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BIMCO CII Clause for Time Charters – The dust begins to settle

Three lawyers explain on BIMCO CII Clause for Time Charters, the obligations, highlight themes emerging from the industry’s reaction to the clause, and impact on the industry so far.

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The following is an article written by three Reed Smith shipping lawyers explaining the International shipping association (BIMCO) CII Clause for Time Charters, the obligations, highlights themes emerging from the industry’s reaction to the clause, and the impact on the industry so far:

By Reed Smith transportation lawyers Nick Austin, Mike Adamson and Laura Hyne 

Just as there is no easy route to decarbonisation, there is no straightforward way of balancing a shipowner’s obligation to comply with the MARPOL Carbon Intensity Indicator (“CII”) Regulations with a time charterer’s right to direct the employment of a vessel.

That much is clear from the long-awaited BIMCO CII Operations Clause for Time Charters 2022 and, more tellingly, from the industry reaction.

Now that the dust is settling: what does the clause actually say? What are the key sticking points? And how are owners and charterers positioning themselves before the CII Regulations come into force on 1 January 2023? In this briefing, we take a closer look at some of the emerging themes.

The BIMCO CII Operations Clause for Time Charter Parties 2022

Messaging from both BIMCO and the IMO has long been that, for the CII Regulations to be effective, owners and charterers will need to work together. This principle of co-operation is at the heart of the clause.

Under sub-clause (b), the parties are obliged to ‘cooperate and work together in good faith’ to: (i) share best practices that may improve the vessel’s energy efficiency and; (ii) collect, share and report on a daily basis any relevant data that may assist the monitoring and assessment of the vessel’s compliance with the CII Regulations and for planning prospective voyages. This, at least, should not be a point of contention because the very essence of the CII Regulations require this.

Charterers’ obligations

The key point is that the clause transfers the responsibility for compliance with the CII Regulations from the owner to the charterer.

Sub-clause (c) sets out the two main obligations on the charterer:

  1.   To operate and employ the vessel in a manner consistent with the CII Regulations.
  2.   To operate and employ the vessel in a manner which will not permit the “C/P Attained CII” (i.e. the vessel’s CII attained at the start of the year or the delivery date if this was in the middle of a year) to exceed the “Agreed CII” (i.e. the CII value which the parties agree in the clause will be met).

The Agreed CII must be stated in sub-clause (d) and this will be a key area of negotiation. Without agreement, the clause defaults to the middle point of ‘C’. For many vessels, this could curb the freedoms traditionally enjoyed by time charterers because they may have to issue adjusted voyage orders (to slow steam or sail by a more fuel efficient route) to comply.

Sub-clause c(ii) says “Any existing warranties as to despatch, speed and consumption or to maintain the Vessel’s description” continue to apply. A charterer will therefore retain the right to claim against the owner for breach of those warranties. However, a charterer must still comply with its other obligations under the clause, even if the owner is in breach of the warranties.  In other words, a charterer is not excused from its obligations if, for example, the vessel underperforms.

Owners’ obligations

The main obligation for the owner is at sub-clause (f). It must exercise due diligence to ensure that the vessel is operated in a manner, which minimises fuel consumption, including the following:

  1.   Maintaining the vessel, its engines, hull and any equipment relating to its energy efficiency in accordance with the charter and to report any deficiencies.
  2.   Adjusting the vessel’s trim and optimising main and auxiliary engine use.
  3.   Making optimal use of navigational equipment and performance monitoring systems.
  4.   Proceeding on the most fuel efficient route (subject to the safety of the vessel and charterers’ instructions).
  5.   Monitoring data relevant to calculating the vessel’s carbon intensity.
  6.   Compliance with the Ship Energy Efficiency Management Plan (SEEMP).

What about non-compliance?

Sub-clause (g) says what happens if the data collected by the owner indicates that the trajectory of the C/P Attained CII is deviating from the Agreed CII.

In short, if, after the owner has given advance warning of such deviation to the charterer, there is a “reasonable likelihood” that the charterer will not be able to comply with its obligations under sub-clause (c), the charterer must submit, at the owner’s request, a plan showing its instructions for at least the next voyage.

Then, if the owner can reasonably show that following this plan will result in the vessel failing to meet the Agreed CII, it must notify the charterer, and the parties must work together in good faith to agree an adjusted plan to bring the C/P Attained CII in line with the Agreed CII.  

Until an adjusted plan is agreed, the owner need not follow the charterer’s orders and can require the charterer to provide alternative instructions to bring the vessel back within the C/P Attained CII.

The vessel is to remain on hire following the owner’s request for a written plan until such plan is agreed and, during that time, the owner will not be in breach of charter if it takes the above steps to bring the vessel within the C/P Attained CII. In theory this could lead to a stalemate if a plan cannot be agreed. However, given the vessel will be off hire, the charterer should be incentivised to agree a compromise as quickly as possible.

There is also an express right at sub-clause (j) for the owner to claim damages caused by any failure by the charterer to comply with the clause.

Observations

A number of themes are starting to emerge from the industry’s reaction to the clause.

The nature of the key obligations

Under the clause, the charterer’s obligation to operate and employ the vessel in a manner consistent with the CII Regulations is an absolute obligation. But the owner’s obligation to operate the vessel in a manner which minimises fuel consumption is one of due diligence only.

This imbalance has raised eyebrows with a few charterers, with some trying to limit their own obligations to the lower standard of diligence.

But how would an obligation to exercise due diligence be measured in the context of the clause? If there is a range of steps open to a charterer to comply, a due diligence obligation should allow it to consider these, choose what it reasonably thinks is best, and avoid liability if it does not work. However, if the only way to achieve compliance is, say, to slow steam, a due diligence obligation would not allow the charterer to avoid that course, even if it came with the risk of liability to third parties under sub-charters, bills of lading or sale contracts.

Changing the absolute obligation to exercising “reasonable commercial endeavours” could be more attractive to a charterer. Whether an owner would agree is another matter.

Incentivising charterers to agree to the clause or assume responsibility for CII compliance

Reports have emerged of charterers in strong negotiating positions resisting an un-amended BIMCO clause on the basis that it uses more stick than carrot to ensure compliance by (a) putting the responsibility to comply on the charterer and (b) giving the owner the right to reduce speed or demand alternate instructions. This is a significant departure from the usual division of rights and responsibilities in time charters and could result in the charterer incurring liabilities to third parties.

Faced with push-back, an owner may want to incentivise charterers to agree the clause or operate vessels in a manner which leads to a more favourable CII rating, for example by sharing in port authority incentives which are expected to be offered to vessels with a CII rating of A or B.

Alternatively, an owner could offer to take other steps not mentioned in the clause, but within its control, to improve a vessel’s energy efficiency. This could include more regular hull and propeller cleaning, upgrading a vessel’s hull coating or installing new energy efficient equipment. A charterer could similarly require an owner to take these steps in return for agreeing to a CII clause under which they take on responsibility for compliance.

In practice, it may not be possible for an owner to avoid taking proactive (and expensive) steps to improve a vessel’s rating if it is so inefficient that it would be not be possible for any charterer to operate it commercially, whilst also ensuring compliance with CII.

Back-to-back charters

Disponent owners often aim to charter out on back-to-back terms with their head charter. However, given that CII clauses are likely to be heavily negotiated with the final wording specific to each charter, we expect to see different clauses in the same chain of charters. Disponent owners should therefore pay particular attention to any exposure gaps and seek to limit them if a fully back-to-back position is not possible.

Nor is the BIMCO clause intended for use in voyage charters. While a BIMCO voyage charter CII clause is anticipated, for the time being parties to a voyage charter will need to agree provisions reflecting the position under any time charter as far as possible. For example, if a party time charters in and voyage charters out and the time charter includes the BIMCO clause, it should aim to agree a right in the voyage charter to sail by an indirect route or slow steam. Alternatively, it could look to include specific terms, e.g. in relation to routing and speed, to ensure the performance of a voyage charter does not put the disponent owner in breach of its time charter up the line.

Claims for breach of CII clauses

The repercussion for non-compliance with CII is that a vessel rated ‘D’ for three consecutive years, or ‘E’ for a single year, must provide a corrective action plan to be signed-off by the vessel’s flag state or class, failing which a vessel could be banned from trading.

Any losses of this type could in principle be recovered under the BIMCO clause. But if an owner suffers other losses in relation to CII, there may be questions about whether those losses were caused by the breach and recoverable in law. For example, what if an owner does not benefit from a future incentive for compliance provided by a port state or suffers an (as yet unknown) penalty imposed by port state or other authority for non-compliance? And what if an owner’s ability to fix the vessel for future voyages, or its market rate of hire, following redelivery is adversely affected? There is fertile ground here for disputes about the cause and recoverability of such losses.

Short term vs long term charters

The BIMCO clause seems best suited for longer term time charters. In short term or trip time charters, where the employment of the vessel is known, specific terms setting out routing, speed and other operational factors affecting energy efficiency may be more appropriate than adopting the BIMCO clause.

Concluding thoughts

The release of the BIMCO clause has had an immediate impact on the industry as owners and charterers grapple with what it means for their operations and wider business models. An owner can now say there is an “industry standard” position, but whether the clause and the delicate balancing act attempted by BIMCO will be widely accepted and actually become “industry standard” remains to be seen. And that’s before the anticipated “update” to the CII Regulations in 2026, intended to reflect the industry’s experience of the Regulations in the first three years, is even on the horizon.

But the initial reaction indicates the clause may be used as a starting point, even if it is amended. And in many cases the final wording will depend on bargaining positions.

The higher level clauses that appeared before the BIMCO clause – which often provided for parties to work together in good faith to ensure compliance or negotiate changes to charter clauses – may now be a thing of a past. It may well also be more difficult for charterers to argue that their largely unfettered right to employ the vessel should not be impeded or that they should not be the ones taking steps to reduce a vessel’s carbon intensity.

It is abundantly clear that the CII Regulations will have a direct impact on the day-to-day operation of vessels across the global fleet. Parties will need to be flexible to achieve compliance even before any update in 2026. The BIMCO clause provides a framework where none existed before, and we expect the market’s approach to CII compliance will mature and evolve as owners and charterers alike come to terms with the reality of the CII Regulations.

 

Photo credit: CHUTTERSNAP from Unsplash
Published: 21 December, 2022

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Research

Sea Cargo Charter report demonstrates shipping’s shortfall against IMO climate goals

2024 report highlights the gap between current emissions and the IMO’s revised strategy for net-zero emissions by 2050.

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Sea Cargo Charter 2024 report

The shipping industry must take urgent action to meet ambitious new climate targets set by the International Maritime Organization (IMO), according to a new report released on Thursday (13 June) from the Sea Cargo Charter (SCC), a global transparency initiative developed by the Global Maritime Forum.

New data from the SCC, a global framework representing 20% of global bulk cargo transport, reveals the sector fell short of minimum international climate goals set by the IMO by an average of 17% in 2023, equivalent to 165 million metric tonnes of CO2e.

When considering ‘striving’ goals set by the IMO, signatories are on average 22% misaligned, which represents a shortfall of 204 million metric tonnes of CO2e in 2023.

Currently, dry bulk, general cargo, and tankers account for around 400 million tonnes of CO2 emissions. With global trade predicted to quadruple by 2050, emissions will skyrocket without urgent action.

Reporting has also been expanded to include “well-to-wake” emissions, which measure emissions from the extraction of oil to its end use, providing a more comprehensive picture of environmental impact and pushing the industry towards faster decarbonisation.

The 2024 report highlights the gap between current emissions and the IMO’s revised strategy for net-zero emissions by 2050. The report shows the importance of commercial and operational decisions on the vessels’ use (such as, instructed speed, cargo and routing optimisation, laden/ballast ratio), innovation and cooperation within the industry to be able to take action in this transition.

Other identified barriers to cutting emissions are geopolitical disruptions, limited alternative marine fuel options for long voyages, and a lack of infrastructure to support new technologies.

The 2024 Annual Disclosure Report was produced by the Global Maritime Forum, which performs secretariat services for the Sea Cargo Charter with expert support provided by UMAS and the Smart Freight Centre.

 

Photo credit: Sea Cargo Charter
Published: 14 June 2024

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Ammonia

Expert discusses technical considerations of using ammonia as marine fuel

Ammonia as bunker fuel poses significant safety challenges due to its toxicity and flammability, says ABS Regional Business Development Manager Muammer Akturk.

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Technical considerations of ammonia as marine fuel

Muammer Akturk, ABS Regional Business Development Manager, on Monday (10 June) published an article on technical considerations of using ammonia as a marine fuel in his Alternative Marine Fuels Newsletter.

The article dives into the use of ammonia as a marine fuel, focusing on the safety and technical considerations necessary for its implementation.

Ammonia is recognised for its potential as a zero-carbon fuel, making it an attractive option for reducing greenhouse gas emissions in the shipping industry. However, it poses significant safety challenges due to its toxicity and flammability.

Key points discussed include:

  1. Safety Measures: The importance of stringent design and operational safety measures to prevent ammonia releases and mitigate risks during both normal and emergency conditions is emphasized. This includes the need for gas dispersion analyses and the use of safety systems like gas detectors and alarms
  2. Regulatory Framework: The article reviews the latest regulations and guidelines developed to ensure the safe use of ammonia as a marine fuel. This includes the IACS Unified Requirement H1, which provides a framework for controlling ammonia releases on vessels
  3. Engineering Considerations: Technical aspects such as fuel storage, handling systems, and the role of risk assessments in identifying potential hazards and implementing preventive measures are detailed
  4. Human Factors: The article also considers the human factors approach to safety, emphasizing training and the importance of designing systems that account for human errorOverall, the article aims to provide a comprehensive overview of the challenges and solutions associated with using ammonia as a marine fuel, highlighting the importance of safety and regulatory compliance in its adoption.

Editor’s note: The full article can be found at the link here.

 

Published: 13 June 2024

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Analysis

JLC China Bunker Market Monthly Report (March 2024)

China’s bonded bunker fuel sales grew in March, as the shipping industry recovered gradually and sellers actively boosted sales on the back of ample supply and high inventories.

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JLC Bonded bunker fuel sales in Zhoushan (Mar 2024)

Beijing-based commodity market information provider JLC Network Technology Co. recently shared its JLC China Bunker monthly report for March 2024 with Manifold Times through an exclusive arrangement:

Bunker Fuel Demand

China’s bonded bunker fuel sales surge in March

China’s bonded bunker fuel sales grew in March, as the shipping industry recovered gradually and sellers actively boosted sales on the back of ample supply and high inventories. Domestic LSFO prices were lower than those in Singapore and other neighboring ports, incentivizing shipowners or operators to refuel their vessels in China, with bunkering volume in Shanghai and Zhoushan rising considerably.

The country sold about 1.82 million mt of bonded bunker fuel in the month, with the daily sales up 13.59% month on month to 58,658 mt, JLC’s data shows.

Sales by Chimbusco, Sinopec (Zhoushan) and China ChangJiang Bunker (Sinopec) came in at 540,000 mt, 630,000 mt and 30,000 mt in March, while those by suppliers with regional bunkering licenses settled at 558,400 mt. At the same time, SinoBunker sold about 60,000 mt of bonded bunker fuel, the data indicates.

China’s bonded bunker fuel exports rise in first two months

China’s bonded bunker fuel exports rose in the first two months of this year, underpinned by fresh quotas and larger production.

The country exported a combination of 3.02 million mt of bonded bunker fuel in January-February, growing by 3.13% from the same months in 2023, JLC estimated, with reference to data from the General Administration of Customs of the PRC (GACC).

Heavy bunker fuel exports totaled about 2.85 million mt in the two months, accounting for 94.13% of the total, while light bunker fuel exports were 177,500 mt, accounting for 5.87%.

The increase in the exports mainly came as China released this year’s first batch of quotas on LSFO exports at the end of 2023. Though refiners’ LSFO production margins were relatively poor, they ramped up their production amid new quotas, which buoyed the exports. China’s LSFO output totaled 2.57 million mt in January-February, with the daily output gaining 2.69% year on year to 42,850 mt, JLC’s data shows.

In January alone, China’s bonded bunker fuel exports settled at 1.78 million mt, jumping by 11.93% month on month and 34.71% year on year.

However, the exports plunged to 1.25 million mt in February, down by 29.99% month on month and 22.75% year on year. Bunkering business at Chinese ports was halted during the Chinese New Year holiday, and customs’ clearing procedure for export was also affected by the holiday. In addition, the operation of many ports was hit hard by heavy snow and freezing rains, adding to the downward pressure on the exports.

 

JLC China bunker exports by region 2023 2024

 

JLC China major blending producers' bunker supply (Mar 2024)

Domestic-trade bunker fuel demand rises in March

Domestic-trade heavy bunker fuel demand recovered mildly in March, as the shipping industry rebounded after the Chinese New Year holiday. However, the demand growth was still limited as some shipowners still suspended services and the market was dominated by wait-and-see sentiment amid high prices.

Domestic-trade heavy bunker fuel demand was estimated at 430,000 mt in the month, a gain of 70,000 mt or 19.44% from a month earlier, JLC’s data shows.

Meanwhile, domestic-trade light bunker fuel demand was estimated at about 140,000 mt, a gain of 20,000 mt or 16.67% from a month earlier, the data indicates.

Bunker Fuel Supply

China’s bonded bunker fuel imports soar in Jan-Feb

China’s bonded bunker fuel imports soared in January-February 2024, due to a low base a year earlier.

The country recorded 581,900 mt of bonded bunker fuel imports in the two months, a surge of 27.36% year on year, with 359,200 mt in January and 222,700 mt in February, JLC estimated, with reference to data from the GACC.

China’s bonded bunker fuel imports dived to a record low in January-February 2023, as bunkering demand had not fully recovered from the epidemic, also because of high freight rates and ample domestic supply. The imports totaled only 456,900 mt in the first two months of 2023, tumbling by 48.01% year on year.

On the other hand, Chinese refiners boosted LSFO production in January-February 2024, limiting the import growth. These refiners produced about 2.57 million mt of LSFO in the two months, with the daily output climbing by 2.69% year on year to 42,850 mt, JLC’s data shows.

Russia became the largest bonded bunker fuel supplier in the first two months of this year, exporting 276,800 mt to China, accounting for 47.57% of the latter’s total imports. Malaysia ranked second with 186,800 mt, accounting for 32.10%, followed by South Korea with 95,800 mt, accounting for 16.46%. Japan climbed to the fourth place with 21,500 mt, occupying 3.69%, while Singapore slipped to the fifth place with only 1,000 mt, making up 0.17%.

In China’s bonded bunker fuel market, only HSFO and MGO are still mainly imported, while LSFO is rarely imported as its import efficiency is relatively low amid steep freight rates.

JLC Bonded bunker fuel imports by source Jan Feb 2024

Domestic-trade bunker fuel supply increases in March

Domestic-trade heavy bunker fuel supply improved in March, as availability of some blendstocks (such as low-sulfur residual oil and shale oil) increased.

Chinese blenders supplied about 460,000 mt of domestic-trade heavy bunker fuel in the month, a rise of 60,000 mt or 15% from February, JLC’s data shows.

Similarly, domestic-trade MGO supply rose to 160,000 mt in March, up 30,000 mt or 23.08% month on month, the data shows. Refineries’ enthusiasm for MGO production improved in March, as domestic MGO prices moved up along with domestic oil products.

JLC Arrival of imported fuel oil cargoes

 

JLC China main oil blending feedstock prices

JLC China domestic trading 180 cSt bunker fuel price 2023 2024

JLC China bunker blending profit by region 2023 2024

Editor
Yvette Luo
+86-020-38834382
[email protected]

Sales (Beijing)
Tony Tang
+86-10-84428863
[email protected]

Sales (Singapore)
Ginny Teo
+65-31571254
[email protected]
[email protected]

JLC Network Technology Co., Ltd is recognized as the leading information provider in China. We specialized in providing the transparent, high-value, authoritative market intelligence and professional analysis in commodity market. Our expertise covers oil, gas, coal, chemical, plastic, rubber, fertilizer and metal industry, etc.

JLC China Bunker Fuel Market Monthly Report is published by JLC Network Technology Co., Ltd every month on China bunker market, demand, supply, margin, freight index, forecast and so on. The report provides full-scale & concise insight into China bunker oil market.

All rights reserved. No portion of this publication may be photocopied, reproduced, retransmitted, put into a computer system or otherwise redistributed without prior authorization from JLC.

Related: JLC China Bunker Fuel Market Monthly Report (February 2024)
RelatedJLC China Bunker Market Monthly Report (January 2024)

Note: China-based commodity market information provider JLC Technology has been providing Singapore bunkering publication Manifold Times China bunker volume data since 2020. Data from earlier periods are available here.

 

Photo credit: JLC Network Technology
Published: 11 April 2024

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