THE INTERNATIONAL REGIME FOR COMPENSATION FOR OIL

POLLUTION DAMAGE

Explanatory note prepared by the Secretariat of the International Oil Pollution

Compensation Funds

June 2007

1 Introduction

Compensation for pollution damage caused by spills from oil tankers is governed by an international regime
elaborated under the auspices of the International Maritime Organization (IMO). The framework for the
regime was originally the 1969 International Convention on Civil Liability for Oil Pollution Damage (1969
Civil Liability Convention) and the 1971 International Convention on the Establishment of an International
Fund for Compensation for Oil Pollution Damage (1971 Fund Convention). This 'old' regime was amended in
1992 by two Protocols, and the amended Conventions are known as the 1992 Civil Liability Convention and
the 1992 Fund Convention. The 1992 Conventions entered into force on 30 May 1996.

Due to a number of denunciations of the 1971 Fund Convention, this Convention ceased to be in force on
24 May 2002. A large number of States have also denounced the 1969 Civil Liability Convention. Therefore
this note deals primarily with the 'new regime', ie the 1992 Civil Liability Convention and the 1992 Fund
Convention.

The 1992 Civil Liability Convention governs the liability of shipowners for oil pollution damage. The
Convention lays down the principle of strict liability for shipowners and creates a system of compulsory
liability insurance. The shipowner is normally entitled to limit his liability to an amount which is linked to the
tonnage of his ship.

The 1992 Fund Convention, which is supplementary to the 1992 Civil Liability Convention, establishes a
regime for compensating victims when the compensation under the applicable Civil Liability Convention is
inadequate. The International Oil Pollution Compensation Fund 1992, generally referred to as the IOPC
Fund 1992 or the 1992 Fund, was set up under the 1992 Fund Convention. The 1992 Fund is a worldwide
intergovernmental organisation established for the purpose of administering the regime of compensation
created by the 1992 Fund Convention. By becoming Party to the 1992 Fund Convention, a State becomes a
Member of the 1992 Fund. The Organisation has its headquarters in London.

As at 1 June 2007, 117 States had ratified the 1992 Civil Liability Convention, and 101 States had ratified the
1992 Fund Convention. The States Parties are listed in the Annex.

2 1992 Civil Liability Convention

2.1 Scope of application

The 1992 Civil Liability Convention applies to oil pollution damage resulting from spills of persistent oil
from tankers.

The 1992 Civil Liability Convention covers pollution damage suffered in the territory, territorial sea or
exclusive economic zone (EEZ) or equivalent area of a State Party to the Convention. The flag State of the
tanker and the nationality of the shipowner are irrelevant for determining the scope of application.
 2

'Pollution damage' is defined as loss or damage caused by contamination. In the case of environmental
damage (other than loss of profit from impairment of the environment) compensation is restricted to costs
actually incurred or to be incurred for reasonable measures to reinstate the contaminated environment.

The notion of pollution damage includes measures, wherever taken, to prevent or minimise pollution damage
in the territory, territorial sea or EEZ or equivalent area of a State Party to the Convention ('preventive
measures'). Expenses incurred for preventive measures are recoverable even when no spill of oil occurs,
provided that there was a grave and imminent threat of pollution damage.

The 1992 Civil Liability Convention covers spills of cargo and/or bunker oil from laden, and in some cases
unladen sea-going vessels constructed or adapted to carry oil in bulk as cargo (but not to dry cargo ships).

Damage caused by non-persistent oil, such as gasoline, light diesel oil, kerosene etc, is not covered by the
1992 Civil Liability Convention.

2.2 Strict liability

The owner of a tanker has strict liability (ie he is liable also in the absence of fault) for pollution damage
caused by oil spilled from his tanker as a result of an incident. He is exempt from liability under the 1992
Civil Liability Convention only if he proves that:

a) the damage resulted from an act of war or a grave natural disaster, or

b) the damage was wholly caused by sabotage by a third party, or
c) the damage was wholly caused by the negligence of public authorities in maintaining lights or other
navigational aids.

2.3 Limitation of liability

The shipowner is normally entitled to limit his liability under the 1992 Civil Liability Convention. The limits
were increased by some 50.37% on 1 November 2003 as follows. The increased limits apply to incidents
occurring on or after that date:

a) for a ship not exceeding 5 000 units of gross tonnage, 4 510 000 Special Drawing Rights (SDR)
(US$7 million);
b) for a ship with a tonnage between 5 000 and 140 000 units of tonnage, 4 510 000 SDR (US$7 million)
plus 631 SDR (US$954) for each additional unit of tonnage; and
c) for a ship of 140 000 units of tonnage or over, 89 770 000 SDR (US$136 million)<1>.

If it is proved that the pollution damage resulted from the shipowner's personal act or omission, committed
with the intent to cause such damage, or recklessly and with knowledge that such damage would probably
result, the shipowner is deprived of the right to limit his liability.

2.4 Channelling of liability

Claims for pollution damage under the 1992 Civil Liability Convention can be made only against the
registered owner of the tanker concerned. This does not preclude victims from claiming compensation outside
this Convention from persons other than the owner. However, the Convention prohibits claims against the
servants or agents of the owner, members of the crew, the pilot, the charterer (including bareboat charterer),
manager or operator of the ship, or any person carrying out salvage operations or preventive measures. The
owner is entitled to take recourse action against third parties in accordance with national law.
<1>
The unit of account in the 1992 Conventions is the Special Drawing Right (SDR) as defined by the International Monetary
Fund. In this document, the SDR has been converted into US dollars at the rate of exchange applicable on 1 June 2007,
ie 1 SDR = US$1.512330.
 3

2.5 Compulsory insurance

The owner of a tanker carrying more than 2 000 tonnes of persistent oil as cargo is obliged to maintain
insurance to cover his liability under the 1992 Civil Liability Convention. Tankers must carry a certificate on
board attesting the insurance coverage. When entering or leaving a port or terminal installation of a State
Party to the 1992 Civil Liability Convention, such a certificate is required also for ships flying the flag of a
State which is not Party to the 1992 Civil Liability Convention.

Claims for pollution damage under the 1992 Civil Liability Convention may be brought directly against the
insurer or other person providing financial security for the owner's liability for pollution damage.

2.6 Competence of courts

Actions for compensation under the 1992 Civil Liability Convention against the shipowner or his insurer may
only be brought before the Courts of the State Party to that Convention in whose territory, territorial sea or
EEZ or equivalent area the damage occurred.

3 1992 Fund Convention

3.1 Supplementary compensation

The 1992 Fund pays compensation to those suffering oil pollution damage in a State Party to the 1992 Fund
Convention who do not obtain full compensation under the 1992 Civil Liability Convention for one of the
following reasons:

a) the shipowner is exempt from liability under the 1992 Civil Liability Convention because he can
invoke one of the exemptions under that Convention; or
b) the shipowner is financially incapable of meeting his obligations under the 1992 Civil Liability
Convention in full and his insurance is insufficient to satisfy the claims for compensation for pollution
damage; or
c) the damage exceeds the shipowner's liability under the 1992 Civil Liability Convention.

In order to become Parties to the 1992 Fund Convention, States must also become Parties to the 1992 Civil
Liability Convention.

The 1992 Fund does not pay compensation if:

a) the damage occurred in a State which was not a Member of the 1992 Fund; or
b) the pollution damage resulted from an act of war or was caused by a spill from a warship; or
c) the claimant cannot prove that the damage resulted from an incident involving one or more ships as
defined (ie a sea-going vessel or seaborne craft of any type whatsoever constructed or adapted for the
carriage of oil in bulk as cargo).

3.2 Limit of compensation

The maximum amount payable by the 1992 Fund in respect of an incident occurring before 1 November 2003
was 135 million SDR (US$204 million), including the sum actually paid by the shipowner (or his insurer)
under the 1992 Civil Liability Convention. The limit was increased by some 50.37% to 203 million SDR
(US$307 million) on 1 November 2003. The increased limit applies only to incidents occurring on or after
this date.
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3.3 Competence of courts

Actions for compensation under the 1992 Fund Convention against the 1992 Fund may only be brought before
the Courts of the State Party to that Convention in whose territory, territorial sea or EEZ or equivalent area the
damage occurred.

Experience in past incidents has shown that most claims are settled out of court.

3.4 Organisation of the 1992 Fund

The 1992 Fund has an Assembly, which is composed of representatives of all Member States. The Assembly
is the supreme organ governing the 1992 Fund, and it holds regular sessions once a year. The Assembly elects
an Executive Committee comprising 15 Member States. The main function of this Committee is to approve
settlements of claims.

The 1992 Fund shares a Secretariat with the 1971 Fund and the Supplementary Fund (see sections 4 and
6.2 below). The joint Secretariat is headed by a Director, and has at present 27 staff members.

3.5 Financing of the 1992 Fund

The 1992 Fund is financed by contributions levied on any person who has received in one calendar year more
than 150 000 tonnes of crude oil and heavy fuel oil (contributing oil) in a State Party to the 1992 Fund
Convention.

Basis of Contributions

The levy of contributions is based on reports of oil receipts in respect of individual contributors. Member
States are required to communicate every year to the 1992 Fund the name and address of any person in that
State who is liable to contribute, as well as the quantity of contributing oil received by any such person. This
applies whether the receiver of oil is a Government authority, a State-owned company or a private company.
Except in the case of associated persons (subsidiaries and commonly controlled entities), only persons having
received more than 150 000 tonnes of contributing oil in the relevant year should be reported.

Oil is counted for contribution purposes each time it is received at a port or terminal installation in a Member
State after carriage by sea. The term received refers to receipt into tankage or storage immediately after
carriage by sea. The place of loading is irrelevant in this context; the oil may be imported from abroad, carried
from another port in the same State or transported by ship from an off-shore production rig. Also oil received
for transhipment to another port or received for further transport by pipeline is considered received for
contribution purposes.

Payment of Contributions

Annual contributions are levied by the 1992 Fund to meet the anticipated payments of compensation and
administrative expenses during the coming year. Each contributor pays a specified amount per tonne of
contributing oil received. The amount levied is decided each year by the Assembly.

The Director issues an invoice to each contributor, following the decision taken by the Assembly to levy
annual contributions. A system of deferred invoicing exists whereby the Assembly fixes the total amount to
be levied in contributions for a given calendar year, but decides that only a specific lower total amount should
be invoiced for payment by 1 March in the following year, the remaining amount, or a part thereof, to be
invoiced later in the year if it should prove to be necessary.
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The contributions are payable by the individual contributors directly to the 1992 Fund. A State is not
responsible for the payment of contributions levied on contributors in that State, unless it has voluntarily
accepted such responsibility.

Level of Contributions

Payments made by the 1992 Fund in respect of claims for compensation for oil pollution damage may vary
considerably from year to year, resulting in fluctuating levels of contributions. The following table sets out
the contributions levied by the 1992 Fund during the period 1996-2006.

Annual Date due Total Contribution per tonne of

contributions contribution contributing oil
£ £
1996 01.02.1997 4 000 000 0.0110440
01.09.1997 10 000 000 0.0188066
1997 01.02.1998 9 500 000 0.0114295
Maximum deferred levy 30 000 000 (No deferred levy made)
1998 01.02.1999 28 200 000 0.0400684
01.09.1999 9 000 000 0.0134974
1999 Credit: 01.03.2000 -3 700 000 -0.0056367
01.09.2000 53 000 000 0.0552651
2000 01.03.2001 49 500 000 0.0545770
Maximum deferred levy 43 000 000 (No deferred levy made)
2001 01.03.2002 41 000 000 0.0428439
Maximum deferred levy 21 000 000 (No deferred levy made)
2002 01.03.2003 31 000 000 0.0274518
2003 01.03.2004 82 000 000 0.0052994
Maximum deferred levy 40 500 000 (No deferred levy made)
2004 01.03.2005 37 800 000 0.0273362
2005 01.03.2006 0
Maximum deferred levy 5 500 000 (No deferred levy made)
2006 01.03.2007 3 000 000 0.0020156

4 International Oil Pollution Compensation Supplementary Fund

On 3 March 2005 a third tier of compensation was established by means of a Supplementary Fund under a
Protocol adopted in 2003. So far 21 States have ratified the Protocol.

The Supplementary Fund provides additional compensation over and above that available under the 1992
Fund Convention for pollution damage in the States that become Parties to the Protocol. As a result, the total
amount available for compensation for each incident for pollution damage in the States which become
Members of the Supplementary Fund is 750 million SDR (US$1 134 million), including the amounts payable
under the 1992 Civil Liability Convention and the 1992 Fund Convention, 203 million SDR (US$307
million).

The Supplementary Fund only pays compensation for pollution damage for incidents which occur after the
Protocol has entered into force for the State concerned.

Membership of the Supplementary Fund is optional and any State which is a Member of the 1992 Fund may
join the Supplementary Fund.

Annual contributions to the Supplementary Fund will be made in respect of each Member State by any person
who, in any calendar year, has received total quantities of oil exceeding 150 000 tonnes after sea transport in
 6

ports and terminal installations in that State. However, the contribution system for the Supplementary Fund
differs from that of the 1992 Fund in that, for the purpose of paying contributions, at least 1 million tonnes of
contributing oil will be deemed to have been received each year in each Member State.

No incidents have occurred which have involved the Supplementary Fund.The following table sets out the
contributions levied in 2006 to meet the Supplementary Fund’s administrative expenses:

Annual Date due Total Contribution per tonne of

contributions contribution contributing oil
£ £
2006 01.03.2007 1 400 000 0.0017223

The Supplementary Fund, which is administered by the 1992 Fund Secretariat (see section 3.4), has its own
Assembly composed of representatives of its Member States.

5 STOPIA 2006 and TOPIA 2006

The two-tier international compensation regime created by the 1992 Civil Liability and Fund Conventions was
intended to ensure an equitable sharing of the economic consequences of marine oil spills from tankers
between the shipping and oil industries. In order to address the imbalance created by the establishment of the
Supplementary Fund, which will be financed by the oil industry, the International Group of P&I Clubs (a
group of 13 mutual insurers that between them provide liability insurance for about 98% of the world’s tanker
tonnage) has introduced, on a voluntary basis, a compensation package consisting of two agreements, the
Small Tanker Oil Pollution Indemnification Agreement (STOPIA) 2006, and the Tanker Oil Pollution
Indemnification Agreement (TOPIA) 2006. These contractually-binding agreements entered into force on 20
February 2006.

The 1992 Fund and the Supplementary Fund will in respect of incidents covered by STOPIA 2006 and
TOPIA 2006 continue to be liable to compensate claimants in accordance with the 1992 Fund Convention and
the Supplementary Fund Protocol respectively. The Funds will then be indemnified by the shipowner in
accordance with STOPIA 2006 and TOPIA 2006. Under STOPIA 2006 the limitation amount is increased on a
voluntary basis to 20 million SDR (US$31 million) for tankers up to 29 548 gross tonnage for damage in 1992
Fund Member States. Under TOPIA 2006, the Supplementary Fund is entitled to indemnification by the
shipowner of 50% of the compensation payments it has made to claimants if the incident involved a ship
covered by the agreement.

STOPIA 2006 and TOPIA 2006 also provide that a review should be carried out after 10 years of the
experience of pollution damage claims during the period 2006-2016, and thereafter at five-year intervals.

6 The 'old' regime: the 1969 Civil Liability Convention and the 1971 Fund Convention

6.1 1969 Civil Liability Convention

The 1969 Civil Liability Convention entered into force in 1975. As at 1 June 2007, 38 States were Parties to
the Convention (as listed in the Annex).

The main features of the Convention are the same as those of the 1992 Civil Liability Convention, except on
the following points.

Unlike the 1992 Civil Liability Convention, the 1969 Convention is limited to pollution damage suffered in
the territory (including the territorial sea) of a State Party to the Convention. Furthermore, it applies only to
damage caused or measures taken after an incident has occurred in which oil has escaped or been discharged.
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The Convention therefore does not apply to threat removal measures, ie preventive measures which are so
successful that there is no actual spill of oil from the tanker involved.

The 1969 Civil Liability Convention applies only to ships which are actually carrying oil in bulk as cargo, ie
laden tankers. Spills of bunkers from tankers during ballast voyages are therefore not covered by the 1969
Convention, nor are spills of bunker oil from ships other than tankers.

Under the 1969 Civil Liability Convention, the limit of the shipowner's liability is much lower than under the
1992 Civil Liability Convention, ie 133 SDR (US$201) per ton of the ship's tonnage or 14 million SDR
(US$ 21 million), whichever is the lower.

The shipowner may be deprived of the right to limit his liability if a claimant proves that the incident occurred
as a result of the personal fault (the 'actual fault or privity') of the owner.

Claims for pollution damage under the 1969 Civil Liability Convention can be made only against the
registered owner of the tanker concerned. This does not preclude victims from claiming compensation outside
this Convention from persons other than the owner. However, the Convention prohibits claims against the
servants or agents of the owner. The owner is entitled to take recourse action against third parties in
accordance with national law.

6.2 1971 Fund Convention

The International Oil Pollution Compensation Fund 1971, generally referred to as the IOPC Fund 1971 or the
1971 Fund, was set up under the 1971 Fund Convention, when the latter entered into force in 1978. The 1971
Fund Convention ceased to be in force on 24 May 2002 and does not apply to incidents occurring after that
date.

The total amount of compensation payable by the 1971 Fund per incident was much lower than the maximum
amount payable by the 1992 Fund, ie 60 million SDR (US$91 million), including the sum actually paid by the
shipowner (or his insurer) under the 1969 Civil Liability Convention.

In the great majority of incidents dealt with by the 1971 Fund, all claims have been settled out of court.

Before the 1971 Fund can be wound up it has to fulfil its obligations to pay compensation to victims of
incidents which occurred when the 1971 Fund Convention was in force. During the winding up period the
1971 Fund is governed by an Administrative Council composed of all States which at any time were Parties to
the 1971 Fund Convention. As indicated above (section 3.4), the 1971 Fund shares a Secretariat with the 1992
Fund.

The 1971 Fund has been financed in the same way as the 1992 Fund.

7 Conclusions

The advantages for a State being Party to the 1992 Civil Liability Convention and the 1992 Fund Convention
can be summarised as follows. If a pollution incident occurs involving a tanker, compensation is available to
governments or other authorities which have incurred costs for clean-up operations or preventive measures and
to private bodies or individuals who have suffered damage as a result of the pollution. For example, fishermen
whose nets have become polluted are entitled to compensation, and compensation for loss of income is
payable to fishermen and to hoteliers at seaside resorts. This is independent of the flag of the tanker, the
ownership of the oil or the place where the incident occurred, provided that the damage is suffered within a
State Party.

As mentioned above, the 1969 Civil Liability Convention and the 1971 Fund Convention have been
denounced by a number of States, and the 1971 Fund Convention ceased to be in force on 24 May 2002.
Moreover, the 1992 Civil Liability Convention and the 1992 Fund Convention provide a wider scope of
 8

application on several points and much higher limits of compensation than the Conventions in their original
versions. For these reasons, it is recommended that States which have not already done so should accede to
the 1992 Protocols to the Civil Liability Convention and the Fund Convention (and not to the 1969 and 1971
Conventions) and thereby become Parties to the Conventions as amended by the Protocols (the 1992
Conventions). The 1992 Conventions would enter into force for the State in question 12 months after the
deposit of its instrument(s) of accession.

States which are already Parties to the 1969 Civil Liability Convention are advised to denounce that
Convention at the same time as they deposit their instruments in respect of the 1992 Protocols, so that the
denunciation of that Convention would take effect on the same day as the 1992 Protocols enter into force for
that State.

As regards the Supplementary Fund Protocol, a State will have to consider whether, in the light of its
particular situation, ratification of the Protocol is in the interests of that State.

***
 States Parties to both the
1992 Civil Liability Convention and the
1992 Fund Convention
as at 1 June 2007
(and therefore Members of the 1992 Fund)

98 States for which 1992 Fund Convention is in force

Albania Germany Panama
Algeria Ghana Papua New Guinea
Angola Greece Philippines
Antigua and Barbuda Grenada Poland
Argentina Guinea Portugal
Australia Iceland Qatar
Bahamas India Republic of Korea
Bahrain Ireland Russian Federation
Barbados Israel Saint Kitts and Nevis
Belgium Italy Saint Lucia
Belize Jamaica Saint Vincent and the
Brunei Darussalam Japan Grenadines
Bulgaria Kenya Samoa
Cambodia Latvia Seychelles
Cameroon Liberia Sierra Leone
Canada Lithuania Singapore
Cape Verde Luxembourg Slovenia
China (Hong Kong Special Madagascar South Africa
Administrative Region) Malaysia Spain
Colombia Maldives Sri Lanka
Comoros Malta Sweden
Congo Marshall Islands Switzerland
Croatia Mauritius Tonga
Cyprus Mexico Trinidad and Tobago
Denmark Monaco Tunisia
Djibouti Morocco Turkey
Dominica Mozambique Tuvalu
Dominican Republic Namibia United Arab Emirates
Estonia Netherlands United Kingdom
Fiji New Zealand United Republic of Tanzania
Finland Nigeria Uruguay
France Norway Vanuatu
Gabon Oman Venezuela
Georgia
3 States which have deposited instruments of accession, but for which
the 1992 Fund Convention does not enter into force until date indicated
Kiribati 5 February 2008
Cook Islands 12 March 2008
Hungary 30 March 2008
 States Parties to the Supplementary Fund Protocol
as at 1 June 2007
(and therefore Members of the Supplementary Fund)

20 States Parties to the 2003 Supplementary Fund Protocol

Barbados Greece Norway
Belgium Ireland Portugal
Croatia Italy Slovenia
Denmark Japan Spain
Finland Latvia Sweden
France Lithuania United Kingdom
Germany Netherlands
1 State which has deposited an instrument of accession but for which the Protocol does not
enter into force until date indicated
Hungary 30 March 2008

States Parties to the 1992 Civil Liability Convention

but not to the 1992 Fund Convention
as at 1 June 2007
(and therefore not Members of the 1992 Fund)

16 States for which 1992 Civil Liability Convention is in force

Azerbaijan Indonesia Republic of Solomon Islands
Chile Kuwait Moldova Syrian Arab
China Lebanon Romania Republic
Egypt Pakistan Saudi Arabia Viet Nam
El Salvador Peru
1 State which has deposited an instrument of accession, but for which the 1992 Civil Liability
Convention does not enter into force until date indicated
Yemen 20 September 2007

States Parties to the 1969 Civil Liability Convention

as at 1 June 2007

38 States Parties to the 1969 Civil Liability Convention

Azerbaijan Georgia Mauritania
Benin Ghana Mongolia
Brazil Guatemala Nicaragua
Cambodia Guyana Peru
Chile Honduras Saint Kitts and Nevis
Costa Rica Indonesia Sao Tomé and Principe
Côte d'Ivoire Jordan Saudi Arabia
Dominican Republic Kazakhstan Senegal
Ecuador Kuwait Serbia
Egypt Latvia Syrian Arab Republic
El Salvador Lebanon United Arab Emirates
Equatorial Guinea Libyan Arab Jamahiriya Yemen
Gambia Maldives

Note: the 1971 Fund Convention ceased to be in force on 24 May 2002