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New Procedure for Calculating Marine Pollution Losses: One Step Forward or Two Backs?

Date of publication: 4 July 2021

Sergey Nedelko, Attorney at Law, Head of Odesa Office

Source:  Ports of Ukraine

On January 16, 2021, the Ministry of Environmental Protection and Natural Resources of Ukraine, by order No. 16, approved the Regulation on the procedure for calculating the amount of compensation and payment of losses caused as a result of pollution from ships, ships and other floating equipment of the territorial and internal sea waters of Ukraine.

Brief background

Previously, this procedure was regulated by the order of the Ministry of Natural Resources No. 116 of October 26, 1995, but it was canceled by the government decree No. 166-r of March 10, 2017 with the wording “ has lost its relevance and sets regulatory barriers“. Since that time, a legislative vacuum has formed in this part, which the bodies of the State Environmental Inspection skillfully used in their own interests, but to the detriment of the state’s image. First of all, we are talking about the activities of the liquidated “marine” environmental inspections to control isolated ship ballast in ports. According to the State Environmental Inspection, 12 claims for a total amount of more than UAH 11 million were filed on the fact of sea pollution in 2017, in 2018 this figure increased significantly and amounted to 75 claims for more than UAH 30 million. In 2019, the number of claims filed decreased to 48 (worth about UAH 26 million), which is primarily due to the active opposition of shipowners and the maritime community, as well as the adoption by the Cabinet of Ministers of two important regulations:       

The Ministry of Natural Resources understands that the lack of uniform rules only contributes to manipulation and different interpretations in determining the amount of discharged pollutants, calculating and reimbursing losses, paying for them, etc., which undoubtedly creates grounds for corruption abuses. However, does the new Regulation, in contrast to the canceled procedure, contain more modern and effective mechanisms that neutralize corruption risks, while maintaining the balance of interests of shipowners and the state? Let’s dwell on the key points.

Damages concept

The new Regulation retained the old approach to determining the amount of pollutants discharged from ships, which is calculated on the basis of instrumental and laboratory measurements, data from ship documents and visual observations. The amount of losses is calculated by simply multiplying the amount (volume) of the pollutant by the rates approved by the Cabinet of Ministers Decree No. 484 of July 3, 1995 in accordance with MARPOL 73/78.

However, in essence, the calculation of losses is a penalty for environmental pollution, and not losses in the classical form, which should be understood as the costs of authorized persons (USPA, State Environmental Inspection) to restore the state of the sea (real losses), as well as lost profits. In a situation with water pollution, losses can be attributed to the costs of containment and elimination of the spill, disposal of the collected material, the death of marine animals and birds, deterioration of the state of marine flora and fauna, losses of fishing enterprises, etc. It is this approach that is used in world practice when determining the amount of losses, first of all, based on the nature of the pollutant and its real impact on the ecology of the sea.

Such a concept is quite reasonable and justified, since in the case of spills of vegetable oils (food product) that periodically occur in Ukrainian ports, the negative consequences for the ecology of the sea are minimal. In addition, as a rule, spills are promptly cleaned up by the port administration services. As a result, the shipowner is forced to reimburse the losses associated with the liquidation of the accident, disposal of the collected substance, which will not affect the ecology of the sea in any way, as well as pay damages calculated according to the rates, which cannot be called a reasonable and fair outcome for the shipowner.         

Thus, the concept of calculating losses laid down in the new Regulation contradicts world practice and requires significant improvement. 

Deadlines for calculating losses and filing a claim with the shipowner

As you know, in the event of any incidents in ports, a vital issue for the shipowner is the ability to avoid the detention of the vessel, or to minimize the downtime. In the early stages of the incident, this completely depends on the actions of the State Environmental Inspection staff.     

The 1995 regulation provided that the amount of losses is calculated no later than five days from the date of detection of pollution – for Ukrainian shipowners and no more than a day – for foreign ones. At the same time, the deadlines for filing a claim were not set, which created grounds for abuse.

The new Regulation obliges the inspector to calculate the amount of losses within 24 hours from the moment of pollution, after which, during the next day, prepare and submit a claim to the ship’s master or marine agent. Then the shipowner decides on the possibility of voluntary satisfaction of the claim.

Filing a claim and prohibiting a ship from leaving

The new Regulation stipulates that in case of refusal from voluntary compensation for damage, the State Environmental Inspectorate sends the Harbor Master a decision to ban the ship’s exit, and also draws up and submits claims for damages to the court. However, such formulations carry several hidden points at once, in which there is a risk of potential abuse, which in the end can nullify all the good intentions of the developers of the document.   

Firstly , the validity period of the decision to ban the ship’s departure from the port in the manner of paragraphs. d) Part 2 of Art. 91 KTMU is formally unlimited and can be canceled by the State Environmental Inspectorate only after voluntary payment of the amount of losses.

Secondly , the authors of the Regulations deliberately avoided the use of the institution of the detention of a vessel at sea demand by the port master on the basis of Articles 80, 81 of the KTMU, since such detention is limited to 72 hours and can be canceled by the port master himself against the provision of sufficient security for the maritime claim, which is not in Art. … 91 KTMU.

Thirdly , the new procedure does not contain specific terms for the State Environmental Inspectorate to apply to the court with a claim for damages, or with an application for securing a maritime claim by imposing an arrest on the ship (based on the Brussels Convention of 1952 and the KTMU). This deprives the ship owner of the opportunity to use the procedural mechanisms for the release of the ship, by, for example, replacing one method of securing with another, providing a letter of guarantee from P&I Club, which is confirmed by judicial practice.    

In a situation where the decision to ban the ship’s departure from the port is not limited in time, the State Environmental Inspectorate may deliberately delay the appeal to the court within the limitation period (three years), or the period for considering the claim (one month), without formally violating any laws. In addition, very often the territorial bodies of the State Environmental Inspection simply do not have the means to pay the court fee, which can also serve as a formal reason for inaction. 

Fourth , the provision in this part completely contradicts the conclusions of the Supreme Court, which, in a ruling dated October 19, 2020 (case No. 420/4129/19), indicated that the amount of losses caused by environmental pollution according to the claim is not a set fee, a fine , another payment within the meaning of Art. 91 KTMU. Consequently, neither the claim itself, nor the refusal to pay the amount of losses, is not a legal basis for the prohibition of the ship’s departure from the port.

Under such conditions, the shipowner is forced to pay the amount of the claim under protest, solely for the early release of the ship, and then go to court for a refund from the state and local budgets, which is a rather lengthy and complicated procedure.

Securing claims and applying guarantees

Все без исключения кейсы по морским требованиям неразрывно связаны с вопросом их достаточного и надлежащего обеспечения для предотвращения ареста судна, либо его отмены. Без преувеличения это было и остается камнем преткновения во взаимодействии с Госэкоинспекцией при ведении дел по разливам, а также предметом долгих обсуждений в морском сообществе.

The 1995 Regulation explicitly stipulated the obligation of the State Environmental Inspectorate to take measures to obtain a guarantee of payment of losses. Even then, it was clear that these provisions were of a fundamental nature, and their implementation could seriously affect the image of Ukraine as a maritime power. The canceled act contained the possibility of using exclusively bank guarantees, despite this, the laid down concept laid a rational grain in the direction of settling the letters of guarantee of the mutual insurance clubs of shipowners (P&I Club) in some future.

Alas, in the new Regulation, this concept did not find its continuation and was simply excluded. In addition, despite numerous requests from maritime specialists, the issue of applying P&I Club letters of guarantee was left without attention in the new act. However, the need for regulatory regulation of letters of guarantee of insurance associations has long been ripe and dictated both by age-old world practice and by the latest Ukrainian experience. We are talking about last year’s spill of vegetable oil during cargo operations on the m / v New Challenge in the Nikolaev port, where the State Environmental Inspection accepted the “ club»A guarantee as a proper, sufficient and sole guarantee of requirements for environmental pollution. Another example is the palm oil spill from the m / v Stavanger (Pivdenny port), where the State Environmental Inspection confirmed its readiness to accept a “club” guarantee to ensure its claims, which was also supported by the positive findings of the South-West Commercial Court of Appeal.    

So, the new procedure, in essence, largely repeats the provisions of the previous act of 1995 and does not contain conceptually new approaches in calculating the amount of environmental losses, effective mechanisms for ensuring environmental requirements, and also does not take into account world experience, the latest findings of the Supreme Court and the courts of appeal. Moreover, the Regulation contains norms that can create grounds for possible abuse. It remains to be hoped that the already existing good practice in port spill cases will be strengthened.