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the damage exceeds the owner's liability under the Civil Liability Convention.

The vast majority of cases in which the IOPC Fund is called upon to pay compensation fall within the last category.

The compensation payable by the 1971 Fund for any one incident is limited to 60 million Special Drawing Rights (US$86 million), and the amount payable by the 1992 Fund to 135 million Special Drawing Rights (US$195 million). Both these limits include the sum actually paid by the shipowner or his insurer under the 1969 or 1992 Civil Liability Convention, as appropriate.

Since its establishment in 1978, the IOPC Fund has been involved in some 75 incidents. The 1971 Fund has paid over US$180 million in compensation.

In the great majority of these incidents, all claims have been settled out of court. So far, court actions against the IOPC Fund have been taken in respect of only four incidents, namely the Haven (Italy, 1991), Aegean Sea (Spain, 1992), Braer (United Kingdom, 1993) and Keumdong No5 (Republic of Korea, 1993) incidents. In these and a few other recent cases, the aggregate amount of the presented claims greatly exceeds the maximum amount payable under the Civil Liability Convention and the Fund Convention.

Structure of the Funds

Both the 1971 Fund and the 1992 Fund are governed by an Assembly composed of all Member States of the respective Organisation. The 1971 Fund has an Executive Committee, composed of 15 Member States elected by the Assembly, with the task of approving claims for compensation in situations where the Director does not have the authority to do so. The 1992 Fund will set up a similar body (a "Claims Committee").

Admissibility of Claims for Compensation

General Considerations

For a claim to be accepted by the IOPC Fund it has to be proved that the claim is based on a real expense actually incurred, that there was a link between the expense and the incident and that the expense was made for reasonable purposes.

The IOPC Fund as acquired considerable experience with regard to the admissibility of claims. In connection with the settlement of claims it has developed certain principles as regards the meaning of the definition of "pollution damage", which in the Conventions is specified as "damage caused by contamination". The Assembly and the Executive Committee have taken a number of important decisions in this regard. In 1994 a Working Group examined in depth the criteria for the admissibility of claims for compensation within the scope of the 1969 Civil Liability Convention and the 1971 Fund Convention and the 1992 Protocols thereto. The Report of the Working Group was endorsed by the Assembly.

The Assembly has expressed the opinion that a uniform interpretation of the definition of "pollution damage" is essential for the functioning of the regime of compensation established by the Civil Liability Convention and the Fund Convention.

The IOPC Fund considers each claim on the basis of its own merits, in the light of the particular circumstances of the case. Whilst criteria for the admissibility of claims have been adopted by the IOPC Fund, a certain flexibility is nevertheless allowed, enabling the Fund to take into account new situations and new types of claims. Generally, the IOPC Fund follows a pragmatic approach, so as to facilitate out-of-court settlements.

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Property Damage

Pollution incidents often result in damage to property: the oil may contaminate fishing boats, fishing gear, yachts, beaches, piers and embankments. The IOPC Fund accepts costs for cleaning polluted property. If the polluted property (eg fishing gear) cannot be cleaned, the IOPC Fund compensates the cost of replacement, subject to deduction for wear and tear. Measures taken to combat an oil spill may cause damage to roads, piers and embankments and thus necessitate repair work, and reasonable costs for such repairs arc accepted by the IOPC Fund.

Clean-Up Operations On Shore and at Sea

The IOPC Fund pays compensation for expenses incurred for clean-up operations at sea or on the shore. Operations at sea may relate to the deployment of vessels, the salaries of crew, the use of booms and the spraying of dispersants. In respect of on-shore clean-up, the operations may result in major costs for personnel, equipment, absorbents etc.

Measures to Prevent Physical Damage

Measures taken to prevent or minimise pollution damage ("preventive measures") are compensated by the IOPC Fund. Measures may have to be taken to prevent oil which has escaped from a ship from reaching the coast, eg by placing booms along the coast which is threatened. Dispersants may be used at sea to combat the oil. Costs for such operations are in principle considered as costs of preventive measures. It must be emphasised, however, that the definition only covers costs of reasonable measures.

As regards measures to prevent physical damage, the requirement of reasonableness laid down in the Civil Liability Convention is assessed on the basis of objective criteria. The assessment of technical reasonableness is made on the basis of the facts available at the time of the decision to take the measures, in the light of the technical advice given or offered at that time. The person in charge should reassess his decision in the light of developments and further technical advice. The costs incurred should also be reasonable. There should be a reasonable relationship between the costs and the benefits derived or reasonably expected. In the assessment, due account is taken of the particular situation of the caso.

Fixed Costs

Claims submitted by public authorities for carrying out clean-up operations and preventive measures often include elements covering costs which would have arisen even if the incident had not occurred (eg normal salaries for permanently employed personnel). Such fixed-costs are distinguished from additional costs, ie costs incurred solely as a result of the incident which would not have arisen otherwise (eg payments for overtime).

The IOPC Fund's position is that a reasonable proportion of fixed costs should be admissible, provided that such costs correspond closely to the clean-up period in question and do not include remote overhead charges.

Consequential Loss and Pure Economic Loss

The IOPC Fund accepts in principle claims relating to loss of earnings suffered by the owners or users of property which had been contaminated as a result of a spill (consequential loss).

As for claims for loss of earnings sustained by persons whose property has not been polluted (so-called "pure economic loss"), the point of departure is the concept of "loss or damage caused by contamination",

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ie the starting point is the pollution rather than the incident itself. Claims for pure economic loss are in principle acceptable, but certain criteria have to be fulfilled for such claims to be admissible. In particular, a claim is not admissible on the sole criterion that the loss or damage would not have occurred but for the oil spill in question.

In order to qualify for compensation the basic criterion is that a reasonable degree of proximity exists between the contamination and the loss or damage sustained by the claimant. When considering whether the criterion of reasonable proximity is fulfilled, the following elements are taken into account:

the geographic proximity between the claimant's activity and the contamination

the degree to which a claimant is economically dependent on an affected resource

the extent to which a claimant has alternative sources of supply

the extent to which a claimant's business forms an integral part of the economic activity
within the area affected by the spill

Account is also taken of the extent to which a claimant can mitigate his loss.

Measures to Prevent Pure Economic Loss

Claims relating to costs of measures to prevent pure economic loss can be admissible if they fulfil the following requirements:

the costs of the proposed measures are reasonable;

the cost of measures are not disproportionate to the further damage or loss which they are
intended to mitigate;

the measures are appropriate and offer a reasonable prospect of being successful; and
in the case of a marketing campaign, the measures relate to actual targeted markets.

In order to be admissible the costs should relate to measures undertaken to prevent or minimise losses which, if sustained, would qualify for compensation under the Civil Liability Convention and the Fund Convention. In addition, the cost of marketing campaigns or similar activities is accepted only if the activities undertaken are in addition to measures normally carried out for this purpose, ie compensation is granted only for the additional costs resulting from the need to counteract the negative effects of the pollution. Measures of too general a nature are not admissible.

The IOPC Fund does not normally consider claims for preventive measures of this type until they have been carried out. A cautious approach is taken in respect of advance payments, and the Fund does not take on the role of the claimant's banker.

Environmental Damage

An important issue is whether and, if so, to what extent claims for environmental damage are admissible. In 1980 the IOPC Fund Assembly adopted an important Resolution on the admissibility of claims relating to damage to the environment. In the Resolution it is stated that the assessment of compensation "... is not to be made on the basis of an abstract quantification of damage calculated in accordance with theoretical models". In other words, compensation can be granted only if a claimant, who has a legal right to claim under national law, has suffered quantifiable economic loss.

The 1992 Protocol to the 1969 Civil Liability Convention (known as the 1992 Civil Liability Convention) contains an amended wording of the definition of pollution damage. A proviso was added to the effect that compensation for impairment of the environment (other than loss of profit from such impairment) should be limited to costs of reasonable measures of reinstatement actually undertaken or to be undertaken.

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The new wording of the definition was not in any way intended to widen the concept. The Diplomatic Conference which adopted the new wording based its deliberations on the policy of the IOPC Fund and the principles developed by the IOPC Fund bodies as regards the admissibility of claims and the interpretation of the definition of pollution damage as worded in the original text of the Convention. It is, therefore, fair to say that the Diplomatic Conference adopted the modified wording of this definition in order to codify the interpretation of the definition as developed by the IOPC Fund.

A further important question is whether the IOPC Fund pays compensation for the cost of measures to reinstate the marine environment. This matter has to be decided on the basis of the definition of "pollution damage" laid down in the 1992 Civil Liability Convention. To be admissible for compensation, measures for reinstatement of the environment should fulfil the following criteria:

the cost of the measures should be reasonable;

the cost of the measures should not be disproportionate to the results achieved or the
results which could reasonably be expected; and

the measures should be appropriate and offer a reasonable prospect of success.

The test of reasonableness laid down in the 1992 Civil Liability Convention is an objective one, ie that the measures should be reasonable from an objective point of view in the light of the information available when the specific measures were taken. Compensation is payable only in respect of measures actually undertaken or to be undertaken.

22 July 1996

On behalf of LAHMAR, a wholly-owned subsidiary of PanEnergy Corp, headquartered in Houston, Texas, we submit the following statement for the record of the June 26, 1996 hearing of the Subcommittee on Coast Guard and Maritime Transportation of the House Committee on Transportation and Infrastructure. LACHMAR is the owner of two U.S.-flag Liquefied Natural Gas (LNG) tankers operating in the international LNG trade, and is greatly affected by the federal financial responsibility requirements imposed under the Oil Pollution Act of 1990 (OPA 90) and addressed in this hearing.

As you know, OPA 90 was enacted principally to address the problem of oil pollution from oil tankers and oil handling facilities. However, while liability under OPA 90 is based on discharges of oil, the financial responsibility requirements are set to correspond to vessel type or construction, and not to the issue of whether the vessel actually carries petroleum cargo. The statue administers the certificate of financial responsibility or “COFR” provisions with a two-tiered structure of liability limits, imposing the higher tier liability limit ($1200 per gross ton) on ships defined as a “tank vessel" under Section 1001(34). Vessels classified as other vessels qualify for the lower tier pollution liability limit ($600 per gross ton). Thus, under these provisions, all tank vessels - whether they carry a cargo of petroleum oil or another commodity such as grain cargoes or LNG - have the same liability and must meet the same financial responsibility requirements as an oil tanker. We believe this is an inequitable result.

The United States Coast Guard has long recognized the unique nature of LNG cargoes when it stated in an earlier rulemaking procedure that “LNG is not defined as oil or a hazardous material." Federal Register, Vol. 58, No. 244, December 22, 1993, page 67990. In fact, LNG can only be a liquid under specifically controlled cryogenic conditions. In the environment under ambient temperatures and pressure, LNG is a gas, so that any LNG spilled from a ship would rapidly vaporize and dissipate into the atmosphere. LNG is a non-polluting, non-toxic, and non-carcinogenic substance, and is the only cargo that LNG ships are capable of carrying. Just as any other commercial vessel, LNG vessels have on board only the oil products and hazardous substances required to power or operate the vessel. It is, therefore, inequitable for LNG ships to incur the higher tier COFR liability when the risk of pollution inherent in its operations or cargoes is no different than for non-tank vessels.