Chris Kidd Head of Shipbuilding and Offshore Construction, Joint Head of Energy & Infrastructure, Partner
BIMCO publishes CII Operations Clause for Time Charterparties
As part of the global shipping industry’s ongoing efforts to decarbonize the maritime sector, the International Maritime Organisation (IMO) has introduced new carbon intensity regulations that entered into force on 1 November 2022 and will be implemented from 1 January 2023. These regulations have been introduced by amendments to MARPOL and are known as the Marpol Carbon Intensity Regulations.
From 1 January 2023, it will be mandatory for most ships over 400 gross tons to calculate their attained Energy Efficiency Existing Ship Index (EEXI) to measure their energy efficiency and to initiate the collection of data for the reporting of their annual operational carbon intensity indicator (CII) and CII rating.
CII rating system
The CII rating system is designed to assess the efficiency of ships in relation to their CO2 emissions and applies to various types of ships of more than 5,000 gross tons. Relevant factors will include quantity of fuel consumed, distance travelled and cargo capacity. Ships will be rated on their operational carbon intensity performance each calendar year starting 2023 and the system will use the operational carbon intensity performance of different types of ships from 2019 as a reference point during assessments. Ratings will be for a ship’s emissions during the previous year, so the first ratings will appear in 2024.
Ships will receive a rating between A-E with ‘E’ indicating the worst emitters. Every year, the threshold for each rating band will be increased with a view to meeting the IMO’s target of reducing carbon intensity of international shipping by 40% by 2030, compared to 2008.
Ships that are rated ‘D’ for three years consecutively or ‘E’ for a single year will be required to update their Ship Energy Efficiency Management Plan (SEEMP) Part III with a corrective action plan showing how the ship will achieve a rating of ‘C’ or better. Meanwhile, it is expected that ships with an A or B rating will receive incentives from port authorities as encouraged by the IMO.
BIMCO CII Clause
In December 2021, BIMCO published an EEXI Transition Clause for Time Charterparties. Subsequently, on 17 November 2022, BIMCO published a CII Operations Clause for Time Charterparties that has been drafted to assist owners and charterers in addressing their joint responsibilities for reducing carbon intensity when entering into their fixtures.
The CII Clause aims to provide a framework that promotes collaboration, transparency and flexibility between the parties to a time charterparty so that they can meet their efficiency obligations under the regulations. Owners and charterers are obliged to cooperate in good faith to collect and share data regarding the ship’s CII performance, as well as to work together and share best practice on achieving operational efficiency.
Given that it is the charterers who make the operational and employment decisions for the duration of the time charter, the CII Clause places primary responsibility for compliance on them. However, owners remain responsible for maintaining a CII compliant ship – among other things, they have due diligence obligations to ensure the vessel is operated in a fuel efficient way, to ensure the vessel is maintained such that it meets efficiency requirements under the regulations and to monitor and provide fuel consumption data. Owners must also be mindful of the potential reputational and commercial risk they face, as well as Class considerations, if their ship is repeatedly non-compliant.
The Clause addresses the possibility that the ship’s speed will have to be reduced in order to achieve CII compliance, particularly in the light of any contractual performance warranties. Charterers may be required to issue alternative employment orders so that the vessel is operated in a manner that is consistent with the regulations. Meanwhile, owners must be proactive in ensuring that charterers operate their vessels in such a way that the contractually agreed CII rating is attained. Charterers must be given prior warning if the data suggests that their attained CII rating is likely to exceed the agreed CII rating. In those circumstances, owners also have a duty to collaborate with charterers to plan how operations can be altered so that the vessel’s attained CII rating is aligned with the agreed CII rating. Where the vessel deviates from the agreed CII rating, charterers will not be able to claim for breach of any performance warranty.
Ultimately, owners can bring a claim for any losses they suffer if charterers breach the CII Clause.
While some might choose to adopt the BIMCO CII Clause wholesale into their time charterparties, it is more likely that, as is often the case with BIMCO clauses and forms, owners and charterers will use it as a starting point for negotiating and drafting bespoke clauses that meet their own specific requirements. Among other things, charterers in a particularly strong negotiating position may be unwilling to agree to the risk allocation for CII compliance as set out in the unamended Clause, and a number have already voiced their resistance.
BIMCO has recognised that the shipping industry will be watching closely to see how the carbon intensity regulations work in practice. It has, therefore, indicated that the Clause will be kept under review to ensure that it remains fit for purpose.
All of this has the potential to significantly alter the balance of rights and obligations that has hitherto existed under charterparties and will inevitably lead to disputes as owners and charterers grapple with implementing these new requirements. Going forwards, careful thought will need to be given to how any new clauses are negotiated and introduced into existing charterparty forms.
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