Following the introduction of the EU Emissions Trading System (EU ETS) into shipping from 1 January 2024, BIMCO have also included an EU ETS Allowances clause to SHIPMAN 2024 – the form of ship management agreement replacing SHIPMAN 2009.
In summary, the clause aims to apportion the responsibilities and costs of compliance with EU ETS requirements. However, it also seeks to anticipate applicable emission schemes which might be introduced in the future.
Whilst the SHIPMAN clause has been introduced to cover the primary concerns relating to EU ETS responsibilities, the parties to any ship management agreement should carefully consider and understand the applicable provisions and satisfy themselves that they are aware of the obligations and liabilities to be assumed by them specifically.
EU ETS: Key Terms
Key terms to have in mind:
- Regulated ships: ships of 5,000GT and above, carrying cargo or passengers for commercial purposes. Several exemptions apply which should be considered in the instance.
- Regulated Emissions: (a) 50% of the emissions in relation to international voyages linked to the EU – i.e. voyages between EU/EEA ports and non-EU/EEA ports; and (b) 100% of the emissions in relation to voyages solely between EU/EEA ports, including berthing in EU/EEA ports.
- Phase In: to facilitate a smooth transition, the emissions thresholds subject to the EU ETS will be as follows: (a) 40% of the total emissions of 2024 (to be surrendered in 2025); (b) 70% of the total emissions of 2025 (to be surrendered in 2026); and (c) 100% of the total emissions of 2026 onwards. The first surrendering deadline falls due in September 2025 in all Member States, in respect of emissions reported as taking place from 1 January 2024 to 31 December 2024.
- Cap and Trade System: this system works with the allocation of allowances (EUAs) on the companies’ annual GHG emissions, offering the option to trade such allowances through primary and secondary markets.
- Responsibility: responsibility for compliance with the regulation lies with the “shipping company” which for the purposes of the EU ETS can be either (i) the registered owner or (ii) any third party having assumed responsibility for the Document of Compliance (DOC) under the ISM, which will usually be the technical managers. Akin to many management services, whilst responsibility rests with the vessel’s Manager, the relevant cost is to be borne by the Owner.
- Penalties for non-compliance: including, (a) meeting any shortfall in EUAs due; (b) paying excess emissions penalties currently set at €100 per extra ton of CO2 equivalent emissions; (c) publication of the defaulting company’s name; and (d) in case of continuing breach for two years or more, a potential expulsion order, which would prohibit vessels under the defaulting company’s responsibility to enter EU/EEA ports.
Clause 10 of SHIPMAN 2024
The new EU ETS provisions for SHIPMAN 2024 can be found at Clause 10, which is divided into two sub-clauses – each dealing with the party’s responsibility for compliance with EU ETS. Box 14 selects the available options to apply under Clause 10.
Clause 10(a) applies in circumstances where the Owners remain responsible, in which case the Managers’ obligation is limited to providing the Owners with the necessary information and data to promptly comply with the regulations.
Clause 10(a)(iii), however, introduces additional optional management services to be provided by the Managers to the Owners for specific compliance with EU ETS.
Clauses 10(b) and 10(c) apply in circumstances where the Managers have been appointed as the responsible entity for complying with EU ETS. Nevertheless, it is important to note that the application of Clause 10 will not serve as an official appointment, and a further mandate should be issued to the competent national Administering Authority, confirming the appointment and clarifying the vessels to which such appointment applies. Helpfully, BIMCO has also introduced a Mandate Form (specifically for EU ETS), a copy of which can be found here.
Pursuant to Clause 10(b), the Managers’ obligations towards the Owners include the provision of emissions data, monitoring and reporting data to the authorities as well as informing owners as to EUAs and relevant timeframes are regulated.
Clause 10(c) provides for an additional fee to be agreed between the parties in respect of the additional services to be provided by the Managers.
Finally, Clause 10(d) emphasises the importance of compliance with EU ETS regulations, with a breach of the requirements of Clause 10 providing the innocent party with a right to terminate the management agreement. However, as no specific provisions for the termination in such circumstances are described, there is scope for the parties to agree additional termination consequences and procedures between them. It is also important to note, however, that indemnity provisions could still apply pursuant to Clause 19(b) (Liability to Owners) and/or Clause 19(c) (Indemnity).
Points of Consideration
As with all newly enforced regulations, the implementation of contractual terms to address those compliance requirements is never straightforward and EU ETS provisions can also lead to a number of complications or challenges for the parties involved.
Risks to consider:
- Manager’s impediments: The risks for Managers accepting responsibility for compliance with the EU ETS cannot be precisely predicted unless seen in practice, but could be summarised as follows:
- a Manager may be operating ships in different jurisdictions and variations in national practices could lead to difficulties with differing compliance requirements and procedure. The appointed Manager should have an updated and comprehensive management system and knowledgeable team to keep up with all regulatory changes – which itself can be time consuming and costly.
- careful consideration of the management agreements (whether new or old) may be required to address the additional costs incurred, the allocation of liability between the Owner and the Manager and other responsibilities in case of non-compliance.
- it is common practice for Managers to operate or manage vessels owned by different groups. As a result, in view of potential publication of either: (i) the defaulting managers’ name; (ii) an expulsion order for non-compliance; or (iii) default under EU ETS requirements, there is a high risk of reputational damage and operational/trading restraints affecting all vessels under management irrespective of ownership.
- Financial risks: Delayed payment by the Owners of the applicable allowance costs could lead to unexpected financial exposure for the Managers. This is often the case with certain services and supply requirements. However, the parties could consider a flow-through payment timeframe that would enable both the Owners to collect/receive the EUAs from their charterers before transferring them to the Managers. Managers could also minimise their exposure by pre-estimating EUAs for the following month. Financial security or reserve funds could also be considered an option to minimise Managers’ exposure and is also generically referenced in Clause 10(b)(vii) of SHIPMAN 2024.
- Financing arrangements: In the context of financing arrangements and a sale and leaseback transaction (for example), the lessor will be the registered owner of the vessel, albeit with limited participation with the vessel’s operation, trading and management. As a result, a lessor is almost certain to appoint the Managers as the responsible entity. Regardless of the form of financing, it is recommended that the financiers obtain adequate measures and incorporate detailed provisions to ensure that the vessel’s approved managers, registered owners or disponent owners (where applicable) assume full responsibility for compliance with the EU ETS, including annual reporting and indemnity provisions.
- Management expiry: The parties should also have in mind that the scheme does not currently address some of the practicalities upon expiry or termination of the management agreement and subsequent responsibilities, apportionment or settlement of EUAs and this may well be a bone of contention with third party management of intermingled fleet vessels and differing owners.
Way forward
The need for global cooperation to address emissions and decarbonisation is self-evident for international shipping. Regulations and requirements for compliance will continue to harden – in differing jurisdictions and different ways around the world.
For that reason, and more so in the complex world of managing an operating seagoing vessel, counterparties will need to ensure that there is good cooperation and harmonisation within the contractual framework. As usual, time will tell and performance will be determined by the trials (and errors) to follow in the coming years of practical implementation.
For further information, please contact:
Jasel Chauhan, Partner, Hill Dickinson
jasel.chauhan@hilldickinson.com
