Counsel London
"The Clause is intended to serve as a practical “tool” towards compliance with new international carbon intensity requirements for vessels which will apply from 1 January 2023"
On 17 November 2022 Bimco unveiled its long-awaited CII Operations Clause for Time Charter Parties (the “Clause”)¹. The Clause is intended to serve as a practical “tool” towards compliance with new international carbon intensity requirements for vessels which will apply from 1 January 2023. The Clause is intended to be used as a starting point for ship owners and charterers when negotiating long-term charterparties and aims to enable transparency, cooperation and data sharing between the parties so that best possible operational efficiency can be achieved.
What is CII?
The new International Maritime Organisation’s (“IMO’s”) Carbon Intensity Indicator (“CII”) certification will capture a wide range of ship types above 5,000 GT. The CII certification regime forms part of the amendments made under the International Convention for the Prevention of Pollution from Ships (“MARPOL”) Annex VI which came into force on 1 November 2022 (the “Regulations”).² From 2024, ships will receive their first CII Rating ranging from A to E (with A being the highest, E being the lowest and C or above being deemed compliant) based on their emissions from 2023. D or E rating for three consecutive periods will trigger the requirement for a Corrective Action Plan (CAP) to be implemented by the non-compliant vessel. Furthermore, the A to E ratings under CII will be recorded in the ship’s Ship Energy Efficiency Management Plan (the “SEEMP”). Further details of the CII regime are discussed in our separate article (click here).
How does the Clause work?
The Clause provides a base from which the parties can begin to agree practical steps towards compliance with CII. In addition to having obligations to cooperate and work together in good faith with a view to sharing best practice on how to achieve the best possible operational efficiency on the vessel, the parties also have duties to collect and share quality data on the vessel CII performance. The Clause also offers a contractual mechanism for the parties to activate if and when the emissions data shows that the vessel’s CII rating is falling. In this instance, a four staged process would apply:
Step 1 – Advance Warning
"The Clause provides a base from which the parties can begin to agree practical steps towards compliance with CII."
The owner is contractually obliged to alert the charterer to the potential deterioration of the CII rating of the vessel from the “Agreed CII” (i.e. the CII rating introduced by Bimco that both parties can agree to contractually which is not the same as the “Required CII”)³ by giving the charter “advanced warning”.
Step 2 – Written Plan
If the vessel’s performance continues to deviate from the “Agreed CII” and there is a reasonable likelihood that the charterer may fail to meet their obligation to “operate and employ the Vessel (including the planning of voyages and supply and selection of fuel) in a manner which is consistent with the Regulations” then the owner is required to write to the charterer and request a written plan, within two working days, detailing any proposed commercial operation of the Vessel for at least the next voyage. This will enable the owner to consider whether such operations would lead to non-compliant performance.
Step 3 – Owner review
If the written plan does not solve the declining performance issue then the owners can request that another written plan be provided by the Charterers but the owners must make this request within two working days of receipt of the Charterers written plan.
Step 4 – “Adjusted Written Plan”
The Clause mandates the parties to work together to agree within another two working days an “adjusted written plan” for the next voyage or voyages which brings the Attained CII in line with the Agreed CII.
How will it work in practice?
The Clause provides a means for the parties to work together to prepare a written plan that would help meet CII. However the Clause does not, and perhaps cannot, guarantee that the parties will agree a written plan that would actually work. Nor does it provide a path for the parties to follow if plan fails to deliver the “Agreed CII” rating within a specified period.
"The Clause assigns the burden of complying to the charterers on the basis that the charterers have day-to-day control of the vessel during the charterparty period and, in most cases, make decisions in relation to choice of fuel, route and speed."
The Clause assigns the burden of complying to the charterers on the basis that the charterers have day-to-day control of the vessel during the charterparty period and, in most cases, make decisions in relation to choice of fuel, route and speed. However, whilst provision is included for the owners to claim damages arising out of charterers’ breach of the Clause, it’s clear that regulatory responsibility for compliance is not passed on in the Clause. Perhaps constrained by its underlying purpose to be fair and balanced, it does not go as far as to avail the owners of all responsibility for CII. Ultimately, the owners would still be the responsible party under the Regulations because in the event of any enforcement action, prosecution and fines the regulators would take action against the owners rather than the charterers. On top of this and similar to the Regulations themselves, the Clause is silent on the critical question of who will pay for CII and the potentially far reaching consequences of any operational changes that would have to be made to maintain a compliant CII rating.
Owners with ships that repeatedly fail to meet CII will likely become exposed not only to potential enforcement action but also to reputational, financial, insurance and other commercial risks as well as potential impact on Class. It is therefore important they take these risks into consideration when negotiating CII provisions with a firm view to finding workable ways to avoid all of them.
Charterers’ perspective
There seems little incentive for any charterers to agree to the Clause in full because it requires considerable interference with their freedom to operate the vessel as it deemed necessary to meet commercial needs and deadlines. Whilst charterers may find data monitoring and data sharing requirements commercially acceptable, they are less likely to agree to making any operational changes, especially in instances where the voyages are 18 months or less, or where their trading route would be somehow limited or interrupted.
Owners’ perspective
Despite the owners being given unprecedented contractual powers to force charterers to make operational changes that would improve the CII rating or at least maintain it, the Clause does not absolve the owners from their responsibility to maintain a CII compliant vessel.
"It is therefore important they take these risks into consideration when negotiating CII provisions with a firm view to finding workable ways to avoid all of them."
Conclusions and recommendations
The Clause contains a mechanism for the owners to claim against the charterers for breach of any obligations under it but, given the many ambiguities and contradictions in the Regulations, the Clause may come to be seen as a starting point from which both parties can begin their negotiations, amending and augmenting the Clause to meet their specific requirements.
Prudent charterers would be well advised to draw up their own CII clause that meets their specific requirements and list of key priorities that for them are non-negotiable, particularly in instances where they charter ships with a borderline rating of C or lower.
Similarly, prudent ship owners, who stand to benefit from the Clause marginally more than the charterers, should expect considerable push back from charterers but also be mindful of the fact that ultimate responsibility for compliance with CII will remain with them.
There is no easy fix contractually (and the difficulties Bimco have faced in drawing up a balanced and fair Clause are testament to this); just as there is no easy way to decarbonise either. Everyone can perhaps at least agree that the maritime industry faces a challenging year ahead where bespoke, rather than one size fits all solutions, will be required.
[1] https://www.bimco.org/contracts-and-clauses/bimco-clauses/current/cii-operations-clause-2022
[2] MARPOL Annex VI “Regulations on the Carbon Intensity of International Shipping” and Resolution MEPC.328(76) implementing the CII and subsequent amendments to the Ship Energy Efficiency Management Plan (SEEMP) https://wwwcdn.imo.org/localresources/en/OurWork/Environment/Documents/Air%20pollution/MEPC.328(76).pdf
[3] “Required CII” is defined in the Clause as the rating for each calendar year of the charter period, the middle point of CII Rating level C equivalent to the required annual operational CII set out in Regulation 28.6 of the Regulations.
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