By Joanne Waters
|Published 27 February 2024
2023 was another volatile and unpredictable year for shipping, with the outbreak of war in the Middle East, upgraded sanctions against Russia, and extreme weather events, all causing disruption to supply chains and impacting operations. With 2024 looking set to be just as uncertain, in this article we look at the key risk and compliance issues that are likely to need continued vigilance from shipowners and operators in the year ahead.
The sanctions landscape for shipowners, operators, ships, and cargoes remains turbulent, with both the EU and the US tightening rules to further marginalise Russian oil exports and the dark fleet being used to transport them. The latest package of sanctions adopted by the EU in December 2023 incorporates a ban on the sale of second-hand tankers to Russian persons or companies, whether directly or indirectly. It allows member states to authorise such sales "under conditions they deem appropriate", except when they have reasonable grounds to believe that the tanker will be used in the transport of Russian oil and oil products. It also includes a retroactive requirement for sellers who sold tankers between 5 December 2022 and 19 December 2023 to notify their member state's competent authority of the sale, and to provide information such as the buyer's incorporation documents.
The 12th package of sanctions also revises the rules around the price cap to require "itemised price information for ancillary costs as provided by operators further up the supply chain", in an attempt to crack down on price manipulation as a means of circumventing the cap, a move which has since been adopted by all other G7 members, including the US.
Sanctions compliance is not new to the industry, but recently the industry has received renewed focus from enforcement agencies. In October 2023, the US imposed sanctions for the first time on tankers suspected to be shipping Russian oil in breach of the price cap, and further targeted sanctions have followed.
Managing sanctions risk effectively requires strong pre-contractual due diligence on counterparties, and ideally ongoing sanctions checks to confirm that a counterparty remains compliant. Every shipping contract should also include a sanctions clause, such as those issued by BIMCO, which sets out the parties' respective rights and liabilities in the event a party becomes a sanctioned entity during the contract, gives orders to carry sanctioned cargoes or otherwise breaches sanctions warranties. Shipping stakeholders may now also need to consider what changes are required to their contracts to ensure they have access to, or have the right to request and receive, the broader attestation information required for compliance with the new EU and G7 sanctions.
Several regulations governing decarbonisation will take effect in 2024, requiring shipowners, operators, and managers to adopt an unprecedented degree of transparency around fuel efficiency, emissions, and carbon accounting. The collaboration needed between stakeholders to comply with the EU ETS reporting requirements will likely require amendments to contracts to ensure they provide firm obligations for sharing of data, within the required timelines, and with clear consequences for any failure to do so.
The financial consequences of getting EU ETS wrong are significant. Prices of EU allowances are market-driven and volatile, and non-compliance can result in meaningful fines. Therefore, a shipowner (or manager) who finds themselves with a shortfall of allowances due to non-performance by a counterparty is exposed to significant credit risk, the management of which is discussed further below.
Shipowners seeking to take advantage of innovative technologies or alternative fuels will also need to grapple with a regulatory framework that is still under discussion, with IMO guidelines on the use of ammonia and hydrogen yet to be finalised. Where new technologies are being trialled in partnership with start-up providers, again due diligence plays a vital role in mitigating risk, to ensure providers are well-funded, have all required insurances in place and that any intellectual property rights are properly owned and / or licensed by the provider. Contracts for such partnerships and pilot schemes should clearly set out roles and responsibilities particularly as regards safety, and address questions around obtaining any necessary regulatory approvals or exemptions.
Sustainability, and the ability of companies to demonstrate ESG credentials, also poses a significant compliance challenge. Greater scrutiny of supply chains by beneficial cargo owners, ship financiers and marine insurers, all seeking to meet their own sustainability objectives, puts greater commercial pressure on shipowners and operators to assess and report on matters that go beyond merely financial or operational performance. In many jurisdictions, most notably the EU, this commercial pressure is matched by regulatory pressure, with corporate sustainability reporting becoming a statutory requirement.
Having a complete understanding of a company's ESG risk profile requires a clear overview not only of the company's internal operations but of its suppliers and their operations. Again, due diligence comes into play, along with policies that require counterparties to provide the required information as part of the procurement process and contractual terms that require counterparties to agree to adhere to the company's own code of conduct.
With interest rates remaining at record highs in many economies, recession worries will linger into 2024, dampening demand for global trade and transport services. On the microeconomic side shipowners and operators are facing increased costs associated with necessary investments in decarbonisation and compliance with new environmental regulations, raising the risk of counterparty non-payment and default.
Pre-contractual and ongoing due diligence is again key to mitigating credit risk. Often, termination is a last resort and it is possible to reach a creative, commercially acceptable outcome if non-payment is dealt with at an early stage. If termination becomes necessary, is it important that the contract terms provide for clear rights of termination in the event of non-payment or insolvency, with objective and measurable triggers, a clear mechanism for parties to follow, and clear notice provisions. For repeated non-payment of hire, care must be taken to ensure rights to terminate for repudiatory breach are preserved, so that a claim for damages can be added to the claim for debt, but that nothing is done to waive the right to terminate in the interim. This is often a fine balance, and we strongly recommend legal advice is sought from your P&I Club or legal advisors if you are considering withdrawing a vessel for non-payment of hire.
There is never a dull moment in shipping and 2024 is likely to be no exception. As ever, robust contractual clauses backed by stringent internal policies and KYC procedures can go a long way to mitigating the compliance burden and providing your business with resilience in an uncertain and unpredictable environment.
DACB has extensive experience in drafting and advising on contractual clauses in charterparties, bills of lading, COAs and sale and purchase contracts. If you need any assistance in reviewing or updating your contractual terms to ensure they meet tomorrow's compliance challenges, please contact Joanne or your usual DACB contact.
If you would like to automate and streamline your internal compliance procedures, empower your teams to easily manage third party risk, or assess supplier performance across customised metrics, fleets, departments and jurisdictions, please contact Joanne, Kate Archer, or Alex Paterson to find out more about our innovative risk management platform, DACB Nexus.
