Charter party agreements lay out the rules that bond carriers with cargo owners, but outdated clauses are holding carriers back on their mission to decarbonise. Here we examine the problems and look at how changes in maritime law might hold the key to significant reductions in carbon emissions.
Inefficiency infiltrates the ocean freight sector even before cargo is loaded aboard a ship. In some cases, inefficiency is even encouraged by outdated clauses in charter party agreements. To understand what’s happening here, we need to take a crash course in charter agreements and highlight where some of the issues lay.
When a charterer hires a vessel to undertake a voyage, the legal contract it creates is called a ‘voyage charterparty’. These agreements are common in the bulk shipping sector, but are frequently used across the supply chain. The charterer pays ‘freight’ to have goods carried from the load port to the discharge port, and often this payment includes the cost of delivering the vessel to the load port.
The freight payment will cover the voyage between the load and discharge ports, allowing limited time for loading and discharge operations at either end – known as ‘laytime’. If the agreed laytime is exceeded, the charterer has to pay damages to the shipowner for delaying the vessel longer than originally expected and this is known as demurrage. The demurrage rate will depend on the freight rates the vessel could attract at the time the charterparty was agreed.
Vessel operators are not just encouraged, but are legally obliged to sail at ‘best speed’ and arrive at the destination port at the earliest opportunity.
Standard voyage charter contract clauses have traditionally been designed to protect the idea that voyages should be carried out as quickly as possible. Key terms require that the carrier undertakes the voyage at ‘utmost despatch’ and without ‘deviation’, meaning that the vessel must make best speed to the destination port without causing unnecessary delays.
The result is that vessel operators are not just encouraged, but are legally obliged to sail at ‘best speed’ and arrive at the destination port at the earliest opportunity. It is very common to find that the discharge berth is not available when the vessel arrives because port operations traditionally operate on a first-come first-served basis. This requires that the vessel must go to anchor outside of the port to await an available berth at the terminal. Depending on the specific terms agreed in the charterparty, ships are often considered to be an ‘arrived ship’ when at anchor in a designated anchorage awaiting an available berth. This starts the clock on laytime, which often means that soon after dropping anchor, the vessel begins to earn demurrage from the charterer.
This can be quite a favourable position for the ship owner. The vessel is largely safe, secure, and at rest, while still earning additional income. More recently, a mixture of high freight rates and unprecedented port congestion has created a lucrative demurrage business for ship owners, who in some cases have spent weeks at anchor awaiting an available berth.
However, 2017 data from voyage optimisation specialists NAPA, suggests that this ‘rush and wait’ system wastes US $18bn worth of ship fuel each year on average and while it isn’t clear how much of this is recovered via demurrage, it is clear that the practice is not conducive to favourable environmental outcomes.
The problem with all of this is that global Energy Efficiency Existing Ship Index (EEXI) and Carbon Intensity Index (CII) regulations, schemes like the Poseidon Principles and Sea Cargo Charter, and the proliferation of JIT shipping and green corridor schemes, all require shipping to adjust voyage speeds to coincide with berth availability and ultimately avoid wasting fuel by sailing faster than is necessary.
Recognising this, BIMCO are prioritising revisions to their standard voyage charterparty clauses. BIMCO clauses are widely accepted as industry standard contract terms across the sea freight industry. Their new green clauses will set a new standard for charter party agreements that shift the focus away from ‘utmost despatch’ to allow shipping the contractual headroom to optimise voyage speeds in the interest of reducing carbon emissions and fulfilling its new obligations under EEXI and CII.
The first new clauses were issued in 2021 and are called the ‘Just in time clauses for voyage charter parties’. Perhaps the most impactful change is found in clause (b) which states in part ‘…the Charterers shall be entitled to request the Owners in writing to adjust the Vessel’s speed to meet a specified time of arrival, or closest thereto, at a particular destination.’
Demurrage is not eliminated by this clause. The standard contract still allows for the concept of laytime and demurrage, but states that laytime is calculated as the difference between the estimated time of arrival (ETA) and actual time of arrival (ATA). This allows carriers to claim demurrage while at sea, if the specified time of arrival given by the charterer is later than the owner’s estimate which is likely to be based on a ‘best speed’ calculation. The charterer is motivated to request arrival times that are aligned with berth availability because slowing the vessel will reduce their scope 3 emissions, reduce or eliminate demurrage at anchor, and because the new clauses allow for the shipowners fuel savings to be credited against at-sea demurrage payments. Crucially, the new clauses make it clear that complying with specified arrival times by slowing the vessel down does not constitute a breach of the ship owner’s obligation to make utmost despatch or deviation, freeing carriers from conditions that are at odds with the just in time concept.
BIMCO has also announced a more comprehensive set of clauses that enable ship owners to exercise their obligations under EEXI and CII requirements. Work on these is still ongoing, expected for release in May 2022. Commenting on the move, they said;
“The future regulatory framework is complex and challenging… Compliance with the new regime may mean that shipowners are at risk of being in breach of their obligations in performing the voyage under standard charter party terms.”
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DIGITAL DECARBONISATION SERIES
In partnership with Inmarsat, Thetius launched a major report on digital decarbonisation at the Nor-Shipping conference in April 2022 to critical acclaim. Read by thousands of industry professionals across the globe, The Optimal Route examines the impact of digital technologies on the trajectory of decarbonisation in shipping.
Based on the findings of this research, we have put together a new series of articles on digital decarbonisation which will be released to our subscribers over the coming weeks. Each article will zoom in on an aspect of digital decarbonisation and together will provide a jam-packed analysis that includes the latest and greatest examples of how digital technologies can prove the difference between success and failure in decarbonising the ocean supply chain.
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