Those who follow our Blog will note that we’ve seen a surge of enquiries on the extension of the EU ETS scheme to ships from 1 January 2024. For those who missed it see our comments on that here.
The EU ETS makes the “shipping company” responsible for procuring and surrendering Emission Allowances but can they legally transfer that responsibility and, if so, to whom and how?
The ETS directive defines “shipping company” as the shipowner or any other organisation or person, such as the manager or bareboat charterer, that has assumed responsibility for the operation of the ship from the ship owner and has agreed to take over all duties and responsibilities imposed by the ISM Code for the Safe Operation of Ships and for Pollution Prevention. That definition seems clear enough. Clearly, voyage or time-charterers are not the “shipping company” but a “bareboat charterer” or “manager” can be the “shipping company” if it has assumed ISM responsibilities.
Various questions arise as to how far a “shipping company” can go to transfer its legal responsibilities and, in an attempt to provide “clarification” on this issue, an EU implementing regulation came into effect in late November 2023. That regulation permits responsibility to be transferred to someone who may not have responsibility for the operation or management of the ship. The preamble to the regulation seems to accord with the definition of “shipping company” in the ETS directive. It reconfirms that Member States should assume that the party that has assumed responsibility for the operation of the ship has been duly mandated by the ship owner when it comes to responsibility for EU ETS liabilities. However, the regulation then goes on to state that the “shipowner” should provide an express mandate in favour of the person assuming responsibility for EU ETS and that, in the absence of such a mandate, responsibility would fall back on the shipowner (presumably the registered owner).
This has caused confusion for registered owners who have leased their ships to others under finance structures including bareboat charters. Under the terms of the bareboat charter there is no question that the bareboat charterer is legally responsible for operation and compliance matters. The ETS Directive itself states that bareboat charters are the “shipping company” and thus can be liable for EU ETS matters. But this regulation suggests that the registered owner/ finance owner is responsible unless it executes a mandate in favour of the bareboat charterers.
This begs the question of what happens if the bareboat charterer refuses to co-operate? The mandate must be signed by both the ship owner and the bareboat charterer. What happens if the bareboat charterer refuses to sign? Can it be compelled to sign under the terms of the bareboat charter? If so, what sort of legal process should the registered owner invoke to compel the bareboat charterer to perform its contractually agreed duties under the bareboat charter?
The other problem is what happens if the bareboat charterer wishes to sub-contract responsibility to its ship manager? The indications are that there can only be one mandate per ship so if the registered/ finance owner mandates the bareboat charterer, the bareboat charterer cannot mandate the ship manager. In other words, the bareboat charterer cannot transfer its legal responsibility to someone else in such circumstances, although it can of course still employ the ship manager to deal with the bareboat charterers’ EU ETS obligations.
There are lots of legal issues arising in relation to the validity of mandates. They need to be in a prescribed form to comply with the EU regulation. However, can they be for a defined period i.e. the term of the bareboat charter? What happens if the bareboat charterer defaults? If the mandate is to a manager, what happens if the management agreement is terminated due to a breach?
So far, we are not aware of bareboat charterers seeking to exploit this issue, although some have indicated that there would be a price to pay for their co-operation in signing any mandate letter. The validity of such a proposal in circumstances where a bareboat charterer is contractually obliged to deal with compliance issues including EU ETS is in question and it is possible that this issue could end up being the subject of legal proceedings.
This is just one of many legal issues that we expect from the uncertainties arising in from the extension of the EU ETS to ships. Others will no doubt follow. Our team is well versed to deal with those issues as and when they arise.