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| 4 minutes read

‘Low Carbon’ shipping regulations could lead to disputes under commodity contacts

The IMO’s Energy Efficiency Existing Ship Index (EEXI) regulations are due to come into force on 1 January 2023 and will apply to all vessels over 5,000 GT, including (but not limited to) bulk cargo carriers, oil and chemicals tankers and LNG tankers.

For ship owners, one option to achieve compliance with the regulations is to reduce steaming speeds, meaning longer, slower voyages. This raises important practical and legal considerations for FOB buyers and DES/ DAP sellers under commodity sale and purchase contracts.

What is the issue?

FOB purchasers and DES/ DAP sellers rely on their vessels (owned or chartered) for performance of their primary obligation to present the vessel or receive/ deliver the cargo within the contractually agreed period.

If the performing vessel goes more slowly than expected, performance of these important obligations could be delayed or even prevented with practical, legal and economic consequences for both buyer and seller.

Without careful planning at the contract negotiation and operational stages, therefore, the new regulation has the potential to cause an increase in performance failures and legal disputes under commodity sale and purchase contracts.

If the ship is too slow, can't liability under the commodity contract be recovered under the charter party?

FOB purchasers and DES/ DAP sellers who charter (rather than own) ships may be wondering if commodity contract liabilities which are caused by slow-steaming can simply be passed through to the ship owner. For example, will slow-steaming be a breach of the ship owner’s performance warranties and/or obligation to comply with charterers’ lawful employment orders?

This will depend on the type of charter party and its terms. However, even if the charter party appears to permit a claim in relevant circumstances, FOB purchasers and DES/ DAP sellers would be unwise to rely on passing through claims since there could be a mis-match between the amount of the liability under the commodity contract and the amount which can be recovered under the charter party. The timing of any recovery under the charter party may also be out-of-sync with the position under the commodity contract.

In addition, it is reasonable to expect that during 2022 and beyond ship owners will begin to propose new clauses in both time and voyage charter parties in order to avoid this scenario. The recent EEXI Transition Clause for Time Charter Parties published by BIMCO in 2021 provides an example of how ship owners may seek to do this. Amongst other things, that clause provides that if the physical and technical modifications required to bring the ship into compliance with EEXI regulations are limited to engine power limitation or shaft power limitation, the ship owner may notify a new maximum speed. In that case, the warranted maximum figures will be adjusted downwards and the charterers may not order the ship to prosecute a voyage in excess of the adjusted maximum.

Can the risks of slow-steaming be mitigated in the commodity contract?

A practical response to the risk of slow-steaming will be to change operational and commercial planning. For example, by allowing additional time for the sea voyage and/or chartering additional shipping capacity.

However, it is prudent to consider the legal position as well and we may therefore see changes to commodity contract negotiating behaviors during 2022 and the EEXI transition period. For FOB purchasers and DES/ DAP sellers, these options may focus on the timing of arrival or receipt / delivery of the cargo.

For example, FOB buyers and DES/ DAP sellers may attempt to bargain for increased operational flexibility (for instance in relation to load or unload port nomination, the narrowing of arrival and delivery windows, and the substitution of vessels). Such flexibility could assist FOB purchasers and DES/ DAP sellers to better manage and accommodate slow-steaming issues on an ‘ad hoc’ basis when they arise.

FOB buyers and DES/ DAP sellers might also seek express performance relief for late arrival, receipt or delivery caused by slow steaming due to EEXI compliance. However, this type of option could be met with resistance from the FOB seller or DES/ DAP buyer for whom it would result in operational uncertainty (and, potentially, legal risk to the extent that equivalent relief is not available in upstream/ downstream arrangements). A relief which is contingent upon regulatory compliance having interfered with due performance would also raise issues of causation and evidence which would need to be considered carefully at the drafting stage.

Alternatively, concerns about slow-steaming could result in an increase in ‘paid for’ performance extensions. In this type of provision the FOB buyer or DES/ DAP seller is entitled to an extension for presenting the vessel or receiving/ delivering the cargo, and in return the other party receives some economic benefit such as a premium or discount (as applicable) to be applied for each day of delay (and perhaps in the case of FOB contracts carrying charges to reflect the FOB seller’s additional costs of storage). Paid for extensions are already common in some agricultural commodity trades and it will be interesting to see whether they are more widely adopted in other commodity markets during the EEXI transition period.

Of course, different organizations operating in different commodity markets will each have their own preferred approach. However, those who engage with the issues at an early stage and undertake careful forward planning could be the most successful at avoiding preventable disputes during the early stages of EEXI implementation.

Tags

energytransition, decarbonisation, commoditytrading, commoditiestrading

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