The maritime world is still coming to terms with the shift brought about by the introduction of FuelEU Maritime. But while the regulation’s technical challenges have captured headlines, the true upheaval is unfolding in the legal departments and boardrooms where commercial negotiations are being redefined from the keel up.
A year on from its introduction and market players are still scrambling to define responsibility, allocate risk, and capture the new financial opportunities presented by the European Union’s decarbonization mandate.
The clock is ticking on a new era of liability, as Oliver Goossens, senior lawyer at GARD, notes:
“The FuelEU regulations have now been in force for a full year, penalties are already being incurred and the deadline for payment is fast approaching.”
This impetus is driving a frantic overhaul of fundamental contractual documents. Yet despite the best efforts by industry bodies to provide standardization, “many parties are still negotiating clauses to cover responsibility for compliance”, Goossens said.
Without agreed clauses, strategies remain undefined. This lack of standardization is amplified by the fact that the principle of the “polluter pays” is struggling to align with the regulation’s strict legal framework.
Compliance versus control
FuelEU Maritime places the legal burden of compliance squarely on the holder of the Document of Compliance, typically the shipowner or technical manager. This creates far-reaching implications for the legal relationship between the contractual parties involved in the ownership and operation of a vessel. While a shipowner with its own ship management division can handle the consequences relatively smoothly, third-party, independent ship management companies (ISM) are exposed to the full financial risk arising from emissions liabilities.
This legal structure conflicts with the operational reality of the chartering market, where the charterer often dictates the vessel’s trade and fuel consumption. Writing in a blog, Helge Hermundsgård, head of business development for DNV’s Emissions Connect services noted that “charter parties rarely line up with the annual compliance cycle”. This misalignment is critical, meaning that “charter parties must ensure that the incurred liabilities are addressed as charters start and end during the reporting year”.
The regulation itself leaves the specific contractual details of these arrangements up to the commercial partners. Therefore, the task of commercial negotiations is to achieve fair allocation of the financial exposure.
Hermundsgard argues that the independent ship manager has virtually no influence on the factors determining FuelEU Maritime exposure, such as the fuel used and the ship’s trade.
“In other words, the financial consequences should be assigned to the party that can influence those factors, based on the principle that the polluter pays,” he says.
Complexity is not limited to owners and charterers.
Lars Nyfløt, global sales manager emissions at DNV’s Connect Business
Development, said “independent ship managers, charterers, and owners must understand the regulations clearly and find ways to allocate the financial consequences in their charter parties fairly, including provisions for hypothetical events or situations”. He added that “they need a clear understanding of who is in charge of what”. This awareness is paramount for service providers. As Nyfløt noted: “An ISM must be highly aware of its risk and ensure that the commercial agreement with the owner provides for suitable mechanisms to manage that risk.”
Penalties and profits
A significant driver of the current negotiation tension is financial exposure. Here, finding the compliance balance is critical, which Hermundsgård defines as “the difference between the required and the actual greenhouse gas (GHG) intensity during the charter period”. This balance determines whether a vessel owes money or has earned a surplus. “In the event of lagging compliance, the balance needs to be paid for, which means that the owner is likely to ask the charterer for compensation,” he said. The complexity arises when parties actively choose to use low-carbon alternatives to generate a surplus. “However, if a charterer uses biofuel and generates a compliance surplus but has paid more for the fuel by the end of the charter period, will the charterer be willing to pay the corresponding monetary benefit to the owner, or should the owner compensate the charterer for the extra fuel cost?” he asks.
“Money can flow in either direction, and all these scenarios need to be accounted for in the agreements between the commercial partners.”
Beyond the monetary accounting, the shift toward compliance options like blending fossil fuels with biofuels has introduced a host of technical considerations that must be resolved in the contract. As Goossens notes: “In our experience, the most common method of compliance is blending fossil fuels with biofuels to bring the fuel within the FuelEU limits.” However, this strategy is not without risk, as it “raises issues of compatibility, stability and other potential technical problems”. This necessitates meticulous attention to detail during the drafting stage, with Goossens advising that “some owners and charterers can be so absorbed in the discussion of FuelEU penalties, that they overlook a key point: if they agree to use new fuels, the charterparty should include provisions for handling those fuels – unless it already does”. He adds that a good biofuels clause should address everything from the time and cost of preparing bunker tanks to fuel certification, testing, handling and the vessel’s performance with these new fuels.
Data and trust
The need for accurate, shared information is now recognized as essential for successful negotiations. Nyfløt says it is crucial for all players in the value chain, including the technical manager, the owner, the charterer, the cargo owner if different, the management company, and others, to have a clear picture of how emissions affect pricing. This transparency, he believes, “will support good-faith negotiations with the understanding that all parties are ultimately in the same boat, as it were, bearing a shared responsibility for compliance, each side with its own part to play”.
“In my experience, one of the most important assets in charter negotiations is a trusted source of emission data. Proper documentation and a single source of truth accepted by all stakeholders are key to negotiations that deliver satisfactory results,” he says.
Source: Baltic Exchange
