Overview of the 2010 Hazardous and Noxious Substances Convention

The Convention sets out a shared liability regime to compensate claimants for damages arising from the international or domestic carriage of HNS by seagoing vessels. It is a regime, which combines the shipowners' liability (tier 1) and the HNS Fund made up of contributions from the receivers or importers of HNS cargo (tier 2).

The HNS Convention follows the two-tier model of compensation of the international oil pollution liability and compensation regime (Civil Liability Convention (CLC) and the IOPC Fund), which Canada adopted in 1989. That is, the shipowner assumes liability in the first place, which is supplemented beyond a certain level by a fund made up of contributions collected from receivers of HNS cargoes. The regime provides up to 250 million Special Drawing Rights (SDR)4, or approximately $500 million per incident in total compensation to claimants. Loss of life and personal injury are also included under the HNS Convention and these types of damages are not covered by the IOPC Fund system. The prioritization for payment of compensation before the satisfaction of other types of claims is an additional significant development in this regime. Fire and explosion damage caused by an HNS substance (including oil), is also covered under the Convention.

The Convention differs from the oil pollution regime mainly in that it covers many more substances and combines the shipowner liability regime and the HNS Fund into one instrument. The key provisions of the Convention are outlined below.

HNS substances

Estimates indicate there are approximately 6,500 substances covered under the definition of HNS. The definition of HNS substances and the relevant Codes can be found in Article 1(5) of the HNS Convention (see Annex 1). Table 3 provides an overview of the substances covered under the Convention.

Table 3 - HNS Substances
Substances covered Conventions Codes Reference (www.imo.org/)
Bulk    
Oils MARPOL 73/785 Annex I, Regulation 1
Noxious Liquids MARPOL 73/78 Annex II, Regulation 1.10
Dangerous liquids
Liquids with a flashpoint not exceeding 60ºC
IBC Code6 Chapter 17
Gases IGC Code7 Chapter 19
Solids IMBSC Code8 (if also covered by the IMDG Code in packaged form)
Packaged IMDG Code9  

An electronic system, known as the HNS Convention Cargo Contributor Calculator (HNS CCCC), has been developed to assist states and potential contributors in identifying and reporting contributing cargoes covered by the HNS Convention, which will be re-evaluated and updated in light of the adoption of the 2010 HNS Protocol. The name or United Nations number of the substance can be used to find out whether or not a chemical falls within the definition of HNS. The use of the HNS CCCC is discussed in greater details below.

HNS damage covered by the Convention

The Convention covers the following damage resulting from the carriage of HNS by sea:

  • loss of life or personal injury on board or outside the ship carrying HNS;
  • loss of, or damage to, property outside the ship;
  • loss or damage caused by contamination of the environment; and
  • costs of preventive measures taken by any person after an incident has occurred to prevent or mitigate damage.

All or some damages are covered depending on where they occur geographically. Specifically, the Convention covers any damage caused during the international or domestic carriage of HNS by any seagoing vessels in the territory including the territorial sea of a state party to the Convention. It also covers pollution damage in the exclusive economic zone, or equivalent area, of a state party. In addition, the Convention covers damage (other than pollution damage) caused by HNS carried on board seagoing vessels of member states when they are outside the territory or territorial sea of any state. This information is summarized in Table 4 below.

Table 4 - Scope of Application and Coverage
Scope of Application Damages Covered
Territorial sea (0-12 nautical miles) of a state party Any damage (loss of life, injury, pollution, property, preventative measures)
Exclusive Economic Zone (EEZ) (12 - 200 nautical miles) of a state party Pollution damage including preventive measures
On board a seagoing vessel of a state party beyond the territorial sea Any damage excluding pollution

The Convention does not cover:

  • Damage caused during the transport of HNS on land before or after carriage by sea.10;
  • Pollution damage caused by persistent oil, since such damage is already covered under the existing international regime established by the 1992 CLC and Fund Conventions. However, it covers non-pollution damage caused by persistent oil, i.e., damage caused by fire or explosion; and
  • Damage caused by radioactive material in either bulk or packaged form.

Claimants

Any victim of damage in Canada would be entitled to make a claim. Claimants can be any individual or partnership or any public or private body including a state or any other level of government within that state.

Tier 1 - The Shipowner's liability

Under the Convention's two-tiered system, claimants first directly seek compensation from the shipowner (tier 1), who is held strictly liable for any damage caused, subject to certain defences (e.g. an act of war, negligence of governmental authority to maintain navigational aids, act or omission of a third party). The shipowner's liability is based on the tonnage of the ship, as depicted in Table 5, up to the maximum limit of 100 million SDR (approximately $200 million) for bulk HNS. That maximum limit of liability for the shipowner increases to 115 million SDR (approximately $230 million) when the damage is caused by packaged HNS or by both bulk HNS and packaged HNS.

Table 5 - Ship Size and Limits of Liability
Ship Size Limits of liability for bulk HNS Limits of liability for packaged HNS
Ships 2,000 gross registered tones (grt)11 10 million SDR
(approx. $20 million)
11.5 million SDR
(approx. $23 million)
Ships between 2,001 and 50,000 grt 1,500 SDR per gross ton = a maximum of 82 million SDR at 50,000 grt
(approx. $164 million)
1,725 SDR per gross ton = a maximum of 94.3 million SDR at 50,000 grt
(approx. $188.6 million)
Ships between 50,001 grt and 100,000 grt 360 SDR per gross ton = a maximum of 100 million SDR at 100,000 grt
(approx. $200 million)
414 SDR per gross ton = a maximum of 115 million SDR at 100,000 grt
(approx. $230 million)
For ships ≥ 100,000 grt 100 million SDR
(approx. $200 million)
115 million SDR
(approx. $230 million)

The Convention requires all shipowners transporting HNS to have onboard the vessel a certificate of insurance issued by a state party indicating they have coverage for their liability under the Convention.12 The shipowner's insurance must provide for direct action so that claimants can pursue their claims for compensation directly with the shipowner's insurer rather than having to seek compensation from the shipowner. State parties must ensure that any ships carrying HNS entering or leaving a port in its territory or offshore facility in its territorial sea, irrespective of where that vessel is registered, have the required insurance certificate.

Tier 2 - The HNS Fund

When damage costs exceed the shipowner's limit of liability under tier 1, additional compensation will then be paid under tier 2 - by the HNS Fund - up to a maximum of 250 million SDR (approximately $500 million) per incident, including the shipowner's portion. If the total amount of admissible claims does not exceed the maximum amount available for compensation, then all claims will be paid in full. Otherwise, the payments will be prorated, i.e. all claimants will receive an equal proportion of their admissible claims.

Claims for loss of life and personal injury have priority over other claims. Up to two thirds of the available compensation amount is reserved for such claims.

To claim against the HNS Fund, the claimants have to prove there is a reasonable probability that the damage resulted from an incident involving one or more seagoing ships. The HNS Fund may be liable to pay compensation "from the first dollar up" if the particular ship causing the damage cannot be identified. In the event that the shipowner is exonerated from liability, or if the shipowner is financially incapable of meeting his/her obligations, the Fund is also liable. However, as is the case of the shipowner, the HNS Fund can also apply certain defences that exempt it from paying compensation e.g. if the damage was caused by an act of war, or by HNS discharged from a warship.

HNS Fund Accounts

The HNS Fund will consist of four separate accounts:

  • oil (Oil Account);
  • liquefied natural gas (LNG Account);
  • liquefied petroleum gas (LPG Account); and
  • all other HNS (General Account)

The principal reason for the separate accounts is to ensure that each account pays its own claims, thus avoiding cross-subsidization of claims among major HNS groups and the industries involved. However, during the early existence of the HNS Fund, it is possible that there may not be sufficient HNS received in member states to set up all four separate accounts. If this were to be the case, the separate accounts may be postponed and the HNS Fund may for a period of time be comprised of only two accounts:

  1. Oil Account; and
  2. General Account including three sectors: LNG, LPG and all other HNS.

Contributions to the Fund and the concept of "receiver"

The HNS Fund and its account will be financed by annual contributions from those persons located in a state party who in the preceding calendar year:

  • received over 150,000 tonnes of persistent oil;
  • received over 20,000 tonnes of LPG;
  • received any quantity of LNG cargo;
    • or held title to an LNG cargo immediately prior to its discharge where:
      • the titleholder has entered into an agreement with the receiver that the titleholder shall make such contributions;
      • the receiver has informed the State Party that such an agreement exists; and
  • received any other bulk HNS cargo, including oils other than persistent oil, in quantities exceeding 20,000 tonnes.

While the Convention covers damages caused by HNS carried in whatever quantity, the duty to pay levies will rest only with those persons who exceed the above thresholds of HNS received in a given year.

The contributions to the HNS Fund will be made in respect of HNS carried by seagoing vessels and received in Canadian ports. The contributions will be made post-event, i.e. they will only be due after an incident occurs and will be levied only in respect of the account(s) involved in that incident (i.e. Oil/LNG/LPG/all other bulk HNS). The levies applying to individual receivers will be calculated according to the quantities of contributing cargo received in the year preceding the year of the incident. Levies may be spread over several years depending on the progress of payment of claims resulting from the incident.

It is important to note that receivers of packaged or containerized HNS would not be required to report receipts or pay contributions to the HNS Fund. However, damages caused by packaged HNS would continue to be covered by both the shipowners' liability and the HNS Fund.

State parties can choose either of these two definitions of "receiver" in Article 1.4:

1.4 (a) the person who physically receives contributing cargo discharged in the ports and terminals of a State Party; provided that if at the time of receipt the person who physically receives the cargo acts as an agent for another who is subject to the jurisdiction of any State Party, then the principal shall be deemed to be the receiver, if the agent discloses the principal to the HNS Fund; or

1.4 (b) the person in the State Party who in accordance with the national law of that State Party is deemed to be the receiver of contributing cargo discharged in the ports and terminals of a State Party, provided that the total contributing cargo received according to such national law is substantially the same as that which would have been received under (a)."

Article 1.4(a) allows the physical receivers of cargo, such as storage companies, to pass on the obligation to pay a levy, to principal receivers or the owners of the cargo, by identifying the final receivers. Both the person who physically receives the contributing cargo in a port or terminal, and the designated third party must be subject to the jurisdiction of a state party to enable the physical receiver to pass on the levy. In such a case, the final receiver or owner of the cargo will include it in their annual report if the total amount they received in the year exceeds the applicable thresholds of "contributing cargo". The agent or storage company would in this case not have any obligation to pay levies in respect of the bulk HNS cargo they handle on behalf of their principal.

If the agents or storage company cannot disclose who their principal is, or if the principal is located in a non-contracting state, the agent or storage company will include such cargo in their annual report. In this situation, the agent or storage company would be considered to be the "receiver" of the bulk HNS and would be responsible for payment of any levies in respect of the contributing cargo.

Article 1.4 (b) allows a state to establish its own definition of "receiver" under national law. Such a definition must result in the total quantity of contributing cargo received in the state in question being the same as if the definition in 1.4 (a) had been applied.

Treatment of cargo in transit

While the HNS Convention covers any damage arising from HNS in transit, such "cargo in transit" is not a contributing cargo, as provided in Article 1(10):

Cargo in transit which is transferred directly, or through a port or terminal, from one ship to another, either wholly or in part, in the course of carriage from the port or terminal of original loading to the port or terminal of final destination shall be considered as a contributing cargo only in respect of receipt at the final destination.

This means that where the bulk HNS is stored at an intermediary stage, in between carriage by sea, with the transhipment being direct (ship-to-ship) or through a port or a terminal, the receipt of such a bulk HNS cargo at an intermediary stage does not constitute a "contributing cargo" since this is a transhipment in the "course of carriage by sea". The purpose of this provision is to avoid the situation where two separate levies from two separate contributors, first at the port of transhipment and then again at the port of final destination, would be paid on the same HNS cargo. However, bulk HNS cargo received in a port for transhipment by truck or rail to its final destination would be subject to a levy at that port.

In the case of persistent oil, the "receiver" under the HNS Convention will be the same as the party responsible for paying contributions under the IOPC Fund. This will mean that, for a levy in respect of persistent oil, the agent/principal relationship will not apply. As a result, the person who receives the oil cargo is liable and must pay contributions even if that person acts as an agent for the principal receiver.

Furthermore, reports of receipts of persistent oil would need to be submitted to both the HNS Fund and the IOPC Fund. However, considering that the thresholds for reporting receipts of persistent oil are the same under both Conventions (HNS and Fund Convention), the reporting obligation should not significantly increase the administrative burden on those receivers.

In the event of an incident involving persistent oil, the receivers may be required to pay levies to both the HNS Fund and the IOPC Fund, but only if and to the extent that damages arise under both Conventions. For example, should an oil tanker covered by both Conventions explode, levies could be due to the IOPC Fund to cover pollution damage resulting from the oil spilled,13 as well as to the HNS Fund to cover damages other than pollution, e.g. personal injury caused by the explosion.

Reporting requirements

One of the key obligations state parties must fulfill under the HNS Convention is to report on HNS cargo received. More specifically, the state party must ensure that the name of any person liable to pay contributions appears on a list to be established by the Director of the HNS Fund. State parties are responsible for the levies lost as a result of the non-submission of reports by persons liable to pay them and therefore it is in the state's interest to ensure that accurate reporting takes place. To that end the Convention enables state parties to take appropriate measures under their national law, including the imposition of sanctions, with a view to achieving the effective implementation of any obligations for which the receivers of HNS are responsible.

Sanctions for non-reporting of contributing cargo

As previously mentioned, one of the major issues facing states prior to the adoption of the 2010 HNS Protocol was the fact that there were no sanctions or consequences for states that do not fulfill their obligations to report contributing cargo. Without appropriate sanctions, states that ratified the Convention were exposed to paying for compensation in states that did not report and thus affecting the equal sharing of the financial burden.

In the Convention, there are three instances when states are required to report their contributing cargo:

  • Upon ratifying the Convention;
  • Annually, to the Secretary General of the IMO, in the period prior to the Convention enters into force (to fulfill one the entry into force requirements of calculating the amount of contributing cargo); and
  • Annually, to the Director of the HNS Fund, following the entry into force of the Convention.

The 2010 Protocol introduced new sanctions in respect of states that not submit contributing cargo reports. These are as follows:

  • an instrument of ratification by a state, which is not accompanied by a contributing cargo report, will not be accepted by the Secretary General of the IMO;
  • in the period prior to the Convention coming into force, a state will be temporarily suspended from being counted as a contracting state should it not submit annual reports to the IMO; and
  • following the entry into force of the Convention, no compensation shall be paid for any incident in a state that does not submit a report unless a report is submitted to the Director of the HNS Fund. States would have one year to submit missing reports after being notified of its failure to fulfill its obligations. It should be noted that these sanctions will not apply in respect of death or personal injury claims and these claims would continue to be assessed and paid.

Exclusion of seagoing vessels under 200 grt

Although the Convention applies to any seagoing vessel, including seagoing vessels navigating in domestic waters, state parties have the choice to exclude from the Convention, seagoing vessels under 200 grt engaged in domestic voyages and carrying packaged HNS only. If a state decides to exclude such vessels, no contributions will be due on any cargo carried by these vessels and they would not be subject to the compulsory insurance provisions. Likewise, the HNS Fund would not be liable for any compensation for pollution or other damage caused by such vessels. In these cases, national law would continue to apply to such incidents.

Entry into force provision

The Convention will enter into force 18 months after ratification by at least 12 states that during the preceding calendar year, received a minimum of 40 million tonnes of bulk HNS cargo. In addition, four of the 12 states must have a total registered ships' tonnage of at least two million gross tonnes.

Canadian Context and Legislation

Under current Canadian law, a shipowner's limits of liability for pollution damage for HNS is subject to the limitation of liability for maritime claims as set out in Part 3 of the Marine Liability Act (MLA). As an example, the maximum liability of a vessel of 20,000 gross registered tonnes would be about $16 million, compared to $74 million under tier 1 (shipowners' liability) of the HNS Convention. Combined with tier 2, the maximum compensation under the HNS Convention would be $500 million.

At the international level Canada is a much larger exporter of HNS substances than importer. At the national level the volume of HNS carried by ships within Canada is relatively low. This scenario suggests that the risk of incidents is higher for goods moving on seagoing vessels in and out of Canada than through Canadian internal waters on domestic trade routes. Furthermore, the majority of HNS shipped domestically is oil and oil products, which are generally shipped on seagoing vessels coming from offshore oil platforms.

Although HNS imports are understood to be much lower than HNS exports, the number of importers in Canada that receive over 20,000 tonnes of HNS annually and would be potentially liable to pay contributions to the HNS Fund is unknown at this time, but has been estimated to be relatively few. It is expected that this consultative process will provide a sense of the number of contributors in Canada.

In terms of the potential costs of the Convention to Canadian receivers of HNS, this will depend on a number of variables. As with any liability regime that involves contributions to a common fund to pay for claims made against it, the amount of any contribution from receivers in a given year will be determined by the size and frequency of HNS incidents and the cost of claims paid by the HNS Fund. In addition, contributions would likely be spread over several years, especially in the case of a major incident, and would likely be reduced by recoveries obtained by the HNS Fund under any recourse action taken against other parties. The only experience in this field that may provide some measure of potential obligations to pay contributions to the HNS Fund is the IOPC Fund. From that perspective, the contributions levied over the years by the IOPC Fund (on average about 5¢ per tonne of oil) seem to be reasonable.



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4 The average value of 1 SDR over the last 10 years has been approximately two Canadian dollars. The actual total amount of compensation would be set in accordance with the value of the SDR in Canadian dollars at the time of an incident.
5 International Convention for the Prevention of Pollution from Ships, 1973, as modified by the Protocol of 1978 relating thereto
6 International Code for the Construction and Equipment of Ships Carrying Dangerous Chemicals in Bulk, as amended.
7 International Code for the Construction and Equipment of Ships Carrying Liquefied Gases in Bulk, as amended.
8 International Maritime Solid Bulk Cargoes Code (IMBSC Code).
9 International Maritime Dangerous Goods Code (IMDG Code).
10 Article 1(9) of the HNS Convention defines "carriage by sea" as "the period of time from when the hazardous and noxious substances enter any part of the ship's equipment, on loading, to the time they cease to be present in any part of the ship's equipment, on discharge. If no ship's equipment is used, the period begins and ends respectively when the hazardous and noxious substances cross the ship's rail."
11 grt refers to gross registered tonnage of a vessel.
12 Compulsory insurance applies to seagoing ships registered in a state party and carrying HNS (with the exception of warships and other ships owned or operated by a state party and used only for the provision of government non-commercial services).
13 Currently, Canada's Ship-source Oil Pollution Fund pays all IOPC Fund levies for Canadian contributors.
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