The global shipping industry is the backbone of international trade, connecting economies and facilitating the movement of goods. However, it comes with pronounced risks. From adverse weather conditions to regulatory complexities, managing risks in shipping supply chains requires meticulous planning and legal foresight. This article explores three areas in which legal strategies can help the shipping industry meet the challenges can be developed.
Charterparty agreements, which delineate the responsibilities and liabilities of owners and charterers, need to adequately address unforeseeable events. Robust and clear charterparty provisions can include:
- (i) Force majeure clauses. In recent years, extreme events such as the Covid-19 pandemic and the war in Ukraine have highlighted the need to provide contractually for unexpected events which can disrupt normal shipping operations. When a force majeure event occurs that prevents a party from performing its obligations, the parties will need contractual protection against claims for breach of charterparty. BIMCO’s Force Majeure Clause 2022 is a model clause that seeks to define what constitutes a qualifying ‘force majeure’ event, and provides a mechanism to relieve parties from performance of their obligations under specific circumstances. It thus assists in avoiding disputes. The philosophy behind its drafting is that in a force majeure situation the parties should communicate and cooperate to handle the situation together, and that contract termination should be the last resort.
- (ii) Laytime and demurrage provisions. Parties who have chartered ships to load at an export terminal where operations are disrupted may incur significant demurrage liabilities or even cancellations if the laycan period expires and loading has not yet commenced. Parties can therefore seek to agree flexibility in their charterparties, by allowing an adjustment (e.g. an extension) to laytime and demurrage provisions in specific circumstances.
- (iii) Contingency planning for vessel rerouting and alternative ports of call. Port closures due to geopolitical tensions may require a change in the vessel’s route. Charterparties should set out in detail the process for obtaining consent, allocating risks and costs and adjusting the duration of a voyage.
- (iv) Cargo handling and stowage. The complexity of modern supply chains, with different modes of transport used to transport goods to their final destination, demands necessary safe handling and cargo stowage procedures. Accordingly, the charterparty should include provisions for securing and protecting cargo at the loading and discharging ports, as well as in transit.
ESG and Environmental Considerations
Typically, Environmental, Social and Governance (ESG) covers principles that promote sustainability, ethical practices, and responsible corporate governance. ESG compliance in the environmental context in shipping involves adopting measures to improve fuel efficiency, investing in eco-friendly technologies and exploring non-traditional fuels such as liquified natural gas (LNG), ammonia, or hydrogen. Never more have ESG principles impacted on shipping as much as they do now, and they produce a range of challenges for the shipping sector.
In this context, the aim of the International Maritime Organisation (IMO) is for an enhanced ‘common ambition’ to reach net-zero greenhouse gas (GHG) emissions from international shipping “close” to 2050.
In particular, the recently implemented Energy Efficiency Existing Ship Index (EEXI) and Carbon Intensity Indicator (CII) regulations introduced by the IMO, which came in force on 1 January 2023, require ship operators to regularly assess a vessel’s design and CO2 emissions. A vessel’s CII rating is assessed on a scale from A-E, depending on the level of emissions in any given year.
To ensure compliance with EEXI, technical modifications to a vessel may be required.
For the majority of ships needing modifications, these will probably be in the form of either Engine Power Limitation (EPL) or Shaft Power Limitation (SHAPOLI). For this reason, the standard BIMCO clause for EEXI focuses on these two types of modification in detail.
In the context of CII, the vessel may also need to (i) operate at a reduced speed and/or slow steam; (ii) divert from the shortest or quickest route on a voyage/increasing the distance sailed; (iii) reduce cargo volume intake and/or (iv) install energy efficient technology in order to retain the desired rating between A and E.
Several legal challenges arise when considering how the EEXI and CII regimes can be successfully implemented into contractual frameworks, notably time charterparties. Which party will bear the responsibility, risks and costs of compliance, the risk of exposure to third party claims and the impact on insurance coverage must be carefully thought out. In the context of CII, this will require bespoke solutions to strike a balance between, on the one hand, a shipowner’s obligation to meet and maintain the required CII rating of their vessel and, on the other, charterers’ right to employ the vessel and trade between safe ports.
In addition, the World Bank’s recent proposal to impose a levy on GHG emissions produced from shipping companies would require those companies to pay into a fund based on the amount of carbon emitted by their fleets, causing them to upgrade their fleets, run them more efficiently or seek cleaner fuels and technologies.
Shipping companies are therefore under growing pressure to reduce GHG emissions in the context of their wider ESG commitments.
The transition to alternative fuels presents very specific challenges. In particular:
- (i) shipowners will need to ensure that their vessels meet all regulatory requirements related to alternative fuels, including safety standards, emissions limits, fuel storage and handling protocols.
- (ii) establishing necessary infrastructure for storing, handling, and bunkering alternative fuels is a key responsibility. This may include installing LNG bunkering facilities or hydrogen refueling stations.
- (iii) Shipowners will need to consider investing in new vessels to accommodate systems such as LNG propulsion, hydrogen fuel cells or electric power.
- (iv) All vessels’ crew must be adequately trained to handle these alternative fuels safely.
- (v) Proper arrangements for bunkering these fuels and cost-sharing between the parties must be provided for in the charterparty.
Accordingly, clear contractual agreements and a shared commitment to sustainability goals will be essential for a successful transition. Both owners and charterers should stay informed about emerging technologies and regulatory developments in the alternative fuel sector.
Cargo Insurance and Liability
The increasing complexity of modern supply chains and heightened risks, such as geopolitical tensions and pandemics, present challenges for insurers and reinsurers and can lead to an increase in cargo insurance premiums. Insurers may adjust rates to reflect the elevated level of risk associated with the transport of goods. This may lead to higher costs for cargo insurance and, ultimately, the price of goods to the end consumer.
Further, insurers may impose exclusions or limitations on coverage for certain high-risk scenarios. For instance, they may specify exclusions related to acts of war, or acts of terrorism. It will therefore be crucial for all parties in the supply chain to be aware of these exclusions and to take appropriate measures to address any gaps in insurance coverage, and to ensure that such coverage adequately addresses the specific risks associated with the particular types of cargo which are being transported.
By working in partnership with brokers and policyholders, global insurance markets are constantly seeking to measure the risks to the supply chain and mitigate them wherever possible.
Challenges in the supply chain are at least partly caused by a lack of proper processes which can (i) identify risks in advance and (ii) implement an efficient risk management plan. The process for managing supply chain risk consists of risk identification, evaluation, adequate response and monitoring steps. Legal strategies need to be implemented into the industry’s contingency planning to ensure smooth operations, even when the unexpected occurs.