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For a general background on the FuelEU Regulation, we refer to our newsletter on 11 March 2024 (link) and Maersk Mc-Kinney Møller Center for Zero Carbon Shipping’ newsletter series (link).
First, BIMCO and the subcommittee should be congratulated on the important work on the new FuelEU clause. As to the content, we wish to highlight the following key features:
Under time charter parties, the charterer procures the fuel, carry the voyage-related costs and decides whether the vessel is trading the EU. BIMCOs clause logically provides that the charterer should carry the costs of undercompliance with FuelEU in respect of the charter party period. The clause also provides that the charterer should enjoy the corresponding benefit of over-compliance (e.g. proceeds from pooling the surplus with third parties) resulting in practice from the use of greener fuels. This key ‘charterer’s risk’-principle pervades the clause.
As owners have the regulatory responsibility while being in the hands of the charterer’s commercial decisions (on e.g. trading in the EU), it may be tempting to simply just require the charterer to always procure fuels which will ensure that the vessel is in compliance with the GHG emission intensity target under the FuelEU Regulation on a yearly basis. As we noted in our newsletter, such requirement would however interfere fundamentally with the charterer’s commercial freedom to procure the fuels and it may be based on the misunderstanding that the vessel is required, from a regulatory perspective, to actually meet the target. Rather, the regulation allows the vessel to become compliant by pooling or paying the FuelEU penalty. BIMCOs clause follows this fundamental approach. As long as the charterer covers the costs, the charterer should be permitted to procure both conventional and green (on-spec) fuels at charterer’s choice.
Most parties are already exchanging GHG emission data on a monthly or voyage basis due to the EU ETS and as part of the parties’ tracking of vessel performance. Similarly, the BIMCO FuelEU clause sensibly require the owner to share the estimated data relevant to the FuelEU at such monthly or voyage-based intervals. Furthermore, the owner is required to provide the verified data in the verification period after each year.
If the charterer trades the vessel in the EU and uses conventional fuels, the vessel will build up a deficit. Over time, this may translate into a significant exposure for the owner (or the DoC holder) to pay the FuelEU penalty after year end (or paying for pooling with vessels in surplus). While the owner may seek to claim reimbursement, the owner will get a potentially large financial risk on charterer’s default. To avoid this, BIMCOs clause requires the charterer to pay a monthly (or voyage-based) surcharge based on the calculated FuelEU penalty. The clause does, however, also provide that the charterer may claim reimbursement for the repayment of the surcharge to the extent that the charterer improves the compliance balance (by burning biofuels). This will ensure that the charterer’s total outstanding surcharge do not exceed the total calculated FuelEU penalty. On the rationale for this, please see our prior newsletter (link). The parties should in this respect, however, consider inserting an explicit set-off right in the clause (see below).
Reflecting that the charterer bears the financial risk and benefits relating to compliance with FuelEU, the clause provides that the charterer should have the right to determine how the compliance balance is to be handled. The clause thus require that the charterer provides instructions to the owner on how the owner (or the DoC holder) is to record decisions on the compliance balance in the FuelEU Database. The clause therefore contains detailed provisions on the exercise of this right in respect of pooling, banking, borrowing and payment of FuelEU penalty. The clause also includes wording to protect the owner from the effects of e.g. the FuelEU penalty multiplier. The clause provides that this right to instruct the owner is in place in all complete reporting periods with special provisions applying in the year of redelivery. In the redelivery year, the owner will itself handle the compliance balance for such reporting period and receive or pay compensation (if agreed) from/to the charterer based on whether the vessel is in a deficit or surplus at redelivery (irrespective of how the owner trade the vessel in the remaining part of the year).
Importantly, the BIMCO clause is fundamentally aligned with the general principle of the time charter party – as it ensures that the charterer keep the decision-making power in respect of fuel procurement and the financial risk relating to the voyages – while at the same time ensuring that it fits with the monthly (or voyage-based) arrangement that many parties have in place for the EU ETS already (based often on the BIMCO ETS clause). With this BIMCO FuelEU clause, many parties will thus hopefully be able to handle FuelEU in continuation of their collaboration on the EU ETS, both commercially and operationally.
At the same time, the regular payment of the FuelEU surcharge (reflecting the owner’s (or the DoC holder) exposure on the FuelEU penalty), should reasonably protect owners from the charterer’s default. From the charterer’s perspective, this arrangement should, in most cases, be acceptable as the charterer may avoid this surcharge by, firstly, using greener fuels if these are available and affordable. It is thus up to the charterer itself to avoid the surcharge payments. Secondly, the charterer’s right to reimbursement for the surcharge previously paid (if the owner’s exposure is reduced or removed, e.g. by pooling), should ensure that the charterer does not overpay. If the charterer can execute its reimbursement claims by off-setting in future hire payments (as set out below), the charterer should largely also be protected from owner’s default.
For further information on the BIMCO clause and the FuelEU Regulation’s impact on time charters, we refer to BIMCO’s helpful explanatory notes available on BIMCOs website (link).
As any clause, BIMCOs FuelEU clause should be considered in the context of the other provisions of the relevant charter parties. On such basis, changes may be needed to e.g. the fuel procurement clauses.
Specifically, BIMCO notes that the parties may consider deleting the charterer’s right to control the compliance balance in short term charters or in long-term charters where the owners prefer to pool the vessel with its own or other vessels. In such case, the parties should delete or amend the sub-clauses relating to the charterer’s instructions and consider adjustments on the payment of the FuelEU surcharge.
The parties may generally consider the following points being absent in the BIMCO clause:
The clause provides that the charterer’s right to instruct the owner (on banking and pooling) only applies to full reporting periods (sub-clause (i)). This instruction power does not apply in the delivery and redelivery years. This is often logical for the year of redelivery as it is counterintuitive for the charterer to make decisions going forward in respect of a vessel it no longer has on charter. As to the year of delivery, it is not always clear why the charterer should not enjoy this right. If the charter party is commenced during a year in which the vessel has not traded the EU prior to delivery, it should be treated the same as a charter party covering the whole year (reporting period). Furthermore, if the vessel has traded in the EU prior to the delivery, the charterer will often wish to be able to control the compliance balance for the entire year provided the charterer does not bear the burden of any (proforma) deficit built up prior to delivery. In such case, the parties may insert wording to facilitate that the charterer will be able to assume the responsibility.
As noted, the clause provides that charterer shall pay a surcharge following each month or voyage (in the EU) but also that the charterer may request a reimbursement for any previous paid surcharge to the extent the charterer subsequently improve the compliance balance (sub-clause (g) and (k)). Noticeably missing, however, is an explicit set-off right for the charterer. While this right may follow under applicable law, depending on the circumstances, it seems only reasonable that the charterer enjoy an undisputed right to set-off the claims for reimbursement of FuelEU Surcharge in the next hire payment. This right should be uncontroversial as the amounts being set-off are based on owner’s or verifier’s calculations of the compliance balance.
One of the reasons for granting the charterer the right to pool the vessel is that the parties do not need to agree on the price of pooling; this is then merely a matter for the charterer to handle. However, this is not possible in the year of redelivery. The BIMCO clause set out that the charterer settles the balance at redelivery solely based on the payment of the surcharge (corresponding to the FuelEU penalty) even though the owners may subsequently be able to pool the vessel at a lower cost. The parties may thus consider amending the clause to allow the charterer to instead pay compensation based on owner’s documented costs of pooling (plus costs). If this cost is lower than the FuelEU penalty, the charterer may be granted a right to reimbursement for the balance. This should, however, not be agreed if the parties do not want such post-redelivery settlement of the balance but rather want to have a ‘clear-cut’ on all aspects of the FuelEU at the time of redelivery.
The BIMCO clause allows parties to agree upon a compensation to the charterer if the charterer build up surpluses that remain after pooling and banking (sub-clause (m)). The parties are to agree on a sum for each tonne of CO2 eq. It will, however, often be difficult to agree on such an amount, noting the difficulties of predicting the biofuel costs. The parties may consider a solution whereby the charterer will be compensated, absent any agreement, on the pooling proceeds (save costs) obtained by the owner through pooling arranged by an independent broker or other third party or, if owners pool with its own vessels, the value of such surplus based on the opinion of an independent broker. This may not be a perfect solution but may be the best one available until a transparent market for the price of pooling has been developed.
Depending on the charter party’s remaining provisions, it may also be relevant to include standard indemnity provisions; protecting each party from breaches of the clause, e.g. owner’s failure to follow charterer’s pooling instructions. As to termination, BIMCO has wisely not included any strict termination right (as noted explicitly in the explanatory notes) but instead allows the owners to suspend performance (sub-clause (h)). On the other side, the charterer will generally be able to rely upon other remedies, in particular if charterer is allowed to set-off its claims for reimbursement in future hire payments (as suggested above). The clause is not prejudicial to any right of termination or other remedies otherwise available under the charter.
Importantly, the owners in particular should ensure that the FuelEU clause in the time charter party fits with owners’ own contractual setup. It would be unwise for owners to grant the charterer the right to control the compliance alance if the owner is not himself the regulatory entity (i.e. the DoC holder) under the FuelEU Regulation and if the owner has not ensured that it may enforce such rights towards the DoC holder (e.g. a technical manager). Here it is critical for the owner to put in place the needed and appropriate contractual arrangements with the head owner and/or the technical manager.
BIMCOs work on FuelEU is not limited to the charter party clauses. BIMCO is working on and is expected to publish its FuelEU Shipman clause early next year. In the meantime, we refer to our newsletter on the impact of FuelEU on ship management agreements of 2 September 2024 (link). BIMCO is also working on a Data Sharing and Energy Efficiency Performance Clause which may also be relevant to FuelEU.
FuelEU will continue to impact the industry. At Gorrissen Federspiel we have developed clauses for MoAs, fuel supply contracts, pooling agreements, among other contracts. As to the regulatory side, the industry is still waiting for more guidelines from the EU Commission on various issues, such as guidelines on the certification of fuels. So, one thing is certain: More is to come – so stay tuned.
Gorrissen Federspiel advises owners, charterers, managers, pool managers, fuel suppliers and other stakeholders with all aspects of the FuelEU Regulation, including regulatory, procedural and contractual advice. Gorrissen Federspiel is a proud knowledge partner of the Maersk Mc-Kinney Møller Center for Zero Carbon Shipping, assisting the center on legal and regulatory matters.