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Navigating decarbonisation – contractual considerations

With mounting global efforts to combat climate change, the shipping and offshore sectors are subject to ever-increasing scrutiny and regulatory intervention. Reed Smith shipping partner Nick Austin and associate Eleni Pilaviou highlight the significant challenges of decarbonisation for shipowners and operators.

To meet IMO’s target of reducing carbon emissions by at least 50% by 2050, the Energy Efficiency Existing Ship index (‘EEXI’, which effectively measures emissions per cargo ton mile) and the Carbon Intensity Indicator (‘CII’, a rating from A to E for operational carbon intensity) will need to be regularly calculated and verified to monitor the performance and energy efficiency of virtually all vessels from January 2023.

This, and the significant challenges of decarbonisation, present shipowners and operators with an immense compliance task and an urgent need to understand the impact on the charterparty and other contractual arrangements under which each ship is operating.

Among others, contractual implications will include: how the responsibility and cost of compliance with EEXI and CII is to be allocated between owner and charterer; what steps are required to maintain a ship’s energy efficiency; and what enforcement steps, sanctions, and commercial outcomes result from a failure to comply. To help with some of these aspects, BIMCO recently published the ‘EEXI Transition Clause for Time Charterparties 2021′, which addresses compliance with EEXI and allocates the responsibility and costs of implementing necessary modifications under a time charterparty. A separate CII clause is awaited, although many players are opting for bespoke clauses for both EEXI and CII.

Time charterparties are particularly vulnerable to the impacts of EEXI and CII. Charterers’ traditional right to employ the vessel for its own commercial ends (within trading limits) is likely to be affected. The IMO regulations may require adjustments to the way in which their ship is operated (e.g., due to a need to reduce cargo intake, deviate or slow steam to ensure compliance), and Owners may have to consider their speed and consumption warranties if compliance means they can no longer be met.

In the context of voyage charterparties, the extension of voyage duration to comply with EEXI and CII could reduce an owner’s earnings under contracts of affreightment or put them in breach of “due” or “utmost” despatch obligations if protective clauses are not agreed.

In summary, as emissions targets continue to tighten, failure to comply with EEXI, CII and other IMO regulations in the pipeline could have a serious impact on earnings, charterparty relationships and, of course, reputation. Industry participants are strongly encouraged to seek advice and consider appropriate clauses for their shipping contracts.”
Source: Reed Smith

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