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Weighty issues for heavy lift cargoes

This article first appeared in the 22 March 2012 issue of Lloyds List DCN and is reproduced with their kind permission. www.lloydslistdcn.com.au.

With major construction projects such as Gorgon and Gladstone continuing to fuel the need for further project cargoes, it is timely to look at some of the legal issues that arise. New reforms to the regulation of Australia’s coastal shipping industry will have an impact. Contractual and insurance issues will continue to feature in the procurement process.

Proposed regulatory reforms

The Coastal Trading Bill 2012 and associated legislation are scheduled for introduction to Parliament in March by the Minister of Infrastructure and Transport, the Hon Anthony Albanese MP.

The Standing Committee on Infrastructure had previously released a report in October 2008 noting the declining Australian shipping fleet, low participation by Australian companies in international maritime trades and the growing maritime skills shortages. The reforms now aim at strengthening Australia’s coastal shipping industry, reducing the tax on Australian registered vessels and changing the cabotage regime. Intra-state shipments are not affected and will continue to be regulated by State law.

Tax incentives will be applicable to Australian registered vessels and to vessels on a new Australian International Register of Ships (AISR). They include relief from freight tax, withdrawal of royalty withholding tax, accelerated depreciation and reductions to the taxation of Australian seafarers, in exchange for undertaking compulsory training commitments for new seafarers.

The current license and permit system under Part VI of the Navigation Act 2012 will be abolished after the period for which they are issued or 30 October 2012, which ever is earlier. They are to be replaced with two new types of licence:

  • General License - for Australian operated, flagged and crewed ships.
  • Temporary License - providing access to Australian coastal trade for a specified time period (currently proposed as two years) for qualifying foreign ships or AISR ships.

AISR ships must at a minimum, employ an Australian resident Master and Chief Engineer; other crew must be employed under negotiated agreements consistent with ILO requirements. To maintain standards, international seafarers must comply with minimum workforce standards and AISR vessels will be subject to the same environmental and safety requirements Australian first registered vessels. There will be a transition regime to phase out current licences and permits.

Public submissions on the reforms closed on 5 March 2012. To date most stakeholders have expressed broad support for the need to boost the Australian Shipping Industry and are (unsurprisingly) supportive of the proposed tax incentives, although cost implications of applying the Fair Work legislation to seafarers have drawn comment. Concerns have also been raised that the proposed Temporary Licenses will be inflexible, requiring applicants to state specific dates and vessels up to a year in advance of when the shipping movements will occur. In contrast, procurement of coastal sea freight when required for project cargo currently operates more flexibly. When a licensed vessel is not available, foreign ships may be brought in at relatively short notice for urgent cargo movements.

Contractual issues

Project cargo operations tend to involve two primary contractual relationships:

  • A Principal and Contractor supply chain for the fabrication and delivery of a heavy lift item by sea to a site (Supply Contract).
  • A contract of carriage between a shipper and a carrier which can comprise a bill of lading, a seaway bill, a consignment note, a voyage charterparty or, where there are several voyages to lift the cargo in question, a contract of affreightment.

The Supply Contract

The Principal in the Supply Contract might be a Joint Venture (JV) or the JV’s appointed operator. A recent example is the Saipem Leighton Consortium’s requirement for fifty 3000 tonne concrete caissons to be shipped to Barrow Island to build the Gorgon LNG jetty. The Supply Contract can take many forms, e.g. Australian Standards such as AS4902 (design & construct) or AS4911 (supply of equipment with and without installation) or an EPIC contract based on FIDIC.

The LOGIC suite of agreements is available for offshore projects such as pipelaying, subsea work using diving support and other support vessels, for example the LOGIC General Conditions of Contract for Marine Construction (Edition 2, October 2004).

The Supply Contract may require the Contractor to enter into a contract of carriage to ship the items to site on behalf of the Principal; alternatively the Principal may enter into such a contract on its own behalf.

Contract of carriage

A contract of carriage is between a shipper (who might be the cargo interest or the owner of the item being shipped) and a carrier. The carrier might be a charterer or owner of a vessel capable of handling heavy lift cargo or a freight forwarder providing an end to end service for the shipper. There are almost endless permutations to the shipper/carrier relationship but it is important to identify clearly who is the shipper and carrier. In the Barrow Island example, any member of the Consortium, or the Contractor, or the Contractor’s freight forwarder could contract as shipper. Alternatively the Contractor may contract with a freight forwarder as the carrier.

The contract of carriage can be embodied in variety of documents including a bill of lading, a seaway bill, a consignment note, a voyage charterparty, a contract of affreightment or a freight forwarding agreement. Different considerations will apply to each.

If a bill of lading is used, the Australian amendments to the Hague-Visby Rules as contained in the Carriage of Goods by Sea Act 1991 (Cth) (the Rules) allow the carrier to cap its liability for claims for cargo damage and delay. The Rules also bar claims against a carrier brought one year after delivery of the goods. There are limits on the type of claims that can be made against the carrier. These restrictions may be unacceptable to a shipper of project cargo and consideration should be given to excluding them. Subject to certain exceptions, one way of doing this is to embody the contract in a consignment note.

In many cases, the shipper and carrier of project cargo can expressly agree to exclude the Rules where the cargo is carried on deck and the character and condition of the goods justifies such carriage. Subject to some exceptions, the Rules only apply to inter-state and not intra-state shipments (Exceptions apply under State legislation in WA and NSW which applies to intrastate voyages. See the Sea-Carriage of Goods Act 1909 (WA) where a “bill of lading or document” (which may include a consignment note) may not exclude the liability of the owner, charterer, master or agent for loss or damage to goods arising from the harmful or improper condition of the ship’s hold, or any other part of the ship in which goods are carried).

While consignment notes and bills of lading could be used for liner type services involving small to medium sized cargoes belonging to different entities, large cargoes may required the entire carrying capacity of the vessel. The HEAVYCON 2007 - Standard Heavylift Charter Party is voyage charterparty specifically adapted for heavy lift cargos. HEAVYCON terms leave the charterer with full responsibility for cargo damage and any liability consequent upon delay to the cargo (excluding consequential damages).

Insurance

Both the Supply Contract and the Charterparty will typically detail insurance requirements.

Under the LOGIC General Conditions of Contract for Marine Construction, the Contractor insures against employer’s liability, general third party liability, marine hull and machinery insurance, P&I cover (including pollution liability) for vessels used by the Contractor in performance of the works.

HEAVYCON requires the Charterer to insure the cargo. The owner is noted as co-insured and there is a waiver of insurer’s subrogation rights against the owner. The owner in turn is required to insure against liabilities it has assumed under knock for knock arrangements.

Under the LOGIC General Conditions (and many other similar contracts) the Principal is required to take out Construction All Risks (CAR) insurance. The Contractor is responsible for the deductible. The Contractor and sub-contractors (but only up to the first layer) are endorsed as co-assureds for their respective interests and insurers rights of subrogation are waived. Most CAR policies cover loss caused by negligence of the Contractor. Given the scope of CAR, it is important for the Contractor to check that there is no double insurance with policies it is required to provide.

Where the Contractor has design responsibilities, Professional Indemnity cover should be included. Design responsibilities arise surprisingly often where project cargo is concerned, as it may require special reinforcement, lifting and stowage. Additional warranty surveys may need to be factored in to already tight procurement time frames.

There are a variety of CAR policies including the Marine Construction All Risks (MARCAR) and WELCAR 2001. Defects exclusions need to be discussed with brokers and underwriters on a case by case basis to ensure appropriate cover is in place.

Delay

A party suffering actual loss as a result of the delay in the shipment of its project cargo will often look to obtain advance loss of profits insurance (ALOP), also known as delay in start-up (DSU) insurance. This type of cover can either attach to the CAR cover required under the Supply Contract (Construction DSU) or the cargo policy, e.g. as required under Cl. 26(a) of the HEAVYCON Charterparty. Standard cargo policy wording exists (See wording drawn up by the Joint Cargo Committee (JCC) in London (JC2009/020)).

DSU/ALOP is often required by lenders. It indemnifies the actual loss of gross profit sustained as a result of delayed commencement of business operation caused by an accident covered under the CAR policy and additional costs such as the increase in cost of working.

Assessing claims under these policies can be complex. For example, it may be difficult to calculate the actual profits that would have been earned on a project that has not commenced because of late delivery of critical equipment.

There may also be a requirement for an insured to first claim liquidated damages (in the case of the Supply Contract) or demurrage (in the case of the Charterparty) or to afford the insurer a right of subrogation for such claims.

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