Shipping newsletter - Legalseas


Welcome to our October edition of Legalseas where we continue to consider a series of topical issues for the shipping industry.

We open this edition, with an article from Norton Rose Australia partner, Ernie van Buuren and associate Melissa Tang covering the Australian Government's new package of shipping reforms. These reforms, which are to be implemented in July 2012, cover changes to the Australian tax regime (including a zero rate corporate tax on qualifying activities), the introduction of an international shipping registry, a new cabotage licensing regime and proposals for incentivising a skilled maritime workforce. As Norton Rose Of Counsel Scott McCabe put it in Lloyd's List on 13 October 2011, "This is an excellent initiative which should have happened 20 years ago at least".

The Equator Principles are a set of principles designed to ensure that projects (traditionally, in industrial sectors such as power, water desalination and petrochemicals etc) are developed in a socially and environmentally responsible way. Due to a recent consultation process invoked by the Equator Principles Association, it is foreseeable that the Equator Principles could soon be applied by ship finance institutions to their lending criteria. In our second article, senior associate Eleanor Martin considers the implications for borrowers of the extension of the Equator Principles to ship lending.

Following hot on the heels of our earlier articles on tax investigations and legal advice privilege in tax disputes, tax partner Angela Savin and associate Leyla Kattan conclude their tax article series with a discussion on recent developments in information exchange between tax authorities. This has become very topical in the UK in the light of the recent agreement between the UK and Switzerland which is aimed at obtaining information in order to tax funds held by British citizens in Swiss bank accounts.

Our next two articles deal with the sensitive subject of bulk cargo liquefaction, a phenomenon which, in 2010, was responsible for the deaths of 44 seafarers in three separate casualties. In the first article shipping litigation partners David McKie (London) and John Liberopoulos (Athens) consider why this particular problem arises and highlight what steps can be taken to minimise the consequences. This is followed by a report from Norton Rose Australia associates Dimity Maybury and Melissa Tang on the significant differences between the regulatory approach to the carriage of cargoes which may liquefy between jurisdictions.

Regular readers of Legalseas will be aware that we have reported on many aspects of the scourge of piracy, including articles relating to the deployment of armed guards, the legitimacy of ransom payments and the effects of piracy on charter contracts. Looking at the issue from a slightly different perspective, associates Richard Milestone and Peter Glover and know-how lawyer Claire Berwick, have provided their thoughts on the implications of piracy on total loss prepayment provisions contained in ship finance documentation and the interplay between such provisions and standard marine insurance policies.

Our final article of this edition, from Norton Rose Australia associate Caroline Dearing, covers the recent steps that have been taken in Australia towards consolidating the regulatory framework for offshore petroleum activities in the light of, amongst others, the Montara incident off Western Australia.

As always, I hope that you will find our articles to be of interest and we would be delighted if our readers could provide any comments on the content (including editorial), or suggestions for future articles of Legalseas, by using the feedback email. Likewise feel free to pass on the details of colleagues who may wish to receive Legalseas.

Finally, for those who may not have seen our press release, I am delighted to announce that with effect from 1 January 2012 the Canadian law firm Macleod Dixon will be merging with Norton Rose Canada and becoming a part of Norton Rose Group. As a result of the merger, Norton Rose Canada will have close to 700 lawyers in their offices across the country and it will add 60 lawyers in Latin America, based in Caracas (Venezuela) and Bogotá (Colombia), a 13 lawyer office in Almaty (Kazakhstan) and a team of lawyers in Moscow to Norton Rose Group.

Richard Howley, Partner
Norton Rose LLP, London

Australian shipping industry reform

Authors: Ernest van Buuren and Melissa Tang

The Australian government announced on 9 September 2011 a package of reforms to revitalise the Australian shipping industry and make it more internationally competitive. The intention is to increase the number of Australian ships carrying Australian cargoes.

Whilst the reforms will assist in building an Australian shipping industry, if they are not implemented carefully, they may increase costs to shippers and consumers of domestic freight. Overseas ship owners and charterers will also be at risk of losing business as the number of Australian ships carrying coastal and export cargoes increases. Past experience has demonstrated that some overseas owners have been able to maintain and even grow their business within the existing regulatory framework.

The proposed reforms are currently planned for implementation in July 2012. This is an ambitious task a year ahead of the Government’s initial proposal of mid 2013, but has been fast tracked in response to a rapidly declining and ageing number of Australian ships.

The Australian shipping industry has been in crisis for some time, despite substantial and continuing increase in LNG, coal and iron ore exports. Australian coastal shipping has also been in decline. The existing cabotage regime has been criticised as being open to manipulation. The reforms promise to implement the more open and transparent system of cabotage set out in legislation.

The Australian government has not yet released detailed information on the proposed reforms and how the reforms will be implemented, but broadly speaking, the package of reforms includes four elements:

Tax reform

  • A zero corporate tax rate on qualifying income from shipping for Australian ship owners.
  • An accelerated depreciation rate for Australian vessels of 10 years, rather than current rate of 20 years, to encourage renewal of an ageing fleet.
  • Roll over relief scheme allowing Australian ship owners to defer tax liability arising from gain or profit on the sale of existing vessels, when replacing the vessels with new vessels.
  • A European style PAYE rebate for the shipowner in respect of any seafarer’s Australian taxation contributions whilst engaged on international voyages.
  • Royalty withholding tax exemption for vessels chartered by Australian companies on a bareboat charter.

In order to receive the tax benefits proposed, the Government has stipulated several conditions, including that vessels must be Australian flagged. Any participant must also commit to providing a minimum training obligation aimed at attracting, training and retaining a skilled seafaring workforce. A ship that elects to be in the regime must remain in the regime for a minimum of 10 years. There will also be a lock out period of 10 years to incentivise compliance with the new rules.

Australian international shipping register

  • The establishment of a second Australian International Shipping Register aimed at placing Australian companies on an even playing field with international competitors to allow them to participate in international trade.
  • Crew members employed on Australian flag ships registered on the Australian International Shipping Register will not be covered by the Fair Work Act when the ship is engaged in international trades. When Australian International Shipping Register ships are engaged in Australian coastal trades, then all crew, irrespective of nationality, will be covered by the Fair Work Act. All Australian flag ships, whether engaged in coastal or international voyages, must comply with the Maritime Labour Convention.

New licensing regime

This involves the implementation of a three tier licensing regime, namely:

  • General Licence - Australian flagged vessels, holding a general licence will have unrestricted access to coastal trades for a period up to five years at a time.
  • Temporary Licence – foreign-flagged vessels will be able to operate on coastal trades, subject to time, trade and/or voyage conditions, for up to 12 months.
  • Emergency Licence – available for cargo or passenger movements in emergency situations.

Workforce skills development.

The establishment of a Maritime Workforce Development Forum to build a skilled seafaring workforce and address the current skills gap.

The reforms proposed by the Government have come in on the back of a process initiated in 2008 including the commissioning of a parliamentary inquiry into coastal shipping and consultation with industry outlined in a discussion paper published in December 2010. The Government cites economic, environmental and security reasons as the reason for the reforms.

The reform package, if implemented properly, has the capacity to encourage more ship owners to base operations in Australia and allow the Australian shipping industry to be more viable and internationally competitive. There are also incentives to increase the number of Australian seafarers. Whether or not this will be the case, is difficult to assess until more detail is released by the Government. We will be following these developments with interest and we will provide further updates in Legalseas (and our regular Shipping Alerts) once more information has been received.

Widening the scope of the Equator Principles - what could this mean for the ship finance market?

Author: Eleanor Martin

The Equator Principles Association has launched a consultation to consider extending the Equator Principles beyond project financing to apply to corporate loans where fifty per cent or more of the proceeds of that loan are being used to finance a single asset thereby, clearly, bringing such principles into the ambit of shipping and asset finance


The Equator Principles are a set of principles designed to ensure that projects are developed in a socially and environmentally responsible way. Financial institutions can voluntarily agree to adhere to the Equator Principles, and by doing so, agree to apply them to all new project financings with total project capital costs of US$10 million or more. Each financial institution which signs up to the Equator Principles (an EPFI) interprets and implements the Equator Principles differently (which has led to inconsistent application) and the EPFIs often then seek to pass on the risk of complying with the Equator Principles to the borrower in loan documentation. As the Equator Principles Association (EPA) is currently considering whether to widen the scope of the Equator Principles to apply to asset finance it is worth considering what this might mean in a shipping context.

What does implementation of the Equator Principles involve?

As part of an EPFI’s internal approval process, it will categorise potential loans based on their perceived level of environmental and social risk. Categorisation is based on the screening criteria of the International Finance Corporation (this is the commercial arm of the World Bank) and the categories include:

  • Category A – Projects with potential significant adverse social or environmental impacts which are diverse, irreversible or unprecedented;
  • Category B – Projects with potential limited adverse social or environmental impacts that are few in number, generally site-specific, largely reversible and readily addressed through mitigation measures; and
  • Category C – Projects with minimal or no social or environmental impacts.

In order to obtain funding for Category A and B projects, a borrower (or external consultant) will need to have conducted a Social and Environmental Impact Assessment (SEIA) which will identify relevant impacts and risks. In addition, borrowers will need to prepare “Action Plans” which set out strategies to mitigate, monitor and manage the impacts and risks identified through the SEIA.

The borrower or third party expert involved in Category A projects and some Category B projects will be required to consult with affected communities where the project is located in non high-income OECD countries. The borrower will need to show, to the satisfaction of the EPFI, that a project has adequately incorporated affected communities’ concerns.

In which type of loans are the Equator Principles implemented now?

The Equator Principles are stated to apply to all new project financings with total project capital costs of US$10 million or more. The EPA refers to the Basel II definition of project financing which is “a method of funding in which the lender looks primarily to the revenue generated by a single project, both as a source of repayment and as security for the exposure. This type of financing is usually for large, complex and expensive installations that might include, for example, power plants, chemical processing plants, mines, transportation infrastructure, environment and telecommunications infrastructure…”. Many EPFIs take the view that shipping loans fall into the category of “asset finance” and therefore they do not need to apply the Equator Principles in their assessment of the transaction.

Changes to the application of the Equator Principles

The EPA recently commissioned a strategic review which highlighted a number of issues and has resulted in certain recommendations. One of the key points is that the definition of “project finance” is interpreted differently across EPFIs. In some cases, the view is that project financings with challenging environmental and social risks are being disguised as corporate loans to avoid application of Equator Principles. The recommendation of the strategic review is to widen the scope of the Equator Principles to apply to corporate loans where fifty per cent or more of the proceeds of that loan are being used to finance a single asset. At present, it is not clear whether that financing would need to be for the construction of that asset or merely related to it.

In response to these recommendations, the EPA has launched a consultation process to consider amendments to the Equator Principles. The key dates are summarised below:

  • Phase I – Focused EPA group work and internal discussion on key topics and thematic areas (July – September 2011);
  • Phase II – Consultation period with the EPA membership, preliminary scoping discussions with key stakeholders and initial drafting of a new Equator Principles framework (known as the EP III framework) (September – November 2011);
  • Phase III - Launch of the formal 60 day Stakeholder Consultation and Public Comment Process (December 2011 – February 2012). The EPA will be providing a more detailed timeline for this at a later date; and
  • Phase IV - Finalisation and launch of the EP III framework (target date March 2012).

Any formal amendment to the Equator Principles will require a voting process by the entire EPA membership.

What this could mean for borrowers and EPFIs

If the Equator Principles apply to shipping loans, each EPFI will need to evaluate the transaction and assess the level of environmental and social risk involved. Depending on the categorisation of the loan, it may be that:

  • Further reports, Action Plans and consultations will be required by EPFIs. This could increase costs for the borrower and lengthen the time period for approvals or satisfaction of conditions precedent.
  • Borrowers are required to give representations, warranties, undertakings and conditions precedent in loan documentation in relation to compliance with SEIAs, Action Plans and environmental laws. There will also be a continuing obligation to provide details of compliance with Action Plans.
  • If an EPFI is planning to syndicate the loan, it will need to ensure that each of the potential syndicate banks agrees to its categorisation of the loan. If not, an EPFI could find that the loan cannot be syndicated without further amendment.

In view of the regulation that already exists in the shipping industry it will be interesting to see whether industry players seek to try and limit the application of the Equator Principles to shipping finance transactions and seek to get involved in the consultation process to achieve this. However, with more than 70 financial institutions (representing in excess of 90% of the global project finance industry as at 2009) having signed up to the Equator Principles, and in view of the significant cross-over between shipping and project finance departments in banks involved with offshore shipping finance transactions it may be difficult for borrowers, and other industry players, to entirely avoid them.

Information exchange between tax authorities

Authors: Angela Savin and Leyla Kattan

In these uncertain economic times, there has been a concerted effort by tax authorities around the globe to tackle tax evasion. As part of this, there has been a focus on exchange of information powers which enable tax authorities to send each other information relating to a taxpayer’s tax affairs. These powers are the subject of increasing focus as tax authorities are encouraged by their governments to communicate regularly and work together to tackle tax fraud and tax evasion.

In this third and final article on tax disputes, we take a brief look at recent legal developments in the field of information exchange between tax authorities. The main provisions are in the relevant EU directives and the relevant OECD measures.

The EU recently published two directives which strengthen European tax authorities’ abilities to exchange information. The first directive took effect on 11 March 2011, and is designed to improve Member States’ administrative cooperation in the field of taxation. The second will take effect on 1 January 2012, and is aimed at establishing a uniform system for the recovery of claims relating to taxes.

The perceived need for these directives is based on the increased mobility of taxpayers, the large number of cross-border transactions and the internationalisation of financial instruments - all of which are seen to make it difficult for Member States to assess and recover taxes that are due.

Both directives have clear and wide exchange of information provisions which enable Member States to share information which they perceive is “foreseeably relevant” to the administration and enforcement of tax laws. This language is intended to provide for the exchange of information in tax matters “to the widest possible extent”, although fishing expeditions are discouraged.

A Member State may not refuse to transmit information because it has no domestic interest, or because the information is held by a bank or other financial institution, or by a person acting in an agency or a fiduciary capacity. However, the requested authority is not required to supply information that it would not be able to obtain for the purpose of recovering similar claims arising in its Member State.

The directive on the recovery of claims provides a more uniform system of enabling one Member State to ask another Member State to recover a claim for tax. Provided certain conditions are met, the claim must be treated as if it were a claim of the requested Member State.

Similar developments are unfolding outside the EU. The Convention for Mutual Administrative Assistance in Tax Matters was developed jointly by the OECD and Council of Europe. However, on 1 June 2011, a protocol to the Convention came into effect. This protocol brings the Convention into line with international standards on information exchange. Over 20 countries have signed the Convention and protocol so far, including the UK, USA, Iceland, Korea and Mexico.

The exchange of information provisions in the Convention are intentionally wide, and they contain similar provisions to those seen in the EU directives mentioned above such as the “foreseeably relevant” test, and a provision that an information request may not be declined solely because the information is held by a bank or other financial institution.

There are limits to the information that may be exchanged under the directives and the Convention. Under both, a request for information can only be made if:

  • the requesting authority has used all its domestic powers;
  • the disclosure is not contrary to public policy; and
  • it does not involve disclosure of commercial, industrial or professional secrets.

Taxpayers should be aware that it is not just multilateral agreements which encourage tax authorities to share information; there are also various bilateral agreements such as double taxation agreements and tax information agreements in place between certain states. Exchange of information provisions in double tax treaties have been around for many years (see article 26 of the OECD Convention). Recently, however, the UK has signed and ratified various tax information exchange agreements with countries such as Belize, Grenada, Liechtenstein and Gibraltar, each with the aim of closing down the benefits of keeping money in tax havens or jurisdictions with banking secrecy laws. These are countries with whom the UK has not had a double taxation treaty.

Other ad-hoc bilateral agreements also frequently contain exchange of information provisions; the UK - Swiss agreement ratified in principle in August 2011 which is aimed at taxing funds held by British citizens in Swiss bank accounts, contains information sharing provisions.

As many companies increasingly find themselves subject to tax investigations and litigation with HMRC, taxpayers with an international footprint should be conscious about the extent of tax authorities’ exchange of information powers.

Cargo liquefaction

Authors: John Liberopoulos and David McKie


The shipment of bulk ore and concentrates cargo with too high a moisture content for safe transportation is a perennial problem and can have tragic consequences. In late 2010, 44 seafarers died in three separate casualties involving the shipment of cargoes which (probably) liquefied. Quite apart from the human cost, the financial cost to shipping runs into hundreds of millions of dollars every year.

In the first part of three articles, we examine what cargo liquefaction is, why the problem can arise after shipment, and we highlight steps that can be taken to try to minimise the consequences. The second article in the series from Norton Rose Australia’s Dimity Maybury and Melissa Tang will examine a significant difference of international opinion on regulatory requirements for carriage of cargoes which may liquefy. The final article (to follow in a later edition) will consider some of the complex legal issues arising out of the carriage of bulk cargoes which are prone to liquefy.

What is liquefaction?

All bulk ore and concentrate cargoes are likely to have some moisture content. These cargoes are often open-cast mined, sometimes using water-jetting. They are frequently stored in the open, and in areas prone to heavy rains, prior to shipment, thereby accumulating further moisture. Some cargoes are shipped only in the dry season, but that is no guarantee of safety; a cargo does not have to be obviously wet for it to be prone to liquefy.

Bulk mineral ore and concentrates cargoes are made up of fine granular particles. There is a tiny space between each of the particles. That space is filled with either air or water. If the amount of water in these spaces within the cargo is low enough the frictional force between the grains will be sufficient to maintain the cargo in a solid state. However if the moisture content of the cargo reaches a specific level, known as the flow moisture point (FMP), the frictional force will be lost and the cargo will behave as if it were a liquid. In these circumstances it will flow freely.

During a sea voyage, the weight of cargo coupled with vibration caused by engines or machinery or the motion of a vessel at sea, particularly in heavy weather, compresses whatever water there is between the fine granular particles. That water is forced out of the spaces between the particles and can flow freely on top of, or between, the particles. When this occurs there can be either a free-surface effect or the whole cargo behaves as if it were liquid. As a result of liquefaction, carrying vessels may suddenly lose stability, and take on a list or even capsize.

Carriage of cargoes prone to liquefy

Solid bulk cargoes which are prone to liquefy are, and should be capable of being, carried safely. P&I Clubs have been issuing circulars on liquefaction for over 20 years (for example the IMO’s Bulk Cargo Code has been around since 1981).

Currently the International Maritime Solid Bulk Cargoes Code (IMSBC Code) contains the latest internationally agreed requirements for the safe stowage and shipment of solid bulk cargoes. The IMSBC Codehas mandatory application under the Safety of Life at Sea 1974 Convention as from 1 January 2011.

Cargoes are split into three types (broader details of which are given in Norton Rose Australia’s companion article), namely those which may liquefy if shipped with a moisture content higher than their Transportable Moisture Limit (TML) (Class A), those which possess chemical hazards (Class B) and cargoes which are not Class A or Class B (Class C). Cargoes which are known to have a propensity to liquefy are listed by their Bulk Cargo Shipping Name (BCSN) in Appendix 1 to the ISMBC Code, but cargoes not listed are still covered by the Code.

Class A cargoes can be carried only where the moisture content of the cargo is less than its TML. The TML is set at 90 per cent of the FMP. The ship is entitled to demand, and the shipper must supply, accurate details of the cargo's moisture content and FMP. The FMP has to be obtained by laboratory testing and reference to tables for that the type of cargo being shipped.

Vessels are required to carry a Document of Compliance issued by the relevant Flag State indicating which classes of cargo the vessel is suitable to carry, and any conditions of carriage which are imposed by the flag state. It is common for the certificates issued for vessels which have not been specifically constructed or fitted for the carriage of cargoes which may liquefy to state that the vessel is designated only to carry cargoes with a moisture content not in excess of the TML.

So why do the casualties still occur?

The answer is probably a mixture of lack of understanding of the problem, and inadvertent or, occasionally, deliberate misrepresentation of the true nature of the cargo by shippers and others.

From our experience of investigating liquefaction casualties and dealing with the legal and insurance issues that result we know that not every Master or Chief Officer is aware of the problem or of the simple “can” or “shake” test that can be performed to check for the risk of cargo liquefaction, despite the test being described in “Thomas on Stowage” and the IMSBC Code.

Masters are often not aware of what information they are entitled to receive from shippers under the IMSBC Code; nor are they fully aware of their rights under international carriage of goods conventions to reject or land unsafe cargo. There can be a mistaken assumption that only Class A cargoes present a liquefaction risk. In rare cases, Masters seem to abrogate all responsibility for checking whether or not the cargo being loaded on board is safe.

This is not to suggest that the problem is all one way. It is still common for shippers and charterers to use trade names rather than the BCSN. Certificates of moisture content and TML may be inaccurate. It could be that FMP and moisture tests were done at the mine, prior to storage in the open, or on unrepresentative samples, or were not done in accordance with IMSBC Code procedures, or (on rare occasions) have simply been made up. Unfortunately, not every survey certificate can be trusted to be accurate or representative.

What might be done in practical terms?

The IMO’s Maritime Safety Sub-committee on Dangerous Goods, Solid Cargoes and Containers will meet in September 2011 to consider proposals to develop a scheme for ensuring reliable independent sampling, testing and certification of cargoes and enhancing education for ship and shore personnel.

The Italian classification society, RINA, has suggested the fitting of strong longitudinal bulkheads under the hatch coamings to port and starboard in alternate holds, and only loading in the space under the hatches. This would reduce the area within which a cargo can flow or suffer a free surface effect.

The International Group of P&I Clubs has recently published its suggested Solid Bulk Cargo Clause for use in charterparties. This is a lengthy and complicated clause which re-states, and perhaps enhances, rights that the carrier has under international conventions and seeks to shift all responsibility and liability for carriage of solid bulk cargoes onto the charterer. Transferring liability is one thing but in itself it does not prevent the problem occurring. In this regard the Solid Bulk Cargo Clause includes the sensible practical suggestion that certificates stating moisture content, TML and FMP of the cargo be provided by a laboratory approved in advance by the owner.

These measures may take time to implement or be impractical in some situations. While increased regulation, alterations to ship design and use of contractual arrangements can all have a part to play, other commonsense and straightforward steps should not be overlooked.

Owners who charter their ships to carry bulk cargoes need to ensure that their Masters and Chief Officers understand the problem of liquefaction as well as the classification of cargoes, and their rights and obligations under the IMSBC Code, the need to perform visual inspections, and the simple “shake” or “can” test that can be done to check before loading whether a cargo is prone to liquefaction, whatever the documentation provided might say. Masters and officers also need to understand that liquefaction can be a risk for all fine particled bulk cargoes, whether or not listed as Class A, and to recognise the importance of level trimming of such cargoes. Owners might also question whether the process of engaging Masters and Chief Officers sufficiently tests their knowledge of the risk of liquefaction and how to deal with it? And while a tick-box exercise is no substitute for the proper exercise of skilled judgment, those on board might benefit if the onshore operations departments provided more detailed or specific loading checklists in relation to liquefaction risks.

It may not be possible to get agreement to the Solid Bulk Cargo Clause, and even if this is included it may conflict or contradict with other provisions in the charter. Those in owners’ chartering departments also need to understand the shipper’s obligation to declare the BCSN and to query the use of trade names, which may (innocently or otherwise) be misleading. Making detailed enquiries prior to fixing charters as to how the cargo has been mined and how it is, or will be, stored and who will undertake sampling and testing, might enable a better assessment of whether or not the cargo can, or should, be carried and, if so, on what terms.

As we shall examine in a later article, charterers, shippers and receivers can each have legal responsibility and potentially unlimited liability for the shipment of dangerous cargoes, and the law does not limit “dangerous” cargoes to those listed in the International Maritime Organisation’s Dangerous Goods Code. Therefore charterers, shippers and receivers may need to tighten up their own procedures and their sale contract requirements to ensure not only that they are provided with proper and accurate documentation, in order to fulfil their IMSBC Code obligations to the carrier but also that they take steps to verify the information, rather than simply passing on information or relying upon the carrier to carry out tests later. Hull, cargo and liability insurers could also perhaps take a look at whether suitable policy conditions (such as sampling and testing by a laboratory approved by underwriters or owners) or policy exclusions might also assist the industry in improving loss records in this area.

Only with concerted effort and the taking of practical steps by all involved in the sale, carriage and insurance of bulk cargoes will it be possible to tackle the problems of cargo liquefaction at sea. Debate continues at IMO, but as our next article shows, there is a divergence of opinion as to what the regulations actually mean - an issue which causes practical difficulties for both owners and charterers.

Competent Authorities disagree on assessment of moisture content of solid bulk cargoes under IMSBC Code

Authors: Dimity Maybury and Melissa Tang

Submissions to be made at the 16th session of the International Maritime Organization, Sub-Committee on Dangerous Goods, Solid Cargoes and Containers (DSC) from 19 September 2011 to 23 September 2011 reveal there is an inconsistency as to how the Competent Authorities of France, Japan and Australia determine the classification of some solid bulk cargoes under the International Maritime Solid Bulk Cargoes Code (IMSBC Code). This is an important issue to be resolved as the difference in approach is resulting in the same cargo having to be carried on different types of ships, depending on where the cargo is loaded, in turn creating uncertainty and potential liability for both shippers and ship owners.

The IMSBC Code regulates the international carriage of solid bulk cargoes and became mandatory under the Safety of Life At Sea 1974 Convention from 1 January 2011. For cargoes not listed in Appendix 1 to the IMSBC Code, the Code prescribes that the Competent Authority of the loading port under the IMSBC Code will assess whether the cargo proposed for carriage presents hazards as defined under the IMSBC Code.

The IMSBC Code defines:

  • Group A cargo as those “cargoes which may liquefy if shipped at a moisture level content in excess of their transportable moisture limit (TML).
  • TML of a cargo which may liquefy is the maximum moisture content of cargo which is considered safe for carriage in standard cargo ships.
  • Group C cargo is defined as consisting “of cargoes which are neither liable to liquefy (Group A) nor to possess chemical hazards (Group B)”.

In accordance with the IMSBC Code, a Competent Authority that has issued a certificate to the Master of a vessel stating the characteristics and required conditions for carriage of any unlisted cargo is required to submit an application to the International Maritime Organization (IMO) so that the unlisted cargo can be incorporated into Appendix 1 of the IMSBC Code.

The submission by the Australian Maritime Safety Authority (AMSA), as the Competent Authority for Australia, suggests that any unlisted cargo with a TML must be categorised as Group A cargo, regardless of whether the moisture content falls below the TML. In other words, AMSA has taken a view that a cargo that has a TML automatically identifies a potential for liquefaction and therefore the cargo must be classified as a Group A cargo. Presumably erring on the side of caution, under AMSA’s criteria, no assessment is made whether there is potential for the moisture content to increase because of factors during loading and the intended voyage.

In contrast, the French and Japanese Competent Authorities have adopted a more systematic approach, recognising that with certain solid bulk cargo, where the solid bulk cargo has a moisture level content less than its TML at the time of shipment and there is little or no risk that the moisture limit might rise above the TML during shipment, the cargo is to be categorised as Group C cargo. This approach is reflected in many of the scheduled products listed in Appendix 1 of the IMSBC Code, including sulphur and alumina.

The interpretative differences between Competent Authorities as to the classification of unlisted solid bulk cargo as either Group A or Group C centres on the issue of whether the relevant factor to be considered is the actual moisture content of the cargo at the time of shipment or whether cargo returns a TML after scientific testing in accordance with the IMSBC Code.

The IMSBC Code was introduced to mitigate and avoid incidents of cargo liquefying during carriage causing vessels to capsize due to inadequate precautions being in place to deal with this risk. If there is a risk of the moisture content of a cargo exceeding its TML, there is no suggestion by any Competent Authority that unlisted solid bulk cargoes should not be classified as Group A. Conversely, if there is no evidence that the moisture content of a shipment is likely to exceed its TML, does this warrant it being classed as Group A? It will be interesting to see how the IMO resolves the difference in interpretation by the various Competent Authorities so that both shippers and ship owners are left with no uncertainty as to the type of ships to be used for the carriage of unlisted solid bulk cargoes that may liquefy.

When does piracy constitute a total loss?

Authors: Richard Milestone, Claire Berwick, Peter Glover

The threat and actual taking of vessels as a result of piracy continues to be a prominent and regular feature in the maritime industry, and one which brings with it a number of practical and legal challenges.

We have considered a number of the legal issues in previously published articles and editions of Legalseas including the legality of ransom payments, whether a vessel chartered on NYPE terms is off hire as a result of detention by pirates and what clauses are being drafted into charterparties to address the issue of piracy.

Whilst much of the focus has been on response and charterparty issues, we have recently started to see piracy issues feature in ship finance transactions. One example is the issue of how to treat a ship taken by pirates for insurance purposes and whether confiscation by pirates will amount to a total loss for the purpose of the relevant finance documents.

As a matter of English law, an actual total loss occurs when insured property is destroyed or damaged such that it ceases to be “a thing of the kind insured”1 or where the shipowner is irretrievably deprived of the insured property. Accordingly, where a ship is captured by pirates and there is still a reasonable prospect of recovering the ship in a repairable condition, there can be no actual total loss.

On the other hand, a constructive total loss will occur where the ship is not an actual total loss, but is reasonably abandoned by the shipowner because she is likely to become so as a consequence of the improbability, impracticality or expense of recovery or repair. This would include the shipowner being deprived of the possession of its ship by a peril against which it is insured (which may include piracy) and either it being unlikely that the ship could ever be recovered within a reasonable time or the cost of recovery exceeding the value of the ship once recovered.

Where a total loss is deemed to occur under ship finance documentation, the borrower will have an automatic obligation to prepay the outstanding loan (or relevant tranche of the loan relating to that ship). Where a ship has been captured by pirates, lenders will want to trigger this prepayment obligation as soon as possible after the ship has been taken because clearly the mortgage is of limited value whilst the ship is captured. Most ship finance documentation will deem a financed ship to be a total loss after a period of 30 days has elapsed since the ship was seized with the prepayment obligation arising within an agreed timeframe thereafter - this time period is usually a period in the 90-180 day range.

The insurance market has, however, responded to concerns by insureds as to when there ceases to be a reasonable prospect of recovery by including a “Detainment Clause” in hull or war risks policies (whichever may be relevant) such that a ship will be deemed to be a constructive total loss if it has been detained for a period of 12 months and there is no realistic possibility of the ship being released. As a result, insurance proceeds for a constructive total loss resulting from piracy will, in principle, not be paid to a shipowner for at least 12 months. Of course, if it becomes clear that there is no hope of recovering the ship before such 12 month period has elapsed (notwithstanding the shipowner’s efforts, including the payment of a ransom), the insurer may agree to declare the ship a constructive total loss earlier. However, for the shipowner, it may not be realistic to expect insurance proceeds to be received for at least a one year period. It should be borne in mind that it may be possible to negotiate from underwriters different types of Detainment Clause and hence the detention period could, in particular cases, be shorter or longer than 12 months.

A shipowner will clearly prefer to avoid having to prepay a loan following a piracy event until it has received the insurance proceeds from the hull and machinery or war risks insurer. Indeed, the shipowner may not have sufficient available working capital to be able to prepay the loan without relying on insurance proceeds.

Clearly this presents a difficulty because there is likely to be a mismatch of expectations between how long a lender will be willing to wait before expecting prepayment (and if payment is not made, ultimately enforcing whatever alternative security to the ship it holds) and whether a shipowner is able to make such prepayment prior to receipt of insurance proceeds.

At the documentation stage, depending on its bargaining strength, a shipowner may be able to convince a lender to increase the time period for prepayment after the ship has been detained. As an alternative to demanding immediate prepayment (within the usual prepayment periods mentioned above), a lender who is looking for a workable solution may be willing to consider accepting additional security (for example, a mortgage over an unencumbered vessel) until such time as the insurance proceeds for the ship are paid out by the insurer or the ship is released.

With the increasing potential for ships to become victim to pirate attacks, it can be expected that shipowners and their financiers will now regularly have to confront this issue during loan negotiations and it may have interesting implications in the ship finance markets. For example, if a lender was willing to extend the loan prepayment period beyond the usual 30 + 90-180 days period it is perhaps more likely that the lender will require the shipowner to take out, and maintain throughout the loan period, a robust kidnap and ransom (or equivalent) policy to try and reduce the detention period as much as possible.


1. s.57(1) Marine Insurance Act, 1906

Towards a single regulatory system for the Australian offshore petroleum industry

Author: Carolyn Dearing

The importance of effective offshore petroleum industry control and regulation has been highlighted in recent years by two serious incidents: the blowout from the Montara wellhead platform on 21 August 2009 off the northern coast of Western Australia (Montara Incident) and the explosion of the Deepwater Horizon on 20 April 2010 which drilled on the BP operated Macondo Prospect in the Gulf of Mexico (Macondo Incident).

The Montara Incident resulted in the uncontrolled discharge of crude oil into the Timor Sea between 21 August 2009 and 3 November 2009. The Macondo Incident resulted in the loss of 11 lives, 17 injuries and the uncontrolled discharge of crude oil into the Gulf of Mexico between 20 April 2010 and 19 September 2010. Given the impact of these incidents on the environment and local communities, it is unsurprising that they received worldwide media attention and caused significant community concern as to how these types of operations are regulated and whether that regulation is adequate to deal with modern offshore drilling practices.

Australian regulation and oversight

The regulation of offshore petroleum activities in Australia is undertaken under a joint arrangement between the Australian federal government and the various States and Northern Territory. This regime divides the offshore area into Commonwealth Waters1 and State or Territory Coastal Waters2.

The principal legislation regulating offshore petroleum activities in Commonwealth Waters is the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (Act) and related regulations. Relevantly, the Act imposes a duty on offshore petroleum operators to take all reasonably practicable steps to ensure the facility and its activities are safe and without risks to health.

The Act (and other related Commonwealth legislation) is administered by the National Offshore Petroleum Safety Authority (NOPSA). NOPSA’s objective is to provide independent assurance that health and safety risks are properly managed. In fulfilling this duty it carries out safety case assessments and inspections to ensure that the operator’s risk management arrangements are both adequate and complied with. In carrying out this role, NOPSA collects and summarizes data on the safety performance of the offshore petroleum industry and its own regulatory performance.

Increasing rates of incidents

In 2008 and 2010, NOPSA published its Health and Safety Performance Reports, which indicated that the annual numbers of gas releases and personal injury rates in the offshore petroleum industry were increasing.

In 2009 the Australian Federal Government, together with the Western Australian State Government, conducted a joint independent inquiry into the regulation of upstream petroleum operations (Offshore Regulatory Inquiry 2009 (2009 Inquiry)). In its response to the 2009 Inquiry, the Federal Government stated that the increasing rate of accidents indicated there was potential for more severe incidents in the industry (2010 Response).

One of the publications that emerged from the 2009 Inquiry was a report titled “Offshore Petroleum Safety Regulation Better practice and the effectiveness of the National Offshore Petroleum Authority” (2009 Report).

The 2009 Report observed that offshore petroleum activities in Australia were regulated by many different and sometimes overlapping State and Federal statutes, regulations and directions. As a consequence, the reach and application of those laws and policies to off-shore operations was unclear and inconsistent. The 2009 Report also stated:

Our examination of the regulatory regime has uncovered a confusing mishmash of jurisdictional, legal, process and regulatory interfaces upon which is overlaid poor relationships among regulators. In such an environment, any serious operator shortcomings are far less likely to be found and addressed to reduce the risk of a major accident event.3

This problem is compounded by the fact that many different regulators have an interest in the regulation of the industry and their ability to discharge their responsibilities is impacted by the limited resources available to them. Aside from NOPSA, other interested regulators include the relevant State or Territory Minister and that Minister’s department4 with responsibility for day-to-day operations, pipelines and subsea facilities in Coastal Waters and environmental aspects of offshore petroleum activities in Commonwealth and Coastal Waters.

Consolidation of regulation and a new national regulator

Regionally and internationally, the Montara and Macondo Incidents have raised questions regarding the ability of governments and regulators to approve, monitor and enforce operations that meet the twin goals of protecting human health and safety and preserving the marine environment. The global response has been to review offshore petroleum legislation and processes relating to prevention and response.

On 24 November 2010 the Report of the Montara Commission of Inquiry5 was released by the Australian Government (Montara Report). This report was prepared in response to the Montara Incident.6

The Montara Report contains 100 findings and makes 105 recommendations which have implications for government, the Federal and State regulators as well as industry. Of these recommendations the Australian Government’s final response7 accepted 92 of the recommendations, noted 10 and did not accept 3 on the basis that they were technically inappropriate.

As part of its response the Federal Government has committed to:

  1. Strengthening the “polluter pays” principle by adding a guarantee in legislation that all costs of responding to a hydrocarbon spill, including scientific monitoring and other damages to the offshore and broader environment, will be met in full by the polluter.
  2. Strengthening Australia’s objective‐based regulatory regime by clarifying the framework for engagement between regulators and the offshore petroleum industry in responding to any future offshore petroleum incident.
  3. Enhancing the environmental assessment processes used by applying additional checks for offshore petroleum activities in Australian waters.
  4. The establishment of a single national regulator for offshore petroleum, mineral and greenhouse gas storage activities - the National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA)

Against this background, on 16 November 2010, the Offshore Petroleum and Greenhouse Gas Storage Legislation Amendment (Miscellaneous Measures) Act 2010 was passed. This legislation consolidated Australia’s health and safety regulation for offshore petroleum operations and clarified NOPSA’s role as the primary regulator for offshore petroleum activities by increasing its powers and efficiency. It extended NOPSA’s regulatory responsibilities to the oversight of the entire structural integrity of petroleum facilities (including pipelines), wells, and well related equipment in Commonwealth Waters, as well as the assessment of Well Operations Management Plans and individual well activities.8

In the February 2011 issue of its newsletter “the Regulator”, NOPSA stated that it has commenced recruitment of additional inspectors to support its new regulatory responsibilities for well operations and well integrity and is recruiting communication and human resource professionals.

On 25 May 2011 the Federal Government put forward the Offshore Petroleum and Greenhouse Gas Storage Amendment (National Regulator) Bill 2011 (Bill). If passed in its current form the Bill will:

  1. create a new national offshore petroleum regulator, to be called the National Offshore Petroleum Titles Administrator (NOPTA). This will replace the seven “Designated Authorities” which currently regulate offshore petroleum in Commonwealth waters. The Joint Authority (which currently consists of the Australian Government minister and relevant State or Territory minister responsible for offshore petroleum regulation) will be retained to make key title decisions. NOPTA’s role will include administering titles, collecting data relating to petroleum and greenhouse gas storage activities, approval and registration of transfers and dealings, maintaining the registers of titles and making recommendations to the Joint Authority on key title decisions. In addition, States and Territories will be able to confer their powers over coastal waters on NOPTA if they wish to do so;
  2. expand the role of NOPSA and rename it the National Offshore Petroleum Safety and Environment Management Authority (NOPSEMA). Its functions will be extended beyond occupational health and safety and well integrity to include environmental management;
  3. ensure sufficient enforcement powers in relation to NOPSEMA’s expanded functions; and
  4. revise the financial arrangements existing between the States and the Commonwealth and impose new levies on industry.

Both NOPTA and NOPSEMA will be based in Perth, Western Australia, and the Bill provides expressly for cooperation between the two.

These two authorities will have jurisdiction over Commonwealth Waters. In relation to the waters extending three nautical miles from the land boundary, the States and Territories may confer their functions and powers on NOPSEMA and NOPTA. In relation to State and Coastal waters, a State or Territory may contract with NOPSEMA for the provision of services.

The Offshore Petroleum and Greenhouse Gas Storage Regulatory Levies Legislation Amendment (2011 Measures No 2) Bill 2011 (Levies Bill) has also been introduced to amend the Offshore Petroleum and Greenhouse Gas Storage (Regulatory Levies) Act 2003 (Cth). The Levies Bill is intended to impose new levies on registered holders of offshore petroleum and greenhouse storage titles in Commonwealth waters in order to recover the costs of establishing NOPTA and the expansion of NOPSA’s functions to include environmental management. The Levies Bill provides for two types of well levies:

  1. an annual titles administration levy, which is payable for each year that the eligible title is in force; and
  2. an environment plan levy, imposed when an application is made to NOPSEMA for acceptance or revision of an environment plan.

Similarly, within Australia, industry has undertaken a detailed analysis of its processes and practices in relation to well design, integrity and operations and oil spill response capabilities and blow out contingency plans as well as equipment reviews and verification of preventative maintenance requirements and integrity assessments.

Legal and operational barriers to sharing equipment and other resources impacted upon industry’s response to the Montara Incident. To address this issue, on 11 August 2011, industry members entered into a Mutual Aid Memorandum of Understanding to establish a framework for deploying and sharing equipment and personnel in responding to a significant offshore petroleum incident.

The Australian Petroleum Production & Exploration Association (APPEA) has also developed and published a Self-Audit Check List for Australian Offshore Oil and Gas Title Holders as a guideline for use when assessing or auditing a title holder’s management system or when developing formal bridging documentation between a title holder and a facility operator.

In APPEA’s view, effective control and assurance of activities requires monitoring of the title holder’s well operation management plan, the facility operator’s safety case and associated bridging documents with an increased need for monitoring of risk mitigation and response mechanisms in formal plans to be included in audits and review.

The next steps

While the Western Australian government remains opposed to the proposed national offshore regulator it has recently entered into a memorandum of understanding with the Federal Government and on 14 September 2011 the legislative package for the establishment of a single national regulator was passed by the Australian Senate. These bills will now be returned to the House of Representatives for approval with the aim of NOPSEMA and NOPTA becoming operational by 1 January 2012.9

This is not the end of the story, however. The development of these arrangements is likely to require the Commonwealth reaching agreement with the States and Northern Territory on cost sharing arrangements, the development of uniform procedures, the level and standard of human resources, recruiting arrangements and the working of accountabilities and ministerial reporting lines. These are just some of the issues that may well generate further political debate.

Likely impact on those subject to this changing regulatory framework

As can therefore be seen, the Australian and international regulatory landscape is undergoing significant change involving the imposition of greater obligations on offshore petroleum operators and contractors, which in turn is impacting on health and safety and environmental liability. This is likely to see increased requirements with respect to corporate governance and management oversight responsibility and an increased focus on managing contractual risk allocation between operators and offshore contractors.

Internationalisation of safety and operating standards amongst regulators can be expected in the future. In turn, there is likely to be a move to adopt uniform standards by global players across each jurisdiction, going beyond minimum compliance with laws and regulations in a particular location.

Industry can also expect to see greater emphasis being placed upon oversight and monitoring of process safety, drilling operations and the integrity of ageing facilities including:

  1. additional multiple levels of control and audit protocol including greater use of third party assurance providers;
  2. improved communication systems and enhancements to the process for managing change, including third party contractors as well as active management of contractor recommendations (which should form part of any review); and
  3. enhanced reporting lines and company board mandated management systems with an emphasis on line of sight management tools to improve existing monitoring and compliance regimes.

In addition to the specific regulatory changes taking place in the Australian offshore petroleum industry, companies also need to be mindful of legislative agendas in other contexts which will also impact upon their business and operations. For example, the introduction of a new requirement for company officers to exercise due diligence to ensure that the company complies with its obligations under the Model Work Health and Safety Act 2009 (Cth).10

It is expected that industry members will continue their current efforts to share information relevant to safety procedures and risk management processes and continue to learn from each other in respect to near misses, safety incidents and new technologies.

Continuous improvement and self criticism, together with meaningful engagement with government, regulators and the general public, offers the best chance of both reducing the costs of regulation and the risks of oversight as well as improving safety standards and public perception of the industry.


1. 3 nautical mile baseline to 200 nautical miles of Australia’s Exclusive Economic Zone

2. Up to 3 nautical miles from the state or territorial sea baseline

3. Kym Bills and David Agostini, Offshore Petroleum Safety Regulation, Better practice and the effectiveness of the National Offshore Petroleum Safety Authority, Commonwealth Department of Resources, Energy and Tourism, 2009 at page xi

4. For example, Western Australian Department of Mines and Petroleum and the Northern Territory Department of Resources

5. Commissioner David Borthwick, Report of the Montara Commission of Inquiry, Commonwealth of Australia, June 2010

6. The Commission of Inquiry was established under Part 9.10A of the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth)

7. Final Government Response to the Report of the Montara Commission of Inquiry

8. Through the Offshore Petroleum and Greenhouse Gas Storage (Resource Management and Administration) Regulations 2011 (Cth)


10. section 27.

Global contacts

Emma Giddings

Emma Giddings Abu Dhabi

Simon Hartley

Simon Hartley London

Dimitri Sofianopoulos

Dimitri Sofianopoulos Athens

Neil Q Miller

Neil Q Miller London


Philip Roche

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Ernie van Buuren

Ernest van Buuren Brisbane

Philip Vallance


Andrew Robinson

Andrew Robinson Durban

Gennaro Mazzuoccolo

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Gordon Hall

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Richard L. Desgagnés



Davide Barzilai Hong Kong

Christine Ezcutari

Christine Ezcutari Paris

Jim James

Jim James Hong Kong

Gervais Green



Jeremy Gibb

Jeremy Gibb Tokyo

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