Increasing Compensation for Damage from Oil Pollution - Sharing the Burden

December 2004

Throughout the 1990's, the CLC and Fund compensation regimes* were considered to have operated successfully. However, following a number of serious oil spill incidents - notably the "Nahodka" off Japan in 1997, the "Erika" off France in 1999 and the "Prestige" off Spain in 2002, they have been called into question.

There have been calls for wide-ranging amendments to the CLC/Fund regimes to ensure both that the compensation levels are adequate and that they provide a sufficient disincentive to sub-standard shipping.

The following changes have been agreed:

CLC and Fund Conventions

New CLC/Fund limits were agreed in October 2000 and came into force in November 2003:

• The CLC limit was increased from SDR59.7m ($90.59m)** to SDR89.77m ($136.22m). 
• The Fund limit will increase from SDR135m ($204.86m) to SDR203m ($308.04m).

(If three States contributing to the Fund receive more than 600 million tonnes of oil per annum, the maximum amount is raised to SDR300.74m SDR ($456.36m)) 

The CLC regulates the shipowner's liability and the Fund is made up of contributions from oil importers. The principle is that if an accident at sea results in pollution damage which exceeds the compensation available under the CLC, the Fund will be available to pay an additional amount. In this way, the regime established by the two treaties ensures that the burden of compensation is spread more evenly between shipowner and cargo interests. 

Third tier of compensation - The Supplementary Fund 

In May 2003, IMO adopted a Protocol establishing an International Oil Pollution Compensation Supplementary Fund. The aim of this Supplementary Fund is to supplement the compensation available under the 1992 Civil Liability and Fund Conventions with an additional, third tier of compensation. The Protocol is optional and participation is open to all States Parties to the 1992 Fund Convention. 

The total amount of compensation payable for any one incident will be limited to a combined total of 750m SDR ($1,138m) including the amount of compensation paid under the existing CLC and Fund Conventions. 

Pro-ration will apply where the total of established claims exceeds the Supplementary Fund limit. However, with the limit set at the upper end of proposed levels, there should be no need in the foreseeable future for pro-rating claims for incidents in Supplementary Fund States once it has entered into force. Thus, where the Supplementary Fund applies, victims of oil pollution damage should be fully compensated for their assessed claims. 

The new Fund will come into existence three months after at least eight States have ratified the Protocol, who have received a combined total of 450 million tons of contributing oil. As at November 2004, six states have ratified the Protocol. They are: Denmark, Norway, Finland, France, Ireland and Japan. It is expected that Spain and Germany will ratify in the near future. This will satisfy the provisions for entry into force, both in terms of the number of signatories and the amount of contributing oil.* 

STOPIA … 

As with the 1992 Fund, it will be the oil receiving states that will finance the Supplementary Fund. Addressing the concerns of these states to see shipowners taking a share of the increased compensation burden, P&I Clubs have agreed in principle to a voluntary Small Tanker Oil Pollution Indemnification Agreement (STOPIA). Under this agreement the CLC liability for relevant small tankers is increased to SDR 20m ($30.35) for spills in Supplementary Fund states. 

The wording of STOPIA has yet to be finalised. However, in preparation for its implementation the 2005 Club rules will be amended to ensure that small tankers that fall within the ambit of STOPIA will be a party to the Agreement. 

(In February 2005 Steamship issued a Circular B.422 on STOPIA. Click Small Tanker Oil Pollution Indemnification Agreement (STOPIA) to view.)  

…Or A 50% Share 

Meanwhile, an alternative means of sharing the burden is also currently being considered. International Group Clubs are making a submission to the next IOPC Fund Working Group meeting in February 2005 proposing a scheme under which Clubs would enter into a contractually binding agreement with the IOPC Funds to share equally the burden of compensation imposed by the Supplementary Fund Protocol. 

Such a proposal will be made strictly as an alternative, and not in addition to, the proposed STOPIA scheme and would be on the basis that no further revisions to the CLC/Fund conventions take place. Moreover, it will provide that shipowners only indemnify the IOPC Fund for 50% of any claims paid under the Supplementary Fund Protocol to the extent that such claims would have been recoverable under the CLC convention but for the CLC limit, and such compensation would not be available to the extent that an incident was caused by a terrorist or bio-chemical incident. 

It is the view of the International Group that the compensation regimes are not the place to address the issue of sub-standard shipping. However, the Group will be submitting a separate proposal to the February IOPC Fund Working Group meeting which will suggest actions to address this issue.

 

 

 

*Update 

On 3 December 2004 Spain became the eighth state to ratify the Protocol. Spain's ratification means the instrument has now reached the entry into force criteria. The new Fund will come into existence on 3 March 2005, three months after the date of Spain's ratification.

See also:

Developments in the CLC/Fund Conventions

* The 1969 International Convention on Civil Liability for Oil Pollution Damage (CLC) and 1971 International Convention on the Establishment of an International Fund for Compensation for Oil Pollution (Fund). Protocols to both conventions were adopted in 1992 and came into force in 1996. 

**The daily conversion rates for Special Drawing Rights (SDR) can be found on the International Monetary Fund website under IMF Finances.