Policy Options

There are two policy options for consideration in regard to this Convention. They are:

Option 1 - Do not ratify the Convention

Under this scenario, Canada would not ratify the HNS Convention and in the event of an HNS spill, Canada would continue to apply the existing regime relating to shipowner's liability in so far as any pollution damage is concerned. Thus, Part 6, Division 2 of the MLA would continue to govern the liability of the shipowner, subject to the limits of liability found in Part 3 of the MLA. The shipowner's liability would remain lower than under the HNS Convention and would not be supported by compulsory insurance with direct action against the insurer or an additional layer of compensation that is available from the HNS Fund. There is also the risk that, in the event of a major HNS incident in Canada, the costs of response, clean-up and third party damages may not be recoverable from the shipowner and taxpayers would be required to fund a portion of these costs. It follows that there would be no extra burden placed on Canadian receivers of HNS to pay any contributions to the HNS Fund and compensation for these claims exceeding the shipowner's limit of liability would not be available in Canada, as is the case at the present time.

Option 2 - Ratify the Convention

Ratifying the Convention would provide a level of compensation for HNS incidents caused by seagoing vessels that is vastly superior to that which is currently available under the MLA, and which more aptly addresses the higher level of risk posed by the larger volume of international movements of HNS. The strict liability of the shipowner for pollution and other damages including injury and death, the requirement to maintain insurance, the right of direct action against the insurer, and the HNS Fund, would ensure that claimants of damages arising from HNS incidents in Canadian waters would receive prompt and adequate compensation analogous to that provided by the IOPC Fund to oil pollution claimants.

However, the option to ratify requires consideration of several policy issues, including those that the Convention has left to the contracting states to decide. These are:

Meaning of "carriage by sea" and "domestic carriage of HNS"

As noted earlier, the Convention covers any damage caused during the international or domestic carriage of HNS by any seagoing vessel in the territory or territorial sea of the contracting state. While the Convention refers in various articles to "carriage by sea", consistent with its title, it would be more prudent in the Canadian context to stipulate that theterm "carriage by sea" should be read to mean "carriage by water". This will leave no doubt that seagoing vessels operating in our internal waters and carrying HNS cargo, be it international or domestic in origin, would be covered in the event of any incident. It follows that such cargo would also be considered "contributing cargo" for the purposes of the annual threshold under the various HNS accounts.

Notwithstanding the proposed provision on "carriage by water", the Convention will not apply to domestic carriage of HNS by non-seagoing vessels. Such vessels will continue to be covered under the existing regime in Part 6 of the MLA. As indicated earlier, the existing regime covers only pollution damage, at a lower level of shipowner's liability than the HNS Convention. However, the principal commodity moved domestically by non-seagoing vessels are oil and other bulk products, in relatively small quantities when compared to the volume of HNS carried by seagoing vessels in Canada.

Given the relatively low risk presented by this type of domestic trade, the existing regime in Part 6 of the MLA should be more than adequate to deal with any incident that may involve non-seagoing vessels engaged in domestic carriage of HNS. Moreover, for incidents involving oil pollution, the domestic Ship-Source Oil Pollution Fund would continue to provide an additional level of compensation for any claims exceeding the shipowner's liability, up to about $155 million per incident.

It is proposed that the liability of non-seagoing vessels engaged in domestic carriage of HNS cargo continue to be governed by Part 6, Division 2 of the MLA; and, that such HNS cargo not be considered as "contributing cargo" for the purposes of the HNS Convention.

Exclusion of seagoing vessels under 200 grt

Although the Convention applies to any seagoing vessel, state parties have the choice to exclude from the Convention seagoing vessels under 200 grt engaged in domestic voyages and carrying packaged HNS only. This option has been introduced in the Convention on the grounds that this category of vessels poses a relatively low risk of damage, given the smaller volume of their cargo, especially when carried in packaged form. From a practical standpoint, excluding this category of vessels would reduce the administrative burden of obtaining and processing insurance certificates for small vessels that might be affected by the Convention.

Similarly, receivers of cargo carried by these vessels would not be required to report it to the HNS Fund. It follows that damage caused by such ships will not be governed by this Convention, but rather by national law. Thus, like in the preceding case involving non-seagoing vessels, the existing regime in Part 6 of the MLA would also apply to seagoing vessels below 200 grt.

It is proposed that seagoing vessels not exceeding 200 grt engaged in domestic carriage of HNS in packaged form be excluded from the application of the Convention in Canada and that their liability be governed by the existing regime in Part 6 of the MLA.

The adoption of the definition of "receiver":

As noted earlier, the Convention allows state parties to choose from two definitions of a receiver. Under Article 1.4 (a), the receiver is:

  • the physical receiver of cargo in the port of discharge, including an agent or storage company that receives the cargo for carriage to a final destination in the state party; or
  • the person who physically receives the HNS cargo. This could be the principal receiver or an agent of the principal receiver. The agent would not be required to report such cargo for the purposes of their own annual threshold, provided that the principal is located in the contracting state and the agent discloses the principal to the HNS Fund (or "designated authority").

Alternatively, under Article 1.4(b), the state party can formulate its own definition of receiver so long as contributions to the HNS Fund are the same as they would have been under Article 1.4(a).

Many states intending to ratify the Convention have indicated their preference for the definition in Article 1.4 (a) on the grounds that it contributes to certainty in the interpretation of who is considered a receiver. Moreover, this definition creates a certain level of stability for industry stakeholders in that no new state controlled mechanism would need to be created in order to satisfy the conditions of keeping track of contributing cargo and receivers within the state.

It is proposed that the definition of receiver set out in Article 1.4(a) be adopted in Canadian law.

Reporting System

As noted earlier, the HNS Fund will be financed by contributions from receivers mainly after an incident has taken place (i.e. post-incident - with the exception of administrative costs). Contributions or levies will be based on reports of HNS receipts exceeding certain thresholds in the year preceding an incident. In order to ensure that all persons who are obliged to contribute to the HNS Fund can be located and invoiced if necessary, the Convention requires all state parties to report to the Director of the HNS Fund, on an annual basis, details of all persons (i.e. contact details and quantities of contributing cargo) in a state who are liable to contribute to the Fund. Contracting states will therefore need to implement a reporting system in support of this obligation. Two main administrative options have been discussed internationally how this obligation could be discharged:

a) national reporting system administered and closely monitored by a national authority; and
b) self-reporting system by industry with provisions for verification by a national authority.

Option (b) has been the preferred option of the majority of states and industry stakeholders. It consists of a system where receivers self-identify and report relevant information to a designated national authority on a yearly basis.14 The national authority takes on the duty of spot verification (or audits) of reports and submission of information to the Director of the HNS Fund.

National law and regulations will have to provide appropriate measures for enforcement of the reporting requirements and for penalties when these are not met. There is a precedent in Canada to this approach. In order to discharge its responsibility as a member of the IOPC Fund, Canada adopted a set of regulations creating an effective mechanism for compliance with reporting requirements and for state verification of reporting responsibilities for receivers of oil. The authority for these regulations are found in Part 7 (section 125) of the MLA.

A decision to ratify the Convention comes with the obligation to implement the reporting system in advance of the entry into force of the Convention in that state. This obligation requires the state to provide data on the amount of HNS received in the 12 months prior to the ratification of the Convention.

It is proposed that regulations be adopted to set out the reporting requirements of receivers and the role and functions of a designated authority responsible for enforcing these requirements in Canada.

It is also proposed that this system of reporting begin 12 months in advance of the Canadian ratification of the HNS Convention.

A lower threshold for reporting

Consideration will also be given in the regulations on reporting requirements to adopting a lower threshold for reporting HNS shipments than the one provided for in the HNS Convention. This would allow the designated authority to better monitor the HNS trade flows and those parties that are on the margins of the annual threshold and that could potentially be brought into the levy system in any given year. This might be a particularly important option for Canada, as the expected number of receivers has initially been estimated to be quite low with many smaller receivers under the annual 20,000 tonne threshold. It is important to note that the establishment of a lower national threshold is being considered only for the purpose of reporting annual HNS receipts to a designated national authority and not for the purpose of providing contributions to the HNS Fund. Information collected from those under the contribution threshold would not be shared with the HNS Fund in any way.

As mentioned earlier, in order to facilitate reporting requirements, receivers will be able to use the HNS CCCC, to identify and report HNS received to the designated national authority. The HNS CCCC will also allow a receiver to input the amount of bulk HNS received in a Canadian port and to calculate whether the total bulk HNS cargo received annually meets the thresholds in the Convention. Upon ratification of the Convention, the HNS Fund will invoice directly individual receivers for the amount of contributions payable to the Fund.

With the adoption of the 2010 Protocol, this system will be reviewed and it is anticipated that it will be accessible through a website in the future.

It is proposed to adopt in Canadian law a lower annual threshold of 17,000 tonnes for receivers of non-persistent oil, LPG and other bulk HNS falling under the General Account.

Treatment of associated persons

Article 16(5) of the HNS Convention requires that quantities of HNS received in the same state by associated persons must be aggregated for the purpose of determining whether the threshold for payment of contributions has been reached. The objective of this provision is to maintain an equitable treatment of all receivers by ensuring that the duty to pay a levy cannot be avoided by spreading the receipts of HNS cargoes among several associated companies.

The Convention defines "associated person" as: "any subsidiary or commonly controlled entity. The question of whether a person comes within this definition must be determined by the national law of the State concerned". In the case of "associated persons", all entities receiving HNS within the group will have to submit the details of the HNS cargo even if they do not exceed the Convention thresholds since the assessment for the levy will be based on the aggregated HNS received within the group of "associated persons". The HNS CCCC will allow users to enter the details of associated persons so that the contributions can be aggregated.

It is proposed to adopt the same definition of "associated persons" as contained in sections 60 and 66 of the MLA to assess aggregate quantities of HNS received by several related entities. This definition, which relates to contributions to the IOPC Fund, reads as follows:

"If two bodies are affiliated with each other within the meaning of section 2 of the Canada Business Corporations Act, they are deemed to be 'associated persons'…

Fines to be levied for not having an insurance certificate

As noted earlier, under tier 1 shipowners will be required to have a certificate of insurance or other financial security covering their liability under the regime. These certificates will be issued by a designated authority in the state party against evidence of insurance or other security provided by the shipowner. A valid certificate has to be carried on board the ship and be available for inspection along with other ship's documents. Under the enforcement provisions of the MLA, ships can be detained for not having a CLC Certificate or Bunkers Convention Certificate and it is foreseen as the same provision would also apply to the HNS Convention.

This requirement raises the question of sanctions or fines for not having a valid insurance certificate. Using the example of current legislation for oil pollution in Part 6 of the Marine Liability Act, a shipowner that does not have a valid insurance certificate as prescribed in that Part, is subject to a fine up to $100,000. These fines were updated in 2009 and it would seem prudent to apply the same scheme of fines for not having an appropriate certificate of insurance in the case of the HNS Convention.

It is proposed that fines for not carrying an appropriate insurance certificate be set at a level consistent with Part 8 of the MLA.

Role of the Ship-Source Oil Pollution Fund (SOPF)

As mentioned previously, the HNS Fund will be financed by contributions from receivers after an incident has taken place. In the IOPC Fund system, Canada is unique in that it already had a domestic fund - the SOPF - established in 1973, which pays all contributions to the international fund on behalf of oil receivers in Canada. The SOPF is a crucial part of Canada's oil pollution liability and compensation regime and it provides additional coverage for the spilling of any type of oil from any type of ship (the IOPC Fund only pays for persistent oil from tankers).

The largest commodity transported by ship covered by the HNS Convention is oil, which has its own "Oil Account" in the HNS Fund. The HNS Convention covers damages for loss of life and personal injury on board or outside the ship, i.e. damages that are not covered under the IOPC Fund system. There is the possibility that claims relating to loss of life and personal injury caused by persistent oil spills, in addition to damages caused by non-persistent oil spills, would be a significant portion of the total HNS Claims. Thus, similar to the current arrangement with the IOPC Fund, the SOPF would also take on the responsibility of reporting Canadian receipts of persistent and non-persistent oil and paying contributions on behalf of Canadian receivers to the future HNS Fund. This would ensure that levies imposed on oil receivers by the HNS Fund are financed through the same mechanism - the SOPF - as levies imposed on the receivers of persistent oil by the IOPC Fund.

It is proposed that the levies to the HNS Fund in respect of persistent and non-persistent oil be paid from the SOPF and that the Administrator of the SOPF assumes the same roles and responsibilities for this obligation to the HNS Fund as the Administrator currently has for the IOPC Funds.

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14 The "designated national authority" will be determined at an appropriate time to ensure smooth operation of the Convention.
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