- Alternative fuel agreements may need amendments to warranties and procedures.
- Owners must report compliance balances, affecting future penalties.
- Compliance balance validation can lead to disputes over costs.
BIMCO’s long-awaited FuelEU clause has now been published, providing a useful starting point for Owners and Charterers to agree on how calculations and costs will be addressed under their charter parties. It does not, however, address all the details, and parties should be aware of some of the issues that arise when incorporating this clause into their agreements. This article discusses key considerations and areas where further amendments or wording may be necessary, reports Gard.
Alternative Fuels
Sub-clause (c) permits the Charterers to provide biofuels or other alternative fuels for the vessel so that it will meet the FuelEU requirements. However, an agreement to employ such fuels could also necessitate adjustments to speed and performance warranties, bunker specifications, and provisions for on-board fuel trials, and tank cleaning/preparation. Class and engine manufacturer approvals, as well as Owners’ H&M insurers’ consent, may also be necessary. These would be important to ensure that such implementation is as smooth as possible and in full compliance with the FuelEU regulations.
Reporting of Compliance Balance Upon Delivery
Sub-clause (a) requires Owners to report the vessel’s compliance balance for the last two reporting periods upon delivery. This is transparent because Charterers must be made aware of the penalties that might accrue in future years. Penalties become escalating if a compliance balance goes negative for consecutive years. This penalty starts at 10% for the first year, rises to 20% the next year, and so on. Charterers should bargain to ensure they are not charged for a multiplier of previous Charterers’ performance.
Compliance Balance Calculation
As required by sub-clause (d), Owners are obliged to communicate to the Charterers an aggregate compliance balance no later than 15 days after the conclusion of each voyage to which such balance applies. When the balance is negative, its validity should be validated independently; thus, issues arise whether a selected validator can indeed be classified as independent. This validation process must be realistic for Owners. Moreover, the parties should agree on how the validation costs are to be shared, especially where Charterers’ trading decisions may lead to the necessity of validation.
Surcharge Payable
A surcharge is payable from Charterers to Owners when the vessel operates in the EU above the FuelEU GHG emission limits, as stated in sub-clause (d). This surcharge relates to the additional cost of sanctions suffered due to non-compliance. Payment is usually agreed at a monthly rate, per voyage, or even on redelivery. However, Owners should guard against leaving payment determination to final hire statements as they are then susceptible to unsecured sums. There is a facility for reimbursement in sub-clause (g). Charterers are expected to provide payment arrangements comparable to those they have agreed for sub-charters.
Banking / Pooling
Sub-clause (i) gives the Charterers a right to order the Owners to bank or pool any compliance balance, but such right is subject only to charters that cover an entire reporting period; that is from 1 January to 31 December. Credit pooling may not be possible with charters starting in February and ending in November. The parties may need to modify the clause if they want to retain rights on pooling decisions. Moreover, the clause does not provide for how the benefits of pooling will be distributed, and Owners and Charterers may have to agree on further provisions to clarify and make it fair.
Borrowing
The charter period should last for more than one consecutive reporting period to borrow (subclause (l)). Therefore, Charterers may require Owners to borrow for 2026 from a negative compliance balance for the previous year, but not in the last year of the charter. Owners would want to limit the amount borrowed to some extent, especially in a case when the deficit crosses a specific limit.
Positive Compliance Balance
For long-term charters, when the vessel makes a positive compliance balance in the earlier years, Charterers might want to capitalize on the full credit either by banking it for future use or by pooling it. However, there are complications when the vessel is redelivered mid-year, with accrued credits left for partial periods. Sub-clause (m) is that Owners should compensate the charterer for credits at a mutually agreed price up to a fixed cap. Charterers may face financial difficulties against Owners in financing the refund before knowing its actual value, or Owners may face financial and administrative complexity if charterers choose to receive the full value of a credit once it is realized.
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Source: Gard
