Oil Spills and Compensation Systems
Herry Lawford
ChairmanThomas Miller (Asia Pacific) Ltd.
1. INTRODUCTION
I am asked to speak on the subject of "Oil Spills and Compensation Systems". Thissubject, which at a first glance appears to be ordinary, discloses the very essence of theinternational oil spill compensation systems. Looking back to the history, one can see
the creation and development of the Civil Liability Conventions and Fund Conventions
were made and shaped by the landmark spills namely the Torrey Canyon, Amoco Cadiz,
Exxon Valdez and perhaps today the Erika.
The Torrey Canyon incident in 1967 started everything. Although it was not the first
pollution incident, it was the most significant oil spill at that time, in terms of size andeffect. It made the public aware of the extent of pollution damage that could result fromthe carriage of oil by sea. This incident also made the legislators aware of the gaps andambiguities in national laws, and the lack of legislation at international level, andultimately, the potential polluters were made aware of the risks inherent in theirindustries.
Governments gathered together at IMO (formerly IMCO) and adopted two
Conventions: the 1969 Civil Liability Convention and the 1971 Fund Convention.
Industries concerned also took the initiative in setting up two voluntary schemes,
TOVALOP and CRISTAL, which are basically similar to the Civil Liability Convention
and the Fund Convention. US Congress adopted its first pollution law, the Water Quality
Improvement Act in 1970 (later called Federal Water Pollution Control Act) whileconsidering whether it would join the Civil Liability Convention. The Civil Liability
Convention entered into force in 1975 whereas the Fund Convention entered into force
in 1978.
Shortly after the entry into force of the Conventions, two incidents, Amoco Cadiz in1978 and Tanio in 1980, called into question the fairness of the system and revealed
that the limits of compensation provided by the two Conventions were not high enoughto satisfy damage claims in major spill cases and that the Convention regime failed toplay its role even in countries which were parties to it.
Thus there arose the need to revise the initial Conventions, even though they had only
been adopted for a short period of time. The attempts at revision of the initial
Conventions began in 1979 and the work itself was completed in 1984, when two
Protocols were signed during the IMO's Diplomatic Conference. However, the entry
into force provisions of the 1984 Protocols were too optimistic, mistakenly assumingthat the USA would ratify. Unfortunately, following the 1989 Exxon Valdez incident,
US Congress promulgated the OPA 90, without ratifying the Protocols.
In 1992, the IMO convened another Diplomatic Conference to remedy the situation,
during which the 1992 Protocols were signed. The '92 Protocols retained most of theprovisions of the '84 Protocols, except those relating to their entry into force, and thecapping system in order to avoid the unfairness to Japan having to contribute too muchto the IOPC Fund.
The 1992 Conventions entered into force on 30th May, 1996. As at 31 December 1999,
54 countries were becoming parties to the new CLC (79.02% of the total world tonnage),among which 50 countries were also parties to the new FC. 69 countries still remainedin the old CLC (world tonnage share of 38.65%) among which 45 are parties to the oldFC.
2. The FIRST international oil spill compensation system CLC 69 & FC 71
The Civil Liability Convention (CLC) establishes liability of shipowners for oil
pollution, whereas the Fund Convention (FC) creates an oil spill compensation fundpaid by oil companies in the member States to supplement compensation provided by
the shipowners. Only a country which is a party to the CLC can become party to theFund Convention. These two Conventions form an integral part of the international oil
pollution compensation system.
A. Civil Liability Convention 69
The 1969 Civil Liability Convention, shaped by the Torrey Canyon incident, is detailed

and precise in its scope. For it to apply, the pollution damage must be caused by adischarge of oil from a vessel actually carrying persistent oil in bulk as cargo. The
pollution damage must be suffered in the territory or the territorial waters of a State
party to the CLC. The flag state of the tanker is irrelevant in determining the scope of
application. Furthermore it is the place where the damage occurred which isdetermining, the place where the incident happened may be of little importance. If theincident took place on the high seas, the Convention may well apply, if the pollution
damage was sustained within the territorial sea of a Contracting State. The costs
involved in preventive measures taken outside the territorial sea should also comewithin the scope of the Convention if the measures aim at preventing or minimisingpollution damage within the territorial sea. However, the CLC only cover the costs of
preventive measures taken after oil has actually spilled.
(a) liable party
In order for pollution victims to easily find the liable party, the CLC holds
the shipowner liable. The identification of the shipowner is based on administrative
evidence - person or persons registered as the owner of the ship or, in the absence ofregistration, person or persons owning the ship.
The shipowner is liable only under the CLC for pollution damage. However, no claim
for pollution damage under the CLC or otherwise may be made against the servants oragents of the owner.
(b) no-fault liability
The shipowner's liability under the CLC is generally considered as "strict" in characteror strict liability. He is liable irrespective of existence of any fault, in other words, he isliable simply because of the fact that his ship carrying persistent oil spilled oil andcaused pollution damage. The victims bringing an action under the CLC need only
prove that the damage sustained by them was caused by the pollution incident inquestion. For being discharged from the strict liability, the shipowner must prove thatthe pollution incident was due to one of the exonerating circumstances as specified by
the Convention. These circumstances are: act of war, act of God, third party sabotage,
negligence of a government.

(c) limit of liability
In balance with the strict nature of liability, the Convention grants the shipowner theright of limitation in the absence of his actual fault or privity. If the pollution damage
does not result from such a fault, the shipowner can limit his liability at 133 SDR per
limitation ton with a maximum ceiling of 14 million SDR, whichever is lesser.
When the shipowner is entitled to limitation, he must constitute a limitation fund in thecompetent court of a State party to the CLC where the pollution occurred and whereclaims for pollution damage are submitted. The constitution of the limitation fundresults in the protection of the shipowner's other assets and the release of any of hisother ships that may have been arrested. However, this protection only takes effect inthose States which are parties to the Convention. If a tanker causes pollution damageon the territory of a Contracting State and on that of a non-Contracting State, any of the
shipowner's assets seized by the latter would not be protected by the constitution of a
CLC limitation fund.
(d) compulsory insurance and direct action against the insurer
The CLC requires ships carrying more than 2,000 tonnes of persistent oil in bulk as
cargo to have a compulsory insurance to cover liability under the Convention. This
insurance is traditionally provided by the P & I Clubs in the form of a so-called 'Blue
Card'. By providing the evidence of insurance to the relevant authority of the vessel'sState of registry, the shipowner obtains a CLC certificate from the latter. This document
certifies that the insurance in place is valid and satisfies the requirements of theConvention. By issuingsuch an insurance, the P & I Clubs surrender themselves to direct action from claimants
for pollution damage under the CLC.
(e) Jurisdictional issues
Anyone can bring an action under the Convention.
The rights of compensation under the CLC are extinguished unless an action is brought
within three years from the date when the damage occurred. However, no action canbe brought six years after the date of the incident which caused the damage.

If a ship has caused pollution damage in several Contracting States, the courts of theseStates are all competent to decide on liability in accordance with the Convention.
However, only the court of the State in which the limitation fund has been established iscompetent to determine the distribution of the fund.
B. Fund Convention 71
Since the CLC chooses the shipowner as the liable party for pollution damage resulting
from oil spills from ships, it was considered necessary to shift some of the burden ofcompensation onto the oil industry, the other main beneficiary of the carriage of oil bysea. This led to the idea of a second convention establishing a fund to which the oil
industry would contribute. The CLC 1969
was complemented by the 1971
International Convention on the Establishment of an International Fund forCompensation for Oil Pollution Damage.
As the Fund Convention uses the same definitions of "ship", "oil", "pollution damage"etc, the scope of application of this Convention is identical to the CLC 69.
(a) compensation for pollution damage
The first function of the IOPC Fund established by the 71 Fund Convention was toprovide supplementary compensation to be paid in cases where the totality of claims
exceed the shipowner's liability limit or where compensation is not obtainable from ashipowner who is exonerated from liability (ie. act of God, act of third party's sabotage,
negligence of a government) or who is incapable of assuming their financial obligations.
The amount of compensation available from the 71 IOPC Fund for an incident cannot
exceed 60 million SDR. This amount includes, where applicable, compensation paid by
the owner under the CLC 69.
(b) indemnification to the shipowner
When the CLC 69 was adopted, it was believed that the shipowner's liability establishedunder that Convention was too onerous comparing to the 1957 Limitation Convention.
It was therefore believed necessary that the oil cargo fund indemnifies the shipowner fora portion of his liability under CLC, ie. between 100 SDR and 133 SDR for each ton of

the ship's tonnage, or between 8,333,000 SDR and 14 million SDR. That was the reasonof the second function of the IOPC Fund. It should be noted that this function wasabandoned in the 1992 Fund Convention.
The IOPC Fund can be relieved of its obligation of indemnifying the shipowner under
two circumstances: a) In the case of the wilful misconduct of the owner; b) In the caseof a ship's non-compliance with requirements laid down in certain international
Conventions.
(c) contributions to the IOPC FundThe IOPC Fund contributions are payable by any person who has received more than
150,000 tons of contributing oil in a Contracting State during the course of the calendar
year.
(d) distribution of the shipowner's limitation fund and of the IOPC FundThe IOPC Fund, together with the shipowner's limitation fund, is divided proportionally
between the claimants. In theory, this means that the distribution of the funds will nottake place until the total amount of admissible claims has been ascertained. If a claim
for pollution damage compensation is to be paid after the distribution of the funds, thecourt sets aside a sufficient sum for the claimant.
If the total amount of the claims exceeds the total amount of compensation available
under the CLC and FC, the compensation paid to each claimant will be reduced
proportionately. When there is a risk that this situation will arise, only a fixed
percentage of the approved claims can be paid to ensure that all claimants are given
equal treatment.
Any person who has paid pollution damage compensation acquires by subrogation therights which the person compensated would have enjoyed under the Conventions,provided that subrogation is permitted under the applicable national law. For example,
if governments paid the clean-up contractors, they are entitled by subrogation to haveaccess to the limitation fund and the IOPC Fund. However, their claims by subrogation
are also subject to the test of "reasonableness" applied in the taking of preventive
measures.

3. The revised oil pollution compensation system - CLC & FC 92
In this paragraph, we only need to address the new features of the 1992 Conventions incomparison to the initial Conventions. For the rest, the new Conventions copied the oldones.
The changes brought by the 92 CLC and FC relate to problems encountered by the
initial Conventions shown through incidents such as Amoco Cadiz, Tanio, Olympic
Bravery etc - namely a narrow and imprecise scope of application (Olympic Bravery);insufficient limits of liability and compensation (Amoco Cadiz, Tanio ); insufficientchannelling of liability (Amoco Cadiz). I would like to explain them one by one.
(a) change relating to scope of application(i) The new 1992 Conventions cover "threat removal measures" which are measurestaken before a discharge occurs, whereas the initial 1969 and 1971 Conventions only
cover the costs of preventive measures taken after oil has actually spilled. This newwording should encourage governments and shipowners to take positive action in athreatening situation in order to prevent or minimise pollution. Hence, costs incurred ina salvage operation which is taken before a discharge occurs, can be covered by the newConventions, if they are aimed at preventing pollution damage.
(ii) The old Conventions only cover spills from laden tankers. This was thereason why they could not be used in Olympic Bravery, as she was not carrying cargo of
persistent oil at the time the spill occurred. The new Conventions have changed this tocover pollution damage resulting from a spill of bunker oil from an unladen tanker.
Spills from a combination carrier are also covered when the ship is actually
carrying oil or during the whole voyage following such carriage.
(iii) The definition of pollution damage is clarified in the new Conventions to
restrict the recoverability of claims under the head of environmental damage to "costs ofreinstating the damaged environment".
(iv) Finally, the geographic scope of the new Conventions has been extended

from the territorial sea to the exclusive economic zone.
(b) changes relating to shipowners' limit of liability and right to limitation
For the Civil Liability Convention, the limits of liability have increased, for ships of
5,000 ton or less, from 133 SDR per limitation ton to a fixed amount of 3 million SDR.
And the ceiling amount under the new Civil Liability Convention has changed from 14
million SDR to 59.7 million SDR. As for the new Fund Convention, the maximum
compensation has increased from 60 million SDR to 135 million SDR including the
shipowner's payment under the new CLC.
In compensation for these considerably increased limits of liability, the test for breaking
the shipowner's right of limitation has moved from "actual fault or privity of the
shipowner" to the concept of "wilful misconduct of the shipowner" (or in the exact
words of the convention "his personal act or omission, committed with the intent tocause such damage, or recklessly and with knowledge that such damage would probably
result"). This change, which brings the test into line with the test in the 1976 Limitation
Convention, will make the shipowner's right to limit much stronger and thus reduce
litigation.
(c) Changes relating to channelling of liability
The 1992 CLC has enlarged the list of persons protected from pollution liability under
the Convention and outside the Convention, to include managers, operators, charterers,
salvors, cleanup companies, and pilots, in addition to the shipowner's agents, unlesssuch protected persons committed wilful misconduct which caused the damage.
Pollution liability is therefore narrowly channelled to the shipowner alone. However, theshipowner can exercise his recourse action against any person at fault. This channellingmechanism aims at making the limits of liability and compensation for oil pollution
valid and real, not only within the Conventions but also outside the Convention field.
The other reason for the improved channelling is that if charterers (who are often oil
companies, and therefore contributors to the IOPC Fund) are not protected by theConventions, they may have to pay twice for one pollution incident, first bycontributing to the IOPC Fund and second by being held liable outside the CLC under adomestic law. The channelling clause should protect charterers from being held liable

for oil pollution under any system of law unless wilful misconduct is committed bythem which caused the pollution damage. I will return to this point, in a moment, inconnection with the "Erica" spill.
>From an insurance point of view, the more effective the channelling the better the usethat can be made of a given market capacity, for it is necessary then only to reserve for
one fund for shipowners' liability.
In conclusion, as the shipowner's level of liability has increased dramatically under the
new Conventions, especially in case of small ships (e.g. for a ship of 1,000 ton, the limit
increases from SDR 133,000 to SDR 3 million), it is expected that in small to medium
spills, the IOPC Fund will not be called on, as the shipowner's limitation fund will be
sufficient to meet claims in those cases. Based on previous experiences, it is expectedthat the maximum available under the 1992 CLC and FC, ie 135 million SDR, will be
sufficient to cover the majority of major spills.
4. Conclusions - looking to the future
TANKERS
Since 1996, the old regime and the new CLC regimes for tankers exist independently.
Although application of the Conventions is more straightforward than during thetransitional period, the potential burden of liability on shipowners and that ofcompensation on oil companies contributing either to the 1971 Fund or to the 1992
Fund, can be substantially heavier than before.
One the one hand, from the shipowner's point of view, if pollution affects two States,
one being party to the old CLC, the other being party to the new CLC, the shipownerwill be liable under the two CLCs and will have to establish two limitation funds. On
the other hand, from the oil companies' point of view, the existence of two separate
IOPC Funds will be burdensome to them. As the IOPC Fund is a mutual system, thebigger its membership is, the less the amount of each member's contributions will be.
The existence of two separate funds amounts to a splitting of the membership and ofcontributions.
This shows that it is in the interests of shipowners and oil companies to have a single

regime. As far as claimants are concerned, the new Conventions which offer
considerably higher amounts of compensation are also more beneficial to them. It istherefore to be hoped that the whole world (leaving aside the USA!) will enter into therevised system of compensation.
While indeed more and more countries are moving into the new regime in recognitionof the progress made during the last 15 years, the very regrettable spills of the
Nakhodka here in Japan, and the Erika last Christmas off the French coast, have raisedquestions about the adequacy of the liability system for oil pollution.
In the case of Nakhodka, the joint claims office has received more than 450 claims
totalling more than US $310 million (Japan Yen 35 billion). Claims include the cost of
the clean up and preventative measures organised by the Japan Maritime Disaster
Prevention Centre, local government agencies, and electricity companies whose plants
were threatened by pollution. There have also been many tourism claims frombusinesses in coastal resorts for loss of income, as well as claims from fishery andmariculture interests. The claims are being assessed and the Director of the 1971 and1992 Funds has so far made provisional payments in respect of 254 claims on a 60 per
cent pro-rated basis totalling about $86 million. (Yen 9.6 billion.) At current exchange
rates, it seems likely that the value of approved claims following assessment will be
about $250 million. This is significantly in excess of the compensation available under
the Conventions of US $186 million (SDR 135 million).
In the case of the Erica, it is uncertain whether the damages are likely to exceed the1992 Fund limit. The charterer, Total Fina, has made a public commitment tovoluntarily contribute up to French Francs 700 million (about US$108 million) to the oilremoval and clean-up expenses, and both Total Fina and the French Government haveindicated that they will refrain from claiming on the IOPC Fund to the extent that thiswould reduce the compansation available to other third parties. There is speculation that
substantial tourism and fishery losses can be expected, but it remains too early to judge
whether the total claims will exceed the compensation available under the '92 Funds, ie
135 million SDR.
Nevertheless, both of these accidents are examples of oil spills which have focussed theattention of governments on the adequacy of the limitation amounts in the compensation
systems.

Although the new Conventions only entered into force in 1996, the large majority of
their content was finalised more than 15 years ago, in 1984. Since that time, generalmonetary inflation, increased costs of clean-up, and an increased public awareness ofpollution issues, have all contributed to raise the costs of a spill. Despite this, the systemhas worked very well and the maximum compensation has in fact proved to be
sufficient in almost all spills. The Nakhodka and Erica cases are therefore very
exceptional, but they draw attention to the need to keep the limitation amounts in thecompensation system under review.
The 1992 Conventions provide that at the request of one quarter of the contracting states
new limits can be proposed, and then introduced if approved by a two thirds majority ofcontracting states. A formula in the Convention restricts the amount of the increase to
the equivalent of the 1992 limitation figures increased by 6% per year, calculated on acompound basis, from 15 January 1993, with an overall ceiling of 3 times the existing
1992 limits. An increase calculated by this formula up to the year 2000 would raise
the overall limit from about $186 million to about $279 million.
The political aspects of the Erika spill have also raised other issues for thecompensation system. As mentioned before, the financial burden from that accident willbe alleviated to some extent by voluntary contributions to oil removal and clean-up
costs from the charterer - the oil company Total Fina. Some European commentators
have suggested that charterers should bear liability in any event and that thecompensation system should therefore be amended to introduce an additional element ofcharterer's liability - in order to discourage oil companies from chartering ships of poor
quality. However, the idea is controversial, first because major spills are by no means
always the result of using poor quality tonnage (the Amoco Cadiz, for example, was a
new ship), and second, because the oil companies are already major contributors to thecosts of large spills through the IOPC Funds.
Conversely, some commentators have suggested that the oil companies should pay lessthan at present, and the shipowners more, on the basis that in cases like the Nakhodka
and Erica the shipowner's contribution is only a small percentage (less than 10%) of thetotal compensation. However, as noted earlier in this paper, the dramatic increase in the
shipowner's contribution under the 1992 Convention has the result that in most spills in1992 CLC states, the shipowner will provide 100% of the compensation without

involving the Fund at all. When this is taken into account, it can be seen that theexisting system does already contain a careful balance between contributions from those
who own ships and contributions from those who charter them for carrying their oil.
NONTANK SHIPSAs the title of this paper indicates, the systems of compensation for spills from tankers
have been shaped by the experience of dealing with the spills themselves and providing
some remedy for the damaged claimant. However, from the claimant's point of view,
there is no great distinction between a beach, or nori-beds, contaminated by cargo froma tanker and a beach or nori-bed contaminated by bunkers from a stranded bulk carrier
or a containership holed in collision. It is therefore not so surprising that, as theimportance of environmental issues has grown, so has the interest in governments inhaving a liability and compensation system to deal with bunker spills, modelled on
similar lines to that of the CLC.
The text of a convention for this purpose has already reached an advanced stage ofdrafting and, during this year 2000, the Legal Committee of IMO will be pressing ahead
with the task of trying to finalise the wording.
The current version of the proposed Convention has the following main features.
It applies to sea-going vessels of "any type whatsoever". It applies in respect ofpollution damage, the definition of which follows that of CLC 92, save that references
to oil are references to oil used for the operation or propulsion of the ship. The"shipowner" is the chosen liable party, and claims are chanelled to him as in CLC.
However, the definition of "shipowner", unlike in CLC, includes the registered owner,
bareboat or demise charterer, manager, and operator of the ship - so the channelling is
not really effective. The persons falling within that definition are strictly liable, with thesame limited defences as in CLC, and their liability is joint and several.
In the development of previous liability conventions, the introduction of strict liability
has generally been balanced by a right of limitation, so that the extent to which liability
can be imposed in the absence of any fault is not unlimited and has some bounds. The
current draft Bunker Convention goes some way to achieving that kind of balance, bywords which make clear that the Convention shall not affect the right of the shipownerto limit liability under any national or international regime. However, this does notguarantee that the shipowner will enjoy any right of limitation in exchange for taking onstrict liability, and there is nothing to actually prevent a state from being party to the
Bunker Convention while having no limitation law at all. Finally, the draft Bunker
Convention follows the model of CLC in proposing compulsory insurance for theregistered shipowner (although not for other parties falling within the Convention
definition of "shipowner") in an amount equivalent to the limitation under the 1996
Protocol to 1976 LLMC. Claimants are provided with a direct right of action against
the insurer.
If the Bunker Convention succeeds, it will fill the last gap left in a well-established andcomprehensive international regime of liability and compensation for oil pollution fromships. Changes brought about by that Convention will have a far-reaching impact if thecurrent draft is followed, since tonnage of every kind will be affected and may for the
first time be required to have compulsory insurance to cover the pollution liabilities
created by the Convention.