Arbitrating Environmental Claims in Maritime Contracts: Sustainability in Dispute Resolution

- Parvati Arun ^[1]

Sustainability is becoming a key driving factor in the way maritime contracts are set up and, therefore, the way they are executed. Previously, the majority of the issues related to the execution of maritime contracts could be attributed to eithercommercial or logistical factors; however, that model is changing and now the execution of maritime contracts is alsobeginning to include environmental provisions that have been implemented by means of international governing agenciessuch as the International Convention for the Prevention of Pollution from Ships (MARPOL) that have establishedregulations pertaining to environmental emissions and fuel standards.

Due to these regulatory pressures and increasing commitment by corporations to Environmental, Social and Governance (ESG) activities, environmental compliance has been shifted from being a peripheral activity that could potentially causebusinesses damage to become a key obligation arising under maritime contracts between commercial parties such as  shipowners, charterers, operators and bunker suppliers  who allocate regulatory risk by employing express warranty and indemnity clauses. Consequently, disputes arising from alleged breaches of environmental obligations such as standards for fuel quality, emissions limits, and energy efficiency benchmarks have increasingly been viewed as a private commercial dispute between shipowners, charterers, and suppliers. Disputes of this nature are commonly within the scope of arbitration contracts contained in maritime contracts.

This blog details the approach taken to adjudicate environmental claims in the context of the maritime industry; analysesboth the basis for the arbitral jurisdiction over these environmental claims; and assesses whether or not the arbitral processis able to continue to provide an effective forum for resolving disputes and promoting sustainability in that environmentwhile simultaneously meeting the traditional commercial objectives for which it was established.

1. ENVIRONMENTAL OBLIGATIONS IN MARITIME CONTRACTS:  FROM REGULATORY COMPLIANCE TO CONTRACTUAL DUTY

The incorporation of environmental obligations into a maritime contract has developed over time from an implicitregulatory aspect to express and distinct contractual obligations, and in so doing, created an increasing number of disputes which can be resolved via arbitration.

1.1  The Regulatory Backdrop

The International Maritime Organization (IMO) is the primary international organization responsible for regulatingshipping-related environmental issues. The IMO has developed an internationally recognised policy framework to preventmarine pollution from ships, which is outlined in MARPOL 73/78. Most noteworthy is MARPOL Annex VI, the part ofMARPOL that outlines the requirements and standards for regulating air emissions of sulphur oxides (SOx),     nitrogen oxides (NOx) and the amount of sulphur in the fuel used by a commercial vessel.

The introduction of the global 0.50% sulphur cap on marine fuels by the International Maritime Organization constituted a major regulatory change that required ship-owners and charterers to either use cleaner fuels or implement alternative compliance methods. While these regulations are legally binding under public international law, the impact of these regulations will be most severely felt within the private contractual framework of the shipping industry.

1.2  Contractual Environmental Clauses in Practice

Contracts for commercial maritime activities often specifically state that vessels used for those activities must comply with MARPOL regulations as part of the terms of the contract, typically incorporated through express clauses. For example, charterparties frequently have a clause requiring the vessel(s) to comply with "all applicable environmental laws," which includes limits on sulphur in fuel and emissions. Standard time charter clauses including the BIMCO 2020 Marine Fuel Sulphur Content Clause require fuel supplied by charterers to permit the vessel to comply with sulphur limits and other MARPOL Annex VI requirements.

Likewise, bunker supply contracts typically contain fuel quality and sulphur content warranties that guarantee compliance with Annex VI regulations. The terms within bunker supply contracts commonly contain provisions which indicate that suppliers of bunkers must guarantee that those products will comply with MARPOL Annex VI, provide a compliant bunker, and a supply of representative samples.

Through the use of Industry Model Clauses developed by trade associations and shipping organizations, we can see another example of how environmental compliance can be contractually operationalised. Through these clauses,responsibility and risk for non-compliance with regulation are allocated to the appropriate contracting party by way of contractual provisions that specifically relate to Fuel Standards and Emissions Control (using INTERTANKO Model Clauses). When these clauses are included in Contracts, environmental regulation compliance becomes an obligation ofthe contracting parties rather than just an expectation of the Regulator.

1.3  From Soft Law to Enforceable Duties

Once a State ratifies international Maritime Organisation (IMO) conventions, they become binding treaty obligations forthat State and thus constitute a form of international law. The enforcement of these treaties typically occurs through domestic regulations and implementation procedures. However, private maritime contracts may also incorporate byreference IMO treaties or other related standards. When this occurs, those treaties/standards serve as benchmarks forperformance rather than being directly enforceable as public law obligations. The conventions of the International Maritime Organization (IMO) are not classified as soft law, but rather the soft law elements are found within the IMOframeworks, such as associated guidelines, technical codes, and non-mandatory standards, which obtain binding force onparties to a contract once they are included in that contract. Whether or not a party is subject to performance obligations arising from the incorporation of soft law elements into a contract depends ultimately on how the contract itself is drafted, including how the requirement for compliance with soft law elements is delineated (e.g., as a warranty, condition, covenant, or continuing obligation).

Like other examples of ESG-related contracting, the introduction of obligations related to sustainable managementthrough treaty and contract has been implemented through contracts between private sector entities. In maritime contracts specifically, if the environmental standards of fuel composition, emission performance or vessel efficiency, as required by these treaties, are not achieved or maintained by either party, the other party could have a claim for breach, to receive indemnification, or otherwise seek compensation for these failures. As such, these claims are of a commercial nature and exist between the two parties, rather than as a function of an individual’s or the company's conduct and satisfyingregulatory requirements and/or penalties imposed by a regulatory body.

1.4  Implications for Arbitration

Understanding the transition of environmental compliance into a contractual obligation provides insight into why environmental issues are more commonly arising in maritime arbitration. Disputes that arise from whether a party hasfulfilled their obligations under a contract for environmental standards involve rights in personam, which are created through private agreements, rather than the enforcement of public environmental laws by state organisations.

In many cases, technical information (such as testing fuel samples, measuring pollution, or conducting analyses ofregulatory compliance by experts) is at the centre of these types of legal disagreements; therefore, arbitration allows forvarying ways of approaching these types of cases, as well as having experts within the industry available to assist in the resolution. The contractual nature of the relationship between the parties (the shipper and the shipping company) forms a legal argument for viewing most environmental claims that arise out of a transport contract as an arbitrable businessdispute. While this agreement is pertinent to arbitrability, it is  imperative to note that it limits the disputes to only thoseof inter-se allocations of risk and liability between parties without doing away with public authorities' continued involvement in enforcing environmental regulations on behalf of the public. Subsequent portions of this blog will reviewthis argument further.

Failure to meet the above-mentioned contractual environmental clauses will result in various private law repercussions, including a breach of warranty, a claim for indemnity, a claim for damages resulting from off-specification fuel, the ability to recover costs for regulatory fines/penalties against one party by the other, and, potentially (in some circumstances) theability to terminate the contract where compliance is a condition precedent. This methodology corresponds with standard risk-allocation mechanisms which are present in most contemporary charterparty and bunker supply contracts, including those that rely on the BIMCO and INTERTANKO standard model clauses. The precise ramifications that result from afailure to comply with the clause will depend on how the clause is drafted and what has been agreed to in terms of risk allocation between the parties.

Nevertheless, it does not follow that every instance of non-compliance will lead to an arbitration. Often, agreements contain clauses that allow for the adjustment of minor or technical breaches, the settlement of such breaches on acommercial basis, or the resolution of claims without resorting to formal dispute resolution. Arbitration arises normallyafter it has been determined that there are commercial consequences resulting from a noncompliance that cannot be resolved by mutual agreement, or where the parties have a disagreement over who is responsible for an exposure to a fine, financial loss or breach of contract under an agreement, as a result of a non-compliance.

2. ARBITRABILITY OF ENVIRONMENTAL CLAIMS IN MARITIME DISPUTES

A primary concern in resolving environmental claims through arbitration is the arbitrability of such claims. While environmental laws and regulations are typically associated with public law, environmental claims associated withobligations set forth in maritime contracts are often viewed as private, bilateral, and compensatory in nature.

The distinction between public enforcement of environmental law and contract disputes surrounding environmental non-compliance in international arbitration case law lies in how claims are interpreted and handled. Claims that arise out of contractual agreements - for example, those pertaining to non-compliant fuel, violations of emissions warranties or theallocation of costs related to pollution - will be viewed as property rights in personam; therefore, they would be brought forth to arbitration.

The framework established by the Indian Supreme Court for determining whether cases may go through arbitration is based on whether the dispute arises from the contractually defined private legal rights of one party against another, or from an action taken against a state actor exercising sovereign power or performing regulatory functions. Claims relating to the environment found in maritime contracts are generally considered to be arbitrable claims because they do not resultfrom regulatory sanctions but instead request damages or indemnities.

3. TREATMENT OF ENVIRONMENTAL CLAIMS BY MARITIME ARBITRAL FORUMS

With the rise in environmental compliance related disputes in maritime law, especially with respect to ship charterparties and bunker supply contracts, maritime arbitral institutions are increasingly acting as the forum for these types of disputes. The various forums operated by the London Maritime Arbitrators Association (LMAA) have been regularly used to resolve claims concerning the quality of fuel used by vessels, compliance with emission standards, and the liability for pollution. While India does not possess a separate maritime arbitration body akin to the LMAA, there has been an increasing prevalence of environmental compliance disputes arising from shipping contracts before  Indian arbitrationforums. These disputes are typically pursued either by way of ad hoc arbitration or through more general institutional frameworks and take the form of different types of contractual claims, including claims for breach of contract, indemnity and cost allocation. It is significant to note that the underlying issues which may give rise to environmental compliance claims, and/or non-compliance with air and water pollution, are likely also to attract the attention of various relevant Port Authorities, Custom Officials and/or maritime regulatory authorities. The coexistence of contractual arbitration and regulatory oversight in this context reflects the practical separation between private dispute resolution and public enforcement in Indian maritime practice.

Disputes of this nature typically involve a significant amount of detail and require significant expertise in assessinglaboratory reports, compliance documents, and expert testimony relating to environmental standards. The arbitration process has a high level of procedural flexibility, enabling tribunals to appoint technical experts or develop customised evidential procedures that reflect the nature of disputes.

Simultaneously, the tension that arbitrations preferred feature of confidentiality presents in relation to environmentaldisputes that include a wide variety of community or environmental factors. In addition to being attractive to the parties to a business transaction, the issue of privacy raises serious concerns regarding the future of environmental andsustainability protocols, and the degree of lack of transparency for maritime arbitrations will continue to be an increasing issue in maritime arbitrations.

4.  SUSTAINABILITY AND “GREEN” ARBITRATION PRACTICES

Arbitration is also being viewed through the lens of sustainability apart from the subject matter of disputes. The shippingindustry has recently started aligning its arbitration practices with the environmental goals of the broader shippingindustry by implementing Green Arbitration practices.

This encompasses utilizing technology to conduct the arbitration process without needing paper (a paperless process),using virtual hearings, and reducing the reliance on travel (decreasing greenhouse gases emitted during travel) whilecontinuing to protect parties' due process rights. Many of these practices have seen an increase in popularity in the context of international disputes related to shipping, where the location of the parties involved and/or the arbitrators may bewidely dispersed geographically.

In addition, there has been a noticeable increase in tribunals’ tendencies to develop commercially pragmatic remedies that incentivise an offending party into compliance over punitive measures such as cost shifting mechanisms and/or performance-directed orders. In doing so, it has created a new perception of arbitration, which is no longer just seen toresolve environmental disputes, but also as a process that can support the development of sustainable outcomes.

5. THE ROAD AHEAD: ESG, CLIMATE RISK, AND MARITIME ARBITRATION

With the growing trend for ESG-related clauses being included in all shipping contracts, it is likely that environmentalfactors will play a more important role in future maritime arbitration. Examples of variables that continue to become integral components of businesses' commercial expectations include climate risk, emission performance, and sustainability reporting; therefore, compliance with environmental regulations has now become one of the primary issuesin allocating risks.

Arbitrators may become more highly specialized because of this evolution, and the present trend toward reliance on scientific expertise may result in the development of institutionalized resources to aid in the resolution of environment-related disputes. As a means of addressing complex, multifaceted international maritime issues that arise from climatechange obligations through arbitration, the flexibility of the arbitration process will continue to attract users.

In conclusion, arbitration cannot serve as a substitute for public enforcement of environmental legislation; however, it can function alongside public agencies to create a viable, legally enforceable mechanism to compel compliance with theenvironmentally sustainable practices. By providing businesses with a binding agreement to follow through with theircommitments, arbitration will allow the increased enforceability of environmental sustainability initiatives in the maritime commerce sector.

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^[1] Fifth Year BA LLB (Hons) student at Institute of Law, Nirma University, Ahmedabad [E-mail parvathyarun93@gmail.com]. Her academic interests include arbitration and maritime law.