The concept of ‘just in time’ planning is not remotely new and has been used in the manufacturing sector for decades. The concept is also not new within the shipping world, where contractual parties have reached ad hoc agreements for many years on how multiple port loading/discharging of part cargoes inter relate with utmost despatch obligations. This, though, is the first time that BIMCO has published a bespoke clause for industry consideration setting out how the parties to a voyage charter can agree a methodology for a just in time voyage.
The Backstory
As part of the 2015 Paris Agreement plan to reduce greenhouse gases, every industry sector must play its part. In April 2018, the International Maritime Organisation (“IMO”) adopted a strategy for reducing emissions from shipping by at least 50% by 2050 (compared to 2008) as a pathway of CO emissions reduction consistent with the Paris Agreement. The JIT clause it is part of that strategy and must be seen in a much wider context when considering whether it will be of benefit to the shipping industry and become a regular fixture in voyage charters.
The JIT clause is a bespoke clause to be incorporated into voyage charterparties and has no application to time charters or bareboat charters, which fall within other industry initiatives.
Under a standard voyage charter, the vessel must arrive at a nominated load port within an agreed laycan, whether the berth is free or not and whether the vessel will face lengthy delays through port congestion or not. Once at the agreed place, and at the expiry of laytime, the vessel incurs a daily detention charge – demurrage. Once the cargo is loaded, the vessel proceeds with utmost despatch to the agreed discharge port, where again, following tendering of NOR, the vessel will commence laytime and ultimately go onto demurrage if there are further delays. That is the normal scenario. If the vessel delays or proceeds slowly to save fuel and misses the laycan, then contractually the charterer has a right to cancel the charter and possibly claim damages. If the vessel races to the load port to ensure that the laycan is complied with, then the vessel may sit idle for some considerable time whilst waiting for a berth to become available to her. The vessel, once laden, must proceed with utmost despatch and without deviation to the agreed discharge port. Should the vessel choose to idle or run at very slow speed to save fuel then there is, prima facie, a breach of the utmost despatch obligations sounding in damages against the owners. That has been the legal landscape for many years. It is, objectively speaking, an energy inefficient way of operating a business.
The ‘just in time’ principle does not shorten the voyage but instead smooths out the energy inefficient moving parts of any voyage. It envisages a vessel and her owners being in constant dialogue with charterers, port agents and the port itself to understand when a vessel may be able to proceed directly to a berth. If a vessel can choose an energy efficient speed to avoid burning unnecessary fuel, but still arrive when the charterer and cargo interests require such cargo to be loaded, then the parties have achieved an energy efficient approach voyage without any delay to the contracted voyage. Once the laden voyage starts, then again, the ‘just in time’ principle envisages a dialogue with all stakeholders to ensure that the optimum energy efficient speed is adopted so that the vessel can proceed directly to berth at the discharge port. In a perfect world it is difficult to challenge the benefits of this process.
Indeed, analysis has shown considerable economic benefits to this more energy efficient manner of carriage. 26 vessels from Maersk and MSC were analysed at the port of Rotterdam. Two different scenarios were established, receiving arrival requests for berthing 24 and 12 hours earlier. The first case showed an 8% reduction in fuel consumption and the second a 9% average reduction. Whilst this is an interesting statistical analysis, as discussed below, this analysis looked only at a well run port with sophisticated operators on liner services.
The Proposal
The basic concept is that the speed of a ship will be adjusted to arrive at a designated place at a specified time where it can proceed immediately to a berth or terminal. To achieve this, all key stakeholders in the process need to be involved such as pilots, tugs, agents and other nautical services providers. JIT has the potential to significantly reduce waiting time at anchorages, which in turn will reduce the port’s “carbon footprint”. Instead of ships following the common practice of “hurry up and wait” when proceeding to ports, their adjusted speed will reduce fuel consumption and emissions and will save costs. The overall length of a voyage remains unchanged as the JIT regime simply absorbs into the sea passage what would otherwise be waiting time and possibly time on demurrage.
BIMCO Just in Time Arrival Clause for Voyage Charter Parties 2021
(a) The owners and charterers shall use their best endeavours to obtain and share information regarding the Vessel’s arrival time, this shall include, but not be limited to, information from, or required by, any relevant third party. Any port specific requirements shall be met.
(b) Notwithstanding any other clause in this Charter Party, the charterers shall be entitled to request the owners in writing to adjust the Vessel’s speed to meet a specified time of arrival, or closest thereto, at a particular destination. Such request shall always be subject to the owners’ consent which shall not be unreasonably withheld and, in the case of an approach voyage, also subject to agreeing an amended cancelling date. The charterers shall not be entitled to request an adjustment of speed outside the normal safe operational limits of the Vessel.
(c) Extra time used on a sea voyage as a direct consequence of the Vessel adjusting speed pursuant to the charterers’ request shall be the difference between:
(i) the “estimated time of arrival” as provided by the Vessel prior to the charterers’ request to adjust the Vessel’s speed to meet a specific time of arrival, or closest thereto, at a particular destination; and
(ii) the “actual time of arrival” at that particular destination, or closest thereto.
Such extra time shall be compensated by the charterers to the owners at USD ___ per day pro rata or as otherwise agreed by the parties which shall take into account the savings in fuel by the owners and shall be payable by the charterers to the owners, prior to completion of final discharge.
(d) Where the Vessel proceeds at a speed adjusted in accordance with subclause (b), this shall constitute compliance with, and there shall be no breach of, any obligation as to despatch and shall not constitute a deviation.
(e) The charterers shall ensure that the terms of the bills of lading, waybills or other documents evidencing contracts of carriage issued by or on behalf of the owners provide that compliance by owners with this Clause does not constitute a breach of the contract of carriage. The charterers shall indemnify the owners against all consequences and liabilities that may arise from bills of lading, waybills or other documents evidencing contracts of carriage being issued as presented to the extent that the terms of such bills of lading, waybills or other documents evidencing contracts of carriage impose or result in the imposition of more onerous liabilities upon the owners than those assumed by the owners under this Clause.
Analysis
Regular users of BIMCO clauses will see the familiar structure of the provision.
Part a) contains the overarching provision that the parties to a voyage charter should use their best endeavours (an obligation far in excess of reasonable endeavours) to be transparent and work collaboratively to discuss the vessel’s arrival time so that she arrives at the load port using appropriately efficient speed and without undue delay before loading.
Part b) seeks to deal with the laycan issue and recognises that if the charterer knows that the vessel will face a long delay at the load port they can “request” that owners slow down the approach voyage thus avoiding delay and demurrage, but such request is conditional upon the charterer pushing back the cancellation date to avoid a ship owner arriving out of the original laycan provision permitting a charterer to cancel.
Part c) recognises that since a charterer has received the benefit of no waiting time at the load port and consequently no payment of demurrage, then it must compensate the owner for the time spent proceeding to the port in an energy efficient manner. This is the economic crux of the at clause and perhaps the most difficult and ‘dispute ripe’ part of the clause.
Part c) contains the methodology for assessing how the parties to the contract share the benefit of the JIT process. The first option uses the estimated versus actual time of arrival to assess the financial cost to the vessel and gives the parties the option of agreeing, at the outset, a fixed sum per day that the owners will receive. The alternative approach is “as otherwise agreed” which on any view gives scope for disputes. The only guidance given to the parties is that the fuel cost saved by the owners in reducing speed on approach to the load port should be factored into the amount payable by charterers. Interestingly, in earlier versions of the clause, an expert determination provision was included, but this provision has fallen away over the various stages of drafting and consultation. It would therefore be left for the dispute resolution mechanism within a charter to determine what is the appropriate amount payable to owners and, as with any clauses drafted in such a way, there is huge scope for dispute.
Part d) deals with the breach of utmost despatch provision by virtue of the vessel proceeding in a fuel efficient manner and acknowledges any extra voyage time due to fuel efficient steaming shall not be a breach of charter.
The final section, part e), recognises the voyage charter is just one of the documents making up the contractual matrix for the carriage of particular goods and contains an indemnity in owners’ favour so that, should they face claims as carrier under bills of lading because of perceived delay in the voyage, then because charterers had failed to ensure mirroring language in other contracts, they bear the consequences of that failure.
Grant Hunter, head of contracts and clauses at BIMCO, explained the rationale for the clause as follows:
“Essentially, the overall length of a voyage remains unchanged as the JIT regime simply absorbs into the sea passage what would otherwise be waiting time and possibly time on demurrage. What marks JIT out as different from the Virtual Arrival concept is that the driver is reducing fuel consumption and emissions.”
Will the market embrace this clause?
Reasons to be fearful:
All parties engaged in shipping are commercial entities and must be persuaded the clause is to their economic benefit as well as their responsibility to the industry generally to assist in achieving the goal of emissions reduction. Parties also want contractual certainty and are unlikely to agree clauses which will lead to litigation down the road.
The case study referenced above involving Rotterdam was theoretical and based upon liner operations with little delay anyway. In a market where, at the time of writing, 6% of the world’s bulk tonnage is waiting at congested ports in China with very long periods of delay and where, given soaring freight rates and bunker cost fast becoming a proportionately reduced element of the voyage cost, there must be real doubt that this clause will gain traction. JIT requires collaboration and certainty as to when a ship can berth. At present, there seems little certainty in most bulk cargo voyages other than prolonged delays waiting to berth in many ports. From a pure economic point of view, it seems hard to see why a charterer would request a delayed arrival at a congested port and so delay joining the queue to get into berth as quickly as possible.
Part b) contains the right for a charterer to request delayed arrival but no duty on an Owner to accept this request. Their rejection simply needs to be “reasonable” Is that an unfettered right for an owner or does it trigger Braganza principles that the refusal must not be arbitrary or capricious? Is economic benefit a fair reason? One can see this clause is ripe for litigation.
Further, how will the cost saving allocation work in practice? The first option in part c) envisages the parties agreeing upfront a figure. Whilst by no means impossible, it would require an estimate of likely fuel saving versus demurrage saved by charterers in advance of the voyage commencing – possibly some considerable time before.
The second methodology simply invites commercial parties to agree. Two commercial parties cognisant of their obligations to enhance green shipping may find a workable formula. Others will not. What will happen where a charterer requests Owners to slow steam to the load port and Owners refuse, arrive “on time” and there is a dispute over whether demurrage is due?
Finally, part e) recognises the need to ensure all involved in the voyage buy into the JIT principle. CIF or FOB sale contracts may contain specific load or discharge deadlines which are inherently inconsistent with the JIT concept when a ship needs to be at the port by a deadline. Will a charterer risk exposure under sales contracts to fulfil their green “duties“ under a voyage charter?
Reasons to be optimistic:
It is early days in the life of this JIT clause and it has received little up take yet. However, Shipping is only going in one direction: towards green shipping. The IMO stance is clear and all actors in the industry are embracing green shipping to a greater or lesser extent. IMO 2020 finally brought in lower sulphur fuel oil which, with a few minor quality issues, has been broadly successful. Carbon is next in the IMO’s sights. At MEPC 75, amendments to chapter 4 of MARPOL Annex VI regulating energy efficiency and carbon intensity of vessels were approved. The draft was formally adopted at MEPC 76 in June 2021 and will come into force by 1 January 2023. Those Regulations amend existing energy efficiency requirements and impose mandatory requirements to reduce carbon intensity in shipping by at least 40% by 2030. Measures include analysing energy efficiency and carbon Intensity with a view to putting vessels that fail the standards into remedial action requirements. Inevitably, charterers will be reluctant to charter vessels failing carbon reduction requirements.
A Who’s Who of global charterers and operators have signed up to the Sea Cargo Charter to support the transparent reporting of greenhouse gas emissions from shipping “to ensure that charterers have the information necessary for them to calculate the emissions that result from their chartering activities and subsequently assess how their overall emission profile is developing in comparison to the requirements of the IMO’s initial strategy on reduction of green house gas emissions from ships”. The signatories, who represent a large percentage of the world’s chartered tonnage, have committed to insist on the following clause being included in their charters:
“the head owner or disponent owner (as appropriate) shall provide a duly completed fuel emission report … within seven days of completing the voyage…”
Modest steps, but steps in only one direction towards greener shipping. Despite the economic challenges and scope for disputes, JIT clauses may be here to stay.
Andrew Preston
Preston -Turnbull
13th September 2021
This paper is an abridged version of the speech given during London International Shipping Week September 2021.
