis Delivered Basis DELAY IN DELIVERY OF CARGO 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 deviate – right 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

50. Vessel Owner Bareboat Charterer Time Charterer Voyage Charterer Delivered Basis DELAY IN DELIVERY OF CARGO VESSEL DETENTION ie BY AUTHORITIES if detention caused by problem with cargo or receiver cargo/charterers initially at risk vessel secondarily at risk