David Lewin, Managing Director
Maritime Transport: Civil Liability and Financail Guarantees of Ship-Owners
An important turn in European Union (EU) shipping regulation was brought about by the breakdown of Maltese single-hull oil tanker “Erika” in 1999 and the ensuing ecological disaster near the coast of Brittany, France. This accident led to the pollution of almost 400 kilometers (252 miles) of French coastline and aroused considerable public concern about the safety of maritime transport. The wreckage of Erika prompted the European Commission (“Commission”) to improve its rules on the safety of ships used to transport high tonnages of oil in European waters and — if possible — to prevent a similar disaster in the future.
The first attempt to enhance maritime safety at the EU level was the “Erika I” package, adopted on March 21, 2000. It provided an immediate response to the regulatory shortcomings highlighted by the Erika accident, strengthened the control of ports, and accelerated the phasing out of single-hull oil tankers. The second set of measures – Erika II – was adopted in December 2000, improving maritime traffic safety, more effective preventing of marine pollution, and establishing the European Maritime Safety Agency (EMSA) to assist the Commission in an effective implementation of European Community (EC) legislation on maritime safety.
A third step towards safer maritime transportation began on November 23, 2005, when the Commission proposed Erika III, which sought to improve existing EC legislation on maritime safety by means of a more proactive and preventive policy. The seven measures proposed in the Erika III — five of which were adopted – are aimed at strengthening accident and pollution prevention and creation of healthy, sustainable and competitive conditions for operators complying with international rules. The package includes provisions on flag states’ obligations, inspection regimes in EU ports, places of refuge for ships in distress, passenger protection standards, insurance obligations, classification societies, and civil liability issues. The adoption of these measures would strengthen Europe’s maritime environment protection framework and align it with international best practice.
Despite the fact that most of the Erika III Directives were accepted without undue negotiations, two proposals — stricter insurance requirements for ship-owners and the obligations of flag states — encountered opposition at the Member State (MS) level. Some worried that the proposed rules would generate too many additional costs for MS administrations and that, given the global nature of shipping, the Commission had no right to take action in a field which allegedly belongs under international law. Consequently, the two proposals were deadlocked until December 2008. During its Presidency, France took the initiative and re-opened the negotiations on both.
Current State of Play and the Path to Stricter Regulation for Ship-Owners’ Civil Liability
Under the current system, civil liability regimes for ship-owners in Europe are not harmonized, and no compulsory insurance scheme exists. Ship-owners are able to limit their liability even if their professional misconduct resulted in major pollution, as a ship-owner can be held accountable for oil spills only if they resulted from a personal act or omission committed with the intent to cause such damage or recklessly and with the knowledge that such damage would probably result. Consequently, in cases where oil spills do not result from a ship-owner’s personal omission or reckless conduct, the clean-up and compensation costs must be borne by taxpayers of a MS in whose territory the accident occurred.
The initial proposal from the Commission for the Directive on Civil Liability and Financial Guarantees of Ship-Owners sought to put an end to this system by introducing a joint compensation scheme for victims of maritime pollution. The Commission proposed that at least proof of ship-owner gross negligence should trigger unlimited liability. To achieve this result, the Commission proposed a two-phased strategy. As a first step, the 1996 International Maritime Organization (IMO) Convention on Limitations of Liability for Maritime Claims (1996 LLMC Convention) would be implemented within the EU. However, the Commission planned that it would be compulsory for all ship-owners to cover their civil liability for an amount no less than double the limitation amounts laid down in the 1996 LLMC Convention – a level of compensation sufficiently high to cover most accident scenarios. Subsequently, the Commission would have asked for a mandate to launch a revision of the Convention at the IMO, so ship-owners eventually would lose their traditional rights to limit their liability in the event of gross negligence.
The European Parliament (“Parliament”) approved the proposed rules during its First Reading on March 29, 2007. Moreover, Members of the European Parliament (MEPs) voted to strengthen the Commission proposals to increase the liability of ship-owners and compensate third parties and passengers in the event of an accident. The Parliament’s amendments included the establishment of a solidarity fund, which would compensate third parties that have suffered damage caused by ships sailing in EU territorial waters not covered by financial guarantee certificates. In addition, MEPs voted to establish a Community office that would keep a full register of issued certificates, monitor and update their validity, and check the existence of financial guarantees registered by third countries. MS would also monitor compliance with the rules laid down in the Directive and establish penalties for infringements.
The vote in the Parliament was widely echoed among concerned stakeholders. The Vice President of the Parliament’s Transport Committee described the vote as “historic,” because for the first time, the tradition to limit legal accountability of maritime operators was overturned.
The Parliament position was not consistent with the general approach of the Council of the European Union (Council), though. A large majority of MS said they did not support the Directive on Civil Liability and Financial Guarantees of Ship-owners because it was “unnecessary” and “unworkable.” Given their deep economic entrenchment in the maritime sector, several MS — including the UK, Greece and Cyprus — believed that the Commission Proposal would jeopardize their maritime interests. Malta, one of the leaders in European maritime activities, was against most of the initial Erika III proposals, as the package was expected to provide a considerable shakeup to its lucrative flag state regime.
During its Second Reading, the Parliament did not agree with the Council’s modified legislative proposal. MEPs refused to abandon their strict demands and threatened to reject the entire package of maritime safety laws if Ministers did not reevaluate their positions. To demonstrate its determination, the Parliament’s Transport Committee voted unanimously on the Erika III package, reintroducing all the amendments from the First Reading, which the Council has not accepted. MEPs stressed that they did not want the Council to water down important suggestions and deplored the fact that, after more than a year since the First Reading, Transport Ministers were still blocking the obligation for ship-owners’ civil liability.
Ultimately, the package was rescued by France, which had the EU Presidency and was one of the only supporters of the proposal at that time. It put MS under pressure to soften their opposition. During the conciliation talks with Council representatives in early Fall 2008, the Parliament managed to extend the scope of the Directive.
Final Adoption of Erika III
On March 11, 2009, three years after the initial Proposal, the Parliament approved the conciliation agreement bringing the Erika III package to conclusion. The subsequent vote at the Council of Transport Ministers on March 30, 2009 finalized the adoption procedure, as it is required by the EU legislative procedure. Even though the final package falls short of the Commission’s initial ambitions, the adoption of Erika III marks an important step in the development of environmental legislation at sea. The Community now has a completely overhauled system for monitoring vessels in its ports and better tools for sea accident prevention and liquidation of their consequences.
Despite the fact that the Parliament strongly favored the initial Commission proposal, which sought to put in place “core” rules governing civil liability, insurance for ship-owners and the liability of any person responsible for operating a ship, the final version of the Directive on Civil Liability and Financial Guarantees of Ship-Owners is significantly watered down. The agreed text no longer concerns the civil liability of ship-owners, but contains the obligation for ship-owners to have insurance covering possible maritime claims. As a result, the adopted Directive was renamed as the Directive on the Insurance of Ship-owners for Maritime Claims so the title would correspond to the contents.
The adopted Directive requires that all vessels flying the flag of an MS and all ships entering a maritime territory under the jurisdiction of an MS must be insured. However, the initially proposed provision to remove the ceiling of liability established in the 1996 LLMC Convention was dropped because, otherwise, MS would have been obliged by Community law to breach the LLMC limits. According to the current requirements, insurance must be at the maximum levels set by the 1996 LLMC Convention.1
The administrative burden on MS has been reduced compared to the Commission’s initial proposal. MS will be required to obtain proof of insurance from ships flying their flag or entering their maritime territory. During inspections, the port state control authorities will verify whether or not the ship is carrying a commercial insurance certificate. There was a debate about what to do if a ship were found to be under-insured: expel it or detain it. However, the adopted Directive states that ships which do not provide sufficient proof of insurance are to be denied entry into any EU port until the situation is rectified. The penalties for any potential breach will be determined by national legislation. MS are obliged to adjust their laws to comply with the Directive before January 1, 2012, and the Commission is required to present a report to the Parliament and Council every three years on the application of the Directive.
Despite the difficult legislative process, the Commission perceives the Erika III package as a “major step forward for safer maritime transport.” Experts estimate that the insurance required by the Directive covers sums to which 80 percent of the global fleet currently are not subject.
Comments from the Industry
The reaction to the adoption of the Erika III package was generally positive, since the proposals were proactive. Unsurprisingly, the Directive on the Insurance of Ship-Owners for Maritime Claims still raised debates within various shipping organizations, which claimed that this Directive would entail significant additional costs for the shipping industry and increase the administrative burdens.
The Oil Companies International Marine Forum (OCIMF), for example, gave its full support for the objectives of the Directive; however, it had some concerns regarding the meaning of “gross negligence” that it contained. The OCIMF suggested introducing a clearer definition or guidance on this term so the application of the Directive would be more consistent throughout the EU. Moreover, the OCIMF supported closer cooperation and exchange of information between MS while checking the proof of insurance. None of the OCIMF proposals were taken into account, though, as the adopted Directive contains neither a definition for “gross negligence” nor a cooperation requirement for MS.
The International Chamber of Shipping (ICS) firmly opposed the initial proposal of the Directive on Civil Liability and the Financial Security of Ship-Owners, saying that it would “lead to the creation of a mandate for the EU to negotiate unwelcome changes to the IMO Convention on Limitation of Liability for Maritime Claims (LLMC) — with the possible ultimate goal of removing ship-owners’ right to limit liability.” Further, the ICS argued that the rule asking for a ship certificate issued by an MS would create a cumbersome bureaucracy and could amount to a technical barrier to trade in insurance services, contravening EU obligations under World Trade Organization (WTO) law. Since these provisions were not adopted in the final version of the Directive on the Insurance of Ship-owners for Maritime Claims, though, the ICS seems to be less concerned.
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- Article 6 of the 1996 LLMC Convention establishes limits on liability that are sufficiently high to guarantee adequate compensation to victims in most cases. The limit amounts are expressed in the “Units of Account” — i.e., a special drawing right that is defined by the International Monetary Fund.