LNG conversions raise legal issues

In the modern regulatory landscape, old technologies, equipment and infrastructure on ships often require overhaul. For shipowners with vessels operating in the recently-introduced ECAs, for example, running vessels on heavy fuel oil (HFO) alone is no longer an option. Although switching to more expensive distillate fuels is one way to achieve regulatory compliance, and fitting scrubbers is another option, many shipowners are coming to the conclusion that, depending on the characteristics of the vessel and the routes that it operates, converting the vessel to run on LNG may be the most attractive long-term solution. That said, legal issues with such conversions may catch out the unwary.

In some ways, a contract for the conversion of an existing ship is more complex than for the build of a LNG-fuelled vessel from scratch. For instance, standard form contracts for newbuildings are widely used in the industry, meaning that the yard and the shipowner have a template for the project that may simply require fine-tuning. No such standard form contract exists for ship conversions. As a consequence, the contractor and shipowner must pay close attention to whether or not every key issue has been dealt with in the contract.

The “interface”

One such key issue in conversion projects is the so-called “interface” aspect, which is of no concern for newbuilds. In a conversion project, the old, existing materials and technologies that form the vessel will need to be mixed with the new components being introduced as part of the project. At the end of the project, the vessel will be an integrated structure once more. It is, therefore, crucial that the “old” and the “new” integrate properly; in other words, that the “interface” is effective.

It may be that the introduction of the new equipment to a vessel puts stresses on parts of the ship that had functioned perfectly before the conversion. Indeed, it might be that the works are approved by the shipowner and the classification society upon completion of the conversion, only for damage to occur at a later date as a result of the discord between the old parts and the new equipment over time. Would the contractor be obliged to rectify any such damage? Ultimately, this is a matter for the parties to decide in the conversion contract.

Where the contractor is keen to ensure a degree of protection against the risks of “interface” issues, the conversion contract could include specific warranties by the shipowner as to the condition and performance of the ship prior to the conversion project. If problems occur as a result of a pre-existing issue with the ship in breach of one of those warranties, the contractor may not be exposed to a claim.

Lengthening vessels

The nature of the conversion itself may lead to its own legal issues. Although one method of LNG conversion involves installing LNG tanks and fuel handling systems in the existing hull, an alternative of considerable popularity (not least because it generally requires the vessel to be out of operation for a shorter period of time) is to insert a new “LNG ready” pre-constructed mid-body section, containing the necessary LNG systems.

Insertion of a new section can be carried out in as little as a few weeks, even on larger vessels, but the fact that the ship itself is elongated as a result means that legal and regulatory issues need to be kept in mind at the outset.

In particular, a lengthening is defined as a major conversion, so the flag state administration should be involved in the process at an early stage, and up-to-date SOLAS requirements will need to be met where the conversion “substantially alter[s] the dimensions of a ship”, even where the majority of the ship may pre-date those requirements. This can present a significant challenge for the shipowner, and it may be worth considering applying to the flag state administration during the opening stages of the project for exemptions from certain SOLAS requirements where possible.

Time constraints

Finally, the time required for completion of a conversion needs to be given very careful thought. Unlike a newbuilding project, a conversion takes place on a vessel that has already been generating revenue for the shipowner. The shipowner will, therefore, often be keen to give the contractor the absolute minimum time required to carry out the conversion, so that the vessel can resume profitable operation as soon as possible.

The shipowner may also push for an agreed sum to be paid by the contractor, by way of liquidated damages, if delays occur. Contractors should, therefore, undertake thorough inspections of the vessel prior to commencing the conversion where possible, to reduce the unknowns and allow better preparation for the project ahead.