The Importance of Complying with Green Recycling Contracts (2020): What ship owners can do to prevent failed “green” recycling contracts?
Cash Buyers failing to comply with “green” recycling contracts has indeed become a reputational/ headline risk for Ship Owners in recent times, with several vessels that were intended to be sold for recycling as per the HKC (The Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships adopted by the International Maritime Organization (IMO) in May 2009) guidelines into India, making news headlines for the wrong reasons after reportedly ending up in non-compliant yards in Bangladesh. This is why it is ever more and increasingly important for Sellers to become conscious of their responsibilities and to start ensuring they are committing their vessels for “green” (HKC-compliant) recycling to wellknown, experienced and reputable Cash Buying counterparties with a proven and reliable track record of guaranteeing “green” recycling.
We’ve seen a recent trend towards the use of tougher and more complicated sale terms in recycling contracts, but which unfortunately have only served as a temporary / superficial band aid to address the pervasive problems caused by failed “green” recycling contracts. More recent attempts by some Sellers to introduce clauses remitting a portion of sale proceeds to “green recycling companies” in an effort to transfer their green contractual responsibilities to third parties are likely to be legally ineffective, and realistically will likely offer little protection to Sellers from being held accountable for failing to comply with green recycling clauses. Such clauses and arrangements will only complicate the sale transaction and make recycling contracts more costly for Sellers. Rather, Sellers would be well-advised to ensure that they only engage with those reputable and reliable cash buying counterparties that can guarantee “green” recycling.
One of the main reasons for this is that all too often, we see price as the primary driving factor and motivation behind a sale transaction, whereas ensuring compliance and adherence to Seller’s “green” recycling contract terms should be the key focus of each transaction. In particular, transactions where vessels are sold on an ‘as is’ basis, Sellers need to exercise far more stringent quality control and vetting of prospective cash buying counterparties and should only engage with those cash buyers who can guarantee “green” compliance, rather than simply inviting the highest offers from the market and committing their vessels to whomever can pay top dollar, without any guarantee of “green recycling” of their vessels. Many ship owners and Sellers who take their green recycling responsibilities lightly and who engage in this risky approach, open themselves up to and are exposed to those cash buyers who are only concerned about their profits and who ignore their “green” recycling contractual obligations and responsibilities.
Recent reported cases of EU ship owners (who had historically sold their vessels for recycling to the sub-continent) being accused and prosecuted by EU authorities, only serves to highlight the problem of failed green recycling contracts, however ironically, the reality is that given the current marginal and very limited number of EU approved recycling yards, sufficient green recycling capacity in the EU simply does not exist and is unable to accommodate the world’s current massive ageing and retiring fleet. EU Regulators and the current EU Regulations fail to take this significant factual reality into account. All stakeholders in the recycling contractual chain therefore have a real and vested interest in ensuring that global recycling facilities are being continuously upgraded and improved to be able to provide sufficient green recycling capacity. In fact, we have witnessed well over half the recycling yards in Alang, India (currently 77 in total as at the date of this article) become certified HKC compliant in recent years, and we expect to see a second yard in Bangladesh become certified HKC compliant very soon.
So encouragingly, we see significant and rapid progress being made year on year in the Indian subcontinent, an important fact that the EU should acknowledge and recognize so that Ship Owners, responsible Cash Buyers and regulatory bodies can all work together to continue and encourage the advances made thus far.