Many may recall news reports covering vessel casualties and the environmental impact that may arise in the event of there being oil pollution, such as was the case in the relatively recent grounding of the bulk carrier “Wakashio” off Mauritius in July 2020, resulting in a significant spillage of bunker fuel oil into a sensitive maritime environment.

The carriage of goods by sea is, by its actual nature, a venture perennially beset by risk, and many in society would be unaware of the legal implications and liabilities that arise from shipping casualties. As the “Wakashio” incident demonstrates, those risks can be very substantial with the potential to jeopardise the existence of the shipowner in the absence of insurance protection. The compensation that may be due to the victims of maritime casualties and any associated fines can be very significant for a shipowner and they are protected in respect of that financial exposure by the insurance coverage of Protection and Indemnity (P&I) Clubs.

The Clubs provide cover for liabilities, losses, damages, costs and expenses caused by or as a consequence of the escape or discharge (or threatened escape or discharge) of oil or any other substance from an entered ship. This may include measures taken to clean-up any pollution, the cost of steps taken to prevent an imminent danger of pollution plus compensation for loss, damage or contamination arising from the escape or threatened escape of oil.

Oil pollution liabilities covered by P&I Clubs can generally be divided into two groups: oil pollution arising from oil tankers and bunker spills from any type of vessels entered with the Clubs.

Oil Pollution caused by oil tankers

The International Maritime Organisation (IMO) developed the Civil Liability Conventions 1969 and, more latterly, 1992 (CLC 92¹) to govern liability for oil pollution from tankers.

CLC 92 provides the framework for the first tier of compensation to be paid by the owner of a tanker causing pollution damage, with ‘oil’ defined to include any persistent hydrocarbon mineral oil, such as crude oil, fuel oil, heavy diesel oil and lubricating oil.

Under CLC 92, the owner is strictly liable for any oil pollution damage from its ship unless the circumstances fall within one of the stated exceptions from liability. These exceptions are very narrow and will only apply in very limited circumstances so in general there is an obligation to pay compensation even if the pollution incident arose where there is no fault on the part of the owner.

In exchange for accepting strict liability, the owner is permitted to limit its liability by reference to the tonnage of the ship and those ships carrying more than 2,000 tons of oil in bulk as cargo are required to have in place financial security to meet the owner’s liabilities under the Convention.

The IOPC Funds

In addition to the compensation due from the owner under CLC 92, a second tier of compensation for oil pollution is available under the 1992 Fund Convention². The Fund provides compensation up to SDR 203m (approximately US$ 285m) paid for by a levy on the receivers of oil in States Parties to the Convention. Approximately 32 States are also signatories to the Supplementary Fund, a third tier of compensation up to approximately US$1 bn. These second and third tiers of compensation are administered by the IOPC Funds³.

Bunker spills

Oil⁴ is of course carried on board all types of vessel in the form of fuel, or bunkers. The International Convention on Civil Liability for Bunker Oil Pollution Damage 2001 (the ‘Bunkers Convention’) came into force in 2008.

While CLC 92 requires the oil to be persistent, the Bunkers Convention applies to spills of any oil types provided they are used or intended to be used for the operation or propulsion of the ship.

The Bunkers Convention regime is similar to CLC 92 save that it is a single tier compensation regime and the limit of liability of the owner is determined by national legislation or an international limitation regime (such as the Convention on Limitation of Liability for Maritime Claims, or LLMC) where applicable.

Like CLC 92, for ships with a gross tonnage of greater than 1,000gt, the Bunkers Convention requires the registered owner to maintain financial security to meet its obligations under the Convention.

P&I Clubs play a crucial part providing the financial security owners need to meet their obligations under these International Conventions, achieved by issuing certificates known as Blue Cards to demonstrate that the ship has insurance to cover these liabilities.

Vessels entered with the P&I Clubs are automatically enrolled with the International Tanker Owners Pollution Federation (ITOPF). In the event of a spill or threat of a spill of oil, chemicals or other substance in the marine environment ITOPF’s technical advisers are available to attend the location on a non-profit basis and provide invaluable assistance to local governments or authorities in how best to respond to the incident and thereby assisting in mitigating cost for the shipowner and the Club.

P&I Clubs have a vital role in society through the Club’s insurance coverage and incident handling to ensure that not only the shipowners’ liabilities are protected but more importantly the victims of pollution incidents receive fair compensation as promptly as possible and that the environmental impact is mitigated effectively.

1 The Convention applies to pollution damages arising within the territory, exclusive economic zone or equivalent of a State Party to the Convention. The CLC92 has been ratified, at the time of writing, by 145 State Parties to the IMO.

2 The Fund Convention has been ratified, at the time of writing, by 118 States Parties to CLC 92.

3 The IOPC Funds are intergovernmental organisations with headquarters in London.

4 Under the “Bunker Convention”, Bunker Oil includes ‘any hydrocarbon mineral oil, including lubricating oil, used or intended to be used for the operation or propulsion of the ship, and any residues of such oil’.