BIMCO Publishes Price Cap Clause for Charterparties
The long-anticipated BIMCO Price Cap Clause was published on 2 June 2023, in response to the price caps on Russian origin crude-oil and petroleum products introduced by G7, EU and others. In this article we take a practical first look at the clause in context.
These "Price Cap Measures" were introduced by the G7 countries and their coalition partners in December 2022 and February 2023 respectively.
In the meantime, shipping parties have already grown accustomed to the process of requesting price information and making attestations to comply with the Price Cap Measures. There has also been strong engagement by the industry and by lawyers specialising in shipping sanctions with the relevant sanctions authorities. This has resulted in useful updates to the official guidance, as well as practical work to implement the rules.
The need for a specific clause on the Price Cap Measures has been clear, and the industry has responded with a number of bespoke clauses in circulation. In some cases these have required fairly intense negotiation. The new BIMCO Price Cap Clause will be a useful and in many cases suitable clause to replace the versions that we have seen in circulation. However, the clause is drafted as a 'one size fits all' clause covering all Price Cap Measures for both time and voyage charters and cannot be expected to address all of the nuanced issues that arise in practice. Users should therefore carefully consider if the clause is suitable for them "as is" or changes are necessary. Some important points to consider are:
- The official EU and UK guidance on the Price Cap Measures makes it clear that Owners must carry out sufficient due diligence to satisfy themselves that it is reasonable to rely on the price information / attestations provided by Charterers. This may require Owners to review additional information beyond what they are entitled to request under the BIMCO clause. Owners should consider whether they are sufficiently protected on this point by any Charter Party clauses or if they are comfortable on the basis of their pre-existing knowledge of the Charterers or trading in question.
- It may be beneficial to both parties to include some form of "pre-approval" process where Owners can assess the relevant trade, the parties involved and agree what further information will be received. This can help avoid situations where it is discovered at a late stage that Owners are unable to satisfy themselves of the above requirements, which can cause delays and lead to a conflicts. For Charterers, this may be especially important in a Charter Party where Owners have other relevant rights to refuse orders.
- Owners should also consider whether the general confirmation that Charterers are complying with their own reporting requirements is sufficient. For example, the UK Price Cap Measures require Owners to report to OFSI if Owners transact directly with a Tier 1 counterparty in certain circumstances, including when that Tier 1 counterparty is not itself required to report because UK sanctions do not apply to it. Accordingly, if UK Owners are dealing with Charterers who are also the buyer or seller of the cargo, it will be important for Owners to find out if Charterers are actually reporting to OFSI.
- Owners and Charterers should also carefully review the rights and remedies in sub-clause (e) and consider if these are suitable for their specific Charter Party. We comment further on this point below.
In relation to the last point regarding remedies, this is an issue that we have commented on in our more general sanctions articles in the context of longer-term contracts, for example see here. In the context of the Price Cap Clause, it is worth keeping in mind that:
- For Owners, the main point will be whether the indemnity adequately covers their interests. The indemnity as drafted only covers losses arising from a breach, and as such may not extend to any steps taken by Owners on the basis of having reasonable grounds to suspect activity contrary to the Price Cap Measures. Owners might therefore find themselves unable to pass on a loss for actions reasonably taken in response to a suspected breach of the Price Cap Measures.
- Charterers should note that Owners are given the right to terminate the Charter Party in cases of a breach of the clause and where Owners have reasonable grounds to suspect activity contrary to the Price Cap Measures.
- More generally, the cause of breaches or the grounds for suspicion may be outside of Charterers' control. Charterers may therefore find it difficult to accept such a wide right to terminate if it is a long-term Charter Party that is crucial to their business. Additional flexibility may be appropriate in such cases if the breach can be remedied or if performance can be lawfully altered in some way.
Despite the need for some amendments in some cases, the BIMCO Price Cap Clause is a well-drafted clause with clear and concise language. It also refers to what are now commonly understood concepts. We therefore expect the BIMCO Price Cap Clause to be widely adopted as a starting point for future negotiations and that it will help speed up such negotiations considerably.
For more information, see the full clause and BIMCO's own explanatory notes at this link.
WR Sanctions Alerts provide you with updates on material developments in the country-specific sanctions programmes implemented by the US, the UN, the UK, the EU and Norway. We will not provide updates on mere prolongations, without material changes, of existing sanctions programmes, nor on any listings or de-listings of individuals/entities placed on implemented sanctions lists. Please note that the WR Sanctions Alerts are provided as general information and do not constitute legal advice.