December, 2022 - The BIMCO CII clause: what does the future bring?
- Date: 23/12/2022
The CII regulations come into force on 1st January, 2023 and will rate ships A, B, C, D or E on the basis of the intensity of their carbon emissions. The way that a ship is operated (speed, amount of cargo, number of voyages etc) will of course have a large impact on a ship’s carbon intensity, so owners and time charterers have for some time been grappling with how to allocate risk and responsibility for this issue.
To assist with the issue, BIMCO has published its CII Operations Clause for Time Charter Parties 2022. The clause is long, some four and half pages, but the basic structure of rights and responsibilities is reasonably clear. However, there remain several outstanding issues, primarily relating to sub-clauses (g) and (i) which we consider further below.
A key concept in the clause is that as per sub clause (d) there will be an agreed carbon intensity for the ship (expressed in gCO2/dwt.nmile) for each year or part year of the charterparty (defined as the “Agreed CII”). In theory the parties should specifically agree the Agreed CII but, if they do not, the clause assumes carbon intensity figures necessary to hit the mid-point of a “C” rating (defined as the “Required CII”).
This raises the possibility of the parties agreeing CII figures that are worse than the Required CII, which could lead to the ship’s CII rating dropping, without any penalty for the charterer. A note in the clause recommends that the Agreed CII be the Required CII or better, but there appears to be no sanction for not doing so. One would however expect that an owner would insist on use of the Required CII if there is no agreement on the Agreed CII.
The division of responsibility
With the Agreed CII in place, there is a general obligation on the parties to co-operate “in good faith” to maximise the ship’s efficiency and share emissions data (sub-clause (b)). Further, an owner is required to maintain the ship in line with the CII regulations and also optimise, monitor and report to the charterer the ship’s CII performance (sub-clause (f)). The charterer meanwhile is obliged to give orders which do not breach the CII regulations or mean that the ship will perform worse than the Agreed CII (sub-clause (c)(i)).
In short, the owner must keep the ship as efficient as possible, and the charterer must not order her to be employed in such a way that her carbon intensity for any given year ends up higher than the Agreed CII.
The thorniest issue is likely to be sub-clause (g), which potentially allows an owner to disregard or alter the charterer’s orders. The sub-clause says it is engaged if:
(1) “the trajectory” of the ship’s CII data “is deviating” from the Agreed CII and then “continues to deviate” after the owner has given the charterer “advance warning” AND
(2) “there is a reasonable likelihood that the Charterers may fail to meet their obligations under subclause (c)”.
Quite what this means in practice is open to debate - it is a new mechanism and BIMCO have not clarified how it is intended to operate. How is the “deviation” measured? How reasonable does the likelihood have to be? How easy is it to satisfy the test that the charterer “may fail” to meet its obligations? The danger is that there are several layers of uncertainty, which means parties may disagree whether the sub-clause is in fact engaged. If an owner gets this point wrong and goes on to refuse or seeks to alter the charterer’s orders (see below), it would likely be in breach of the charterparty, and there is case law to the effect that a refusal to comply with a valid employment order is a repudiatory breach.
Assuming that the sub-clause is engaged, an owners can demand and a charterer must provide (within 2 working days) a “written plan” detailing the ship’s future employment, covering at least the next voyage. If an owner “can reasonably show that following this written plan will result in the Charterers failing to meet their obligations under sub-clause (c)” AND that the Agreed CII “would be exceeded”, an owner must inform the charterer of this within 2 working days. The parties must then “cooperate and work together in good faith to agree within 2 working days” a revised plan of employment, to bring the ship’s emissions “into line with” the Agreed CII.
Unless and until this revised plan is agreed, an owner is at liberty to ignore the charterer’s current orders, reduce speed or even require the charterer to issue alternative orders “to bring the [ship’s CII data] in line with the Agreed CII”.
The above raises further questions. What happens if an owner does not inform the charterer within two working days as per the sub-clause – is it then shut out from using the rest of the sub-clause? What happens if the revised plan is not agreed within 2 working days? The clause provides that the parties shall cooperate and work together “in good faith” to agree a plan and until such plan is agreed the owner is entitled not to follow the charterer’s orders. Assuming that the orders referred to include the orders which the ship is actually performing at the time, the consequences for both parties of the owner refusing an order are serious (both legally and commercially) and one can envisage disputes as to whether good faith has been exercised in the required process.
Further, some charterers (perhaps many, where a ship is “tramping”) do not know at all times what their planned commercial operation for a ship is for the next voyage - it will depend on a number of factors, including when and where she becomes free. Such charterers may be genuinely unable to produce the initial written plan, let alone agree a revised one. In the meantime, an owner would be at liberty to ignore existing orders or reduce the ship’s speed under clause (g)(iii)(2).
Sub-clause (i) requires a charterer to ensure that any Bills of Lading or similar documents have wording allowing the owner to exercise its rights under the CII clause without being in breach, and states that the charterer should indemnify the owner for any consequences of the owner breaching bills of lading in terms of due despatch, deviation etc.
In practice, commercial realities make it unlikely that a charterer can or will ensure that bills of lading contain the required wording. There are countless examples of bills of lading which fail to contain important information (e.g. the date of the charter which is to be incorporated) and it seems unlikely that charterers will be able regularly to insert the required wording into the bills.
Whilst there is (as above) a wide indemnity in an owner’s favour, there is (in contrast to the LOI for non-production of bills of lading) no obligation on a charterer to provide security, so counterparty risk becomes a serious issue. Further, where will it leave an owner in terms of its P&I cover if, by exercising its rights under a CII clause, it breaches the contract of carriage by deviating?
Despite its length, the BIMCO clause represents a real attempt to grapple with the problems inherent in the CII regulations. The clause seeks to balance the interests of both parties, but ultimately provides owners with a mechanism to step in and ensure that a ship’s carbon intensity does not rise, and thereby downgrade her CII rating. However, the mechanism by which this is effected (sub-clause (g)) seems a potentially fertile ground for disputes.
An alternative (and perhaps simpler) route would be for an owners not to have the right to ignore/alter its charterer’s orders, but rather for the charterer to indemnify the owner for any reduction in a ship’s CII rating at the end of the charterparty, perhaps by reference to an agreed amount. However, it is unclear how the figure for compensation would be calculated and such an arrangement would still raise an element of counterparty risk, if the charterer was unwilling or unable to make good on this indemnity.
As always, if Members have any questions in relation to the above issues they are invited to contact the Club for further information.
Paul Herring, Legal Director
Alex McCue, Senior Claims Executive