Whistleblowers, Oily Water and Ship Managers

Port state authorities around the world, but most notably in the USA, Germany and France, are taking an increasingly hard line on ships which have, or are suspected of having, breached the MARPOL Regulations which govern the limits on the amount of oil which ships can legitimately discharge into the sea. The trade press has been full of reports where engineers on ships owned by some of the biggest names in shipping have been accused of, or have been found guilty of, breaching MARPOL Regulations by using the engine room oily water separator improperly, or by-passing it altogether to discharge oil directly into the sea. In other cases, the offence is the falsifying of the ship’s records (particularly the Oil Record Book) by the crew. The United States Coast Guard and Department of Justice have been extremely aggressive in the investigation and prosecution of the owners, operators and crew of suspect ships. US law also enables the US authorities to offer rewards of up to 50% of the fine imposed to those who report alleged violations (the so-called “whistleblower” legislation). In April 2005 Evergreen International S.A. pleaded guilty and was fined US$25,000,000. In 2004 the owner of the “GUADALUPE” was fined US$4,200,000, of which 50% (US$2,100,000) was paid directly to the second engineer, who blew the whistle on the practices on board. With such rewards on offer, crew loyalty and the fear of blacklisting by owners or managers is unlikely to have any effect.

Why does this involve ship managers? For two reasons:

P&I Cover

P&I cover for deliberate (rather than accidental) breaches of MARPOL Regulations by crew is only provided subject to the discretion of the P&I Club’s Directors, which discretion will not be sought until the matter is concluded. It will be necessary for evidence to be provided to satisfy the Directors that reasonable steps were taken to avoid the offence. The International Group of P&I Clubs issued a circular in June 2005, in which it is made clear that the Clubs are unable to provide security while proceedings are underway (except in exchange for counter security) either for fines or for costs incurred in defending criminal or civil proceedings. Therefore, although the ship manager will be co-assured on the owner’s P&I insurance, the manager’s position vis-à-vis P&I insurance will be identical to that of the owner.

The manager as “operator”

In the US version of MARPOL, the Act to Prevent Pollution from Ships (33 USC 1901), the operator of a ship is defined as “a charterer by demise or any other person, except the owner, who is responsible for the operation, manning, victualing, and supplying of the vessel”. The US authorities regard the ship manager as the operator of the ship, and several ship managers have already faced direct claims from the US authorities, while other ship managers will undoubtedly do so in future.

Even where it can be evidenced that the crew member’s actions in violating the MARPOL Regulations are contrary to the company’s policy, the owner (or the manager) will still be vicariously liable for any actions performed in the course of the crew member’s duties, and the owner (or the manager) will still face a fine. However, if it can be evidenced that the ship has a proper documented voluntary compliance system on board, then it should be possible to obtain a reduction in any fine and to avoid criminal prosecution of the owner or manager.

It is, therefore, vital that the owner or manager can demonstrate to the relevant authorities that he has a voluntary compliance programme in place, which is properly documented and properly enforced.

Some suggestions with regard to voluntary compliance with MARPOL Regulations are:

• clear and concise company policies regarding compliance and reporting, possibly in the form of an Environmental Management Systems Manual. The Manual should be written in both English and the language of the crew;
• documentation evidencing that the crew has been given a copy of the company policy in writing, which the crew should sign off agreeing that they understand the policy and will abide by it;
• systematic training of the crew in MARPOL compliance, record keeping and equipment;
• up-grading of any equipment (particularly the Oily Water Separator) which is not functioning correctly;
• voluntary reporting of any suspected or discovered violations, either to the flag state, or to the US authorities if the ship is bound for the USA;
• companies should conduct periodic reviews, on-shore and on-board, to ensure that policies are being adhered to and these reviews must be carefully documented. This would involve periodic comprehensive audits by both outside auditors and shoreside high level engineering personnel of waste oil treatment equipment on board and ship’s records (such as the Oil Record Book and Bilge Soundings Log) to ensure compliance.

In view of the position regarding P&I cover, in the event that the ship manager is targeted by the authorities, he should be able to look to the owner for funds to deal with fines or costs. However, owners are sometimes reluctant to deal with claims involving crew negligence or wilful default where the crew have been selected or are directly employed by the ship manager.

It is therefore extremely important that ship managers contract using BIMCO Shipman 98, or a contract which is very similar. If the managers have their own tailor-made contract, great care must be taken to make sure that all the necessary provisions are included. In particular, the contracts must contain clauses such as the following (taken from Shipman 98);

[Acts or omissions of the Crew]

Notwithstanding anything that may appear to the contrary in this Agreement, the Managers shall not be liable for any of the actions of the Crew, even if such actions are negligent, grossly negligent or wilful, except only to the extent that they are shown to have resulted from a failure by the Managers to discharge their obligations under sub-clause 3.1, in which case their liability shall be limited in accordance with the terms of this Clause 11.

Indemnity

Except to the extent and solely for the amount therein set out that the Managers would be liable under sub-clause 11.2, the Owners hereby undertake to keep the Managers and their employees, agents and sub-contractors indemnified and to hold them harmless against all actions, proceedings, claims, demands or liabilities whatsoever or howsoever arising which may be brought against them or incurred or suffered by them arising out of or in connection with the performance of the Agreement and against and in respect of all costs, losses, damages and expenses (including legal costs and expenses on a full indemnity basis) which the Managers may suffer or incur (either directly or indirectly) in the course of the performance of this Agreement.

The ship manager who is facing direct action by the authorities may come under pressure from the owner to minimise losses by pleading guilty to the charges against him in order to reduce the fine; there may also be an agreement by the owner that the fine and costs will be paid by him. However, admitting responsibility has consequences for other ships under the same management. The management subsidiary of one owning company, who admitted liability, had to agree to implement a comprehensive compliance programme for 38 other ships under its management which called at US ports. Third party ship managers need to consider the interests of the owners of other ships under their management.