LP 47/2020 Legal Issues arising from Using Tankers as Floating Storage

The growing demand for tankers to be used as floating storage will continue to push the high hire rates while leading to some unnoticed issues as it is generally considered a practice of high reward and high risk. To avoid potential legal consequences, it will be prudent to have the Owner’s responsibilities carefully considered and the risks allocated between Owners and Charterers.

I.   Background

Demand for oil products has slumped since the global outbreak of COVID-19. With shore tanks near capacity and traders stockpiling oil at low, even negative prices, there has been a recent increase in demand for tankers as floating storage for crude and refined oils. It will continue to be so in potentially very long periods before oil prices rise again to cover the charter rate and actually bring any profits. Owner, in such cases, is subject to a variety of risks and therefore advised to arrange additional insurance with consideration on its responsibilities as the leaser under charter parties, the carrier under B/L, the employer of seafarers and the owner of tankers.

II.   Charterer’s order and obligations under the B/L

In the circumstance where a bill of lading has been issued by owners, any order by charterers to stop the vessel for the purposes of floating storage will place the owner at risk of breaching the utmost dispatch requirements and terms restricting deviations. Any delay in cargo delivery may give rise to claims by consignees and further affect P&I cover. It is then crucial to consider charterers’ entitlement to use tankers as floating storage under the charter party and the reliability of provided warranties. Even if no B/L is issued, the transportation and storage of goods should conform to the Hague Rules.

III.   Crew welfare

Tankers and seafarers are subject to greater risks of piracy and armed robbery during the periods of prolonged storage. Owners may consider incorporating BIMCO’s War Risks Clause for Time Charter Parties 2013 (CONWARTIME 2013) and BIMCO’s Piracy Clause for Time Charter Parties 2013. Against the backdrop of the COVID-19 pandemic, owners shall further consider issues of taking on supplies, changing crews and getting medical care at the selected port, as well as the expenses and loss of time incurred from leaving the port for these purposes.

IV.   Cargo degradation

Oil products stored over time may suffer from shortage disputes, and possibly cargo damage, even degradation due to factors including evaporation or settlement of sediments. It is therefore of vital importance that owners comprehensively assess whether the vessel is fit for the purpose of storing oil for long periods and whether oil products could become off spec. An indemnity from charterers should be obtained. We also suggest making it clear in the charter party that a note will be attached to the B/L, stating that “Cargo(es) loaded on (insert date) stored on board. Carrier makes no representation regarding the quality or quantity of the cargo on board.”

V.   Hull fouling

While the vessel is employed as floating storage, it is exposed to the risk of hull fouling. This may impact the vessel’s subsequent speed and performance and corresponding warranties given by the owners under the charter party, leading to under-performance claims by charterers, unless the fouling can be proved the result of following charterers’ order. Owners are advised to incorporate BIMCO’s Hull Fouling Clause 2019, which provides that if the vessel fails to meet the speed/consumption requirements as a result of remaining at or shifting within a place for an aggregated period (the default periods shall be 15 days) in accordance with charterers’ orders, the cost of inspection and cleaning shall be undertaken by the charterer. If charterers choose to postpone cleaning, speed and consumption warranties shall remain suspended until such cleaning has been completed.

VI.   Conclusions

There are probably many other problems for owners to worry about and whether the risks arising from using tankers as floating storage are still covered in previous policies is yet to be confirmed. To avoid significant consequences and facilitate prudent operation, owners are advised to reach out to their insurers before reaching any agreement.

For more information, please contact your manager at the Club.