Shipowners seeking to ensure their scrapping is green have the tools to do so and lenders are calling on owners to use them, according to Watson Farley & Williams (WFW) partners Nick Walker and Toby Royal.
The rapid spread of environmental scrapping regulations threatens shipowners with unlimited exposure to legal liability for demolition candidates, over which they have no control.
"Once the [scrapping] sale contract has been signed and the deal done, you have to ask how much else is expected of a diligent owner," Royal said. "Potentially, there is an open-ended obligation."
That leaves owners in a squeeze: relinquishing control of a vessel to buyers while remaining on the hook for environmental compliance when the ship is torched.
"Once the ship has arrived at the scrapping facility, is it going to be necessary to have a representative of the seller present to oversee the scrapping? It's a new frontier," said Royal, who sees this as unfair to shipowners who make an effort to be compliant.
Scrapping should be "an essential part of the life cycle of the ship", which if done properly results in an environmentally wholesome outcome where recovered materials can be reused.
Within the European Union, Royal's colleague Walker cited 2018 Rotterdam court verdicts — against Dutch reefer-owner Seatrade and two executives — as having heightened EU shipowners' risk awareness of scrap sales that can be prosecuted as hazardous waste exports.
Similar risk applies to owners with tonnage in EU jurisdictions at the time of such a sale.
But in recent months, awareness of that risk has gone global.
Shipowners including Taiwan's Evergreen Marine and Hong Kong'sTai Chong Cheang Steamship have gone to court or threatened legal action where ships have ended up trading after scrap sales, or turned up on a beach despite contracts specifying green demolition.
Sellers have complained that clauses in memorandums of understanding (MOUs) carry little weight when a swing in freight or scrap steel markets make it attractive to violate them.
On the other hand, some sellers may also be complicit where toothless green scrapping clauses allow cash buyers to do as they like, while giving sellers plausible deniability.
Royal believes there is an alternative to toothless MOU scrapping clauses.
Compliant recycling
"For those shipowners who want to be responsible, they could require the cash buyer to agree in a document that an element of the sales proceeds be remitted to a green scrapping company, like for example Grieg Green, and they can check to verify the existence of such a compliant recycling contract," Royal said. "Whether or not that is realistically achievable is another matter."
The Norwegian outfit provides green scrapping in third-party facilities and also checks end users of materials for compliance with safety and environmental regulations.
The WFW lawyers were unwilling to provide the MOU clause language that they are recommending to owners, due to client confidentiality and because the new approach is still being tested.
"This language isn't going to be tested until the regulators start prosecuting cases," Walker said. "It's only then that we will see if they do the job they are meant to do — protecting the seller from liability. And it's only then that the cost of responsible scrapping will be worked into the cost of the asset."
However, they believe the change will come because lenders are pushing for it, and not only on the shipowner side.
Reputational risk
"Remember that cash buyers have lenders too, who are aware of the reputational risks around this issue, as well as the potential risk of liability in the UK under the Proceeds of Crime Act," Walker said.
"Any lender would be well advised to ensure they are pushing for rigidity and reporting in the documentation of scrap sales."
Asked whether such lenders are among WFW's clients, Royal said: "While we cannot comment on our clients, as mentioned before, the recycling of vessels is part of the life cycle of any ship.
"Given WFW’s role in the shipping industry, we see it as a natural part of our work to assist owners and lenders in the industry to understand the law applicable to scrapping ships and assisting them to do so in accordance with the regulations."
