Table of contents
1 The Association shall cover fines or other penalties imposed upon a Member (or, imposed upon a third party whom the Member is legally obliged to reimburse or whom the Member reimburses with the Agreement of the Association) in respect of the Ship by any court, tribunal or other authority of competent jurisdiction for or in respect of any of the following:
a short- or over-delivery of cargo, or failure to comply with regulations concerning the declaration of goods, or documentation of cargo, provided that the Member is insured by the Association for cargo liability under Rule 34 (other than fines or penalties arising from smuggling of goods or a cargo or any attempt thereat);
b breach of any immigration law or regulations;
c the accidental escape or discharge of oil or any other substance or threat thereof, provided that the Member is insured for pollution liability by the Association under Rule 38, and subject to the applicable limit of liability under the P&I entry in respect of oil pollution risk.
2 The Association may, in its sole discretion, cover in whole or in part a fine or penalty other than those listed in Rule 47.1 above imposed upon the Member (or imposed upon a third party whom the Member is legally obliged to reimburse), provided the Member has satisfied the Association that he took such steps as appear to the Association to be reasonable to avoid the event giving rise to the fine or penalty.
3 The Association shall be under no obligation to give reason for its decision pursuant to Rule 47.2 above.
For further commentary see Chapter 8 of the Gard Guidance on Maritime Claims and Insurance.
Every Member of the Association is expected to operate his Ships in compliance with the laws and regulations that apply where his Ships are trading. He is expected to have, or to obtain knowledge about, all such laws and regulations, and to ensure to the best of his ability that he complies with them.
A distinction is drawn in the Rules between conduct that may result in the cesser of cover and conduct that, whilst not resulting in cesser of cover, will, nevertheless, deprive the Member of cover for liabilities, losses, costs and expenses that arise as a result of certain conduct. Secondly, a distinction is drawn between serious offences or violations of regulations that are committed with or without the knowledge of the Member, and less serious offences or violations of regulations that are caused by the acts or omissions of the master or Crew in the course of their duties and employment but without the knowledge of the Member. For example:
However, subject to such restrictions, cover is available as of right under Rule 47 for fines or other penalties that may be imposed either directly or indirectly on the Member for certain prescribed offences whilst, in the case of other offences, cover may be available only if the Board of Directors of the Association decide to exercise their discretion to extend cover. Rule 47.1 itemises the categories of fines and penalties for which cover is available, whereas Rule 47.2 gives the Association the discretionary right to cover fines and penalties in circumstances other than those itemised in Rule 47.1. However, it is important to note that cover is available only in respect of fines and penalties that have been incurred in direct connection with the operation of the Ship, and in respect of the Member’s interest in the Ship, and as a result of events that have occurred during the period of entry of the Ship in the Association.1
(A) …fines or other penalties… (Rule 47.1)
The cover that is available as of right pursuant to Rule 47.1 for fines or other penalties that are imposed on the Member is specifically restricted to the categories of fines or other penalties that are itemised in sub-paragraphs a, b and c of that Rule and is based on a ‘model Rule’ that has been agreed between the P&I clubs that are parties to the Pooling Agreement. This ‘model Rule’ is designed to strike a balance between, on the one hand, accidental or non-deliberate law infringements that are considered difficult to avoid given the trading environment in which ships normally operate, and which are, consequently, considered to be mutual risks that should be shared by the membership and, on the other hand, those infringements that a Member should have taken steps to avoid and which are not considered to be mutual risks but risks that should be for the Member’s own account.
Rule 47.1 does not define the terms ‘fines’ or ‘other penalties’. However, for the purposes of Rule 47.1, a ’fine’ is considered to be a monetary punishment that is imposed by a public authority that is empowered under the applicable law to impose such a punishment for a violation or infringement of any applicable laws or regulations, and which has the legal means to enforce it in the country, port or place in question.
Similarly, for the purposes of Rule 47.1, the term ‘other penalties’ is considered to include any other form of monetary punishment that is not considered to be a fine by the imposing authorities, e.g. a penalty imposed by a customs authority for the alleged shortlanding of a cargo.
However, in reality a ’penalty’ is in many cases merely a ‘fine’ under another name and therefore, the phrase ‘fines or other penalties’ encompasses most types of monetary punishment, but does not extend to the confiscation by authorities of the Ship2 or the Member’s other assets.
(B) …imposed upon a Member… (Rule 47.1)
Cover is available under Rule 47.1 for the fines or other penalties that are itemised in sub-paragraphs (a) to (c) of the Rule when they are imposed upon the Member by a court, tribunal or other authority of competent jurisdiction. In this context, the Member also means any Joint Member or Co-assured, as well as any Affiliate to whom the Association may exercise its discretion to extend cover.3
Whilst the laws of some countries permit enforcement action to be taken against the Ship in rem, with the consequent risk that the Ship may be arrested, attached, detained and, ultimately, auctioned, cover is not available under Rule 47.1 in such circumstances unless the fines or other penalties in respect of which action has been taken against the Ship, have also been imposed on the Member. Therefore, cover is not available for fines or other penalties that are imposed not on the Member but simply on the Ship and which relate to violations or infringements that occurred at a time when the Ship was owned by someone other than the Member.
(C) …imposed upon a third party whom the Member is legally obliged to reimburse or whom the Member reimburses with the Agreement of the Association… (Rule 47.1)
Whilst cover is not directly available for fines or other penalties that are imposed, not on the Member, but on other individuals who may be employed, engaged or appointed by the Member, cover is, nevertheless, available if the Member is legally obliged to indemnify that person in respect of such fines or other penalties. Such individuals normally include the master and Crew members of the Ship on the basis that the Member usually has a legal obligation pursuant to the terms of their employment to indemnify them for, or to hold them harmless against, any fines or other penalties that are imposed upon them personally as a result of acts or omissions that are committed by them within the scope of their duties and employment on board.
Similarly, cover is available for any legal liability that the Member may have to indemnify independent contractors such as a firm of engineers that has been contracted by the Member to conduct main engine repair works while the Ship is in port, or for the legal liability that a charterer Member may have to indemnify the owner of the Ship as a result of the charterer’s failure to provide cargo manifest information that is compulsorily required by the relevant authorities pursuant to port security regulations. However, in both cases, cover is available only if the Association has previously approved the terms of the contract or indemnity that imposes the duty to indemnify the Member.4
In some circumstances, the Member may wish to reimburse a third party in respect of a fine or other penalty that has been imposed upon that party even though the Member does not have a legal obligation to do so. For example, the Member may wish to indemnify a master in respect of a fine that has been imposed personally on him even if there is no obligation to do so under the contract of employment. Although the Association has no obligation to make cover available in such circumstances, cover may be extended if the Member obtains the agreement of the Association to indemnify the master. However, the Member should always endeavour to obtain such agreement before entering into any commitment to indemnify the third party in question.
(D) …in respect of the Ship… (Rule 47.1)
The fine or penalty that is imposed on the Member must have been incurred by him in his capacity as the owner and/or operator of the Ship. For example, if the Member is an owner of an oil tanker that is entered in the Association, but is also the operator of an oil terminal, cover would not be available for fines or other penalties that the Member has incurred in his capacity as operator of the terminal.5 Similarly, cover is not available for fines and penalties that a Member that is also the owner of the cargo that is carried on the Ship (e.g. a Member who is a charterer) has incurred in his capacity as owner of the cargo.
(E) …by any court, tribunal or other authority of competent jurisdiction… (Rule 47.1)
Cover is available under Rule 47.1 only if the Member can demonstrate that the fine or penalty has been imposed by a court, tribunal or another authority of ‘competent jurisdiction’, i.e. an authority that is empowered under the applicable law to impose such punishment, e.g. the customs authorities, the coast guard or an environmental protection agency. The Member is required to investigate and verify the applicability of the law or regulation based upon which the fine or penalty is being imposed, and the legal competence of the authority that is purporting to impose the fine or penalty. This is usually done by taking advice from local P&I correspondents or legal counsel.
Most countries have a system of law that enables a person upon whom a fine or penalty has been imposed by administrative public authorities to appeal to a court or a higher authority. Whilst it is not a pre-requisite of cover that the Member must have requested appellate review of any fine that has been imposed upon him, the Member is obliged to take, and to continue to take, such steps as may be reasonably necessary in order to minimise the liability of the Association, and to consult the Association in this regard.6 The question of whether the Member should simply pay the fine when first imposed, or seek appeal to a court or higher authority is an issue that must be determined on a case by case basis in the light of the particular facts, the applicable law or regulations and the likelihood of obtaining a fair hearing in the country in question.
Comment is made in (F) – (L) on the specific types of fines or other penalties for which cover is available whereas comment is made in (M) and (N) on the other circumstances in which the Association has a discretion to extend cover.
(F) ...short or over-delivery of cargo, or failure to comply with regulations concerning the declaration of goods, or documentation of cargo… (Rule 47.1.a)
Cover is available under Rule 47.1.a if the Member has failed to comply with regulations that govern ‘cargo’ documentation or the declaration of ‘goods.’ However, whilst the Rule refers to both terms, no distinction is intended and, for the purposes of Rule 47.1.a, the terms ‘cargo’ and ‘goods’ are intended to be interchangeable.
The customs laws and regulations of many countries empower the local customs authorities to impose a fine or some other similar penalty on a carrier of cargo in the event that there is a discrepancy between, on the one hand, the marks, number, quantity or weight of cargo that is described in the Bill of Lading, waybill or some other transport document such as cargo manifest and, on the other hand, the actual marks, number, quantity or weight of cargo as ascertained by those authorities after discharge of the cargo from the Ship. The customs authorities of some countries are particularly strict in carrying out their duties in this regard and may impose fines or other penalties even when the discrepancies are either very small or unavoidable given the nature of the cargo, e.g. where a dry bulk cargo loses weight during the course of transit as a result of evaporation caused by the inherent moisture content of the cargo on loading.
Fines and penalties are often imposed as a result of the failure of the carrier to present a cargo manifest on time and/or to make accurate cargo declarations in the manifest, and/or for short-delivery of cargo, i.e. when less cargo has (allegedly) been delivered than that which is recorded in the Bill of Lading etc., and/or for over-delivery of cargo, i.e. when more cargo has (allegedly) been delivered than that which is recorded in the Bill of Lading etc. Cover is available in all these circumstances.
Whilst cover is not restricted to fines and penalties that have been imposed by customs authorities, cover is called upon most usually in such circumstances. However, cover is also available for fines and penalties that have been imposed on the Member as a result of the failure to provide an accurate cargo manifest by authorities that have the responsibility for port security. Nevertheless, the Member is considered to have failed to comply with regulations that apply to ‘documentation of cargo’ notwithstanding the fact that the regulations are designed primarily to protect the port against terrorist attacks.7
The expression ‘goods’ is broader in scope than ‘cargo’ and will comprise necessary supplies and other objects on board that are not carried as cargo. This may include stores such as medical supplies, food or other provisions or consumer goods. Therefore, Rule 47.1.a also provides similar cover for fines that may be imposed by authorities who allege that there are discrepancies in a vessel’s manifest that relate to her stores, medicine chest, or bunkers on board. However, objects that are part of the Ship’s permanent equipment are not deemed to be ‘goods’ for the purposes of Rule 47.1.a.
(G) ...provided that the Member is insured by the Association for cargo liability under Rule 34… (Rule 47.1.a)
Fines falling within Rule 47.1 .a will typically relate to cargo carried on board. For that reason, the cover for fines under sub-paragraph (a) is made conditional upon the Member being covered for cargo liability under Rule 34. In other words, cover is not available under Rule 47.1.a for fines etc., where the Member, as a result of special terms of entry, has excluded cargo liability as provided by Rule 34 from the scope of the Ship’s P&I cover. However, if the Ship is covered for such cargo liability, the fact the incident being the basis for a fine or penalty also gives rise to liabilities excluded from the scope of cover by virtue of the special exclusions in Rule 34.1.i to xi does not in itself deprive the Member of the right to recovery under Rule 47.1.a. In such circumstances, the Member is still deemed to be insured for cargo liability for the purposes of Rule 47.1.a.
(H) …(other than fines or penalties arising from smuggling of goods or cargo or any attempt thereat)… (Rule 47.1.a)
The effect of the bracket is to exclude from cover fines that are imposed upon the Member based on the alleged smuggling of cargo or goods or any attempt thereat. Although providing cover for smuggling fines may not necessarily be unlawful, it may be seen by governments and other authorities as undermining the intended penal and corrective effect of the regulations and, consequently, to be contrary to public policy. For that reason, standard terms of cover offered by the International Group Clubs do not provide insurance as of right for smuggling fines. This is the case even if there has been no intentional or reckless unlawful conduct on the part of the Member.
For these purposes ‘smuggling’ means the offence of importing prohibited articles, or of defrauding the revenue by the introduction of articles into consumption, without having paid the duties that are chargeable upon them. In practice ‘smuggling’ occurs when cargo or goods are brought into a country in a manner designed to avoid detection by the local authorities and in order to avoid any embargos that are imposed by the criminal laws of that country, e.g. laws prohibiting the importation of drugs, or in order to avoid or circumvent the importation laws and regulations of that country, e.g. import taxes, customs dues etc. The exclusion also applies to the smuggling of “goods” the meaning of which is considered in paragraph (F) above.
(I) …breach of any immigration law or regulations… (Rule 47.1.b)
The immigration laws and regulations of a country govern the extent to which any person that is not a citizen of that country may enter and reside in that particular country. Such laws and regulations will usually require persons who are not citizens of that country to show, on arrival at that country’s border, such evidence of permission to enter that country that is required from the citizens of the country where the person that is seeking entry is domiciled, e.g. a passport, visa or other similar documentation. A person who violates the relevant immigration laws or regulations may not only be arrested, held in custody or deported, but may also be made liable to pay fines or other penalties, including any costs that may be incurred by the relevant authorities in this regard. Common examples of violations occur when Crew members cross a border without permission, or stay in a country for longer than is permitted by the conditions of the relevant visa.
Cover is available under Rule 47.1.b where a fine is imposed on the Member as a result of a breach by him, or by a person whom the Member is obliged by law to reimburse, of any such immigration law or regulations. For example, cover is available if the Member is held responsible by the authorities as a result of the desertion of Crew members from the Ship, or if stowaways that are held in custody on board the Ship escape ashore while the Ship is in port and are subsequently apprehended by the local authorities. Cover is also available if an operator of a passenger Ship or ferry is held responsible by the local authorities when passengers enter the country at the Ship’s port of call without a proper visa.
Immigration laws or regulations may also require the repatriation of Crew members or passengers if the Ship is detained or arrested in port in circumstances where there is no prospect that the Ship will be able to resume trading in the immediate future. Cover for costs and expenses that are incurred by a Member in relation to such repatriation is not available under Rule 47.1.b, but may be recoverable under Rules 27 or 28.8
(J) ...accidental escape or discharge of oil or any other substance or threat thereof... (Rule 47.1.c)
Cover is available for fines or penalties that are imposed on the Member as a result of the accidental discharge or escape of oil or any other substance from the Ship or as a result of a threat thereof. However, the cover is not restricted to incidents where the Ship is the source for the pollution. Rule 47.1.c comprises also fines and penalties imposed on the Member in respect of accidental escape of oil or any other substances from sources other than the Ship as long as the Ship is directly involved in the casualty or event giving rise to the penalty or fine and the Member has incurred the fine in his capacity as owner or operator of the Ship. Practical examples on accidental escape of oil or any other substances from sources other than the Ship can be fines or penalties imposed on the Member in respect of pollution from a shore installation caused by the Ship in a FFO case or from the other ship in a collision case. The general requirement as to cover as set out in, inter alia, Rule 2.4 must be satisfied.
The term ’other substances’ is widely construed and includes, inter alia, garbage and water that is used to wash a hold or deck. A further increasingly common example is where a fine is imposed on a Ship that breaches air pollution rules, usually because the Ship has entered an area where only low sulphur fuel can be used, and the Ship does not have such fuel on board or fails to use it correctly so as to breach local air pollution regulations. However, cover is available under Rule 47.1.c only if the discharge or escape is ‘accidental.’
An escape or discharge would normally be considered to be accidental if caused, for example, by:
However, an escape or discharge would not be considered to be accidental when, for example:
oil or any other pollutant has been discharged or allowed to escape as a result of infringements or violations of or non-compliance with the provisions regarding construction, adaptation and equipment of ships contained in the International Convention for the Prevention of Pollution from Ships, 1973, as modified or amended by the Protocol of 1978 and any subsequent Protocol (MARPOL 73/78) or such of those aforesaid provisions as are contained in the laws of any State giving effect to that convention or to such protocol(s); or
oil or any other pollutant has been intentionally discharged or allowed to escape from the Ship even if this was thought to be justifiable in the circumstances, e.g. the jettison of crude oil for safety purposes after a casualty; or
(K) ...provided that the Member is insured for pollution liability by the Association under Rule 38... (Rule 47.1.c)
Rule 38 outlines the scope of cover that is available for liabilities, costs and expenses that arise in consequence of the discharge or escape from the Ship of oil or any other substance, or as a result of the threat of such discharge or escape.9 Cover for pollution-related fines is expressly excluded under Rule 38 since cover for such fines is made available under Rule 47. However, if a Member is not insured by the Association for pollution liability pursuant to Rule 38, the cover that would otherwise have been available for fines and penalties under Rule 47.1.c is not available. Furthermore, it is unlikely that the Association would exercise its discretion to extend cover to the Member pursuant to Rule 47.2 in such circumstances, in view of the fact that the Member has chosen to exclude pollution liability cover under his terms of entry for the Ship.
(L) ...and subject to the applicable limit of liability under the P&I entry in respect of pollution risk… (Rule 47.1.c)
The liability that the Association has for claims for oil pollution is subject to special limits depending on whether the Ship is entered on behalf of an owner or a charterer. Furthermore, the Member and the Association may have agreed special terms of entry for the Ship, as a result of which, a special limit may apply for pollution liability. Rule 47.1.c stipulates that whatever the applicable limit may be, it shall apply to the sum total of the cover that is available for the liabilities etc., under Rule 38 and for fines and penalties under Rule 47.1.c.
(M) The Association may, its sole discretion, cover in whole or in part a fine or penalty other than those listed in Rule 47.1… (Rule 47.2)
The reason why cover is restricted in the case of the fines and penalties that are itemised in Rule 47.1 has been explained in (A) above. However, Rule 47.2 recognises the fact that restricting cover in this way may, in exceptional cases, cause hardship to the Member. Consequently, subject to the conditions that are imposed by Rule 47.2, the Association is given the discretion to cover in whole or in part a fine or penalty that has been imposed upon the Member, or upon a third party whom the Member is legally obliged to reimburse, in circumstances other than those described in Rule 47.1. However, for the avoidance of doubt, the Association is unlikely to exercise its discretion to provide cover for fines relating to the smuggling of cargo or goods, the cover for which is excluded under Rule 47.1.a.
Discretion is exercised by the Board of Directors of the Association which will consider any application which the Member wishes to make under Rule 47.2 after the Member has paid the fine or penalty, and after the Member has provided a full and complete explanation of all the relevant circumstances that resulted in the imposition of the fine or penalty upon the Member. Whilst each case is considered on its own facts, the Board of Directors is under no obligation to give reasons for any decision that it reaches in relation to such application for cover.10
(N) …provided the Member has satisfied the Association that he took such steps as appear to the Association to be reasonable to avoid the event giving rise to the fine or penalty… (Rule 47.2)
Discretion cannot be exercised in favour of the Member under Rule 47.2 unless and until the Member has demonstrated to the satisfaction of the Association that he took steps that are considered to be reasonable in order to avoid the event that gave rise to the fine or penalty. The onus is on the Member to convince the Association in this regard and to provide all relevant information and documentation, and to give all the assistance that the Association may require in order to enable it to properly investigate the claim.11
However, even if the Member satisfies all such requirements, the Association is under no obligation to exercise its discretion in favour of the Member. The Association must consider the interests of the membership as a whole, and may conclude that the event that gave rise to the fine or penalty was of such a nature, or had such characteristics, that it would be contrary to the interests of the membership as a whole to make cover available for the claim even if the Member had taken all reasonable steps to avoid it.
For example, the Association might decide to exercise its discretion in favour of the Member in the case of a fine or penalty that has been imposed on the Member for the discharge or escape of oil from the Ship, if the Member convinces the Association that there has in fact been no such discharge or escape of oil, and that the fine or penalty has been wrongfully imposed on him as a result of an unjustifiable act by the relevant authorities.
Similarly, the Association might decide to exercise its discretion in favour of the Member in the case of a fine or penalty that has been imposed upon the Member for a breach of a regulation that was impossible to avoid since no information had been made available to the Member about the circumstances that would result in the breach, e.g. where the relevant authorities have prohibited the anchoring of ships in certain coastal areas but have not released the relevant information into the public domain, and the charts that are available for the areas do not indicate any such restriction.
(O) The Association shall be under no obligation to give reasons for its decision pursuant to Rule 47.2 above. (Rule 47.3)
Rule 47.2, like the ‘Omnibus Rules’ of other P&I clubs, empowers the designated decision-making body of the Association, i.e. the Board of Directors, to consider and determine whether, in the context of mutual insurance, and with due regard to the interests of the membership as a whole, a claim that does not fall within the scope of cover that is provided by the Rules should, nonetheless, be compensated by the membership.
The decision of the Board of Directors is to be final in this regard and it need not give any reasons for its decision. By agreeing to the Association’s Statutes and Rules, Members have agreed and confirmed that claims made pursuant to Rule 47.2 are to be decided by the Board of Directors of the Association as the sole and highest decision-making authority of the Association. The decision of the Board is subject to judicial review only when it is alleged that the Directors have exceeded their authority or have failed to apply the rules of natural justice.12 However, a court will normally assume that the Directors have acted in good faith, and the onus of proving otherwise, which is not easily discharged, is on the party making the allegation.13
1 See the Guidance to Rule 2.4.
2 The cover is available for the confiscation of the Ship is subject to the special provisions set out in Rule 49.
3 See Rule 1.1 for a definition of Member and the Guidance to Rules 78.1 and 78.7 which describes the basis on which cover can be extended to an Affiliate.
4 See the Guidance to Rule 55.
5 See also the Guidance to Rule 2.4.a and b.
6 See the Guidance to Rule 82.1.
7 See the Guidance to Rule 58
8 See the Guidance to Rule 27.2
9 See the Guidance to Rule 38 in this regard.
10 See the Guidance to Rule 47.3.
11See the Guidance to Rules 82.2.d and e.
12 See VAINQUEUR JOSE (1979) 1 Lloyds Rep 557. This is a decision of the English court, but other courts and tribunals are likely to follow the same approach.
13 See Steven J. Hazlewood and David Semark P&I Clubs law and Practice, 4th Edition, London, Informa 2010.