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Legal problems associated with scrapping ships

Regular visitors to the BDM legal blog will note that we try to highlight legal issues of interest to the shipping industry. Recently we have noticed an upturn in enquiries about laying ships up and/or selling them for scrap. It seems that owners, hedge funds and financiers are realising that these options are worthy of consideration as a way of stemming losses. The global dry bulk fleet presently amounts to around 10,000 vessels with orders for another 1,250 believed to be in existence. Many commentators have predicted that overcapacity is running at anywhere between a third and a half based on conservative estimates of current and anticipated medium term global requirements.

For those looking to scrap ships, there are several options. The main scrapping nations are India, Pakistan and Bangladesh but there are also options in Europe, particularly in Turkey. China is also an option although scrapping capacity has declined recently. This year is expected to see record scrapping although the incentive to scrap is not helped by current low steel scrap prices.

The regulatory environment surrounding scrapping also does not help and this is where we have seen recent enquiries from clients. Those interested in scrapping need to be aware of three things:

1) The Basel Convention;
2) The Hong Kong Convention; and
3) The EU Regulation 1257/2013.

The Basel Convention (“Basel”) came into force in 1992 and has been ratified by 183 countries including all EU member states and the OECD countries (save for the US who don’t like to ratify international conventions but effectively give effect to it via other means). Basel deals with transboundary movements of “waste”. Almost all ships due to be scrapped fall within the definition of “waste” as they contain hazardous materials. The regulatory regime under the Convention provides for the exporter and the importer of “waste” to provide advance written notification to the relevant authorities in those respective countries and consents must be obtained including, where relevant, from any transiting states. There also needs to be a contract in place for the disposal of the waste which complies with the requirements of the Convention.

The Hong Kong Convention (“HKC”) is gaining momentum but is not presently in force. One of the requirements is that at least 15 states representing 40% of the world’s merchant shipping fleet by tonnage need to ratify. Whilst the number of ratifications has increased recently, we are still some way off 40% of the world’s merchant fleet. Furthermore, the main scrapping nations are reluctant to ratify because HKC is perceived to impose onerous and expensive requirements that can only add to the cost of scrapping.

The EU decided to unilaterally implement the principles of the HKC by passing Regulation 1257/2013. However, the part of the regulation dealing with scrapping is not yet in effect as the EU is still compiling a list of approved ship recycling facilities. The list is expected to be available towards the end of 2016 and it is expected that the regulation will come into effect six months after that. Until that time Basel still applies to all ships flying the flags of EU member states by virtue of Regulation 1013/2016.

All of the above give rise to legal questions of interpretation and application. Ship recycling is commonly arranged via a scrap sale but multiple parties may be involved and the ship may move through several jurisdictions before being delivered to the breakers in India, Pakistan or Bangladesh. We are often asked to review the scrap sale and advise on the regulatory issues. The application of Basel involves considerations of when the intention to scrap arises, who falls within the definition of “exporter”, how the removal of hazardous substances in advance might take the ship out of the definition of “waste” and how the position might be different if covered by the HKC and/or the EU regime. The sale can often be managed to ensure that consents can be obtained easily and effectively from the exporting and importing nations. Once the EU regime comes into effect we expect to see enquiries on how to avoid the regime through re-flagging to a non EU flag. That can deal with certain issues but not necessarily all issues as one of the requirements of the EU regime is that ships trading in EU ports need to carry an inventory of hazardous materials on board regardless of their flag.

Legal considerations are important as a breach of Basel can lead to criminal sanctions at a national level in some jurisdictions. There can also be potential liability on the original owner if the scrap sale is not handled properly. Reputational issues are also important when it comes to scrapping. Owners of Japanese flagged vessels have traditionally used China for recycling but, more recently, they are looking at certain facilities in India on the basis that those facilities can demonstrate that they are putting into place systems to adopt HKC standards. It would seem that, although not yet in force, the HKC standards are perceived as being the ideal for the ship recycling industry albeit perhaps not by those working in that industry who merely see this as an extra cost to be absorbed on the back of already decreasing margins in the scrapping business.

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