Navigating S&P Agreements under FuelEU Maritime
Updated: Aug 3
As regulatory obligations under FuelEU Maritime begin to settle into market practice, maritime lawyers and shipowners face new challenges. They must craft robust Sale and Purchase (S&P) contracts for ships that safeguard against unexpected regulatory and commercial liability. While our previous newsletter addressed the general compliance responsibilities of buyers and sellers (“Selling and Buying Ships Under FuelEU Maritime”), this edition moves beyond theory. It provides actionable legal guidance for drafting S&P contracts in alignment with FuelEU Maritime requirements.
Understanding the Compliance Nexus: Responsibility and Risk Transfer
FuelEU Maritime Regulation (Article 15(4)(c)) creates a unique statutory trigger. The ISM company of the vessel on 31 December of the reporting year is unequivocally liable for annual compliance. This exceeds ordinary risk allocation. The transferee (buyer) may inherit compliance deficits or surplus positions, regardless of actual ownership duration.
Implication for Drafting
The contract must ensure that the risk for FuelEU compliance—namely deficits, surpluses, and penalties—is clearly allocated between parties. It should reflect who will constitute the “company responsible” as of year-end.
Verified Data: The Gold Standard for Settlement
Article 15(4)(a)-(b) mandates outgoing ISM companies to submit all relevant compliance data for their compliance responsibility period. This data must be verified and logged into the FuelEU database within one month post-transfer.
Practical Drafting Points
Data Representation Warranties: Sellers should be required to provide validated (preferably verified) operational and emissions data as a contractual condition precedent.
Adjusted Price Settlements: Draft clauses for price adjustment based on compliance status at transfer, confirmed via FuelEU-verified and reported data.
Settlement Mechanisms: Consider escrow arrangements or deferred payment structures tied to verification of compliance positions.
Surplus, Pooling, and Commercial Rights
FuelEU surplus credits and pooling rights can carry substantial commercial value. However, they can also create ambiguity if not expressly addressed. If pooling agreements already exist, alignment between those and the sale & purchase agreements under FuelEU is of utmost importance.
Model Clause Essentials
Surplus/Deficit Ownership: Explicit assignment of all surplus and deficit positions at transfer, with mechanisms for settlement such as BetterSea's FuelEU Surplus Index.
Pooling Agreements: Representations and warranties confirming whether the vessel is subject to pre-existing pooling arrangements. This includes the transfer of existing pooling arrangements to the new ISM company or termination. Indemnities for undisclosed pooling positions should also be included, along with disclosure obligations.
Responsibility for Previous Penalties or Borrowing: Contractual allocation and indemnity for pre-transfer penalties or borrowing (especially prior year exposures) should be considered. A lookback period and express covenants on notification obligations are advisable. Indemnification provisions should cover historic deficits, penalties, borrowing, or regulatory actions related to the seller’s period of ownership, especially where unverified data is the only information available at closing.
Post-Closing Cooperation: Covenants requiring the seller to cooperate with compliance investigations or regulatory requests after sale are essential. This is particularly important if retrospective recalculations impact the buyer’s FuelEU position, which can occur for up to two years after finalisation of the compliance period.
Checklist for Drafting FuelEU-Compliant Sale & Purchase Agreements
Obtain verified compliance data prior to closing.
Assess and document surplus, pooling, penalty, and borrowing status.
Allocate mid-year deficits/surpluses with an agreed settlement or adjustment mechanism.
Clarify post-closing cooperation and seller warranties on FuelEU data submissions and post-period checks.
Incorporate indemnities and settlements reflecting verification lag and latent liabilities.
Conclusion: Best Practice for Legal Advisors
Legal clarity related to FuelEU Maritime in S&P contracts is essential. It helps prevent unintended risk allocation, exposure to significant FuelEU penalties, and post-closing disputes.
By implementing comprehensive representations, warranties, indemnities, and settlement mechanisms, maritime lawyers and shipowners can preserve their commercial interests and regulatory compliance. For further guidance, support in drafting clauses, and related advisory, contact BetterSea's Legal Team (legal@bettersea.tech).
BetterSea's FuelEU Maritime Platform transparently connects you to sellers. It highlights the seller's industry role, data availability, and accuracy. The platform provides a streamlined, end-to-end post-trade process with standardised contracts and additional financial security. Trade surplus with reduced risks, no additional intermediaries, and the transparency you need to make the right decision.
Best regards,
The BetterSea Team
Contact Us: info@bettersea.tech
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