More than a decade has passed since the adoption of the Hong Kong Convention for the Safe and Environmentally Sound Recycling of Ships. With a rising average age of vessels, cooling markets in some segments, appreciating steel prices and new environmental regulations, many shipowners will have to determine when, where and how to resell or recycle their older tonnage. In this newsletter we will provide an update on the international rules, the status on the Hong Kong Convention, the EUs approval of yards and the contractual developments affecting the recycling of vessels.
Internationally, the control on the export/import of waste is mainly regulated by the 1989 Basel Convention which has been implemented in EU law through the Waste Shipment Regulation. These rules apply to all forms of “waste”. Vessels are deemed to be “waste” in principle when the vessels are intended (or required) to be recycled or disposed of.
The Basel Convention and the Waste Shipment Regulation basically apply to any international (“transboundary”) transport of “waste” (including vessels).
The purpose of the rules is generally to ensure that waste is being handled in an “environmentally sound manner” (ESM) in accordance with international and national laws, regulations and practices. Depending on the states involved and the (potentially hazardous) character of the substances onboard the vessel (e.g. asbestos or cargo residues), the transboundary ‘movement’ of a vessel intended to be recycled may either be prohibited (in any form) or subject to cumbersome administrative and financial requirements.
The waste shipment rules contain broad definitions of the responsible parties. Apart from the actual exporter (the owner of the vessel), the “producer” of the waste is also responsible for observing the control procedures. When selling to a (interim) cash buyer just prior to the recycling, the seller/owner may be the “producer” based on the assertion that it is the seller who allows for the vessel to be recycled. The seller thus risks being liable if the buyer violates the waste shipment rules just after the sale.
The rules entail other difficulties in particular in respect of vessels. In most cases, the vessel may not be exported/imported prior to the receipt of approval of the transfer and the recycling operation from the authorities in the export, import and, if any, transit states. Based on a strict application, the vessel is barred from leaving the waters of the export state during the application handling process (even though the vessel is in class and fully operational and insured). Obviously, this entails the risk that the owners will seek to avoid the application of the rules, not necessarily because the owners wish to scrap vessels without regard to the environment, but simply because the administrative procedures are not appropriate.
Importantly, these waste shipment rules do not apply if there is no transboundary movement (between an exporting state and an importing state). If the decision to recycle the vessel is in fact taken while the vessel is in international waters (e.g. in the Indian Ocean) and the vessel travels straight to the recycling facility (e.g. in India), the rules do not apply in principle. Combined with difficulties in and unwillingness of enforcing the rules in some states, this has led the waste shipment rules to be fairly ineffective.
In 2009, IMO adopted the Hong Kong Convention as a special regime for the recycling of vessels in order to replace the rules based on the Basel Convention. In the IMO Secretary-General Mitropoulos’ words, the new convention aimed to strike “the right balance between the responsibilities and obligations of ship owners, ship recycling facilities, flag and recycling States, [to allow] for future improvements and [to provide] a platform and an avenue for better regulation, in due course, of the activity it addresses”.
The Hong Kong Convention shall apply to vessels of not less than 500 GT which are registered in a state which is a contracting party to the convention. It applies irrespective of where the vessel is located at the time of the recycling operation. The Hong Kong Convention is thus not concerned with the transboundary movement of the vessels (unlike the waste shipment rules). The registered owner or, if applicable, the disponent owner is required to comply with the Hong Kong Convention. The Hong Kong Convention does not include the concept of “waste producer” and should not apply to sellers of vessels destined for recycling – thereby ensuring a clearer profile on the responsible parties.
The Hong Kong Convention follows, unlike the Basel Convention, a ‘cradle-to-grave’ approach. It sets out requirements for the construction and operations of vessels to prepare the vessel for environmentally friendly recycling. The owners are required to keep a list Inventory of Hazardous Materials (IHM) and subject to inspections. The Hong Kong Convention requires that vessels are only to be recycled at facilities authorised by approved classification societies and based on an Ship Recycling Plan for the specific vessel.
In 2013, the EU adopted the Ship Recycling Regulation. While it is based on the Hong Kong Convention, the Ship Recycling Regulation puts additional requirements in place. Most importantly, the Ship Recycling Regulation requires that the recycling is undertaken at facilities approved by the EU Commission (and not just facilities approved by classification societies). These are compiled on the so-called “European List”.
Noteworthy, the Ship Recycling Regulation only applies to vessels under EU flag. The Ship Recycling Regulation provides that the Waste Shipment Regulation shall not apply to EU flagged vessels. At the same time, the Ship Recycling Regulation does not restrict the reflagging of the vessels prior to the initiation of recycling operations. The reflagging of an EU vessel to a non-EU registry will thus only entail that the Waste Shipment Regulation should apply to the extent the vessel is in EU waters. Hence, if the vessel is reflagged to a non-EU flagged and not trading in the EU, the Ship Recycling Regulation can be ‘disapplied’. Instead, the local rules of the territories involved, (which are, most likely based on the Basel Convention) may potentially apply to the transfer and recycling of the vessel.
The Hong Kong Convention will enter into force 24 months after the ratification by at least 15 states which represent at least 40% of world merchant shipping measured by GT. Back in 2009, it was expected – or at least the hope of the industry – that the Hong Kong Convention would be swiftly ratified and broadly accepted by the leading flag states.
Sadly, while more than 15 states have ratified the convention, the contracting states’ share of the world merchant is still less than 30%. The most recent ratification was Spain in July 2021 and the threshold of 40% is not expected to be reached in the near term.
While the Hong Kong Convention is not in force internationally, large parts of the industry have nonetheless adhered to the Hong Kong Convention by, for instance, broadly using the RECYCLECON which is based on the Hong Kong Convention. The Hong Kong Convention still enjoys broad endorsement from the primary shipping organisations such as BIMCO, Intertanko and International Chamber of Shipping. The ambitions are still the same.
The Ship Recycling Regulation requires that any hazardous materials and waste are handled only on “impermeable floors with effective drainage systems”. This has caused difficulties to the facilities in South Asia. These facilities generally use the ‘beaching method’ – using the tides to get the vessel to lay ashore, then allowing the yard to dismantle the vessel on location. The yards have been found not to have any effective systems to avoid chemicals and other hazardous substantances being dispersed into the local marine environment. The method has been perceived as the main reason for the South Asia recycling facilities not being able to obtain approval from the EU Commission.
In October 2022, Marprof Environmental Ltd, issued its “Report on the European List”, 3rd Ed. The report underlines that the EU Commission has issued statements which may indicate that the beaching method can, in fact, be accepted in some situations. In the EU Commission’s last published inspection reports from 2019, the Commission noted no major failures in respect of a specific yard, but noted that the local infrastructure outside the yard’s control, incl. hospitals and downstream waste management, was unsuitable.
In December 2022, the EU Commission published its 10th review of the European List. 45 yards were included, 38 in Europe. To the disappointment of the Indians, no Indian yards were included. The Commission also notably removed two Turkish yards, one for failing to sufficiently protect the employees’ working conditions and one for failing to ensuring transparancy on dismantling operations. The update shows that the facilities must constantly fulfill the rigorous requirements to be approved for the recycling of EU flagged vessels. We are still a long way for a broad EU acceptance of non-EU facilities.
In 2012, BIMCO adopted the RECYCLECON. At the time, it was expected that the Hong Kong Convention would be ratified quickly. As the waste shipment rules will often still apply, the contract parties would need to insert wording to cover the potential obligations and liabilities relating to the compliance with the waste shipment rules.
In practice, due to the seller’s potential liabilities under the waste shipment rules (as a “waste producer”) it is common and often advisable for the contract parties to include a further-trading (or on-trading) clause in MoAs concerning old second-hand tonnage. In such clauses, the buyer undertakes to trade the vessel for a certain period following the sale. No industry organisation has published any widely used trading clause. BIMCO plans, however, to publish a much-awaited On-trading Clause for MoAs in April 2023.
As the industry at large is well aware of, the IMO has introduced a measure called EEXI (Energy Efficiency Existing Ships Index). It is a framework for determining energy efficiency and CO2 emissions from existing vessels over 400 GT. The EEXI sets a minimum requirement for the technical efficiency by requiring a vessel to assess and measure its CO2 emissions by design against specific emission reduction factors for each vessel type. The owners then have the possibility of implementing technical measures to adjust the emissions to the level required to comply with the regulation.
A potentially overlooked aspect of the EEXI is the risk that the waste shipment rules will be triggered by charter party arrangements. Shipowners and charterers will often agree how to split the costs relating to planned and potential further needs for retrofitting. In respect of old vessels, the parties will need to consider what to do and who to pay if the costs of retrofitting end up exceeding the benefit of prolonging the vessel’s life. In such case, the charterers should be attentive to the risks in agreeing to cost arrangements which give the owner an incentive to scrap the vessel if, for instance, the charterer does not agree to exercise an option to pay for the retrofitting costs or if the charterer gets compensation for early delivery in order for the vessel to recycle the vessel. In such case, there is a risk – not under the flag state rules but under the waste shipment rules, if applicable – that the charterer is deemed to be a “waste producer”. The risk is inherently tied to the uncertainty on the “producer” concept.
Both parties are thus advised to carefully consider the arrangement pertaining to EEXI compliance and retroftting. In any event, the charterers are advised to consider insisting on the inclusion of green recycling clauses or other protections against the owner in the event that the owner does not comply with the ship recycling rules post-redelivery.
The years in which owners could disregard the environmental rules are long gone. In recent years, owners who have failed to fulfill the waste shipment/recycling rules have been indicted. Examples include the Norwegian Tidecarrier/Harrier case. In March 2022, the Court of Appeals upheld a 6-months prison sentence issued by the lower court against the ship owner for failing to obtain export permit under the Norwegian rules implementing the Basel Convention for a vessel that was dismantled in Pakistan shortly after the owner’s sale to a well-known cash buyer (intermediary). The court specifically rejected the argument that the seller was relieved of liability by selling to a cash buyer as the seller was or should have been aware of the buyer’s intention to recycle the vessel.
The IMO’s initial hope that such cases could be easily avoided through the rapid adoption of the Hong Kong Convention worldwide has, as noted, not yet been fulfilled, and the Basel Convention and Waste Shipment Regulation still regulate the export/import of the many non-EU flagged vessels. As the costs of recycling in Europe is still substantially higher than in South Asia, owners of ocean-going vessels still have an incentive to sell the vessels to yards located there. Many leading European shipowners also invest to improve environmental, health and safety standards and the employment conditions at the yards. Furthermore, the EU shipyards’ total recycling capacity is still far from being high enough for the tonnage that needs to be recycled annually. There are thus many reasons for owners still using facilities in South Asia.
At Gorrissen Federspiel, we have a long history of advising owners, charterers, recycling facilities, financiers and other concerned parties with all matters relating to the sale and green recycling of vessels, including the application process (under the waste shipment rules), the sales contracts/on-trading clauses, retrofit agreements and compliance risks.
 The Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal of 22 March 1989 (as amended).
 The Regulation (EC) No. 1013/2006 of 14 June 2006 on shipments of waste (as amended).
 Basel Convention, Art. 2 (1), WSR, Art. 2 (1), see Art. 1 (1) (a) of Directive 2006/12/EC.
 Basel Convention, Art. 6, Waste Shipment Regulation, Art. 49.
 Hong Kong Convention, Art. 3.
 Hong Kong Convention, Annex, Regulation 1 (8).
 The main requirements are found in the Annex to the Hong Kong Convention.
 Regulation (EU) No. 1257 of 20 November 2013 on ship recycling (as amended).
 Ship Recycling Regulation, Art. 13.
 Commission Implementing Decision (EU) 2022/691 of 28 April 2022 (as amended).
 Hong Kong Convention, Art. 17, and the IMOs press release of 7 June 2021 (here). The third requirement that the contracting states have a combined maximum annual ship recycling volume of at least 3 % of the contracting states’ combined tonnage has been fulfilled, see IMO’s press release of 28 November 2019 (here).
 Ship Recycling Regulation, Art. 13 (1) (g).