BIMCO completes its suite of CII, EEXI and ETS time charter clauses
BIMCO has recently published three new clauses which seek to balance Owners’ and Charterers’ respective interests under time charters in relation to the obligations imposed by the CII, EEXI and EU ETS.
A new wave of environmental regulations will hit international shipping in the coming months. The IMO’s Carbon Intensity Indicator (CII) and the Energy Efficiency Existing Ship Index (EEXI) regulations will apply from 1 January 2024. Moreover, the EU is set to include maritime emissions in its emissions trading system, although the exact scope and timing remains uncertain.
All three regulations will impact the relationship between Charterers and Owners. BIMCO has therefore introduced three new clauses which aim to assist parties in existing and future time charters, by allocating the responsibility and costs for ensuring compliance. In this article, we will take a closer look at these clauses.
EEXI Transition Clause
The EEXI is a one-time requirement to improve the energy efficiency of an existing ship’s design. If covered by the scope of the regulation, the relevant ship will be ascribed an “attained EEXI”. This will demonstrate the ship’s energy efficiency, compared to a baseline. The attained EEXI is then compared to a “required EEXI” for that particular ship type. If the attained EEXI is less efficient than the required EEXI, Owners will need to take steps to ensure compliance.
On 7 December 2021, BIMCO published its EEXI Transition Clause for Time Charter Parties. The clause stipulates that it is Owners’ responsibility to ensure that any required “EEXI Modifications” are completed prior to the vessel’s next annual, intermediate or renewal survey, whichever comes first after 1 January 2023. “EEXI Modifications” are defined therein as any physical or technical modifications required to bring the subject vessel into compliance with the EEXI.
Two practical ways of achieving the required EEXI are Engine Power Limitation (EPL) or Shaft Power Limitation (SHAPOLI). The clause has detailed regulations for these, providing that Owners must make the decision and then inform Charterers of the specifications of the modification, the estimated new maximum speed and the corresponding consumption figures of the vessel. After the modification is completed and certified, these figures, as well as any other consequential changes, shall be updated in the vessel’s description. Owners are responsible for the time and costs of the modification, but they are allowed to take the vessel out of service to effect such modifications.
Some Owners may choose other energy efficiency solutions for their vessels than EPL or SHAPOLI. In such cases, the clause provides that any such other modifications shall be subject to agreement by Charterers which shall not be unreasonably withheld or delayed.
The CII requires continuous improvements to a vessel’s energy efficiency, by demanding increasingly stricter emission targets every year. Specifically, the vessel’s attained yearly carbon intensity will be documented and verified against a required CII. This gives a rating on a scale from A to E. Ships rated E, or ships which for three consecutive years are rated D, will have to submit a corrective action plan showing how the required CII will be achieved.
Nearly a year after the EEXI Clause was introduced, BIMCO presented its long-awaited CII Clause for Time Charter Parties on 21 November 2022. Under BIMCO’s clause, Owners and Charterers shall settle on an “Agreed CII” rating for 2023 through 2026. If the parties fail to agree on a value, the middle point of CII Rating Level C shall apply. As such, it is up to the parties to decide commercially which carbon intensity level to settle on.
Following the agreement, Charterers must operate and employ the vessel in a manner consistent with the Agreed CII, even if this for example may require alternative or adjusted voyage or employment orders. Charterers may still order the Master to adjust the vessel’s speed to meet a specified arrival time, or closest thereto, as long as compliance with the Agreed CII and other regulations is upheld. Owners’ warranties related to despatch, speed and consumption and other aspects of the vessel’s description are maintained, but Charterers are not able to rely on a breach of these as a basis to avoid meeting their obligations under the clause. Owners are required to ensure an energy efficient vessel by operating the vessel in a manner which minimises fuel consumption. This includes performing maintenance on the vessel and adequately planning voyages.
Data regarding fuel consumption, type and distance travelled shall be provided to Charterers daily, as well as a calculation for the attained CII value. If the trajectory of the attained CII is deviating from the Agreed CII and there is a reasonable likelihood Charterers may breach their obligations, Owners may, after written notification, request a written plan from Charterers. The plan shall detail any proposed commercial operation of the vessel for at least the next voyage. If Owners can reasonably show that Charterers’ written plan will result in a breach of the Agreed CII, the parties must undertake to cooperate in good faith to adjust the written plan so that compliance is reached. Until an agreement is reached, Owners are entitled to not follow Charterers’ orders and to reduce the vessel’s speed or take other remedial actions, with the vessel remaining on hire.
If the CII Clause is breached, Owners shall be entitled to claim any losses from Charterers. Charterers shall ensure that contracts of carriage incorporates provisions allowing Owners to comply with their obligations under the CII clause and also indemnify Owners from claims and liabilities resulting from breach of Owners’ obligation to proceed with due dispatch or are held to be a deviation under the contracts of carriage in contradiction to Owners obligations under the CII clause.
BIMCO also published its emissions trading scheme (ETS) clause for time charter parties on 31 May 2022. BIMCO’s clause is drafted to be applicable to all future emissions trading schemes that permit the emission of greenhouse gases in exchange for allowances. The BIMCO clause follows the principle that the party providing and paying for the fuel should also provide the emission allowances to cover the greenhouse gases emitted by that fuel.
Owners will likely be responsible for complying with the obligations under the various schemes. The main obligation will probably be to submit allowances which cover the vessel’s yearly emissions. However, Charterers will, under a traditional time charter, be providing the fuel for the vessel and give orders regarding its voyages and operation, and thereby effectively be exerting control over the level of emissions. Therefore, the starting point under BIMCO’s ETS clause is that Charterers shall transfer the requisite amount of emissions allowances into Owners account each month. The amount of allowances is based on verified emission data, provided by Owners.
If Charterers fail to timely transfer the requisite amount of allowances, Owners have the right to suspend the charter, with the vessel remaining on hire. This seemingly intrusive right is warranted, as it is Owners that will suffer public sanctions if the requirements under the relevant ETS are not fulfilled. Conversely, Charterers’ obligation does not apply during periods of off-hire, and they will have a right to offset or demand return of any allowances submitted for such periods.
The EU ETS is likely to be the first notable scheme to cover maritime emissions. On 30 November 2022, the EU Commission, the EU Council and the European Parliament reached a preliminary agreement to include maritime emissions, with a final text expected in late December. For the sake of completeness, BIMCO has announced that they will amend its SHIPMAN-contract once the EU ETS is finalized.
Like all of BIMCO’s clauses, the EEXI, CII and ETS clauses have been carefully drafted by working groups consisting of industry experts and representatives of all main stakeholders. Having this in mind, we deem it likely that the clauses will become the market standard, and that they will provide the baseline for contract negotiations going forward. However, as with all standard clauses, they will not suit all individual circumstances and contracts. Parties are therefore well-advised to carefully consider whether the clauses provide for the desired allocation of rights and obligations in their individual charter parties.