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In April 2024 BIMCO published its update to its main management contract, SHIPMAN, which incorporates its 2023 ETS SHIPMAN clause. Fundamentally, under SHIPMAN, the managers act as agents to owners, always acting in the name and for the account of the owners. This role is, however, difficult to align with the managers’ obligations under the EU ETS when the managers have assumed the responsibility under a mandate from owners. In such case, the managers will, from a regulatory perspective, be responsible for surrendering emission allowances for owners’ vessels in the managers’ name.
SHIPMAN has for long served as an integral part of the shipping industry’s contractual framework and can be applied for commercial, crewing and/or technical management services. The contract is increasingly important due to the ever-increasing plethora of regulations relating to the operation of vessels and the commercial and financial risks relating to non-compliance with such regulations. BIMCO’s work on the update of SHIPMAN 2024 and the specific clauses on the ETS are very central to the industry.
As to the general updates to SHIPMAN 2024, we refer to BIMCOs own, useful explanatory notes (link) which do not require additional commentary. Instead, we will in this newsletter provide broader reflections on the use of BIMCO’s 2023 ETS clause for SHIPMAN (now contained in SHIPMAN 2024) and the rationale for security arrangements to cater for the financial risks relating to default of the counter party.
The International Safety Management (“ISM”) Code sets out the main requirements relating to sea safety procedures on board vessels. As default, the entity responsible to comply with the ISM Code is the registered owner. The owner may though transfer this responsibility to a bareboat charterer or technical manager who is willing to assume the responsibility under the ISM Code, as is the case under SHIPMAN. By agreeing to take over the ISM responsibility, the technical manager thus becomes the so-called ‘ISM Company’, also known as the ‘DoC holder’ as this entity is required to possess a “Document of Compliance”.
The DoC holder holds, under international conventions and EU regulations, many regulatory responsibilities, such as the responsibility to ensure compliance with the NIS2 Directive regarding cyber risk security. As to decarbonisation, the DoC holder is importantly responsible to submit emissions data in the IMO DCS database relating to the CII and the emission data under the EU’s MRV Regulation (the “Emission Data”). The MRV Emissions Data serves as the basis for the calculation of the Emission Allowances (or “EUAs”) required to be submitted under the ETS Directive in respect of all EU voyages from 1 January 2024[1].
Under the ETS Directive, the DoC holder was deemed as the entity responsible for compliance with the EUAs (the “Responsible Entity”), including the responsibility to surrender EUAs. In November 2023, the EU Commission switched this default responsibility to the registered owner through an implementation regulation. At the same time, the regulation allowed the owner to ‘mandate’ the DoC holder to assume this responsibility (if different from the registered owner himself), i.e. either the bareboat charterer or the technical manager[2]. Any DoC holder (other than the registered owner) would thus not automatically become the Responsible Entity but only if the DoC holder accepted the specific ETS mandate.
BIMCO’s ETS Clause for SHIPMAN is a standard clause allowing parties to allocate their responsibilities relating to emission schemes such as the EU ETS (the “Emission Scheme(s)”). The clause, incorporated in SHIPMAN 2024 as Cl. 10, includes three overall options for this allocation:
We will below describe the main elements of these obligations. Furthermore, we will consider the sub-clauses (c)-(d) on management fee and termination rights which apply to all the above-mentioned options.
The sub-clause, section (i)-(ii), provides that the managers are to provide the Emissions Data to the owners. Under the MRV Regulation, the managers will – if the managers hold the DoC – still be obliged to submit the data not to the owners but to the authorities (as the DoC Holder is the responsible entity under the MRV Regulation). The parties may consider amending the clause to provide this explicitly.
If the parties agree that the managers should provide ‘Emission Scheme Management Services’ under section (iii), the managers will be tasked to arrange the surrendering of Emission Allowances as required under the Emission Scheme(s). The managers will support the owners in calculating the required Emission Allowances while the owners remain the Responsible Entity under the Emission Scheme.
When the managers are the Responsible Entity, the managers are, from a regulatory perspective, no longer acting as “agents” to the owners but responsible in their own name. Contractually, the clause aims to still make the owners bear the financial burden. The clause provides the following main obligations:
Importantly, SHIPMAN 2024 includes many general provisions which will apply to the parties’ responsibilities relating to the Emission Schemes which may limit the need for the parties to insert specific clauses in this respect. BIMCO has thus for instance decided not to provide for any specific indemnity clause on Emission Schemes due to the general indemnity provision in SHIPMAN 2024, Cl. 19 (c).
While all of these points are explained well in BIMCO’s Explanatory Notes, BIMCO also states that the parties should consider whether the ETS clause fits the parties’ relationship and circumstances. We have included some comments which the parties should consider when negotiating the ETS clause.
It is a fundamental premise of the ETS regime that there will be a long period from the voyage to the time when the EUAs may be surrendered. When a mandate has been made to the managers, the managers will rely on the owners to provide the EUAs, and the owners will rely on the managers actually surrendering the EUAs in the end. This leaves the question of the parties’ risk on the counter party’s default.
The managers’ risk on owners’ default is the reason for the BIMCO clause stipulating that the EUAs are to be provided on a monthly basis. While the managers have a credit risk for a short while prior to the EUAs being transferred, the monthly transfers should cater for most of the managers’ risks against the owners.
From the perspective of the owners, managers’ default may not seem as a fundamental problem – even if EUAs have been provided to the managers – as the owners are not the responsible “Company” and thus not liable for surrendering the EUAs under the ETS Directive. If the managers default, the owners can move the technical management to a new technical manager under a new DoC. Nonetheless, the owner may carry risks based on domestic regulations which implement the ETS Directive. For instance, in Denmark, the registered owners will still be liable for the payment of the fines for each missing EUAs (even though the registered owners are not responsible for the surrendering of the missing EUAs). These fines accrue to EUR 100 (in 2012-prices) for each missing EUAs. This may be huge sums if the managers thus fail to surrender the EUAs and pay the fines themselves. It may be a significant risk for some managers which are not well capitalised.
The question is therefore which other mechanism the parties can consider handling these risks.
Under the SHIPMAN ETS clause, the managers have an obligation to keep the funds – the EUAs – relating to that particular SHIPMAN separated from the managers’ other arrangements. This is obviously intended to help protect the owners from the managers’ insolvency and subsequent failure to surrender the EUAs in respect of the owners’ vessels. In practice, this separation of funds will though often be difficult. Based on the law and procedures of some national authorities, the funds held by a legal entity (such as the managers) will often not be deemed as ‘separate’ funds belonging to the managers’ respective owners even if held on separate trading (holding) accounts. The EUAs will in many jurisdictions be deemed to be owned outright by the account holder, i.e. in the managers own name and right and not for the benefit of owners.
The likely most effective way to keep the funds/EUAs relating to one owners’ vessel(s) truly separated from others will be for the managers to set up legal entities for each owner with their own DoCs. Each entity will then be deemed the ‘Responsible Entity’. This will, however, often not be feasible for managers or involve complexities which have other negative effects on the services to be provided by the managers.
The separation of ‘funds’ (EUAs) will in any event not protect owners from the managers’ insolvency in the period after the owners have transferred the EUAs but before the manager surrenders the EUAs. The owners should thus consider the risk of providing the EUAs on a monthly basis without receiving some form of counter security from the managers or their parent entity. An alternative is for owners to keep the EUAs on owners’ account or to hold them in custody with a third party. Such arrangements should, in any event, be considered on a case-by-case basis having the particular domestic laws on security rights into account.
The SHIPMAN clause does not specify the parties’ obligations relating to the execution of mandate letters. As a starting point, this may not be critical as sub-clause (b) is worded to ensure that it will apply only when the managers are properly mandated (thus requiring the confirmation of the administrating authority).
Nonetheless, the parties should consider inserting explicit obligations in terms of the execution of the mandate letters and the obligations concerning needs to update the information as required in the EU implementation regulation[3]. It may also, depending on the ownership structure, be relevant to agree for the managers to collaborate if the owners need to novate the ownership from one group company to another (e.g. due to a change of flag). The Parties may also consider agreeing on the parties’ obligations in connection with the revocation of mandate letters and the correspondence with the administrating authorities.
In the industry, different formats for mandate letters have been used as most administrating authorities have, to our knowledge, not issued standard forms for the mandate letters (the German authorities being one notable exception). BIMCO therefore recently published a standard mandate letter form. It sets out a schedule helping to ensure compliance with the requirements under the ETS directive as it lists the date of the transfer of responsibility and the covered vessels. It is subject to the signature of both the mandating and the receiving party. Furthermore, it specifically sets out that it may be used to appoint managers as the responsible entity under sub-clause (b) of BIMCO’s new ETS clause under the SHIPMAN.
The clause assumes that the mandate is to be made by the owners under the SHIPMAN. Often, the owners will merely be the bareboat charterers and not the registered owner who is the entity mandating the Managers as the Responsible Entity. It will thus require the bareboat charterers (owners under the SHIPMAN) to include provisions in the bareboat charter party and the ETS SHIPMAN clause requesting each counter party to execute the mandate letter and to otherwise provide such assistance to maintain or amend the mandate letter as may be required following the execution of the mandate and, not the least, to consider the effects of the (just or unjust) revocation of the mandate in respect of all parties.
Under the BIMCO standard ETS clause, the parties may agree on a fee to be agreed for each port call subject to an Emission Scheme applicable to the Vessel(s). In the absence of any particular ETS fee being stated, the services should be deemed covered by the general Annual Management Fee under the SHIPMAN.
Based on the standard, any agreed fee will apply to any of the services under the clause even though the services (and risks for managers) are different for each of the above-mentioned three options. The parties may thus consider adjusting the fee based on the services that the managers actually provide.
Under the ETS clause, any party may terminate the SHIPMAN with immediate effect if the other party is in breach of any obligation under the clause. The parties may consider whether this clause is too onerous as it will apply to any breach which may be easily cured without any risk to the other party.
Furthermore, the obligations are thus not always clear (what is “timely”?) and some obligations may be of less importance. The EU ETS will generally also allow for a long period between the voyage and the surrender obligation, meaning that each party could reasonably be able to remedy breach within a certain time period. The parties should thus consider including a period to remedy the breach. Furthermore, it may be beneficial to include a right of the manager to merely terminate the mandate (effectively returning the ETS responsibility to the owners) and still otherwise remain as manager of the vessel.
It seems fair to say that the ETS has been difficult for many industry stakeholders to manage on the contractual front and BIMCO’s standard clauses are without any doubt fundamental to help the industry finding some common ground. One major problem is still the allocation of non-EU “companies” between the various member states – depending on port calls – and the different practices in each member state on setting up and maintaining the accounts. The application processing schedules seem to differ widely.
Arguably most critically, the industry still has no clarity on how and to which extent the EU and the member states will enforce non-compliance, in particular towards non-EU companies. If it is possible to set up a new company, transfer the DoC and close the previous company, there might be a significant risk that owners (and managers) may evade the responsibilities under the EUA with potentially disruptive effects on competition, in particular when the ETS is fully implemented in 2026. The industry must look to the EU Commission for the revisions to the ETS. As of now, it is very difficult to see any clear solution.
The industry has clearly needed a lot of time to process the implications of the EU ETS. As is becoming increasingly clear, the stakeholders may be even less prepared for the next big ‘thing’, the FuelEU regulation entering into force in January 2025 – the implications of which may be even greater! We will thus in our next newsletter discuss the contractual implications on the FuelEU on the SHIPMAN.
[1] The obligation applies to vessels of more than GT 5,000 used for the transport of cargo and/or passengers (and therefore not e.g. offshore vessels). For more information on the scope, see the EU Commission’s FAQ.
[2] For more information on the responsible entity, see our newsletters of 24 November 2023 (link).