How FuelEU Maritime is changing commercial negotiations

While under the EU Emissions Trading System (EU ETS), shipowners must submit annual emissions reports, the new FEUM regulation in effect since 1 January 2025 assigns the emissions reporting responsibility to the ship manager as the holder of the document of compliance (DoC), with consequences for the business relationship between the owner, charterer, and independent ship manager (ISM).

Document of compliance holder has legal responsibility

Shipowners with ship management divisions of their own can handle the consequences relatively smoothly, but third-party, independent ship management companies (ISM) are exposed to the full financial risk arising from emissions liabilities, a fact that needs to be addressed in their commercial negotiations with owners, who must monitor and manage the FEUM compliance balances for specific charter periods. This constellation must be adequately accounted for in the charter party negotiations between the owner and charterer to achieve fair allocation of the financial exposure.

There are far-reaching implications for the legal relationship between the contractual parties involved in the ownership and operation of a vessel. “Charter parties rarely line up with the annual compliance cycle,” explains Helge Hermundsgård, head of business development for DNV’s Emissions Connect services. “This means that charter parties must ensure that the incurred liabilities are addressed as charters start and end during the reporting year.” The ISM in charge at year’s end is responsible for compliance with the reporting requirements during the entire calendar year – a responsibility that cannot be assigned to a third party.

Charter parties must reflect “polluter pays” principle

However, the ISM has virtually no influence on the factors determining FuelEU Maritime exposure, such as the fuel used and the ship’s trade, continues Hermundsgård.” In other words, the financial consequences should be assigned to the party that can influence those factors, based on the principle that the polluter pays.”

The FEUM regulation leaves the contractual details of these arrangements up to the commercial partners. On 19 December 2024, the Baltic and International Maritime Council published a FuelEU Maritime clause for its SHIPMAN standard contract, which is widely used as a basis for ship management contract negotiations. Other bodies are offering similar contract amendments.

Charter parties must clearly allocate financial responsibilities

There are certain intricacies and details that the SHIPMAN FEUM or similar clauses cannot cover. “Independent ship managers, charterers, and owners must understand the regulations clearly and find ways to allocate the financial consequences in their charter parties fairly, including provisions for hypothetical events or situations,” explains Lars Nyfløt, global sales manager emissions connect business development at DNV. “They need a clear understanding of who is in charge of what.” Questions such as how the responsibility for FEUM will be reallocated to the owner and how the ISM is guaranteed compensation for any additional liabilities must be answered in advance. “An ISM must be highly aware of its risk and ensure that the commercial agreement with the owner provides for suitable mechanisms to manage that risk,” says Nyfløt.

Contracting parties need a trusted common source of emission data

Nyfløt, who held various commercial functions in the shipping industry on both the shipowners’ and the charterers’ side for about 30 years and took part in countless charter party negotiations before joining DNV, says it is crucial for all players in the value chain, including the technical manager, the owner, the charterer, the cargo owner if different, the management company, and others, to have a clear picture of how emissions affect pricing. “This will support good-faith negotiations with the understanding that all parties are ultimately in the same boat, as it were, bearing a shared responsibility for compliance, each side with its own part to play.

“In my experience,” adds Nyfløt, “one of the most important assets in charter negotiations is a trusted source of emission data. Proper documentation and a single source of truth accepted by all stakeholders are key to negotiations that deliver satisfactory results.”

Proper documentation of emissions

Rules-based documentation both sides can trust – verified and quality-assured through a tool like DNV’s Emissions Connect – enables a more informed discussion,” continues Nyfløt. “The commercial focus is not on historical, summary data but on specific time spans, voyages, or charter periods.” Voyage or freight charter contracts, where an FEUM component can simply be included in the freight rate, are much easier to handle than time charter contracts, he adds.

Flexibility of monitoring and documentation is key

Different shipping segments have different dynamics and ways of doing things, Nyfløt points out, for example the requirement to generate specific statements need for continuous monitoring features, whether for individual vessels or entire fleets, where you can see, for example, how much liability a particular vessel has generated over a predefined period of time, and follow that throughout the year, whether for EU ETS or FEUM reporting.

Compliance balance accounts for compliance deficit and surplus

A key term in determining that liability is the compliance balance, says Helge Hermundsgård. “This is the difference between the required and the actual greenhouse gas (GHG) intensity during the charter period. In the event of lagging compliance, the balance needs to be paid for, which means that the owner is likely to ask the charterer for compensation. However, if a charterer uses biofuel and generates a compliance surplus but has paid more for the fuel by the end of the charter period, will the charterer be willing to pay the corresponding monetary benefit to the owner, or should the owner compensate the charterer for the extra fuel cost? Money can flow in either direction, and all these scenarios need to be accounted for in the agreements between the commercial partners.”

One of these scenarios is the option to pool well-performing vessels that produce an FEUM compliance surplus, such as ammonia-fuelled or biofuel-powered ships, with older tonnage that is unable to achieve compliance without excessive investments. Capturing the surplus and deficit under FEUM, by using something like the Emissions Connect tool, can help to enable generate pooling mechanisms.