Decarbonization and contracts in the world of international maritime trade
Tthere is so much discussion about the regulatory aspect of maritime decarbonization. And there are so many complaints about the uncertainty and the need for clarity and certainty. As if the future could be known and all you had to do was lay it out on a map – carefully organized, defined and preordained by this government or that international organization. One wonders what certainty there was when steam began to replace the sails and fuel oil began to replace coal.
Unlike other regulatory areas (pollution, safety), decarbonization is a journey with an uncertain route and a fuzzy destination: percentage reduction or net zero? And what does net zero really mean by reference to “wake up well”? And how do you get there? What is the course? It is also an effort with unknown tools, perhaps tools that have not yet been invented.
So, conceptually speaking, we are looking for the impossible; and if, practically speaking, we seek the inaccessible, what remains? Do we need a decarbonization prophet or an oracle to guide us?
Moving away from the philosophical, the aim of this article is to provoke a different thinking, in order to take a step back from decarbonization as a regulatory issue, and to reflect on the question of whether a regulatory approach misses wood. trees. Behind the seemingly innocuous technical jargon of “operational carbon intensity requires a linear reduction in the carbon intensity in service of ships between 2023 and 2030”, looms a contractual tsunami.
Freighters, particularly in the transport of dry and wet bulk, are not purely “operational” and “in service”, by and for the benefit of the shipowner. Freighters do not carry the cargoes of their owners. The voyage of a ship represents contractual relations: charter parties, bills of lading, sales contracts, letters of credit. Changes in the way cargo ships are operated have contractual repercussions. This characteristic differentiates the transport of bulk goods from heavy industry, manufacturing, aviation, or indeed passenger transport. If we now add the ad hoc nature of a large part of bulk transport, a much more dynamic contractual landscape emerges, which also differentiates bulk transport from container transport.
These contracts that make up international maritime trade have their origin in the age of sailing, have been refined for steamboats and adapted for contemporary ships. It might surprise the uninitiated that the cornerstones of maritime law have remained fundamentally unchanged since the Steam Age: The Hague Rules date back to the 1920s and the York-Antwerp Rules to the 1890s.
We must ask ourselves whether the contractual structures on which the edifice of international maritime trade has been built for 150 years will be adapted to the purpose of the decarbonization process.
Let’s start with the two main types of ship employment contracts: time and voyage charter parties. The big question around EEXIs and CIIs is operational optimization: are orders placed by a time charterer optimized to reduce fuel consumption and emissions? It’s not just the obvious choice of speed, but also the choice of routes and ballast travel. Currently, time charter parties give charterers complete flexibility and the right to issue any employment orders required by their business considerations. But what if these considerations collide with the need to reduce emissions? Until now, the only exception to a charterer’s right to issue hiring orders has been the safety and navigational privilege of the ship’s captain. Is this dichotomy (commercial employment vs navigation safety) still appropriate? Or do we now need a contractual mechanism to introduce emission reduction as a parameter in the charter parties?
Turning now to voyage charters, the risk of delay lies with the shipowner, who receives the same amount of freight regardless of the length of the voyage, and the shipowner pays for the bunkers. Depending on the state of the market, there is a nice balance that determines profit or loss: speed vs consumption vs travel time vs arrival time. And, of course, a shipowner’s best friend: demurrage. Lawyers define it as “fixed damages for the immobilization of the vessel in port beyond the agreed waiting period”. Often demurrage is a large part of a shipowner’s profit. This encourages the universal practice of “sail fast, then wait”: all bulk carriers chartered to the voyage sail to the port of destination regardless of local conditions, so that they arrive as soon as possible, issue a readiness notice. , so that to run the rest clock. And when the release time expires, demurrage becomes payable. Now take a step back and think: is this universal practice sustainable in today’s world? Or is it an anachronism born at a time when ships sailed towards sunset with little communication.
Demurrage is also a common feature of sales contracts for goods carried by freighters, and the same consideration also applies to traders: Demurrage is often a profit center for traders, who may pay less demurrage to ship owners. than what they receive from their contractual counterparts under the sales contract. And the same question arises: is demurrage consistent with the Age of Decarbonization, or should we now be recording it in the history of the Age of Sailing, the Age of Steam and the Age of fuel oil.
There is a common thread running through charter parties and sales contracts: Basically, they all prioritize security, then commercial considerations. Depending on the market, the commercial considerations of either party prevail. None of these contracts provide for the third factor: emission reduction. And it is not a question of regulation, but a question of contractual autonomy.
It is clear that the regulations and in particular the Carbon Intensity Indicators will frame the contractual provisions. However, it is important to remember that the maritime industry has always served as a paradigmatic example of contractual laissez-faire and that maritime transport and commerce are areas of commercial activity with almost complete contractual autonomy. This enabled the transition through the earlier eras, and there is no reason why this could not apply in the era of decarbonization as well. It is certain that the charter parties and the contracts for the sale of raw materials will be rethought and redesigned to become adapted to the objectives of the decarbonisation journey. It is inevitable that the bipolar world of navigation safety compared to commercial reality will be replaced by a triangle which will now include emission reductions. But to start making the necessary changes, you have to stop thinking in narrow terms of regulatory compliance and let shipping do what it has always done: adapt to an ever-changing world through ever-changing demands. commercial contracts.
Source: Stephenson Harwood LLP. by Haris Zografakis