FuelEU Maritime: How can DOC holders reduce their risks?

Following the release of our six-part FuelEU Maritime Regulation Series in December 2024, we wanted to take a closer look at the risks faced by technical managers under the FuelEU Maritime Regulation (Regulation).

Under the Regulation, any organisation, such as the manager or bareboat charterer, that has assumed responsibility for the operation of the ship from the shipowner and that has agreed to take over all the duties and responsibilities imposed by the International Management Code for the Safe Operation of Ships and for Pollution Prevention (ISM Code) is considered the entity responsible for ensuring compliance with the obligations imposed. Accordingly, Document of Compliance (DOC) holders under the ISM Code are deemed a responsible entity.

Technical managers as DOC holders are in an awkward position under the Regulation: if the greenhouse gas intensity limits for the energy consumed on board a ship are exceeded, this will result in a deficit for which the DOC holder of the ship in question will be subject to penalties imposed by the competent authority.

From an economic perspective, it is difficult to justify penalising the DOC holder as an independent technical manager, given that the DOC holder is a mere service provider for the registered owner and has no control over what type of energy the owner (or in the case of a time charter, the time charterer), as “polluter”, uses on board a ship. Consequently, this is a regulation that is drafted to the detriment of the DOC holder, seeing as the EU legislator leaves it to the parties concerned - DOC holder, registered owner and time charterer (as polluter) - to contractually regulate any claims for the reimbursement of costs.

In contrast to the EU ETS regime, the Regulation does not provide for the DOC holder, as a “shipping company”, a statutory right for the reimbursement of penalties against the time charterer, and it is not foreseeable that the EU legislator will provide such a recourse in the future (this should not prevent the national legislators of the EU member states from providing the DOC holder with a national statutory right for the reimbursement of penalties under the FuelEU regime, however, corresponding legislative initiatives at the national level are also not foreseeable).

It is, therefore, all the more important for a DOC holder to protect itself against any risks, in particular if the risk is that the DOC holder may be liable to the competent authority for penalties under the FuelEU regime.

If the legislator does not grant the DOC holder a statutory right to reimbursement, as a starting point, the DOC holder should insist on a contractual right to reimbursement from the registered owner under the management agreement, for example, based on the BIMCO FuelEU Maritime Clause for SHIPMAN 2024 (combined with the expectation that the registered owner separately agrees a contractual right to reimbursement with the time charterer under the time charter).

However, these precautionary measures do not change the fact that the DOC holder still carries the registered owner's risk of insolvency. If the DOC holder cannot enforce his contractual right of reimbursement against the registered owner, the DOC holder, nevertheless, remains liable to the competent authority for payment of the penalty.

The consequences for the DOC holder can be dramatic. The competent authority enforces its claim for payment of the penalty by means of an administrative act, which, in principle, has the function of a title to claim and is immediately enforceable. Unlike other creditors, the authority does not first have to obtain an enforceable title, for example, in the form of a court judgment.

When several ships are managed under a single document of compliance, the risks for the DOC holder can accumulate, particularly in a crisis, if the DOC holder finds itself having to pay penalties for a large number of ships. The fact that this could also lead to a crisis for the DOC holder, or even to its insolvency, is impressively demonstrated by the case of Flyr, a Norwegian airline that had to file for insolvency because it was no longer able to meet its payment obligations under the EU ETS.

What does this mean for DOC holders?

It will be important for DOC holders to receive instalment payments or advance payments for any penalties from their contractual partner, the registered owner, at intervals that are as regular as possible.

Security in the form of guarantees or cash deposits would also be desirable, although it is difficult to say whether the DOC holder would be able to negotiate this with the registered owner.

A further consideration would be to install a form of ring-fencing to ensure that problems within a specific business area of a DOC holder company do not spread to the entire business. One possibility could be ”horizontal” ring-fencing, whereby the DOC holder entity and the operational and fee-earning technical management entity are separated from each other and, in the event of an issue with the DOC holder, the DOC holder could be sidelined as an entity without any value.

On the other hand, a “vertical” ringfencing could be considered, whereby different DOCs are used for ships owned by the group of the DOC holder and for ships managed on behalf of third-party owners, in order to avoid ships “infecting” each other. If a ship is non-compliant, authorities can take sanctioning measures against ships under the same DOC, even if the ships in question are compliant.

Larger technical managers, in particular, should consider setting up various DOCs for different ship groups. A shipowner, particularly one with a large fleet, who entrusts a third-party technical manager with the management of its ships should also consider having its ships managed under a separate DOC which would only be reserved for the shipowner concerned.

For further information, please contact Dr Clemens Hillmer, Partner, Clyde & Co (clemens.hillmer@clydeco.com) or your usual contact at Clyde & Co.

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