BIMCO FuelEU Maritime: our response to your feedback

Back in mid-February, we published our regulatory update on the FuelEU Maritime Regulation. We have since received considerable engagement and feedback on the subject from our clients and contacts.  

In this article, we set out our views on a number of common themes which emerge.  

Provision for compliance deficit or surplus at delivery

As summarised in our earlier update, the main purpose of the BIMCO Clause is to set out the terms on which responsibility for any compliance deficit, and (potentially) the benefit of any compliance surplus, are passed on to charterers. We address compliance surpluses further below.  

In relation to compliance deficits, a common concern is the extent to which the clause will ensure that liability rests with the “responsible” time charterer, rather than a subsequent charterer or the vessel owner. This concern arises in circumstances where the relevant deficit may not crystalise under the Regulation until the vessel is under her next employment. 

Taking the position of the vessel owner first, the owner is likely to remain liable to the authorities for any penalty on a primary basis. However, the BIMCO Clause provides for any surcharge to be calculated on a monthly or “per voyage” basis (at the parties’ election – see sub-clause (d)) failing which, at redelivery. While a degree of credit risk is inevitable, accurate and timely invoicing of any surcharge by owners to charterers should minimise the risk of owners being left to bear any liability. 

As to time charterers, the BIMCO Clause at sub-clause (e) expressly provides for certain criteria to be disregarded for the purposes of calculating any surcharge. These criteria include the effects of:  

• borrowing and pooling, and  

• of the vessel having a negative compliance balance for two consecutive earlier periods,  

in each case prior to commencement of the new charter period.  

This provides some assurance to subsequent charterers that they should not be left to bear the cost of previous charterers’ non-compliance.  

However, from a charterer’s perspective, the clause could go further. For example, the penalty for non-compliance increases by 10% for each consecutive year of non-compliance. Whilst the BIMCO Clause provides some protection for a new charterer where there has been two consecutive earlier periods of non-compliance (see above), it does not address the scenario where there has been one period of earlier non-compliance only. In those circumstances, if the new charterers exceeded GHG intensity limits in their first year of use of the vessel, they could be exposed to the 10% uplift on the penalty, due in part to the previous charterer’s non-compliance.  

Charterers might seek to include a provision in the charterparty excluding any liability whatsoever arising, directly or indirectly, from the vessel’s previous employment.  

Finally, whilst the BIMCO Clause requires owners to disclose certain information to charterers at delivery, we suggest charterers should be seeking detailed up to date information from owners as part of any due diligence exercise undertaken prior to entering into the charterparty. This includes the vessel’s compliance balance for the previous two years and details of any bunkers likely to be on board at delivery, which may well be relevant to charterers’ strategy for complying with the Regulation during their use of the vessel. 

Calculation of cash benefit to charterers, in the event of a compliance surplus at the end of a charter period

The extent to which charterers should be entitled to a financial benefit at the end of a defined period in the event of a compliance surplus gives rise to questions of principle and quantification.  

As a starting point, it should be noted that a compliance balance does not give rise to any right of recovery from the authorities on the vessel’s part. Owners might therefore say that if charterers employ measures that go further than necessary to ensure the minimum level of compliance with the Regulation, and do not take advantage of pooling arrangements to move compliance surpluses from one vessel to another, they should bear the risk of any unnecessary expenses incurred in the process, rather like if one puts more petrol than necessary in the tank of a hire car before returning it. 

At the same time, (again subject to any pooling arrangements in place) any positive compliance balance carried into the vessel’s next employment will make the vessel a more attractive proposition on the market, to owners’ benefit. Any outgoing charterer could therefore argue, with some justification, that they should be entitled to compensation in respect of that benefit.   

As to the calculation of any benefit due to charterers, sub-clause (m) of the BIMCO Clause provides, in outline, for charterers to receive a payment calculated by reference to the quantity of CO₂ equivalent in surplus at the end of the relevant period, capped at a certain level (also to be negotiated). It falls to the parties to determine what the relevant rate might be. 

Possible approaches include:  

• Charterers to be entitled to an amount equivalent to the surcharge that would have been payable had there been a deficit of an equivalent amount. This in turn would fall to be calculated by reference to the formula for calculating a penalty at Part B Annex IV of the Regulation.  

• A rate linked to the additional cost of biofuel at the time, as compared to standard MGO. 

• Owners might also wish to factor in any reduction in GHG intensity achieved through efficiencies on board the vessel, including the capacity to take electricity from shore-side sources whilst on the berth and wind assisted propulsion systems.   

Does the BIMCO Clause oblige parties to make all payments in EURO? Which party bears the risk of exchange rate losses? 

As discussed previously, where the aggregated compliance balance has a negative value at the end of a period defined by sub-clause (d) of the BIMCO Clause (the clause anticipates that this will be calculated on a monthly or per-voyage basis, or at redelivery), owners will invoice charterers for a surcharge. Sub-clause (d) provides for the surcharge to be of an amount, “equal to the FuelEU Penalty expected for that previous month or that Voyage (whichever applies) and upon redelivery.”  

This mirrors the wording in Article 23(2) of the Regulation requiring, “the company [e.g. shipowner] shall pay … an amount equal to the FuelEU penalty resulting from the application of the formulas specified in Part B of Annex IV.” The penalty at Part B Annex IV is calculated in EUR.  

The fact that both the BIMCO Clause and the Regulation refer to an amount “equal to” the FuelEU penalty gives rise to a degree of ambiguity as to whether the relevant amount must be in EURO or whether it could be an amount in another currency, equal to the EURO penalty amount. The following considerations arise: 

• On a plain reading of the Regulation and the BIMCO Clause, the words “an amount equal to…” would appear to open the door to payments being made in currencies other than EURO.  

• The trigger for payment under the BIMCO Clause is an invoice from owners for an amount equal to the penalty. Therefore, to the extent there is a choice of currencies, it would appear to be owners’ choice to exercise. Sub-clause (f) requires charterers to pay the surcharge set out in the invoice. On this construction, charterers would be obliged to settle the invoice in the currency determined by owners and any consequent expense would be the charterers’ to bear. 

• However, when determining the meaning of sub-clause (d) in each case, one would need to consider a) the charterparty as a whole; and b) the background knowledge which would reasonably have been available to the parties when they entered into the charterparty. If all other payments due under the charterparty (e.g. hire) are in e.g. US$, there is a reasonable argument that the parties are likely to have intended charterers to have the right to pay any surcharge under the BIMCO Clause in US$ as well. US$ is of course widely adopted as the universal global currency for transactions in shipping contracts. 

Whilst the construction of each charterparty falls to be determined on its own facts, it is clear from the discussion above that the wording of the BIMCO Clause gives rise to a degree of uncertainty on this issue. We recommend that parties should expressly clarify their intention in terms of which currency should apply at the time of entering into each charterparty. 

What about charterparties where there is no BIMCO Clause? 

The starting point is likely to remain that owners (or parties to whom liability has been delegated by owners) will be liable to authorities in EU member states for compliance with the Regulation.  

In order for owners to pass the cost of compliance onto charterers, the burden will be on owners to establish that the right to do so arises pursuant to other terms in the charterparty. To discharge this burden may not be straightforward. 

Each case falls to be determined on its own facts. However, here are some possible avenues for owners to explore (with help from their lawyers) if faced with this scenario.  

Standard clauses whereby expenses are for charterers’ account 

See for example clause 2 of the NYPE 1946 proforma, which provides that, “the Charterers shall provide and pay for all the fuel except as otherwise agreed, Port Charges […] and all other usual expenses except those before stated […]”.  

Penalties arising under the Regulation are probably not port charges, but could it be argued, now or when the Regulation becomes more established, that they fall under the “all other expenses” umbrella? 

Bespoke contractual clauses 

Check additional clauses e.g. addressing compliance with regulatory regimes, or covering taxes, dues and penalties. 

Implied indemnity 

An implied indemnity is available, under certain time charters and in certain circumstances, where a ship owner suffers a loss while complying with a charterer’s orders. Owners should consider whether this assists them in the event they are left holding a liability arising from the Regulation. 

However:  

• The indemnity will not cover losses which the owner is held to have agreed to bear at the time of entering into the charterparty.  

• Equally, if the loss was foreseeable at the time the charterparty was entered into, the indemnity is unlikely to apply. As such, it may be unlikely the implied indemnity will assist owners in relation to charterparties entered into recently, or in future. 

• The implied indemnity may be more likely to assist owners where a long-term time charter was entered into some time ago, such that it could be said that the Regulation was not objectively in consideration when the charterparty was concluded. 

What are the contractual considerations for ship management companies? 

Article 3 of the Regulation defines the ‘company’ responsible for compliance and accounting for any penalties as, “the shipowner or any other organisation or person such as the manager or the bareboat charterer, which has assumed the responsibility for the operation of the ship from the shipowner and has agreed to take over all the duties and responsibilities imposed by the International Management Code for the Safe Operation of Ships and for Pollution Prevention.”  

Accordingly, where a ship manager falls within this definition, they could be liable to the relevant authority for compliance with the Regulation.  

Equally, the ship manager may have no control over variables that determine the vessel’s compliance or exposure to penalties, such as chartering terms, trading routes and choice of bunkers.  

It is therefore very important from a ship manager’s perspective that contracts between them and their clients are clear about which party is responsible for different aspects of compliance with the Regulation and the terms on which they are entitled to pass liabilities onto vessel owners. Equally, where ship managers accept direct liability to the authorities under the Regulation, it would be sensible to consider retaining appropriate security from owners as reassurance for their potential exposure. 

It is also likely that ship managers will be required to assist vessel owners with the administration, monitoring and optimisation around borrowing, banking and pooling of compliance balances, as well as analysis of vessels’ operations in order to ensure maximum efficiency for the purposes of the Regulation. This is likely to be complex and there are various pitfalls and unknowns that could give rise to liabilities on the part of the ship manager. Again, contractual documentation should, wherever possible, address these risks and (from the ship manager’s perspective) exclude and limit liability wherever possible.