Authors: Nick Austin Alexander Brandt

Reed Smith partners Nick Austin and Alex Brandt explore today’s challenges faced by the shipping industry and discuss key areas where we are likely to see the most activity in 2025, including sanctions, decarbonisation and legal developments in the courts.
Transcript:
Intro: Trading Straits brings legal and business insights at the intersection of the shipping and energy sectors. This podcast series offers trends, developments, challenges and topics of interest from Reed Smith litigation, regulatory and finance laws across our network of global offices. If you have any questions about the topics discussed on this podcast, please do contact our speakers.
Nick: Hello, everyone, and welcome back to Trading Straits. I'm Nick Austin, a partner in the shipping team at Reed Smith in London. I'm joined today by my friend and colleague, Alex Brandt, who's also a partner in the London shipping team. Alex and I both have the privilege, some would say, of working in an industry, the shipping industry, which is heavily impacted by markets, geopolitics, technological change, decarbonisation, and a raft of legal and regulatory changes, and no more so, I think, than now. So in this podcast, we're going to be looking in broad terms at what 2025 might hold in some of these areas. And with a particular eye on where as lawyers we're likely to see the most activity. We don't have a crystal ball, and we can't possibly cover everything today, but we do think there will be some themes that will continue to emerge throughout the year. So, Alex, if I can come to you first, I mean, I know that you spend, some would say, indecent amounts of time advising clients on sanctions in the maritime and commodities world. Russia has, of course, dominated the headlines in that regard. How do you see 2025 developing?
Alex: Yeah, thanks, Nick. And it's nice to be back on Trading Straits. Yeah, well, look, as you say, 2024 was a big year for sanctions. And I think there were a couple of key themes that developed. The G7 really continued to clamp down on the trade and the transport of Russian oil. And I think having come up with a novel scheme, the G7 price cap, which allowed the carriage of Russian oil and support for that trade, albeit under sort of you know attestations and a regulated process what had happened from that was the emergence of the shadow fleet which is obviously dominated not just the trade news but but you know international news and particularly events going on in the baltic at the moment and so really you had this castle mouse game with the regulators concerned with the monster they'd created with the shadow fleet and trying to cut down on circumvention and that that really sort of you saw that in two ways. One is the guidance around the sale of tankers trying to stop vessels going into the shadow fleets. And the second is the increasing sanctioning of. Dark fleet, shadow fleet, parallel fleet actors, vessels, trading houses that have emerged in certain jurisdictions who are seen by the G7 as facilitating breaches of price cap and keeping that Russian oil flowing at levels that the G7 are uncomfortable with. So that's what 2024 was really framed by. 2025 from the sanctions landscape has already started with a bang. We had on the 10th of January, 183 more vessels designated by the US, a significant focus on Middle Eastern trading houses, focus on LNG projects by the US as well, and critically. Two large oil producers in Russia, Gazprom Neft and Surgutneftegas. We were only in the first month of January. Hard to know exactly where we'll end up with the Trump administration, But it's certainly the case, I think, that the first half of 2025 is going to see more of the same, more of a tightening on Russian oil, more of a tightening on circumvention, continued concern with the threat that the parallel fleet poses, not just from a sanctions perspective, but also safety environment. And now with this sort of the suggestion of sabotage of key infrastructure in the Baltic. So I think that will be one of the key themes going forward. I think the other interesting area will be Iran, harking back to 2018 and the first iteration of the Trump administration. Trump was really the architect of the modern sanctions program, particularly when looking at Iran and the withdrawal from the nuclear treaty. And I think we can expect to see what we saw then, which is interference with cargoes on board vessels that are believed to have originated from Iran. So, you know, it's going to be a complicated environment. You know, it's going to be a dynamic environment and we'll have to feel through it day by day, week by week, as we have been doing. So, you know, that's three, four minutes, whatever it was, crystal ball gazing. I know that you've been working with clients on various decarbonisation initiatives. Where do you see the main features of that? And I guess, indeed, the challenges going into 2025?
Nick: Yeah, thanks, Alex. And I mean, that's right. As if shipping didn't have enough to think about from sanctions, war risks and other geopolitical developments. Decarbonisation in the sector in terms of new regulation affecting the operation of vessels on a daily voyage-by-voyage basis is really continuing apace. And I think 2025 is set to be no different to the last two or three years we've had in that space. Before I get to the latest regulation, it's worth pointing out that the industry is still having to deal in depth with CII and EUETS. And a quick recap on both of those, a reminder that, of course, CII was introduced by the IMO in 2023 as part of its strategy to achieve net zero emissions in the maritime sector by 2050. And that's a rating scheme under which vessels, a bit like a fridge, get a rating from A to E based on their carbon intensity. And that's measured by an equation, which among other things takes into account the size of a vessel and somewhat controversially its distance sailed as we'll see. And 2024 was the first year, so the year that's just finished, in which ships were actually given ratings, from A being the best to E, the worst. And from a legal perspective, and I know you've been dealing with this too, but clauses in timeshaft parties, which is where tensions most obviously arise with CII. Have tended to be agreed now for a couple of years, usually some version of the BIMCO clause, but very varied around that standard wording. But of course, now that ships have actual CII ratings, the rubber hits the road, and the legal is meeting the commercial, in a sense, in terms of the impact that the rating is going to have on the marketability, the value of a vessel. For example, if it's re-delivered to its owners with a lower rating than it started with. And I think those issues are going to rumble on in 2025, and particularly if a vessel might have been sub-chartered by a time charterer and a rating thereby affected, which the time charterer isn't able really to visit on the voyage charterer under the freight regime. And it's fair to say that CII has come in for widespread criticism from the industry, really, from the moment it was launched, and in fact, before. There is going to be revision, most recently at the MEPC 82 meeting at IMO in September last year in London. That were very loud calls for a complete recalibration of CII, ensuring basically that it better represents true operational efficiency and actual emissions performance. And one of the issues, as I mentioned, in terms of distance sailed, is the so-called idle time, ships waiting around doing nothing, tend to be prejudiced in the calculation of CII ratings. And that has been perhaps the one-off, if not the central challenge. Ships are frequently spending time at anchor, in port, undergoing maintenance, dry dock, during which emissions will continue to accumulate without actually carrying any cargo. And that, rather artificially in the view of many, will give it a poor rating. So changes afoot with CII. The new Secretary-General of IMO has said in recent months that he is listening to the concerns of the industry on CII. And I think we'll see changes perhaps even before the official review date of 2026 so watch this space on that. EU ETS remains another show in town. From the 1st of January last year, shipping came within the already well-established EU ETS regime. As we've discussed on previous podcasts. And that's had really significant implications for the sector, not the least of which, of course, is cost. Again that's an EU concept it imposes obligations on shipping companies as they're defined who need to set up new compliance procedures, open operator accounts within the EU and they need to buy and surrender allowances to cover the emissions from voyages that are caught by the scheme 40% in general terms of this year shipping companies need to surrender after verification And it's this year that, of course, the performance and the compliance of EUETS is really coming into play in terms of the verification in March and surrender later this year of the 2024 allowances. Now again a bit like CII we've been working for a year or two now with almost all our clients in the shipping world on the mechanics of that setting up the accounts making the registrations and of course negotiating charter clauses to suit owners and charters needs and in fact anecdotally just today I heard from a colleague involved in setting up accounts for EUETS that it is taken in the Malta and the Netherlands. Some clients, over a year to establish the necessary accounts for the purposes of compliance. So it has not been easy for businesses to get used to this brave new world. In terms of the clauses, BIMCO is the standard starting point. Again, a big variety we've seen in the clauses that are being negotiated and agreed in the time charter market. Will all of that work out as the compliance of the EUETS really revs up this year? Well, we shall see. And last but not least, on DCARB, I think for this year, is the new kid on the block, Fuel EU Maritime, which is another EU, regime, effective from January this year. And what that does is set well-to-wake greenhouse gas emission limits for fuel used on board vessels trading within the EU or to and from the EU. And again, really significant challenges are emerging and have emerged with FuelEU, noticeably, so far as I'm concerned, in the negotiation of clauses. BIMCO have done, again a sterling job in producing a template clause which so far in my experience has been greeted generally positively albeit as you might expect owners and charters are seeking bespoke solutions to those provisions to suit their commercial needs and to make sure that the allocation of costs and risk where penalties will need to be paid under FuelEU maritime is dealt with for their own best interests, but also in the interests of those they're seeking to do business with. What the limits are of that in terms of give and take, I think remains to be seen, but that is going to be a real thing for 2025. And certainly there seems to be no let up in work needed in that space. So Alex, that's a run through of where I think the main action will be on the decarbonisation front. You talked earlier about Russia, which I thought was really interesting, setting the scene around that for 2025. What are going to be some of the more practical implications for clients in this sector as we look forward to the coming months in 2025?
Alex: Yeah, thanks. Thanks, Nick. And really interesting hearing you speak on decarb. I think I've been mulling over this myself and mulling it over with the team. The reality is that trade has become more complicated and there's more sand in the gears of trade, particularly when it comes to sanctions and due diligence. And this will be my surprise, I think, to our audience, there's going to be a lot more focus on due diligence. And I think that falls into several buckets. And then the first is knowing your counterparty, KYC, who are you getting into bed with? And the consequence of geopolitics has meant that there's been an emergence, a brave new world of traders, charterers, operators that have established in places like Dubai, the Middle East and others as well. These companies have been newly formed and don't have a huge amount of track record behind them. Information on publicly available databases is limited. And so the legal compliance and indeed leadership have to make difficult decisions about whether and to what extent and with what guardrails they want to do business with these people. And I think that's the first thing. And that has been a theme of last year, but it is only going to get more complicated. And as we look at the recent guidance that's coming out, and all of the focus on circumvention, you know, the counterpart circumvention and who you're dealing with, that's going to be a key aspect of it. So I think that's the first. The second is due diligence on vessels and, you know, the parallel fleet, the dark fleet, whatever name you ascribe to it. You know, there's tempting, you know, if you're explaining it at a dinner table. It's tempting when you hear that definition to say, you know, is this Putin's navy? You know, is this a group of vessels under a common sort of ownership and common purpose and common management structure? That's obviously not the case. I mean, there is no legal definition of the parallel fleet. It's ultimately a construct of the media. And when one looks at the 600, 700 vessels, 1,000 vessels, however many you say that there are, actually when you look at them, they have very different characteristics. So obviously similar themes, but different characteristics. And I think the challenge for the industry is, as we go into a bifurcated world, how do we weigh the risk? How do we interact with the shadow fleet? Is it the shadow fleet at all? And what risk does that pose to our business? That is something that is clearly going to continue in that debate and that challenge around that is clearly going to continue. So I think that's the second one. The third one is the origin of cargo. And repeatedly now, the regulators are warning us about fraud and falsification of documents and that cargo from sanctioned jurisdictions or sanctioned cargo, however you want to describe it, is being laundered through fraudulent documentation. That is not a surprise. I mean, that's a method that's as old as the hills. But trying to spot that, trying to operationalize that in real time. Is challenging and it throws up real challenges for the compliance team and also the interaction between legal and compliance functions within our clients and the commercial, the frontline and decision makers. So that will be a key theme that goes forward. And obviously, if you get it wrong, the consequences are draconian. On the UK side, we've got strict liability. Strict liability on the US side, always be non-compromising about these sort of things. So that is a challenge. And I think the final part is where is the cargo going? It's the flip side of that coin. And again, only a few weeks ago, we saw the UK introduce a no re-export clause. The EU has already been trying to do it in certain sectors. The recognition that key commodities are flowing to sanctioned jurisdictions such as Russia, the recognition that it is very difficult to know if you are part of that initial supply chain, very difficult to know where the commodity or cargo is ending up. But at the same time, there is clearly an impetus on the part of government to try and stop and try and curtail those supply chains. And so with all of that will be a holistic sort of review of compliance policies, processes, and also, as I've alluded to, once again, going back to our sanctions and compliance clauses and updating and making sure they're in line with the recent government guidance and wisdom that is being promulgated. I think that is what the years has in store for us, or at least the first part of it. And I know already from colleagues in the industry and our own work. It's an extremely challenging time trying to manage these risks. And I'm afraid I don't see it getting easier, or perhaps I see it getting harder before it gets easier. I appreciate that won't be welcome news. But that's me whittling on about sanctions again. Look Nick 23-24 they were they were busy years and we saw some groundbreaking legal cases in the going through the english court these cases have had you know real practical significance for shipping what are we looking out for in 2025 what's what's coming up in the pipeline that the listeners should be aware of?
Nick: Yeah thanks Alex and just before I answer that you mentioned the parallel fleet and the shadow feet it used to be known as the dark fleet has that term been abandoned for being too Star Wars like?
Alex: Does have a ring to it I think i think I think you're you're right and I and I think to the point that i i was sort of trying to lead to the position is maybe a little bit more nuanced than it used to be and there is there is a reality that there is bifurcation in in the world order now and and there's the G7 which is generally aligned but there's a lot of other jurisdictions out there. So I think you're starting to see now increasingly in parlance the parallel fleet, which is a less loaded expression. Whilst it's a less loaded expression, the threats or the risks of G7 service providers engaging with the parallel fleet are not diminished because of that different terminology, but it's a recognition that there are different stances that one can take on the Russia-Ukraine conflict and trying to be deferential to that to an extent.
Nick: Okay. Well, thanks for that. And you raised the point about some interesting legal cases, and you're right. Thank you for that, because in fact, I think it is going to be a relatively interesting year in 2025 in the development of some. Practical and relevant legal cases going through the courts in England. And as you know, 2023 and 2024 were busy years. In the Supreme Court in the UK here last year, we had MUR and RTI, which essentially about the operation of a Charter Party force majeure clause in a sanctions context, which you'll be very familiar with. Another case called the Giant Ace, the FinBank case, which clarified a question that had never really been properly answered in English shipping law for some decades about the application of the one-year time bar, the crucial one-year time bar under the Hague-Visby rules for claims for cargo misdelivery which occurs after discharge and the answer to that was previously not clear. So I think 2025 is also set to be busy. I've only picked out two examples in the interest of time and brevity. One is a drier, more contractual case, and one is prevalent in the wet and the sort of admiralty casualty field. The first is that just before the end of 2024, there was quite a significant new case in the commercial court, the first layer of court we have here in the UK, between Hapag-Lloyd v Skyros. As owners in relation to the assessment of damages following the late re-delivery of two ships under TC's, where under the terms of separate MOAs signed with third-party buyers by the owners to sell the vessels, the owners couldn't charter the vessels and earn higher after the late re-delivery. Okay. Why is it interesting? Well, the court in that case awarded the owners only token damages, nominal damages, so virtually nothing, instead of market-based damages for the period of the overrun. In other words, the period of the delayed delivery. And that has been, and usually is, the normal measure because it is seen as a loss of opportunity for the owners to take advantage of the rising market, which he is shut out of because the ships in breach of charter were redelivered late to him. The difference here was that the court, Robert Bright, Mr. Justice Bright to me, said that even though the charters were in breach by redelivering late, because the owners were going to sell the vessels and were bound to sell the vessels to someone else, they did not, in fact lose an opportunity to make money in a rising market during the overrun period because they were going to sell them and they wouldn't have chartered them out. So there was no actual loss. And so the award of nominal token amount followed from that. Now, all of that might sound obvious, but it arguably goes against quite a fundamental rule in this area that owners can recover in a rising market the difference between the charter rate and the market rate for that overrun period, whatever they do with the vessel. But as here and as always, facts will be important and were important. And what's interesting, I think, for 2025 is that this case, essentially the invitation of the commercial court judge himself, looks like it's heading to the Court of Appeal later this year, where a number of really fundamental issues about market-based damages will, I think, be analysed in greater depth. That's the first case the second one is the now very long-running MSC Flaminia case and that's being heard by the supreme court this year on the 5th of February people listening may recall that this was a container vessel chartered by its owners conti to MSC which unfortunately suffered an explosion a large-scale fire back in 2012 caused by auto polymerization of a chemicals cargo. Inevitably, plenty of legal battles have followed. But specifically in this case, the ship owner started arbitration in London under the time charter against MSC to recover all its costs following the incident, plus lost hire during the repairs and various other heads of damage, which it won to the tune of some $200 million. Unsurprisingly, after that, MSC applied to the English court to limit their liability for damages payable to the owners under the 1976 Limitation Convention. People will know from maritime law, both in England and elsewhere, that that enables owners and a class of people involved in the ownership and charging of a vessel to limit their liability for maritime claims following an incident of this nature. Their liability would have been limited to 28 million sterling, in fact. So a small, very small portion of the $200 million damages award that had been made against them. And that was on the basis that the liability fell within a much-argued-about provision of the Limitation Convention 21A. And what that attempts to do is define the claims which can be limited. And back in 2004 some 20 21 years ago a case called the CMA CGM Jakarta had decided that it only applies to claims for loss of and damage to property other than the ship and consequential loss arising from that but not to the ship itself and MSC said that their liability the owners wasn't for damage caused by the ship but for damage caused by the exploding cargo which is not a ship. So therefore it could be limited under T1A. And the effect of that would have been that the charters could limit their exposure to an owner's claim for the owner's own losses, rather than losses suffered by what they called in the case outsiders or third parties. Well, the commercial court and then the court of appeal disagreed with that, albeit for slightly different reasons in the Court of Appeal, so the MSC could not limit their liability. But the Supreme Court will now hear that case in the coming weeks. And it's fairly rare for this area of maritime law, which is relevant, I should say, in quite a few ongoing limitation actions in the English Admiralty Court, the Maersk, the Ever Given arising out of the blockage of the Suez Canal in 2021. It's quite rare for this kind of case to get to the Court of Appeal, let alone to the Supreme Court. But that is what's happening with the MSC Flaminia. So that will be watched very keenly by quite a few people. So, those are just two examples, Alex, across the whole spectrum of shipping, really, to look out for in 2025.
Alex: Yeah, thanks, Nick. And it's clearly going to be a fascinating year ahead, at least for you and I. And I hope for our listeners as well, a lot to look out for there. Look, I'm mindful, you know, you and I could continue talking about this stuff forever. And I think that's probably not a bad place to bring this podcast to an end. We will obviously have to see what 2025 has in store we certainly live in interesting times so I think all that's left for me to say is thank you to our audience for listening I hope very much you found our insights interesting and helpful you know if if anything that we've said is has provoked further thoughts then please do get in touch with myself or Nick or indeed your usual contact to Reed Smith and happy to talk further about any of these issues and indeed others so um And in the meantime, take care.
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Intro: Trading Straits brings legal and business insights at the intersection of the shipping and energy sectors. This podcast series offers trends, developments, challenges and topics of interest from Reed Smith litigation, regulatory and finance laws across our network of global offices. If you have any questions about the topics discussed on this podcast, please do contact our speakers.
Nick: Hello, everyone, and welcome back to Trading Straits. I'm Nick Austin, a partner in the shipping team at Reed Smith in London. I'm joined today by my friend and colleague, Alex Brandt, who's also a partner in the London shipping team. Alex and I both have the privilege, some would say, of working in an industry, the shipping industry, which is heavily impacted by markets, geopolitics, technological change, decarbonisation, and a raft of legal and regulatory changes, and no more so, I think, than now. So in this podcast, we're going to be looking in broad terms at what 2025 might hold in some of these areas. And with a particular eye on where as lawyers we're likely to see the most activity. We don't have a crystal ball, and we can't possibly cover everything today, but we do think there will be some themes that will continue to emerge throughout the year. So, Alex, if I can come to you first, I mean, I know that you spend, some would say, indecent amounts of time advising clients on sanctions in the maritime and commodities world. Russia has, of course, dominated the headlines in that regard. How do you see 2025 developing?
Alex: Yeah, thanks, Nick. And it's nice to be back on Trading Straits. Yeah, well, look, as you say, 2024 was a big year for sanctions. And I think there were a couple of key themes that developed. The G7 really continued to clamp down on the trade and the transport of Russian oil. And I think having come up with a novel scheme, the G7 price cap, which allowed the carriage of Russian oil and support for that trade, albeit under sort of you know attestations and a regulated process what had happened from that was the emergence of the shadow fleet which is obviously dominated not just the trade news but but you know international news and particularly events going on in the baltic at the moment and so really you had this castle mouse game with the regulators concerned with the monster they'd created with the shadow fleet and trying to cut down on circumvention and that that really sort of you saw that in two ways. One is the guidance around the sale of tankers trying to stop vessels going into the shadow fleets. And the second is the increasing sanctioning of. Dark fleet, shadow fleet, parallel fleet actors, vessels, trading houses that have emerged in certain jurisdictions who are seen by the G7 as facilitating breaches of price cap and keeping that Russian oil flowing at levels that the G7 are uncomfortable with. So that's what 2024 was really framed by. 2025 from the sanctions landscape has already started with a bang. We had on the 10th of January, 183 more vessels designated by the US, a significant focus on Middle Eastern trading houses, focus on LNG projects by the US as well, and critically. Two large oil producers in Russia, Gazprom Neft and Surgutneftegas. We were only in the first month of January. Hard to know exactly where we'll end up with the Trump administration, But it's certainly the case, I think, that the first half of 2025 is going to see more of the same, more of a tightening on Russian oil, more of a tightening on circumvention, continued concern with the threat that the parallel fleet poses, not just from a sanctions perspective, but also safety environment. And now with this sort of the suggestion of sabotage of key infrastructure in the Baltic. So I think that will be one of the key themes going forward. I think the other interesting area will be Iran, harking back to 2018 and the first iteration of the Trump administration. Trump was really the architect of the modern sanctions program, particularly when looking at Iran and the withdrawal from the nuclear treaty. And I think we can expect to see what we saw then, which is interference with cargoes on board vessels that are believed to have originated from Iran. So, you know, it's going to be a complicated environment. You know, it's going to be a dynamic environment and we'll have to feel through it day by day, week by week, as we have been doing. So, you know, that's three, four minutes, whatever it was, crystal ball gazing. I know that you've been working with clients on various decarbonisation initiatives. Where do you see the main features of that? And I guess, indeed, the challenges going into 2025?
Nick: Yeah, thanks, Alex. And I mean, that's right. As if shipping didn't have enough to think about from sanctions, war risks and other geopolitical developments. Decarbonisation in the sector in terms of new regulation affecting the operation of vessels on a daily voyage-by-voyage basis is really continuing apace. And I think 2025 is set to be no different to the last two or three years we've had in that space. Before I get to the latest regulation, it's worth pointing out that the industry is still having to deal in depth with CII and EUETS. And a quick recap on both of those, a reminder that, of course, CII was introduced by the IMO in 2023 as part of its strategy to achieve net zero emissions in the maritime sector by 2050. And that's a rating scheme under which vessels, a bit like a fridge, get a rating from A to E based on their carbon intensity. And that's measured by an equation, which among other things takes into account the size of a vessel and somewhat controversially its distance sailed as we'll see. And 2024 was the first year, so the year that's just finished, in which ships were actually given ratings, from A being the best to E, the worst. And from a legal perspective, and I know you've been dealing with this too, but clauses in timeshaft parties, which is where tensions most obviously arise with CII. Have tended to be agreed now for a couple of years, usually some version of the BIMCO clause, but very varied around that standard wording. But of course, now that ships have actual CII ratings, the rubber hits the road, and the legal is meeting the commercial, in a sense, in terms of the impact that the rating is going to have on the marketability, the value of a vessel. For example, if it's re-delivered to its owners with a lower rating than it started with. And I think those issues are going to rumble on in 2025, and particularly if a vessel might have been sub-chartered by a time charterer and a rating thereby affected, which the time charterer isn't able really to visit on the voyage charterer under the freight regime. And it's fair to say that CII has come in for widespread criticism from the industry, really, from the moment it was launched, and in fact, before. There is going to be revision, most recently at the MEPC 82 meeting at IMO in September last year in London. That were very loud calls for a complete recalibration of CII, ensuring basically that it better represents true operational efficiency and actual emissions performance. And one of the issues, as I mentioned, in terms of distance sailed, is the so-called idle time, ships waiting around doing nothing, tend to be prejudiced in the calculation of CII ratings. And that has been perhaps the one-off, if not the central challenge. Ships are frequently spending time at anchor, in port, undergoing maintenance, dry dock, during which emissions will continue to accumulate without actually carrying any cargo. And that, rather artificially in the view of many, will give it a poor rating. So changes afoot with CII. The new Secretary-General of IMO has said in recent months that he is listening to the concerns of the industry on CII. And I think we'll see changes perhaps even before the official review date of 2026 so watch this space on that. EU ETS remains another show in town. From the 1st of January last year, shipping came within the already well-established EU ETS regime. As we've discussed on previous podcasts. And that's had really significant implications for the sector, not the least of which, of course, is cost. Again that's an EU concept it imposes obligations on shipping companies as they're defined who need to set up new compliance procedures, open operator accounts within the EU and they need to buy and surrender allowances to cover the emissions from voyages that are caught by the scheme 40% in general terms of this year shipping companies need to surrender after verification And it's this year that, of course, the performance and the compliance of EUETS is really coming into play in terms of the verification in March and surrender later this year of the 2024 allowances. Now again a bit like CII we've been working for a year or two now with almost all our clients in the shipping world on the mechanics of that setting up the accounts making the registrations and of course negotiating charter clauses to suit owners and charters needs and in fact anecdotally just today I heard from a colleague involved in setting up accounts for EUETS that it is taken in the Malta and the Netherlands. Some clients, over a year to establish the necessary accounts for the purposes of compliance. So it has not been easy for businesses to get used to this brave new world. In terms of the clauses, BIMCO is the standard starting point. Again, a big variety we've seen in the clauses that are being negotiated and agreed in the time charter market. Will all of that work out as the compliance of the EUETS really revs up this year? Well, we shall see. And last but not least, on DCARB, I think for this year, is the new kid on the block, Fuel EU Maritime, which is another EU, regime, effective from January this year. And what that does is set well-to-wake greenhouse gas emission limits for fuel used on board vessels trading within the EU or to and from the EU. And again, really significant challenges are emerging and have emerged with FuelEU, noticeably, so far as I'm concerned, in the negotiation of clauses. BIMCO have done, again a sterling job in producing a template clause which so far in my experience has been greeted generally positively albeit as you might expect owners and charters are seeking bespoke solutions to those provisions to suit their commercial needs and to make sure that the allocation of costs and risk where penalties will need to be paid under FuelEU maritime is dealt with for their own best interests, but also in the interests of those they're seeking to do business with. What the limits are of that in terms of give and take, I think remains to be seen, but that is going to be a real thing for 2025. And certainly there seems to be no let up in work needed in that space. So Alex, that's a run through of where I think the main action will be on the decarbonisation front. You talked earlier about Russia, which I thought was really interesting, setting the scene around that for 2025. What are going to be some of the more practical implications for clients in this sector as we look forward to the coming months in 2025?
Alex: Yeah, thanks. Thanks, Nick. And really interesting hearing you speak on decarb. I think I've been mulling over this myself and mulling it over with the team. The reality is that trade has become more complicated and there's more sand in the gears of trade, particularly when it comes to sanctions and due diligence. And this will be my surprise, I think, to our audience, there's going to be a lot more focus on due diligence. And I think that falls into several buckets. And then the first is knowing your counterparty, KYC, who are you getting into bed with? And the consequence of geopolitics has meant that there's been an emergence, a brave new world of traders, charterers, operators that have established in places like Dubai, the Middle East and others as well. These companies have been newly formed and don't have a huge amount of track record behind them. Information on publicly available databases is limited. And so the legal compliance and indeed leadership have to make difficult decisions about whether and to what extent and with what guardrails they want to do business with these people. And I think that's the first thing. And that has been a theme of last year, but it is only going to get more complicated. And as we look at the recent guidance that's coming out, and all of the focus on circumvention, you know, the counterpart circumvention and who you're dealing with, that's going to be a key aspect of it. So I think that's the first. The second is due diligence on vessels and, you know, the parallel fleet, the dark fleet, whatever name you ascribe to it. You know, there's tempting, you know, if you're explaining it at a dinner table. It's tempting when you hear that definition to say, you know, is this Putin's navy? You know, is this a group of vessels under a common sort of ownership and common purpose and common management structure? That's obviously not the case. I mean, there is no legal definition of the parallel fleet. It's ultimately a construct of the media. And when one looks at the 600, 700 vessels, 1,000 vessels, however many you say that there are, actually when you look at them, they have very different characteristics. So obviously similar themes, but different characteristics. And I think the challenge for the industry is, as we go into a bifurcated world, how do we weigh the risk? How do we interact with the shadow fleet? Is it the shadow fleet at all? And what risk does that pose to our business? That is something that is clearly going to continue in that debate and that challenge around that is clearly going to continue. So I think that's the second one. The third one is the origin of cargo. And repeatedly now, the regulators are warning us about fraud and falsification of documents and that cargo from sanctioned jurisdictions or sanctioned cargo, however you want to describe it, is being laundered through fraudulent documentation. That is not a surprise. I mean, that's a method that's as old as the hills. But trying to spot that, trying to operationalize that in real time. Is challenging and it throws up real challenges for the compliance team and also the interaction between legal and compliance functions within our clients and the commercial, the frontline and decision makers. So that will be a key theme that goes forward. And obviously, if you get it wrong, the consequences are draconian. On the UK side, we've got strict liability. Strict liability on the US side, always be non-compromising about these sort of things. So that is a challenge. And I think the final part is where is the cargo going? It's the flip side of that coin. And again, only a few weeks ago, we saw the UK introduce a no re-export clause. The EU has already been trying to do it in certain sectors. The recognition that key commodities are flowing to sanctioned jurisdictions such as Russia, the recognition that it is very difficult to know if you are part of that initial supply chain, very difficult to know where the commodity or cargo is ending up. But at the same time, there is clearly an impetus on the part of government to try and stop and try and curtail those supply chains. And so with all of that will be a holistic sort of review of compliance policies, processes, and also, as I've alluded to, once again, going back to our sanctions and compliance clauses and updating and making sure they're in line with the recent government guidance and wisdom that is being promulgated. I think that is what the years has in store for us, or at least the first part of it. And I know already from colleagues in the industry and our own work. It's an extremely challenging time trying to manage these risks. And I'm afraid I don't see it getting easier, or perhaps I see it getting harder before it gets easier. I appreciate that won't be welcome news. But that's me whittling on about sanctions again. Look Nick 23-24 they were they were busy years and we saw some groundbreaking legal cases in the going through the english court these cases have had you know real practical significance for shipping what are we looking out for in 2025 what's what's coming up in the pipeline that the listeners should be aware of?
Nick: Yeah thanks Alex and just before I answer that you mentioned the parallel fleet and the shadow feet it used to be known as the dark fleet has that term been abandoned for being too Star Wars like?
Alex: Does have a ring to it I think i think I think you're you're right and I and I think to the point that i i was sort of trying to lead to the position is maybe a little bit more nuanced than it used to be and there is there is a reality that there is bifurcation in in the world order now and and there's the G7 which is generally aligned but there's a lot of other jurisdictions out there. So I think you're starting to see now increasingly in parlance the parallel fleet, which is a less loaded expression. Whilst it's a less loaded expression, the threats or the risks of G7 service providers engaging with the parallel fleet are not diminished because of that different terminology, but it's a recognition that there are different stances that one can take on the Russia-Ukraine conflict and trying to be deferential to that to an extent.
Nick: Okay. Well, thanks for that. And you raised the point about some interesting legal cases, and you're right. Thank you for that, because in fact, I think it is going to be a relatively interesting year in 2025 in the development of some. Practical and relevant legal cases going through the courts in England. And as you know, 2023 and 2024 were busy years. In the Supreme Court in the UK here last year, we had MUR and RTI, which essentially about the operation of a Charter Party force majeure clause in a sanctions context, which you'll be very familiar with. Another case called the Giant Ace, the FinBank case, which clarified a question that had never really been properly answered in English shipping law for some decades about the application of the one-year time bar, the crucial one-year time bar under the Hague-Visby rules for claims for cargo misdelivery which occurs after discharge and the answer to that was previously not clear. So I think 2025 is also set to be busy. I've only picked out two examples in the interest of time and brevity. One is a drier, more contractual case, and one is prevalent in the wet and the sort of admiralty casualty field. The first is that just before the end of 2024, there was quite a significant new case in the commercial court, the first layer of court we have here in the UK, between Hapag-Lloyd v Skyros. As owners in relation to the assessment of damages following the late re-delivery of two ships under TC's, where under the terms of separate MOAs signed with third-party buyers by the owners to sell the vessels, the owners couldn't charter the vessels and earn higher after the late re-delivery. Okay. Why is it interesting? Well, the court in that case awarded the owners only token damages, nominal damages, so virtually nothing, instead of market-based damages for the period of the overrun. In other words, the period of the delayed delivery. And that has been, and usually is, the normal measure because it is seen as a loss of opportunity for the owners to take advantage of the rising market, which he is shut out of because the ships in breach of charter were redelivered late to him. The difference here was that the court, Robert Bright, Mr. Justice Bright to me, said that even though the charters were in breach by redelivering late, because the owners were going to sell the vessels and were bound to sell the vessels to someone else, they did not, in fact lose an opportunity to make money in a rising market during the overrun period because they were going to sell them and they wouldn't have chartered them out. So there was no actual loss. And so the award of nominal token amount followed from that. Now, all of that might sound obvious, but it arguably goes against quite a fundamental rule in this area that owners can recover in a rising market the difference between the charter rate and the market rate for that overrun period, whatever they do with the vessel. But as here and as always, facts will be important and were important. And what's interesting, I think, for 2025 is that this case, essentially the invitation of the commercial court judge himself, looks like it's heading to the Court of Appeal later this year, where a number of really fundamental issues about market-based damages will, I think, be analysed in greater depth. That's the first case the second one is the now very long-running MSC Flaminia case and that's being heard by the supreme court this year on the 5th of February people listening may recall that this was a container vessel chartered by its owners conti to MSC which unfortunately suffered an explosion a large-scale fire back in 2012 caused by auto polymerization of a chemicals cargo. Inevitably, plenty of legal battles have followed. But specifically in this case, the ship owner started arbitration in London under the time charter against MSC to recover all its costs following the incident, plus lost hire during the repairs and various other heads of damage, which it won to the tune of some $200 million. Unsurprisingly, after that, MSC applied to the English court to limit their liability for damages payable to the owners under the 1976 Limitation Convention. People will know from maritime law, both in England and elsewhere, that that enables owners and a class of people involved in the ownership and charging of a vessel to limit their liability for maritime claims following an incident of this nature. Their liability would have been limited to 28 million sterling, in fact. So a small, very small portion of the $200 million damages award that had been made against them. And that was on the basis that the liability fell within a much-argued-about provision of the Limitation Convention 21A. And what that attempts to do is define the claims which can be limited. And back in 2004 some 20 21 years ago a case called the CMA CGM Jakarta had decided that it only applies to claims for loss of and damage to property other than the ship and consequential loss arising from that but not to the ship itself and MSC said that their liability the owners wasn't for damage caused by the ship but for damage caused by the exploding cargo which is not a ship. So therefore it could be limited under T1A. And the effect of that would have been that the charters could limit their exposure to an owner's claim for the owner's own losses, rather than losses suffered by what they called in the case outsiders or third parties. Well, the commercial court and then the court of appeal disagreed with that, albeit for slightly different reasons in the Court of Appeal, so the MSC could not limit their liability. But the Supreme Court will now hear that case in the coming weeks. And it's fairly rare for this area of maritime law, which is relevant, I should say, in quite a few ongoing limitation actions in the English Admiralty Court, the Maersk, the Ever Given arising out of the blockage of the Suez Canal in 2021. It's quite rare for this kind of case to get to the Court of Appeal, let alone to the Supreme Court. But that is what's happening with the MSC Flaminia. So that will be watched very keenly by quite a few people. So, those are just two examples, Alex, across the whole spectrum of shipping, really, to look out for in 2025.
Alex: Yeah, thanks, Nick. And it's clearly going to be a fascinating year ahead, at least for you and I. And I hope for our listeners as well, a lot to look out for there. Look, I'm mindful, you know, you and I could continue talking about this stuff forever. And I think that's probably not a bad place to bring this podcast to an end. We will obviously have to see what 2025 has in store we certainly live in interesting times so I think all that's left for me to say is thank you to our audience for listening I hope very much you found our insights interesting and helpful you know if if anything that we've said is has provoked further thoughts then please do get in touch with myself or Nick or indeed your usual contact to Reed Smith and happy to talk further about any of these issues and indeed others so um And in the meantime, take care.
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