Real Estate Focus – August 2019
A round-up of some key legal developments in England and Wales for the real estate sector.
By the end of this year, a new European Union regulation will take effect to prevent owners of EU flagged ships from recycling ships in yards which have not been approved by the EU Commission. The regulation comes fully into force following the first criminal prosecution of a shipowner, Seatrade, in March 2018, after its directors were found to have breached existing EU regulations by indirectly selling ships to scrap yards in non-OECD countries. The Seatrade case sends a clear message that violations of the EU regulations will not go overlooked and is concerning for owners who have evaded, and who may continue to evade the regulations, on the basis that they are simply unworkable.
The new European Regulation on Ship Recycling (No 1257/2013) will be fully applicable to all EU flagged ships destined for recycling (wherever they may be at such time) from 31 December 2018. Currently, any ship (whatever the flag) departing European waters for recycling is regulated by the European Waste Shipment Regulation (No 1013/2006). After 31 December 2018, the Waste Shipment Regulation will continue to apply to any non-EU flag ship departing from European Union ports for recycling. Pursuant to each of these regulations, ship owners are obliged to recycle their ships under different regimes, both of which, at least as it currently stands, prevent an owner from recycling in the ship recycling yards which provide more than three quarters of the world’s recycling capacity.
The United Nations Environment Programme (UNEP) developed an international convention to address the problem of toxic waste in the 1980s, following a case of dumping toxic waste offshore Africa. The Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal, better known as the Basel Convention, was adopted in 1989, entered into force in 1992 and currently has been ratified by 186 countries (out of a possible 195).
The Basel Convention provides controls for the international movement of hazardous wastes and such controls are implemented through the establishment of a chain of communications between the authorities of the country exporting the hazardous wastes and the authorities of the importing country, with the involvement of the authorities of any transit state. The Convention relies on the “prior informed consent” of the authorities of the importing country, which might agree to the shipment of a certain hazardous waste, on the basis that the waste will be treated in an environmentally sound manner by the importing country.
In order to strengthen protection to developing countries further, in 1995, parties to the Basel Convention adopted the “Ban Amendment”, banning the export of all hazardous wastes from OECD to non-OECD countries. At the end of the 1990s, UNEP decided that the Basel Convention should also regulate the recycling of ships, notwithstanding that the Basel Convention does not make any provision specifically for ships, or recycling yards and safety issues, or for the concept of “flag state”.
The Ban Amendment has not yet entered into force internationally although it appears that this might happen within the next year or two. Nevertheless, the European Union decided it would not wait for the amendment to come into force and the Ban Amendment has been effectively enforced unilaterally since 2006 in the EU, through the European Waste Shipment Regulation. This means that no ship leaving an EU port destined for recycling (regardless of its flag) may be exported to a non-OECD country for that purpose, as end-of-life ships are deemed to be ‘hazardous waste’ by the Regulation.
However, the European Commission found1 during its study period in 2009 that 91 percent of ships that should have been impacted by the Waste Shipment Regulation had evaded its provisions by not declaring at the time of departure from an EU port their true destination and/or fact that they were to be scrapped at that destination. It is, therefore, widely agreed that the Waste Shipment Regulation vis a vis ships for recycling has been (at least historically) unsuccessful, impractical and unenforceable.
The underlying cause for such evasion is due to the fact that the international capacity for ocean going ships is to be found outside the OECD. Furthermore OECD yards pay far less for an end of life ship than the yards in South Asia where more than three quarters of global tonnage is recycled annually.
In light of the failings of the EU Waste Shipment Regulation to regulate ships destined for recycling, the European Commission developed the EU Ship Recycling Regulation specifically to address properly the problem. The EU Ship Recycling Regulation, which will be fully applicable by 31 December 2018 to all EU flagged ships destined for recycling (wherever they may be at such time), mirrors the mechanisms of the International Maritime Organisation’s not yet in force Hong Kong Convention and requires (amongst other things) such ships to be recycled at a yard which has been approved by the European Commission and included on the European List of Authorised Ship Recycling Facilities. As it stands presently, the (first edition of the) European List includes only European yards, but the Commission is now in the process of reviewing applications for inclusion on the List from yards located outside of the OECD.
Some shipowners have historically avoided the provisions of the Waste Shipment Regulation by (amongst other things) trading their ships out of Europe before scrapping them. Where sales have been deemed to breach the Regulation, ships have been detained in Europe, but their owners have never previously faced criminal prosecution.
The decision of the Rotterdam court in March 2018 was therefore a great surprise to the industry.
The case involved the Dutch company Seatrade which sent, in 2012, four reefer ships from the ports of Hamburg and Rotterdam for scrapping in Turkey, India and Bangladesh. At the time the ships left the European ports, three were laden with cargo.
Proceedings were brought by the Dutch Public Prosecutor for breach of the prohibition of the shipment of ‘hazardous waste’ from European ports to non-OECD countries, as set out in the Waste Shipment Regulation.
Seatrade argued that the ships should not be classified as waste as (i) they remained operational until the last moment and (ii) they represented several million dollars in sale value. It was also argued that it was not possible to determine when the decision to scrap the ships was taken (i.e. that the decision to do so was only made following the departure of the ships from Europe).
The prosecution relied on email evidence which showed that negotiations were held as to the fleet’s scrap value and the removal of valuable equipment and spares, prior to the voyages from Hamburg and Rotterdam. Additionally, the court heard from crew members, that the crew were under orders to ensure that when arriving at their destinations, the ships were to have as little fuel and oils on board as possible.
The Rotterdam court held that, from the evidence, it was clear that, before the ships left Hamburg and Rotterdam, the intention was to have all four ships demolished and that they were therefore being ‘discarded’ and could therefore be properly described as ‘waste’ within the meaning of the Waste Shipment Regulation.
Noting the harmful consequences of scrapping ships (in Bangladesh and India particularly) to the environment and human health and safety, the court found that the directors of Seatrade had “closed their eyes” to the problem and only considered the business interests of the companies for which they were responsible. The Court imposed a 12 month suspension on each of the two directors, together with fines of EUR750,000. The court also noted that the suspensions were given in lieu of prison sentences (which, it noted, were warranted on the facts) on the basis that this was the first case of its type to be heard by a criminal court.
Whilst Seatrade is appealing to the Court of Appeal in The Hague, the Rotterdam court’s ruling sends a very clear message that any intentional violation of the Waste Shipment regulation will no longer go overlooked. By extension, this approach is likely to apply equally to the EU Ship Recycling Regulation.
The implications for shipowners are two-fold. First, no longer will a ship’s owner (of any flag) be able to ‘mis-declare’ its true intended destination when leaving European waters for recycling without the possibility of criminal sanctions being applied potentially years later, should it be found that such declaration was misleading (intentionally so or not), or that the decision to recycle was made before the ship left Europe in violation of the European Waste Shipment Regulation. Shipowners can expect regulators (and indeed environmental NGO activists) to be studying lists of ships arriving at breaking yards in Asia to determine whether owners would have been subject to those regulations.
Secondly, for owners of EU flagged ships the concern is that, should they decide to reflag outside Europe to avoid the EU Ship Recycling Regulation and the ship is recycled in a yard outside the EU shortly afterwards, the regulators may look into that decision making process to determine whether the change in registration was to avoid the obligation to recycle the ship at a yard included on the European List of Authorised Ship Recycling Facilities. Such obligation will apply to all owners of an EU flagged ship from no later than 1 January 2019. As can be seen in the Seatrade case, the regulators are now willing to look closely at this process and owners could now potentially face criminal prosecution under the Waste Shipment Regulation if they are found to have evaded the EU Ship Recycling Regulation.
The current version of the European List includes European yards with a combined capacity of just over 300,000 LDT which is wildly insufficient to handle all EU flagged ships destined for recycling. As a result, the EU is now under certain pressure to approve and include in the second edition of the European List non EU yards (and yards outside the OECD) in order to bolster the capacity and ensure that the EU Ship Recycling Regulation is workable. Until such time that there is sufficient capacity included on the European List, we might expect to see more cases akin to Seatrade as owners attempt to avoid commercially and economically unworkable regulation, whilst the regulators become more ready to impose penalties for violations, whether they be intentional or not.
“Proposal for a Regulation of the European Parliament and of the Council on Ship Recycling” (Brussels 23 March 2012)
A round-up of some key legal developments in England and Wales for the real estate sector.
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