As the maritime industry enters the era of mandatory decarbonisation, the traditional legal boundaries of seaworthiness are being reshaped. Building upon Part I, which explored the IMO CII rating regime, Part II turns to the European Union’s Emissions Trading System (EU ETS) and the Monitoring, Reporting and Verification (MRV) regulations. This article unpacks the severe enforcement mechanisms—specifically Port State Control detentions and crippling fleet-wide expulsion orders—and how they cement “regulatory unfitness” as the modern equivalent of documentary unseaworthiness.

The Evolution to Regulatory Unfitness

Part I explored how the English law concept of seaworthiness has evolved far beyond the mere physical fitness of a vessel to safely encounter the ordinary perils of the sea. The courts have long recognised that a lack of “documentary seaworthiness” or “legal fitness”—such as lacking a mandatory port health certificate—can render a vessel legally unfit to trade or unseaworthy, as it practically impedes the contracted voyage or chartered service just as effectively as a physical defect in the hull.

As the global maritime industry adapts to mandatory decarbonisation, the next frontier in seaworthiness disputes centres on “regulatory unfitness to trade”.

The EU ETS and MRV Regulatory Framework

Under both regimes, the “shipping company” (the shipowner, ISM manager, or bareboat charterer assuming ISM responsibilities) bears the compliance burden.

MRV Obligations

Under the MRV Regulation, shipping companies must monitor greenhouse gas (GHG) emissions—including carbon dioxide (CO2) and, from 2024 onwards, methane (CH4) and nitrous oxide (N2O)—for voyages into, out of, and within EU ports. They must report this data, verified by an independent accredited verifier, for the preceding calendar year by 31 March each year. Upon satisfactory verification, the ship is issued an annual ‘document of compliance’, which must be carried on board by 30 June of that year.

EU ETS Obligations

Based on the verified MRV data, shipping companies must surrender emissions allowances for the preceding calendar year by 30 September each year. This liability is tied to the EU’s geographical scope: companies must surrender allowances equal to:

·       100% of emissions on intra-EU voyages (between two EU ports) and while in EU ports; and

·       50% of emissions on extra-EU voyages (between an EU port and a non-EU port).

This surrender obligation is being gradually phased in—companies are liable to surrender allowances for:

·       40% of their verified scope-adjusted emissions reported for 2024;

·       70% for 2025; and

·       100% for 2026 onwards.

Port State Control (PSC) and the Document of Compliance

EU Member States are required to ensure that PSC inspections on ships arriving at, within, or departing from their ports include a check for a valid document of compliance.

Enforcement Measures: Penalties, Expulsion, and Detention

Failure to surrender EU ETS allowances: A shipping company failing to surrender the requisite allowances by 30 September:

·       is publicly named;

·       incurs a strict excess emissions penalty of €100 per tonne of CO2; and

·       must still surrender the missing allowances the following year, as the payment of the penalty does not cure the underlying breach.

MRV consecutive non‑compliance: ship‑specific expulsion: If a ship fails to comply with its MRV monitoring and reporting obligations for two or more consecutive reporting periods, the competent authority of the port of entry may, at its discretion, issue an expulsion order. If the discretion is exercised and an expulsion order is issued, a mandatory EU-wide blockade falls on the ship:

·       Every EU Member State (except the ship’s flag State) must refuse entry to that specific ship until the company fulfils its obligations and produces a valid document of compliance.

·       If the offending ship is flagged in an EU Member State and enters one of its ports, the flag State must detain the vessel.

ETS consecutive non‑compliance: company‑wide expulsion: If a ship fails to comply with its ETS allowance-surrender obligations for two consecutive years, the consequences are even more draconian—the competent authority of the port of entry may, at its discretion, issue an expulsion order. An ETS expulsion order does not just target the non-compliant ship, but applies all ships under the responsibility of the shipping company. All Member States (other than the ship’s flag State) must refuse entry to the entire fleet, and any such ship found in its own flag State’s ports must be detained until the company fulfils its surrender obligations across the board.

The Seaworthiness Implication and Commercial Friction

The intersection of expulsion and detention orders with the law of carriage of goods by sea is where the new seaworthiness frontier emerges.

As established in The Madeleine [1967] 2 Lloyd’s Rep. 224 and The Derby [1985] 2 Lloyd’s Rep. 325, a vessel lacking mandatory statutory certificates/clearances or failing to carry certificates and documents required by the law of the vessel’s flag or by the laws and regulations in force at the vessel’s ports of call is not seaworthy.

A ship liable to expulsion or detention from EU ports due to missing compliance documentation suffers from “documentary unseaworthiness” no different in effect from lacking a deratisation certificate or proper navigational charts.

Responsibility for emissions: Although the shipping company bears the regulatory burden, the commercial operator—typically the time charterer—controls emissions through speed, route, cargo, and fuel choice. To reflect the “polluter pays” principle, the EU ETS regulations grant shipping companies a statutory right to seek retrospective reimbursement from the commercial operator.

Although that is not part of English law, English-law governed time charters frequently incorporate the BIMCO ETS Allowances Clause for Time Charters 2022, which not only incorporates the reimbursement requirement but also expands it, obliging the charterer to transfer allowances in advance and permitting the owner to suspend performance if the charterer fails to do so.

Owners vs Charterers

If the charterer fails to reimburse the owner and the owner therefore is financially unable to surrender allowances, the company may face a fleet-wide expulsion order. If a charterer then orders the vessel to an EU port, and the vessel is refused entry or detained, the vessel will be documentarily unseaworthy.

Charterers may argue causation—that the unfitness results from the owner’s failure to surrender allowances. But where that failure stems from the charterer’s breach, this argument is weak. As held in The Imvros [1999] 1 Lloyd’s Rep. 848, a party will face legal challenges in relying on consequences it has induced.

In any event, where the owner exercises the right to “suspend” under the BIMCO ETS Clause, the vessel is not trading during the suspension, so the question of seaworthiness does not arise.

Owners vs Cargo Interests

The allocation of responsibilities between owners and charterers does not affect the owners’ strict, non‑delegable duty to the holders of bills of lading under Art III r 1 of the Hague/Hague‑Visby Rules to exercise due diligence to make the vessel seaworthy at the beginning of the voyage (The Muncaster Castle [1961] 1 Lloyd’s Rep. 57 (HL); The CMA CGM Libra [2021] 2 Lloyd’s Rep. 613 (SC)).

Owner’s Indemnity against Charterers

Owners may recover liabilities to cargo interests from charterers as damages for breach of the BIMCO ETS Clause. Charterers may argue that the chain of causation was broken by the owner’s subsequent omission. However, as explained in Borealis AB v Geogas Trading SA [2011] Lloyd’s Rep. 482, an intervening act must “obliterate” the wrongdoing to break causation.

Even if damages are contested, owners have a strong fallback: the implied indemnity. Under The Island Archon [1994] 2 Lloyd’s Rep 227 (CA), owners are entitled to be indemnified against the consequences of complying with a time charterer’s orders, including lawful orders. Ordering the vessel to EU ports while failing to provide allowances exposes owners to regulatory penalties that are outside normal navigational risk; owners are therefore entitled to indemnity.

Conclusion

The integration of EU ETS and MRV into maritime commerce creates a stringent new paradigm of documentary unseaworthiness. While owners face strict liability to cargo interests if a vessel is refused entry or detained, the commercial operator typically bears the financial burden in practice.

Owners will rely on the BIMCO ETS Clause—particularly the suspension mechanism—to rebut unseaworthiness allegations, and on the implied indemnity in The Island Archon to recover any liability incurred to cargo interests. Charterers may seek to advance causation-based arguments, though these are likely to have limited prospects of success.