Background: What happened in 1999?

On 8 December 1999, the products tanker, the “ERIKA”, set off on a voyage from Dunkirk, France to Livorno, Italy carrying a cargo of 30,000 tonnes of fuel oil. She had been chartered by Total, the world’s fourth largest oil company and the largest company in France. Two days into the voyage, the “ERIKA”, encountered high winds and seas which caused her to develop structural damage to her hull and eventually to break in two and sink. 20,000 tonnes of oil, equivalent to 11 million litres, were spilt into the Atlantic. This caused a slick which spread over 400 kilometres of the French coastline, from La Rochelle in the west to the Brittany coast in the east.

Reaction: What happened after the incident?

Unsurprisingly, there was a large and vociferous public reaction to the incident. Much of the negative feeling was directed at Total, as the owner of the oil. Calls were made by environmental groups for those responsible to be held to account. Politicians reacted, both domestically in France, and in the European Union. The incident contributed to a climate of antipathy towards the oil trading and shipping business, the seeds of which were sown by earlier disasters such as the “EXXON VALDEZ” spill. This climate has lead to a focus in the law towards:

(a) increasing the safety of ships and transportation of polluting materials; and

(b) increasing the liability regimes (both civil and criminal) relating to the transportation of polluting materials.

Politicians reacted to the “ERIKA” incident in the European Union, by accelerating legislation which requires that all oil tankers have double hulls – an extra layer of steel to protect the oil carrying tanks from exposure to the sea (which the “ERIKA” did not have). In France, a criminal investigation was launched which resulted in charges against a total of 15 defendants, including the individuals treated by the courts as representatives of the shipowning company and the ship’s technical managing company, the charterer (Total), the ship’s classification society (RINA) (which is responsible for monitoring and certifying that the ship was seaworthy), the ship’s flag authority (Malta) and a number of individuals, including Total’s shipping manager. The criminal charges included:

(a) endangering human life;

(b) causing pollution;

in addition to which compensation claims were made for damage to property and the environment.

The decision: Who was responsible?

After seven years of investigation and, following a trial that took almost a year from start to judgment, the court gave its decision on 16 January 2008. In summary:

(a) Total was found guilty together with the representative of the shipowner, the

representative of the ship’s technical manager and the ship’s classification society of causing pollution and was ordered to pay damages of E192 million; (b) Total was ordered to pay the maximum fine of E350,000;

(c) The basis of the decision against Total was that it had been careless/did not exercise due caution in chartering the “ERIKA” in that it had not taken account of the age of the ship (24 years) and its condition. This was despite the fact that the vessel had the required certification issued by its classification society certifying that it was seaworthy.

The case makes legal history in two ways. First, it was the first time in France that the law permitted a claim for damages for harm caused to the environment. Secondly, it appears to be the first time anywhere that a charterer has been held responsible for the consequences of an oil spill, where the Civil Liability Convention 1992 applies. The Convention governs oil pollution claims throughout most of the world, excluding the United States. The decision is therefore significant.

Immediate Impact: What does this mean for commodity traders?

The decision has legal, practical and political implications.

Legally, unless the decision is overturned on appeal, (Total are currently considering an appeal) it represents a precedent where the courts in France have been prepared to circumvent the provisions of international law, in order to hold a charterer of a ship liable for the consequences of a breakdown in that ship which leads to pollution. The Civil Liability Convention of 1992 provides that the shipowner is liable for pollution. The finding that the charterer is liable would seem to contradict the position of the Convention. In short, those who charter ships for the carriage of oil should, following this decision, be prepared for the fact that they might be held liable for any pollution caused in French waters. It remains to be seen, if the decision stands, whether it will be followed in other jurisdictions when an incident occurs. The Convention was thought to provide a settled set of principles, on which those involved in the shipping of oil could base their operations and their risk management programmes. Commodity traders have, more and more recently, employed vessel vetting programmes whereby ships chartered by them must satisfy minimum criteria relating to their fitness for the purpose. However, these programmes are voluntary. There is nothing in law which requires them. Interestingly, in the “ERIKA” judgment the Judge criticised Total for not following its own vessel vetting procedures to a sufficiently high standard. It blamed Total for not taking account of the age of the vessel and its condition, despite the fact that it was certified by its classification society. These findings suggest that charterers of ships should carry out their own due diligence as to the ship’s suitability for carrying oil, regardless of any documentation attesting to its condition and/or seaworthiness.

The decision has so far been roundly approved by environmental groups, politicians and the French shipowner’s association. Little or nothing has been said by these groups about the questionable legal basis for holding Total liable.

Wider implications: Where are things going in the future?

A further consequence of the trend towards increasing the liability regimes relating to shipping incidents is that increased scrutiny is being placed on legal corporate structures. The aim in many cases is to “get at” an ultimate parent company that has sufficient assets to pay a large fine/damages award. In an example of this aim, the French president, Nicolas Sarkozy, has stated publicly that he wants to hold parent companies more accountable for environmental actions of their subsidiaries. Currently, many legal jurisdictions around the world recognise the principle of the separate legal personality of a company (otherwise known as the “corporate veil”). Under this principle, only the company can be held liable for its actions. Many oil trading companies have chosen to structure their business to take account of this, separating shipping and trading functions, so that the trading business is protected from the effects of a major shipping incident.

As a matter of English law, subject to certain exceptions, the principle of separate legal personality is strictly upheld. However, it is often argued that a company, despite being a separate legal entity, is acting as the agent of its parent. Where such an agency relationship is proved, the parent will be held liable for the subsidiary’s actions. For that reason, it is essential, for the structure to be effective, that arrangements are put in place to reduce the scope for such arguments. The arrangements should be designed to demonstrate clearly the independent nature of the companies. Relevant considerations would include Directors’ duties in their service contracts, which should be consistent with their obligation to act in the sole interest of one of the companies only; corporate procedures (should be followed strictly); and operational functions (should be physically separate between the companies as far as possible). If there is a blurring of the lines of demarcation between companies, there is scope for the structure to be challenged and, therefore, a risk of a parent company being held liable. Shareholders who are individuals will be similarly at risk unless the appropriate steps are taken.

Officers and Directors of the companies are similarly at greater risk for the actions of the companies they represent. Although ultimately acquitted, Total’s shipping manager faced criminal charges for the duration of the “ERIKA” trial. New legislation comes into force in England in April 2008 which makes it possible to convict a company of manslaughter, that is, unlawful killing of a person, due to failings in the management and health and safety procedures in the company. The legislation specifically requires consideration of whether senior management’s organisation of the company’s activities contributed to the failings. It is foreseeable that any pollution incident governed by English law, which leads to a loss of life, would lead to prosecution of the company under this legislation. If there is a finding of fault on the part of senior management then it is easy to see how this will lead to “piggy back” actions seeking to hold these persons personally liable for offences under Health and Safety legislation.

Conclusion: What are the lessons?

The “ERIKA” decision represents a departure from the liability regime of the Civil Liability Convention 1992. Charterers should now expect that they may be held liable for pollution caused by the ships they charter in French waters and possibly elsewhere. Therefore, oil traders who charter ships will need to ensure that their vessel vetting procedures are robust and that good records are kept of the procedures followed.

Those trading companies that charter ships through separate chartering companies, or those who may now be considering doing so, should expect there to be detailed scrutiny of the link between these companies in the event of a pollution incident. Appropriate care can and should be taken to preserve the separate legal liability of a chartering company.

Public and political opinion is currently such that whenever there is an oil pollution incident, efforts are usually made to hold the party with the deepest pockets responsible. In most cases the most lucrative target will be the oil trader. Little can be done to prevent the reputational damage which follows. Therefore, the onus should be, more than ever, on maintaining and enforcing detailed risk management programmes, which aim to minimise the likelihood of a pollution incident occurring, rather than to mitigate the effects of one.