Ship recycling – legal developments and contractual protection for shipowners
Ship recycling is once again in the spotlight. Many in the shipping industry have committed to responsible ship recycling practices through the adoption of green scrapping policies. With authorities increasing action against shipowners and insurers for suspected breaches of ship recycling regulations, responsible recycling is an increasingly important topic for shipowners with end-of-life or near end-of-life vessels. In this article, we consider the recently overturned Seatrade decision, the increase in scope of the European ship recycling regulations since 31 December 2020 and contractual provisions to consider when selling an end-of-life or near end-of-life vessel.
Investigations and prosecutions
It has become increasingly common for national authorities including environment agencies to investigate and prosecute shipowners and insurers for failure to comply with applicable ship recycling regulations. Often, these cases involve complex fact patterns that only come to light after a shipowner has disposed of a vessel near the end of its useful life. In some cases, shipowners have been convicted for breaching regulations after the ship had been sold to a third party before being scrapped.
Some shipowners attempt to evade regulatory scrutiny for scrapping a vessel at a facility that may not comply with good international industry practice (such facilities are often located in non-OECD countries), through the use of an end of life flag of convenience. In some cases vessels are sold to a cash buyer (incorporated in a non-mainstream offshore jurisdiction where it may be difficult to trace beneficial ownership) and can then be reflagged under a new end-of-life flag of convenience. These flags typically belong to countries that have less onerous ship recycling regulations. Flags of convenience sometimes used for these purposes include those of The Comoros, Tuvalu and St Kitts and Nevis.
In 2018, the District Court of Rotterdam held the Dutch shipping operator Seatrade, and certain of its executives, criminally liable for the illegal export of vessels for demolition in breach of the European Waste Shipment Regulation (No 1013/2006) (the “WSR”).
In 2012, Seatrade sold four reefer vessels which sailed from Rotterdam and Hamburg to India, Bangladesh and Turkey, where they were beached then scrapped. In its judgment, the Dutch court found that Seatrade had intended to sell the vessels for demolition, but that instead of recycling them in accordance with the applicable regulations, it had circumvented those regulations by selling the vessels to a cash buyer. The reefers had been used to carry refrigerated and dry cargo which contained high amounts of hydrochlorofluorocarbons, along with other commonly present hazardous substances. The Dutch court ruled that the sale of the ships amounted to a breach of the prohibition in the WSR on the export of hazardous waste from an EU port to a non-OECD country. The court handed two Seatrade directors 12-month suspensions (in lieu of prison sentences) and fines in the region of USD1m each.
Although the Seatrade judgment was overturned in July 2020 following a petition to the Court of Appeal in the Hague, the case highlights that shipowners need to be mindful of how they choose to dispose of end-of-useful life ships. In particular, if a ship is leaving European waters to be scrapped, shipowners should be aware that they may face possible criminal sanctions if their declarations or actions as to the nature of the voyage are found to be misleading or in breach of the law or regulations.
It is worth noting that in the Seatrade case, the Dutch prosecution relied on email evidence to prove that Seatrade had negotiated the scrap value of the vessels prior to their departure from the EU ports. When deciding whether to initiate proceedings, national authorities and regulators are likely to consider the steps taken by shipowners prior to the sale or disposal of end-of-life or near end-of-life vessels including any reflagging, scrap valuations obtained or evidence of sale to a cash-buyer.
The market will watch with interest to see how the retrial deals with the issues the second time around.
The Tide Carrier case is a reminder for last voyage insurers to ensure they have discharged their obligations not to aid the illegal export of waste. In 2018, the Norwegian authorities investigated leading Norwegian marine insurer, Skuld, in relation to an alleged breach of the WSR. While Norway is not a Member State, it has implemented the WSR into national legislation.
Skuld had provided final voyage hull and machinery insurance for the Tide Carrier, which the Norwegian authorities were told was to depart for repairs in Oman but which was in fact headed to Pakistan for scrapping. Before departure, it became clear the Norwegian authorities had granted authority for the ship to sail based on fraudulent information and the vessel was arrested. Ultimately, the Norwegian economic and environmental crime prosecution agency imposed a fine on the cash buyer of the ship, but both the insurer and the marine warranty surveyor came under investigation. Skuld in particular was investigated for aiding the illegal export of the vessel by providing insurance that facilitated the banned movement of the ship as waste to a non OECD country under the WSR (from Norway to Pakistan).
The Norwegian investigation demonstrates that insurers also have a responsibility to assess whether any final voyage insurance they provide could enable a shipowner to breach regulations on ship recycling and hazardous waste disposal. This clearly presents practical challenges for both insurers and shipowners, as the decision to recycle rather than repair a ship can at times arise en route to planned repairs (e.g. further deterioration of the ship or its valuable components whilst in transit such that it becomes beyond economic repair).
The penalties imposed by the court in the Seatrade case and the scope of the Norwegian authorities’ investigation in the Tide Carrier case serve as a stark reminder to all shipowners and insurers to carefully consider their actions and options as to the disposal of end-of-life and near end-of-life vessels to ensure compliance with the relevant law and regulations.
Ship Recycling Regulations
The relevant provisions of the WSR in relation to vessels have largely been replaced by the EU Ship Recycling Regulation EC No. 1257/2013 (the “SRR”) which came into force on 31 December 2018.
The WSR continues to apply to any non-EU flagged ship that departs from an EU port for recycling.
Since its implementation, the SRR has applied to all new EU flagged ships (wherever located) destined for recycling. The SRR has increased in scope since 31 December 2020 and now applies to all EU-flagged ships (the increase being that it now also applies to existing EU-flagged ships) as well as to ships flying the flag of a third country that call at an EU port or anchorage.
The SRR mirrors the International Maritime Organisation’s Hong Kong Convention. Under the SRR, shipowners are required to ensure that any EU flagged ships:
> carry on-board an inventory of hazardous materials that form part of the ship’s structure and equipment, operationally generated hazardous wastes and stores on board (an “IHM”) and an Inventory Certificate or Ready for Recycling certificate (for EU flagged ships) or a Statement of Compliance (for non-EU flagged ship);
> are recycled only in safe and environmentally sound ship recycling facilities included in the European List of ship recycling facilities (the 7th version of the European List of ship recycling facilities, adopted by the European Commission on 11 November 2020, includes 34 ship recycling yards in Europe, 8 in Turkey and 1 in the USA); and
> are subject to an acceptable ship recycling policy.
It is widely accepted that the benchmark for responsible ship recycling is compliance with the Hong Kong Convention for the Safe and Environmentally Sound Recycling of Ships which was adopted at a Diplomatic Conference held in Hong Kong, China, in May 2009. It will come into force 24 months after the date on which the following conditions are met: ratification by at least 15 states, which represent 40% of the world’s merchant shipping by gross tonnage, and a combined maximum annual ship recycling volume (during the preceding 10 years) of not less than 3 per cent of their combined tonnage. These conditions have not yet been met.
Where a shipowner intends to dispose of a ship for scrap, it is advisable to use a form of contract that provides that the ship should be recycled in a safe and environmentally sound manner and in accordance with the Hong Kong Convention.
BIMCO has a standard form contract that provides for these circumstances and which incorporates the requirements of the Hong Kong Convention (RECYCLECON), the latest edition of which is from 2012.
The recent investigations into and prosecutions of shipowners mostly involved sale contracts where recycling was not the intended purpose of the sale. This is because the standard agreement for sale of ships still in operation (“MOAs”), such as the Norwegian Saleform, does not contain provisions that purport to regulate how the ship should be disposed of or recycled. As a result, shipowners that are looking to sell near-end-of useful life ships, while such ships are still in active service, should consider protecting their position and reducing any risk that they will be held liable for the actions of an unscrupulous buyer once the vessel has been sold.
Linklaters are seeing an increasing number of shipowners seeking to include in their MOAs provisions specifying that the buyer must adhere to responsible recycling practices and/or that the ship must be recycled in accordance with the SRR or Hong Kong Convention, even where a near term recycling is not anticipated. Prudent sellers will undertake proportionate due diligence on buyers with a view to ensuring they are selling to an entity whose approach to ship recycling aligns with their own.
A risk-averse seller or lessor might also seek to include a provision that if the buyer resells the ship within a certain timeframe, or a lessee acquires the ship, for example by way of a purchase option, any documentation relating to that onward sale or purchase option exercise must also contain ship recycling provisions. In particularly sensitive cases, a seller may wish to continue to monitor a ship’s location for a certain period following its sale so as to ensure that a ship sold as an operating vessel is not then inappropriately scrapped.
Some larger shipowners have cemented their commitment to safer, more responsible ship recycling practices through the adoption of responsible ship recycling policies. This reflects an increased sector focus on responsible scrapping and sustainability issues more broadly, with BIMCO’s new form of ship sale agreement, which is currently in development, expected to include provisions covering this topic.