Charterers' liability for oil pollution

Introduction
Most Gard News readers involved in chartering operations are aware that they may be liable for oil pollution under US state law as a charterer of a vessel spilling oil, or as owner of the cargo which is spilled from the vessel. There are, however, several other scenarios where charterers may be ultimately liable for oil spilled from the vessel, even though oil pollution is typically considered an owner's risk.

Naturally, a bareboat or demise charterer who is stepping into the shoes of the shipowner and operator is exposed for oil pollution, even though under the Civil Liability Convention (CLC)¹ the registered owner is the "responsible party", which is why owners should always be named assureds or co-assureds on a bareboat charterer's certificate of entry. Demise or bareboat charterers effect owner's entries, which covers them for this exposure. But what about time and voyage charterers who cause a spill by ordering the vessel to an unsafe port? Are oil trading charterers assuming additional pollution liability under contract? What is the extent of the charterer's exposure, and how much is covered by his P&I insurance?

These are the ways in which a charterer may become liable for oil pollution:

By force of law applicable to the vessel's operations
The best known example of this comes from the US, where various states have enacted their own pollution legislation intended to operate side-by-side with the federal OPA 90 regime. With regard to OPA 90, because "any person owning, operating, or demise chartering the vessel" from which oil is discharged may be liable for the costs of removal and specified damages, a demise charterer (commonly accepted to mean a bareboat charterer) can be liable. A non-demise charterer may be liable under OPA 90 as charterer and/or cargo owner if it is operating the vessel, this issue appears to have not yet been the subject of any decision. With regard to state law, most enactments target "the party causing the pollution" or "any person directly or indirectly causing the spill" or variations of this to the same effect, which means the charterer and cargo owner, together with the vessel owner, are potentially responsible for oil pollution.²

The pollution liability which the charterers incur under applicable law in their capacity as charterers is covered by P&I, whether they have taken out poolable charterers' cover or Gard's Comprehensive Charterers' Cover. Charterers with the latter cover may opt to be covered for liability incurred in their capacity as cargo owners as well.

As a recourse under the charterparty
In the typical spill scenario, the owners of the vessel have primary responsibility for payment of compensation to third parties, clean-up costs and pollution fines. For instance, the CLC regime imposes strict liability, with a few narrow exceptions, on the shipowner as the "responsible party" with respect to third party claimants in the event of a spill. Where the spill emanates not from persistent oil as cargo but from bunkers on a non-tank vessel, even though the CLC does not apply, the applicable national law often follows the CLC template, in that the shipowner is liable in the first instance to pay for the damage.³

This, however, does not limit the shipowner's eventual recourse against the charterer or others who may be responsible for the spill. For instance, the shipowner may attempt to recover against public authorities for failure to provide adequate navigational aids such as accurate maps.

Often, owners involved in a spill will investigate whether there is a causal link between the spill and breach of the charterparty. Where the oil has escaped because of a damaged hull, owners may allege that the oil spill was caused by charterers' breach of their obligation to nominate a safe port or berth. Breach of this warranty may translate to charterers' liability not only for damage to the hull itself but also any damage to third party property (including pollution) which results from the damage to hull.

Voyage as well as time charterers may be liable for breach of the obligation to nominate a safe port or berth, which may be express or implied, or may be a warranty (as under Asbatankvoy) or a duty to exercise "due diligence" to nominate a safe berth or port (BP Voy 2). Although voyage charterers are not "employing" the vessel, they may in some cases nominate the port (for instance, where the charterparty provides the voyage charterer with a list of possible ports) or otherwise have some control over where the vessel calls. In the well known limitation case of the AEGEAN SEA,⁴ the voyage charterers (using the Asbatankvoy form) ordered the vessel to what turned out to be an unsafe port in Spain, where she grounded and spilled the cargo of crude oil.

There are other charterparty breaches which may translate into charterers' liability for oil pollution. For instance, the charterer's failure to provide proper bunkers may result in an engine breakdown and loss of steering, leading the vessel onshore or into the path of another ship, with pollution as a consequence. A spill may also result from charterers' failure to properly stow the cargo as agreed under the charterparty, for instance, where cargo stowed at an improper temperature leads to a fire, resulting in the spill of bunkers along with other damage. The charterer could potentially face liability because of his employment of the vessel, for instance, where he overrules the master's proposed routing, orders the vessel to take an alternative course that exposes it to adverse weather conditions, which results in an accident.

In certain cases, owners entitled to seek a remedy under the charterparty may opt not to do so because the chances of recovering from the charterer are too low to justify the expense of pursuing the claim. Charterers who have substantial assets, such as tanker charterers, who are often oil traders as well, can not count on such a lucky escape from a recourse claim.

Concerning the P&I cover, charterers facing a recourse claim from owners for breach of the charterparty are covered by their P&I insurance, provided they have contracted on usual charterparty terms or have obtained the Association's approval of other terms before the liability arises.

By express terms of contract
This is an area where oil-trading members, owners and charterers alike, have seen the need to become increasingly vigilant. In addition to the "Exxon GA" clause and variations of it, whereby the owner waives the right to include pollution prevention expenses in a general average incident (contrary to the provisions of the 1994 York Antwerp Rules), there is a flurry of new contractual terms aimed at overriding the apportionment of risk set out in the applicable legislation and /or conventions.

Charterers may be ultimately liable for oil spilled from a vessel.

Here are three recent examples. The first two are found in sales contracts between a buyer of oil (normally the charterer of the tanker) and the seller (i.e., the oil terminal). The third is found in a charterparty.

Example 1:
"The party providing the vessel shall reimburse the other party for all expenses, penalties and other payments if incurred as a result of any oil or other pollution discharged into waters from the vessel unless such discharge was caused by the negligence of such terminal's servants or agents (…)"

Example 2:
"Buyer shall indemnify Seller against all losses, damages, costs and expenses which may be incurred by Seller, or Seller's terminal operator or any other person, Authorities or the Government by reason of any act or omission including any deballasting or oil pollution, during berthing, loading or unberthing caused by or arising out of vessel's fault or negligence (…)"

Example 3:
"Charterer shall hold harmless, defend and indemnify the Owner, the Vessel, her actual owner(s), and her operator (collectively called "Shipowner") from loss or damage to the cargo and/or claims or demands of a third party or parties against Shipowner of whatsoever nature, including, without limitation, liability arising from or related to pollution, arising out of the use or operation of the vessel (…)"

In all three cases, the charterer (or "vessel provider") is assuming greater liability in the applicable contract than what he would otherwise incur. However, there is an important distinction to be made between the first two examples and the third example. In the first two, the terminal owners are attempting to circumvent the applicable liability regime (in this case, OPA 90) in order to ease recovery of their losses in the event of a spill. For obvious reasons, they would prefer to have unique access to a remedy against an established oil trader with whom they already do business than to have to join with all other potential claimants to bring their claim against the shipowner. In neither case has the charterer/buyer waived his recourse against the owner of the vessel. (It should be noted that the charterer may not be able to recover against the shipowner; although under OPA 90 the shipowner is liable to make good a claimant's economic loss, this might not include a loss arising out of an obligation assumed under contract. Furthermore, in the second example, there is no reference to the buyer's right to limit liability for the seller's losses). On the other hand, the third example is a clear and final transfer of shipowners' pollution risk to charterers.

In the first two situations, the risk is outside the scope of P&I cover, as the charterer is acting as a cargo buyer, and assuming contractual liability in that capacity. Although Gard's Comprehensive Charterers' Liability Cover may be extended to include the pollution risks which the charterer incurs in his capacity as a cargo owner, this does not include risk assumed under contract, for instance under a sales contract. Instead, the cover responds to pollution liabilities imposed on the cargo owner by reason of applicable legislation (as described under the paragraph "By force of law applicable to the vessel's operations", above).

On the other hand, the third situation is an illustration of a charterer's risk, agreed between the charterers and owners in a non-standard charterparty. A member accepting this term will not be covered under his charterers' P&I cover because of Rule 55 (Terms of contract). This rule excludes liability that would not have been incurred by the member but for the term of contract, unless the term has been approved by the Association beforehand. Special terms such as this one can not be approved under a charterers' P&I entry because the risk incurred by the member is not mutual. However, the Association may be able to cover the risk assumed under special, more onerous terms with one of its additional covers.

The Future
In addition to the three situations listed above, in the future there may be other means by which charterers could be liable for oil pollution. Although it is too early to predict what the ultimate effects of the ERIKA will be, it is already clear that this case has triggered some important developments in the debate over where to place the financial burden of a spill. Two possible consequences may be:
- Charterers as de facto operators of the vessel: In a maritime dispute, the court or tribunal is frequently asked to look beyond the terms of the charterparty to determine whether charterers in a particular case interfered with or even overrode the master with respect to the operation of the ship. Recent developments in the ERIKA case show that the courts, or at least the one involved in the proceedings in France, are prepared to take this analysis a step further. Court-appointed experts found that charterers TotalFinaElf had exercised operational control over the vessel, and moreover failed to take appropriate measures when it was clear the vessel was in trouble. On the basis of these findings, several executives and the company itself have been charged with causing complicity in endangering human life.
- "Non liability", i.e., ex gratia payments outside of CLC or other applicable legal regime: Again, the ERIKA is a good illustration of how a charterer may be legally exempt from liability for pollution, yet for commercial (indeed, even moral) reasons may have no choice other than to contribute financially to the clean-up. For the charterer and his insurer, this poses some interesting challenges, the principal one being: how does the charterer prepare for this risk, which up to now is uninsurable (in that it is not a liability)?

It is too early to draw any conclusions, other than to warn readers that this topic will appear in future editions of Gard News, because there will surely be new developments in the ongoing struggle to find a proper apportionment of risk and responsibility for oil pollution.