Reed Smith Client Alerts

In recent years, international oil markets have witnessed collapsing oil prices as a result of an excess in supply and a corresponding decrease in demand as consumer behaviour switches slowly away from a dependency on oil. Oil refineries and storage facilities are near or at capacity. The absence of terminal and tank farm capacity has generated renewed global interest in and a growing demand for oil tankers to be used as floating storage. This increase in demand for floating storage is being reflected in daily hire rates, with VLCC rates being pushed from averages closer to $100,000 to reportedly in excess of $300,000 a day, according to industry sources.

While no doubt compounded by the COVID-19 outbreak and the resultant uncertainties it has generated for international trade, the current macroeconomic climate means that there will be potentially very long periods during which tankers will be used as floating storage. Given that most charterparties do not contain storage clauses, or have clauses which are legally or practically deficient when considering long-term storage, owners and charterers alike are presented with an array of issues that need to be carefully considered and the risk allocated to avoid legally significant and potentially expensive consequences. Any failure to do so may result in legal implications which could be far-reaching.

This briefing note will discuss a number of legal issues that may arise under a charterparty or bill of lading contract, where owners accept charterers’ requests to employ their tankers as floating storage. The discussion is intended to highlight the various issues. The terms of individual charterparties, together with the factual circumstances, will determine the scope of consideration required in each case.

Auteurs: Sally-Ann Underhill Peter Glover

oil tanker, gas tanker in the high sea

Time charterparties

Within the contractual and legal limits of the charterparty, charterers enjoy wide liberty to employ a vessel to accommodate their commercial requirements. This will usually take the form of voyage orders for the vessel to proceed from one named port to another, to carry one or more named cargoes, and may include waiting time at named ports or places. The principal restrictions on charterers are generally the requirement to nominate safe ports or berths, the range of cargoes permitted to be carried, compliance with Institute Warranty Limits, and any sanctions compliance.

However, when a charterer orders a vessel to be used as floating storage, the position is not as straightforward as an order to proceed from one named port to another for the purposes of loading and discharging. For charterparties that contain a floating storage clause, such as BPTIME 3 (clause 21 – Storage), a right to order a vessel to be used for floating storage is express, but additional clauses will be needed to deal with the array of issues arising from such storage. For charterparties that do not contain an express right for the vessel to be used for floating storage, the position is complicated, compounded if a bill of lading has been issued by owners, and may amount to an unlawful order by charterers.

Voyage charterparties

For voyage charterparties, the situation is even less straightforward. Most voyage charterparties will contain an express term that “the vessel shall perform her service with utmost despatch and shall proceed to such berths as Charterers may specify…or so near thereunto as she may safely get…load the cargo…proceed as ordered on signed bills of lading…and there…discharge the cargo” (SHELLVOY 6). If the term is not express, an utmost despatch term will likely be implied. Any order by charterers to stop the vessel for the purposes of floating storage places the owner at risk of breaching the “utmost dispatch” requirements and any specific bill of lading terms which restrict deviations other than for the safety of life at sea.

Some voyage charterparties expressly provide for the vessel to be stopped or diverted to an alternative port: For example, BPVOY5 (clause 24 Revised Voyage Orders) provides that “Charterers may issue revised Voyage Orders and instruct the Vessel to stop and await orders and/or proceed to an alternative loading or discharge port within the Charter Ranges”. However, the precise scope of this provision has not been tested before the courts as regards floating storage, and it cannot be stated with confidence that this clause would, on its true construction, extend to permitting charterers to use the vessel for floating storage.