1 Introduction

1.1 In terms of international regulation a distinction needs to be drawn between public international law conventions and private international law conventions. The former are regulatory in the sense that governments in ratifying the convention in question impose regulations upon individuals and corporations. On the other hand private international law conventions generally seek to regulate the relationship between individuals and corporations who may be exposed in shipping related contract or incident. The terms of this latter type of convention may be incorporated voluntarily into shipping contracts (for example the Hague Rules) or may become, by ratification and legislation, part of the domestic law of a particular state.

1.2 In recent years it has been possible to identify a trend towards hybrid conventions which are predominately concerned with private international law but may also have some public law elements. A good example of this is the 1969 CLC which imposes obligations and gives rights to shipowners following an oil spill. The CLC requirement to maintain insurance or other financial security is regulatory in nature and therefore a matter of public law.

1.3 In the course of the Quality Shipping Campaign the possibility of a convention or other instrument has been discussed which would require cargo interests and marine insurers to take responsibility for vetting the quality and condition of ships which they employ or insure. The consequences of failure to vet would be some form of sanction. Such a measure would be essentially regulatory in nature and therefore a matter of public international law in that it does not simply regulate relations between individual parties to the maritime adventure but imposes a regulatory regime. This distinction is important because it brackets the proposal with the ISM code and other regulatory measures such as SOLAS.

1.4 It will not be sufficient, for the measure to work, for the individual parties to a maritime adventure to exercise the rights and accept the obligations imposed by the measure. It would require implementation by domestic legislation and policing by flag states and port states. Enforcement of the ISM code and SOLAS regulations is left to flag states and port states also play an important role but the focus of that enforcement exercise is always the owner or operator. Should it be decided to impose, by regulation, obligations upon cargo interests and marine insurers, those responsible for the enforcement would have to add a diverse collection of corporations and individuals to the list of those against whom enforcement may be necessary. Would there be a willingness amongst subscribing states to invest further funds in such a complex enforcement process?

1.5 The Quality Shipping Campaign proposes the creation of EQUASIS. This would be a database built up from many sources and would contain information regarding the conditions of ships trading on an international basis. It may be felt that making available detailed information regarding the condition of ships on a regional or international basis is a better way of ensuring that substandard ships are identified, not employed and therefore eliminated from the pool of ships trading.

1.6 Targeting cargo interests and insurers would be both administratively complex and expensive. It would also represent an admission that efforts to improve standards by targeting shipowners and operators had failed; not an admission which should be made without much very careful thought as to the likely consequences.

2 The role of the shippers/cargo owners in quality shipping

2.1 As is described in the Report on the Lisbon Conference on Quality Shipping on 4th June 1998, the successful eradication of sub-standard operations and practices in shipping depends on the co-operation of all links in the responsibility chain, including cargo interests. Equally it has been recognised that the evidence that a proportion of sub-standard tonnage continues to trade demonstrates that to date efforts to influence the market to achieve higher quality standards has not been wholly effective. In addition to the EU initiative to create EQUASIS, the question still remains whether such an initiative should be supplemented by additional and alternative measures, supported by sanctions, which might serve to discourage cargo owners from carrying cargo on sub-standard ships.

 

2.2 While, as a link in the responsibility chain, cargo owners have a role to play in eliminating sub-standard shipping, there can be seen to be complex legal and practical difficulties in creating a mechanism by which, through legal sanctions, cargo interests might be encouraged to act more directly to avoid sub standard ships. Several can be highlighted.

2.2.1 A legal sanction will only be perceived as providing a fair and constructive contribution to the objective of eliminating sub-standard ship if it is possible to answer the question not only of against whom sanctions can be directed, but also what act or omission should be the subject of sanctions.

2.2.2 On the preliminary assumption that "what is a sub-standard ship" can satisfactorily be defined, identifying the act or omission which might attract the sanction throws into relief the difficulties which flow from cargo multiplicity, different methods of carriage, different contracts of carriage and known cargo owners involved. Thus, giving the two extremes of a wide spectrum of possibilities: a large corporate entity might ship, charter a vessel for and take delivery on his own account of a full cargo of crude oil; a private individual may own part of the contents in one container on board a vessel operated by a consortium of liner operators. In assessing the risks attached to sub standard ships a distinction between these two adventures is not obvious. The pollution risk from the bunkers of a container vessel which runs along a densely inhabited coastline may be no less significant than in a case of a tanker aground elsewhere. Similarly, any distinction between bulk cargoes and small parcels on liner vessels based on, for example, volumes or values would be equally artificial.

2.2.3 In both the above examples, however, the cargo owner is easy to identify. Even so it will be equally important to ask whether the responsibility of the relevant cargo owner stems from his capacity as the cargo owner or as the party to a contract of carriage with the sub-standard vessel. In some cases the cargo owner and charterer would have the opportunity and resource to verify the documentary suitability of the vessel were information in relation to Class, ISM and insurance cover freely available through a database such as that envisaged in relation EQUASIS. The same does not, however, necessarily apply in connection with liner cargo on container vessels. Cargo parcels of both significant size and value may be booked for ocean carriage through a freight forwarder who either as agent or principal may fix the vessel with a liner operator who may either by an owner, slot charterer or NVOCC (non vessel owning carrying company). The identity of the vessel upon which the cargo is physically shipped may owe much to chance. It is certainly not a matter over which the cargo owner would be likely to be in position to have any influence whatsoever.

2.2.4 In practice, very similar difficulties will arise in most cases of bulk shipments sold on either FOB or CIF terms. Depending on the law governing the chain of sale contracts the shipper/supplier, his buyer/charterer, and the physical receiver may be the owner of the goods either at the time the sub-standard vessel is selected for the cargo or when the cargo is shipped on board. A CIF sale is a sale by documents and the CIF buyer and receiver of the goods has very little influence over the chartering of the vessel.

2.2.5 It is unclear whether arrangements creating sanctions might distinguish among the different interests or render each of them responsible. Bearing in mind that one or other of the entities may be located in jurisdictions whose regulatory framework is out of step with, for example, those of the countries who are parties to the Paris MOU, it might be felt that there could be substantial scope for injustice and for distortion in the market forces operating in the international bulk trades.

2.2.6 The difficulty of identifying who owns the cargo or arranged freight is linked to the issue of the circumstances in which a sanction might be levied. The first will arise from the definition of the act or omission which attracts the sanction. Any relevant failure properly to verify a ship’s condition or her class or insurance status ought to reflect not only the ease with which such matter can be verified by a cargo owner, but also the degree of his involvement in the selection of the ship. Second, the existence of sub-standard ships may be established before or after the fact. The potential target of the sanction will depend on whether it is levied at the time of shipment as part of an inspection programme already being carried out by port state control, on the one hand, or as a result of investigation by the relevant regulatory body after a casualty, on the other. The same points summarised above will apply to the identification of the responsible entity, which could change at the time of or indeed because of any casualty.

2.3 All the above consideration casts doubt on the practical effectiveness of any system of sanctions to deal with specific cases of sub-standard ships. The administrative costs involved in implementing and policing such a system would also be significant. Where divers interest are involved it is unclear where such costs could fairly and properly fall. At best it could be said that any arrangement which exposes cargo owners to the risk of sanctions is one which in the medium to long term will encourage some traders and charterers to eliminate the use of some sub-standard ships. However, unless there is uniformity of approach in the EU and elsewhere a disproportionate burden is likely to be shouldered by EU domiciled entities.

2.4 International initiatives such as the 1992 Civil Liability and Fund Conventions (and the 1996 HNS Convention when it enters into force) require cargo interests to contribute to the compensation of victims of oil spills (and HNS incidents) when, inter alia, claims exceed the shipowner’s level of liability. This system of shared responsibility is supported by the industry and is considered effective in deterring cargo owners/shippers from using sub-standard tonnage.

3 Marine Insurance - The Role of the Insurer

 

3.1 The Quality Shipping Campaign has explored the role that cargo owners and marine insurers can play in enhancing quality shipping and eradicating substandard shipping. The BMLA supports the recommendations for greater transparency and availability of data amongst all sectors of the Maritime community. It believes that the dramatic increase in availability of data in recent years will, in conjunction with the operation of the international free market in marine insurance, tend to price such shipping to the margins of existence. However, the BMLA believes that suggested compulsory liability insurance is unnecessary and will require a huge bureaucracy to support it. Furthermore, any such issues should continue to be dealt with at the IMO (rather than on a regional basis) in order to ensure uniformity of Maritime law (see 4 below).

3.2 It has long been accepted that transparency of information is, in itself, beneficial as it empowers each user of that information to make his or her own informed decision. In shipping, data about a vessel has, until very recently, been available only to very few parties: the ship owner, the flag state, the Classification Society, and, to a significantly lesser extent, to insurers and financiers. In the last few years this has changed, primarily as a result of port state control and the internet. The amount of available information continues to increase, although the extent to which this information is "real time" up to the minute and accurate is a moot point.

3.3 Port state control has enabled port states to gather their own information about vessel’s compliance with internationally required standards. In Europe this is used to detain deficient vessels in port until those deficiencies are rectified or to ban vessels from areas covered by the Paris MOU. The information is also used to target vessels likely to be deficient. The detention and banning remedies as well as the targeting of such vessels add significantly to the costs of the operating vessels in a deficient and substandard manner.

3.4 The internet has transformed the availability of information about substandard vessels. The identity of all detained vessels and the deficiencies for which they were detained is now available to anyone (including cargo, charters, insurers and financiers) through the internet. This enables those parties to use that information in their decisions thus further adding to the cost of operating substandard vessels. The power of this recently available data should not be underestimated, and it should be given a chance to prove itself.

3.5 The amount of information available to insurers continues to increase. The Classification Society’s file on a vessel is now available to insurers as a result of the IACS Initiative on Information Transparency (since July 1995). Moreover, since the report was published, the EU has launched the Quality Shipping Campaign. Furthermore, EQUASIS would pool information about vessel’s conditions from a wide variety of industry and regulatory sources and make the consolidated information generally available to insurers amongst others.

3.6 The power of transparent data as a method to improve vessel standards in conjunction with IMO initiatives such as the ISM Code is considerable. Moreover, these are focused sharply on improving vessel standards without adding significant extra costs to the entire shipping industry as would result from any scheme to make marine insurers liable for the consequences of insuring substandard tonnage.

4 Compulsory Insurance

4.1 The BMLA does not accept that the amount of uninsured tonnage is greater than the frequently quoted 5% figure. Reference has been made to an IMO Legal Committee Document, LEG 76/WP 1, (13 Oct 1997) which contains data submitted by Norway that out of the vessels detained in the Paris MOU area between January and September 1996 (some 95), 54% by number and 30% by tonnage lacked P&I insurance with an International Group P&I Club member² This is cited in support of a statement that the problem of uninsured ships is greater than previously thought. In fact, this data is more likely to show that the Paris MOU criteria are effectively targeting and detaining substandard vessels which are likely to be the only ones without such insurance (or other means of meeting third party claims). The list of certificates and documents inspected by the port state control officer is significant³and failure to have some of these will result in detention of the vessel. The BMLA believes that an uninsured vessel is unlikely to have many of the required certificates, but that there exist few vessels with required certificates, which do not also have insurance or other appropriate financial security. After all, insurance is as much a protection for the vessel owner as for anyone else.

4.2 The LEG 76/WP1 paper underestimates the role of liability insurance outside that provided by the International Group of P&I Clubs. The BMLA has analysed the Report and found that on the 26/10/98, 3% of the "uninsured" vessels were insured with one insurer alone that being the Ocean Marine Club (now in liquidation), while a further 10% were entered in an International Group Club⁴ and one vessel had been broken up. This alone reduces the number of "uninsured" vessels to 37% by number. This takes no account of insurance outside the International Group.

4.3 The size of fleets involved and the total volume of tonnage insured outside the International Group ought not to be underestimated. The Ocean Marine Club (now in liquidation) and British Marine Mutual are two Clubs outside the International Group which provide P&I insurance. The Swedish Club and the London insurers such as HIH, The Dragon facility, Southern Seas also provide such cover, the latter mainly on a fixed premium basis. While these clubs and insurers rarely provide cover to the largest vessels or fleets, their membership is certainly not confined to domestic risks. In other words, such insurers are likely to be over-represented on the LEG 76/WP1 paper because of the preponderance of comparatively small tonnage vessels. Unless account is taken of the contribution which such insurance markets make to the provision of P&I cover, the extent to which any part of the world’s fleet deliberately sets sail without such insurance is bound to be overstated.

4.4 Moreover, the belief of the BMLA is supported by their memberships’ experience as practising marine insurance solicitors who become involved in a significant proportion of serious maritime incidents world-wide each year. Their experience is that the problem of uninsured vessels is extremely rare, and has only been experienced in relation to coastal fleets in the Far East and fishing vessels from the former Soviet Union.

4.5 Therefore, the BMLA submits that there is no demonstrated need for compulsory insurance.

4.6 Even if there was a demonstrated need for compulsory insurance, putting a system in place to monitor such a scheme would be costly and ineffective and would not necessarily ensure any more vessels are insured than at present. An example of a compulsory insurance scheme is the United Kingdom’s compulsory third party motor liability insurance regime which has been in existence for many years. It is a criminal offence to take a vehicle onto a public road without such cover. The United Kingdom government also taxes all vehicles, annually, under a system by which all vehicles must display a disc evidencing payment of tax. That disc cannot be obtained without producing proof that the vehicle is insured against third party liabilities. The police are accordingly in a position to establish compliance with, (and enforce penalties in respect of) the insurance and fiscal aspects of motor vehicle regulation.

4.7 In order to ensure that third parties cannot suffer in the event of being involved in accidents with uninsured vehicles or drivers, the motor insurance industry also funds what is known as the Motor Insurers Bureau (MIB), established under an Act of Parliament to levy the motor insurers for that specific purpose. The MIB estimates that at any one time between 3% and 5% of vehicles on the road in the United Kingdom are nevertheless uninsured. This is a striking statistic. If a well-established system backed by criminal sanctions, which can be easily enforced as the British compulsory motor insurance scheme, still produces a failure rate as high as 3-5% then it would seem questionable whether there is much to gain by imposing a compulsory insurance scheme in a sector where there would already appear to be voluntary compliance at a rate as high as 95%. In short, it would appear unlikely that a compulsory scheme would produce a marked improvement on that figure. The BMLA respectfully suggests that comparative research into other compulsory insurance schemes elsewhere in the world would corroborate that conclusion.

4.8 The comparison between motorists who default under the British compulsory motor insurance regime and the degree to which the world merchant fleet similarly "defaults" does highlight one further matter. The BMLA believes that, with limited exceptions, the modest proportion of the world’s fleet which does sail without liability cover is likely to be dominated by Owners whose vessels do not meet the standards of the insurance market or whose resources are insufficient to pay the premiums the market would charge for such cover. Neither type of owner is one who the commercial insurance market (including the marine mutual P&I Clubs) is likely to embrace. On the contrary, commercial insurers take considerable care to ensure they are protected from claims on owners who default in their premium payments or default in compliance with condition warranties. Once the insurer takes steps to cancel cover on such grounds, the presence of any Certificate of Insurance on board the vessel is likely to prove only illusory, rather than give real protection for third party claimants. Any scheme which fails to recognise the legitimate commercial interest which the insurance market has, both in being able to decline "bad risks" and to protect itself against defaulting assureds, is unlikely to muster significant support either from the insurers themselves or from the vast majority of Shipowners most of which already address the issue of third party liability insurance in a responsible fashion.

4.9 Indeed, the supposed competitive advantage gained by irresponsible Owners may also be an illusion, when set against the consequence of going down the compulsory insurance route. If the commercial insurance market was in any way compelled to assume or retain bad risks of defaulting assureds, the overall cost of liability insurance premium to all shipowners would inevitably increase. Moreover, by allowing vessels which had hitherto no doubt suffered difficulties in trading just because of their lack of insurance to rectify that competitive disadvantage, the scheme might ultimately produce the reverse effect from that which it is intended to have i.e., enabling low quality ships to continue to trade, on more than advantageous terms than hitherto, to the ultimate detriment of inter alia, the environment.

 

 

 

5 Recommendations

The BMLA supports the declared goal of improving vessel standards, and believes that the improved transparency with respect to vessel information will greatly assist this aim.

The BMLA submits that the recent increase in publicly available information, combined with such initiatives as the ISM code, is likely to lead to improving standards and quality shipping.

The BMLA doubts whether imposing obligations on charterers, cargo interests and insurers in relation to the standard of the ships with which they are involved would do anything to improve ship standards and believes that any such regime would be very expensive to operate and would give rise to numerous practical problems.

The work at the IMO to drive out substandard vessels should be fully supported, and any EU regional regime(s) in this regard would tend to undermine the efforts of the IMO.