As part of London International Shipping Week, Norton Rose Fulbright hosted a timely discussion on the evolving challenges in LNG shipping and trading. Fulbright hosted a timely discussion on the evolving challenges in LNG shipping and trading. Against a backdrop of geopolitical tension, regulatory shifts, and landmark legal disputes, the session explored how industry players can navigate uncertainty and prepare for what’s next.

1. Contractual clarity in a volatile market

An arbitration between a US LNG exporter and its energy sector customers has sent ripples through the LNG sector. The LNG exporter’s actions regarding commissioning of the facility and resulting commissioning cargoes (i.e., selling cargoes on the spot market)  has raised fundamental questions about the relationship between the parties under long-term LNG offtake agreements and the evolving LNG market. The dispute highlights a critical issue - many long-term LNG offtake agreements, typically drafted early in project lifecycles, contain broad and sometimes ambiguous terms, particularly around commercial operation and liability caps.

Key takeaways: 

In light of both COVID disruptions and the above discussed dispute, many LNG industry participants are reviewing their existing long-term offtake agreements to determine their rights and obligations and are considering risk allocation as they enter into new LNG offtake agreements that are being drafted post-COVID. Parties should consider key contractual terms (e.g., force majeure, liability caps, operational terms) to ensure that there is clear understanding between the parties and to properly allocate risk along the value chain. Familiarity with the precise wording of your contracts is essential, as courts and tribunals will look to what is written and signed, not what was intended or assumed. 

2. Time charter party economics under pressure

The introduction of the IMO’s Net-Zero Framework (NZF) and recent US tax developments (including USTR 301 and the SHIPS for America Act) are creating uncertainty for LNG shipping economics, particularly in long-term time charter parties (TCPs). With no clear enforcement mechanisms, it is down to parties to negotiate how regulatory penalties and benefits are allocated. While the EU has recognised LNG as a transition fuel where reduced penalties apply under the FuelEU Maritime regulation for its use, the NZF has taken a different position. Under the NZF, LNG is penalised in the same way as other fossil fuels which created a degree of regulatory mismatch disadvantaging owners and operators who have invested heavily in LNG infrastructure and vessels on the assumption of a more favourable treatment.

Key takeaway: 

Industry players should resist the temptation to “wait and see”. Instead, this is an opportune moment to renegotiate risk and reward sharing mechanism in TCPs to avoid unexpected liabilities.

3. US policy: A strategic shift

The Office of the US Trade Representative (USTR) Section 301 Action on China’s Targeting of the Maritime, Logistics, and Shipbuilding Sectors for Dominance (which was initiated under the Biden presidential administration and which continues under the current Trump presidential administration) signals bipartisan concern over China’s role and influence in the global maritime and shipping sectors. While the Jones Act remains in the background, there are a number of regulatory and legislative developments in the US that indicate a growing bipartisan momentum in support of US shipbuilding, as well as vessel ownership and operation. It remains to be seen how this will impact the industry, but the current Trump administration has signalled a clear preference for LNG carriers to be built in “US-friendly” jurisdictions if or until domestic capacity catches up.

Key takeaway:

Consider the origin of vessel construction and its potential impact on regulatory compliance and market access. Monitor regulatory and legislative developments in the US closely, including through the strategic use of US-based advisors and counsel, as they may impact procurement strategies and long-term planning.

4. Warranties and defects: Legal landscape

LNG contracts often include post delivery warranties with liability limitations. While mutually beneficial, these clauses can significantly restrict claims for defects in design, construction, materials, or workmanship.

Design responsibility must be clearly assigned. Without express wording, general warranties may not cover design errors. Courts may treat design defects as poor workmanship, but this depends on the contract’s language and context.

Warranty clauses are often interpreted as the exclusive remedy for post-delivery defects, even if not clearly drafted. Attempts to rely on other contractual terms are usually unsuccessful.

Buyers may seek to bypass warranty limits by alleging dishonest concealment of defects. While such claims are rare, they can raise complex issues, particularly when involving junior staff. Courts have recognised that fraudulent concealment may give rise to tort claims outside the contract. A recent High Court decision confirmed that well-drafted exclusion or limitation clauses can still apply even in cases of fraud, especially where the fraud is of an agent or employee. However, this depends on the contract’s wording, and time bar provisions may not apply if a claim has been fraudulently concealed.

Key takeaway

Buyers should carefully review warranty clauses for scope, duration, and enforceability. Clear and precise drafting is essential to preserve rights and avoid unintended exclusions of liability.

Looking ahead

The LNG sector is facing a convergence of legal, regulatory, and geopolitical pressures. For clients, the message is clear: revisit your contracts, reassess your risk allocations, and stay ahead of developments. Flexibility is no longer enough – clarity, strategy, and preparedness are key.

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