“Polluters pay principle” confirmed

At the end of last year, the French Cour de Cassation confirmed a ruling of the ECJ in relation to a claim for oil pollution. Applying the “polluter pays” principle, the European Court of Justice (ECJ) decided that oil spilled from a ship falls within the scope of “waste” as defined under the Waste Framework Directive (75/442/EC) (WFD)1 and that the “holder” of the waste is responsible for the clean up and compensation to the community so affected.

The case arises from the loss of the Erika in December 1999, which polluted the coast of Brittany. Although the cargo owners Total, together with the shipowners and the classification society, were found liable to pay €192 million in compensation to victims of the spill, the village of Mesquer brought claims under the WFD.  

Civil liability for maritime oil spills potentially widens

This decision serves to unsettle the previous certainty surrounding civil liability for maritime oil spills. It is of particular relevance to owners of oil cargoes, ship operators and tanker charterers who could be held accountable for the cost of clearing up in the event of an oil spill beyond the limits established by the International Convention on Civil Liability for Oil Pollution Damage. In effect this exposes certain parties to unlimited liability for oil pollution and may be a step towards dismantling the international consensus (excluding the USA) that has existed since the aftermath of the Torrey Canyon spill in the 1960s. Indeed it could be said that the ruling makes EU law more oppressive than the US Oil Pollution Act 1990 (OPA), which was enacted following the Exxon Valdez spill, in that the class of persons against whom claims may be made is much wider than under OPA and such liability is potentially unlimited.

Compensation under the IMO Conventions

The International Convention on Civil Liability for Oil Pollution Damage (adopted in 1969 and amended by the 1992 Protocol) (CLC) in conjunction with the International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage (adopted in 1971 and amended by the 1992 Protocol and as further supplemented and amended in 2003) (Fund Convention) are intended to ensure that adequate compensation is available to the victims of a maritime oil spill who suffer oil pollution damage. The CLC provides for the strict liability of the shipowner, and it is the duty of the shipowner to prove that any of the (limited) exceptions apply. Actions against persons other than the shipowner are “channelled” back to the shipowner under the CLC and ensures that the shipowner remains solely responsible for oil pollution damage up to a certain limit. The limitation of the shipowner’s liability is capped by a calculation relating to the ship’s tonnage although the shipowner may not limit liability if it is proved that the pollution damage resulted from the shipowner’s personal act, whether recklessly or with intent, and knowing that such damage would probably result. However, this is almost impossible to prove and therefore the limit is effectively unbreakable. Compulsory insurance in relation to a single incident grants the shipowner immunity from further liability and victims are given the right of direct action against the insurer under the CLC. However, the CLC leaves the issue of responsibility for clean-up of oil pollution damage to national and local governments.

Problems where compensation proves inadequate

As the liability of the shipowner is linked to the ship’s gross tonnage, insurers are able to gauge the “worst-case scenario” which may result from a casualty and allows them to allocate risk with a degree of certainty. The Fund Convention works in tandem with the CLC by providing a fund (commonly known as the IOPC Fund) which is contributed to by importers of oil to provide additional compensation to the victims of pollution damage where compensation under the CLC proves inadequate. This was seen as a reasonable balance between shipowners and the cargo interests that hired such ships. Unfortunately, in the case of the Erika and later, the Prestige the upper limits of compensation were set too low and consequently when a major oil spill of very persistent fuel oil occurred in a developed country the amounts available for compensation were found to be inadequate and many people were left uncompensated or the national and local governments were left to face the bill. It was due to this that ways to circumvent the CLC were explored.

Three key questions in Erika case

In 2007 the Cour de Cassation directed three specific questions to the ECJ.

  • First, can fuel oil, intended to be sold as a product by the producer, be classified as waste within the meaning of the WFD?
  • Secondly, if so, should fuel oil accidentally spilled at sea and either on its own or when mixed with water and sediment constitute waste?
  • And lastly, can the producer of the fuel oil spilled at sea, and/or the seller of that oil and charterer of the ship carrying it, be required to bear the costs of the waste, even though the substance spilled at sea was being transported by a third party (namely, the shipowner)?

ECJ rulings on key questions - the Erika decision

In the Commune de Mesquer v Total France SA and another2, the ECJ followed the principles set out in the land oil pollution Van der Walle3 case. In answering the first question the ECJ ruled that fuel oil cannot be classified as waste under the WFD when it is in the process of being exploited or marketed on economically advantageous terms and is capable of being used as a fuel without requiring prior processing. However, in answering the second question the ECJ established that hydrocarbons accidentally spilled at sea and mixed with water and sediment constitutes waste under the WFD.

The ECJ also ruled that the national court (in its own discretion and having regard to the particular circumstances in each case) may regard the seller and/or charterer of the fuel oil as a producer of the waste within the meaning of Article 1(b) of the WFD - and therefore also as a previous holder for the purpose of Article 15 - and as having contributed to the risk that the pollution would occur.

If the cost of disposing of the waste is not borne by the Fund Convention (or cannot be borne if the compensation ceiling is reached and the shipowner’s liability is limited) then the national court would have to make provision for that cost to be borne by the producer/previous holder. In other words, if the limits of financial liability are reached under the CLC and IOPC Fund Convention, and the national court believes, for example, that the charterer’s choice of ship has contributed to the pollution damage and also deems them to be “holders” of the waste under Article 1(c), the charterer can be made to bear the additional costs. In sum, the “polluter pays” principle within the WFD applies and the previous “holder” of the fuel oil can be held liable for the cost of the clean up.

Article 15 liability on previous holder or producer of waste

Article 15 of the WFD states that the cost of cleaning up the oil spill must be borne by the “waste holder who has waste handled by a waste collector or a waste undertaking and/or the previous holder or producer of the product from which the waste came”. Therefore whilst the shipowner should be regarded as the “holder of the waste” as it had immediate possession of the oil before the spill, Article 15 also permits the “previous holder or producer of the waste” to be liable in the event of a spill.

WFD is applicable law and ECJ is not bound by IMO Conventions

In response to the question of whether the WFD is the appropriate legislation to apply to the case or whether, as the Total companies argued, the issue of liability and compensation should be governed by the IMO Convention, the ECJ stated that the Community had not acceded to those international conventions and furthermore as not all EU member states are bound by the conventions, the Community was not bound either. Additionally, it decided that as the spillage had taken place with the Exclusive Economic Zone of a member state, it was lawful to apply the WFD to the scenario. The ECJ also implied that even if the spillage had occurred in open sea as the oil had washed up on a member state’s shore the WFD would still apply. The ECJ then returned the case to the Cour de Cassation to decide whether compensation should be paid by the Total companies to Mesquer.

ECJ decision - a departure from accepted maritime law?

The ECJ decision, as confirmed by the Cour de Cassation, marks a departure from the generally accepted international maritime law that compensation for oil pollution should be provided by the shipowner, his insurer and the oil pollution fund. The CLC deliberately channels liability in this way and prohibits claims against other parties, such as cargo owners so that the limit imposed under the CLC cannot be circumvented.

However, the decision on the WFD directive means that if the victim is not fully compensated by the funds available through the CLC and Fund Convention, then they may make separate claims under the WFD against charterers and/or the owner or seller of the oil cargo. This raises the spectre of effectively unlimited liability and takes the EU beyond the USA in terms of imposing liability on a much broader class of persons involved in the transportation of oil.

Despite not falling within the ambit originally envisaged by the drafters, the absence of any exclusion in the WFD stating that it only applies to the extent that any oil spill damage falls outside the scope envisaged by international conventions means that this EU directive effectively prevails over the international law obligations of member states in the event that compensation limits are insufficient and a charterer/seller is believed to have contributed to the risk.

“Polluter pays” principle tantamount to a test of negligence?

The new WFD came into force on 12 December 20084 and must be implemented into national legislation by member states by 12 December 2010. Although the new legislation has not yet tested any circumstances similar to those of the Erika, the introduction of the “polluter pays” principle seems to amount to a negligence test when allocating contribution of risk (and therefore costs) in the aftermath of a maritime oil spill.

This is a much less strict test than currently provided for under the CLC, which requires intention or recklessness before the charterer can be liable for any damage caused by the spill over and above the limit of liability. Further concern is that insurers may be more reluctant to provide insurance in respect of oil spills as there is a greater degree of uncertainty surrounding the amounts which could be paid out. As already mentioned, the CLC grants victims direct rights of action against the shipowner’s insurers. In the case of a charterer or cargo owner, the likelihood is that they would not have similar insurance in place and therefore any liability would not be covered by their P&I club. Therefore, it would be prudent for charterers and sellers of fuel oil to consider the need for separate insurance in the event that they are also held accountable for the costs of clean-up following an oil spill. Without doubt, the vetting of tankers by charterers and owners of oil cargoes is now of paramount importance and this process will need to be exhaustive and rigorous if these parties are to any have chance of fighting charges of negligence and disproving contributory risk to the oil pollution damage in both the civil and criminal spheres.

ECJ decision - a concern for the wider maritime community

Whilst initially raising more questions than it solves, the ECJ decision should serve as a warning to all those involved in the selling and transportation of oil - and other potentially polluting substances - to consider very carefully the quality of the ship and the shipowner or operator chosen to transport that cargo and generally exercise particular care when vetting tankers. The development should also concern the IMO and the maritime community at large as it confirms a worrying trend for the EU as an institution to ignore international conventions, to which its member states are signatories, when it is convenient to do so. If the EU continues in this way then the international consensus on such regulations will be undermined with worrying consequences for international trade by sea.