AN EXAMPLE OF A VOYAGE CHARTER BAF CLAUSE “The Freight Rate is based on Platts Bunker FO 380 CST dlvd Singapore. It is agreed that the Freight Rate shall be increased or decreased by US$0.125 for every US$1.00 and/or prorated for the difference between US$300 [this figure is adjustable and usually based on geography and previous pricing realities] and the price per metric ton of spot IFO 380 CST in Singapore as per advice from “Platts Oilgram Bunkerwire” on the Bill of Lading Date”.2
In this case, if the price of IFO 380 CST as published by Platts Oilgram Bunkerwire on the bill of lading date was US$310/mt spot in Singapore, then the freight rate should be increased by US$1.25.
Conversely, if the Singapore spot price was US$290/ mt, then the agreed charter freight rate would decrease by US$1.25.
POTENTIAL PITFALLS AND PRACTICAL TIPS Existing clauses may become outdated with IMO 2020’s implementation. An alternative index to IFO 380, such as Platts FOB Singapore Gasoil, would more likely align with IMO 2020-compliant fuel pricing.
Other potential drafting issues or anomalies stand out: no provision is made for an index more closely aligning with ultra low sulphur fuel oil (i.e., with a maximum sulphur content of 0.1%) as would be required to be burned in Emission Control Areas (ECA).
Also, no provision is made for the burning of high sulphur fuel where owners are at liberty to use scrubbers at their own discretion. In such instances, utilising the IFO 380 CST Singapore price may in fact be more appropriate.
2 Figures used in this sample clause are for illustrative purposes only.
BAF clauses typically track against prices fixed on a passed date (the bill of lading date in the clause above). They will not track the present pricing reality at the time the bunkers are purchased or stemmed.
If parties wish to track actual bunker costs during the voyage more closely, they should consider incorporating Bunker Escalation and De-Escalation clauses.
These are particularly useful where it is difficult to nominate suitable indices (not least where one is dealing with different blends of fuels stemmed on board with broad pricing variances) and where pricing movements are uncertain/volatile.
TAKE-HOME POINTS BAF clauses help carriers hedge against the risk of bunker price volatility.
Markets will likely adjust in line with carriers’ obligations to purchase more expensive low-sulphur fuel.
Whilst parties’ relative bargaining powers will determine the extent to which carriers may pass on these additional costs to their customers, BAF clauses are malleable and can be drafted to suit the wants and needs of the parties involved and are therefore a viable device.
The immediate challenge for carriers will be winning their customers’ hearts and minds to accept revised BAF clauses ahead of IMO 2020’s implementation.
Wole Olufunwa E:
wole.olufunwa@hfw.com T: +65 6411 5344
23 | ADMISI - The Ghost In The Machine | November/December 2018
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