Pollution Liability and Compensation

Despite the serious threat to the principle of limitation of liability, the IMO Civil Liability (CLC) and FUND Conventions have been remarkably effective in ensuring that those effected by oil pollution from tankers are provided with prompt compensation without legal wrangling. The shipowner’s contribution is paid regardless of fault, and on the rare occasions that valid claims exceed the shipowner’s liability under the CLC, additional compensation is provided by the International Oil Pollution Compensation Fund (IOPCF) financed by oil importers. 

Today, over US$1 billion is available in countries that have joined the Supplementary Fund to cover the cost of clean-up and to compensate those affected by a single spill, a feat which would be near impossible for a single nation to support alone. 

An important consideration during the discussions that led to the adoption by governments of the Supplementary Fund Protocol in 2003 was the need to maintain an equitable balance in the sharing of compensation costs between the shipping and oil industries. To support the continuing success of the global regime, the shipping industry offered to make additional contributions in certain circumstances and two voluntary but binding industry agreements were adopted known as the Small Tanker Oil Pollution Indemnification Agreement (STOPIA) and the Tanker Oil Pollution Indemnification Agreement (TOPIA). While the mechanics of these agreements are complicated, their main aim is to maintain an approximately equal apportionment of costs for pollution damage claims between the shipping industry and the oil importers.

2016 marked ten years since STOPIA and TOPIA were introduced and the first scheduled review which was carried out by the IOPCF and the International Group of P&I Clubs (IG). The aim was to determine the approximate proportions in which the overall costs of pollution damage claims in the previous ten years have been borne by the shipping and oil industries. A clause in both agreements provides that where either party has borne a proportion exceeding 60% of the overall cost then measures should be taken to adjust the financial burden. 

A snapshot review of ten years of claims data from February 2006 to February 2016 in fact showed that shipowners, through their P&I Clubs, had actually paid 86% of claims during this period, reflecting that there have recently been very few large scale pollution incidents. 

However, the shipping industry and the IG have decided not to take measures to adjust the financial burden at this review, recognising that claims are cyclical and that while the vast majority of tanker incidents continue to be fully compensated by shipowners alone without any recourse to the IOPCF, a single major tanker incident in the future could significantly alter the percentage proportion borne by the oil industry. Nevertheless, the shipping industry has stressed that this decision has been made in recognition of present circumstances and that the right is retained to take measures following future reviews should an imbalance continue to be evident. 

Meanwhile, ICS has welcomed the successful conclusion of discussions between the IOPCF and the International Group of P&I Clubs (IG) concerning the funding of interim payments which are made to claimants in the immediate aftermath of pollution incidents. 

The funding of interim payments by the Clubs is important because if the text of the IMO Conventions was strictly followed, P&I Clubs would pay the limitation amount into court and then the court would decide the claims and pay the claimants the amounts due. In a major incident where there are many claims this could cause serious delay in providing immediate compensation to claimants who might be facing hardship. For this reason, P&I Clubs often make interim payments and if these eventually exceed the shipowner’s limitation amount the difference is then usually reimbursed by the IOPCF, thus maintaining the balance of payments between the shipping and oil industries. 

Unfortunately, this informal arrangement was damaged by the decision of governments to wind up the 1971 Fund at the end of 2014, even though potential claims were still outstanding against the 1971 Fund. This decision left the Clubs potentially exposed to claims and undermined the trust on which their relationship with IOPCF was based. There was a concern that in any future incidents where there was a risk of the tanker owner’s liability being exceeded, the Clubs would have to think twice before advancing compensation payments to claimants above the CLC limits in case any overpayments were not reimbursed by the Fund. 

Despite these difficulties, continued discussion and collaboration between the IG and the IOPCF eventually bore fruit and, in October 2016, governments approved an agreement on standard terms relating to interim payments which was formally signed by the IG and the IOPCF in December 2016. 

Elsewhere, ICS has been active in discussions about whether the IMO pollution compensation regime is adequate to address increased shipping activity in polar waters. As a part of an exercise conducted by Comité Maritime International (CMI – the international association of maritime lawyers), ICS and the IG have produced analysis which concludes that overall the legal infrastructure is sound, though it would be improved if all of the Arctic nations party to the 1992 Fund also subscribed to the Supplementary Fund Protocol. These findings have been included in a CMI report which is expected to be published in 2017.


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