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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

Yamna identifies five potential global ammonia bunkering hubs

Unlike methanol, ammonia is not constrained by biogenic CO2 availability, and its production process is relatively simple.

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Yanma projected ammonia bunkering hubs

Specialised green hydrogen and derivatives platform Yamna in early December identified several potential ammonia bunkering hubs around the world.

The hubs are Port of Rotterdam, Port of Algeciras, Suez Canal, Jurong Port, and Port of Salalah.

“The shipping industry faces an ambitious challenge: reducing emissions by 20% by 2030 (compared to 2008 levels) and achieving net-zero emissions by 2050, in alignment with IMO targets,” it stated.

“Achieving these goals in the medium to long term depends on the adoption of alternative low-emission fuels like green ammonia and methanol.

“Among these, ammonia is attracting growing interest as a viable option. Unlike methanol, it is not constrained by biogenic CO2 availability, and its production process is relatively simple.”

However, the firm noted kickstarting ammonia bunkering on a large scale required four enablers to align:

  • Ammonia fuel supply
  • Application technology
  • Bunkering infrastructure
  • Safety guidelines and standards

It believed ammonia bunkering hubs will first emerge where affordable and scalable ammonia supply is available.

Yanma Why use ammonia for bunkering fuel

 

Photo credit: Yanma
Published: 31 December 2024

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Research

Port of Long Beach releases Clean Marine Fuels White Paper

Document intended to prepare and position the port and its stakeholder for adopting low carbon alternative fuels.

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Clean Marine Fuels Port of Long Beach (December 2024)

The Port of Long Beach (PLB) in late December released the Clean Marine Fuels White Paper as part of efforts to identify solutions capable of reducing emissions from ships.

“To understand the opportunities and challenges related to the adoption of clean marine fuels, the Port of Long Beach hired ICF Consulting to develop this white paper as an educational resource and guidance document,” stated PLB

“This document is also intended to prepare and position the port and its stakeholder for adopting low carbon alternative fuels.

“The white paper provides high level information on the array of currently available low carbon marine fuels, along with an exploration of the potential infrastructure needs for their deployment.”

The document covers the use of different types of clean bunker fuels such as green hydrogen, green methanol, green ammonia, renewable LNG and biofuels for shipping.

“The shift to clean marine fuels is no longer optional but a necessity for the sustainability of the maritime industry,” stated PLB in its closing remarks.

“This transition, while presenting challenges such as high costs, limited fuel availability, and the need for extensive infrastructure development, is advancing due to evolving policy frameworks and growing industry commitment.

“Addressing these obstacles will require targeted initiatives and robust collaboration between public and private sectors. Continued policy support, government funding, and sustained industry commitment will be essential to driving this progress and ensuring the long-term sustainability of maritime operations.”

Editor’s note: The 123-page Clean Marine Fuels White Paper may be downloaded from the hyperlink here.

 

Photo credit: Clean Marine Fuels White Paper
Published: 26 December 2024

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Port & Regulatory

Clyde & Co: FuelEU Maritime Series – Part 6: Legal issues

Bunker purchasers should consider the wording of their bunker supply contracts carefully and ensure that they are comfortable with the contractual provisions.

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Global law firm Clyde & Co on Thursday (19 December) released the final instalment of its six-part series uncovering the FuelEU Maritime Regulation.

In it, the firm looked at the legal issues that could potentially arise between various parties, such as owners, charterers, ship managers, bunker suppliers, and ship builders, as a result of the compliance requirements imposed by the Regulation.

The following is an excerpt from the original article available here:

Bunker supply contracts - legal issues

Both vessel owners and bunker purchasers will want to ensure that they are able to take advantage of the preferential treatment provided under the FuelEU Regulation for consuming renewable fuels, including biofuels and renewable fuels of non-biological origin (RFNBOs) (such as methanol and ammonia).

Article 10 of the FuelEU Regulation states that such fuels must be certified in accordance with the Renewable Energy Directive (RED) 2018/2001. If the fuel consumed by the vessel does not meet the applicable standards or have the appropriate certification, then it “shall be considered to have the same emissions factors as the least favourable fossil fuel pathway for that type of fuel[1].

In order to confirm that the fuel complies with greenhouse gas (GHG) intensity and sustainability requirements, the vessel owner and bunker purchaser will want to ensure that the bunker supplier provides the appropriate certification required under the FuelEU Regulation. The EU has required certification of such fuels, with the aim of guaranteeing “the environmental integrity of the renewable and low-carbon fuels that are expected to be deployed in the maritime sector.”[2]

The FuelEU Regulation provides that the GHG intensity of fuel is to be assessed on a “well-to-wake” basis, with emissions calculated for the entire lifespan of the fuel, from raw material extraction to storage, bunkering and then use on board the vessel.

Vessel owners and bunker purchasers will, therefore, need to be mindful of the importance of establishing how “green” the fuel actually is, and of the risk of bunker suppliers providing alternative fuels that will not allow for preferential treatment under the FuelEU Regulation.

It would, therefore, be advisable for bunker purchasers to consider whether the wording of their bunkering supply contracts is sufficient to ensure that the fuel is properly certified under the FuelEU Regulation. This could include contractual provisions that require the supplier (i) to provide a bunker delivery note (BDN), setting out the relevant information regarding the supply (such as the well-to-wake emission factor), and (ii) to provide the necessary certification under a scheme recognised by the EU.

Bunker purchasers should also be mindful that bunkering supply contracts often contain short claims notification time bars and provisions restricting claims for consequential loss. Issues could therefore arise where a purchaser tries to advance a claim against the supplier for consequential loss due to a lack of certification, but the bunker supplier argues that such losses are excluded under the terms of the bunker supply contract.

Bunker purchasers should therefore consider the wording of their bunker supply contracts carefully and ensure that they are comfortable with the contractual provisions.

 

Photo credit: CHUTTERSNAP from Unsplash
Published: 26 December 2024

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