As shipping faces growing pressure to reduce emissions, charterparty negotiations are becoming an important testing ground for the industry’s energy transition. Owners and charterers must increasingly determine not only who pays for compliance, but how operational decisions, investment costs, and future regulatory risks should be shared.

The challenge has become more pressing as uncertainty surrounding the IMO Net-Zero Framework persists, even as regional measures such as the EU Emissions Trading System (EU ETS) and FuelEU Maritime impose new financial obligations. Existing contractual arrangements are being tested by regulations that do not always align responsibility for compliance with control over a vessel’s operations.

The cost of decarbonisation

For charterers, one of the immediate challenges is recovering the additional expense of lower-carbon fuels from customers further along the supply chain.

“The main problem is cost recovery,” says Olivier Josse, Co-CEO of Seascale Energy. “From the bunker procurement side, a charterer will only commit to a lower-carbon fuel if they can pass the additional cost down the supply chain. Without a clear global framework, most can’t, especially companies at the early end of the chain, with little leverage over their own customers.”

Regional regulation is beginning to change that calculation. Where emissions carry an established financial cost, alternative fuels can become commercially attractive. Elsewhere, conventional fuels generally retain their advantage.

Yet price alone does not explain the industry’s reluctance to adopt lower-carbon alternatives. Josse points to cases where owners remain hesitant to approve biofuel bunkering even when it offers a financial advantage, suggesting that operational caution and regulatory uncertainty are also influencing decisions.

An underlying issue is that decarbonisation does not necessarily assign its costs and benefits to the same party. Charterers may pay for cleaner fuels while owners benefit from improvements to their vessels’ Carbon Intensity Indicator (CII) ratings. Conversely, owners investing in efficiency improvements may see charterers capture much of the resulting fuel savings.

Rachel Hoyland, Of Counsel at Stephenson Harwood, identifies this as a persistent obstacle. “When it comes to the retrofitting of vessels to increase efficiency, reduce emissions costs or meet new fuel standards, the parties often struggle to navigate the ‘split incentive’,” she said.

Such arrangements can discourage investment even where efficiency improvements would benefit the vessel’s overall performance. More effective cost-sharing mechanisms could help address the imbalance, but their success depends on whether both parties can establish a commercially acceptable division of costs and savings.

Where contracts fall short

The difficulties extend beyond investment incentives to the allocation of regulatory responsibility itself. Selena Challacombe, Legal Director at INTERTANKO, identifies a fundamental disconnect between the parties responsible for compliance and those making operational decisions.

She said: “The biggest challenge is the misalignment between regulatory responsibility, commercial cost and operational control. The underlying ‘Polluter Pays Principle’ is straightforward: the party making the operational decisions that affect emissions should bear the associated costs. In practice, however, that principle is not always reflected in charterparty terms.”

Under the EU ETS and FuelEU Maritime, compliance obligations fall on owners or designated shipping companies, while charterers may control fuel procurement, routing, and speed. Although contractual provisions can transfer associated costs, they cannot necessarily eliminate the financial exposure of the regulated party.

Challacombe highlights risks including delayed reimbursement, fluctuating carbon prices, and payment arrangements that fail to reflect actual emissions. FuelEU Maritime introduces further complications because compliance deficits can affect subsequent reporting periods, potentially after a vessel has moved to another charter.

These issues could demonstrate why allocating liability on paper is not always equivalent to managing it effectively. Contractual provisions must account for payment security, verification, and the consequences of decisions whose effects extend beyond the immediate charter.

Hoyland argues that traditional charterparty clauses were not designed to accommodate the growing complexity of environmental regulation. Bespoke provisions are increasingly necessary, but their interaction with other agreements can create additional uncertainty.

Where shipowners, charterers, and managers operate under different contractual arrangements, inconsistencies between clauses may leave responsibilities unclear or introduce overlapping obligations. The challenge is therefore to create provisions that work across the contractual chain without generating new disputes.

Finding a workable balance

Addressing these tensions requires agreements that recognise the distinction between legal responsibility, commercial control, and financial liability.

Challacombe argues that contracts should reflect the decisions and responsibilities of each party while allowing owners to meet their regulatory obligations. More regular reconciliation and payment arrangements could reduce exposure to unpaid compliance costs, while agreed compensation mechanisms could address operational decisions that adversely affect a vessel’s CII performance. Such provisions would give owners greater financial protection without unnecessarily restricting charterers’ commercial flexibility.

For Josse, however, the absence of suitable contractual mechanisms is not the principal barrier. “In our view… the tools already exist. BIMCO has a biofuels clause, and the market knows how to write cost-sharing terms.”

His argument points to a wider limitation: contractual innovation cannot, by itself, create the commercial incentives needed to accelerate decarbonisation. Without a clearer regulatory framework, owners and charterers may have little reason to move beyond existing practices.

“Things move when the incentives and economics make sense. Until regulation creates that case outside the EU and UK, there is little to push either side beyond the status quo. Global clarity, including on the IMO Net-Zero Framework, would do more to unlock investment than any new clause,” he said.

Regulatory certainty may strengthen those incentives, but contracts must also remain capable of accommodating future changes without repeatedly reopening negotiations. As Challacombe concludes: “Environmental regulation will continue to evolve and new requirements must be accommodated without double counting costs or reopening the entire contractual framework each time the rules change.”