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[Tank]ing contracts: Doctrine of ‘Good faith’ versus ‘WOG’ and other exclusionary terms

2021 has been a very important year for the Shipping industry with the issue of carbon emissions, radical changes in the supply chain logistics, and with countries and corporations coming together to address larger issues at hand. What is fascinating to a novice to the industry are carriers particularly designed for the carriage of oil cargoes… e.g., Motor Tankers, Oil carriers, crude carriers, FPSO/FSO’s, etc., (will be referred to as Tankers collectively). If you have gasped at the size of the recent Ever Given vessel that halted world traffic at the Suez Canal, or the oil rigs in the movie Deepwater Horizon, try googling ULCC’s and VLCC’s. The Oil & Gas industry obscures as much as it reveals, whether it is with respect to allegations of oil spills, carriage of cargo from sanctioned countries, or the general manipulation of market forces determining prices of the commodity.

It is no secret that the ship-recycling industry has always been under scrutiny, with ‘end of life’ Tankers being sold for safe-recycling to the Indian sub-continent to the West’s distress. This article aims to address nuanced issues arising at the time of sale of Tankers for demolition and representations and warranties (express/implied) made at the time by sellers and various commercial considerations.

Method/mode of sale: Tankers, often due to their inability to be worthy of carriage for another journey or (increasingly of late) to battle the uncertainties and protect oneself against the uncertainties of the freight market, are circulated for sale by owners through brokers/broking houses for sale. Negotiations ensue between direct buyers/intermediary buyers and sellers: a crucial stage where contracts are concluded in the course of the day, two at most due to volatile markets, competitive bidders, etc. If the terms and conditions for sale asserted by the Sellers cannot be agreed upon at the earliest, the negotiations die down and the deal withers away elusively, making a prompt cost-benefit analysis of the deal a determining factor in the prices put in for the bids. This is a time-sensitive and extremely competitive process in a niche and concentrated market.

Particularly, sellers are always on an inexorable march to be unrelenting in the incorporation of exclusion terms that only favor one side and have repercussions on fair dealing in trade. One of the key themes of this article converges on the declaration of the quantity of ‘Sludges/Slops’ present onboard the Tankers. Specific and technical definitions can be found in The International Convention for the Prevention of Pollution from Ships (MARPOL), but below is a paraphrased version:

A Tanker (specifically designed to carry cargoes of Oil & Gas of complex compositions) over the years (also depending on the number of years it has been chartered/commissioned as a carrier for crude/oil) accumulates residues/sludge/slops in the Tanks used for storage of cargo.

  • Slop - This mostly includes oily water that can be pumped out, and cleaning is relatively quick and convenient.
  • Sludge – Depending on the density of cargoes the carrier has carried onboard, the semi-solid residues requiring precise cleaning and Hot wash;
  • Residue – Residues are mostly solid in form and require manual labor for removal, which is a time- and resource-consuming process (mostly found in older tankers that have been out of commission for a long time). [“SSR”]

Tankers, even when markets showcase a conservative trend, fetch a decent recycling price. Sellers usually give an estimate of sludge and slops present onboard the vessel in MT/Cbm that determines the bids to be received from intermediary/end buyers who shall further sell the vessel for recycling or purchase the vessel themselves. These bids are not only placed keeping profit margins in mind but also delivering clean and safe Tankers following best recycling practices.

The Tanker needs to be thoroughly cleaned and freed of SSR, gas-free certificates must be provided to the ultimate recycler as a pre-condition of sale, and an inspection by safety officers and a state environment agency is required before any demolition permits are granted.

However, the position of parties in negotiations is often adversarial and parties are entitled to pursue their own best interests, as long as they avoid misrepresentations. This duty to negotiate ‘in good faith' is often cited as being unworkable in practice as it is believed to be inherently inconsistent with the position of negotiating parties. The declaration of the quantity of sludge and slops onboard the vessel is directly proportional to the price the intermediary/end buyer will offer for the purchase of the vessel--cleaning costs of the residual sludge and slops being factored into the offered price to ensure that vessel is free of any potential hazard when finally delivered to compliant yards employing safe recycling practices.


Without Guarantee: Legal Implications

At the time of these contract negotiations, the estimate of sludge and slops stipulated in the MOA is preceded with the qualified condition that the same is ‘… given in good faith but without guarantee.’ The requirement of negotiating in good faith seeks to promote fair and open dealing to prevent unfair surprises and the absence of real choice [1].T[2]? Yet, the inclusion of the word ‘without guarantee’ in itself should be enough to raise serious questions about the good faith aspect of negotiations, especially when bargaining positions of parties differ by and large.

Now, this is not to suggest that it is always so only in case of unscrupulous sellers who want to limit their liability knowingly, but also in cases of unsuspecting sellers who may want to cash in and hedge their position when freight markets are underperforming without making a  good faith AND reasonable attempt to determine the sludge quantities, or, make inadequate attempts that do not qualify as reasonable to determine the quantities, therefore jeopardizing accuracies.

Under English Law, the position of the meaning of ‘good faith’ is evolving jurisprudence, the effect of caveating any representation with the term ‘without guarantee’ is seemingly resolute; Dickensian descriptions would be [Pickwick Papers]- “…what can’t be cured, must be endured.”

For example, the leading Judgment on the effect that this disclaimer would have in a maritime contract (Lenodoudis Evangelos II) The Lipa[3], held that a standard deviation of 5%-10% shall be tolerated in case of short loading/cargo disputes, etc. as long as there are no major deviations from the material terms of the contract. Interestingly, it was also observed that when parties are involved in similar trade/businesses, the question of either party’s ‘reliance’ on representations hardly arises till the time a dispute surfaces.

In an alternate observation by an Arbitral Tribunal, the treatment of qualifying reservations on representations made in correspondence between parties is rather stringent, i.e. absent bad faith any such qualified notice preceded with Without Guarantee/ Without Prejudice is accepted by the party at their own peril and an unqualified declaration/Notice should be sought.[4]

What is abundantly clear is that on the basis of the above, when estimates are preceded with WOG, the burden of proof to be discharged is the proof of bad faith on the part of the party making representations. A buyer having an equal bargaining power may be able to factor in the cleaning costs for sludge and slops already in 10%-15% excess of declared quantities because of the qualified reservation of WOG, but serious issues arise when quantities are found to exceed any budgeted calculations a prudent buyer may elect to set aside as cleaning costs.

This begets an important question on which there seem to be none to limited answers in legal textbooks:

Can exclusion clauses like Without Guarantee extend to deviations in excess of tolerable/acceptable industry standards and yet not qualify as misrepresentations on the seller’s part? Recent examples of Tanker sales to intermediary/end buyers are proving detrimental to trade practices where on ‘as is where is’ sale of vessels, the quantities observed onboard are found to be 100 % - 300% in excess of declared quantities.

The Tankers are sometimes in the Seller’s ownership for more than 10 years with a specialized crew, Masters, and team of engineers employed onboard to ensure smooth functioning and are specifically trained in management and cleaning of these vessels. In all probability, the seller’s crew may even be attempting to obtain this estimate in good faith, but with the quantum that is at the time observed and inspected on sale, it comes across as manifest misdeclaration, given the resources that were at the seller's disposal to provide an accurate and good faith estimate. The parties find themselves in a closed-loop, and sellers in these cases are often quick to resort to asserting their ‘Without Guarantee’ exclusion that they have insisted upon at the time of contract negotiation, raising the question of whether the estimates were accurate, to begin with.

In most cases, buyers may be forced to salvage their losses elsewhere with no hope of recovery. Most of the brokers/broking houses will sit on the fence and not provide either party with any inputs in such a situation. The reason for this sometimes can range from brokers failure to communicate the party’s requirement and insistence clearly, their own lack of understanding of the repercussions aforesaid misdeclarations have on the party’s commercial position, to the mere nonchalance that their role is confined to the ultimate delivery of goods from seller to the buyer and nothing beyond.

There are special marine & offshore services companies providing services specifically targeted to cleaning of SSR onboard the vessels to ensure that a vessel safe and clean for recycling is being sold. It comes as no surprise that these costs, in case of a non-trading/dormant FSO/Tankers are comparatively high, and therefore, sellers deliberately choose to cut corners to hide behind the draconian clause of ‘WOG’ and retreat, taking no responsibility for consequences that would follow. This sets the standard so low for good faith business practices, that even reputable Tanker owners have participated in orchestrating such manifest misdeclarations to avoid cleaning.

To add to this conundrum, sometimes Buyers are offered no inspection of the Tanks to ascertain the SSR leaving no recourse to the Buyers on arrival in the sub-continent where the unsafe and subpar job of cleaning has to be undertaken before she could be gas-free for hot works.

‘Contra Proferentem’: Solving the ambiguity of exclusion clauses


While Courts have insisted on parties’ freedom to contract and not interfere with solving and assisting with minor inconveniences caused to parties by virtue of their own conduct [agreeing to exclusion terms in a contract], the liberties provided as a result of freedom to contract cannot leave one party with losses that they cannot breakeven on a deal while affording the other unqualified freedom to retreat into patterns where they continue to indulge in practices deterrent to fair trade. Legally, the principle of Contra Proferentem means:

if there is any doubt about the meaning or scope of an exclusion clause, the ambiguity should be resolved against the party seeking to rely on the exclusion clause on the basis that parties are not lightly to be taken to have intended to cut down the remedies the law provides for breach of contract, unless the contract contains clear words to that effect. In the case of exclusion clauses this means the narrower interpretation should be applied.”

One might argue that even with the best team of experts and reasonable efforts, only an estimate of sludge and slops onboard can be provided due to the inherent lack of scientific formula to determine the same, but with experts specifically dealing with the cleaning of Oil carriers to ensure safety, a clear and definite estimate (+/- 10%) is one phone call away. An alternate argument may be to suggest that rule of contra proferentem applies when there is an ambiguity/doubt about the meaning or scope of a term. We have already examined the flexibility offered by the term ‘Without Guarantee’ and implications thereof, but the reliance on the same cannot be sought upon by the Sellers in case the quantities so under-declared that had it not been for the misrepresentation, the Tanker would have been sold for a much lower price.

In light thereof, the interpretation of the meaning of Without Guarantee remains ambiguous and unclear vis-à-vis its scope w.r.t misrepresentations. Even with legal fiction created by yardsticks per the above case-laws, it is pertinent that contra proferentem apply and be construed against the sellers so narrow interpretation is given, especially in cases where sellers attempt to wriggle out of their obligation to provide an estimate in good faith by incorporating exclusion terms.



Ms. Prachi Shah

In-House Counsel,
GMS Dubai
Email: legal@gmsinc.net



[2] [2001] UKHL 52, [2002] 1 AC 481, at 17

[3] [1997] 1 Lloyd’s Rep. 404

[4] IMT Shipping and Chartering GmbH v. Changsung Shipping Company Limited: THE ZENOVIA [2009] EWHC 739 (Comm)

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Green ship recycling – time to invigorate all the segments of the industry
By Dr. Kanu Priya Jain, Coordinator, Responsible Ship Recycling, GMS (Dubai)

The majority of the global ship recycling activity is operated from a handful of countries such as: India, Pakistan, Bangladesh, China and Turkey. Within the last few years we have witnessed a rapid growth in the ship recycling yards looking to upgrade their facilities in these major recycling countries. In India, almost half of the active yards are operating under a Statement of Compliance (SOC) with the Hong Kong Convention (HKC) and recently, the first yard in Bangladesh also received the same certification. These developments in the market have led to an increase in the capacity of the ‘green’ ship recycling, which denotes the safe and environmentally sound disposal of ships and offshore assets. Ideally, this increased capacity should attract owners of all ship types to opt for ‘green’ recycling of their end-of-life tonnage, however, in our experience, we have witnessed a fragmented demand. It would be interesting to analyze which industry segment is lagging in availing ‘green’ recycling services and the reasons behind it.

The data required to analyze the market of ‘green’ recycling is generally confidential. Therefore, we will use the data of our company in aggregate form. Being the leading company in the ship recycling industry, the dataset used for the analysis represents the general trend of the industry. Within the last few years, we have undertaken about 30 projects annually under our ‘Responsible Ship Recycling Program’ (GMS RSRP) which caters to the needs of the ship owners interested in recycling end-of-life ships and offshore units in a safe and environmentally sound manner. Interestingly, none of the projects are of tankers, whereas 38% projects are of container ships, 29% projects are of offshore units, 17% are of car carriers, followed by 8% for bulkers and 4%  for reefers and  LPG carriers.

The percentages above, especially that of tankers is quite concerning because despite the fact that tankers pose the highest risk during the dismantling process, owners are not very keen to avail ‘green’ recycling options. This is quite worrying because the availability of the HKC-compliant yards has increased significantly in the recent years. Such a trend doesn’t augur well for yards willing to upgrade their facilities as they do not find enough incentive to do so considering the fact that not all ship types reach ‘green’ recycling yards. These numbers reflect the defensive strategy adopted by the tanker owners which tend to go for ‘as is’ deals at the end of ships’ economic life to condone their duty of recycling end-of-life ships responsibly.

When an industry transits towards enhancement, all stakeholders must assume a collective responsibility of equal and meaningful contribution to achieve an effective progression. Presently, we are seeing more and more yards inclined towards the upgrading of their facilities to meet the standards of the HKC, especially in India. Certain Classification Societies have voluntarily started providing Statements of Compliance (SOC) to the recycling yards that wish to upgrade their infrastructure and processes in line with the HKC. At the same time, we as a vital link between the ship owners and the recycling yards, have been contributing to the industry by delivering workers’ training programs in association with Classification Societies (such as IRCLASS), offering additional services to the ship owners such as supervision, monitoring and reporting of the recycling process, and providing technical expertise to the yards for the upgrading of their facilities. A bigger contribution and will to embrace ‘green’ recycling options from the ship owners’ side is required to boost the ship recycling industry in the right direction.

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The conundrum of the enforcement of the Hong Kong international convention on ship recycling
By Dr. Kanu Priya Jain, Coordinator, Responsible Ship Recycling, GMS (Dubai)
More than 8 years after the IMOs Hong Kong international convention for the safe and environmentally sound recycling of ships (the Hong Kong Convention (HKC)) was adopted, currently, the biggest question being asked in the corridors of the ship recycling industry is “when will the HKC come into force”. The Convention aimed at improving the health and safety standards of the ship recycling yards has so far seen a very slow progress towards meeting its entry into force criteria. At the beginning of 2017, only four countries – Belgium, Congo, France and Norway had ratified the Convention. The list got only two more additions by the end of 2017 when Denmark and Panama acceded to the Convention, which does not translate into the minimum requirements of the convention’s entry into force.
The Hong Kong Convention will enter into force 24 months after the date on which the following conditions are met:
1) At least 15 States have either signed it without reservation or deposited instruments of ratification/acceptance/approval/accession with the IMO Secretary-General.
2) The combined registered gross tonnage of the States mentioned in ‘1)’ is at least 40 percent of the total world registered tonnage.
3) The combined maximum annual recycling capacity of the States mentioned in ‘1)’in the preceding 10 years is at least 3 percent of their combined registered tonnage.
Effectively, the above conditions mean that in order for the Convention to enter into force, it is required to be ratified/acceded by at least one of the largest shipping registries along with two major recycling nations, which could technically be either of the following combinations – India and China, India and Bangladesh, India and Pakistan, and China and Bangladesh. However, given the state of the industry in Bangladesh and Pakistan, it would be safe to assume that any combination involving Bangladesh or Pakistan isn’t likely in the near future. Therefore, China and India become crucial in this context. Moreover, China (including Hong Kong) having a relatively large percentage of fleet registration becomes even more critical for the HKC’s entry into force.
In light of these requirements, 2017 has been an important year as Denmark and Panama have acceded to the Convention. The world’s largest flag state – Panama acceding to the convention mean condition #2 mentioned above is getting close to fulfilment. Moreover, Turkey got within the touching distance of submitting the ratification documents to IMO by incorporating the HKC into its domestic law and India completed the draft bill for translating the provisions of the HKC into its domestic law. Turkey’s ratification and India’s accession to HKC would help impart pressure on other major recycling countries to ratify the Convention and its journey towards enforcement will be accelerated.
In conclusion, we have seen some important developments in 2017 stimulating the progression of the HKC towards enforcement. However, more efforts are required to meet the criteria set by the IMO. Other relevant states must step up for the speedy enforcement of the HKC, following Turkey and India’s steps taken in the right direction.
For any questions or comments, please contact at: green@gmsinc.net
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Authored by Ms. Arnavi Panda, LLM (Maritime Law), Legal Advisor at GMS DMCC

Risk assessment and risk transfer are fundamental to every commercial contract. In English law, in the absence of any contract to the contrary, liability is traditionally assessed on the basis of fault. Emphasis should be laid on the phrase “in the absence of any contract to the contrary”. A knock for knock clause if one such regime whereby the parties can contractually agree that the liability and/or the losses lie where they fall irrespective of fault of either of the parties and without any further recourse against one another. The English Courts have upheld the validity of the knock for knock liability clause describing it to be “a crude but workable allocation of risk and responsibility” and would normally seek to give effect to the “natural and ordinary” meaning to the agreement between the parties so long as it is not repugnant to basic principle of contract. 

Knock for knock clauses are a common feature in most maritime and offshore contracts adopted in numerous standard form contracts published by BIMCO. This article focuses on the knock for knock clause in the BIMCO Towcon 2008 contract.  The knock for knock clause in a standard BIMCO Towcon appears in Clause 25 which essentially seeks to allocate risk and liability between the parties where each party agrees to bear responsibility for and indemnify the other party for any loss or damage sustained to their respective property i.e. either the tug in the case of the tugowner or the tow in the case of the Hirer, and any injury or death of their own (and their contractors and subcontractors) employees, irrespective of fault. While the rationale behind the knock for knock clause was to protect contractors from accepting liability for a client’s property that might involve significant high risks and to avoid the need of overlapping insurance coverage, and even though the liability regime has developed since 1970s from the time of it’s origin, the primary debate of this regime still focuses on whether the knock for knock regime exempts a party to the contract from gross negligence, material breach of performance of contract or willful misconduct. 

This is particularly a cause of concern in the ship breaking and recycling market where the Hirer will be seen to waive off his rights to claim any damage for damage sustained to the physical property of the tow i.e. the Vessel and/or any other asset that is often towed from one destination to the recycling yard depending upon the condition of the Vessel to sail on her own power or in need of being towed. Such waiver includes but is not limited to pillage of material onboard the Vessel which might be of commercial value at the end destination i.e. the recycling yard where every part of the Vessel is either dismantled or reused. Furthermore, it is important to note that gross negligence is not recognized as a distinct concept with no set defined meaning in English law and is open to the interpretation of the Court from a case to case basis. Parties are only required to observe a minimum level of due diligence in conducting the towage operation based on the precedent established in the landmark judgment of ATurtle [2008] EWHC 3034 and therefore in the absence of a specific provision in the contract must ensure to carefully word such knock for knock clauses in such contracts. Under English law, courts will usually give preference to enforce the contractual terms agreed to between the parties excluding negligence, gross negligence, material breach of contract, consequential losses or willful misconduct provided that the wording used of such exclusion is clear. Such amended clauses normally require the assessment and approval of the tugowners and the Hirer’s underwriters specially in the case of Towcons where the damages suffered may very well be over the cost of the asset. A clearly drafted knock for knock provision coupled with a complimenting insurance cover is therefore vital and needs particular attention when negotiating a towcon and assessing the potential recourses in the event of defaults, negligence, misconduct or material breach of contract amongst other primary terms of contract. 


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Myriads of responsibilities and possibilities for ship owners seeking to recycle end-of-life tonnage
By Dr. Kanu Priya Jain, GMS Green Team

For ship owners, it is critical to manage the recycling of end-of-life ships and offshore assets carefully, keeping in mind the relevant national and international regulations and the CSR policy of their company. However, most ship owners lack time and resources to dedicate specifically to such tasks because their main focus is on operations. In recent days, managing end-of-life ships is becoming increasingly complex due to revamped international and national regulatory landscape. Moreover, environmental protection has taken a spotlight amidst the talk of corporate social responsibility towards the environment and climate change. Therefore, ship owners, besides seeking the best possible monetary value for their  end-of-lifeships and offshore assets, are also in need of partners capable of end-to-end management of such projects.

The entire end-to-end management of such projects includes memorandum of agreement between the ship owner, the last voyage owner and the end-buyer, i.e. the ship recycler; the technical management of the ship’s last voyage to the recycling yard; and the safe and environmentally sound management of the ship recycling process with continuous supply of technical expertise and supervision. All these tasks must be undertaken within the purview of a complex mesh of national and international regulatory regimes governing the shipping industry. With such tasks, responsibilities related to legal, technical, regulatory and social must be diligently undertaken by the concerned parties.

In the current market, India, Pakistan, Bangladesh, China and Turkey continue to be the major recycling countries in terms of recycled tonnage volumes. However, within each country many different types of ship recycling facilities co-exist. The facility types can be broadly classified as non-ISO-certified, ISO-certified and Hong Kong Convention (HKC)-compliant. Usually, ship owners are free to choose the type of yard they want their ships to recycle.

Since GMS’ inception over two decades ago, the company has successfully negotiated about 3200 ships for recycling. Our job goes beyond negotiating ships for our principals. We  monitor the recycling process with monthly reports created by our Green Team of dedicated Ph.D. professionals from the moment a ship is sold to our principals till  the completion of the recycling process,  keeping the ship owner informed about and involved in the entire procedure. The decision on critical aspects such as the selection of the recycling yard is also left to the ship owners during initial negotiations. In the past few years, we have seen an increase in demand for the HKC-compliant facilities as more and more ship owners are seeking environmentally conscious options to dispose of end-of-life tonnage and we have been strongly advocating in favor of Responsible Ship Recycling at HKC compliant recycling facilities

Amongst major recycling centers, India is now emerging as a leader of HKC-compliant yards where almost half of the operational yards now have acquired a HKC Statement of Compliance (SOC) issued by reputed (IACS members) classification societies. Also, Turkey, that has recently taken legal steps towards ratifying the HKC, and China, too have several HKC-compliant yards. Interestingly, quite recently (19th Oct 2017) we saw the first recycling yard in Bangladesh receiving a SOC with HKC from classification society RINA. We hope this trend amongst yards to become HKC-compliant keeps growing in all major recycling countries. It will create a fair competition between major recycling regions and increase the options for ship owners seeking the services of ‘green’ yards.

For any questions or comments, please contact our Green Team at: green@gmsinc.net 

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