Contents. Tullio Scovazzi

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1 Chapter 13 Maritime Accidents with Particular Emphasis on Liability and Compensation for Damage from the Exploitation of Mineral Resources of the Seabed Tullio Scovazzi Abstract Maritime casualties can affect both human life and the protection of the environment. The United Nations Convention on the Law of Sea binds States to effectively exercise their jurisdiction and control in administrative, technical, and social matters over ships flying their flag, conforming to generally accepted international regulations, procedures, and practices. International rules related to maritime accidents are also found in a number of specific treaties adopted at either the world or the regional level and relating to both the prevention of accidents and compensation of damage if an accident has taken place. The paper focuses on the 2010 incident caused by the explosion of the Deepwater Horizon platform in the Gulf of Mexico. Keywords Maritime incidents Prevention Compensation of damages Oil exploitation platforms Contents 13.1 Maritime Casualties in General The Deepwater Horizon Incident The Facts The Response The Lessons to Be Learned Treaties on Liability and Compensation for Damage from Offshore Activities The World Level The Mediterranean Regional Level The Main Legal Questions T. Scovazzi (&) Università di Milano-Bicocca, Piazza dell Ateneo Nuovo 1, 20126, Milano A. de Guttry et al. (eds.), International Disaster Response Law, DOI: / _13, Ó T.M.C. ASSER PRESS, The Hague, The Netherlands, and the author(s)

2 288 T. Scovazzi Compensation for Environmental Damage Evaluation of Environmental Damage Compulsory Insurance and Compensation Fund The Initiatives for a New Regime within the European Union Other Recent Developments Conclusive Remarks References Maritime Casualties in General As other accidents, maritime casualties can affect both human life and the protection of the environment. The United Nations Convention on the Law of Sea (Montego Bay 1982) 1 binds States to effectively exercise their jurisdiction and control in administrative, technical, and social matters over ships flying their flag. In particular, under Article 94: 3. Every State shall take such measures for ships flying its flag as are necessary to ensure safety at sea with regard, inter alia, to: (a) the construction, equipment and seaworthiness of ships; (b) the manning of ships, labor conditions and the training of crews, taking into account the applicable international instruments; (c) the use of signals, the maintenance of communications and the prevention of collisions. 4. Such measures shall include those necessary to ensure: (a) that each ship, before registration and thereafter at appropriate intervals, is surveyed by a qualified surveyor of ships, and has on board such charts, nautical publications and navigational equipment and instruments as are appropriate for the safe navigation of the ship; (b) that each ship is in the charge of a master and officers who possess appropriate qualifications, in particular in seamanship, navigation, communications and marine engineering, and that the crew is appropriate in qualification and numbers for the type, size, machinery and equipment of the ship; (c) that the master, officers and, to the extent appropriate, the crew are fully conversant with and required to observe the applicable international regulations concerning the safety of life at sea, the prevention of collisions, the prevention, reduction and control of marine pollution, and the maintenance of communications by radio. 1 Hereinafter, UNCLOS.

3 13 Maritime Accidents with Particular Emphasis on Liability and Compensation 289 In taking the above-mentioned measures, each State is required to conform to generally accepted international regulations, procedures, and practices (Article 94 para 5). As ships navigate through all the oceans and seas of the world, technical requirements relating to their design, construction, manning, or equipment need to be established at a uniform level. In the case of artificial islands, installations and structures, under Article 60 para 3: due notice must be given of the construction of such artificial islands, installations or structures, and permanent means for giving warning of their presence must be maintained. Any installations or structures which are abandoned or disused shall be removed to ensure safety of navigation, taking into account any generally accepted international standards established in this regard by the competent international organization. Such removal shall also have due regard to fishing, the protection of the marine environment and the rights and duties of other States. Appropriate publicity shall be given to the depth, position and dimensions of any installations or structures not entirely removed. As far as the protection of the environment is concerned, the UNCLOS makes a distinction between six different kinds of marine pollution, namely from landbased sources, from activities in the seabed subject to national jurisdiction, from activities in the seabed beyond national jurisdiction, from dumping, from vessels and from the atmosphere. In almost all cases, 2 pollution can also result from unexpected and unintentional events, as envisaged in Article 194 para 3, which binds States to take measures designed to minimize to the fullest possible extent (b) pollution from vessels, in particular measures for preventing accidents and dealing with emergencies, ensuring the safety of operations at sea, preventing intentional and unintentional discharges, and regulating the design, construction, equipment, operation and manning of vessels; (c) pollution from installations and devices used in exploration or exploitation of the natural resources of the seabed and subsoil, in particular measures for preventing accidents and dealing with emergencies, ensuring the safety of operations at sea, and regulating the design, construction, equipment, operation and manning of such installations or devices; (d) pollution from other installations and devices operating in the marine environment, in particular measures for preventing accidents and dealing with emergencies, ensuring the safety of operations at sea, and regulating the design, construction, equipment, operation and manning of such installations or devices. The UNCLOS also provides that when a State becomes aware of cases in which the marine environment is in imminent danger of being damaged or has been damaged by pollution, it shall immediately notify other States it deems likely to be 2 The exception is pollution from dumping, which is defined as the deliberate disposal of wastes or other matters at sea.

4 290 T. Scovazzi affected by such damage, as well as the competent international organizations (Article 198). In this case, States in the area affected, in accordance with their capabilities, and the competent international organizations must co-operate, to the extent possible, in eliminating the effects of pollution and preventing or minimizing the damage and shall jointly develop and promote contingency plans for responding to pollution incidents in the marine environment (Article 199). International rules related to maritime accidents are also found in a number of specific treaties adopted at either the world or the regional level. As regards cooperation in the field of prevention of accidents and their consequences, is it sufficient to mention the Convention Relating to Intervention on the High Seas in Cases of Oil Pollution Casualties (Brussels 1969) and its Protocol Relating to Intervention on the High Seas in Cases of Pollution by Substances Other than Oil (London 1973), the Convention on the International Regulations for Preventing Collisions at Sea (London 1972), the Convention for the Safety of Life at Sea (London 1974), the Convention for the Prevention of Pollution from Ships as modified by the Protocol of 1978 relating thereto (London 1978), the Convention on Standards of Training, Certification, and Watchkeeping for Seafarers (London 1978), the Convention on Maritime Search and Rescue (London 1979), the Convention on Salvage (London 1989), the Convention on Oil Pollution Preparedness, Response, and Co-operation (London 1990) and its Protocol on Preparedness, Response, and Co-operation to Pollution Incidents by Hazardous and Noxious Substances (London 2000), the Convention on the Removal of Wrecks (Nairobi 2007) and the Convention for the Safe and Environmentally Sound Recycling of Ships (Hong Kong 2009). While it is obvious that to prevent is better than to compensate, also the existence of an adequate regime to ensure compensation for damage can ultimately be seen as an effective tool to discourage actions or omissions that are likely to determine an incident. In this regard, emphasis should be put on the Convention on Civil Liability for Oil Pollution Damage (Brussels 1969; amended in 1992), the Convention relating to Civil Liability in the Field of Maritime Carriage of Nuclear Material (London 1971), the Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage (Brussels 1971; amended in 1992 and 2003), the Convention on Liability and Compensation for Damage in connection with the Carriage of Hazardous and Noxious Substances by Sea (London 1996), and the International Convention on Civil Liability for Bunker Oil Pollution Damage (London 2001). As it would not be possible to enter into the details of such a complex regime, this paper will focus on the question of compensation of damage resulting from socalled offshore activities that is activities of exploration and exploitation of mineral resources located in the seabed falling under national jurisdiction.

5 13 Maritime Accidents with Particular Emphasis on Liability and Compensation The Deepwater Horizon Incident Pollution from offshore activities 3 is not the most serious cause of degradation of the marine environment. Nevertheless, where major incidents occur, also this kind of pollution can create devastating consequences on the marine environment, 4 as the recent disasters of the Deepwater Horizon reminds The Facts On 20 April 2010 the Deepwater Horizon, a semi-submersible rig owned by the American corporation Transocean, exploded while it was drilling for oil from a well called Macondo in the Gulf of Mexico. Because of the explosion, eleven out of the 126 workers on the platform died and several others were injured. The Deepwater Horizon was located on the continental shelf of the United States, about 49 n.m. south-east of the Mississippi River delta. It was operating under a contract with BP (formerly British Petroleum), a British multinational corporation. Two days after, the Deepwater Horizon sank in about 5,000 feet (1,500 m) of water. Crude oil gushed out of the riser, which is the pipe that connects the well at the ocean floor to the platform on the surface. For long time any attempts to shut down the flow failed. Nearly 5,000,000,000 barrels of oil spilled before it was possible, on 15 July 2010, to cap the well. The discharge of oil disrupted the economy of the entire region, damaged fisheries and critical habitats and brought to light the risks of deepwater drilling for oil and gas. The damage arising from the incident was estimated by BP to be in excess of US$ 40,000,000,000. The environmental consequences of the largest oil spill in the history of the United States are described as follows by the Commission appointed by the President of the United States to investigate on the disaster, analyze its causes and effects, and recommend the actions necessary to minimize such risks in the future: ( ) although the nation would not know the full scope of the disaster for weeks, the first of more than four million barrels of oil began gushing uncontrolled into the Gulf threatening livelihoods, precious habitats, and even a unique way of life. A treasured American landscape, already battered and degraded from years of mismanagement, faced yet another blow as the oil spread and washed ashore. ( ) The costs from this one industrial accident are not yet fully counted, but it is already clear that the impacts on the 3 Namely the seabed subject to the regimes of maritime internal waters, the territorial sea and the continental shelf, as defined in the UNCLOS. 4 On a serious incident that occurred in 1979 during offshore activities on the continental shelf of Mexico see Badenes Casino 2005, 65.

6 292 T. Scovazzi region s natural systems and people were enormous, and that economic losses total tens of billions of dollars. 5 As stated in the report by the Commission, the incident was the result of a number of concurrent technical factors, such as the insufficient integrity of the well, the undetected entrance of hydrocarbons into it, the ignition of these hydrocarbons, and the failure of the blowout preventer: The immediate cause of the Macondo blowout was a failure to contain hydrocarbon pressures in the well. Three things could have contained those pressures: the cement at the bottom of the well, the mud in the well and in the riser, and the blowout preventer. But mistakes and failures to appreciate risk compromised each of those potential barriers, steadily depriving the rig crew of safeguards until the blowout was inevitable and, at the very end, uncontrollable. 6 More generally, the operator BP, together with its two main contractors (the corporations Halliburton and Transocean), were to be blamed for the accident: The immediate causes of the Macondo well blowout can be traced to a series of identifiable mistakes made by BP, Halliburton, and Transocean that reveal such systematic failures in risk management that they place in doubt the safety culture of the entire industry The Response The response to the disaster mobilized several subjects, namely the Federal Government of the United States and the governments of some of its member States (Alabama, Florida, Louisiana, and Mississippi), private companies, in particular BP acting as the responsible party under the United States Oil Pollution Act of 1990, as well as non-profit organizations, seeking to stop the leaking well, to limit the damage and to monitor and clean-up the spilled oil. BP committed to pay all legitimate claims made by the United States and the subjects affected. After consultation with the United States government, it established a US$ 20,000,000,000 claims fund. The Gulf Coast Claims Facility (GCCF), an independent facility administered by a Claims Administrator, was set up. The GCCF is the official way for affected individuals and business, including fishermen, oystermen and tourist operators, to file claims for cost and damages due 5 National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, Deep Water, The Gulf Oil Disaster and the Future of Offshore Drilling, Recommendations, 2011, vi. 6 National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, Deep Water, The Gulf Oil Disaster and the Future of Offshore Drilling, Report to the President, 2011, National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, Recommendations op. cit. n. 5, vii.

7 13 Maritime Accidents with Particular Emphasis on Liability and Compensation 293 to the spill. 8 Eligible claims include removal and clean-up costs, physical damages to real or personal property, lost profits or impairment of earning capacity, loss of subsistence use of natural resources, and physical injury or death. BP has also entered into long-term reputation-building commitments relating to response projects, research, and workers compensation. It appears that GCCF has paid so far more than US$ 5,000,000,000 to more than 200,000 claimants. Criticism has however been raised by some individuals or groups who are not satisfied with the timeliness of compensation received for approved claims, believe that certain founded claims are being turned away or allege that GCCF is pressing claimants to accept the prompt payment of amounts which do not correspond to the whole damage suffered. 9 A number of claims for compensation against BP and other defendants are today pending before the United States District Court in New Orleans, including a lawsuit for environmental damage by the United States Department of Justice The Lessons to Be Learned A first notable lesson that can be learned from the Deepwater Horizon disaster is the increased risk of incidents if drilling for oil takes place in deep marine waters. As stated in the Commission report, deepwater energy exploration and production, particularly at the frontiers of experience, involve risks for which neither industry nor government has been adequately prepared, but for which they can and must be prepared in the future. 11 The industry first moved into shallow water and eventually into deepwater, where technological advances have opened up vast new reserves of oil and gas in remote areas in recent decades, much deeper under the water s surface and farther offshore than ever before. The Deepwater Horizon was drilling the Macondo well under 5,000 feet of Gulf water, and then over 13,000 feet under the sea floor to the hydrocarbon reservoir below. It is a complex, even dazzling, enterprise. The remarkable advances that have propelled the move to deepwater drilling merit comparison with exploring outer space. The Commission is respectful and admiring of the industry s technological capability. 12 In general, the Commission was of the opinion that there is today a need for more State regulation for the activities carried out by the oil and gas industry: 8 The GCCF does not pay claims brought by the government. The latter sends periodical bills to BP and other responsible parties and is reimbursed by them for response and recovery operations. 9 The United States Department of Justice sent a letter to Feinberg [= the GCCF Claims Administrator] on September 17, 2010, urging expediency. In response, the Claims Facility noted that the large number of fraudulent and undocumented claims have slowed the process (ibid. 49). 10 The District Judge has set the trial date in February National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, Recommendations op. cit. n. 5, vii. 12 Ibid. viii.

8 294 T. Scovazzi The oil and gas industry remarkable for its technological innovation and productivity needs government oversight and regulation that can keep pace. 13 In the years between the Exxon Valdez spill and the spring of 2010, Congress, like much of the nation, appears to have developed a false sense of security about the risks of offshore oil and gas development. Congress showed its support for offshore drilling in a number of ways, but did not take any steps to mitigate the increased perils that accompany drilling in ever-deeper water. 14 Other remarks relate to the liability limits provided for in the above-mentioned Oil Pollution Act. According to the Commission, it is important that compensation to victims is paid in full and that the process for receiving compensation is swift and efficient: Oil spills cause a range of harms, both economic and environmental, to individuals and ecosystems. The Oil Pollution Act makes the party responsible for a spill liable for compensating those who suffered as a result of the spill through property damage, lost profits, and other economic injuries and for restoring injured natural resources. The Act also provides an opportunity to make claims for compensation from a dedicated Oil Spill Liability Trust Fund. The Oil Pollution Act, however, imposes limits on both the amount for which the responsible party is liable, and the amount of compensation available through the trust fund. In the case of the Deepwater Horizon spill, BP (a responsible party) has placed $20 billion in escrow to compensate private individuals and businesses through the independent GCCF. But if a less well capitalized company had caused the spill, neither a multi-billion dollar compensation fund nor the funds necessary to restore injured resources, would likely have been available. It is critical that compensation to victims be paid in full, and that the process for receiving compensation is swift and efficient. The Commission offers recommendations that would increase assurances that responsible parties are able to compensate victims (and at the same time strengthens incentives to prevent accidents in the first place), and that the Oil Spill Liability Trust Fund provide any compensation not provided by responsible parties. 15 Under the United States legislation, liability for damages from offshore spills is capped at US$ 75,000,000. However, there is no limit to damages if it can be shown that the responsible party was guilty of gross negligence or willful misconduct, violated a federal safety regulation, or failed to report the incident, or to co-operate with removal activities. Claims up to US$ 1,000,000,000 above the cap for certain damages can be made to, and paid out of, the Oil Spill Liability Trust Fund, which is supported by an 8 % per barrel tax on domestic and imported oil. The Oil Pollution Act also requires responsible parties to establish and maintain evidence of financial responsibility generally based on a worstcase discharge estimate. In the case of offshore facilities, necessary financial responsibility ranges from US$ 35,000,000 to 150,000, Ibid Ibid. 50. The American supertanker Exxon Valdez ran aground in 1989 in the waters off Alaska.. 15 Ibid Ibid. 45.

9 13 Maritime Accidents with Particular Emphasis on Liability and Compensation 295 An evident concern is that, in the event of future accidents, not all the responsible parties may have the financial means which were available to BP, one of the largest oil companies in the world. In the specific case, BP waived its statutory US$ 75,000,000 liability limit and accepted to establish a US$ 20,000,000,000 claims fund. According to the Commission, liability limits present two serious disadvantages, as they provide little incentive for industry to adopt precautionary measures and do not ensure full compensation for damages: There are two main problems with the current liability cap and financial responsibility dollar amounts: Lack of Adequate Safety Incentives: A threshold problem with any damages cap that limits liability well below levels that may actually be incurred is that such a cap distorts the incentives of industry participants to adopt cost-effective safety precautions. Decisions regarding safety precautions are made for a variety of reasons, some of which cannot be influenced by policy measures. The relatively modest liability cap and financial responsibility requirements provide little incentive for oil companies to improve safety practices. Inadequate Damages Compensation: BP s damages from the Deepwater Horizon spill will total in the tens of billions of dollars. The company has already paid claims that measure in the billions, and has waived the statutory $75 million cap. But there is no guarantee that other companies in the future will agree to waive the cap. And if an oil company with more limited financial means than BP had caused the Deepwater Horizon spill, that company might well have declared bankruptcy long before paying fully for all damages. In the case of a large spill, the Oil Spill Liability Trust Fund would likely not provide sufficient backup. Thus, a significant portion of the injuries caused to individuals and natural resources, as well as government response costs, could go uncompensated. 17 Because of this kind of considerations, the Commission recommended to the United States Congress to adopt legislation to significantly increase the liability cap and financial responsibility requirements for offshore facilities : To address both the incentive and compensation concerns noted above, Congress should significantly raise the liability cap. Financial responsibility limits should also be increased, because if an oil company does not have adequate resource to pay for a spill, the application of increased liability has little effect: should a company go bankrupt before fully compensating for a spill, its liability is effectively capped. If, however, the level of liability imposed and the level of financial responsibility required are set to levels that bear some relationship to potential damages, firms will have greater incentives to maximize prevention and minimize potential risk of oil spills and also have the financial means to ensure that victims of spills do not go uncompensated. 18 To reach this conclusion, the Commission balanced contrary arguments 19 and envisaged other options that could reduce the difficulties to be faced by the oil 17 Ibid Ibid Legislative attempts to raise the cap and financial responsibility requirements to significantly higher levels have been met with the argument that these changes will cause insurance carriers to

10 296 T. Scovazzi industry, such as a mutual insurance pool, 20 the phasing in of increases in liability limits, 21 or partnerships among firms. 22 The Commission was confident that developments in the insurance market would contribute to higher safety standards: If liability and financial responsibility limits are raised, increased liabilities will be borne by insurance carriers, which will have a strong incentive to promote new safety techniques and methods, as well as to monitor risk. Insurance carriers might insist on certification of operators by an independent entity devoted to identifying best safety practices and monitoring risk, such as a self-policing safety organization for the oil and gas industry. Insurers or a self-policing safety organization for the industry also could provide a guard against unqualified companies entering the offshore drilling market. 23 However, it appears that efforts to raise the limit of liability have so far met with the concerns of independent operators smaller than BP, who fear to be unable to afford higher insurance premiums. The main pending legislative proposal in the United States is the Securing Protections for the Injured from Limitations of Liability Act (SPILL), which would have the effect of repealing limitations and expanding recovery for injured claimants. The American Senate upheld a modified version of the SPILL, known as Fairness in Admiralty and Maritime Law Act (Footnote 19 continued) drop oil pollution coverage, leading to an exodus of small and independent companies from the offshore drilling market. The counter-argument is that oil companies should bear the social costs of their activities, and if those costs are too large or unpredictable to be insurable, then it is appropriate that these companies exit the market. There is legitimacy to aspects of both arguments. A company should not be able to cause billions of dollars of damage and walk away, simply because its operations contribute to the economy of the Gulf. Nor should smaller companies that can demonstrate the ability to drill safely and to pay for damages resulting from a large spill be forced out of the market. However, smaller companies that cannot demonstrate financial responsibility and meet risk requirements set and monitored by the Department of the Interior or a third party should not be allowed to make others pay for the costs of their accidents. (ibid. 47). 20 One option for keeping competent independents in the market is a mutual insurance pool. Under such an arrangement, individual companies engaged in offshore drilling would pay premiums into a pool, which would pay out damages caused by a company as a result of a spill. A possible downside is that the mutual pool could have the effect of undercutting incentives individual firms might otherwise have to improve safety practices but this problem could be addressed, for example, by tying premium levels to the financial and safety risk posed by an individual company s activities. This option would allow companies to demonstrate financial responsibility for the cost of spills, at least to the limit paid out by the pool. (ibid. 47).. 21 Another option would be to phase in increases in the liability cap and financial responsibility requirements, which would allow the insurance industry a period of adjustment. Although any increase in liability limits and financial responsibility requirements would test the capacity of the offshore drilling insurance market, over time such a change would almost certainly stimulate an increase in insurance capacity. A phased-in approach would allow Congress to re-assess any concerns about limited capacity in the insurance industry in light of actual experience (ibid. 47). 22 Finally, regardless of how insurance is provided, smaller firms could be encouraged to partner with firms with greater financial resources. It should be noted that joint ventures between larger and smaller companies already exist; thus a policy change may not be necessary to encourage such arrangements (ibid. 47). 23 Ibid. 49.

11 13 Maritime Accidents with Particular Emphasis on Liability and Compensation 297 (FAMLA), which excludes from limitation claims for wages, personal injury, and wrongful death, as well as claims relating to oil drilling or exploration or the discharge of oil from a vessel or offshore facility. Further, the Consolidated Land, Energy and Aquatic Resources Act (CLEAR) was approved in 2010 by the House of Representatives. This Act would remove the Oil Pollution Act limits for offshore facilities. None of these bills has been passed into law so far Treaties on Liability and Compensation for Damage from Offshore Activities The World Level So far, offshore activities are not covered by any global or regional environmental liability and compensation regime established under an international treaty. The only treaty concluded to deal with this subject matter, that is the Convention on Civil Liability for Oil Pollution Damage resulting from Exploration for and Exploitation of Seabed Mineral Resources (London 1977) which was intended to apply to the North Sea, the Baltic Sea, and the Northern Atlantic Ocean, has not entered into force and is not likely to do so. It provided for the channeling of liability on the operator (Article 3), the right of the latter to limit his liability (Article 6), and his obligation to maintain an insurance or other financial security (Article 8) The Mediterranean Regional Level A few provisions on liability and compensation for damage from offshore activities can be found at the Mediterranean regional level. One of the instruments concluded within the framework of the Convention for the Protection of the Marine Environment and the Coastal Region of the Mediterranean (Barcelona 1976, amended in 1995) 26 is the Protocol concerning Pollution Resulting from Exploration and Exploitation of the Continental Shelf, the Seabed and its Subsoil (Madrid, 14 October 1994). 27 The Offshore Prot. was opened for signature in Madrid on 14 October 1994 and entered into force on 24 March It is today 24 Foley 2001, However, where the operator is a State Party, the operator shall not be required to maintain insurance or other financial security to cover its liability (Article 8 para 5). 26 Hereinafter: Barcelona Conv. 27 Hereinafter: Offshore Prot. The adoption of appropriate measures in this field is envisaged by Article 7 of the Barcelona Conv. The Offshore Protocol is the result of preparatory works which have lasted for several years and were carried out on the basis of a project drafted by the International Juridical Organization for Environment and Development (IJO), a non-

12 298 T. Scovazzi binding on six parties, namely Albania, Cyprus, Libya, Morocco, Syria, and Tunisia. The Offshore Prot. is an advanced instrument from the point of view of an enhanced protection of the marine environment. 28 The general undertaking of the parties is to take, individually or through bilateral or multilateral co-operation, all appropriate measures to prevent, abate, combat, and control pollution resulting from the activities covered by the Protocol. 29 This objective can be achieved, inter alia, by ensuring that the best available techniques, environmentally effective and economically appropriate, are used for this purpose (Article 3 para 1). Several provisions of the Offshore Prot. set forth obligations with respect to activities carried out by operators, who often are private persons, either natural or juridical. 30 The definition of operator (Article 1.g) has a broad content. It includes not only the persons who are authorized to carry out activities or carry out activities (e.g., the holder of a license), but also any person who does not hold an authorization but is de facto in control of activities. All activities in the Offshore Prot. area, 31 including erection on site of installations, are subjected to the prior written authorization from the competent authority of a party (Article 4). Before granting the authorization, the authority must be satisfied that the installation has been constructed according to international standards and practice, and that the operator has the technical competence and the financial capacity to carry out the activities. The authorization is refused if there are indications that the proposed activities are likely to cause significant adverse effects on the environment that could not be avoided by compliance with specific technical conditions. Detailed provisions of the Offshore Prot. are devoted to safety measures, contingency planning, notification, and mutual assistance in cases of emergency, (Footnote 27 continued) governmental organization having its seat in Rome. See Treves 1978, 827; Sersic 1989, 161; Scovazzi 1995, It is composed of a preamble and 32 articles, distributed in six sections relating to the following matters: General provisions; Authorization system; Wastes and harmful or noxious substances and materials; Safeguards; Co-operation; Final provisions. Seven annexes and an appendix complete the instrument. 29 The activities to which the Protocol applies are defined in quite broad terms by Article 1.d: (i) Activities of scientific research concerning the resources of the seabed and its subsoil; (ii) Exploration activities: Seismological activities; surveys of the seabed and its subsoil; sample taking; Exploration drilling; (iii) Exploitation activities: Establishment of an installation for the purpose of recovering resources, and activities connected therewith; Development drilling; Recovery, treatment and storage; Transportation to shore by pipeline and loading of ships; Maintenance, repair and other ancillary operations. 30 These obligations are to be understood in the sense that parties are bound to take the appropriate measures in order to ensure that the operators comply with the provisions of the Offshore Prot. 31 According to Article 2 para 1, the Offshore Prot. applies to the seabed under any legal condition, be it the continental shelf or the seabed under the territorial sea or the internal maritime waters. The Parties may also extend its application to wetlands or coastal areas (Article 2 para 2)..

13 13 Maritime Accidents with Particular Emphasis on Liability and Compensation 299 monitoring, removal of installations, specially protected areas. Duties of cooperation among the parties are envisaged with respect to studies and research programs, formulation of rules, standards, and recommended practices and procedures, scientific and technical assistance to developing countries, mutual information, and prevention of transboundary pollution. Of particular interest for the purpose of this study is Article 27, relating to liability and compensation. The first paragraph of Article 27, as it is provided in other treaties relating to the protection of the environment, sets forth a future undertaking by the Parties to co-operate in the drafting of appropriate rules and procedures: The Parties undertake to co-operate as soon as possible in formulating and adopting appropriate rules and procedures for the determination of liability and compensation for damage resulting from the activities dealt with in this Protocol in conformity with Art. 12 of this Convention. 32 An obligation to co-operate is not devoid of legal meaning. It implies a duty to act in good faith in pursuing a common objective and in taking into account the positions expressed by the other interested States. This kind of behavior is likely to lead to the conclusion of an agreement. As remarked by the International Court of Justice in the judgments of 20 February 1969 on the North Sea Continental Shelf cases, The parties are under an obligation to enter into negotiations with a view to arriving at an agreement, and not merely to go through a formal process of negotiation ( ); they are under an obligation so to conduct themselves that the negotiations are meaningful, which will not be the case when either of them insists upon its own position without contemplating any modification of it. 33 The second paragraph of Article 27 sets forth three provisional, but substantive, obligations. Waiting for the adoption of appropriate rules and procedures on liability and compensation, the parties to the Offshore Prot. are bound to take measures to ensure that, first, liability is channeled on the operators, second, they pay compensation in a prompt and adequate manner and, third, they have and maintain compulsory insurance or other financial guarantee: Pending development of such procedures, each Party 32 Under Article 12 of the original 1976 text Barcelona Conv. the Contracting Parties undertake to co-operate as soon as possible in the formulation and adoption of appropriate procedures for the determination of liability and compensation for damage resulting from the pollution of the marine environment deriving from violations of the provisions of this Convention and applicable protocols. After the amendments of 2005, the corresponding Article 16 of the present Barcelona Conv. provides as follows: The Contracting Parties undertake to cooperate in the formulation and adoption of appropriate rules and procedures for the determination of liability and compensation for damage resulting from pollution of the marine environment in the Mediterranean Sea Area. 33 ICJ Rep. 1969, para 85 of the judgment.

14 300 T. Scovazzi (a) shall take all measures necessary to ensure that liability for damage caused by activities is imposed on operators, and they shall be required to pay prompt and adequate compensation; (b) shall take all measures necessary to ensure that operators shall have and maintain insurance cover or other financial security of such type and under such terms as the Contracting Party shall specify in order to ensure compensation for damages caused by the activities covered by this Protocol. As it can be seen, the Offshore Prot. does not allow the so-called self-insurance, a dubious euphemism that simply means the absence of any insurance or financial security to cover compensation for damage. The strict character of the obligation set forth in Article 27 para 2, may, together with other reasons, explain why it took more than 16 years for the Offshore Prot. to enter into force and why it is now binding only on six parties. In fact, at the time of signature of the Offshore Prot., the European Community (now the European Union) 34 and France entered a reservation, pending consideration, with specific regard to para 2 of Article 27. Today the limited number of parties to the Offshore Prot. does create evident problems. It is unfair to burden the parties with legal obligations that make offshore activities more expensive for those who operate on their continental shelves and that are not applicable in the case of other Mediterranean coastal States. There is a need to avoid that the stricter measures adopted by some coastal States are frustrated by a tolerant and insufficient regime applied in other neighboring States. As damage caused by marine pollution cannot be confined within the boundaries artificially drawn by man at sea, the consequences of an incident could affect a high number of States, including those that have adopted a more precautionary attitude. The only equitable development is to do every effort to achieve the broadest possible participation to the Offshore Prot. and to formulate and adopt the appropriate rules and procedures provided for in Article 27 para 1 to ensure that a uniform regime is in place for the whole Mediterranean seabed and marine environment. In fact, a set of Guidelines for the Determination of Liability and Compensation for Damage Resulting from Pollution of the Marine Environment in the Mediterranean Sea Area has been adopted on 18 January 2008 at the 15th ordinary meeting of the Parties to the Barcelona Conv. But they have a general character, applying to to the activities to which the Barcelona Convention and any of its Protocols apply (Guideline A para 4), and are not specific to offshore activities The attitude of the European Union, at least as far as the European Commission and the European Parliament are concerned, has today changed (see infra Sect. 13.5). 35 Scovazzi 2009, 183.

15 13 Maritime Accidents with Particular Emphasis on Liability and Compensation The Main Legal Questions Compensation for Environmental Damage One of the main legal questions to be addressed when discussing the regime of liability for activities hazardous for the environment is linked to the distinction between traditional and environmental damage. Traditional damage is intended as the damage suffered by persons, either natural or juridical, such as individuals and private or public entities, including the State. It can consist in bodily injuries or loss of life, in loss or deterioration of property, in loss or reduction of earnings, as well as in the cost of measures undertaken to clean up, restore, and reinstate the impaired environment. This damage, however consistent it might be, can be calculated in precise monetary terms. There is no doubt that traditional damage must be compensated by the liable person. 36 But the discussion is open as regards the extent to which the other kind of damage, that is environmental damage, should be compensated. This damage, which is typical in cases of pollution of natural components, including marine waters, is suffered by the environment as such (per se) and is given by a negative change in the quality of a natural component. It can consist in the value of the diminution of the quality of natural components during the time when restoration is pending (compensation for interim damage) or in the cost of compensation by equivalent action to be taken elsewhere if the polluted environment cannot fully return to its previous condition (compensation for irreparable damage). This kind of damage cannot be calculated in precise monetary terms. As far as international law is concerned, the treaties that establish uniform civil liability regimes for certain potentially polluting activities, such as the exploitation of atomic energy, shipping, carriage of dangerous goods, or transboundary trade of hazardous wastes, follow a scheme usually based on strict liability, the channeling of liability on the operator, the right of the latter to limit liability to a predetermined amount, his obligation to maintain an insurance or other financial security and, in some cases, the creation of an international fund to provide compensation if the protection already afforded is inadequate. However, these treaties are often based on the assumption that compensation must be restricted to damage that can be determined in precise monetary terms. For example, under the International Convention on Civil Liability for Oil Pollution Damage (London 1992), pollution damage means (a) loss or damage caused outside the ship by contamination, resulting from the escape or discharge of oil from the ship, wherever such escape or discharge may occur, provided that compensation for impairment of the environment other than loss of profit from such 36 The adjective traditional simply means that there is no discussion that this kind of damage can be compensated under well established general principles of law, which have existed for hundreds, if not thousands, of years in the legislation of most countries.

16 302 T. Scovazzi impairment shall be limited to costs of reasonable measures of reinstatement actually undertaken or to be undertaken; (b) the costs of preventive measures and further loss or damage caused by preventive measures. (Article 1 para 6). 37 However, it is a matter of fact that some national enactments take the different approach that also damage to the environment that cannot be evaluated in precise monetary terms shall be compensated. For instance, under the United States Oil Pollution Act of 1990 (s.1002(a)) each responsible party is liable for the removal costs and damages. The definition of damages (s.1002(b)(2)) includes different entries of traditional damage, as well as the following entry of environmental damage: Natural Resources Damage for injury to, destruction of, loss of, or loss of use of, natural resources, including the reasonable costs of assessing the damage, which shall be recoverable by a United States trustee, a State trustee, an Indian tribe trustee, or a foreign trustee. 38 Under s.1006(d)(1) of the Act the measure of natural resource damages is: A. the cost of restoring, rehabilitating, replacing, or acquiring the equivalent of, the damaged natural resources; B. the diminution in value of those natural resources pending restoration; plus C. the reasonable cost of assessing those damages. A claim to recover damage to natural resources is presented by the United States Government (or the other public entities specified in the Act) as a trustee of natural resources (s.1006(b)(1)). Any costs related to natural resources damage are to be determined with respect to plans that the trustee is called to develop and implement (s.1006(d)(2)). Relevant for the purpose of compensation for environmental damage is also Directive 2004/35/EC of the European Parliament and the Council of 21 April 2004 on environmental liability with regard to the prevention and remedying of environmental damage. 39 This instrument makes a distinction between primary remediation, that is any remedial measure which returns the damaged natural resources and/or impaired services to, or towards, baseline condition, complementary remediation, that is any remedial measure taken in relation to natural resources 37 A similar approach is followed, inter alia, in the 1996 International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea, in the 1999 Protocol on Liability and Compensation for Damage Resulting from Transboundary Movements of Hazardous Wastes and their Disposal and in the 2001 International Convention on Civil Liability for Bunker Oil Pollution Damage. 38 The term natural resources is defined as including land, fish, wildlife, biota, air, water, ground water, drinking water supplies, and other such resources belonging to, managed by, held in trust by, appertaining to, or otherwise controlled by the United States (including the resources of the exclusive economic zone), any State or local government or Indian tribe, or any foreign government (s. 1001, 20). 39 Official Journal of the European Union No L 143 of 30 April 2004.

17 13 Maritime Accidents with Particular Emphasis on Liability and Compensation 303 and/or services to compensate for the fact that primary remediation does not result in fully restoring the damaged natural resources and/or services and compensatory remediation, that is any action taken to compensate for interim losses of natural resources and/or services that occur from the date of damage occurring until primary remediation has achieved its full effect (Annex II, para 1, sub-paras a, b, and c). 40 The approach taken by the United Nations Compensation Commission, established under United Nations Security Council Resolution 687 (1991) after the end of the illegal invasion and occupation of Kuwait by Iraq, also provides an important contribution to the trend to take into consideration compensation for interim and irreparable environmental damage. 41 In the report and recommendations presented in 2005, the Panel of the Commission in charge of the issue of depletion of, or damage to, natural resources 42 reached the following conclusions: The Panel does not consider that there is anything in the language or context of Security Council resolution 687 (1991) or Governing Council decision 7 that mandates or suggests an interpretation that would restrict the term environmental damage to damage to natural resources which have commercial value. 43 Furthermore, the Panel does not consider that the fact that the effects of the loss of or damage to natural resources might be for a temporary duration should have any relevance to the issue of the compensability of the damage or loss, although it might affect the nature and quantum of compensation that might be appropriate. In the view of the Panel, it is not reasonable to suggest that a loss that is documented to have occurred, and is shown to have resulted from the invasion and occupation of Kuwait, should nevertheless be denied compensation solely on the grounds that the effects of the loss were not permanent. 44 The Panel paid little consideration to the different approach adopted in a number of international treaties establishing uniform regimes of liability and compensation: 40 Interim losses are defined in the Directive as losses which result from the fact that the damaged natural resources and/or services are not able to perform their ecological functions or provide services to other natural resources or to the public until the primary or complementary measures have taken effect. It does not consist of financial compensation to members of the public. (Annex II, para 1, sub-para d). 41 The Commission (decision 7 of 1991) allowed compensation for losses or expenses resulting from (a) Abatement and prevention of environmental damage, including expenses directly relating to fighting oil fires and stemming the flow of oil in coastal and international waters; (b) Reasonable measures already taken to clean and restore the environment or future measures which can be documented as reasonably necessary to clean and restore the environment; (c) Reasonable monitoring and assessment of the environmental damage for the purposes of evaluating and abating the harm and restoring the environment; (d) Reasonable monitoring of public health and performing medical screenings for the purposes of investigation and combating increased health risks as a result of the environmental damage; and (e) Depletion of or damage to natural resources. 42 Doc. S/AC.26/2005/10 of 30 June Ibid. para Ibid. para 56.

18 304 T. Scovazzi The panel does not consider that this finding is inconsistent with any principle or rule of general international law. In the view of the Panel, there is no justification for the contention that general international law precludes compensation for pure environmental damage. In particular, the panel does not consider that the exclusion of compensation for pure environmental damage in some international conventions on civil liability and compensation is a valid basis for asserting that international law, in general, prohibits compensation for such damage in all cases, even where the damage results from an internationally wrongful act. 45 According to the Panel, a fundamental principle of justice was at stake: Where the [wrongful act] itself is of such a nature as to preclude the ascertainment of the amount of damages with certainty, it would be a perversion of fundamental principles of justice to deny all relief to the injured person, and thereby relieve the wrongdoer from making any amend for his acts. In such case, while the damages may not be determined by mere speculation or guess, it will be enough if the evidence shows the extent of the damages as a matter of just and reasonable inference, although the result may be approximate. 46 In the case of irreparable damage, the Panel recommended compensation by equivalent, charging Iraq, for instance, for the cost of the establishment and management for 30 years of a coastal protected area: The Panel finds that a coastal preserve would provide appropriate compensation for the loss of shoreline resources resulting from Iraq s invasion and occupation of Kuwait. A preserve sited in shoreline habitats similar to those that have been damaged would provide ecological services similar in kind to those that were lost. In view of the Panel, such a preserve is feasible, cost-effective and poses a low risk of adverse impacts Evaluation of Environmental Damage A different, although related, question is how to evaluate environmental damage, as it cannot be determined in precise monetary terms. Doubts and concerns have been expressed about the complexity and reliability of a number of methods used for calculating such kind of damage. For instance, in the United States alternatives to valuing the environment for the purpose of assessing claims include the price that the environmental resource commands in the market, the economic value attached to the use of environmental resources (such as methods of costing travel relying on expenditures made by an individual to visit and enjoy a resource, or a hedonic pricing method which takes the extra market value enjoyed by a private property with certain environmental amenities and assumes that public resources with comparable amenities have similar economic values), or contingent valuation methods to measure the 45 Ibid. para Ibid. para Ibid. para 451.

19 13 Maritime Accidents with Particular Emphasis on Liability and Compensation 305 willingness of individuals to pay for environmental goods such as clean air or water or the preservation of endangered species (usually taken from public opinion surveys). 48 Annex II to the above-mentioned European Union Directive 2004/35 develops the following considerations: When determining the scale of complementary and compensatory remedial measures, the use of resource-to-resource or service-to-service equivalence approaches shall be considered first. Under these approaches, actions that provide natural resources and/or services of the same type, quality and quantity as those damaged shall be considered first. Where this is not possible, then alternative natural resources and/or services shall be provided. For example, a reduction in quality could be offset by an increase in the quantity of remedial measures (para 1.2.2). If it is not possible to use the first choice resource-to-resource or service-to-service equivalence approaches, then alternative valuation techniques shall be used. The competent authority may prescribe the method, for example monetary valuation, to determine the extent of the necessary complementary and compensatory remedial measures. If valuation of the lost resources and/or services is practicable, but valuation of the replacement natural resources and/or services cannot be performed within a reasonable time-frame or at a reasonable cost, then the competent authority may choose remedial measures whose cost is equivalent to the estimated monetary value of the lost natural resources and/or services. The complementary and compensatory remedial measures should be so designed that they provide for additional natural resources and/or services to reflect time preferences and the time profile of the remedial measures. For example, the longer the period of time before the baseline condition is reached, the greater the amount of compensatory remedial measures that will be undertaken (other things being equal). (para 1.2.3). The already mentioned Panel of the United Nations Compensation Commission recognized that there are inherent difficulties in attempting to place a monetary value on damaged natural resources, particularly resources that are not traded on the market. With specific regard to HEA [= Habitat Equivalency Analysis], the Panel recognises that it is relatively a novel methodology, and that it has had limited application at the national and international levels. The Panel is also aware that there are uncertainties in HEA calculations, especially for establishing a metric that appropriately accounts for different types of service losses and for determining the nature and scale of compensatory restoration measures that are appropriate for damage to particular resources. For these reasons, the Panel considers that claims presented on the basis of HEA or similar methodologies of resource valuation should be accepted only after the Panel has satisfied itself that the extent of damage and the quantification of compensation claimed are appropriate and reasonable in the circumstances of each claim. However, the Panel does not consider that these potential difficulties are a sufficient reason for a wholesale rejection of these methodologies, or for concluding that their use is contrary to international law principles. It is likely that the elaboration of reliable and predictable criteria for the evaluation of environmental damage will become one of the main questions to be 48 Sands 2003, 884.

20 306 T. Scovazzi addressed in the near future at the international level, including in the case of damage resulting from offshore activities Compulsory Insurance and Compensation Fund In domestic legislation the most usual kind of liability for polluting activities is strict liability, instead of fault based liability. For instance, under the already mentioned European Union Directive 2004/35, the operator of activities causing significant environmental damage to protected species, natural habitats, or water is strictly liable to prevent and remedy the damage and to bear the full costs of it. 49 However, the laws of different countries greatly vary as to whether there should be a limitation to the liability to the benefit of the person, such as the operator, the licensee, or the shipowner, on whom liability is channeled. If liability is limited, it is usual to establish a compensation fund for cases in which the amount of compensation exceeds the limitation or the responsible cannot be identified. For instance, under the United States Oil Pollution Act, liability for damages from offshore spills is capped at US$ 75,000,000 and claims up to US$ 1,000,000,000 above the cap are paid out of the Oil Spill Liability Trust Fund. National legislation can also establish that the operator has to be insured or has to establish an adequate financial guarantee. A certain margin of flexibility may be envisaged in this regard. This is the case, for instance, of the legislation of Norway (Pollution Control Act No. 6 of 3 March 1981) that provides as follows: A permit granted in accordance with this Act or regulations issued pursuant thereto may include the condition that security shall be provided in respect of possible liability to pay compensation pursuant to this chapter. The pollution control authority will decide what security shall be required. The pollution control authority may issue regulations relating to the duty to provide security for specified types of activities. The King may issue provisions concerning the establishment of separate compensation arrangements to cover claims of the types to which this chapter applies, including financing, the duty to make financial contributions, the right to bring civil action and the settlement of claims Under the Directive, operators who carry out certain dangerous activities, as listed in Annex III, are strictly liable (without fault) for environmental damage. Operators carrying out other occupational activities are liable for any fault-based damage they cause to nature. Operators may benefit directly from certain exceptions and defenses (for example force majeure, armed conflict, third party intervention) and defenses introduced via transposition (for example permit defense, state of the art defense). Operators have to take preventive action if there is an imminent threat of environmental damage. They are likewise under an obligation to remedy environmental damage once it has occurred and to bear the costs (polluter-pays principle). In specific cases where the operators fail to do so, or are not identifiable, or have invoked defenses, the competent authority may carry out the necessary preventive or remedial measures. 50 Para 63. The Norwegian relevant legislation also includes the Petroleum Activities Act No. 72 of 29 November 1996.

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