SHORTCOMINGS IN OIL AND CHEMICAL POLLUTION COMPENSATION REGIME– THE CHINA EXPERIENCE


China acceded to the 1969 Civil Liability Convention in the 1990 and to the CLC 92 Protocol in 1999. Currently all Chinese ocean going ships carrying more than 2000 tons of oil in bulk are compulsorily insured for oil pollution liability. China is also a party to the Fund Convention (Fund 71) but it is only applicable to Hong Kong SAR but not to the rest of China.

The bulk of the oil and chemical pollutions along the Chinese coasts and rivers are caused by coastal tankers or tankers of less than 2000 grt. Hence in reality, there is no proper compensation regime in existence for oil pollution or for that matter chemical pollution in China which is caused by vessels of this category.

There have been much consultation on this but as of today, no agreement has been reached to set up a domestic compensation regime which requires coastal ships to have mandatory insurance for oil pollution liability and neither is there any compensation fund set up by cargo receivers. Today PRC is the third largest importer of crude oil and the largest importing country of chemical refined products. China has yet to accede to the International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea (HNS), 1996 and it is unlikely to accede to it any time soon largely for the same reason to protect the viability of the local fleets and businesses.

While this policy is understandable, the negative impact of such a policy is that the country’s environment, its industries and its people will have to bear the brunt of the effects of inadequate or non existent compensation regime. More insidious is the chemical pollution where the resultant impact on the environment and the well being of its people is long term and its effects are not so easily identifiable. This loophole is also subject to exploitation by both local and foreign ships engaged in the carriage of oil and chemical products to China.

The paper will examine the growth of China as a key player in the oil, gas and chemical industry, its comparative development of a compensatory legal regime, its shortcomings and how this situation is being exploited by local and foreign shipowners in a perfectly legal way but at the expense of the local environment, water sources and the well being of the population.


The historical records of marine oil spills in PRC

As mentioned above, PRC has now emerged as the third-largest oil importer in the world. Statistics from the Ministry of Communications of PRC indicated that cargo landed by sea reached around 1.8 billion tons in 2005 and the throughput in ports across the country amounted to 4.17 billion tons. This also included the 61.8 million TEUs handled in PRC which is one-eighth of the world’s total. According to the statistics published by the Customs Administration of PRC, the country imported more than 100 million tons of crude oil in 2003 for the first time. By 2004, the crude oil imported had exceeded 120 million tons, and in the case of refined oil and chemical products, more than 40 million tons. In 2005, crude oil imported had exceeded 130 million tons. It is estimated that given the rapid growth of high powered PRC’s economy, the insatiable demand for crude and refined oil and chemicals will continue its spiraling growth.


It is also reckoned that at least 90 per cent of the nation’s imported crude oil would continue to be transported by sea. Even if the pipelines into China from Kazakhstan and Russia are completed and in operation, it is estimated that 80% of the imported oil would still be transported by sea. The phenomenal rise in the movement of goods and people along the Chinese coasts had led to surging growth in maritime traffic. Collisions between ships and incidents of groundings are also on parallel increase and resultant oil pollution occurrences of all descriptions could not be avoided. Between 1973 and 2003, there were more than 2,353 reported oil spills along the Chinese coasts and rivers. This figure includes oil spillages of big and small spills. In PRC, a big spill is in excess of 50 metric tons. Over a period of 30 years, it would work out to be one oil spill every 54 days. Of this figure, there were 62 major spills, each in excess of 50 metric tons and to be precise, more than 34,189 metric tons of oil had been spilt into coastal waters and rivers. This figure represents oil pollution caused by vessels of all descriptions.

If this is broken down into specific details, there were a total of 29 oil spills in PRC between 1973 and 2003 which were caused by oil tankers (according to a statistics ). Each of these spills was in excess of 50 metric tons. 7 of these oil tanker related oil spills were caused by foreign vessels and all of them had paid compensation for the damage caused. Excluding the compensation for cleaning up costs, the compensation for these 7 cases averaged 8.28 million RMB, the highest being 17.75 million RMB. The remaining 22 oil spill accidents were caused by Chinese vessels and only 9 of them had paid compensation. Excluding the compensation for cleaning up resources, their compensation amount averaged 1.53 million RMB, the highest being 5.5 million RMB.

For example on 14 November 2000, a Chinese tanker “DeHang 298” collided with Norwegian chemical tanker “Bow Cecil” at the mouth of Pearl River. Dehang 298 eventually sank with loss of five crew members and 230 cubic meters of heavy oil were leaked into the sea. China’s Maritime Safety Department took timely action to clean up the oil spill and expanded around 6.5 million RMB on the cleaning-up operation. The owner of the tanker DeHang 298 is a single ship owner and did not have the financial ability to pay the compensation. On the other hand, Bow Cecil was found not liable for the collision and hence was not responsible for the cleaning up costs. Due to the absence of clear law governing the compensation regime in PRC, the State ended up having to pay for the entire cleaning up cost.




Prevailing Situation of Damage to Environment Arising from Carriage of Hazardous and Noxious Substances by Sea in PRC

Whilst researching for historical records and data on compensation models concerning damage to environment arising from carriage of hazardous and noxious substances in PRC, the writer had met with little success because of the paucity of information. The Chinese State Oceanic Administration began to publish the Ocean Environment Quality Yearbook in 1990 to indicate important happenings to the ocean environment, but incidents of pollution and damage to environment caused by the carriage of hazardous and noxious substances within PRC waters was not recorded. Up to the year 2005, this situation has not changed. To understand the seriousness of the impact to environment arising from carriage of hazardous and noxious substances, the writer would summarize the example of one collision case near the estuary of Yangtze River.

On the morning of April 17, 2001, a chemical tanker of the Republic of Korea which had onboard 2000 metric tons of styrene, was involved in a collision with a Hong Kong registered cargo ship near the estuary of Yangtze River. This collision resulted in more than 700 metric tons of styrene spillage into the sea causing serious damage to the marine environment and ecosystems.

This was the world’s most serious incident of styrene spillage and the relevant department claimed a ‘state indemnification’ of US$8 million from the wrongful parties. The term "state indemnification" is still a new terminology in China and was used for the first time in judiciary practice since the promulgation of the "Law on State Ocean Environment Protection of the People's Republic of China" in April 2000. Pursuant to the relevant provisions of the law, the Chinese Government shall have the right to demand the ship in question to indemnify the State for damage caused to the Chinese marine environment arising from serious leakages of crude oil or other chemical products within the territorial waters of PRC.

The money obtained from the ‘state indemnification’ will mainly be used for i) measure taken to neutralize the damage caused by the chemical and ii) to monitor the condition of the affected marine areas. As the impact is often far reaching, such monitoring and supervision will take years if not decades to determine the true extent of damage. To be realistic, the US$8 million is just an initial estimation by environmental experts and the actual losses to the marine environment and damage to its ecosystems would certainly be much higher.

As the writer is given to understand, the owners of the two ships involved had paid only US$1 million each as fines, hardly sufficient for costs to neutralize the styrene contamination. The final agreement on the "state indemnification" has still to be finalized.

In retrospect, the compensation demanded by the Chinese authority paled in comparison with that of a recent heavy oil spill in the port of Odessa involving 74 m/tons of bunker fuel. The State Ecological Inspection presented a claim of US$24.5 million for environmental damage which amounted to US$329 per kg of oil spilt. The Port Authority also put up a claim of US$7.6 million for cleaning up cost which worked out to US$84 per kilo of oil spilt.

Another trend in the maritime transportation chain which warrants attention in PRC is the importation of high tech refined products such as lubricating oil from United States, South Korea and Singapore. Many of the shipments of refined products are shipped from South Korea or Singapore using small chemical tankers of 2000 dwt or below. This practice is to evade the compensation regime of the CLC and also to take advantage of the absence or lack of a well defined national compensation regime in PRC.

CLC only applies to ship carrying more than 2,000 m/tons of oil in bulk as cargo, and in this case, a ship carrying less than 2000 m/tons can totally evade the governance of CLC should a pollution occur. And since China has not acceded to the HNS Convention or push for a comparable national compensation regime to be put in place, a ship found to be have caused spillage is only governed by the limits of limitation of liability as found in Chapter XI of the Maritime Code of PRC. The limitation amount as set in Chapter XI of the Chinese Maritime Code is actually much lower than that of CLC.

In the case of an oil spill caused by a foreign ship carrying less than 2000 m/tons of oil in bulk within China’s territorial waters, the shipowner can actually escape liability by paying a security deposit into the maritime court in accordance with the stipulations of the Chinese Maritime Code. Once this limitation fund is set up, the wrongful vessel can continue to trade freely without any fear of being arrested or detained by any parties in PRC.

Reasons for the inadequate compensation for oil and chemical spills in PRC

PRC as of to date, does not have a specific legal regime which introduces strict liability for the shipowners and a system of compulsory insurance and insurance certificates for ships of all tonnages operating within Chinese waters. She has a patchwork of articles in laws and regulations which are inadequate and does not address the changing situations confronting the country in the present as well as into the future. Perhaps a highlight of some of these regulations and articles in law would give readers a better picture.

Article 124 of the General Principles of the Civil Law of PRC stipulates “Any person who pollutes the environment and causes damage to others in violation of state provisions for environmental protection and the prevention of pollution shall bear civil liability in accordance with the law.” This is the basic principle for civil compensation regarding oil spill pollution.

Article 90 of the Marine Environment Protection Law of PRC stipulates that “Whoever causes pollution damage to the marine environment shall remove the pollution and compensate the losses; in case of pollution damage to the marine environment resulting entirely from the intentional act or fault of a third party, that third party, shall remove the pollution and be liable for the compensation. For damages to marine ecosystems, marine fishery resources and marine protected areas which cause heavy losses to the State, the department invested with power by the provisions of this law to conduct marine environment supervision and administration shall, on behalf of the State, put forward compensation demand to those held responsible for the damages.”

Article 39 of the Regulations of the PRC on the Prevention of Vessel-Induced Sea Pollution stipulates that “In case of violation by vessels of the Marine Environmental Protection Law of the People's Republic of China and these Regulations that has caused pollution damage to the marine environment， the harbor superintendency may order the payment of a fee for eliminating the pollution， and compensation for the state's losses. If the party concerned does not accept the order， he may bring a suit before the people's court in accordance with the stipulation of Article 41 of the Marine Environmental Protection Law of the People's Republic of China.”

Article 40 of the Regulations of the PRC on the Prevention of Vessel-Induced Sea Pollution stipulates that “In the event that units or individuals that have suffered pollution damage as a result of the marine environmental pollution by vessels demand civil liability compensation， the matter shall be handled in accordance with the handling procedures stipulated in Article 42 of the Marine Environmental Protection Law of the People's Republic of China. Disputes over liability for and the amount of compensation may be handled by the harbor superintendency through conciliation. If a party does not agree, a suit may be brought before the people's court. Cases involving foreign vessels may also be solved in accordance with arbitration procedures.”

Article 44 of the Regulations of the PRC on the Prevention of Vessel-Induced Sea Pollution stipulates that “In case of vessel-induced pollution，the ship owners who request exemption from liability for compensation shall submit to the harbor superintendency a report，which shall be able to prove that the pollution damage has been caused entirely by one of the circumstances as listed in Article 43 of the Marine Environmental Protection Law of the People's Republic of China，and that the pollution damage to the marine environment could not be avoided despite all prompt and reasonable measures.”

But the above-mentioned rules are too ambiguously drafted to be firmly applied in judicial practices. Due to a lack of a uniform, standard and fixed criterion, the judges in many instances, have to apply their discretions in interpretation and this is one reason which explained for the different conclusions arrived at by the judges of different districts or even from judges of the same court. The inconsistencies of the judicial decisions have led to poor compensation for victims of the pollution incidents.

Another reason for the inadequate compensation in PRC is the loophole in the application of the CLC. According to an analysis , PRC’s domestic oil tankers navigating along the coast with a deadweight of less than 2,000 tons accounts for 77.6 percent while oil tankers on inland rivers below 2,000 tons in deadweight accounts for 87 percent. Fully 47 percent of these inland tankers are less than 500 tons. All these vessels do not come under the governance of CLC and China has such a large diverse fleet of small and old vessels plying within its waters and rivers that any attempt to impose strict liability on them and or compulsory insurance would certainly kill off this important leg of the transport chain which kept the China’s economy beating.

Being a party to CLC, China only requires owners of oil tankers engaged on international route carrying more than 2,000 tons of cargo oil to buy insurance to protect their pollution liability. CLC as a whole, did not achieve its objective well in PRC because insurance for oil pollution is not widely promoted. In PRC only vessels carrying more than 2,000 tons of cargo oil and for international transport are obligated to insure their risks against oil pollution. Vessels for internal transport and vessels with a deadweight under 2,000 tons are not covered with liability insurance for cost reasons.

Next, the FC, of which PRC is a party, is only applicable to Hong Kong SAR and not to the mainland proper. Again for economic reasons, PRC has not set up any oil pollution compensation fund, hence for any excess amount above the limitation amount stipulated by CLC, the victims have no remedy in PRC against the guilty parties. The Chinese authority is apparently reluctant to impose financial burdens on many nascent shipowners who have yet to find their feet.

Finally, the low limitation amount of the limitation of liability regime as stipulated by the Maritime Code of PRC, as mentioned before, also contributed to the inadequate compensation regime available to victims of oil or chemical pollution incidents. Furthermore though the rules are present, the actual implementation and enforcement of the rules are rare and hard to be applied .

The prevalent compensation regimes for oil/chemical spill pollutions in the world which could be models for PRC to adopt

(1) Compensation regime established by CLC and FC

Many countries choose to become a party to both CLC and FC and to follow the stipulations in their entirety. At the end of May 2006 there are 93 countries and regions which have joined both the CLC and FC. But this compensation regime is hard to be promoted in China, because China is now the third largest importer of oil and the largest importer of refined oil products and chemicals. Oil importers would have to shoulder a heavy burden for contributions made to the FC. It will also increase the operating costs of the Chinese oil tanker fleets and any such increases of their operating costs would certainly meet with strong resistance. It is also inevitable that the owners would pass all the cost increases down the line to the consumers. There is a huge social costs to be considered.

(2) US model : Internal Compensation Fund Regime only
Due to the limitation amount stipulated by FC 1971, it was deemed too low by US. It did not join in the FC and after the major oil pollution accident of 1989, US promulgated the OPA 1990, and set up the OSLTF (Oil Spill Liability Trust Fund) accordingly. This kind of compensation regime may be suitable for PRC as it has the liberty to impose a regime which is uniquely suitable for the Chinese economic and social conditions.

(3) Double compensation regime: International Conventions and Internal Legislations

In 1971, Canada promulgated a code to set up an ocean oil pollution compensation fund, and in 1987 promulgated the amended SOPF (Ship Source Oil Pollution Fund). Canada is at the same time a party to the CLC and FC and so the internal fund is mainly for making up shortfalls not covered by the CLC and FC.


Can PRC wait any longer to push for and implement a compulsory compensation regime?

In 2005 while promoting compulsory insurance against oil pollution from ships, China’s Maritime Safety Administration (MSA) began the work to establish a compensation regime for oil pollution from ships to guarantee financial support for cleaning up operations and compensation for victims of such incidents. This fund will be set up by levying a charge on ship owners and cargo consignors to ensure that they in take responsibility for oil pollution and compensating the victims of oil spills. But till now the fund has yet to be set up.

PRC in my view, is faced with a difficult choice of trying to protect and nurture a viable shipping and oil/chemical industry but at the same time, pinned down with a pressing need to come to terms with the harsh reality of a fast degrading maritime environment. A weak and feeble legal regime with no bite, will not serve its long term purpose and it is critical that PRC must design a feasible compensation regime to protect its environment adequately and to ensure that victims of such incidents are realistically compensated. PRC cannot afford to remain status quo because with the wide range of industrial chemicals being imported into the country, the impact of any spills whether in small or large quantity, would be far reaching in its impact to its marine ecosystems, marine resources and the health of the Chinese people.

A major source of protein needs of the population is derived from its rivers and coastal waters where large scale aqua farming are undertaken to harvest fish, crabs, shell fish, oysters, scallops, shrimps etc. It cannot depend on catches landed from the surrounding seas and the far oceans as these alone, are not able to meet the demands from a increasingly affluent society. The rivers and lakes are also water sources for PRC. The coastal regions, beside supporting large industrial installations, are also increasingly being used for recreational purposes. Any contamination of such areas by chemicals would be far reaching in its implications. It is unrealistic to draw on the country’s financial resources to clean up such pollution or to implement measures to minimize its damage whilst the guilty parties can get away easily.

Rising health care costs is already a serious concerns for the Chinese people and any additional burdens imposed on the population because of long term contaminated related illnesses will surely lead to social tensions and high social costs.

Imposition of a strict compensation regime will close the loophole now being exploited by local and foreign shipping entities. More importantly, a strict compensation regime will force shipowners to upgrade their fleets and to improve manning standards. The implementation of such a national compensation regime should be taken proactively rather than taking the traditional route of implementing reactive legislation to deal with the effects after a major disaster.

A good example for PRC to consider is the International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea (HNS) 1996. This Convention was adopted by IMO on 3 May 1996. The HNS Convention is based on the two tier system established under the CLC and FC. However it goes further in that it covers not only pollution damage but also risks of fire and explosions, including loss of life or personal injury as well as loss of or damage to property.
Hazardous and noxious substances are defined by reference to lists of substances included in various IMO Conventions and Codes. These include oils; other liquid substances defined as noxious or dangerous; liquefied gases; liquefied substances with a flashpoint not exceeding 60C; dangerous, hazardous and harmful materials and substances carried in packaged form; and solid bulk materials defined as possessing chemical hazards. The Convention also covers residues left by the previous carriage of HNS, other than those carried in packaged form.

The Convention defines damage as including loss of life or personal injury; loss of or damage to property outside the ship; loss or damage by contamination of the environment; the costs of preventative measures and further loss or damage caused by them.

The Convention introduces strict liability for the shipowner and a system of compulsory insurance and insurance certificates。 For ships not exceeding 2000 GRT, the limits of liability is set at 10 million SDR and above that, additional 1500 SDR is added for each gross ton until it reaches 50,000 GRT and above that, 360 SDR per gross ton until the limit of 100 million SDR is reached or roughly about US$128 million.

In order to ensure that shipowners engaged in the transport of HNS are able to meet their liabilities, the Convention makes insurance compulsory for them. A certificate of insurance must be carried onboard and a copy is kept by the authorities who keep record of the ship’s registry.

The HNS also set up a second tier fund which is financed by cargo interests. Contributions to the second tier will be levied on persons in the contracting parties who receive a certain minimum quantity of HNS cargo in a calendar year. This second tier will consist of one general account and three separate accounts for oil, liquefied natural gas and liquefied petroleum gas. The HNS Convention excludes pollution damage as defined in the CLC and FC to avoid an overlap with these Conventions.

The HNS in the writer’s view, is not entirely perfect but it serves to provide a good template for PRC to study and to create a compensation model which will suit the Chinese economic model whilst at the same time, represent a bold step to ensure at least some certainty of compensation for the victims of oil or chemical substance pollution. This will also relieve the State from having to shoulder the burden of dealing with the consequences of long term damage to its maritime environment, ecosystems and the health of the Chinese people.


Capt Lee Fook Choon
International Congress of Maritime Arbitrators
Singapore 27 Feb 2007