BIMCO CII Operating Clause for Sustainable Shipping in 2023

Addressing Compliance Challenges: Insights into the BIMCO CII Operating Clause for Sustainable Shipping in 2023

Introduction:

The Beginning of 2023 marked the commencement of a new regulatory era for cargo, RoPax, and cruise ships, with a gross tonnage of 5,000 or more, falling within the purview of the Carbon Intensity Indicator (CII) rating system. This metric quantifies a ship's efficiency in transporting goods or passengers by measuring grams of CO2 emitted per cargo-carrying capacity and nautical mile. Compliance with these regulations necessitates vessels to report their annual operational CII to respective flag state administrations. This data undergoes thorough examination against the prescribed annual operational CII, establishing the vessel's carbon intensity rating on a scale from A to E, denoting varying performance levels. Aiming to achieve at least the required annual operational CII, which represents the midpoint in rating level C, is crucial. Any ship with a D rating for three consecutive years or an E rating for one year must submit a corrective action plan. Incentives for A or B-rated ships were introduced as part of the initiative that started with annual reporting in 2023, and the initial CII ratings for qualifying ships are set for 2024. The proactive pursuit of operational adjustments aligns with the International Maritime Organization's (IMO) phased strategy, targeting annual reductions of CO2 emissions of 2%. The diligence of owners and managers in consistently enhancing a vessel's carbon intensity is paramount to prevent a deterioration of its rating over time.

In practical terms, as the CII operates as an operational metric, achieving a superior rating may necessitate alterations in the ship's usage and operations. This may involve nuanced adjustments in speed, route, and cargo capacity. The complexity of these regulations is magnified when navigating time charterparties, potentially impacting traditional charterparty rights. This article delves into the BIMCO CII Operations Clause for Time Charter Parties, introduced on November 17, 2022. This clause serves as a pivotal step in establishing a collaborative framework, distributing the responsibility for compliance between vessel owners and charterers. The primary goal is to mitigate conflicts that may arise from divergent priorities in maritime operations.

Contractual Dynamics:

The owner-appointed master follows the charterer's instructions regarding vessel employment, cargo selection, destinations, agency matters, and associated arrangements, while shipowners are ultimately responsible for complying with the CII Regulation. Conflicts may arise due to the charterer's primary focus on maximizing vessel profitability, while the owner is committed to complying with the CII Regulation. The BIMCO CII Operations Clause for Time Charter Parties aims to create a collaborative framework, sharing the responsibility for CII compliance between vessel owners and charterers, thereby mitigating the risk of contractual breaches.

The determination of the achieved annual operational CII involves considerations such as fuel type, energy-efficient technologies, port stays, hull cleaning, and sailing speed. While these factors can positively influence CII, they may pose challenges to contractual adherence based on charterparty terms. For example, reducing vessel speed or cargo without safety reasons might potentially cause breaches related to despatch or speed, performance and cargo warranties. The BIMCO CII Operations Clause for Time Charter Parties establishes a proactive framework for owners and charterers to collaboratively address challenges posed by CII regulations.

The clause redistributes the responsibility for CII compliance, ensuring it is not solely borne by the vessel owner but is equally shared with the charterer, who wields commercial control. This collaborative approach seeks to achieve a favorable CII rating without jeopardizing the contractual obligations of either party.

BIMCO CII Operations Clause for Time Charter Parties:

This clause emphasizes the importance of cooperation, stressing the shared responsibility to act in good faith and exchange information to enhance the vessel's energy efficiency. It also mandates daily collection, sharing, and reporting of pertinent data to monitor compliance with MARPOL Carbon Intensity Regulations and strategically plan future voyages.

Collaborative Framework and Agreed CII:

Within this cooperative framework, parties are expected to agree on an "Agreed CII Value" for each calendar year, ideally aligning with or surpassing the Required CII, representing the midpoint of CII Rating level C. In instances where tables are incomplete, the default Agreed CII is set as the Required CII. The BIMCO Clause assigns the primary responsibility for CII compliance to the charterer during the charter term, recognizing their customary role in operational decisions. Simultaneously, it imposes specific due diligence obligations on the owner regarding CII compliance. Upon delivery, the owner assumes the obligation to monitor and calculate the vessel's daily consumption, furnishing the charterers with comprehensive details. This information is then used to determine the C/P Attained CII value, compared against the Agreed CII for the relevant period, and shared transparently with the charterers.

Charterer's Responsibilities:

The charterer is entrusted with crucial tasks such as careful fuel selection, thoughtful voyage planning, and efficient supply management, always considering the CII. Under sub-clause (c), the charterer is obligated to diligently operate the vessel in adherence to Carbon Intensity Regulations, ensuring that the Attained CII remains within the Agreed CII specified in the charterparty. BIMCO suggests that the CII Clause seamlessly integrates into an existing time charter, preserving existing performance warranties. Importantly, the charterer cannot use the breach of performance warranties to evade obligations under the CII Clause or initiate a claim for breach if the warranties go unmet due to a valid invocation of sub-clause (g), pertaining to the deviation of Attained CII from the Agreed CII. In essence, this clause retains warranties but creates an exception.

Charterers' failure to compliance:

Sub-clause (g) addresses scenarios where the C/P Attained CII deviates from the Agreed CII, potentially resulting in charterers' failure to fulfill obligations. If data indicates such a deviation, owners must promptly notify charterers. If the trajectory persists, and owners can demonstrate a “reasonable likelihood” of charterers failing to meet their obligations, specific procedures are outlined. Owners request a written plan from charterers within two working days, outlining proposed commercial operations. After evaluating charterers' plan, owners must notify charterers within two working days if they can reasonably demonstrate that the proposed plan would lead to charterers failing to meet their obligations. Subsequently, the parties collaborate to agree on an adjusted written plan within two working days, modifying the employment plan to align the C/P Attained CII with the Agreed CII. Until an adjusted plan is finalized, owners retain the right to refrain from following charterers' orders, reduce vessel speed, or request instructions to align with the Agreed CII, all without breaching the Charter Party. Furthermore, charterers are responsible for indemnifying owners against liabilities exceeding those assumed by owners under the clause.

Owner's Due Diligence Compliance:

While the charterer bears the primary responsibility, the owner is obliged to exercise due diligence in minimizing fuel and energy consumption, as outlined in sub-clause (f). This includes various aspects such as maintaining the vessel, its engines, hull, and related energy efficiency equipment in alignment with the charter, with a commitment to promptly report any identified deficiencies. Responsibilities further involve adjusting the vessel's trim, optimizing the use of main and auxiliary engines, making efficient use of navigational equipment and performance monitoring systems, selecting the most fuel-efficient route (while prioritizing safety and adhering to charterers' instructions), and diligently monitoring data relevant to calculating the vessel's carbon intensity. Compliance with the Ship Energy Efficiency Management Plan (SEEMP) is integral to fulfilling these obligations.

Key considerations and potential disputes:

When navigating the complexities of applying this clause to charterparties, it is crucial to be mindful of key considerations and potential conflicts.

• Ambiguity in the Definition of Charterer's Failure: The clause in section (g) introduces a stringent procedure if charterers fail to meet their obligations, raising challenges.
  • Ambiguity in defining a "reasonable likelihood" of failure may lead to potential disputes, and the discretion given to the owner adds to this complexity. Once the owner determines this likelihood, the two days countdown begins for the charterer, placing a significant burden on them.
  • The tight two-day deadline for charterers to submit a written plan may be impractical, especially in intricate charter party chains.
  • The definition of what constitutes a "reasonable" refusal by the owner to follow an order or plan introduces further ambiguity, leaving room for potential disputes. In essence, while the clause aims to bring about swift resolutions, its practical implementation raises concerns and leaves room for different interpretations.
• Lack of Clarity on Enforcement and Damages:
  • Owners maintain the entitlement to pursue damages as outlined in sub-clause (j) in case of breaches by charterers. The repercussions of attaining D (for three consecutive years) or E rating lack clarity, and the assessment of enforcement by the IMO is postponed until 2026. Consequently, the potential implications of such enforcement may be determined only in 2026. Furthermore the assessment of enforcement by the IMO is deferred until 2026, posing challenges in identifying responsible parties for seeking recourse, especially considering the cumulative nature of the rating.
  • In situations where vessels receive unfavorable ratings under the management of different charterers within the same rating year, or when three 'D' ratings occur under different charterers, disputes may arise. Determining liability allocation becomes a challenging task in such instances. The owner may encounter various scenarios where attempts to recover damages prove difficult due to the inability to accurately identify the responsible party.
• Defining Recoverable Losses Under the Clause:
  • The clause allows for claims of general damages for breach of contract, but the definition of recoverable losses is not explicitly outlined.
  • Ambiguity may lead to disputes, especially concerning commercial losses like the loss of future incentives or the impact on the vessel's market rate of hire or the owner's ability to fix the vessel for future voyages.
• Encouraging Charterer Compliance:
  • Owners may seek to encourage charterers to embrace the clause and guide vessels towards a favorable CII rating, possibly sharing anticipated port authority incentives. Considerations should extend to scenarios where the charterparty comes to an end before obtaining ratings or chartered shortly after being hired with pre-existing ratings. Crafting this provision requires careful consideration of such circumstances.
  • Charterer may also find it beneficial to have a mutually agreed schedule for maintenance.
• Short-Term Charter Parties and Exposure Gaps:
  • The clause is designed for long-term time charter parties, and careful assessment is needed for exposure gaps or back-to-back terms in the contract chain.
  • Considerations apply to all contracts of carriage, including bills of lading, and negotiations may be extensive.
• Vessel's CII Rating upon Delivery:
  • Agreed CII is determined during CP negotiation; charterers may find it beneficial to request performance data well in advance, not just at the vessel's delivery into the CP. Additionally, Charterparty warranties might require future updates, potentially including the delivered CII rating of the vessel.
  • Consideration for adapting warranties to energy-efficient devices is crucial, especially if device failure impacts the vessel's efficiency.
• Engaging Independent Third-Party Services:
  • Consideration should be given to engaging third-party services before entering into charter parties, with discussions on cost-sharing if additional services are contemplated.

Conlusion

In conclusion, the journey toward achieving a favorable Carbon Intensity Indicator (CII) rating involves collaboration between vessel owners and charterers, with the latter holding commercial control. The CII Clause, at its core, places the responsibility for attaining the agreed CII rating largely on the charterer. While this may seem fair in attributing losses from a reduced CII rating to the responsible party, critics anticipated a more equitable approach from BIMCO.

Charterers, in their advantageous position, might perceive this clause as limiting their rights and burdening them with significant obligations. During negotiations, charterers may explore (and they are indeed exploring) alternative CII clauses formulations to better align with their interests. Prudent charterers should consider developing a customized CII clause that outlines non-negotiable priorities, especially when chartering vessels with a borderline or lower CII rating. It is essential to recognize that the ultimate responsibility for CII compliance with the authorities rests with the owners.

The practical effectiveness of this clause remains uncertain, with some charterers refusing to comply and leading to impasses. Despite potential reputational risks, charterers may perceive the economic burdens as non-recourse. Nevertheless, the provision acts as a deterrent, ensuring that economic liabilities are not easily evaded. In the context of a niche market, such practices may prompt owners to be more discerning in selecting charterparties, potentially reshaping the dynamics of this small-scale industry.

The inclusion of this clause is pivotal, preventing shipowners' attempts to enhance CII ratings from leading to charter party violations. Consequently, it becomes a crucial consideration in negotiations for shipowners entering into charter party agreements. In my opinion, this clause may not be directly implementable in practice. However, despite several shortcomings, it serves as a valuable starting point for negotiations between the involved parties.