Challenged Facing Classification Societies

Ugo Salerno,

Chief Executive Officer, RINA S.p.A

I hope I will provide you with some thoughts about unlimited Class liability that, even if they do not impact financially on ITIC, may very seriously affect the whole Maritime Industry as later I hope I will be able to demonstrate to you.

The current situation is that we do face liability issues, both under the present legal regimes, which courts in different countries are trying to extend, and under EU proposals, which we are trying to modify. Therefore my objective today is to ask for your support to obtain a dedicated convention which clearly limits our liability in the same fashion as happens for other players in the maritime industry, namely shipowners, charterers, agents, and managers.

We, as classification societies, are in an increasingly exposed position.

Every time an oil spill reaches a coastline the local people get justifiably upset. They look for someone, anyone, to blame. Quite often they cannot identify or trace the shipowner, and even more often, the cargo owner is not visible. However, usually we are, and in the press we are labelled as the people who said the ship was safe. And we, along with our much larger colleagues, are businesses that have done well in a buoyant shipping market, and all of us publish our financial results. So naturally, we make attractive targets. We are convinced we should enjoy the same limitation that is granted, as I previously said, to the owner and charterer, being service providers as defined in the CLC convention.

Challenges Facing Classification Societies

I will give you an example that demonstrates that there is a lot of confusion about this issue. In the Prestige case, the attempt by Spain to hold ABS responsible for the Prestige loss and subsequent pollution damages was dropped by the US court, at the beginning of January 2008, because it accepted that classification societies are covered by the CLC Convention under the definition of service providers. That is in line with the interpretation I was giving before. However, unfortunately for us, in the first instance of the Erika judgement, at around the same time, the Paris court held RINA partially responsible, under French law, for the loss of the Erika, alongside the cargo owner, the shipowner and the ship manager. What we find amazing is that such a burden was put onto RINA’s shoulders on the basis of what was defined by the same Court as a simple “imprudence” by one of our surveyors. And what is even more incredible is that, if the other parties will be entitled to limit under the CLC, we will be left with the largest part of the bill. All of us in this room are here because we provide services to shipping. All of us can be held liable if things go wrong when we provide these services. And all of us are have chosen to insure those liabilities. As long as we can insure the liabilities, and we act prudently, then we can stay in business.

However, if any of us should suddenly find themselves facing unlimited liability, we might also find we would not be in a position to be invited back to the next ITIC Forum. And nobody wants to miss a good party with nice people.

This is where we are today.

This is the legal bit.

Class faces liabilities to:

• The builder or owner of a vessel for negligent acts or omissions in performing their duties under the classification contract with theshipbuilder or shipowner.
• The Flag State for which the classification society acts as a Recognized Organization (RO) for negligent acts or omissions in performing statutory duties on behalf of the Flag State.

Third parties such as:

• a coastal state whose waters and/or shoreline have been
• polluted as the result of an incident involving a classed vessel,
• the charterer
• the owner of the cargo who may incur loss as a result of an incident affecting a classed vessel. We address the issue of potential claims made by the shipbuilder or shipowner through the wording of our Rules and the terms of the class contract.

Case law has upheld these terms and shown these contractual arrangements to be a reasonable, fair and effective method of addressing the relationship between the parties concerned. But claims with respect to acting as a Recognized Organization and potential third party claims now give us a headache. Within the EU, a small number of flag states (Italy, France, Spain) require class societies to accept unlimited liability if they are to be accorded RO status. Moreover the EU, through its Directive governing the recognition of class societies as ROs (article 6 of Dir.94/57/ EC), is attempting to extend unlimited liability for classification societies to other states. The Directive is currently subject to revision and IACS has lobbied for liability caps to be adopted but, to date, has been unsuccessful. And with respect to third parties, courts are trying more and more, as in the case of the PRESTIGE, to hold liable the only person they can see, which is the classification society.

And we have very limited means of defence.

The answer to such an unfair situation is the introduction of a balanced convention, developed by the IMO, which would unequivocally extend to class comparable liability limits to those accorded to the other principal sectors of the industry. Is that too much to ask? Shipowners, ship managers, charterers, captain and crew, pilots, tugs, salvors, port authorities and all their servants and insurers have a right to limit their liability for negligence

pursuant to international conventions such as the CLC 69/92, the LLMC ’76 or the Athens Convention ’74 et al. Their liability becomes unlimited only if it is proven that they acted “recklessly with the knowledge that damage would probably occur.” Flag States may also benefit from sovereign immunity, protection or immunity granted by national and international public law.

How can it be considered fair that the actions of a class surveyor, acting as a statutory agent on behalf of a Flag State, may expose the class society to disproportionate claims while the self same actions, if performed by a direct employee of the Flag State, would allow the State to invoke sovereign immunity against a claimant? Indeed, in the ERIKA case, we saw Malta granted sovereign immunity by the French court. Class is usually the body with the least ability to limit liability, yet also has the least ability to influence the course of actions at any time. Class does not design, manufacture, operate, own, maintain or derive commercial benefit from the vessel, equipment or the installation it surveys. We see the vessel infrequently and for short periods and you can notice it is not the easiest job. We cannot control the vessel or its operations. But if something goes wrong we face claims which could threaten our existence. I think it would be fair if our potential financial liability reflected, fairly and reasonably, the important but limited role that class undertakes. There are some moves in that direction, but not enough. This is an explosive issue, bubbling and waiting to erupt. I realise that the unlimited liability issue does not directly and immediately affect ITIC Members and in general our underwriters because they sign contracts with a clearly limited exposure towards the members. But, if sooner or later, someone somewhere succeeds in a claim for damages of the order of $1bn or more against class then the entire classification system will be at risk to the detriment of maritime safety and the industry as a whole. In fact the present classification society system will no longer be viable and you will receive our services through Governmental organizations. I’ll leave you to dwell on how the maritime industry might change.

We all have something to lose.

So we want everyone in shipping to work with us to develop an acceptable means to limit the liability of class. I hope I can count on my fellow club members for support in this.