FuelEU – a blessing or a curse for the technical manager?

Introduction

The FuelEU Regulation entering into force 1 January 2025 is part of the EU’s Fit for 55 programme, introducing regulatory requirements to decarbonise the shipping industry, by incentivising the industry to use more sustainable fuels.

For more general information on the FuelEU Regulation, we refer to our previous newsletters dated 11 March 2024 (general intro) (link), 1 July 2024 (implications for time charter parties) (link) and 22 August 2024 (certification requirements and implications on fuel supply contracts) (link).

Consequences of the FuelEU Regulation

Introduced in the wake of the EU ETS, the FuelEU regulation is expected to impose even greater challenges in practice, especially where vessels are managed by third party technical managers.

The FuelEU Regulation introduces many complexities all derived from the technical managers being the responsible entity in the capacity of being the DoC holder (instead of the registered owners as is the case under the ETS unless the managers have been mandated to assume the ETS responsibility):

• From a regulatory standpoint, a third party appointed technical manager is not acting as agent for and on behalf of the owners under the FuelEU but is instead responsible as principal (in his own right and name) for ensuring compliance with the regulation. The technical manager shall thus make the decision whether for instance to bank a surplus or pool the vessel with other vessels.
• The owners (or their charterers) take all the commercial decisions relating to the vessel and determine, crucially, whether the vessel will be trading in the EU and which fuel to use.
• The managers cannot take actions to hinder that the vessel receives a deficit but will nonetheless be required to pay the FuelEU penalty for such deficit. Conversely, the managers will enjoy the benefits of any surplus even though the owners may have covered the costs (of alternative fuels).
• The owners on their part have no control over which decisions the managers take in respect of the vessels which may impact the vessels’ ratings going forward. If the manager wishes to sell a surplus to pool with other vessels, strictly based on the regulation, the owners of the vessel in surplus cannot avoid this unless the parties provide for such rights on a contractual basis.
• The DoC holder as of 31 December in any reporting period (first time on 31 December 2025) will be responsible for that whole reporting period. If the management agreement takes effect during e.g. 2025, the managers should be aware of the data and risks relating to the period prior to that, and in the year the agreement comes to an end, the owners (or the new managers) will assume responsibility for that year, also for the period when the former managers had the DoC.

The parties’ rights and responsibilities in respect of this regulatory framework depend on the contractual setup. Below we have outlined the legal position under the BIMCO contract “SHIPMAN 2024” in an unamended form and commented on the basis for making explicit contractual clauses to address the FuelEU Regulation.

Position under SHIPMAN 2024

Right of indemnification?

The first question is whether a technical manager can claim reimbursement from the owner for the FuelEU penalties if the vessel accrues a deficit during a year. Noteworthy, the manager may seek indemnities for such penalties under SHIPMAN 2024, Cl. 19 (c) which requires owners to indemnify the managers for all “demands or liabilities whatsoever and howsoever” relating to the manager’s performance of the contract.

From the perspective of the manager, it may seem fair that this provision should cover FuelEU penalties as the penalties accrue based on the owners’ decision to trade the vessel in the EU without procuring sufficient alternative fuels to be in surplus, decisions for which the managers have no control or power to object under the contract. The managers merely have to follow and execute the orders of the owners.

There is, however, no certainty that the provision will effectively protect the managers. To provide some perspective, it seems unlikely that the provision will protect the managers from any fine issued against the managers acting in their own name, as the “Company”, for a failure to comply with the ISM Code (e.g. failure to comply with safety procedures). As to the FuelEU, the managers will similarly be acting in their own name and thus, arguably, managers should also not be able to rely upon Cl. 19 (c) in respect of FuelEU. While the managers have arguments to support that FuelEU obligations are materially different from the ISM Code responsibilities (as compliance of FuelEU depends on owners’ fuel choices etc.), this does not come across as a safe starting position for technical managers when entering into a management agreement.

Right to demand security?

SHIPMAN 2024, Cl. 20 (f), provides that owners are to provide for “any necessary guarantee bond or security”. The clause, originating in SHIPMAN 98, was and is still linked to the managers’ obligations in handling incidents and claims with third parties as part of the management services in the agreement. Generally, the SHIPMAN provides in certain clauses whether managers should have a right to demand security to cover potential risks, e.g. in respect of the ETS (Cl. 10) or the MLC (Cl. 25 (c)).

The seemingly general provision (in Cl. 20 (f)) is unlikely to grant managers any effective right to claim security from the owners for the potential costs of non-compliance with the FuelEU Regulation also noting that this is, as a matter of law, the managers’ (and not owners) obligation as DoC holder.

Right of suspension of performance?

The parties are mutually obliged not to cause any breach or infringement of the laws and regulations in the places where the vessel will be trading (SHIPMAN 2024, Cl. 24). On this basis, the managers may seek not to carry out any voyages in the EU which may lead to the managers incurring a FuelEU penalty.

To counter this point, owners may argue that it is the managers’ obligation to comply with the FuelEU Regulation and note that the FuelEU is, as a starting point, merely a ‘cost’ which in principle is not different from the managers’ other costs needed to comply with e.g. the ISM Code. If the FuelEU penalty is paid up (no later than 30 June of the verification period), the vessel is not in breach of the regulations and no criminal sanction may be imposed on the managers (as DoC holder) and no enforcement actions may be made against the vessel. Put differently, the resulting breach will not relate to any failure to use alternative fuels but to the (managers’) failure under the regulation to pay up the penalty, arguably not triggering Cl. 24.

It is thus not clear that the managers can rely upon Cl. 24 to protect its position under FuelEU.

Furthermore, it is important that compliance with FuelEU is determined on a yearly basis and that the final data will not be verified prior to March the year after the reporting period (i.e. for the first time in March 2026). The owners may also simply decide to create a (proforma) deficit in the first part of the year with the plan to use alternative fuels later in the year and thereby create a (total) surplus. Even if the managers’ right of suspension under Cl. 24 were to apply to the FuelEU exposure in principle (which is not settled), the position may thus be that this right cannot be exercised until the managers can show that the owners will not be able to ‘recover’ before the end of the year. In practice, it seems very unlikely that the managers will be able to effectively rely upon Cl. 24 to properly protect its interests under FuelEU even if needed.

Contractual solutions

As indicated above, the parties will need to implement a specific FuelEU provision and procedures to ensure that existing and new ship management agreement facilitate efficient collaboration in respect of FuelEU. This is necessary to ensure that the managers are protected against the potential curse associated with the FuelEU penalty exposure but also so that the owners can effectively manage the decisions relating to FuelEU compliance (such as banking, pooling etc.).

Consequently, the parties should negotiate a FuelEU clause which may provide that:

• The managers are obliged to submit and update monitoring plans, FuelEU Report etc.;
• The owners should have authority to instruct the managers to execute the owners’ decision on compliance decisions such as banking, borrowing, pooling etc.;
• The owners should bear all financial benefits and costs relating to vessel’s compliance;
• Owners are to provide protection to managers (indemnities or financial security) against the risk of owner’s non-compliance, including specifically the obligation to pay the FuelEU penalty; and
• Termination rights and provisions on the consequences of termination etc.

The needs for such provisions may differ widely depending on the parties. In some instances, financial security may not be needed. It is, however, difficult to see any situation where the clause should not be based on the premise that the owners bear the costs of non-compliance but also obtain the benefit of over-compliance (e.g. in terms of pooling), reflecting the owners’ responsibility in procuring the fuel.

Noteworthy, SHIPMAN 2024 already includes new clauses on for instance information sharing in Cl. 21-22 which is also relevant for FuelEU, being one of many reasons for using SHIPMAN 2024 (instead of SHIPMAN 2009). Still, as BIMCO acknowledges, a specific clause for FuelEU is needed and thus being developed by BIMCO. Industry stakeholders should thus follow the news – and consider, sooner rather than later, to incorporate clauses for all existing and new management agreement going into 2025.

Gorrissen Federspiel assist owners, managers and other stakeholders in preparing for FuelEU and general decarbonisation regulations, including advice on compliance, clauses and internal procedures.